<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 0-8550
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-4
---------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PCA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NORTH CAROLINA 7200 56-0888429
(State or other (Primary Standard (I.R.S.
jurisdiction of Industrial Employer
incorporation or Classification No.) Identification
organization) No.)
</TABLE>
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
(704) 847-8011
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN GROSSO
PRESIDENT
PCA INTERNATIONAL, INC.
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
(704) 847-8011
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
<TABLE>
<S> <C>
MARC WEINGARTEN RICHARD BORISOFF
Schulte Roth & Zabel LLP Paul, Weiss, Rifkind, Wharton &
900 Third Avenue Garrison
New York, NY 10022 1285 Avenue of the Americas
New York, NY 10019
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time of the merger (the "Merger") of Jupiter Acquisition Corp.
("Mergerco") with and into PCA International, Inc. as described in the attached
Proxy Statement/Prospectus.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box / /.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering / /.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.20 par value................ 358,490 $26.50 $9,499,985.00 $2,802.50
</TABLE>
1. This Registration Statement relates to the shares of common stock of the
Registrant to be retained by holders of the Registrant's common stock in the
proposed Merger of Mergerco with and into the Registrant, with the
Registrant continuing as the surviving corporation.
2. Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, based on the
cash merger consideration being offered to existing holders of the
Registrant's common stock.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PCA INTERNATIONAL, INC.
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
Dear Shareholder:
You are cordially invited to attend the special meeting of shareholders of
PCA International, Inc. ("PCA"), which will be held on August 17, 1998 at PCA's
principal executive offices located at 815 Matthews-Mint Hill Road, Matthews,
North Carolina (the "Special Meeting"). As you may be aware, PCA and Jupiter
Acquisition Corp. ("Mergerco"), a subsidiary of Jupiter Partners II L.P.
("Jupiter"), entered into an Agreement and Plan of Merger, dated as of April 20,
1998 (the "Merger Agreement"), pursuant to which Mergerco will be merged with
and into PCA (the "Merger") with PCA continuing as the surviving corporation
(the "Surviving Corporation").
The Merger Agreement provides that each share (a "Share") of PCA common
stock, par value $.20 per share ("PCA Common Stock"), issued and outstanding
immediately prior to the effective time of the Merger (other than treasury
shares and shares as to which appraisal rights have been exercised) will, at the
election of the holder thereof and subject to the terms described in the Proxy
Statement/Prospectus, either (i) be converted into the right to receive $26.50
in cash (the "Cash Merger Consideration") or (ii) remain outstanding as one
fully paid and nonassessable share of common stock of the Surviving Corporation
following the Merger (a "Continuing Share"), subject to proration in certain
circumstances. A copy of the Merger Agreement is included as Annex A to the
Proxy Statement/Prospectus, which you are urged to read carefully.
Proration may be required because the Merger Agreement contemplates that
shareholders of PCA must elect to retain as Continuing Shares a minimum of
271,698 shares of PCA Common Stock ("Minimum Continuing Number") and may not
elect to retain as Continuing Shares more than a maximum of 358,490 shares of
PCA Common Stock ("Maximum Continuing Number"), excluding certain Shares to be
retained by management .
If holders elect in the aggregate to retain Continuing Shares in excess of
the Maximum Continuing Number, then the number of Continuing Shares to be owned
by such holders will be prorated based on the number of Continuing Shares each
holder elected to retain (with fractional shares rounded down to the next whole
number) so that only the Maximum Continuing Number of Shares will remain as
Continuing Shares. With respect to Shares as to which Continuing Share elections
are made but with respect to which no Continuing Shares will be issued by reason
of the preceding sentence, such Shares will be converted into the right to
receive the Cash Merger Consideration.
If holders elect in the aggregate to retain less than the Minimum Continuing
Number, then (i) each holder that made a Continuing Share election will retain
the number of Continuing Shares set forth in such election and (ii) each
shareholder of PCA (whether or not such shareholder made a Continuing Share
election) will receive a prorated (based on the total number of Shares owned by
such shareholder as to which a Continuing Share election has not been made)
number of Continuing Shares (with fractional shares rounded up to the next whole
number) so that the Minimum Continuing Number will remain outstanding as
Continuing Shares. With respect to Shares as to which no Continuing Share
election was made but which will remain outstanding as Continuing Shares by
reason of the preceding sentence, such a Continuing Share election shall be
deemed to have been made.
Shareholders of PCA who elect to retain Continuing Shares should note that,
immediately following the Merger, Jupiter will own, directly or indirectly,
between approximately 77% and 88% of the outstanding shares of the Surviving
Corporation. Jupiter is a New York-based investment firm organized to invest in
buyouts and growth capital opportunities.
The National Association of Securities Dealers ("NASD") has advised the
Company that as a result of the Merger the shares of the Surviving Corporation
may no longer meet the listing requirements of the Nasdaq National Market System
("NASDAQ") and, should the Shares be delisted by the NASD, shareholders are
likely to experience difficulty trading Continuing Shares or obtaining prices
that reflect the value thereof. Also, the Company will incur substantial
indebtedness in connection with the Merger and will have substantially more
indebtedness than it has had historically.
<PAGE>
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of PCA Common Stock held by shareholders
of record on July 13, 1998 (the "Record Date").
Holders of PCA Common Stock will be entitled to dissenters' rights under the
Business Corporation Act of the State of North Carolina in connection with the
Merger, as described in the accompanying Proxy Statement/Prospectus.
THE MERGER AGREEMENT HAS BEEN APPROVED BY THE BOARD OF DIRECTORS OF PCA.
YOUR BOARD HAS DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST INTERESTS OF
PCA AND ITS SHAREHOLDERS AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
The investment banking firm of Needham & Company, Inc. ("Needham") has
delivered to the Board of Directors its written opinion dated April 20, 1998, to
the effect that, as of such date and based upon and subject to certain matters
stated therein, the consideration to be received by the holders of PCA Common
Stock (other than Mergerco and its affiliates) is fair to such holders from a
financial point of view. Needham's opinion is included as Annex B to the
accompanying Proxy Statement/Prospectus. You are urged to read the opinion
carefully in its entirety.
Consummation of the Merger is subject to certain conditions, including the
approval of the Merger Agreement by the requisite vote of PCA shareholders and
the receipt of funding by Jupiter under its existing financing commitments.
The enclosed Notice of Special Meeting of Shareholders and Proxy
Statement/Prospectus describe the Merger and provide information regarding the
Special Meeting. Please read these materials carefully.
A form of Continuing Share election ("Continuing Share Election"), which
contains instructions on how shareholders can convert their Shares of PCA Common
Stock into cash, retain such Shares as shares of the Surviving Corporation or
both, is being mailed to all PCA shareholders at the same time as the Proxy
Statement/Prospectus but under separate cover. IN ORDER TO MAKE A VALID ELECTION
TO RETAIN ALL OR SOME OF A SHAREHOLDER'S SHARES OF PCA COMMON STOCK AS
CONTINUING SHARES, A SHAREHOLDER MUST RETURN A PROPERLY COMPLETED CONTINUING
SHARE ELECTION TOGETHER WITH ALL CERTIFICATES FOR SHARES OF PCA COMMON STOCK TO
THE COMPANY, BY 5:00 P.M., NEW YORK CITY TIME, ON THE LAST BUSINESS DAY
PRECEDING THE DATE OF THE SPECIAL MEETING. SEE "THE MERGER--STOCK ELECTION
PROCEDURE" IN THE PROXY STATEMENT/PROSPECTUS.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. THE
AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES
OF PCA COMMON STOCK ELIGIBLE TO VOTE IS REQUIRED TO APPROVE THE MERGER
AGREEMENT. A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN
PERSON WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT.
THEREFORE, I URGE YOU TO FILL IN, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE AS SOON AS POSSIBLE TO ASSURE
THAT YOUR SHARES WILL BE VOTED AT THE SPECIAL MEETING.
On behalf of the Board of Directors, we thank you for your support and urge
you to vote FOR the approval of the Merger Agreement.
I look forward to seeing you on August 17, 1998.
Sincerely,
Joseph H. Reich
Chairman of the Board
<PAGE>
PCA INTERNATIONAL, INC.
815 MATTHEWS-MINT HALL ROAD
MATTHEWS, NORTH CAROLINA 28105
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
AUGUST 17, 1998
A special meeting of shareholders (the "Special Meeting") of PCA
International, Inc. (the "Company" or "PCA") will be held on August 17, 1998 at
10:00 a.m., at the Company's principal executive offices located at 815
Matthews-Mint Hill Road, Matthews, North Carolina, for the following purposes:
1. To consider and vote on a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of April 20, 1998 (the "Merger Agreement"), by
and between the Company and Jupiter Acquisition Corp. ("Mergerco"), a
subsidiary of Jupiter Partners II L.P. ("Jupiter"), pursuant to which
Mergerco will be merged with and into the Company (the "Merger") with the
Company continuing as the surviving corporation (the "Surviving
Corporation"). Pursuant to the Merger, each share (a "Share") of common
stock, par value $.20 per share, of the Company issued and outstanding
immediately prior to the effective time of the Merger (other than (i) Shares
held by the Company as treasury stock or owned by Mergerco, which Shares
shall be canceled and (ii) Shares as to which appraisal rights have been
exercised) will, subject to certain limitations, at the election of the
holder thereof and subject to the terms described herein, either (a) be
converted into the right to receive $26.50 in cash, or (b) remain
outstanding as one fully paid and nonassessable share of common stock of the
Surviving Corporation (a "Continuing Share"), subject to proration in
certain circumstances. The Merger Agreement is included as Annex A to the
Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
Only shareholders of record as of the close of business on July 13, 1998
will be entitled to notice of the Special Meeting and to vote at the Special
Meeting or at any adjournment or postponement thereof. A list of shareholders
entitled to vote at the Special Meeting will be available for inspection by any
shareholder beginning two business days after the notice of the Special Meeting
is given and continuing through the Special Meeting at the Company's principal
executive offices, located at 815 Matthews-Mint Hill Road, Matthews, North
Carolina.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. THE
AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES
OF PCA COMMON STOCK ELIGIBLE TO VOTE IS REQUIRED TO APPROVE AND ADOPT THE MERGER
AGREEMENT.
Any shareholder shall have the right to dissent from the consummation of the
transactions contemplated by the Agreement and Plan of Merger and to receive
payment of the "fair value" of his or her Shares upon compliance with the
procedures set forth in Article 13 of the North Carolina Business Corporation
Act. See "DISSENTING SHAREHOLDERS' RIGHTS" in the Proxy Statement/Prospectus
that accompanies this Notice and the full text of Chapter 55, Article 13 of the
General Statutes of North Carolina, which is attached as Appendix C to the
accompanying Proxy Statement/Prospectus.
A form of Continuing Share election ("Continuing Share Election"), which
contains instructions on how shareholders can convert their Shares of PCA Common
Stock into cash, retain such Shares as shares of the Surviving Corporation or
both, is being mailed separately to all PCA shareholders at the same time as the
Proxy Statement/Prospectus but under separate cover. IN ORDER TO MAKE A VALID
ELECTION TO RETAIN ALL OR SOME OF A SHAREHOLDER'S SHARES OF PCA COMMON STOCK AS
CONTINUING SHARES, A SHAREHOLDER MUST RETURN A PROPERLY COMPLETED CONTINUING
SHARE ELECTION TOGETHER WITH ALL CERTIFICATES FOR SHARES OF PCA COMMON STOCK TO
THE COMPANY, BY 5:00 P.M., NEW YORK CITY TIME, ON THE LAST BUSINESS DAY
PRECEDING THE DATE OF THE SPECIAL MEETING. SEE "THE MERGER--STOCK ELECTION
PROCEDURE" IN THE PROXY STATEMENT/PROSPECTUS.
<PAGE>
A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT. PLEASE FILL IN,
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. IF YOU DECIDE TO ATTEND THE SPECIAL MEETING, YOU CAN
REVOKE YOUR PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE SPECIAL
MEETING.
The Board of Directors recommends that shareholders vote to approve the
Merger Agreement, which is described in detail in the accompanying Proxy
Statement/Prospectus.
By Order of the Board of Directors,
Bruce A. Fisher
Secretary
July 27, 1998
Matthews, North Carolina
<PAGE>
PCA INTERNATIONAL, INC.
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
PROXY STATEMENT/PROSPECTUS
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
AUGUST 17, 1998
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.20 per share, of PCA International, Inc., a North Carolina
corporation (the "Company" or "PCA"), in connection with the solicitation of
proxies by the Board of Directors of the Company (the "Board") for use at the
special meeting of shareholders, and at any adjournment or postponement thereof
(the "Special Meeting"), to be held at 10:00 a.m. at the Company's principal
executive offices, located at 815 Matthews-Mint Hill Road, Matthews, North
Carolina, on August 17, 1998.
The Special Meeting has been called to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger, dated as of April 20, 1998
(the "Merger Agreement"), by and between the Company and Jupiter Acquisition
Corp. ("Mergerco"), a subsidiary of Jupiter Partners II L.P. ("Jupiter").
SHAREHOLDERS ARE URGED TO READ THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGES 17 TO 22 OF THIS PROXY STATEMENT/PROSPECTUS.
The Merger Agreement provides, among other things, for the merger of
Mergerco with and into the Company (the "Merger"), with the Company continuing
as the surviving corporation (the "Surviving Corporation"). Pursuant to the
Merger, each share (a "Share") of the common stock of PCA ("PCA Common Stock")
issued and outstanding immediately prior to the effective time of the Merger
(the "Effective Time") (other than (i) Shares held by the Company as treasury
stock or owned by Mergerco, which Shares shall be canceled and (ii) Shares as to
which appraisal rights have been exercised) will, at the election of the holder
thereof (a "Continuing Share Election") and subject to the terms described
herein, either (a) be converted into the right to receive $26.50 in cash ("Cash
Merger Consideration"), or (b) remain outstanding as one fully paid and
nonassessable share of common stock of the Surviving Corporation following the
Merger (a "Continuing Share," and together with the Cash Merger Consideration,
the "Merger Consideration"). Because by the terms of the Merger Agreement the
number of Shares of PCA Common Stock to be retained by existing shareholders
must be no less than 271,698 Shares nor more than 358,490 Shares (excluding
certain Shares to be retained by management), the right to receive $26.50 in
cash or retain PCA Common Stock is subject to proration as set forth in the
Merger Agreement and described in this Proxy Statement/Prospectus. See "THE
MERGER--Merger Consideration."
If holders elect in the aggregate to retain Continuing Shares in excess of
358,490 Shares (the "Maximum Continuing Number"), then the number of Continuing
Shares to be owned by such holders will be prorated based on the number of
Continuing Shares each holder elected to retain (with fractional shares rounded
down to the next whole number) so that only the Maximum Continuing Number of
Shares will remain as Continuing Shares. With respect to Shares as to which
Continuing Share Elections are made but with respect to which no Continuing
Shares will be issued by reason of the preceding sentence, such Continuing Share
Elections will be deemed to be revoked and such Shares will be converted into
the right to receive the Cash Merger Consideration.
If holders elect in the aggregate to retain less than 271,698 Shares (the
"Minimum Continuing Number"), then (i) each shareholder of PCA that made a
Continuing Share election will retain the number of Continuing Shares set forth
in such election and (ii) each holder (whether or not such holder made a
Continuing Share Election) will receive a prorated (based on the total number of
Shares owned by such shareholder as to which a Continuing Share Election has not
been made) number of Continuing Shares (with fractional shares rounded up to the
next whole number) so that the Minimum Continuing Number will remain outstanding
as Continuing Shares. With respect to Shares as to which no Continuing Share
<PAGE>
Election was made but which will remain outstanding as Continuing Shares by
reason of the preceding sentence, such a Continuing Share Election shall be
deemed to have been made.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Shareholders of PCA who elect to retain Continuing Shares should note that,
immediately following the Merger, Jupiter will own, directly or indirectly,
between approximately 77% and 88% of the outstanding common stock of the
Surviving Corporation ("Surviving Corporation Common Stock"). Jupiter is a New
York-based investment firm organized to invest in buyouts and growth capital
opportunities. Also, the Company will incur substantial indebtedness in
connection with the Merger and will have substantially more indebtedness than it
has had historically.
The Company has filed a registration statement on Form S-4 (together with
all amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of the Surviving Corporation Common Stock which may be
retained pursuant to the Merger. This Proxy Statement/Prospectus also
constitutes a prospectus of the Company with respect to such Shares.
This Proxy Statement/Prospectus does not cover any resales of shares of the
Surviving Corporation to be received by the shareholders of the Surviving
Corporation upon consummation of the Merger, and no person is authorized to make
any use of this Proxy Statement/Prospectus in connection with any such resale.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding Shares of PCA Common Stock held by shareholders
of record on July 13, 1998.
PCA Common Stock is listed for trading on the Nasdaq National Market System
("NASDAQ") under the symbol "PCAI". On April 20, 1998, the last trading day
before public announcement of the execution of the Merger Agreement, the closing
price of PCA Common Stock on NASDAQ was $21.50 per share. If the Merger is
approved, there will be a substantial decrease in the number of outstanding
shares of the Surviving Corporation that are publicly traded, and the volume of
shares of the Surviving Corporation traded following the Merger will be
substantially smaller than the trading volume of PCA Common Stock prior to the
Merger. Furthermore, the National Association of Securities Dealers ("NASD") has
advised the Company that as a result of the Merger the Surviving Corporation
Common Stock may no longer meet the listing requirements of the NASDAQ and,
should the Shares be de-listed by the NASD, shareholders are likely to
experience difficulty trading Continuing Shares or obtaining prices that reflect
the value thereof. See "RISK FACTORS--Delisting and Loss of Liquidity."
This Proxy Statement/Prospectus, the accompanying form of proxy and, under
separate cover, the Continuing Share Election are first being mailed to the
Company's shareholders on or about July 27, 1998. The Continuing Share Election
contains instructions on how shareholders can convert their Shares of PCA Common
Stock into cash, retain such Shares as shares of the Surviving Corporation or
both. In order to make a valid election to retain all or some of a shareholder's
Shares of PCA Common Stock as Continuing Shares, a shareholder must return a
properly completed Continuing Share Election to the Company, by 5:00 p.m., New
York City time, on the last business day preceding the date of the Special
Meeting (the "Election Date"). See "THE MERGER--Stock Election Procedures."
The date of this Proxy Statement/Prospectus is July 23, 1998.
<PAGE>
TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................................................... 1
SUMMARY AND SPECIAL FACTORS................................................................................ 2
The Company.............................................................................................. 2
Mergerco................................................................................................. 2
The Special Meeting...................................................................................... 3
The Merger............................................................................................... 3
Merger Financing......................................................................................... 8
Appraisal Rights of Dissenting Shareholders.............................................................. 8
Interests of Certain Persons In the Merger............................................................... 9
NASDAQ Listing........................................................................................... 10
Material Federal Income Tax Consequences................................................................. 10
Risk Factors............................................................................................. 11
Summary..................................................................................................
Summary Historical Consolidated Financial and Operating Data............................................. 12
Summary Unaudited Pro Forma Condensed Consolidated Financial and Operating Data.......................... 14
RISK FACTORS............................................................................................... 17
Cautionary Statement Concerning Forward-Looking Statements............................................... 17
Control By Jupiter....................................................................................... 17
Delisting, Loss of Liquidity............................................................................. 18
Potential Deregistration Under the Exchange Act.......................................................... 18
Restrictions on Additional Indebtedness; Maintenance of Ratios........................................... 18
Substantial Indebtedness................................................................................. 18
Ability to Service Indebtedness.......................................................................... 19
Substantial Leverage..................................................................................... 19
Potential Dilution of Company Shareholders............................................................... 19
Taxation of Shareholders Receiving Cash--Possible Dividend Treatment..................................... 20
Certain Proration Risks.................................................................................. 20
Authorization of Preferred Stock......................................................................... 20
Risk of Loss of Kmart and Wal-Mart Licenses.............................................................. 20
Management of Growth..................................................................................... 21
Funding of Growth........................................................................................ 21
Dependence on Key Personnel.............................................................................. 21
Seasonality.............................................................................................. 22
Competition.............................................................................................. 22
Litigation............................................................................................... 22
THE SPECIAL MEETING........................................................................................ 23
Time and Place of Meeting; Matter to Be Considered....................................................... 23
Proxy Solicitation....................................................................................... 23
Record Date and Quorum Requirement....................................................................... 23
Voting Procedures........................................................................................ 23
Voting and Revocation of Proxies......................................................................... 24
Stock Election........................................................................................... 24
Effective Time........................................................................................... 24
Rights of Dissenting Shareholders........................................................................ 24
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THE MERGER................................................................................................. 25
Background of the Merger................................................................................. 25
Litigation............................................................................................... 28
Recommendation of the Board of Directors; Reasons for the Merger......................................... 28
Opinion of Financial Advisor............................................................................. 32
Certain Estimates of Future Operations................................................................... 36
Merger Consideration..................................................................................... 37
Stock Election........................................................................................... 37
Stock Election Procedure................................................................................. 38
Effective Time of the Merger............................................................................. 38
Conversion/Retention of Shares; Procedures for Exchange of Certificates.................................. 38
Conduct of Business Pending the Merger................................................................... 39
Conditions to the Consummation of the Merger............................................................. 40
Federal Income Tax Consequences.......................................................................... 40
Accounting Treatment..................................................................................... 44
Effect on Stock Options and Employee Benefit Matters..................................................... 44
Interests of Certain Persons in the Merger............................................................... 44
Investors' Agreement..................................................................................... 45
NASDAQ Listing........................................................................................... 46
Resale of PCA Common Stock Following the Merger.......................................................... 46
Merger Financing......................................................................................... 46
Conversion of Mergerco Stock............................................................................. 47
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................................................. 48
The Merger............................................................................................... 48
Proration of Continuing Shares........................................................................... 48
The Surviving Corporation................................................................................ 48
Representations and Warranties........................................................................... 49
Certain Pre-Closing Covenants............................................................................ 49
No Solicitation of Transactions.......................................................................... 50
Indemnification and Insurance............................................................................ 50
Employee Benefit Plans................................................................................... 51
Financing................................................................................................ 51
NASDAQ Listing........................................................................................... 51
Cooperation and Reasonable Best Efforts.................................................................. 51
Conditions to the Consummation of the Merger............................................................. 51
Termination.............................................................................................. 52
Fees and Expenses........................................................................................ 53
Amendment and Modification............................................................................... 54
</TABLE>
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THE COMPANY................................................................................................ 55
Overview................................................................................................. 55
Distribution Channels.................................................................................... 57
Sales and Marketing...................................................................................... 58
Research and Development................................................................................. 59
Manufacturing and Facilities............................................................................. 59
Raw Materials and Suppliers.............................................................................. 59
Competition.............................................................................................. 59
Market Coverage.......................................................................................... 60
Seasonality.............................................................................................. 60
Governmental Regulations................................................................................. 60
Employees................................................................................................ 61
Intellectual Property.................................................................................... 61
Legal Proceedings........................................................................................ 61
Recent Developments...................................................................................... 61
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA.............................................. 62
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA.................................................. 64
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME AND OTHER DATA.............................. 65
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income and Other Data.................... 67
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET................................................... 68
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.......................................... 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 71
Operations............................................................................................... 71
Liquidity and Capital Resources.......................................................................... 73
Year 2000 Issues......................................................................................... 75
Inflation................................................................................................ 75
Comprehensive Income..................................................................................... 76
Segments of an Enterprise and Related Information........................................................ 76
DESCRIPTION OF COMPANY CAPITAL STOCK....................................................................... 77
General.................................................................................................. 77
Common Stock............................................................................................. 77
Senior Preferred Stock................................................................................... 77
Certain Provisions of North Carolina Corporation Law..................................................... 78
Exchange Agent and Registrar............................................................................. 79
Capital Stock of the Company Following the Merger........................................................ 79
MANAGEMENT AND BOARD OF DIRECTORS OF THE COMPANY........................................................... 80
Management............................................................................................... 80
Board of Directors....................................................................................... 81
EXECUTIVE COMPENSATION..................................................................................... 82
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................................................... 84
</TABLE>
iii
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS........................................................ 85
Employment and Severance Arrangements.................................................................... 86
Compensation of Directors................................................................................ 87
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................................................... 87
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 87
MANAGEMENT FOLLOWING THE MERGER............................................................................ 88
Board of Directors....................................................................................... 88
Officers................................................................................................. 89
REGULATORY CONSIDERATIONS.................................................................................. 89
Antitrust................................................................................................ 89
MERGERCO AND JUPITER....................................................................................... 89
Equity Sponsor........................................................................................... 89
DISSENTING SHAREHOLDERS' RIGHTS............................................................................ 90
EXPERTS.................................................................................................... 92
LEGAL MATTERS.............................................................................................. 92
</TABLE>
<TABLE>
<CAPTION>
Annex A Agreement and Plan of Merger
<S> <C>
Annex B Opinion of Needham & Company, Inc.
Annex C Article 13 of the North Carolina Business Corporations Act
</TABLE>
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AVAILABLE INFORMATION
PCA has filed with the Securities and Exchange Commission (the "Commission")
the Registration Statement pursuant to the Securities Act, and the rules and
regulations promulgated thereunder. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Statements made in this Proxy Statement/Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement or incorporated by
reference herein, reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference.
PCA is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy and information statements and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth St., N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth St., N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a World Wide Web site (http://www.sec.gov) that contains
such material regarding issuers that file electronically with the Commission.
The Registration Statement has been so filed and may be obtained at such site.
The shares of PCA Common Stock are included for quotation on NASDAQ, and
such reports are available for inspection and copying at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES COVERED BY THIS PROXY STATEMENT/PROSPECTUS OR A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
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SUMMARY AND SPECIAL FACTORS
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. Unless the context
otherwise requires, all references to the "Company" or "PCA" prior to the
Effective Time refer to PCA International, Inc., its predecessors and
subsidiaries, and after the Effective Time, to the Surviving Corporation. This
summary is not intended to be complete and is qualified in its entirety by the
more detailed information contained elsewhere in this Proxy Statement/
Prospectus, the Appendices hereto and the documents incorporated by reference or
otherwise referred to herein. Shareholders are urged to review this entire Proxy
Statement/Prospectus carefully, including the Appendices hereto and such other
documents.
THE COMPANY
PCA is a holding company engaged through its subsidiaries in the sale and
processing of professional color portraits of children, adults and families. As
of May 3, 1998, the Company operated 2,034 permanent portrait studios within
Kmart and Wal-Mart stores and supercenters in the United States, Canada, Mexico,
Puerto Rico, and South America. The Company also operates an extensive traveling
studio business providing portrait photography services in approximately 1,400
additional retail locations and to church congregations and other institutions.
The Company's principal executive offices are located at 815 Matthews-Mint
Hill Road, Matthews, North Carolina 28105, and the Company's telephone number is
(704) 847-8011.
MERGERCO
Mergerco was incorporated on April 17, 1998 and has not to date carried on
any activities other than those incident to its formation and the transactions
contemplated by the Merger Agreement. All of the outstanding capital stock of
Mergerco is owned by Jupiter.
THE SPECIAL MEETING
TIME AND PLACE OF MEETING; MATTER TO BE CONSIDERED
The Special Meeting will be held at the Company's principal executive
offices located at 815 Matthews-Mint Hill Road, Matthews, North Carolina, on
August 17, 1998, starting at 10:00 a.m., New York City time. At the Special
Meeting, holders of PCA Common Stock will be asked to approve and adopt the
Merger Agreement.
RECORD DATE AND QUORUM REQUIREMENT
The PCA Common Stock is the only outstanding voting security of the Company.
The Board has fixed the close of business on July 13, 1998 as the record date
(the "Record Date") for the determination of shareholders entitled to notice of,
and to vote at, the Special Meeting and any adjournment or adjournments thereof.
Each holder of record of PCA Common Stock at the close of business on the Record
Date is entitled to one vote for each Share then held on each matter submitted
to a vote of shareholders. At the close of business on the Record Date, there
were 7,947,879 Shares of PCA Common Stock issued and outstanding held of record
by 951 holders.
The holders of a majority of the outstanding Shares entitled to vote at the
Special Meeting must be present in person or represented by proxy to constitute
a quorum for the transaction of business. Proxies with instructions to abstain
are counted as present for purposes of determining the presence or absence of a
quorum for the transaction of business.
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<PAGE>
VOTING PROCEDURES
Approval of the Merger Agreement will require the affirmative vote of the
holders of a majority of the outstanding Shares of PCA Common Stock present in
person or represented by proxy and entitled to vote at the Special Meeting. A
failure to vote or an abstention will have the same legal effect as a vote cast
against approval. Brokers and, in many cases, nominees will not have
discretionary power to vote on the Merger proposal to be presented at the
Special Meeting. Accordingly, beneficial owners of Shares should instruct their
brokers or nominees how to vote. A broker non-vote will have the same effect as
a vote against the Merger. Shareholders may vote by proxy by completing and
signing the Proxy included with this Proxy Statement/Prospectus and returning it
to Wachovia Bank, N.A., as Exchange Agent, (the "Exchange Agent") in the
envelope provided. A Proxy may be revoked at any time prior to the Special
Meeting by submitting a properly executed Proxy with a later date to the
Exchange Agent or the Company's secretary prior to the Special Meeting or by
attending and voting at the Special Meeting.
Under North Carolina law, holders of PCA Common Stock who do not vote in
favor of the Merger Agreement and who comply with certain notice requirements
and other procedures will have the right to dissent and to be paid cash for the
"fair value" of their Shares as finally determined under such procedures, which
may be more or less than the consideration to be received by other shareholders
under the terms of the Merger Agreement. Failure to follow such procedures
precisely may result in loss of Dissenters' Rights (defined below). See
"DISSENTING SHAREHOLDERS' RIGHTS."
Record holders of Shares of PCA Common Stock will be entitled to make an
unconditional election to retain shares of Surviving Corporation Common Stock
(subject to proration and the receipt of cash in certain events described
herein) on or prior to the Election Date (as defined herein) on the form of
Continuing Share Election being sent to all record holders of PCA Common Stock
at the same time as this Proxy Statement/Prospectus but under separate cover.
Shareholders electing to retain shares of Surviving Corporation Common Stock
should carefully follow the instructions on the Continuing Share Election form
and will need to return their certificates which represent Shares of PCA Common
Stock to the Company for cancellation with the Continuing Share Election.
Shareholders who do not return a Continuing Share Election or who do not
properly complete a Continuing Share Election will be deemed to have elected to
receive the Cash Merger Consideration. See "--The Merger--STOCK ELECTION."
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS
As of July 1, 1998, directors and executive officers of the Company and
their affiliates as a group beneficially owned an aggregate of 3,408,148 Shares
of PCA Common Stock (approximately 42.9% of the PCA Common Stock eligible to
vote at the Special Meeting). While the directors and executive officers of the
Company have indicated that they intend to vote their Shares of PCA Common Stock
in favor of the approval and adoption of the Merger Agreement, none of such
persons have a contractual obligation to do so.
Any management option which Jupiter allows to remain outstanding will not be
subject to proration. See "THE MERGER--Interests of Certain Persons in the
Merger." The directors and executive officers otherwise will be subject to
proration to the same extent as the other shareholders of the Company.
THE MERGER
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board believes that the Merger is in the best interests of the
shareholders, has approved the Merger Agreement and the transactions
contemplated thereby and has recommended that shareholders vote in favor of
approval and adoption of the Merger Agreement. See "THE MERGER--Recommendation
of the Board of Directors; Reasons for the Merger."
3
<PAGE>
OPINION OF FINANCIAL ADVISOR TO THE COMPANY'S BOARD OF DIRECTORS
Needham & Company, Inc. ("Needham"), the financial advisor to the Company,
rendered its written opinion on April 20, 1998 (the "Needham Opinion") to the
Board to the effect that, based upon and subject to certain assumptions and
matters stated therein, as of the date of such opinion, the consideration to be
received by holders of PCA Common Stock (other than Mergerco and its affiliates)
pursuant to the Merger was fair to such holders from a financial point of view.
The full text of the Needham Opinion, which sets forth the assumptions made,
matters considered, and limitations on and scope of the review undertaken, is
attached as Annex B to this Proxy Statement/Prospectus and should be read
carefully in its entirety. The Needham Opinion is directed only to the fairness,
from a financial point of view, of the consideration to be received by the
holders of PCA Common Stock (other than Mergerco and its affiliates) in the
Merger, does not address any other aspect of the Merger, and does not constitute
a recommendation to any shareholder as to how such shareholder should vote at
the Special Meeting or what election such shareholder should make with respect
to the retention or conversion of such holder's Shares of PCA Common Stock. See
"THE MERGER--Opinion of Financial Advisor" and Annex B.
ADVANTAGES AND DISADVANTAGES OF THE MERGER
The Company believes that the principal advantage of the Merger to the
shareholders is that they will have the opportunity to receive an attractive
value in cash for their Shares of PCA Common Stock while being offered the
opportunity to elect to have a continuing interest in the Company through the
retention of shares of Surviving Corporation Common Stock (to the extent such
retention is not otherwise limited by the terms of the Merger Agreement). See
"RISK FACTORS--Certain Proration Risks," "THE MERGER--Background of the Merger"
and "THE MERGER--Recommendation of the Board of Directors; Reasons for the
Merger."
The Company believes that the principal detriments of the Merger to the
shareholders are the inability of shareholders who elect Continuing Shares, but
are subject to proration, to fully participate in any future profitability of
the Company that may not be reflected in the Cash Merger Consideration; the
potential delisting of, the potential deregistration of, and loss of liquidity
for, the Surviving Corporation Common Stock to be retained by shareholders; for
those shareholders who receive Continuing Shares, the substantial indebtedness
to be incurred pursuant to the Merger Financing (as defined herein); the
dilution following the Merger of the equity ownership percentage of the
shareholders who receive the Continuing Shares due to, among other things, the
issuance of options in the Surviving Corporation under the New Option Plans (as
defined herein); the lack of a meaningful vote by minority shareholders after
the Merger due to the amount of Surviving Corporation Common Stock to be held by
Jupiter and its affiliates, and the negative book value of the shares of
Surviving Corporation Common Stock to be retained by shareholders. See "RISK
FACTORS."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or waiver of all conditions to the
Merger, Mergerco will be merged with and into the Company, with the Company as
the Surviving Corporation. The Merger will become effective at such time as the
articles of merger are duly filed with the Secretary of State of the State of
North Carolina or at such later time as is specified in the articles of merger
(the "Effective Time"). From and after the Effective Time, the Surviving
Corporation will possess all the rights, privileges, immunities, powers and
franchises of the Company and Mergerco, all as and to the extent provided under
the North Carolina Business Corporation Act ("NCBCA").
MERGER CONSIDERATION
At the Effective Time, subject to certain provisions as described herein
with respect to Shares owned by Mergerco, Shares held in treasury, fractional
Shares and Shares as to which appraisal rights have been
4
<PAGE>
exercised ("Appraisal Shares") and the effects of proration described herein,
each share of PCA Common Stock (other than Continuing Shares (as defined
below)), will be converted into the right to receive in cash following the
Merger an amount equal to $26.50 and each Share of PCA Common Stock with respect
to which an election to retain PCA Common Stock has been made and not revoked in
accordance with the Merger Agreement will continue to represent one fully paid
and non-assessable share of Surviving Corporation Common Stock.
The Merger Agreement provides that shareholders of the Company must retain a
minimum of 271,698 Shares of PCA Common Stock as Continuing Shares and may not
elect to retain more than 358,490 shares of PCA Common Stock as Continuing
Shares (excluding certain Shares to be retained by management). The aggregate
amount of Cash Merger Consideration to be paid to Shareholders will be between
$197,868,795 and $200,168,783, depending on the number of shareholders who elect
to retain Shares of PCA Common Stock as Continuing Shares.
STOCK ELECTION
Record holders of Shares of PCA Common Stock will be entitled to make an
unconditional election to retain shares of Surviving Corporation Common Stock on
or prior to the Election Date on the form of Continuing Share Election being
sent to all record holders of PCA Common Stock at the same time as this Proxy
Statement/Prospectus but under separate cover. If holders elect in the aggregate
to retain Continuing Shares in excess of the Maximum Continuing Number, then the
number of Continuing Shares to be owned by such holders will be prorated based
on the number of Continuing Shares each holder elected to retain (with
fractional shares rounded down to the next whole number) so that only the
Maximum Continuing Number of Shares will remain as Continuing Shares. With
respect to Shares as to which Continuing Share Elections are made but with
respect to which no Continuing Shares will be issued by reason of the preceding
sentence, such Continuing Share Elections will be deemed to be revoked and such
Shares will be converted into the right to receive the Cash Merger
Consideration.
If holders elect in the aggregate to retain less than the Minimum Continuing
Number, then (i) each holder that made a Continuing Share Election will retain
the number of Continuing Shares set forth in such election and (ii) each holder
(whether or not such holder made a Continuing Share Election) will receive a
prorated (based on the total number of Shares owned by such shareholder as to
which a Continuing Share Election has not been made) number of Continuing Shares
(with fractional shares rounded up to the next whole number) so that the Minimum
Continuing Number will remain outstanding as Continuing Shares. With respect to
Shares as to which no Continuing Share Election was made but which will remain
outstanding as Continuing Shares by reason of the preceding sentence, such a
Continuing Share Election shall be deemed to have been made.
OPTIONS
Except as provided below, immediately prior to the Effective Time, each
option to acquire Shares of PCA Common Stock granted to employees and directors,
whether vested or not (the "Options"), will be canceled and, in exchange
therefor, as soon as practicable following the Effective Time, the holders of
the Options will receive, with respect to each Option, a cash payment in an
amount equal to the product of (x) the excess, if any, of $26.50 over the
exercise price of the Option multiplied by (y) the number of Shares of PCA
Common Stock subject to such Option (the "Option Consideration"). Jupiter has
agreed to allow certain members of management (the "Management Shareholders")
who hold Options, including Mr. John Grosso, the Company's President and Chief
Executive Officer, to elect not to have their Options canceled at the Effective
Time and instead to have such Options become fully exercisable and vested at the
Effective Time and be retained as options to purchase shares of Surviving
Corporation Common Stock.
5
<PAGE>
WARRANTS
Immediately prior to the Effective Time, outstanding warrants ("Warrants")
to acquire 150,000 Shares of PCA Common Stock at an average exercise price of
$16.25 will be exchanged for an amount equal to the excess of the Cash Merger
Consideration over the exercise price per share, multiplied by 150,000, and the
Warrants shall then be cancelled.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither the Company nor any of its
subsidiaries or affiliates shall (and the Company shall use its best efforts to
cause its officers, directors, employees, representatives and agents not to),
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than Mergerco,
or any of its affiliates or representatives) concerning any merger, tender
offer, exchange offer, sale of assets, sale of shares of capital stock or debt
securities or similar transactions involving the Company or any subsidiary,
division or operating or principal business unit of the Company (an "Acquisition
Proposal"). The Merger Agreement further provides that the Company will
immediately cease any existing activities, discussions or negotiations with any
parties conducted prior to the date of the Merger Agreement with respect to any
of the foregoing. Notwithstanding the foregoing, the Company may furnish
information concerning its business, properties or assets to any corporation,
partnership, person or other entity or group pursuant to appropriate
confidentiality agreements, and may negotiate and participate in discussions and
negotiations with such entity or group concerning an Acquisition Proposal: (x)
if such entity or group has on an unsolicited basis submitted a bona fide
written proposal to the Board of the Company relating to any such transaction
which the Board determines (based upon the advice of independent investment
bankers for the Company) represents a superior transaction to the Merger for
shareholders of the Company and (y) if the Board determines, only after receipt
of advice from independent legal counsel, that the failure to provide such
information or access or to engage in such discussions or negotiations could
cause the Board to violate its fiduciary duties to the Company's shareholders
under applicable law. The Merger Agreement further provides that the Company
shall immediately (in any event within 24 hours) communicate to Mergerco the
terms of any proposal, discussion, negotiation or inquiry (and will disclose any
written materials received by the Company in connection with such proposal,
discussion, negotiation or inquiry) and the identity of the party making such
proposal or inquiry which it may receive in respect of any such transaction. See
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT--No Solicitation of Transactions."
As of the date this Proxy/Registration Statement is first being mailed to
shareholders the Company has not received any proposals from any third party
relating to an Acquisition Proposal.
CERTAIN FEES AND EXPENSES
Except as otherwise contemplated by the Merger Agreement, including the
discussion below, all costs and expenses incurred in connection with the Merger
will be paid by the party incurring such cost or expense. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--Fees and Expenses."
The Merger Agreement provides that the Company will pay Mergerco an amount
equal to $6 million and all reasonable out-of-pocket fees and expenses incurred
by Mergerco in connection with the Merger ("Fees and Expenses") if: (i) the
Company terminates the Merger Agreement to support a superior alternative
acquisition proposal, (ii) Mergerco terminates the Merger Agreement as a result
of the Board having withdrawn, failed to reaffirm or adversely modified its
approval or recommendation of the Merger or having recommended an alternative
acquisition proposal or having executed an agreement relating to an alternative
acquisition proposal, (iii) Mergerco terminates the Merger Agreement as a result
of the Merger having not been consummated by October 31, 1998 (the "Termination
Date") and the Company has failed to use commercially reasonable efforts to
cause the Merger to occur or (iv) either party terminates the Merger Agreement
as a result of the Merger having not been consummated by the
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<PAGE>
Termination Date or by the failure to obtain the requisite shareholder vote, and
an alternative acquisition proposal or an intention to make an alternative
acquisition proposal shall have been made to the Company or publicly announced
at the time of such termination and within one year of such termination the
Company enters into an alternative acquisition proposal.
The Merger Agreement further provides that the Company will pay Mergerco all
Fees and Expenses if: (i) Mergerco terminates the Merger Agreement as a result
of the Company having breached or failed to comply with any of its covenants,
representations or warranties such that any of the conditions to closing is
reasonably likely to be incapable of being satisfied by the Termination Date or
(ii) the Company terminates the Merger Agreement at a time after Mergerco has
given notice to the Company that Mergerco is or would be entitled to terminate
the Merger Agreement under (i) above.
The Company will also pay to Mergerco an amount equal to $6 million if (a)
the Merger Agreement is terminated by either party if the Merger is not
consummated by the Termination Date, or because the requisite shareholder vote
has not been obtained and (b) at the time of such termination, a person or group
of persons has acquired beneficial ownership of more than 20% (or, in the case
of Centennial Partners L.P., 35%) in the aggregate of the PCA Common Stock and
if, within one year of such termination, the Company enters into any alternative
acquisition proposal. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Fees and
Expenses."
Jupiter estimates that (i) Jupiter's reimbursable Fees and Expenses if the
Merger is not consummated will be approximately $5 million, and (ii) the total
cash costs that will be incurred if the Merger is consummated are estimated to
be approximately $15 million.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of the Company and Mergerco to consummate the
Merger are subject to the satisfaction of a number of conditions, including: the
Merger Agreement shall have been adopted by the shareholders of the Company; no
statute, rule, order, decree or regulation shall have been enacted or
promulgated by any government or any governmental agency or authority of
competent jurisdiction which prohibits the consummation of the Merger and all
governmental consents, orders and approvals required for consummation of the
Merger and the transactions contemplated thereby shall have been obtained and
shall be in effect at the Effective Time; and there shall be no order or
injunction of a court or other governmental authority of competent jurisdiction
in effect precluding, restraining, enjoining or prohibiting consummation of the
Merger. The obligation of Mergerco to consummate the Merger is subject to
satisfaction of certain additional conditions, including: the Company's
representations and warranties set forth in the Merger Agreement (other than as
to its capitalization and considered without regard to any materiality or
material adverse effect qualification) shall be true and correct in all respects
in each case when made and on the closing date as though made on and as of the
closing date except at either time to the extent that the failure of such
representations and warranties to be true and correct would not have or be
reasonably likely to have a material adverse effect on the Company and its
subsidiaries taken as a whole or on the consummation of the Merger transactions
or the Company's ability to perform its obligations under the Merger Agreement
in a timely manner; in addition, the representations and warranties of the
Company as to its capitalization shall be true and correct in all material
respects on and as of the date made and as of the closing date; the Company
shall have performed or complied in all material respects with all obligations,
agreements or covenants required by the Merger Agreement to be performed or
complied with by it; since the date of the Merger Agreement, there shall have
been no material adverse change in the business, assets, operations or condition
(financial or otherwise) of the Company and its subsidiaries taken as a whole;
holders of not more than 10% of the outstanding Shares shall have demanded
appraisal of their Shares in accordance with North Carolina law; and all
conditions to the availability of Jupiter's financing contemplated by the
commitment letters it has obtained shall have been met and such financing shall
be available or alternative financing shall be available. The obligation of the
Company to consummate the Merger is also subject to the satisfaction of certain
additional conditions,
7
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including: Mergerco's representations and warranties set forth in the Merger
Agreement that are qualified as to materiality shall be true and Mergerco's
representations and warranties set forth in the Merger Agreement that are not
qualified as to materiality shall be true in all material respects, in either
case, when made and on the closing date as though made on and as of the closing
date and without giving effect to any knowledge qualifiers; and Mergerco shall
have performed or complied with all obligations, agreements or covenants
required by the Merger Agreement to be performed or complied with by it. See
"CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Conditions to the Consummation of
the Merger."
AMENDMENT AND MODIFICATION
Any provision of the Merger Agreement may be amended, modified or
supplemented by the Company and Mergerco by written agreement, except that after
the approval and adoption of the Merger Agreement by the shareholders of the
Company, no such amendment, modification or supplement may reduce the amount or
change the form of the consideration to be received in exchange for any shares
of capital stock of the Company. In the event either or both of the parties
amend or modify material conditions of the Merger Agreement, the Company will
resolicit shareholder approval. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Amendment and Modification."
Although the Board of Directors of the Company reserves the right to waive
any conditions to the Merger without the approval of the Company's stockholders,
the Company intends to solicit further approval of its stockholders in the event
any such waiver would change the terms of the Merger in a way that would be
materially adverse to such stockholders. The Company does not anticipate that a
waiver of a material condition to the Merger will be required. In the event the
Company or Mergerco decides to waive any conditions to the Merger without
seeking shareholder approval, the shareholders may be subject to the risk that
the closing of the transaction may be delayed or that, once closed, the
transaction may be subject to legal challenge.
MERGER FINANCING
In order to (i) fund the payment of the cash portion of the Merger
Consideration and the Option Consideration, (ii) refinance certain outstanding
indebtedness of the Company and (iii) pay the fees and expenses incurred in
connection with the Merger, Mergerco has received commitments for the following
(collectively, the "Merger Financing"): (a) an equity contribution from Jupiter
in an amount of no less than $50.5 million and no more than $54.3 million (with
the exact amount dependent upon the number of currently outstanding shares of
PCA Common Stock which elect to remain outstanding following the Merger); (b) up
to $150 million in senior debt financing pursuant to a new bank credit facility
(the "New Credit Facility") led by NationsBank, N.A. ("NationsBank") and
arranged by NationsBanc Montgomery Securities LLC ("NMS"); and (c) $100 million
in senior subordinated debt ("Senior Subordinated Debt"), either through the
sale of such Senior Subordinated Debt to third parties or the issuance of bridge
loans from NationsBridge, L.L.C. ("NationsBridge") and The Chase Manhattan Bank
("Chase"). See "THE MERGER--Merger Financing."
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Any shareholder of PCA who does not vote in favor of the proposal to approve
the Merger Agreement and who complies strictly with the applicable provisions of
Article 13 of Chapter 55 of the North Carolina General Statutes ("Article 13")
has the right to dissent and be paid cash for the "fair value" for such holder's
Shares of Common Stock ("Dissenters' Rights"). The applicable provisions of
Article 13 are attached to this Proxy Statement/Prospectus as Annex C. To
perfect Dissenters' Rights with respect to the Merger, a shareholder must follow
the procedures set forth therein precisely. Such procedures are briefly
summarized as follows:
8
<PAGE>
A holder of shares of Common Stock wishing to exercise Dissenters' Rights:
(a) must give to the Company, and the Company must actually receive before the
vote on the Merger is taken, written notice of the holder's intent to demand
payment for his shares if the Merger is consummated and (b) must not vote his
shares in favor of the Merger. If the Merger Agreement is approved, the Company
will mail a written dissenters' notice to all such shareholders. To preserve his
Dissenters' Rights, a shareholder must demand payment and deposit his share
certificates in accordance with the terms of the notice. A shareholder failing
to do so will not be entitled to payment for his shares under Article 13 but
will receive the Cash Merger Consideration. For further details of the above
procedures, see "DISSENTING SHAREHOLDERS' RIGHTS" and Annex C.
Shares of Common Stock held by persons properly exercising Dissenters'
Rights (the "Dissenting Shares") will not be converted into the Cash Merger
Consideration in the Merger and after the Effective Time will represent only the
right to receive such consideration as is determined to be due the holder of
such Dissenting Shares pursuant to Article 13. If after the Effective Time any
dissenting shareholder fails to perfect or loses such right to payment or
appraisal under Article 13, each Share of Common Stock of such shareholder shall
be treated as a Share that had been converted as of the Effective Time into the
right to receive the Cash Merger Consideration.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company may have interests,
described herein, that present them with potential conflicts of interest in
connection with the Merger. The Board is aware of the conflicts described below
and considered them in addition to the other matters described under "THE
MERGER--Recommendation of the Board of Directors; Reasons for the Merger."
John Grosso, the Company's President and Chief Executive Officer and a
Director, has a provision in his employment agreement permitting him to
terminate his employment and receive severance from the Company following a
"change in control" as defined in such agreement. The Merger would constitute a
"change in control" under Mr. Grosso's employment agreement. Mr. Grosso has
indicated that he will terminate his employment agreement at the Effective Time
and the Company will pay him the amount due in accordance with the terms and
conditions of such agreement. Mr. Grosso and Jupiter have agreed that at the
Effective Time the Surviving Corporation will enter into a new employment
agreement with Mr. Grosso substantially identical to his current employment
agreement with the Company except that it will not include a "change in control"
provision and will provide for an increase in annual salary from $304,000 to
$350,000.
It is also expected that Bruce A. Fisher, the Company's Chief Financial
Officer, and Eric H. Jeltrup, the Company's Executive Vice President and Chief
Technical Officer, will enter into amendments to their existing employment
agreements with the Company as of the Effective Time providing for base annual
salary increases from $155,250 to $200,000 and from $220,000 to $250,000,
respectively.
Also, at the Effective Time, Jupiter has agreed that the Surviving
Corporation will establish two new stock option plans (the "New Option Plans")
under which shares of common stock equal to 12.5% of the outstanding shares
immediately following the Effective Time will be reserved for issuance upon
exercise of options to be granted to certain officers and employees, including
Mr. Grosso, who will receive options for 3.0% of the outstanding shares, Mr.
Fisher, who will receive options for 0.6% of the outstanding shares and Mr.
Jeltrup, who will receive options for 1.0% of the outstanding shares. Of the
options to be granted under the New Option Plans, 50% will vest over time and
50% will vest only if the Surviving Corporation meets certain performance goals.
See "THE MERGER--Investors' Agreement."
At the Effective Time, all outstanding Options (other than certain Options
held by certain Management Shareholders who agree with Mergerco not to have such
Options canceled) will be canceled and the holders thereof will receive the
Option Consideration in lieu of the Merger Consideration, regardless of whether
the Option would be exercisable at the Effective Time. The Directors of the
Company, other than
9
<PAGE>
Mr. Grosso, hold a total of 116,300 Options and would be entitled to receive
$1,536,800 aggregate Option Consideration at the Effective Time upon
cancellation of their Options. The Options held by such certain Management
Shareholders of the Company that are not canceled at the Effective Time will be
become fully exercisable and vested at the Effective Time and will be retained
as options to purchase Surviving Corporation Common Stock. Holders of Options
will not be subject to proration. As of July 1, 1998, approximately 1,490,700
Options were outstanding. The Company estimates that the aggregate amount of the
Option Consideration, assuming all Options are canceled, will be approximately
$21,193,987.
As of May 3, 1998, John Grosso held 63,900 Shares of PCA Common Stock, Bruce
A. Fisher held 24,335 Shares of PCA Common Stock, Eric H. Jeltrup held 29,000
Shares of PCA Common Stock and other Management Shareholders held an aggregate
of 2,954 Shares of PCA Common Stock. Also, as of May 3, 1998, the value of the
Options held by John Grosso was $3,230,750, the value of the Options held by
Bruce A. Fisher was $477,500, the value of the Options held by Eric H. Jeltrup
was $2,090,000 and the aggregate value of the Options held by other Management
Shareholders was $5,497,714.
Pursuant to the Investors' Agreement (as defined herein), certain Management
Shareholders are required to maintain equity in the Company following the Merger
of at least $3.5 million but not more than $5.0 million (whether through the
retention of Continuing Shares, valued at $26.50 per share, the retention of
Options that the Management Shareholders elect not to have canceled at the
Effective Time, valued at the amount of Option Consideration foregone by such
election, or the purchase of shares of Surviving Corporation Common Stock
immediately following the Effective Time at $26.50 per share).
Pursuant to the Merger Agreement, the Company has agreed after the Effective
Time to indemnify all present and former directors and officers of the Company
with respect to all losses, claims, damages, liabilities, fees and expenses
arising out of actions or omissions occurring at or prior to the Effective Time
to the full extent permitted under North Carolina law and, subject to certain
limitations, to maintain for a period of no less than six years the Company's
existing directors' and officers' liability insurance policy or substitute
policies of substantially similar coverage and amounts containing terms no less
favorable to such directors and officers. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Indemnification and Insurance."
NASDAQ LISTING
The Company has been informed by the National Association of Securities
Dealers, Inc. ("NASD") that as a result of the Merger, the Company's Common
Stock may no longer meet all of the requirements for continued listing on the
NASDAQ National Market. In the event the Shares are de-listed from the NASDAQ
National Market, they will trade only in the over-the-counter market. Although
prices in respect of trades would be published by the NASD periodically in the
"pink sheets," quotes for such Shares would not be readily available. As a
result, it is anticipated that the Shares would trade much less frequently
relative to the trading volume of PCA Common Stock prior to the Merger and
shareholders may experience difficulty selling Shares or obtaining prices that
reflect the value thereof.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In general, holders of PCA Common Stock who receive cash in the Merger will
be treated, with respect to the PCA Common Stock surrendered in return for such
cash, as if (i) they sold a portion of such PCA Common Stock to Jupiter and (ii)
the Company redeemed the remaining portion of such PCA Common Stock. Holders
will recognize gain (or loss) with respect to the portion of the PCA Common
Stock deemed to have been sold to Jupiter in an amount equal to the amount by
which the amount received in the deemed sale exceeds (or is less than) the
Holder's adjusted basis in the PCA Common Stock deemed sold. The treatment of
the amount received in the portion of the transaction treated as a redemption
for tax purposes with respect to a Holder will be treated either as a taxable
exchange of the shares redeemed or as a taxable dividend distribution, depending
on the particular situation of such
10
<PAGE>
Holder. The Merger will not have any federal income tax consequences for
shareholders who do not receive any cash in the Merger. See "THE MERGER--Federal
Income Tax Consequences."
EACH SHAREHOLDER IS URGED TO CONSULT HIS OWN TAX ADVISOR CONCERNING THE
FEDERAL (AND ANY STATE, LOCAL AND FOREIGN) TAX CONSEQUENCES OF THE MERGER.
SUMMARY RISK FACTORS
Holders of PCA Common Stock should carefully consider the following factors,
which are described in more detail beginning on page 17, relating to the
retention of PCA Common Stock in connection with their consideration of the
Merger. As a result of the Merger: (i) Jupiter will have control of the Company,
including the ability to elect all of its directors, (ii) there will be a
substantial decrease in the liquidity of the Surviving Corporation Common Stock
in the event that the Shares no longer meet NASDAQ listing requirements, (iii)
the shares of Surviving Corporation Common Stock may be subject to
deregistration under the Exchange Act, and (iv) the terms of the Merger
Financing are expected to subject the Company to significant operating and
financial restrictions and to increase substantially the leverage of the
Company. The future grant or sale by the Company of shares of Surviving
Corporation Common Stock or options to purchase Surviving Corporation Common
Stock to management will dilute the equity percentage ownership of Company
shareholders and may result in a decrease in the Surviving Corporation Common
Stock book value per share. The risk of proration, as described in greater
detail herein, may subject holders of PCA Common Stock to dividend treatment for
tax purposes with respect to cash received in the Merger. The effects of
proration may also result in shareholders receiving consideration which is
different from the consideration specified in their respective elections.
In addition, the Company's business entails certain risks including those
relating to (i) reliance on its business relationships with Wal-Mart and Kmart,
which may be terminated or modified by Wal-Mart at any time or by Kmart on 180
days notice; (ii) uncertainty of generating sufficient cash flow or obtaining
financing to fund the Company's future growth; (iii) intense competition; (iv)
dependence on key personnel; and (v) general economic conditions and business
downturns. See "RISK FACTORS" for a more detailed discussion of the above
mentioned risk factors and for a description of other risk factors.
11
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary historical consolidated financial and operating data for and as
of each of the fiscal years in the five-year period ended February 1, 1998 set
forth below under the captions "Statement of Operating Data," "Other Data,"
"Balance Sheet Data" and "Per Share Data" have been derived from the Audited
Consolidated Financial Statements of the Company. The summary historical
consolidated financial and operating data set forth below for the quarters ended
May 4, 1997 and May 3, 1998 have been derived from the Unaudited Consolidated
Financial Statements of the Company and, in each case, include, in the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results for the unaudited interim
periods. Results of operations for the quarter ended May 3, 1998 are not
necessarily indicative of the results that may be expected for the entire year.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial Statements
and the notes thereto included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDING
APPROXIMATELY JANUARY 31, QUARTER ENDED
--------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MAY 4, MAY 3,
1994 1995 1996 1997(1) 1998 1997 1998
--------- ----------- --------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING DATA:
Sales................................ $ 149,150 $ 144,881 $ 144,715 $ 156,099 $ 242,899 $ 58,692 $ 54,662
General and administrative
expenses(2)........................ 20,594 22,936 23,782 31,676 38,070 10,632 10,428
Total costs and expenses............. 140,947 137,028 131,392 150,783 220,036 55,633 52,005
Interest expense (income)............ (5) 406 459 179 6,571 1,620 1,220
Income from continuing operations.... 4,912 4,373 7,617 2,994(3) 8,735 643 778
Net income........................... $ 2,712 $ 4,785 $ 7,617 $ 2,994(3) $ 8,735 $ 643 $ 778
OTHER DATA:
Ratio of long-term debt (noncurrent
portion) to total
capitalization(4).................. -- -- -- 0.64 0.48 0.64 0.47
Depreciation......................... $ 5,159 $ 7,136 $ 8,490 $ 9,498 $ 13,543 $ 3,286 $ 3,241
Amortization......................... -- -- -- -- $ 1,910 $ 456 $ 507
Capital expenditures................. $ 21,875 $ 14,698 $ 6,309 $ 13,424 $ 12,086 $ 3,363 $ 1,785
Ratio of earnings to fixed
charges(5)......................... -- (6) 19.3x 29.0x 29.7x 3.5x 1.9x 2.2x
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)............ $ (4,321) $ (6,697) $ (3,878) $ (18,472) $ (20,334) $ (20,200) $ (19,668)
Total assets......................... $ 56,751 $ 59,557 $ 59,884 $ 146,661 $ 153,301 $ 151,308 $ 146,916
Long-term debt (noncurrent
portion)........................... -- -- -- $ 58,680 $ 42,064 $ 63,228 $ 41,105
PER SHARE DATA:
Income from continuing operations
Basic.............................. $ 0.61 $ 0.54 $ 1.00 $ 0.40(3) $ 1.12 $ 0.08 $ 0.10
Diluted............................ $ 0.58 $ 0.52 $ 0.96 $ 0.38(3) $ 1.07 $ 0.08 $ 0.09
Net income
Basic.............................. $ 0.34 $ 0.59 $ 1.00 $ 0.40(3) $ 1.12 $ 0.08 $ 0.10
Diluted............................ $ 0.32 $ 0.57 $ 0.96 $ 0.38(3) $ 1.07 $ 0.08 $ 0.09
Dividends per share.................. $ 0.28 $ 0.28 $ 0.28 $ 0.21 $ 0.21 0 $ 0.07
Book value per share(7).............. $ 3.56 $ 3.93 $ 3.96 $ 4.29 $ 5.45 $ 4.43 $ 5.46
Weighted average shares outstanding:
Basic.............................. 8,092 8,149 7,632 7,522 7,779 7,631 7,932
Diluted............................ 8,513 8,398 7,895 7,836 8,195 7,933 8,373
</TABLE>
12
<PAGE>
- ------------------------
(1) PCA's operating results for the fiscal year ended February 2, 1997, do not
include operating results from ASI, as the acquisition was accounted for by
the purchase method at the fiscal year-end; balance sheet data include the
assets and liabilities of the combined companies.
(2) Includes amortization of intangibles. General and administrative expenses
for fiscal year ended February 2, 1997, include non-recurring expenses of
$6,000 for the closure of underperforming studios and redeployment of
underutilized assets. General and administrative expenses for the quarter
ended May 3, 1998, include expenses of $618 associated with the Merger.
(3) Net income and per share earnings include tax effected nonrecurring expenses
of $3,600 or $0.46 per share associated with the closure of underperforming
studios and redeployment of underutilized assets.
(4) Total capitalization is long-term debt and total shareholders' equity.
(5) For the purpose of computing this ratio, earnings consist of income from
operations before income taxes plus fixed charges. Fixed charges consist of
net interest expense and amortization of deferred financing costs.
(6) For the fiscal year ended 1994, fixed charges were less than zero because of
net interest income of $5.
(7) Book value per share has been calculated by dividing total shareholders'
equity by the number of diluted shares.
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL AND OPERATING DATA
The unaudited summary consolidated pro forma financial data of the Company
set forth below are based on historical consolidated financial statements of the
Company as adjusted to give effect to the Merger, including the Merger Financing
and the application of the proceeds thereof. The pro forma statements of
operating data and other data for the fiscal year ended February 1, 1998 and
quarter ended May 3, 1998 give effect to the Merger, including the Merger
Financing and the application of the proceeds thereof, as if they had occurred
as of February 3, 1997 and February 2, 1998, respectively. The pro forma balance
sheet data give effect to the Merger, including the Merger Financing and the
application of the proceeds thereof, as if they had occurred on May 3, 1998. The
pro forma adjustments are based upon available information and upon certain
assumptions that management believes are reasonable under the circumstances. The
pro forma financial data do not purport to represent what the Company's actual
results of operations or actual financial position would have been if the
Merger, including the Merger Financing and the application of the proceeds
thereof, had occurred on such dates or to project what the Company's actual
results of operations or actual financial position would have been if the
Merger, including the Merger Financing and the application of the proceeds
thereof, had occurred on such dates or to project the Company's results of
operations or financial position for any future period or date. See "UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA."
14
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------
FISCAL
YEAR ENDED
FEBRUARY 1, QUARTER ENDED
1998 MAY 3, 1998
--------------- --------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT RATIOS
AND PER SHARE DATA)
STATEMENT OF OPERATING DATA:
Sales........................................................................... $ 242,899 $ 54,662
General and administrative expenses(1).......................................... 38,070 10,428(2)
Total costs and expenses........................................................ 220,036 52,005
Interest expense (income)....................................................... 22,210 5,408
Loss from continuing operations................................................. (648) (1,735)
Net loss........................................................................ $ (648) $ (1,735)
OTHER DATA:
Depreciation.................................................................... $ 13,543 $ 3,241
Amortization.................................................................... $ 1,910 $ 507
Ratio of earnings to fixed charges(5)........................................... 1.0x -- (6)
PER SHARE DATA:
Net loss per share
Basic......................................................................... $ (0.21) $ (0.71)
Diluted....................................................................... $ (0.21) $ (0.71)
Dividends per share(3).......................................................... -0- -0-
Weighted average shares outstanding:
Basic......................................................................... 2,387 2,387
Diluted....................................................................... 2,426 2,426
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
--------------
QUARTER ENDED
MAY 3, 1998
--------------
<S> <C>
(IN THOUSANDS)
BALANCE SHEET DATA AT PERIOD END:
Working capital (deficit)......................................................................... $ (14,550)
Total assets...................................................................................... $ 152,682
Long-term debt.................................................................................... $ 220,683
Book value per diluted share(4)................................................................... $ (50.50)
</TABLE>
- ------------------------
(1) Includes amortization of intangibles.
(2) Includes non-recurring expenses of $618 associated with the Merger.
(3) Covenants of the New Credit Facility restrict payment of dividends.
(4) Calculated as total stockholders' equity (deficit) divided by diluted shares
outstanding.
(5) For purposes of computing this ratio, earnings consist of income from
operations before income taxes plus fixed charges. Fixed charges consist of
net interest expense and amortization of deferred financing costs.
(6) On a pro forma basis, earnings would not be sufficient to cover fixed
charges by $2,751 for the quarter ended May3, 1998.
15
<PAGE>
PRICE OF THE PCA COMMON STOCK
The PCA Common Stock is listed and traded on the NASDAQ National Market
under the symbol "PCAI". The following table shows, for the periods indicated,
the high and low sale prices of a share of the PCA Common Stock as reported on
NASDAQ.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 2, 1997 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st Quarter.................................................................................... $ 14.13 $ 9.00
2nd Quarter.................................................................................... $ 17.75 $ 13.00
3rd Quarter.................................................................................... $ 19.00 $ 15.50
4th Quarter.................................................................................... $ 18.25 $ 15.00
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 1, 1998 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st Quarter.................................................................................... $ 17.25 $ 14.62
2nd Quarter.................................................................................... $ 23.25 $ 15.50
3rd Quarter.................................................................................... $ 25.50 $ 21.00
4th Quarter.................................................................................... $ 25.50 $ 19.75
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31, 1999 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st Quarter.................................................................................... $ 26.00 $ 20.00
2nd Quarter through July 21, 1998.............................................................. $ 26.00 $ 25.00
</TABLE>
On April 20, 1998, the last trading day before public announcement of the
execution of the Merger Agreement, the closing price of the PCA Common Stock on
NASDAQ was $21.50 per share.
On July 21, 1998, the most recent trading day for which sale prices were
available prior to the mailing of the Proxy Statement/Prospectus, the closing
price of the PCA Common Stock as reported on NASDAQ was $25.625 per share.
Shareholders should obtain current market price quotations for the PCA
Common Stock in connection with voting their shares and making Continuing Share
Elections.
The Company paid cash dividends of $0.07 per share in the first quarter of
the fiscal year ending January 31, 1999, in each of the last three quarters of
the fiscal year ended February 1, 1998 and in each of the first three quarters
of the fiscal year ended February 2, 1997. On May 28, 1997, the Company's Board
voted to reinstate payment of a quarterly dividend which was suspended on
December 4, 1996 in anticipation of the financial requirements for the
acquisition of American Studios, Inc. The credit agreement with NationsBank,
N.A., as agent, allows the Company to pay dividends provided that the following
restrictions are met: (a) immediately before and after making such payment, no
default or event of default exists or would result from making the payment, (b)
the Company, after giving effect to such payment, remains in compliance with the
financial covenants and (c) the aggregate amount of such dividends paid in any
fiscal year does not exceed 25% of consolidated excess cash flow for the prior
year.
The Company will be restricted from paying cash dividends on its Common
Stock by covenants contained in the Merger Financing documentation. In the event
the payment of dividends is not prevented in the future by such covenants, the
decision whether to pay dividends on the Common Stock will be determined by the
Board of Directors in light of the Company's earnings, cash flows, financial
condition, business prospects and other relevant factors. Holders of Common
Stock will be entitled to share ratably, as a single class, in any dividends
paid on the Common Stock.
16
<PAGE>
RISK FACTORS
In addition to the other information set forth herein, shareholders should
carefully consider the following information in evaluating the Company and its
business before voting on the Merger and making a Continuing Share Election.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the competitive environment in the portrait photography
industry in general and in the Company's specific market areas; changes in
prevailing interest rates and the availability of and terms of financing to fund
the anticipated growth of the Company's business; inflation; changes in costs of
goods and services; economic conditions in general and in the Company's specific
market areas; demographic changes; changes in or failure to comply with federal,
state and/or local government regulations; liability and other claims asserted
against the Company; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant indebtedness
of the Company after the Merger and the impact of increases in interest rates on
such indebtedness; labor disturbances; changes in the Company's capital
expenditure and studio expansion plans; termination of the Company's right to do
business in Kmart or Wal-Mart stores on a permanent or traveling studio basis;
decreases in the number of customers or lower average sales amounts; and other
factors referenced herein. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and dates that may be
incorrect or imprecise and involve known and unknown risks, uncertainties and
other factors. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other things,
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "seeks," "pro forma," "anticipates," "intends" or the negative
of any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements, projections and plans. Such forward-looking statements speak solely
as of the date hereof, and the Company disclaims any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
CONTROL BY JUPITER
Following the Merger, between approximately 77% and 88% of the outstanding
shares of PCA Common Stock will be held by Jupiter. As a result of its stock
ownership, Jupiter will control the Company and have the power to elect all of
its directors, appoint new management and approve any action requiring the
approval of the holders of the PCA Common Stock, including adopting amendments
to the Company's Restated Articles of Incorporation, as amended, and approving
mergers or sales of all or substantially all of the Company's assets. The
directors elected by Jupiter will have the authority to effect decisions
affecting the capital structure of the Company, including the issuance of
additional capital stock, the implementation of stock repurchase programs and
the declaration of dividends. While the Board of Directors of the Surviving
Corporation will initially include four Directors who are currently Directors of
PCA, such persons will constitute a minority of the Board, there is no agreement
as to how long such persons will remain on the Board and such Directors may be
removed by Jupiter at any time, with or without cause.
The existence of a controlling stockholder of the Company is likely to have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from seeking to acquire, a majority of the
outstanding Common Stock of the Company. A third party would be required to
negotiate
17
<PAGE>
any such transaction with Jupiter and the interests of Jupiter may be different
from the interests of the Company's other stockholders.
DELISTING, LOSS OF LIQUIDITY
The Company has been informed by the NASD that as a result of the Merger the
PCA Common Stock may no longer meet the listing requirements for the NASDAQ
National Market. In addition, the volume of Shares traded is expected to decline
substantially because of the significant ownership by Jupiter and the consequent
reduced public float.
Upon any delisting, the Shares would trade only in the over-the-counter
market. Although prices in respect of trades would be published by the NASD
periodically in the "pink sheets," quotes for such Shares would not be readily
available. As a result, it is anticipated that the Shares would trade much less
frequently relative to the trading volume of PCA Common Stock prior to the
Merger and shareholders may experience difficulty selling Shares or obtaining
prices that reflect the value thereof.
POTENTIAL DEREGISTRATION UNDER THE EXCHANGE ACT
PCA Common Stock is currently registered under the Exchange Act.
Registration could be terminated upon application by the Surviving Corporation
to the Commission if the Surviving Corporation Common Stock is not listed on a
national securities exchange and there are fewer than 300 record holders. The
termination of the registration of the Surviving Corporation Common Stock under
the Exchange Act would substantially reduce the information required to be
furnished by the Surviving Corporation to holders of Surviving Corporation
Common Stock and to the Commission and would make certain provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b), the requirement of furnishing a proxy statement in connection with
stockholders' meetings, the requirements of Rule 13e-3 under the Exchange Act
with respect to "going private" transactions, certain periodic reporting
requirements and certain beneficial ownership reporting requirements, no longer
applicable to the Surviving Corporation.
RESTRICTIONS ON ADDITIONAL INDEBTEDNESS; MAINTENANCE OF RATIOS
In connection with consummating the transactions contemplated by the Merger
Agreement, the Company and Mergerco will enter into the Merger Financing
(described under "THE MERGER-- Merger Financing") to (i) fund payment of the
cash portion of the Merger Consideration and the Option Consideration, (ii)
refinance certain indebtedness of the Company, (iii) pay the fees and expenses
incurred by the Company, Mergerco and Jupiter in connection with the Merger and
the Merger Financing and (iv) provide for working capital requirements. Although
the definitive terms of the Merger Financing have not been finalized as of the
date of this Proxy Statement/Prospectus, the Company expects that such terms
will include significant operating and financial restrictions, such as limits on
the Company's ability to incur additional indebtedness, create liens, sell
assets, engage in mergers or consolidations, make investments and pay dividends.
In addition, the New Credit Facility and the Senior Subordinated Debt are
expected to require the Company to maintain certain debt-to-equity and other
financial ratios. Failure by the Company to comply with such restrictions or to
maintain such ratios could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. See "THE
MERGER--Merger Financing."
SUBSTANTIAL INDEBTEDNESS
After effecting the Merger Financing, the Company will be highly leveraged.
On May 3, 1998, after giving pro forma effect to the Merger and the Merger
Financing, the Company would have had total consolidated indebtedness of
approximately $229.3 million (of which $100.0 million would have consisted of
the Senior Subordinated Debt and the balance would have consisted of the New
Credit Facility,
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(including $4.3 million in letters of credit drawn thereunder)) and
stockholders' deficit of approximately $122.5 million. Also, after giving pro
forma effect to such transactions, the Company's earnings would have been
insufficient to cover its fixed charges by approximately $2.7 million for the
three months ended May 3, 1998. The Company and its subsidiaries will be
permitted to incur substantial additional indebtedness in the future. In
addition, as of May 3, 1998, on a pro forma adjusted basis giving effect to the
Merger and the Merger Financing, approximately $20.7 million would have been
available for additional borrowing under the New Credit Facility. See "UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA."
ABILITY TO SERVICE INDEBTEDNESS
The Company's ability to make scheduled payments of principal of, or to pay
the interest or other costs and expenses (if any) on, or to refinance, its
indebtedness (including the Senior Subordinated Debt), or to fund planned
capital expenditures, research and development expenses and other obligations
will depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. The Company may need to refinance all or a
portion of the principal of the Senior Subordinated Debt on or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements will be realized or that future borrowings will be
available under the New Credit Facility or otherwise in an amount sufficient to
enable the Company to service its indebtedness, including the Senior
Subordinated Debt, or to fund its other liquidity needs. In addition, there can
be no assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources."
SUBSTANTIAL LEVERAGE
The degree to which the Company will be leveraged following the Offering
could have important consequences to the Company, including, but not limited to:
(i) making it more difficult for the Company to satisfy its obligations with
respect to the Senior Subordinated Debt, (ii) increasing the Company's
vulnerability to general adverse economic and industry conditions, (iii)
limiting the Company's ability to obtain additional financing to fund future
working capital, capital expenditures, research and development and other
general corporate requirements, (iv) requiring the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
of, and interest on, its indebtedness, thereby reducing the availability of such
cash flow to fund working capital, capital expenditures, research and
development or other general corporate requirements, (v) limiting the Company's
flexibility in planning for, or reacting to, changes in its business and the
industry and (vi) placing the Company at a competitive disadvantage vis-a-vis
less leveraged competitors. See "THE MERGER--Merger Financing."
POTENTIAL DILUTION OF COMPANY SHAREHOLDERS
Concurrently with the consummation of the Merger, the Company will grant
options to purchase additional shares of Surviving Corporation Common Stock in
an amount up to 12.5% of the outstanding Shares immediately after the Effective
Time to members of the Company's management and its other employees pursuant to
the New Option Plans. Also, certain members of the Company's management will
retain their existing Options, which upon consummation of the Merger will become
fully vested and exercisable for shares of Surviving Corporation Common Stock.
All options granted at the Effective Time will have an exercise price of $26.50
per share. The retention of currently outstanding Options to acquire PCA Common
Stock and grants under the New Option Plans will dilute the equity ownership
percentage of the Company's shareholders and Jupiter, and may result in a
decrease of the book value of Surviving Corporation Common Stock per share.
Certain members of management may purchase shares of Surviving Corporation
Common Stock at the time of the Merger, which will also reduce the equity
ownership
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percentage of Jupiter and the Company's stockholders. See "THE MERGER--Interests
of Certain Persons in the Merger."
TAXATION OF SHAREHOLDERS RECEIVING CASH--POSSIBLE DIVIDEND TREATMENT
A shareholder may make a Continuing Share Election and thereby elect to
retain shares of PCA Common Stock in the Merger. However, if the number of
Continuing Shares exceeds the Maximum Continuing Number, such electing
shareholder may receive some cash for a portion of his or her PCA Common Stock
as a result of the proration procedures described herein under "THE
MERGER--Stock Election." All or a portion of any cash received by such a
shareholder may be treated as a dividend (which is taxed at ordinary income
rates) rather than as an amount realized on the sale or redemption of the
shareholder's PCA Common Stock (which would generally be taxed at capital gain
rates. See "THE MERGER--Federal Income Tax Consequences" for a more detailed
discussion of the tax consequences of receiving cash. No such dividend treatment
should generally be applicable in the case of a shareholder who exchanges all of
his Shares for cash in the Merger or who retains shares of PCA Common Stock and
receives no cash as a result of proration.
CERTAIN PRORATION RISKS
The election of record holders of PCA Common Stock to retain Continuing
Shares or to receive the Cash Merger Consideration pursuant to the Merger is
subject to the proration procedures of the Merger Agreement. Accordingly, if the
Merger is consummated, shareholders may not necessarily receive the type of
consideration specified in their respective elections. If a shareholder's
election to retain all of his shares of PCA Common Stock is prorated down and
the shareholder receives cash in the Merger, such cash could be treated as a
dividend paid to such shareholder. See "THE MERGER--Federal Income Tax
Consequences--Shareholders Receiving Cash." If a shareholder's election to
convert Shares of PCA Common Stock into the Cash Merger Consideration is
prorated and the shareholder receives Surviving Company Common Stock instead,
the shareholder will be subject to the risks associated with owning shares in
the Surviving Company despite having elected the Cash Merger Consideration. See
"THE MERGER--Stock Election."
AUTHORIZATION OF PREFERRED STOCK
Under the Company's Restated Articles of Incorporation, as amended,
following the Merger, the Board of Directors of the Company has the authority
under the Company's Articles of Incorporation to issue shares of the Company's
authorized preferred stock (the "Preferred Stock") in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued shares of Preferred Stock. The issuance of Preferred Stock may
adversely affect the voting and dividend rights, rights upon liquidation and
other rights of the holders of Surviving Corporation Common Stock. See
"DESCRIPTION OF COMPANY CAPITAL STOCK--Undesignated Preferred Stock."
RISK OF LOSS OF KMART AND WAL-MART LICENSES
Approximately 96% of the Company's revenues for the fiscal year ended
February 1, 1998 were derived from sales at permanent and traveling studios
located at Kmart and Wal-Mart stores. Such studios are operated under agreements
with Kmart Corporation ("Kmart") and Wal-Mart Stores, Inc. ("Wal-Mart") that
permit the Company to operate its studios in exchange for a commission payable
by the Company based on a percentage of sales from the studio in each store. As
of May 3, 1998, the Company operated studios in 910 domestic Kmart stores. The
U.S. license agreement with Kmart expires May 9, 2001 and may be terminated by
either party at any time before May 9, 2001 upon 180 days' notice. The Company's
U.S. license agreement with Wal-Mart may be terminated by either party at any
time without notice. The Company's license agreement with Wal-Mart for its
Canadian stores expires on a store-by-store basis five years after a store opens
and may be terminated by either party, on a store-by-store basis, if
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certain minimum sales results are not achieved. The loss of the license to do
business in the U.S. Kmart stores, U.S. Wal-Mart stores or international
Wal-Mart stores, the reduction or cancellation of a significant number of
traveling studios or the closing of a significant number of Kmart or Wal-Mart
stores, without replacement, could have a material adverse effect on the
Company.
In April 1998, Kmart notified the Company that it would close 75 studios in
which PCA is currently operating and would allow alternative portrait studio
operators to service such locations. While Kmart has stated that it plans no
further terminations in 1998, there can be no assurance that Kmart will not
close additional PCA studio locations in the future or that it will retain PCA
as its primary supplier of portrait photography services indefinitely. Under the
terms of the licensing agreement between Kmart and PCA, PCA is required to exit
these 75 studios within six months of notification, or around November 1, 1998.
Kmart will also pay to PCA a termination fee of approximately $500,000
representing PCA's unamortized investment in leasehold improvements made in
these specific 75 studios. These 75 studios generated approximately $8.0 million
in revenue (which represents 8.2% of all Kmart revenues for the period) and
approximately $1.7 million in income from operations before income taxes in
fiscal 1997. Any significant reduction in the number of Kmart stores in which
the Company operates, without replacement, could have a material adverse effect
on the Company.
MANAGEMENT OF GROWTH
Any future growth of the Company will require the Company to manage its
expanding domestic and international operations and to adapt its operational and
financial systems to respond to changes in its business environment, while
maintaining a competitive cost structure. The expansion of the Company's
business has placed and will continue to place significant demands on the
Company and its management to improve the Company's operational, financial and
management systems, to develop further the management skills of the Company's
managers and supervisors, and to continue to retain, train, motivate and
effectively manage the Company's employees. The failure of the Company to manage
any future growth effectively could have a material adverse effect on the
Company.
FUNDING OF GROWTH
Additionally, the Company's ability to maintain and increase its revenue
base and to respond to shifts in customer demand and changes in industry trends
will be partially dependent on its ability to generate sufficient cash flow or
obtain sufficient capital for the purpose of, among other things, financing
capital expenditures, infrastructure growth and acquisitions. There can be no
assurances the Company will be able to generate sufficient cash flow or that
financing will be available on acceptable terms (or permitted to be incurred
under the terms of the Merger Financing and any future indebtedness) to fund the
Company's future growth.
DEPENDENCE ON KEY PERSONNEL
The Company's continued success depends, to a large extent, upon the efforts
and abilities of key managerial employees, particularly the Company's senior
management. See "Management and Board of Directors of the Company." While the
Company has employment contracts with several members of senior management,
including John Grosso, Bruce A. Fisher, Eric H. Jeltrup and J. Robert Wren, Jr.,
such contracts cannot assure the continued employment of such officers following
the Merger. Competition for qualified management personnel in the industry is
intense. The loss of the services of certain of these key employees or the
failure to retain qualified employees when needed could have a material adverse
effect on the Company.
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SEASONALITY
Because of the retail nature of its services and its focus on discount
stores, the Company's business is very seasonal. The Christmas season accounts
for a high percentage of the Company's sales and earnings, and the Company's
fourth fiscal quarter (late October through late January) typically produces a
large percentage of annual sales and annual earnings. The fourth quarters of the
fiscal years ended February 1, 1998, February 2, 1997, and January 28, 1996,
accounted for approximately 31.2%, 33.2% and 32.2%, respectively, of sales, and
89.4%, 32.8% and 64.2%, respectively, of earnings for those years. The 1996
fourth quarter earnings would have accounted for 69.5% of annual earnings before
giving effect to a $3.6 million after-tax charge for studio closure costs. The
Company can be adversely affected by inclement weather, especially during the
important fiscal fourth quarter, and by general downturns in consumer Christmas
spending.
COMPETITION
The professional portrait photography industry, including both permanent and
traveling studios, is highly competitive. The companies in the industry compete
on the basis of price, service, package size, technology and convenience via the
retail distribution channel. The major professional portrait studio companies,
including CPI, Lifetouch and Olan Mills, operate permanent studios in retail
chains and independent locations. To compete successfully, the Company must
continue to remain competitive in areas of price, service, package size,
technology and convenience.
Furthermore, consumer products, particularly those that are value-priced,
are subject to significant price competition. There can be no assurance that the
Company will not be forced to engage in price-cutting initiatives to respond to
competitive and consumer pressures. The failure of the Company's sales volumes
to grow sufficiently to improve overall revenues and income as a result of a
competitive price reduction could have a material adverse effect on the Company.
LITIGATION
On April 22, 1998, the Company and the members of its Board of Directors
were sued by Harbor Finance Partners, a shareholder of the Company, to enjoin
the Merger, or in the alternative, for damages. The lawsuit was filed in the
Superior Court of Mecklenburg County, North Carolina. Harbor Finance Partners
has alleged that the Company and its Directors breached their fiduciary duty to
the shareholders in connection with the Merger. The Company and the Directors
have denied these allegations and have stated that they will defend the lawsuit
vigorously. However, should the plaintiffs be successful in the action, the
transaction could be enjoined or the Company may be required to pay the
plaintiffs the difference between the Cash Merger Consideration and the court's
determination of the fair value of the Shares.
On May 26, 1998, the Company and the Directors moved to dismiss the lawsuit
on the basis that Harbor Finance Partners had failed to state a claim for which
relief can be granted. As of July 21, 1998 a hearing date for that motion to
dismiss has not yet been set by the Court.
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THE SPECIAL MEETING
TIME AND PLACE OF MEETING; MATTER TO BE CONSIDERED
The Special Meeting will be held at the Company's principal executive
offices located at 815 Matthews-Mint Hill Road, Matthews, North Carolina, on
August 17, 1998, starting at 10:00 a.m., local time. At the Special Meeting,
holders of PCA Common Stock will be asked to approve and adopt the Merger
Agreement.
PROXY SOLICITATION
This Proxy Statement/Prospectus is being delivered to PCA's shareholders in
connection with the solicitation by the Board of proxies to be voted at the
Special Meeting. The cost of soliciting proxies will be borne by the Company.
Officers, directors and regular employees of the Company, who will receive no
additional compensation for their services, may solicit proxies by telephone or
personal call.
The Company has requested brokers and nominees who hold stock in their names
to furnish this proxy material to their customers and the Company will reimburse
such brokers and nominees for their related out-of-pocket expenses. This Proxy
Statement/Prospectus and the accompanying proxy card are being mailed to
shareholders on or about July 27, 1998.
HOLDERS OF PCA COMMON STOCK ARE REQUESTED TO PROMPTLY COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY CARD AND RETURN IT TO WACHOVIA BANK, N.A., AS
EXCHANGE AGENT, IN THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE.
RECORD DATE AND QUORUM REQUIREMENT
The PCA Common Stock is the only outstanding voting security of the Company.
The Board has fixed the close of business on July 13, 1998 as the record date
(the "Record Date") for the determination of shareholders entitled to notice of,
and to vote at, the Special Meeting and any adjournment or adjournments thereof.
Each holder of record of PCA Common Stock at the close of business on the Record
Date is entitled to one vote for each Share then held on each matter submitted
to a vote of shareholders. At the close of business on the Record Date, there
were 7,947,879 Shares of PCA Common Stock issued and outstanding held of record
by 951 holders.
The holders of a majority of the outstanding Shares entitled to vote at the
Special Meeting must be present in person or represented by proxy to constitute
a quorum for the transaction of business. Proxies with instructions to abstain
are counted as present for purposes of determining the presence or absence of a
quorum for the transaction of business.
VOTING PROCEDURES
Approval of the Merger Agreement will require the affirmative vote of the
holders of a majority of the outstanding shares of PCA Common Stock entitled to
vote at the Special Meeting. A failure to vote or a vote to abstain will have
the same legal effect as a vote cast against approval. Brokers and, in many
cases, nominees will not have discretionary power to vote on the Merger proposal
to be presented at the Special Meeting. Accordingly, beneficial owners of shares
should instruct their brokers or nominees how to vote. A broker non-vote will
have the same effect as a vote against the Merger.
Under North Carolina law, holders of PCA Common Stock who do not vote in
favor of the Merger Agreement and who comply with certain notice requirements
and other procedures will have the right to dissent and to be paid cash for the
"fair value" of their shares as finally determined under such procedures, which
may be more or less than the consideration to be received by other shareholders
under the terms of
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the Merger Agreement. Failure to follow such procedures precisely may result in
loss of Dissenters' Rights (defined below). See "DISSENTING SHAREHOLDERS'
RIGHTS."
VOTING AND REVOCATION OF PROXIES
A shareholder who executes and delivers a proxy has the power to revoke it
at any time before the vote at the Special Meeting by (i) filing with the
Secretary of the Company an instrument revoking it, (ii) submitting a duly
executed proxy bearing a later date or (iii) voting in person at the Special
Meeting. Subject to such revocation, all shares represented by each properly
executed proxy received by the Secretary of the Company will be voted in
accordance with the instructions indicated thereon, and if no instructions are
indicated, will be voted to approve the Merger, and in such manner as the
persons named on the enclosed proxy card in their discretion determine upon such
other business as may properly come before the Special Meeting or any
adjournment thereof. The shares represented by the accompanying proxy card and
entitled to vote will be voted if the proxy card is properly signed and received
by the Secretary of the Company prior to the Special Meeting.
STOCK ELECTION
Record holders of Shares of PCA Common Stock will be entitled to make an
unconditional election to retain shares of Surviving Corporation Common Stock on
or prior to the last business day preceding the date of the Special Meeting on
the form of Continuing Share Election being sent to all record holders of PCA
Common Stock at the same time as this Proxy Statement/Prospectus but under
separate cover. If holders elect in the aggregate to retain Continuing Shares in
excess of the Maximum Continuing Number or less than the Minimum Continuing
Number, then the holders will be subject to proration as provided herein. See
"THE MERGER--Stock Election."
EFFECTIVE TIME
The Merger will be effective as soon as practicable following shareholder
approval of the Merger Agreement and upon the filing of articles of merger with
the Secretary of State of the State of North Carolina (the "Effective Time").
The Effective Time is currently expected to occur as soon as practicable after
the Special Meeting, subject to approval of the Merger Agreement at the Special
Meeting and satisfaction or waiver of the terms and conditions set forth in the
Merger Agreement. See "THE MERGER--Effective Time of the Merger."
RIGHTS OF DISSENTING SHAREHOLDERS
Any shareholder of PCA who does not vote in favor of the proposal to approve
the Merger Agreement and who complies strictly with the applicable provisions of
Article 13 of the North Carolina Business Corporations Act has the right to
exercise Dissenters' Rights and be paid cash for the "fair value" for such
holder's shares of PCA Common Stock. The provisions of Article 13 are attached
to this Proxy Statement/Prospectus as Annex C. To perfect Dissenters' Rights
with respect to the Merger, a shareholder must follow the procedures set forth
therein precisely. Those procedures are summarized in this Proxy
Statement/Prospectus under "DISSENTING SHAREHOLDERS' RIGHTS." Dissenting Shares
of PCA Common Stock held by persons properly exercising Dissenters' Rights will
not be converted into the Cash Merger Consideration in the Merger and after the
Effective Time will represent only the right to receive such consideration as is
determined to be due the holder of such Dissenting Shares pursuant to Article
13. If after the Effective Time any dissenting shareholder fails to perfect or
loses such right to payment or appraisal under Article 13, each share of PCA
Common Stock of such shareholder shall be treated as a share that had been
converted as of the Effective Time into the right to receive the Cash Merger
Consideration.
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THE MERGER
BACKGROUND OF THE MERGER
The Board of Directors has reviewed on an ongoing basis, with the assistance
of Needham since its engagement in the spring of 1997, alternative strategies
for enhancing shareholder value. As a part of this process, in the spring of
1997, the Board determined to explore the sale of the Company. Needham solicited
offers for the Company and, during late June and early July 1997, the Company
received proposals from four potential purchasers. Two of the proposals were at
prices below the Merger Consideration and the other two proposals, one of which
was from Jupiter, were at prices in excess of the Merger Consideration.
Following preliminary due diligence by, and preliminary negotiations with, the
two higher bidders, the Board determined to proceed with final negotiations with
the bidder other than Jupiter. In the course of such negotiations it became
apparent that consummation of a transaction, or its ultimate price, would be
contingent upon the results of the Company's operations during its 1997 winter
holiday season. The Board was unwilling to proceed with a transaction subject to
a contingency of this nature, and sale negotiations were terminated. In fact,
the projections of the Company's sales, profit and cash flow for the fiscal year
ended February 1, 1998, on which the bids were premised, were considerably
higher than actual results achieved by the Company.
On March 9, 1998, Jupiter approached John Grosso, President of the Company,
regarding Jupiter's renewed interest in pursuing a potential acquisition of the
Company. Jupiter subsequently spoke with Joseph H. Reich, the Company's Chairman
and the Managing Partner of Centennial Associates, L.P. ("Centennial"), the
Company's largest shareholder, concerning the potential acquisition of the
Company. Jupiter preliminarily proposed a price of up to $26 per share, which
Mr. Reich indicated would not be acceptable. Jupiter stated that it would only
pursue its interest in the Company if it was assured that discussions would be
held on an exclusive and confidential basis. Mr. Reich conveyed this preliminary
interest to the Directors of the Company on an informal basis.
On March 31, 1998, representatives of Jupiter met with Mr. Grosso and
representatives of Needham and the Company's legal counsel concerning a possible
transaction between Jupiter and the Company. At these discussions, the Jupiter
representatives outlined a transaction of the nature described in this Proxy
Statement/Prospectus in which a subsidiary of Jupiter would be merged into the
Company and all shareholders of the Company, other than certain members of
management, would have the right to elect to receive consideration, either in
cash or a combination of cash and stock in the surviving entity, but with the
condition that at least a minimum number of Shares of PCA Common Stock be
retained by existing shareholders of the Company. Jupiter indicated that an
essential element of any transaction would be that the transaction qualify as a
recapitalization for accounting purposes. Jupiter also indicated that the
conditions of its willingness to proceed would include, among other things, an
agreement from Mr. Reich and the other Board members with significant
shareholdings to vote their Shares in favor of the transaction, an option on
certain of such Shares, an agreement by Mr. Reich or Centennial to retain at
least the Minimum Continuing Number required to assure recapitalization
accounting treatment, and a termination fee. Jupiter further stated that it
would have to perform detailed business and technical due diligence before
making a formal offer.
During a telephonic meeting held on April 2, 1998, the Board discussed a
possible transaction with Jupiter and authorized management to cooperate in
conducting due diligence with Jupiter. It was the view of the Board that
pursuing an auction of the Company would terminate Jupiter's interest and would
be disruptive to the Company's operations without assuring that any higher offer
would emerge. On April 2, 1998, Jupiter commenced its due diligence
investigations of the Company by holding meetings with the Company's senior
management For approximately the next two weeks, Jupiter continued its due
diligence which included additional meetings with management of the Company and
legal, accounting and other technical areas of due diligence.
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On April 8, Jupiter's legal counsel circulated a draft of a merger agreement
for discussion purposes while Jupiter continued its due diligence review. As of
that time, there remained differences between the parties relating to the price
of the transaction (including the significance of certain due diligence
findings), the proposed voting, option and share retention agreements, the
termination fee, and the general structure of the transaction including
conditions to consummation.
On April 13, Jupiter sent a letter (the "April 13 Letter") to the Company
which outlined its proposal. The significant terms of the April 13 Letter
include the following: (i) the transaction would be accomplished through a cash
merger of the Company with an affiliate of Jupiter and would be accounted for as
a recapitalization; (ii) existing PCA shareholders would have the right to elect
either (a) $26.00 in cash for each share or (b) $16.00 in cash and one share
(valued at $10.00) in the surviving entity (subject to a minimum and maximum
number of shares continuing and pro ration if the target range was not met, each
as discussed below); (iii) conditions (for purposes of qualifying for
recapitalization accounting treatment) that (a) existing PCA shareholders (other
than management) retain between $7.2 million and $10.0 million of the
outstanding PCA Common Stock (valued at $26.00 per share), and (b)
non-management members of the Board of Directors of the Company who are also PCA
shareholders commit, prior to signing the definitive purchase agreement, to
select the cash/stock offer for at least $7.2 million of stock so that the $7.2
million minimum would be met by them if other shareholders elected cash only;
(iv) the cash portion of the cash/stock offer would be reduced and the stock
portion increased if less than $7.2 million in value of the surviving entity was
elected to be maintained by the continuing shareholders, and the stock portion
of the cash/stock offer would be reduced and the cash portion would be increased
if more than $10.0 million in value of the surviving entity was elected to be
maintained by the continuing shareholders; (v) Messrs. Reich, Grosso, Tulchin
and Foreman and certain of their affiliates, including Centennial, would enter
into an agreement pursuant to which they would (a) agree to vote shares of
common stock owned or controlled by them in favor of the transaction with
Jupiter, and (b) grant to Jupiter the option to purchase up to 100% of the
shares of Common Stock owned or controlled by each of them at the price set
forth in the April 13 Letter; (vi) non-solicitation provisions; (vii) detailed
provisions regarding circumstances in which the Company would have to pay a
termination fee in the amount of $12 million, and a requirement that the Company
reimburse Jupiter for all expenses incurred in negotiating the transaction if it
terminates for any reason; and (viii) certain arrangements with senior
management.
On April 13, representatives of Jupiter and Centennial (including Mr. Reich)
met to further discuss the open issues.
On the morning of April 14, legal counsel for Jupiter and the Company met to
resolve certain differences on the draft merger agreement. At the conclusion of
this meeting, it was agreed that there were certain business issues that
remained to be resolved. In the afternoon and evening of April 14, in an attempt
to resolve some of the issues raised by the April 13 Letter and left unresolved
from the morning meeting, representatives of Jupiter and their legal counsel and
representatives of Needham and the Company's legal counsel met in New York. At
this meeting, the Company's legal counsel indicated concern with the condition
contained in the draft agreement that the financing (which had been committed)
be consummated. Jupiter and its counsel pointed out the limited sets of
circumstances under which the financing sources could fail to close on the
financing. In addition, the Company's legal counsel raised concerns over the
broad circumstances under which Jupiter had proposed that it receive a
termination fee and the reimbursement of its expenses, which Jupiter then
estimated to be at least $3.5 million. Finally, they indicated their opposition
to the requirement that the Board members with significant shareholdings agree
to vote all of their Shares in favor of the Merger. They also conveyed the
objections of the Company to the adequacy of the price offered and of Mr. Reich
to the proposed option agreement and to any requirement to commit to retaining
shares of PCA Common Stock. Jupiter stated that it would consider their position
on the voting, option and share commitment agreements and the termination fee.
The Company's representatives requested that Jupiter reconsider its proposal and
suggested a meeting the next day to readdress these issues.
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On the morning of April 15, Jupiter sent a new letter (the "April 15
Letter") to the Company outlining a revised proposal and raised the
consideration to $26.50 per share. Some key differences between the April 13
Letter and the April 15 Letter were: (i) PCA shareholders would have the right
to elect either (a) to receive $26.50 in cash for each Share or (b) to retain
one share of Surviving Corporation Common Stock valued at $26.50 for each Share
of PCA Common Stock (subject to the same minimum and maximum aggregate dollar
thresholds for Continuing Shares); (ii) proration of the number of shares issued
to continuing shareholders in the event such thresholds were not met; (iii) no
voting and option agreements would be required, but non-management members of
the Board with significant shareholdings would be required to commit to select
the stock offer for the minimum amount prior to signing the definitive purchase
agreement; and (iv) reduction in the termination fee to $10 million.
In the afternoon and evening of April 15, representatives of Jupiter and
their legal counsel and representatives of the Company, Needham and the
Company's legal counsel met to discuss the terms of the April 15 Letter and
other open items in the merger agreement. Mr. Grosso reported that management
and Jupiter had substantially completed negotiating their arrangements.
Representatives of the Company stated their position that despite the increase,
the price was still too low, their opposition to the broad circumstances under
which termination fees would be paid and expenses reimbursed and their
continuing discomfort with the conditions to closing, including the condition
that the financing be consummated, and the condition that non-management
Directors would be required to commit to select the stock offer prior to
Jupiter's signing the definitive purchase agreement. Representatives of Jupiter
indicated that Jupiter would not pursue a transaction which would result in a
breach of its obligations under the Merger Agreement if its committed financing,
or alternative financing, was not obtained.
During the negotiations, it was agreed by the parties that: (i) the price
per share would be $26.50; (ii) the non-management directors of the Company
would not be required to provide a commitment to retain the minimum amount of
continuing shares; (iii) Jupiter would have a condition that the financing
(which had been committed) be consummated; and (iv) the Company would pay
Mergerco a $6 million termination fee (rather than the $12 million termination
fee originally proposed) plus expenses in circumstances generally where the
Merger is not consummated due to the receipt of an alternative proposal and
other circumstances as provided in the Merger Agreement. Mr. Reich agreed to
present this proposal to the Board for its consideration.
From April 15 through April 17 representatives of the respective legal
counsel of Jupiter and the Company negotiated the terms of a revised draft
merger agreement.
On April 17, a special meeting of the Board was convened to discuss the
current status of negotiations. All members of the Board participated and
received a draft of the Merger Agreement dated April 16, 1998, and certain other
related documents. Representatives of the Company's legal counsel advised the
Board of its fiduciary duties under North Carolina law with respect to the
transaction. Mr. Grosso informed the Board that he would likely be an interested
party in the transaction in light of his proposed role with the surviving
corporation and would not participate in deliberations about the contemplated
transaction. The Board then reviewed the basic features of the proposed
transaction, including the price and structure, the conditions to closing and
transaction protection features. Mr. Reich and counsel to the Company outlined
in detail the discussions with Jupiter described above.
The Board then focused on the proposed transaction protection features and
discussed the difficulty in balancing the need to provide sufficient
transactional protections to induce Jupiter to make and contractually commit to
its highest bid and to also permit other bidders a meaningful opportunity to
emerge and compete with that bid. The Board determined, based in part on the
view of its legal and financial advisors, that the proposed transaction
protection features would not deter an offer that was materially better to the
Company's shareholders, since the termination fee (excluding the expense
reimbursement) was less than 3% of the transaction size (excluding
indebtedness), or approximately $.75 per outstanding share, and no directors,
shareholders or members of management were subject to a voting
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or option agreement. Representatives of Needham presented the Board with such
firm's preliminary analysis of the proposed transaction from a financial point
of view.
As part of the above discussions, members of the Board asked Mr. Grosso for
management's views as to the reasonableness of the estimated financial
information as to possible future performance developed by management and used
by Needham. Mr. Grosso responded by indicating that in his and the other
executive officers' respective opinions such estimates were reasonable, based on
the best currently available information, and generally conformed with
management's business plan that was presented to the Board.
Mr. Grosso then disclosed the current state of his negotiations with Jupiter
regarding the continued employment of certain members of management by, and the
continuing economic interest of such persons in, the Surviving Corporation.
On April 20, the Board of the Company reconvened by telephone to further
discuss and review the terms of the draft merger agreement that had been
distributed to them on April 17, which included the $26.50 price that had been
offered by Jupiter on April 15. At this meeting, representatives of Needham
delivered to the Board a written opinion to the effect that as of the date of
such opinion and based upon and subject to certain matters stated therein, the
Merger Consideration was fair to the PCA shareholders (other than Mergerco and
its affiliates) from a financial point of view. See "--Opinion of Financial
Advisor." After further discussion, the Board (other than Mr. Grosso, who did
not participate in the vote) unanimously approved the transaction. Soon
thereafter, the Company and Mergerco entered into the Merger Agreement and
issued a press release announcing the Merger.
LITIGATION
On April 22, 1998, the Company and the members of its Board of Directors
were sued by Harbor Finance Partners, a shareholder of the Company, to enjoin
the Merger, or in the alternative, for damages. The lawsuit was filed in the
Superior Court of Mecklenburg County, North Carolina. Harbor Finance Partners
has alleged that the Company and its Directors breached their fiduciary duty to
the shareholders in connection with the Merger. The Company and the Directors
have denied these allegations and have stated that they will defend the lawsuit
vigorously. However, should the plaintiffs be successful in the action, the
transaction could be enjoined or the Company may be required to pay the
plaintiffs the difference between the Cash Merger Consideration and the court's
determination of the fair value of the Shares.
On May 26, 1998, the Company and the Directors moved to dismiss the lawsuit
on the basis that Harbor Finance Partners had failed to state a claim for which
relief can be granted. As of July 21, 1998 a hearing date for that motion to
dismiss has not yet been set by the Court.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
At its meeting on April 20, 1998, the Board determined that the Merger
Agreement is fair to the shareholders of the Company, adopted the Merger
Agreement and recommended that holders of PCA Common Stock approve and adopt the
Merger Agreement. This determination was made by all members of the Board,
except for Mr. Grosso who did not participate in such Board action because of
his interest in the transaction as a member of the management team continuing
with the Surviving Company. Mr. Grosso, however, concurs with the determination
of the Board.
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The Board of Directors has reviewed on an ongoing basis alternative
strategies for the enhancement of shareholder value. Pursuant to such process,
the Company acquired American Studios, Inc. ("ASI") in early 1997, which
materially increased the Company's business with Wal-Mart. Following the
integration of ASI, the Board continued to consider alternative strategies for
the Company, both in order to enhance shareholder value and because certain of
the Company's larger shareholders had expressed a desire to realize cash for a
substantial portion of their investments. From time to time, with the assistance
of Needham, the Company approached strategic partners regarding a potential
joint venture or acquisition, without success. With the advice of Needham, it
was determined that the sale of the Company to a financial buyer also should be
explored. As indicated above under "Background of the Merger," the Company
pursued a potential sale in the late spring and early summer of 1997, also
without success. Thus, when Jupiter expressed continuing interest in acquiring
the Company, notwithstanding the Company's failure to achieve its previously
projected results for the fiscal year ended February 1, 1998, the Board
determined to pursue discussions. As Jupiter's offer would permit Company
shareholders to receive Cash Merger Consideration, representing a premium to the
market price, for at least 97% of their Shares, as well as an option for
shareholders who preferred to retain PCA Common Stock to be able to participate
in the future of the Company, the Board considered the offer to be an attractive
one to all shareholders.
The Board received an opinion from Needham to the effect that as of the date
of such opinion and based upon and subject to certain matters stated therein,
the Merger Consideration to be received by holders of PCA Common Stock (other
than Mergerco and its affiliates) in the Merger was fair to such holders from a
financial point of view. The Board's decision to enter into the Merger Agreement
was based in part on the Board's view that while no solicitation of other bids
had been attempted, the transaction protection features offered to Mergerco
would not deter competing bids that were materially superior to the Company's
shareholders. Ultimately, the Merger was deemed by the Board to be the
alternative which would yield the best results to the shareholders of the
Company from a financial point of view. See "--Background of the Merger."
The recommendation by the Board that the Company's shareholders approve and
adopt the Merger Agreement is not, and should not be considered to be, a
recommendation by the Board that the shareholders elect to retain or,
alternatively, that the shareholders sell shares of PCA Common Stock held by
them in the Merger.
In its deliberations, the Board considered a number of factors including,
without limitation, the following:
1. The Board's knowledge of the business, operations, properties,
assets, financial condition, operating results and prospects including,
without limitation, the expected growth of the Company and industry growth,
and the Board's belief that (i) the Merger Consideration was within the
range of values determined by Needham, and deemed most appropriate by the
Board, using a discounted cash flow analysis of management's own estimates
and (ii) the Merger Consideration therefore permitted shareholders of the
Company to recognize with certainty the present value of those estimates for
at least 97% of their shares, whereas without the Merger, the Company's
ability to realize such estimates would inherently be subject to significant
economic and competitive uncertainties and contingencies beyond the
Company's control. See "--Background of the Merger";
2. The oral and written presentations of Needham. See "--Opinion of
Financial Advisor" for a discussion of the factors considered by Needham in
rendering the Needham Opinion. Such opinion, which is subject to
limitations, qualifications and assumptions, is included as Annex B hereto,
and should be read in its entirety. The Merger Consideration was within the
valuation range determined by Needham, and deemed most appropriate by the
Board, using a discounted cash flow analysis presented by Needham, which was
the analysis on which Needham and the Board placed relatively greater
emphasis, and also, generally, was within the range of values presented by
Needham in its various other analyses performed in rendering the Needham
Opinion. Needham and the Board gave
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relatively more emphasis to the discounted cash flow analysis because, among
other things, they did not believe that other companies or transactions were
highly comparable and the discounted cash flow is the analysis which relies
most heavily upon specific information about the Company itself and its
prospects. See "--Opinion of Financial Adviser--DISCOUNTED CASH FLOW
ANALYSIS." While in some analyses performed in rendering the Needham
Opinion, premiums and multiples calculated based on the Merger Consideration
were below the means and medians of the ranges of premiums and multiples for
the selected companies and transactions, based on the Needham Opinion and in
light of all of the analyses performed by Needham in rendering such Opinion,
the Board believed that the Merger Consideration was fair to holders of PCA
Common Stock from a financial point of view;
3. The fact that, as described above and in "Background of the Merger,"
the Board had recently pursued certain transactions on behalf of the Company
without success. The Board also considered the fact that although two bids
received during the summer of 1997 were higher than $26.50 per share, those
bids were not binding and were based on management's projections of the
Company's sales, profits and cash flows for the fiscal year ended February
1, 1998, which projections were considerably higher than actual results
achieved by the Company;
4. The terms and conditions of the Merger Agreement. The Board
considered in particular the "no solicitation" provision of the Merger
Agreement, the fees and expense reimbursements payable to Jupiter (which
could require estimated payments of up to approximately $11 million in the
aggregate and which provisions were negotiated at arm's length between the
parties), the conditions precedent to the payment of such fees, and the
termination provisions of the Merger Agreement. The Board sought to balance
the interests of Jupiter, which would contractually commit to its
acquisition offer only if the Company were prohibited from soliciting other
offers, against the Company's ability to obtain a superior offer for the
Company's shareholders. The Board sought to negotiate provisions in the
Merger Agreement that would allow it to fulfill its fiduciary duties in the
event a superior unsolicited offer from a third party was received. While
the Merger Agreement prohibits the Company from soliciting third-party
offers, it does not prohibit the Company from considering unsolicited
third-party offers, negotiating with such third parties or furnishing such
third parties with information about the Company, subject to certain
obligations of the Company, among other things, to inform Jupiter of the
identity of the bidder and terms of the bid.
Also, the Board negotiated provisions in the Merger Agreement that would
permit the termination thereof in the event an offer that is superior to the
Company's shareholders to the Jupiter offer is received from a third-party.
Only in the event that (i) the Company terminates the Merger Agreement to
support a superior alternative acquisition proposal, (ii) Mergerco
terminates the Merger Agreement as a result of the Board having withdrawn,
failed to reaffirm or adversely modified its approval or recommendation of
the Merger or having recommended an alternative acquisition proposal or
having executed an agreement relating to an alternative acquisition
proposal, (iii) Mergerco terminates the Merger Agreement as a result of the
Merger having not been consummated by the Termination Date and the Company
has failed to use commercially reasonable efforts to cause the Merger to
occur or (iv) either party terminates the Merger Agreement as a result of
the Merger having not been consummated by the Termination Date or by the
failure to obtain the requisite shareholder vote, and if the Company
received an alternative acquisition proposal at the time of such termination
and within one year of such termination the Company enters into an
alternative acquisition proposal, would the Company be required to pay
Jupiter a termination fee of $6 million and reimburse its expenses then
estimated to be at least $3.5 million. Alternatively, the Company is
required to pay Jupiter's expenses if (i) Mergerco terminates the Merger
Agreement as a result of the Company having breached or failed to comply
with any of its covenants, representations or warranties such that any of
the conditions to closing is reasonably likely to be incapable of being
satisfied by the Termination Date or (ii) the Company terminates the Merger
Agreement at a time after Mergerco has given notice to the Company that
Mergerco is entitled to terminate the Merger Agreement under
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(i) above. Finally, the Company will pay to Mergerco an amount equal to $6
million if (a) the Merger Agreement is terminated by either party if the
Merger is not consummated by the Termination Date, or because the requisite
shareholder vote has not been obtained and (b) at the time of such
termination, a person or group of persons has acquired beneficial ownership
of more than 20% (or, in the case of Centennial Partners L.P., 35%) in the
aggregate of the PCA Common Stock and if, within one year of such
termination, the Company enters into any alternative acquisition proposal.
The Board concluded that the termination fees and expense reimbursements
would not deter a third-party from making an offer that was materially
superior to the Company's shareholders;
5. The belief that conducting an auction after receipt of Jupiter's
offer would (i) cause Jupiter to withdraw its offer, (ii) be disruptive to
the Company's operations and (iii) not assure the Company of receiving any
higher offers;
6. The decline in the volume of Shares traded following the Merger and
the possible delisting and deregistration of the Surviving Corporation
Common Stock. See "RISK FACTORS--Delisting, Loss of Liquidity" and "RISK
FACTORS--Potential Deregistration." The Board determined that liquidity
issues would not materially affect the value of the Merger Consideration
because approximately 97% of that consideration would be in cash;
7. The Board's consideration of the conditions to closing included in
the Merger Agreement and the commitment letters provided by Jupiter,
including the contingency that the committed financing be consummated, and
the fact that a substantial portion of the financing was to be provided or
committed by NationsBank and its affiliates, which historically has been the
Company's lender and accordingly is knowledgeable about the Company's
business and financial position;
8. The historical market price of PCA Common Stock, which was $21.625 on
April 17, 1998, the last trading day prior to the Board's approval of the
Merger Agreement, and had never reached the level of the Cash Merger
Consideration and, since January 1, 1998, had generally traded at a discount
to the stocks of other leased-space retailers and to broader market indices;
9. The fact that the trading volumes in the Company's shares have been
low, and that consummation of the Merger would enable the Company's
shareholders to realize a premium to the market price. Certain of the
Company's larger holders had expressed a desire to realize cash for their
investments, and their alternative means for liquidity could have included
large-scale open market stock sales which could have depressed the market
price of the Common Stock, or the sale of their holdings in private
transactions which could potentially have been made at a premium in which
other shareholders would not have participated and which could have resulted
in a change of control of the Company on which the other shareholders would
not have voted;
10. The fact that the consideration to be received by the Company's
shareholders in the Merger represents an approximately 22.5% premium over
the closing price of PCA Common Stock of $21.625 per share on April 17,
1998, the last trading day prior to the Board's approval of the signing of
the Merger Agreement, compared to the range of transactional premiums
presented by Needham (See "--Opinion of Financial Advisor--SELECTED
TRANSACTION ANALYSIS");
11. The fact that the Merger Agreement requires that the Merger be
submitted to the Company's shareholders for approval, and the fact that none
of the Company's shareholders have contractually committed to vote in favor
of the Merger.
The foregoing discussion of the information and factors considered and given
weight by the Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the Merger, the Board
did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. The Board did not consider the "liquidation value" of the Company
in its analysis. In that regard, the Board also noted that Needham, the
Company's financial advisor, did not consider the "liquidation value" of the PCA
Common Stock in
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performing their analysis in rendering the Opinion. The Company does not believe
that the "liquidation value" of the Company would exceed the Merger
Consideration. In addition, individual members of the Board may have given
different weights to different factors.
Mr. Grosso, in arriving at the conclusion that he concurs with the Board,
considered the same factors as the Board enumerated above.
OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated May 6, 1997, the Company retained
Needham to furnish financial advisory and investment banking services, which
applied to the proposed transaction with Mergerco, including the rendering of an
opinion as to the fairness, from a financial point of view, to the Company's
shareholders (other than Mergerco and its affiliates) of the consideration to be
received by such shareholders in the Merger. The amount of consideration to be
paid in the Merger was determined through negotiations between the Company, in
consultation with Needham, and Jupiter.
At a meeting of the Board on April 20, 1998, Needham delivered its opinion
that, as of such date and based upon the matters described therein, the
consideration to be received by the holders of PCA Common Stock (other than
Mergerco and its affiliates) in the Merger is fair to such holders from a
financial point of view. Needham has not been requested to render an updated
opinion as of any date subsequent to April 20, 1998 because, as of the date of
this Proxy Statement/Prospectus, the Company does not believe that any
significant events have occurred or any significant changes to the information
reviewed by Needham that could affect the conclusions as to fairness set forth
in the Needham Opinion. A revised or updated opinion will be requested from
Needham if an amendment or modification is made to the Merger Agreement that
materially affects the financial terms of the Merger. THE NEEDHAM OPINION IS
DIRECTED ONLY TO THE MERGER CONSIDERATION TO BE PAID BY MERGERCO TO THE HOLDERS
OF PCA COMMON STOCK (OTHER THAN MERGERCO AND ITS AFFILIATES) AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING OR WHAT ELECTION SUCH SHAREHOLDER
SHOULD MAKE WITH RESPECT TO THE RETENTION OR CONVERSION OF SUCH HOLDER'S SHARES
OF PCA COMMON STOCK.
The complete text of the April 20, 1998 Needham Opinion, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken by Needham, is attached to this Proxy Statement/Prospectus as Annex
B, and the summary of the Needham Opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the Needham
Opinion. SHAREHOLDERS ARE URGED TO READ THE NEEDHAM OPINION CAREFULLY AND IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED
AND THE ASSUMPTIONS MADE BY NEEDHAM.
In arriving at its opinion, Needham, among other things, (i) reviewed a
draft of the Merger Agreement dated April 17, 1998; (ii) reviewed certain other
documents relating to the Merger; (iii) reviewed certain publicly available
information concerning the Company and certain other relevant financial and
operating data of the Company made available from the internal records of the
Company; (iv) reviewed the historical stock prices and trading volumes of the
PCA Common Stock; (v) held discussions with members of senior management of
Jupiter and the Company concerning the current and future business prospects of
the Company; (vi) reviewed certain financial forecasts and projections prepared
by the management of the Company and information relating to certain pro forma
effects on the Company's capital structure after the Merger provided by
management of the Company and Jupiter (See "--Certain Estimates of Future
Operations" for a summary of such forecasts and projections); (vii) compared
certain publicly available financial data of companies whose securities are
traded in the public markets, which Needham deemed generally comparable to the
business of the Company, to similar data for the Company; (viii) reviewed the
financial terms of certain other business combinations that Needham deemed
generally relevant; and (ix) performed and/or considered such other studies,
analyses, inquiries and investigations as Needham deemed appropriate.
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Needham assumed and relied upon, without independent verification, the
accuracy and completeness of the information it reviewed for purposes of its
opinion. With respect to the Company's financial forecasts provided to Needham
by the Company's management, Needham assumed that such forecasts have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the Company's management, at the time of preparation, of the
future operating and financial performance of the Company. Needham did not
assume any responsibility for or make or obtain any independent evaluation,
appraisal or physical inspection of the assets or liabilities of the Company or
Mergerco. The Needham Opinion states that it was based on economic, monetary and
market conditions existing as of the date of such opinion. Needham expressed no
opinion as to what the value of the PCA Common Stock will be after consummation
of the Merger or the prices at which the PCA Common Stock will actually trade at
any time. In addition, Needham was not asked to consider, and the Needham
Opinion does not address, the Company's underlying business decision to engage
in the Merger, the relative merits of the Merger as compared to any alternative
business strategies that might exist for the Company, or the effect of any other
transaction in which the Company might engage. In connection with the sale of
the Company to Jupiter, Needham was not authorized by the Company or the Board
to solicit, nor did Needham solicit, third-party indications of interest for the
acquisition of all or any part of the Company. No other limitations were imposed
by the Company on Needham with respect to the investigations made or procedures
followed by Needham in rendering the Needham Opinion.
The following paragraphs summarize the material financial analyses performed
by Needham in arriving at its opinion presented to the Board.
SELECTED COMPANY ANALYSIS
Using publicly available information, Needham compared selected historical
and projected financial and market data ratios for the Company to the
corresponding data and ratios of certain other publicly traded leased-space
retail companies: CPI Corp., Finlay Enterprises, Inc., National Vision
Associates, Ltd. and U.S. Vision, Inc. (the "Selected Companies"). Such data and
ratios included total market capitalization to historical and projected revenue,
price per share to historical and projected earnings per share and market value
to historical book value.
Needham calculated multiples for the Selected Companies based on the closing
stock prices on April 17, 1998 and for the Company based on the proposed Cash
Merger Consideration of $26.50 per share. For the Selected Companies, the
multiples of total market capitalization to last twelve months ("LTM") revenues
ranged from 0.6 to 1.0 with a mean of 0.9 and a median of 0.9, as compared with
a multiple of 1.1 for the Company; the multiples of market capitalization to
projected calendar 1998 revenues ranged from 0.5 to 1.0 with a mean of 0.8 and a
median of 0.8, as compared with a multiple of 1.1 for the Company; and the
multiple of market capitalization to projected calendar 1999 revenues (based on
one Selected Company) was 0.7, as compared with a multiple of 1.0 for the
Company. For the Selected Companies, the LTM price-earnings multiples ranged
from 14.9 to 29.6 with a mean of 21.6 and a median of 20.9, as compared with a
multiple of 24.8 for the Company; the projected calendar 1998 price-earnings
multiples ranged from 12.8 to 22.2 with a mean of 17.0 and a median of 16.6, as
compared with a multiple of 18.9 for the Company; and the projected calendar
1999 price-earnings multiples (based on three Selected Companies) ranged from
9.8 to 17.8 with a mean of 13.9 and a median of 14.1, as compared with a
multiple of 13.5 for the Company. For the Selected Companies, the multiples of
market value to historical book value ranged from 2.4 to 4.6 with a mean of 3.4
and a median of 3.4, as compared with a multiple of 4.7 for the Company.
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SELECTED TRANSACTION ANALYSIS
Needham also analyzed publicly available financial information for 21
selected mergers and acquisitions of companies in the retail industry that
represent transactions since January 1, 1996 with transaction values of between
$100 million and $500 million. In examining these transactions, Needham analyzed
certain market price, income statement and balance sheet parameters of the
acquired companies relative to the consideration offered, such as premiums of
the consideration offered to the target's stock price one day, one week and four
weeks prior to the announcement date of the transaction; and transaction value
as multiples of net sales, operating income, cash flow, pretax income, net
income and book value. In certain cases, complete financial data was not
publicly available for these transactions and only partial information was used
in such instances.
Transactions analyzed by Needham included (target/acquirer): Younkers, Inc.
/ Proffitt's, Inc.; National Convenience Stores Incorporated / Diamond Shamrock,
Inc.; Strawbridge & Clothier / The May Department Stores Company; Fresh Fields
Markets, Inc. / Whole Foods Market, Inc.; Parisian, Inc. / Proffitt's, Inc.;
Fay's Incorporated / Thrift Drug, Inc. (J.C. Penney Company, Inc.); Orchard
Supply Hardware Stores Corporation / Sears, Roebuck and Co.; Big B, Inc. / Revco
D.S., Inc.; Rhodes, Inc. / Heilig-Meyers Company; Baby Superstore, Inc. / Toys
'R' Us, Inc.; Kash n' Karry Food Stores, Inc. / Food Lion, Inc.; G.R.
Herberger's, Inc. / Proffitt's, Inc.; Leslie's Poolmart / Investor Group;
Shoppers Food Warehouse Corp. / Dart Group Corporation; Riser Foods, Inc. /
Giant Eagle, Inc.; Amrion, Inc. / Whole Foods Market, Inc.; Hechinger Company /
Leonard Green & Partners, L.P.; Delchamps, Inc. / Jitney-Jungle Stores of
America, Inc.; Tuesday Morning Corporation / Madison Dearborn Partners II, L.P.;
Borden Decorative Products / Blackstone Capital Partners III; and General Host
Corporation / The Cypress Group L.L.C. (collectively, the "Selected
Transactions").
For the Selected Transactions, the one-day stock price premium ranged from
8.1% to 96.4% with a mean of 34.4% and a median of 24.4%; the one-week stock
price premium ranged from 19.2% to 107.7% with a mean of 47.8% and a median of
32.6%; and the four-week stock price premium ranged from 6.7% to 118.2% with a
mean of 42.3% and a median of 31.8%. The multiples of transaction value to net
sales ranged from 0.1 to 2.6 with a mean of 0.6 and a median of 0.5; the
multiples of transaction value to operating income ranged from 8.4 to 36.1 with
a mean of 17.8 and a median of 12.7; the multiples of transaction value to cash
flow ranged from 1.8 to 20.3 with a mean of 10.2 and a median of 8.8; the
multiples of transaction value to pretax income ranged from 10.0 to 71.4 with a
mean of 25.5 and a median of 20.1; the multiples of transaction value to net
income ranged from 11.1 to 133.5 with a mean of 44.8 and a median of 29.3; and
the multiples of transaction value to book value ranged from 0.3 to 6.6 with a
mean of 3.3 and a median of 3.2.
These premiums and ratios compared with the following for the Company, based
on the proposed Merger consideration of $26.50 per share: one-day stock price
premium of 21.8%, one-week stock price premium of 14.0%, four-week stock price
premium of 17.1%, net sales multiple of 1.1, operating income multiple of 11.6,
cash flow multiple of 6.9, pretax income multiple of 16.3, net income multiple
of 30.5, and book value multiple of 4.7.
DISCOUNTED CASH FLOW ANALYSIS
Needham analyzed the Company based on an unlevered discounted cash flow
analysis of the projected performance of the Company. Needham used projected
financial statements for the Company for the third and fourth quarters of the
fiscal year ending January 31, 1999 and fiscal years ending January 30, 2000
through February 2, 2003 provided by the Company's management. The discounted
cash flow analysis determined the unlevered after-tax cash flows generated over
the period commencing with the third quarter of fiscal year ending January 31,
1999 and then added a terminal value based upon a range of EBITDA multiples from
6.0x to 8.0x. The unlevered after-tax cash flows and terminal values were
discounted using a range of discount rates from 12.5% to 25.0%. This analysis
resulted in a range of
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discounted cash flow values for the Company from $175.7 million to $349.9
million, or $18.30 per share to $36.43 per share, based upon the number of the
Company shares outstanding as of March 31, 1998 assuming the exercise of options
and warrants outstanding using the treasury stock method and less net debt
outstanding as of January 31, 1998. Needham noted that it believed that discount
rates ranging from 15.0% to 20.0% represented more appropriate risk-adjusted
costs of capital for companies in the Company's industry and, applying the
EBITDA multiple of 7.0x (the midpoint of the range of such multiples, which were
based on the trading levels of shares of companies deemed generally comparable
to the Company), derived a range of discounted cash flow values for the Company
from $236.9 million to $284.7 million, or $24.67 to $29.65 per share.
Needham placed relatively greater emphasis on the discounted cash flow
analysis than on the analyses of selected companies and selected transactions
for a number of reasons. There is a relatively small number of publicly traded
companies that are deemed to be generally comparable to the Company and, of the
Selected Companies, the only publicly traded company deemed comparable to the
Company that operates photo studios in leased space in department stores is CPI
Corp. In addition, none of the Selected Transactions represent recent
retail-oriented transactions involving businesses that operate photo studios in
leased space in department stores. The only recent transaction involving a
publicly traded company in such leased space photo studio business was the
Company's acquisition of American Studios, Inc. in early 1997. However, Needham
believes that this transaction should not be viewed as directly comparable to
the Merger because American Studios, Inc. had incurred net losses during the
39-week fiscal period and fiscal year prior to such acquisition. Because the
reasons for and circumstances surrounding the Selected Transactions were
specific to those transactions, and because of the inherent differences among
the businesses, operations and prospects of the Company and the Selected
Companies analyzed, although Needham placed relatively greater emphasis on the
discounted cash flow analysis, it did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance thereof. As noted below, Needham believes that
its analyses should only be considered as a whole.
OTHER ANALYSES
In rendering its opinion, Needham considered certain other analyses,
including, among other things, a history of trading prices and volumes for the
Company, a comparison of the Company's indexed stock price performance relative
to an industry index, the Standard & Poor's 500 Index and the Nasdaq Composite
Index, and a comparison of the Company's stock price relative to the per share
consideration offered in the proposed Merger, each for the periods from January
1, 1997 to April 17, 1998 and January 1, 1995 to April 17, 1998.
No company or transaction used in any comparable analysis as a comparison is
identical to the Company or the Merger. Accordingly, these analyses are not
mathematical; rather, they involve complex considerations and judgments
concerning differences in the financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies and transactions to which they are being
compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which are
beyond the control of the Company. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable as set forth therein.
Additionally, analyses relating
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to the values of business or assets do not purport to be appraisals or
necessarily reflect the prices at which businesses or assets may actually be
sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. The Needham Opinion and Needham's related analyses were
only one of many factors considered by the Board in its evaluation of the
proposed Merger and should not be viewed as determinative of the views of the
Board or management with respect to the consideration to be received by the
holders of PCA Common Stock (other than Mergerco and its affiliates) or the
proposed Merger.
Pursuant to its engagement letter, the Company has agreed to pay Needham a
fee for rendering the Needham Opinion of $500,000, which is the total amount of
compensation to be paid to Needham in the event that the Merger is not
consummated. In addition, the Company has agreed to pay Needham a fee of
$750,000 upon consummation of the Merger. The Company has also agreed to
reimburse Needham for its reasonable out-of-pocket expenses and to indemnify it
against certain liabilities relating to or arising out of services performed by
Needham as financial advisor to the Company.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. Needham was retained by the Board to act as the
Company's financial advisor based on Needham's experience as a financial advisor
in mergers and acquisitions as well as Needham's familiarity with the Company
and its industry. Needham has previously rendered certain investment banking and
financial advisory services to the Company, for which it received customary
compensation. In the normal course of its business, Needham may actively trade
the equity securities of the Company for its own account or for the account of
its customers and, therefore, may at any time hold a long or short position in
such securities. Joseph H. Reich, Chairman of the Board of the Company, is a
director of Needham.
CERTAIN ESTIMATES OF FUTURE OPERATIONS
At the request of Jupiter, the management of the Company prepared certain
nonpublic estimates reflecting management's views as to the possible future
performance of the Company over the five fiscal years ending February 2, 2003.
This information was provided to Jupiter on a confidential basis. Such financial
projections included estimates of revenues and income from operations for the
fiscal years 1998 through 2002. Management projected revenues and income from
operations for fiscal 1998 to be $246.2 million and $26.4 million, for fiscal
1999 to be $266.7 million and $32.3 million, for fiscal 2000 to be $284.5
million and $36.4 million, for fiscal 2001 to be $302.7 million and $40.6
million, and for fiscal 2002 to be $319.7 million and $44.2 million,
respectively.
THE ESTIMATES REFERRED TO ABOVE WERE NOT PREPARED WITH A VIEW TO PUBLIC
DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES ESTABLISHED BY THE COMMISSION
OR THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS.
THE ESTIMATES PREPARED BY THE COMPANY'S MANAGEMENT ARE INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS SOLELY BECAUSE SUCH INFORMATION WAS PROVIDED TO JUPITER.
NONE OF THE COMPANY, JUPITER, MERGERCO, OR THE COMPANY'S INDEPENDENT AUDITORS
ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OF SUCH INFORMATION. IN ADDITION,
BECAUSE THE ESTIMATES ARE INHERENTLY SUBJECT TO SIGNIFICANT ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES BEYOND THE COMPANY'S CONTROL, THERE
CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE REALIZED AND ACTUAL RESULTS MAY
BE HIGHER OR LOWER THAN THOSE ESTIMATED. SEE "RISK FACTORS." NEITHER THE
COMPANY'S AUDITORS NOR ANY OTHER INDEPENDENT ACCOUNTANTS HAVE COMPILED, EXAMINED
OR PERFORMED ANY PROCEDURES WITH RESPECT TO THE FOREGOING ESTIMATES, NOR HAVE
THEY EXPRESSED ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON SUCH INFORMATION OR
ITS ACHIEVABILITY, AND ASSUME
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NO RESPONSIBILITY FOR, AND DISCLAIM ANY ASSOCIATION WITH, THE PROSPECTIVE
FINANCIAL INFORMATION.
These estimates do not give effect to the Merger and should be read together
with the sections regarding Risk Factors, Unaudited Pro Forma Condensed
Consolidated Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
MERGER CONSIDERATION
At the Effective Time, subject to certain provisions as described herein
with respect to shares owned by Mergerco, Shares held in treasury, fractional
shares and Appraisal Shares and the effects of proration described herein, each
share of PCA Common Stock (other than Continuing Shares), will be converted into
the right to receive in cash following the Merger an amount equal to $26.50, and
each Continuing Share will remain outstanding as one fully paid and
nonassessable share of Surviving Corporation Common Stock.
The Merger Agreement contemplates that shareholders of the Company must
elect to retain a minimum of 271,698 shares of PCA Common Stock as Continuing
Shares and may not elect to retain more than a maximum of 358,490 shares of PCA
Common Stock as Continuing Shares (excluding certain Shares to be retained by
management).
Immediately prior to the Effective Time, each Option will be canceled and,
in exchange therefor, as soon as practicable following the Effective Time, the
holders of the Options will receive, with respect to each Option, a cash payment
in an amount equal to the Option Consideration. Payment may be withheld until
any required consent of the holder of an Option to its cancellation is obtained.
The surrender of an Option will be a release of all rights of the holder, other
than the right to receive the Option Consideration. Mergerco may separately
agree with a holder of an Option to alternative treatment of that holder's
Options.
STOCK ELECTION
Record holders of shares of PCA Common Stock will be entitled to make an
unconditional Continuing Share Election to retain shares of the Surviving
Corporation on or prior to the Election Date on the Continuing Share Election
form being sent to all record holders of PCA Common Stock at the same time as
this Proxy Statement/Prospectus but under separate cover. If holders elect in
the aggregate to retain Continuing Shares in excess of the Maximum Continuing
Number, then the number of Continuing Shares to be owned by such holders will be
prorated based on the number of Continuing Shares each holder elected to retain
(with fractional shares rounded down to the next whole number) so that only the
Maximum Continuing Number of Shares will remain as Continuing Shares. With
respect to shares as to which Continuing Share Elections are made but with
respect to which no Continuing Shares will be issued by reason of the preceding
sentence, such Continuing Share Elections will be deemed to be revoked and such
shares will be converted into the right to receive the Cash Merger
Consideration.
If holders elect in the aggregate to retain less than the Minimum Continuing
Number, then (i) each holder that made a Continuing Share Election will retain
the number of Continuing Shares set forth in such election and (ii) each holder
(whether or not such holder made a Continuing Share Election) will receive a
prorated (based on the total number of Shares owned by such shareholder as to
which a Continuing Share Election has not been made) number of Continuing Shares
(with fractional shares rounded up to the next whole number) so that the Minimum
Continuing Number will remain outstanding as Continuing Shares. With respect to
Shares as to which no Continuing Share Election was made but which will remain
outstanding as Continuing Shares by reason of the preceding sentence, such a
Continuing Share Election shall be deemed to have been made.
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If a shareholder elects to make a Continuing Share Election and receives
cash as a result of the proration procedures described above, such shareholder
may receive dividend treatment (rather than capital gain treatment) for any cash
received in the Merger as a result of such proration procedures. See "RISK
FACTORS--Stock Election and Proration into Cash--Possible Dividend Treatment."
See also "THE MERGER--Federal Income Tax Consequences--Shareholders Receiving
Cash."
With respect to certain risks related to continuing to hold PCA Common
Stock, see "RISK FACTORS."
STOCK ELECTION PROCEDURE
The Continuing Share Election is being mailed to holders of record of PCA
Common Stock at the same time as this Proxy Statement/Prospectus but under
separate cover. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Elections."
FOR A CONTINUING SHARE ELECTION TO BE EFFECTIVE, HOLDERS OF COMMON STOCK
MUST PROPERLY COMPLETE SUCH CONTINUING SHARE ELECTION, AND SUCH CONTINUING SHARE
ELECTION, TOGETHER WITH ALL CERTIFICATES FOR ALL SHARES OF PCA COMMON STOCK HELD
BY SUCH HOLDER, DULY ENDORSED IN BLANK OR OTHERWISE IN FORM ACCEPTABLE FOR
TRANSFER ON THE BOOKS OF THE COMPANY (OR BY APPROPRIATE GUARANTEE OF DELIVERY AS
SET FORTH IN SUCH CONTINUING SHARE ELECTION) MUST BE RECEIVED BY THE COMPANY BY
5:00 P.M., NEW YORK CITY TIME, ON THE LAST BUSINESS DAY PRECEDING THE DATE OF
THE SPECIAL MEETING.
ONLY HOLDERS OF PCA COMMON STOCK WHO WISH TO MAKE A CONTINUING SHARE
ELECTION ARE REQUIRED TO SEND STOCK CERTIFICATES WITH THEIR CONTINUING SHARE
ELECTION. HOLDERS OF PCA COMMON STOCK WHO DO NOT MAKE A CONTINUING SHARE
ELECTION WITH RESPECT TO ALL OF SUCH HOLDER'S SHARES OF PCA COMMON STOCK WILL
RECEIVE, BY MAIL, LETTERS OF TRANSMITTAL WITH WHICH SUCH STOCK CERTIFICATES
SHOULD BE RETURNED AFTER THE EFFECTIVE TIME. IN NO EVENT SHOULD SHAREHOLDERS
SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
The determinations of the Company as to whether or not Continuing Share
Elections have been properly made or revoked, and when such elections or
revocations were received, will be binding.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the articles of merger
with the Secretary of State of the State of North Carolina or at such later time
as is specified in the articles of merger. The filing of the certificate of
merger will occur simultaneously with the closing of the Merger unless another
time is agreed to by the Company and Mergerco. Subject to certain limitations,
the Merger Agreement may be terminated by either party if, among other reasons,
the Merger has not been consummated on or before October 31, 1998. See "CERTAIN
PROVISIONS OF THE MERGER AGREEMENT--Conditions to the Consummation of the
Merger" and "--Termination."
CONVERSION/RETENTION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Record holders of Shares of PCA Common Stock will be entitled to make an
unconditional election to retain shares of Surviving Corporation Common Stock on
or prior to the Election Date, and the conversion of shares of PCA Common Stock
(other than Appraisal Shares and Continuing Shares) into the right to receive
cash following the Merger will occur at the Effective Time.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will send a letter of transmittal to each holder whose Shares were
converted into the right to receive the Cash Merger Consideration. The letter of
transmittal will contain instructions for use in effecting the surrender of
share
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certificates in exchange for payment of the Cash Merger Consideration. Upon
surrender of a share certificate for cancellation to the Exchange Agent,
together with the letter of transmittal, the holder of such share certificate
shall be entitled to receive in exchange therefor the Cash Merger Consideration
and the surrendered share certificate shall be canceled. If payment of the Cash
Merger Consideration is to be made to a person other than the person in whose
name the surrendered shared certificate is registered, it shall be a condition
of payment that the surrendered share certificate shall be properly endorsed or
shall be otherwise in proper form for transfer and that the person requesting
such payment shall have paid any transfer and other taxes required by reason of
the payment of the Cash Merger Consideration to a person other than the
registered holder of the surrendered share certificate or shall have established
to the satisfaction of the Surviving Corporation that such tax has been paid or
is not applicable. Until surrendered as described herein, each share certificate
shall be deemed, at any time after the Effective Time, to represent only the
right to receive the Cash Merger Consideration in cash as contemplated herein.
EXCEPT FOR PCA COMMON STOCK CERTIFICATES SURRENDERED WITH A CONTINUING SHARE
ELECTION AS DESCRIBED ABOVE UNDER "--STOCK ELECTION PROCEDURE," SHAREHOLDERS OF
THE COMPANY SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT UNTIL
THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates at such time which prior thereto
represented shares of PCA Common Stock shall, upon surrender to the Exchange
Agent of such certificate or certificates and acceptance thereof by the Exchange
Agent, be entitled to the amount of cash into which the number of shares of PCA
Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to the Merger Agreement. The
Exchange Agent will accept such certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices. After the
Effective Time, there will be no further transfer on the records of the Company
or its exchange agent of certificates representing shares of PCA Common Stock
which have been converted, in whole or in part, pursuant to the Merger Agreement
into the right to receive cash, and if such certificates are presented to the
Company for transfer, they will be canceled against delivery of such cash. Until
surrendered as contemplated by the Merger Agreement, each certificate for shares
of PCA Common Stock will be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the Merger Consideration
(which may be cash and Continuing Shares as a result of proration). No interest
will be paid or will accrue on any cash payable as consideration in the Merger.
No dividends or other distributions with respect to shares of the Surviving
Corporation with a record date after the Effective Time will be paid to the
holder of any unsurrendered certificate for shares of PCA Common Stock with
respect to the shares of PCA represented thereby.
Any portion of the Merger Consideration made available to the Exchange Agent
to pay for Shares for which appraisal rights have been perfected will be
returned to the Surviving Corporation, upon demand.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed to carry on its
business and that of its subsidiaries prior to the Effective Time in the
ordinary and usual course of business consistent with past
practice. See "CERTAIN PROVISIONS OF THE MERGER AGREEMENT--Certain Pre-Closing
Covenants."
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CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of the Company and Mergerco to consummate the
Merger are subject to the satisfaction of a number of conditions, including: the
Merger Agreement shall have been adopted by the shareholders of the Company; no
statute, rule, order, decree or regulation shall have been enacted or
promulgated by any government or any governmental agency or authority of
competent jurisdiction which prohibits the consummation of the Merger and all
governmental consents, orders and approvals required for consummation of the
Merger and the transactions contemplated thereby shall have been obtained and
shall be in effect at the Effective Time; and there shall be no order or
injunction of a court or other governmental authority of competent jurisdiction
in effect precluding, restraining, enjoining or prohibiting consummation of the
Merger. The obligation of Mergerco to consummate the Merger is subject to
satisfaction of certain additional conditions, including: the Company's
representations and warranties set forth in the Merger Agreement (other than as
to its capitalization and considered without regard to any materiality or
material adverse effect qualification) shall be true and correct in all respects
in each case when made and on the closing date as though made on and as of the
closing date except at either time to the extent that the failure of such
representations and warranties to be true and correct would not have or be
reasonably likely to have a material adverse effect on the Company and its
subsidiaries taken as a whole or on the consummation of the Merger transactions
or the Company's ability to perform its obligations under the Merger Agreement
in a timely manner; in addition, the representations and warranties of the
Company as to its capitalization shall be true and correct in all material
respects on and as of the date made and as of the closing date; the Company
shall have performed or complied in all material respects with all obligations,
agreements or covenants required by the Merger Agreement to be performed or
complied with by it; since the date of the Merger Agreement, there shall have
been no material adverse change in the business, assets, operations, condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole;
and holders of not more than 10% of the outstanding Shares shall have demanded
appraisal of their Shares in accordance with NC law; and all conditions to the
availability of Jupiter's financing contemplated by the commitment letters it
has obtained shall have been met and such financing shall be available or
alternative financing shall be available. The obligation of the Company to
consummate the Merger is also subject to the satisfaction of certain additional
conditions, including: Mergerco's representations and warranties set forth in
the Merger Agreement that are qualified as to materiality shall be true, and
Mergerco's representations and warranties set forth in the Merger Agreement that
are not so qualified shall be true in all material respects, in either case when
made and immediately prior to the closing date as though made on or as of the
closing date, and in each case without giving effect to any knowledge qualifiers
contained therein; and Mergerco shall have performed or complied with all
obligations, agreements or covenant required by the Merger Agreement to be
performed or complied with by it. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Conditions to the Consummation of the Merger."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion accurately reflects the material United States
federal income tax consequences of the Merger to shareholders of the Company,
based on the opinion of Schulte Roth & Zabel LLP. The tax consequences described
below may vary depending upon each shareholder's particular circumstances and
tax position. Certain shareholders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations,
persons who are not citizens or residents of the United States, shareholders who
do not hold their shares as capital assets and shareholders who have acquired
their existing stock upon the exercise of options or otherwise as compensation)
may be subject to special rules not discussed below. No ruling from the Internal
Revenue Service ("IRS") will be applied for with respect to the federal income
tax consequences discussed herein and, accordingly, there can be no assurance
that the IRS will agree with the conclusions stated herein. The discussion below
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations, rulings and judicial decisions thereunder as of
the date hereof. Such authorities may be
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repealed, revoked or modified, possibly on a retroactive basis, so as to result
in U.S. federal income tax consequences different from those discussed below. In
addition, this discussion does not consider the effect of any applicable
foreign, state, local or other tax laws. SHAREHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX
LAWS.
CHARACTERIZATION OF THE MERGER FOR U.S. FEDERAL INCOME TAX PURPOSES
For U.S. federal income tax purposes, Mergerco will be disregarded as a
transitory entity, and the Merger of Mergerco with and into the Company will be
treated as if it were in part a sale of PCA Common Stock to Jupiter (the "Deemed
Sale") and in part a redemption of Shares by the Company (the "Redemption"). It
is unclear how the allocation of proceeds between the Deemed Sale and the
Redemption should be determined. The Company intends to take the position that
the percentage of cash proceeds allocable to the Deemed Sale will be equal to
(i) the amount contributed to Mergerco by Jupiter in exchange for Mergerco
common stock divided by (ii) the aggregate amount of cash paid to shareholders
pursuant to the Merger, and that the remaining percentage of the proceeds will
be allocable to the Redemption. The IRS could, however, adopt a different
approach in determining the allocation of proceeds between the Deemed Sale and
the Redemption. See "--Shareholders Receiving Cash" below for a discussion of
the consequences of the Redemption.
SHAREHOLDERS RECEIVING CASH
As described more fully below, the U.S. federal income tax consequences of
the Merger with respect to a particular shareholder will depend upon, among
other things, (i) whether the shareholder received any cash proceeds pursuant to
the Merger, (ii) the extent to which a shareholder is deemed to have sold its
Shares to Jupiter in the Deemed Sale or is deemed to have had its Shares
redeemed by the Company in the Redemption and (iii) whether the Redemption will
qualify as a sale or exchange under Section 302 of the Code. First, to the
extent that a shareholder is considered to have sold Shares to Jupiter, such
shareholder will recognize capital gain or loss equal to the difference between
the amount realized on its Deemed Sale (I.E., the cash proceeds properly
allocated to such sale received by the shareholder) and the shareholder's
adjusted tax basis in such Shares. Such gain or loss generally will be long-term
capital gain or loss if the Shares were held by the shareholder for more than
one year. For individuals, long-term capital gain is generally taxed at
favorable rates compared to ordinary income or short-term capital gain. Second,
a shareholder also will recognize capital gain or loss equal to the difference
between the cash proceeds received by the Shareholder allocable to the
Redemption and the shareholder's adjusted tax basis in such Shares to the extent
such Redemption is treated as a sale or exchange under Section 302 of the Code
with respect to such shareholder. Such gain or loss generally will be long-term
capital gain or loss if the Shares are held by the shareholder for more than one
year and will be taxed under the rules described above in respect of the portion
of such shareholder's Shares deemed to have been sold to Jupiter. Under Section
302 of the Code, the Redemption of a shareholder's Shares pursuant to the Merger
will, as a general rule, be treated as a sale or exchange if the Redemption (a)
is "substantially disproportionate" with respect to the shareholder, (b) results
in a complete termination of the shareholder's interest in the Company as
described in Section 302(b)(3) of the Code or (c) is "not essentially equivalent
to a dividend" with respect to the shareholder.
In determining whether any of the Section 302 tests is satisfied,
shareholders must take into account not only the Shares that they actually own,
but also any Shares they are deemed to own under the constructive ownership
rules set forth in Section 318 of the Code. Pursuant to the constructive
ownership rules, a shareholder is deemed to own constructively any Shares that
are owned by certain related individuals or entities and any Shares that the
shareholder has the right to acquire by exercise of an option.
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A stock warrant, convertible debenture and an option to acquire an option each
qualify as an option to acquire stock.
The Redemption of a shareholder's Shares will be "substantially
disproportionate" under Section 302 of the Code with respect to such shareholder
if, among other things, the percentage of Shares actually and constructively
owned by such shareholder immediately following the Merger is less than 80% of
the percentage of Shares actually and constructively owned by such shareholder
immediately prior to the Merger. Shareholders should consult their own tax
advisors with respect to the application of the "substantially disproportionate"
test to their particular facts and circumstances.
The Redemption of a shareholder's Shares will result in a "complete
termination" of a shareholder's interest in the Company described in Section
302(b)(3) of the Code if either (a) all the Shares actually and constructively
owned by the shareholder are sold in the Merger or (b) all the Shares actually
owned by the shareholder are sold in the Merger and the shareholder is eligible
to waive, and does effectively waive in accordance with Section 302(c) of the
Code, attribution of all Shares that otherwise would be considered to be
constructively owned by such shareholder.
Even if the Redemption of a shareholder's Shares fails to satisfy the
"substantially disproportionate" test or the "complete termination" test
described above, the Redemption may nevertheless satisfy the "not essentially
equivalent to a dividend" test if the shareholder's sale of Shares in the Merger
results in a "meaningful reduction" in such shareholder's proportionate interest
in the PCA Common Stock. Whether the receipt of cash by a shareholder will be
considered "not essentially equivalent to a dividend" will depend upon such
shareholder's facts and circumstances. In certain circumstances, even a small
reduction in a shareholder's proportionate equity interest may satisfy this
test. Shareholders should consult with their own tax advisors as to the
application of this test to their particular situation.
If a shareholder cannot satisfy any of the three tests described above and
to the extent the Company has sufficient current or accumulated earnings and
profits, such shareholder will be treated as having received a dividend which
will be includible in gross income (and treated as ordinary income) in an amount
equal to the cash received in respect of the Redemption of such shareholder's
Shares (without regard to gain or loss, if any).
In the case of a corporate shareholder, if the cash paid is treated as a
dividend, such dividend income may be eligible for the dividends-received
deduction. The dividends-received deduction generally equals 70 percent of the
amount of the dividend but is subject to certain requirements and limitations.
The primary requirement is that the deduction is available only if the corporate
shareholder satisfies certain holding period requirements with respect to the
Shares. The primary limitation is that the amount of the deduction is reduced or
eliminated if the Shares are treated as "debt financed portfolio stock" in the
hands of the corporate shareholder within the meaning of Section 246A(c) of the
Code. Additionally, if a dividends-received deduction is available, the dividend
would generally be treated as an "extraordinary dividend" under Section
1059(e)(1)(A) of the Code, in which case a corporate shareholder's adjusted tax
basis in the Shares retained by such shareholder would be reduced, but not below
zero, by the amount of the "nontaxed portion" of such dividend. The "nontaxed
portion" of the dividend would equal the portion of the dividend eligible for
the dividends-received deduction. If the nontaxed portion of the dividend
exceeds the shareholder's adjusted tax basis in the Shares, the shareholder
would recognize gain immediately in the tax year in which the extraordinary
dividend is received or accrued. Corporate shareholders are urged to consult
their own tax advisors as to the effect of Section 1059 of the Code on the
treatment of cash received in the Merger.
In the case of a shareholder who owns shares that have differing tax bases,
it is not clear how such shareholder's bases in such Shares should be allocated
between the Deemed Sale and the Redemption.
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SHAREHOLDERS RETAINING STOCK AND RECEIVING NO CASH
The Merger will have no U.S. federal income tax consequences for
shareholders who retain their Shares and receive no cash. Accordingly, such a
shareholder will not recognize any gain or loss as a result of the Merger.
FOREIGN SHAREHOLDERS--WITHHOLDING
The following is a general discussion of certain U.S. federal income tax
consequences of the Merger to non-U.S. shareholders. For this purpose, a
non-U.S. shareholder is any person who is not, for U.S. federal income tax
purposes, (i) a citizen or resident of the United States, (ii) a corporation
created or organized under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. fiduciaries have the authority
to control all substantial decisions of the trust.
In the case of any non-U.S. shareholder, the Exchange Agent will withhold
30% of the amount treated as paid by the Company to purchase the Shares of such
shareholder in order to satisfy certain U.S. withholding requirements, unless
such non-U.S. shareholder proves in a manner satisfactory to the Company and the
Exchange Agent that either (i) the deemed purchase by the Company of his or her
Shares pursuant to the Merger will qualify as a sale or exchange under Section
302 of the Code, rather than as a dividend for U.S. federal income tax purposes,
in which case no withholding will be required, (ii) the non-U.S. shareholder is
eligible for a reduced tax treaty rate with respect to dividend income, in which
case the Exchange Agent will withhold at the reduced treaty rate or (iii) no
U.S. withholding is otherwise required.
Non-U.S. shareholders should consult their own tax advisors regarding the
application of these withholding rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each shareholder the
amount of dividends paid to such shareholder and the backup withholding tax, if
any, withheld with respect to such dividends. Copies of these information
returns also may be made available to the tax authorities in the country in
which a non-U.S. shareholder resides under the provisions of an applicable
income tax treaty.
Backup withholding (which generally is a withholding tax imposed at the rate
of 31% on certain payments to persons that fail to furnish certain information
under the United States information reporting requirements) generally will not
apply to dividends paid to a non-U.S. shareholder at an address outside the
United States (unless the payor has knowledge that the payee is a U.S. person).
Payment of the proceeds of a sale of Shares by or through a United States
office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. shareholder, and the broker or his or her agent does not have
actual knowledge that such owner is a U.S. person, or otherwise establishes an
exemption. In general, backup withholding and information reporting will not
apply to a payment of the proceeds of a sale of Shares by or through a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation, or a
non-U.S. person that derives 50% or more of his or her gross income for certain
periods from the conduct of a trade or business in the United States, such
payments will be subject to information reporting, but not backup withholding,
unless (1) such broker has documentary evidence in its records that the
beneficial owner is a non-U.S. shareholder and certain other conditions are met,
or (2) the beneficial owner otherwise establishes an exemption.
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Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
The Treasury Department issued final regulations that were published in the
Federal Register on October 14, 1997 (the "Final Regulations") which affect the
United States taxation of dividends paid to a foreign shareholder. The Final
Regulations would, if applicable to the Merger, alter the foregoing rules in
certain respects; however, the Final Regulations are generally effective with
respect to dividends paid after December 31, 1999 (subject to certain transition
rules), and should not apply to the Merger. Shareholders should consult their
own tax advisors regarding questions about the Final Regulations.
ACCOUNTING TREATMENT
The Merger will be accounted for as a recapitalization. Accordingly, the
historical basis of the Company's assets and liabilities will not be affected by
the Merger.
EFFECT ON STOCK OPTIONS AND EMPLOYEE BENEFIT MATTERS
Immediately prior to the Effective Time, each Option to acquire shares of
PCA Common Stock granted to employees and directors, whether vested or not, will
be canceled and, in exchange therefore, as soon as practicable following the
Effective Time, the holders of the Options will receive, with respect to each
Option, a cash payment in an amount equal to the product of (x) the excess, if
any, of $26.50 over the exercise price of the Option multiplied by (y) the
number of shares of PCA Common Stock subject to such Option. Alternatively,
Mergerco may separately agree with each holder of the Options to alternative
treatment of that holder's Options.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company may have interests,
described herein, that present them with potential conflicts of interest in
connection with the Merger. The Board is aware of the conflicts described below
and considered them in addition to the other matters described under "THE
MERGER--Recommendation of the Board of Directors; Reasons for the Merger."
John Grosso, the Company's President and Chief Executive Officer and a
Director, has a provision in his employment agreement permitting him to
terminate his employment and receive severance from the Company following a
"change in control" as defined in such agreement. The Merger would constitute a
"change in control" under Mr. Grosso's employment agreement. Mr. Grosso has
indicated that he will terminate his employment agreement at the Effective Time
and the Company will pay him the amount due in accordance with the terms and
conditions of such agreement. Mr. Grosso and Jupiter have agreed that at the
Effective Time the Surviving Corporation will enter into a new employment
agreement with Mr. Grosso substantially identical to his current employment
agreement with the Company except that it will not include such a "change in
control" provision and will provide for an increase in annual salary from
$304,000 to $350,000.
It is also expected that Bruce A. Fisher, the Company's Chief Financial
Officer, and Eric H. Jeltrup, the Company's Executive Vice President and Chief
Technical Officer, will enter into amendments to their existing employment
agreements with the Company as of Effective Time providing for base salary
increases from $155,250 to $200,000 and from $220,000 to $250,000, respectively.
Also, at the Effective Time, Jupiter has agreed that the Surviving Corporation
will establish the New Option Plans under which shares of common stock equal to
12.5% of the outstanding shares immediately following the Effective Time will be
reserved for issuance upon exercise of options to be granted to certain officers
and employees, including Mr. Grosso, who will receive options for 3.0% of the
outstanding shares, Mr. Fisher, who will receive options for 0.6% of the
outstanding shares, and Mr. Jeltrup who will receive options for 1.0% of
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the outstanding shares. Of the options to be granted under the New Option Plans,
50% will vest over time and 50% will vest only if the Surviving Corporation
meets certain performance goals.
Time-vesting options will vest in equal portions on each of the first five
anniversaries from grant. Performance-vesting options will vest provided the
Company generates cumulative EBITDA for the fiscal years ending January 1999,
2000, 2001 and 2002 (the "Performance Option Calculation Period") equivalent to
or greater than the sum of specified EBITDA targets for the comparable time
period (which is approximately $195.6 million). At the conclusion of the
Performance Option Calculation Period, a portion of the performance-vesting
options will vest provided the Company achieves at least 90% of the cumulative
EBITDA target; all such options will vest if the Company achieves 100% of the
cumulative EBITDA target (vesting to be pro rata between 90% and 100%). In the
event of a change in control (as defined in the New Option Plans) prior to the
conclusion of the Performance Option Calculation Period, the vesting of the
performance-vesting options will be based on Company performance versus
management's projection of cumulative EBITDA from the Merger to the change in
control. The EBITDA test will be adjusted if the Company makes any material
acquisitions or divestitures. See "--Investors' Agreement."
At the Effective Time, all outstanding Options (other than certain Options
held by certain Management Shareholders who elect not to have such Options
canceled) will be canceled and the holders thereof will receive the Option
Consideration in lieu of the Merger Consideration, regardless of whether the
Option would be exercisable at the Effective Time. The Directors of the Company,
other than Mr. Grosso, hold a total of 116,300 Options and would be entitled to
receive $1,536,800 aggregate Option Consideration at the Effective Time upon
cancellation of their Options. The Options held by such Management Shareholders
that are not canceled at the Effective Time will be become fully exercisable and
vested at the Effective Time and will be retained as options to purchase
Surviving Corporation Common Stock. Holders of Options will not be subject to
proration. As of July 1, 1998, approximately 1,490,700 Options were outstanding.
The Company estimates that the aggregate amount of the Option Consideration,
assuming all Options are canceled, will be approximately $21,193,987.
Pursuant to the Investors' Agreement, certain Management Shareholders are
required to maintain equity in the Company following the Merger of at least $3.5
million but not more than $5.0 million (whether through the retention of
Continuing Shares, valued at $26.50 per share, the retention of Options that the
Management Shareholders elect not to have canceled at the Effective Time, valued
at the amount of Option Consideration foregone by such election, or the purchase
of shares of Surviving Corporation Common Stock immediately following the
Effective Time at $26.50 per share).
Pursuant to the Merger Agreement, the Company has agreed after the Effective
Time to indemnify all present and former directors and officers of the Company
with respect to all losses, claims, damages, liabilities, fees and expenses
arising out of actions or omissions occurring at or prior to the Effective Time
to the full extent permitted under North Carolina law and, subject to certain
limitations, to maintain for a period of no less than six years the Company's
existing directors' and officers' liability insurance policy or substitute
policies of substantially similar coverage and amounts containing terms no less
favorable to such directors and officers. See "CERTAIN PROVISIONS OF THE MERGER
AGREEMENT--Indemnification and Insurance."
INVESTORS' AGREEMENT
An Investors' Agreement (the "Investors' Agreement"), has been entered into
between Jupiter and Management Shareholders, including Mr. Grosso, who own
shares of Common Stock or Options. The Investors' Agreement requires the
Management Shareholders to maintain equity in the Company following the Merger
of at least $3.5 million but not more than $5.0 million (whether through the
retention of Continuing Shares, valued at $26.50 per share, the retention of
Options that the Management Shareholders elect not to have canceled at the
Effective Time, valued at the amount of Option Consideration foregone by such
election, or the purchase of shares of Surviving Corporation common stock
immediately
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following the Effective Time at $26.50 per share). The Investors' Agreement (a)
restricts transfers of the shares of common stock by the Management Shareholders
until the earliest of (i) the public listing of the Surviving Company Common
Stock, (ii) the date Jupiter owns less than 20% of the Shares it held as of the
closing of the Merger, (iii) six months prior to the expiration of the options
issued pursuant to the New Option Plans (which is generally 8 years from the
date of grant), (iv) the occurrence of a "tag along transaction", which is
defined therein as a transaction in which the executive officers have the right
to sell a proportionate number of their Shares or Options on the same terms and
conditions which Jupiter and other management shareholders are selling their
Shares in a private transaction with third parties, or (v) the occurrence of an
applicable "drag along transaction", which is defined therein as a transaction
in which holders of Common Stock are required by Jupiter to sell a portion of
their Shares and Options equivalent to the portion that Jupiter has agreed to
sell to any person in such transaction, (b) permits the Management Shareholders
to participate in certain sales of shares of Common Stock by Jupiter, (c)
requires the Management Shareholders to sell shares of common stock in certain
circumstances should Jupiter choose to sell any such shares owned by it, (d)
subject to certain limitations requires Management Shareholders to offer to sell
to the Company and Jupiter shares of common stock acquired upon exercise of
Options after the Effective Time or pursuant to options granted by the Company
after the Effective Time upon the Management Shareholder's termination of
employment, (e) sets forth the terms of the New Option Plans following the
Effective Time pursuant to which shares of Common Stock equal to up to 12.5% of
the outstanding shares of common stock immediately following the Effective Time
may be issued to officers and employees of the Company, including the Management
Shareholders, and (f) provides for certain registration rights on customary
terms.
NASDAQ LISTING
Although pursuant to the Merger Agreement Mergerco has agreed not to take
any action (subject to certain exceptions) to have the PCA Common Stock, which
is currently traded on the NASDAQ National Market, delisted for at least three
years after the Effective Time, the Company has been informed by the NASD that
as a result of the Merger the Company's Common Stock may no longer meet the
listing requirements for the NASDAQ National Market. In the event the Shares are
de-listed from the NASDAQ National Market, they will trade only in the
over-the-counter market. Although prices in respect of trades would be published
by the NASD periodically in the "pink sheets," quotes for such Shares would not
be readily available. As a result, it is anticipated that the Shares would trade
much less frequently relative to the trading volume of PCA Common Stock prior to
the Merger and shareholders may experience difficulty selling Shares or
obtaining prices that reflect the value thereof. See "RISK FACTORS--Delisting;
Loss of Liquidity."
RESALE OF PCA COMMON STOCK FOLLOWING THE MERGER
The PCA Common Stock to be retained in connection with the Merger will be
freely transferable, except that Shares of PCA Common Stock retained by any
shareholder who may be deemed to be an "affiliate" (as defined under the
Securities Act and generally including, without limitation, directors, certain
executive officers and beneficial owners of 10% or more of a class of capital
stock) of the Company for purposes of Rule 145 under the Securities Act will not
be transferable except in compliance with the Securities Act.
MERGER FINANCING
In order to (i) fund the payment of the Cash Merger Consideration and the
Option Consideration, (ii) refinance certain outstanding indebtedness of the
Company and (iii) pay the fees and expenses incurred in connection with the
Merger, Mergerco has received commitments for: (a) an equity contribution from
Jupiter in an amount of no less than $50.5 million and no more than $54.3
million (with the exact amount dependent upon the number of Continuing Shares);
(b) up to $150 million in senior debt financing
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pursuant to the New Credit Facility led by NationsBank and arranged by
NationsBanc Montgomery Securities LLC ("NMS"); and (c) $100 million in Senior
Subordinated Debt, either through the sale of such Senior Subordinated Debt to
third parties or the issuance of bridge loans from NationsBridge and Chase.
NEW CREDIT FACILITY
On April 20, 1998, Jupiter received a commitment letter from NationsBank to
provide the New Credit Facility which is expected to be syndicated by NMS. The
New Credit Facility will consist of $150 million of borrowings.
SENIOR SUBORDINATED DEBT
The Company expects to issue senior subordinated notes in a private
placement for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended. If such notes have not been issued at the time of the Merger, the
Company intends to consummate the Bridge Loans, and thereafter utilize the
proceeds of a future issuance of such senior subordinated notes to refinance the
Bridge Loans.
On April 20, 1998, Jupiter received a commitment letter from NationsBridge
and Chase pursuant to which (i) NationsBridge and/or its affiliates will make up
to $60.0 million in aggregate principal amount of Bridge Loans and (ii) Chase
and/or its affiliates will make up to $40.0 million in aggregate principal
amount of Bridge Loans. The Bridge Loans will be subordinated to up to $150
million of borrowings under the New Credit Facility.
MERGERCO EQUITY
Prior to or immediately following the Effective Time, Jupiter has committed
to purchase between 1,905,661 and 1,992,453 shares of common stock of Mergerco
or the Surviving Corporation, as the case may be, at a price per share of
$26.50, providing the Company with between $50.5 million and $54.3 million of
equity (with the exact amount dependent upon the number of currently outstanding
shares of PCA Common Stock that elect to remain outstanding following the
Merger).
CONVERSION OF MERGERCO STOCK
As a result of the Merger, in connection with an equity contribution of not
less than $50.5 million and not more than $54.3 million, Mergerco and Jupiter
will own between approximately 77% and 88% of the shares of the Surviving
Corporation Common Stock expected to be outstanding after consummation of the
Merger.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following summarizes the material provisions of the Merger Agreement
which appears as Annex A to this Proxy Statement/Prospectus and is incorporated
herein by reference. Such summary is qualified in its entirety by reference to
the Merger Agreement.
THE MERGER
The Merger Agreement provides that as soon as practicable after satisfaction
or waiver of all conditions to the Merger, Mergerco will be merged with and into
the Company, with the Company as the Surviving Corporation. The Merger will
become effective at such time as the articles of merger are duly filed with the
Secretary of State of the State of North Carolina or at such later time as is
specified in the articles of merger. From and after the Effective Time, the
Surviving Corporation will possess all the rights, privileges, immunities,
powers and franchises of the Company and Mergerco, all as and to the extent
provided under the NCBCA.
At the Effective Time, each Share held by the Company as treasury stock or
owned by Mergerco immediately prior to the Effective Time will be canceled, and
no payment will be made with respect thereto; each share of common stock, par
value $.01 per share, of Mergerco outstanding immediately prior to the Effective
Time will be converted into and become one share of Surviving Corporation Common
Stock; and each Share of PCA Common Stock outstanding immediately prior to the
Effective Time will, except as otherwise provided with respect to Shares as to
which appraisal rights have been exercised, be converted into the following: for
each such Share with respect to which an election to retain PCA Common Stock has
been effectively made, such Share shall remain outstanding as one fully paid and
non-assessable share of Surviving Corporation Common Stock, and for each such
Share other than Continuing Shares, the right to receive in cash from Mergerco
an amount equal to $26.50.
PRORATION OF CONTINUING SHARES
The Merger Agreement provides that, if holders elect in the aggregate to
retain Continuing Shares in excess of the Maximum Continuing Number, then the
number of Continuing Shares to be owned by such holders will be prorated based
on the number of Continuing Shares each holder elected to retain (with
fractional shares rounded down to the next whole number) so that only the
Maximum Continuing Number will remain as Continuing Shares. With respect to
shares as to which Continuing Share Elections are made but with respect to which
no Continuing Shares will be issued by reason of the preceding sentence, such
Continuing Share Elections will be deemed to be revoked and such shares will
converted into the right to receive the Cash Merger Consideration.
If holders elect in the aggregate to retain less than the Minimum Continuing
Number, then (i) each holder that made a Continuing Share Election will retain
the number of Continuing Shares set forth in such election and (ii) each holder
(whether or not such holder made a Continuing Share Election) will receive a
prorated (based on the total number of Shares owned by such shareholder as to
which a Continuing Share Election has not been made) number of Continuing Shares
(with fractional shares rounded up to the next whole number) so that the Minimum
Continuing Number will remain outstanding as Continuing Shares. With respect to
Shares as to which no continuing Share Election was made but which will remain
outstanding as Continuing Shares by reason of the preceding sentence, such a
Continuing Share Election shall be deemed to have been made.
THE SURVIVING CORPORATION
The Restated Articles of Incorporation of the Company in effect immediately
prior to the Effective Time will be the Articles of Incorporation of the
Surviving Corporation until thereafter amended in accordance with applicable
law. The bylaws of Mergerco in effect immediately prior to the Effective Time
will be the bylaws of the Surviving Corporation until thereafter amended in
accordance with applicable
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law. From and after the Effective Time, until successors are duly elected or
appointed and qualified in accordance with applicable law (a) the directors of
Mergerco at the Effective Time will be the directors of the Surviving
Corporation, provided that Mergerco has agreed to offer Donald P. Greenberg,
Bridgette P. Heller and Joseph H. Reich the opportunity to remain as directors
following the Effective Time until their successor shares have been duly elected
or appointed or qualified in accordance with applicable law and (b) the officers
of the Company at the Effective Time will be the officers of the Surviving
Corporation. See "MANAGEMENT FOLLOWING THE MERGER."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
the Company relating, with respect to the Company and its subsidiaries, to,
among other things, (a) organization, standing and similar corporate matters;
(b) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement; (c) the Company's capital structure; (d) documents filed
by the Company with the Commission and the accuracy of information contained
therein; (e) the Company's financial statements; (f) the accuracy of information
supplied by the Company in connection with this Proxy Statement/ Prospectus; (g)
the absence of certain changes or events since the date of the most recent
audited financial statements filed with the Commission, including material
adverse changes with respect to the Company and the absence of material
undisclosed liabilities; (h) pending or threatened material litigation; (i)
filing of tax returns and payment of taxes; and (j) benefit plans and other
matters relating to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and employment matters.
The Merger Agreement also contains customary representations and warranties
of Mergerco relating to, among other things, (a) organization, standing and
similar corporate matters; (b) authorization, execution, delivery, performance
and enforceability of the Merger Agreement and related matters; (c) accuracy of
information supplied by Mergerco in connection with this Proxy
Statement/Prospectus; (d) financing commitments in connection with the Merger;
and (e) Mergerco's capital structure.
CERTAIN PRE-CLOSING COVENANTS
In the Merger Agreement, the Company has agreed that, prior the Effective
Time, the Company and its subsidiaries will conduct business only in the
ordinary and usual course consistent with past practice.
The Merger Agreement also provides that, except as disclosed in a schedule
or consented to by Mergerco, prior to the Effective Time the Company will not,
among other things, (i) sell, transfer or pledge, or agree to sell, transfer or
pledge, any Shares, preferred stock or capital stock of it or any of its
subsidiaries beneficially owned by it; (ii) amend its Restated Articles of
Incorporation or bylaws or similar organizational documents; (iii) split,
combine or reclassify the outstanding Shares or any outstanding capital stock of
any of the subsidiaries of the Company; (iv) declare, set aside or pay any
dividend or other distribution payable in cash, stock or property with respect
to its capital stock; (v) issue, sell, pledge, dispose of or encumber any
additional shares of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire any
shares of, capital stock of any class of the Company or its subsidiaries, other
than shares reserved for issuance on the date of the Merger Agreement to the
exercise of the Company's Options outstanding on the date hereof; (vi) transfer,
lease, license, sell, mortgage, pledge, dispose of, or encumber any material
assets other than in the ordinary and usual course of business and consistent
with past practice, or incur or modify any material indebtedness or other
liability; (vii) redeem, purchase or otherwise acquire directly or indirectly
any of its capital stock; (viii) grant any increase in the compensation payable
or to become payable by the Company or any of its subsidiaries to any of its
executive officers or key employees, or adopt any new or amend or otherwise
increase or accelerate the payment or vesting under any existing bonus,
incentive compensation, deferred compensation, severance, profit sharing, stock
option, stock purchase, insurance, pension, retirement or other employee benefit
plan, agreement or arrangement; (ix) enter into any employment or severance
agreement with or, except in accordance with the existing written policies of
the Company, grant any
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severance or termination pay to, any officer, director or employee of the
Company or any of its subsidiaries; (x) modify, amend or terminate any of its
material agreements or waive, release or assign any material rights or claims
thereunder, (xi) permit any material insurance policy naming it as a beneficiary
or a loss payable payee to be canceled or terminated without notice to Mergerco,
and the Company shall use its reasonable commercial best efforts to maintain all
such policies; (xii) incur or assume any long-term debt or any short-term
indebtedness other than normal borrowings under the Company's existing revolving
credit facility; (xiii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person, except in the ordinary course of business and consistent with
past practice; (xiv) make any loans, advances or capital contributions to, or
investments in, any other person (other than to wholly owned subsidiaries of the
Company or customary expense or advances to employees in accordance with past
practice); and (xv) enter into any material commitment or transaction
(including, but not limited to, any material borrowing, capital expenditure or
purchase, sale or lease of assets or real estate).
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither the Company nor any of its
subsidiaries or affiliates shall (and the Company shall use its best efforts to
cause its officers, directors, employees, representatives and agents not to),
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than Mergerco,
or any of its affiliates or representatives) concerning any merger, tender
offer, exchange offer, sale of assets, sale of shares of capital stock or debt
securities or similar transactions involving the Company or any subsidiary,
division or operating or principal business unit of the Company (an "Acquisition
Proposal"). The Merger Agreement further provides that the Company will
immediately cease any existing activities, discussions or negotiations with any
parties conducted prior to the date of the Merger Agreement with respect to any
of the foregoing. Notwithstanding the foregoing, the Company may furnish
information concerning its business, properties or assets to any corporation,
partnership, person or other entity or group pursuant to appropriate
confidentiality agreements, and may negotiate and participate in discussions and
negotiations with such entity or group concerning an Acquisition Proposal: (x)
if such entity or group has on an unsolicited basis submitted a bona fide
written proposal to the Board of the Company relating to any such transaction
which the Board determines (based upon the advice of independent investment
bankers for the Company) represents a superior transaction to the Merger for
shareholders of the Company and (y) if the Board determines, only after receipt
of advice from independent legal counsel, that the failure to provide such
information or access or to engage in such discussions or negotiations could
cause the Board to violate its fiduciary duties to the Company's shareholders
under applicable law. The Merger Agreement further provides that the Company
shall immediately (in any event within 24 hours) communicate to Mergerco the
terms of any proposal, discussion, negotiation or inquiry (and will disclose any
written materials received by the Company in connection with such proposal,
discussion, negotiation or inquiry) and the identity of the party making such
proposal or inquiry which it may receive in respect of any such transaction. As
of the date this Proxy/ Registration Statement is first being mailed to
shareholders, the Company has not received any proposals from any third parties
relating to an Acquisition Proposal.
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, after the Effective Time, the Surviving
Corporation (or any successor to the Surviving Corporation) shall indemnify,
defend and hold harmless the present and former officers and directors of the
Company and its subsidiaries with respect to matters occurring at or prior to
the Effective Time to the full extent permitted under North Carolina law. The
Merger Agreement provides that the Surviving Corporation shall maintain the
Company's existing officers' and directors' liability insurance ("D&O
Insurance") including coverage with respect to claims arising from facts or
events which occurred before the Effective Time for a period of not less than
six years after the Effective Time, provided
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that the Surviving Corporation may substitute therefor policies of substantially
similar coverage and amounts containing terms no less favorable to such former
directors or officers. The Merger Agreement further provides that if the
existing D&O Insurance expires, is terminated or canceled during such period,
the Surviving Corporation will use all reasonable efforts to obtain
substantially similar D&O Insurance, but in no event shall it be required to pay
aggregate annual premiums for such insurance in excess of 150% of the aggregate
annual premiums paid in 1998 and, in the event that the annual premium for
insurance required to be obtained under the Merger Agreement exceeds such
amount, the Surviving Corporation shall maintain as much of such insurance as
may be maintained for such amount.
EMPLOYEE BENEFIT PLANS
The Merger Agreement provides that, immediately prior to the Effective Time,
the Company will cancel all Options under the Amended and Restated 1996 Omnibus
Long-Term Compensation Plan, the 1990 Non-Qualified Stock Option Plan and the
1992 Non-Qualified Stock Option Plan (collectively, the "Stock Option Plans").
As soon as practicable following the Effective Time, each holder of an Option
will receive from the Company, in respect of each Option so canceled, an amount
equal to the excess, if any, of the Cash Merger Consolidation over the exercise
price of such Option, multiplied by the number of Shares subject to such Option,
without any interest thereon and after deducting taxes required to be withheld.
Notwithstanding the foregoing, payment may be withheld in respect of any Option
until any required consent of the holder is obtained. The surrender of an Option
to the Company will be deemed a release of any and all rights the holder had or
may have had in such Option, other than the right to receive the Option
Consideration in respect thereof. Notwithstanding the foregoing, Mergerco may
separately agree with holders on alternate treatment of their Options.
FINANCING
Pursuant to the terms of the Merger Agreement, Mergerco will use
commercially reasonable efforts to consummate the Merger Financing or
alternative financing on terms similar to the Merger Financing and no more
onerous than the terms of the Merger Financing.
NASDAQ LISTING
Mergerco will not take any action, for at least three years after the
Effective Time of the Merger, to cause the Common Stock to be delisted from
NASDAQ, except that Mergerco may cause or permit the Common Stock to be
de-listed in connection with any transaction which results in the termination of
registration of such securities under Section 12 of the Exchange Act, and
provided, further, that the foregoing will not require the Company to take any
affirmative action to prevent the PCA Common Stock from being delisted by NASDAQ
if the PCA Common Stock ceases to meet the applicable listing standards. See
"RISK FACTORS--Delisting, Loss of Liquidity" and "THE MERGER--NASDAQ Listing."
COOPERATION AND REASONABLE BEST EFFORTS
Pursuant to the Merger Agreement, and subject to certain conditions and
limitations described therein, the parties have agreed to cooperate with each
other and to use their respective reasonable best efforts to take certain
specified and other actions, including cooperation in the arrangement of
financing, so that the transactions contemplated by the Merger Agreement may be
consummated.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Each party's obligation to effect the Merger is subject to satisfaction of a
number of conditions, most of which may be waived by a specified party or
parties. The most significant conditions to consummating the Merger include: (i)
the Merger Agreement shall have been approved and adopted by the requisite vote
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of the Company's shareholders at the Special Meeting; (ii) the Company's
representations and warranties set forth in the Merger Agreement (other than as
to its capitalization and considered without regard to any materiality or
material adverse effect qualification) shall be true and correct in all respects
in each case when made and on the Closing Date as though made on and as of the
Closing Date except at either time to the extent that the failure of such
representations and warranties to be true and correct would not have or be
reasonably likely to have a material adverse effect on the Company and its
Subsidiaries taken as a whole or on the consummation of the Merger transactions
or the Company's ability to perform its obligations under the Merger Agreement
in a timely manner; in addition, the representations and warranties of the
Company as to its capitalization shall be true and correct in all material
respects on and as of the date made and as of the Closing Date; (iii) the
Company shall have performed or complied in all material respects with all
obligations, agreements or covenants required by the Merger Agreement to be
performed or complied with by it; (iv) since the date of the Merger Agreement,
there shall have been no material adverse change in the business, assets,
operations or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole; (v) all conditions to the availability of the
Merger Financing contemplated by the commitment letters Mergerco has obtained
shall have been met and such financing shall be available or alternative
financing shall be available; (vi) all consents and waivers from third parties
necessary in connection with the consummation of the Merger shall have been
obtained, except to the extent that the failure to obtain such consents and
waivers would not, individually or in the aggregate, have a materially adverse
effect to the Company and its subsidiaries as a whole or a material adverse
effect on the consummation of the transactions contemplated by the Merger
Agreement; (vii) no statute, rule, order, decree or regulation shall have been
enacted or promulgated by any government or any governmental agency or authority
of competent jurisdiction which prohibits the consummation of the Merger and all
governmental consents, orders and approvals required for the consummation of the
Merger and the transactions contemplated hereby shall have been obtained and
shall be in effect at the Effective Time; (viii) there shall be no order or
injunction of a court or other governmental authority of competent jurisdiction
in effect precluding, restraining, enjoining or prohibiting consummation of the
Merger; (ix) the holders of not more than 10% of the Company's outstanding
shares shall have exercised dissenter's rights; and (x) the Company shall have
canceled all outstanding stock options for the payment of the option spreads
(other than the employee options which are agreed to stay outstanding).
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval of the
shareholders of the Company, by mutual consent of the boards of directors of
Mergerco and the Company.
The Merger Agreement may be further terminated and the Merger abandoned at
any time prior to the Effective Time, whether before or after approval of the
shareholders of the Company, by either of the boards of directors of Mergerco or
the Company: (i) if the Merger shall have not been consummated before October
31, 1998 (the "Termination Date"); provided, that a party that has willfully and
materially breached a representation, warranty or covenant set forth in the
Merger Agreement shall not be entitled to exercise its rights to terminate under
this provision; (ii) if, upon a vote at a duly held meeting of the shareholders
of the Company or any adjournment thereof, the shareholders of the Company shall
not approve the Merger or the Merger Agreement; or (iii) if any Governmental
Entity (as defined in the Merger Agreement) shall have issued an order, decree
or ruling or taken any other action (which order, decree, ruling or other action
the parties shall use their reasonable efforts to lift), in each case
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Merger Agreement and such order, decree, ruling or other
action shall have become final and non-appealable.
The Merger Agreement may be further terminated and the Merger abandoned at
any time prior to the Effective Time, whether before or after approval of the
shareholders of the Company, by the Board of Directors of the Company: (i) if,
prior to the Effective Time, the Board shall have (A) withdrawn, or
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modified or changed in a manner adverse to Mergerco its approval or
recommendation of the Merger Agreement or the Merger in order to permit the
Company to execute an agreement in principle or a definitive agreement providing
for the acquisition of the Company by merger, consolidation or otherwise, on
terms (including the per share consideration) determined by the Board (based
upon the advice of independent investment bankers for the Company), to be
superior for the shareholders of the Company as compared to the terms of the
acquisition of the Company contemplated by the Merger Agreement, and (B)
determined, only after receipt of advice from independent legal counsel to the
Company, that the failure to take such action as set forth in the preceding
clause (A) could cause the Board to violate its fiduciary duties to the
Company's shareholders under applicable law; or (ii) if, prior to the Effective
Time, Mergerco breaches or fails in any material respect to perform or comply
with any of its material covenants and agreements contained in the Merger
Agreement or breaches its representations and warranties in any material
respect, or if any representation or warranty of Mergerco set forth in the
Merger Agreement shall have become untrue such that certain of the closing
conditions set forth in the Merger Agreement of Mergerco are reasonably likely
to be incapable of being satisfied by the Termination Date (as such date may
otherwise be extended by agreement of the parties); provided, however, that the
Board of Directors of the Company may terminate the Merger Agreement under this
section (ii) only if such breach, failure of compliance or untruth, if it is
capable of being cured, continues uncured for a period of ten (10) days after
receipt by Mergerco of notice thereof from the Company; or
The Merger Agreement may be further terminated and the Merger abandoned at
any time prior to the Effective Time, whether before or after approval of the
shareholders of the Company, by the Board of Directors of Mergerco: (i) if,
prior to the Effective Time, the Board of Directors of the Company shall have
withdrawn, failed to reaffirm or modified or changed in a manner adverse to
Mergerco its approval or recommendation of the Merger Agreement or the Merger or
shall have recommended an Acquisition Proposal or offer, or shall have executed
an agreement in principle (or similar agreement) or definitive agreement
providing for a tender offer or exchange offer for any shares of capital stock
of the Company, or a merger, consolidation or other business combination with a
person or entity other than Mergerco or its affiliates (or the Board resolves to
do any of the foregoing); or (ii) if, prior to the Effective Time, the Company
breaches or fails in any material respect to perform or comply with any of its
material covenants and agreements or breaches any of its representations and
warranties, or if any representation or warranty of the Company shall have
become untrue such that certain of the closing conditions set forth in the
Merger Agreement is reasonably likely to be incapable of being satisfied by the
Termination Date (as such date may otherwise be extended by the agreement of the
parties); provided, however, that the Board of Directors of Mergerco may
terminate this Agreement under this provision only if the breach, failure of
compliance or untruth referred to herein would have or would be reasonably
likely to have a material adverse effect on the Company and its Subsidiaries
taken as a whole or on the consummation of the Merger transactions or the
Company's ability to perform its obligations under the Merger Agreement in a
timely manner and, if such breach, failure of compliance or untruth is capable
of being cured, the same continues uncured for a period of ten (10) days after
receipt by the Company of notice thereof from Mergerco.
FEES AND EXPENSES
Except as otherwise contemplated by the Merger Agreement, including the
discussion below, all costs and expenses incurred in connection with the Merger
will be paid by the party incurring such cost or expense.
The Merger Agreement provides that the Company will pay Mergerco an amount
equal to $6 million and all reasonable out-of-pocket fees and expenses incurred
by Mergerco in connection with the Merger ("Fees and Expenses") if: (i) the
Company terminates the Merger Agreement to support a superior alternative
acquisition proposal, (ii) Mergerco terminates the Merger Agreement as a result
of the Board having withdrawn, failed to reaffirm or adversely modified its
approval or recommendation of the Merger
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or having recommended an alternative acquisition proposal or having executed an
agreement relating to an alternative acquisition proposal, (iii) Mergerco
terminates the Merger Agreement as a result of the Merger having not been
consummated by October 31, 1998 (the "Termination Date") and the Company has
failed to use commercially reasonable efforts to cause the Merger to occur or
(iv) either party terminates the Merger Agreement as a result of the Merger
having not been consummated by the Termination Date or by the failure to obtain
the requisite shareholder vote, and an alternative acquisition proposal or an
intention to make an alternative acquisition proposal shall have been made to
the Company or publicly announced at the time of such termination and within one
year of such termination the Company enters into an alternative acquisition
proposal.
The Merger Agreement further provides that the Company will pay Mergerco all
Fees and Expenses if: (i) Mergerco terminates the Merger Agreement as a result
of the Company having breached or failed to comply with any of its covenants,
representations or warranties such that any of the conditions to closing is
reasonably likely to be incapable of being satisfied by the Termination Date or
(ii) the Company terminates the Merger Agreement at a time after Mergerco has
given notice to the Company that Mergerco is or would be entitled to terminate
the Merger Agreement under (i) above.
The Company will also pay to Mergerco an amount equal to $6 million if (a)
the Merger Agreement is terminated by either party if the Merger is not
consummated by the Termination Date, or because the requisite shareholder vote
has not been obtained and (b) at the time of such termination, a person or group
of persons has acquired beneficial ownership of more than 20% (or, in the case
of Centennial Partners L.P., 35%) in the aggregate of the PCA Common Stock and
if, within one year of such termination, the Company enters into any alternative
acquisition proposal.
AMENDMENT AND MODIFICATION
The Merger Agreement may be amended, modified and supplemented in any and
all respects, whether before or after any vote of the shareholders of the
Company, by written agreement of the parties at any time prior to the Closing
Date; provided that after the approval of the Merger Agreement by the
shareholders of the Company, no such amendment, modification or supplement shall
reduce the amount or change the form of the Merger consideration. In the event
either or both of the parties amend or modify material conditions of the Merger
Agreement, the Company will resolicit shareholder approval.
Although the Board of Directors of the Company reserves the right to waive
any conditions to the Merger without the approval of the Company's stockholders,
the Company intends to solicit further approval of its stockholders in the event
any such waiver would change the terms of the Merger in a way that would be
materially adverse to such stockholders. The Company does not anticipate that a
waiver of a material condition to the Merger will be required. In the event the
Company or Mergerco decides to waive any conditions to the Merger without
seeking shareholder approval, the shareholders may be subject to the risk that
the Closing of the transaction may be delayed or that, once closed, the
transaction may be subject to legal challenge.
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THE COMPANY
OVERVIEW
PCA is engaged in the professional portrait photographic business, focusing
on the pre-school segment of the market. PCA sells its products and services
through two distribution channels: Kmart and Wal-Mart. As of May 3, 1998, the
Company operated 2,034 portrait studios within Kmart and Wal-Mart stores and
supercenters in the United States, Canada, Mexico, Puerto Rico and South
America. PCA also operates a traveling studio business, providing portrait
photography services in approximately 1,400 additional Wal-Mart retail locations
as well as in churches and other institutions.
From 1989 to 1994, PCA spent more than $55.0 million on (i) developing an
integrated digital imaging system; (ii) upgrading its film developing and
portrait processing laboratory; and (iii) increasing the number of permanent
studios in Kmart stores. In 1993, PCA discontinued its department- store
division, including adult/family and fashion/glamour studios and refocused its
efforts on establishing permanent studios targeted at the pre-school market in
the discount retail channel. From 1995 to the present, the Company has focused
on expanding and diversifying its distribution network. In 1996, PCA began
operating permanent Wal-Mart studios in Canada and the Western U.S. In 1997, PCA
became Wal-Mart's exclusive provider of portrait photography services by virtue
of its acquisition of American Studios, Inc. ("ASI") and the Wal-Mart
portraiture businesses owned by ASI in January and the August purchase from
Wal-Mart of 72 West Coast Wal-Mart portrait studios previously operated by
Wal-Mart.
In order to appreciate the strengths of PCA's integrated digital imaging
operations, it is important to distinguish PCA's operations from non-digital
portrait photography operations.
NON-DIGITAL PORTRAIT PHOTOGRAPHY OPERATIONS. Traditionally, customers were
attracted to permanent and traveling studios through advance advertising of a
specially-priced promotional offer of an assortment of color portraits. In
addition to such specially-priced offers, additional assortments of color
portraits were made available at regular prices. Most of the profits were
generated from the sale of these regularly-priced portraits. During the portrait
session, the photographer took several exposures of the subject varying the pose
and background. Upon completion of the photography session, customers paid
appropriate sitting fees and returned three weeks later to view, for the first
time, finished portraits. Following a photography session, film was sent to a
portrait processing facility where it was developed, edited and processed.
During the editing process, company personnel viewed all frames from a
customer's session and selected the sizes and quantities of portraits to be
processed for each pose. This "speculation" production method involved printing
a large quantity of finished portraits in advance of the customer making a
purchase decision. The portrait packages, consisting of the specially-priced
promotional offer and additional assortments determined by Company personnel,
were returned to the host store for viewing and purchase by the customers; any
portraits not purchased were discarded as waste. The customer did not have the
luxury of ordering additional portraits of their favorite poses, therefore
limiting the Company's average sale potential to the amount of product produced.
Since fully implementing its integrated digital imaging system in 1994, this
"speculation" process no longer exists in PCA's domestic permanent studios.
PCA'S INTEGRATED DIGITAL IMAGING SYSTEM. The integrated digital imaging
system, installed in all of PCA's permanent studios, offers a superior portrait
photography experience coupled with a more effective, customer-friendly selling
process. During the digital portrait photography session, customers preview and
approve each photographic image on a color monitor, thereby "buying into" the
quality of each pose and expression. Following photography and during the same
session, only selected and approved poses are transmitted to a digital sales
system with proprietary software designed to step customers through the sales
process. The integrated digital sales system enables customers to view all poses
and customize a portrait collection. Customers choose the exact poses to be
produced in the specific portrait sizes and quantities desired, facilitating
higher sales averages. Furthermore, the integrated digital sales system has
strengthened the Company's field organization by guiding a consistent sales
approach. Beginning in the second half of 1994, PCA began to realize production
cost savings (paper, chemicals, etc.) because portraits were
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printed based on specific customer orders, rather than on speculation, thus
eliminating the cost associated with unsold portraits. After PCA's acquisition
of ASI on January 27, 1997, PCA began the process of integrating ASI's
operations, converting approximately 600 of ASI's permanent non-digital studios
to PCA's integrated digital system and making modifications to approximately 250
of ASI's permanent digital studios and its processing center (which, unlike
PCA's digital studios and processing center, did not use an integrated system).
By July 1997, all of the former domestic ASI permanent locations had been
upgraded to PCA's integrated digital imaging technology.
Management believes that the conversion of ASI's studios has been largely
responsible for the $15 increase in revenue per customer at the former ASI
locations since January 27, 1997. The conversion of ASI's permanent locations is
now complete, but the Company is also proposing to convert approximately 270
additional Wal-Mart locations that are currently served by traveling studios
(which use non-digital technology) to permanent integrated digital studios.
STUDIO EXPERIENCE. In the digital studio, a computerized video camera,
mounted on the stationary portrait camera, captures images of the live subject
being photographed for review on a color monitor. When a photograph is taken,
the image is frozen on the screen. Should a pose be unsatisfactory to the
customer (as is often the case with pre-school children) the photograph is
re-taken. Beyond the pose for the advertised portrait collection, up to six
additional poses are taken for the optional portrait collection. When the
photography session ends, the sales presentation begins. The digital
photographic images are sent to another computer in an adjacent room. There, the
photographer/salesperson presents the photographic images on the sales computer
screen and, prompted by a sales program designed by PCA's research and
development staff, explains the portrait packages available. The customer
chooses the poses, the sizes and quantities, as the package price is
re-calculated and appears on the screen when each choice is made. The receipt is
a laser print-out of the order, with the poses displayed. The customer either
pays in full or makes a deposit and returns in two to three weeks to pick up the
finished portraits. This is in sharp contrast to the non-digital system, under
which the customer returns two to three weeks later to see the portraits for the
first time with only limited selections of product to purchase.
PERMANENT STUDIOS. The typical permanent studio occupies 250 square feet
and consists of a camera room, a portrait viewing and sales area, and a
reception area with point-of-sale computer. Generally, the permanent studio is
staffed by one to three employees who perform both the photography and sales
functions. Except for extended hours during certain holiday seasons, the
majority of PCA's portrait studios are open from 10:00 a.m. to 7:00 p.m. either
five or seven days a week.
TRAVELING STUDIOS. Non-digital traveling studios operate in designated
Wal-Mart stores at regularly scheduled intervals throughout the year. A
traveling studio is operated for a period of approximately five days every seven
to ten weeks in a host Wal-Mart store designated for traveling studio
operations. The Company begins a traveling studio promotion by advertising a
promotional offer of an assortment of color portraits at a special price several
days prior to the scheduled arrival of the photographer at a host store. The
traveling studio occupies approximately 100 square feet and consists of a table,
camera, lights, and portable backdrops. Approximately three weeks after the
photographs are taken, a sales associate sets up a temporary sales area in the
host store and for one to five days assists the customers in selecting portraits
for purchase. In traveling studios servicing Wal-Mart locations, customer volume
per day is typically higher while purchase averages are generally lower than in
permanent studios because of the non-digital technology used in traveling
studios. During fiscal year 1997, PCA's Wal-Mart traveling studios serviced an
average of 161 locations per week (each, a "promotion").
PCA photographs a greater number of customers per location at permanent
studios than through traveling studios since permanent studios are operated five
to seven days per week, 52 weeks per year, while traveling studios typically
service a store for only five days for a limited number of weeks per year.
Additionally, since traveling studios do not employ the Company's integrated
digital technology, the
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average customer purchase in a permanent studio is significantly higher than the
average purchase in a traveling studio.
DISTRIBUTION CHANNELS
The Company operates within the professional portrait photography industry,
specializing in pre-school children's portraits offered through permanent and
traveling studios and adult and family portraits provided through traveling
studios in churches and other institutions.
U.S. DISCOUNT RETAIL CHANNEL OPERATIONS--WAL-MART AND KMART.
The Company operates portrait studios in discount stores in all 50 states,
principally servicing the pre-school portrait market. PCA's portrait studio
operations contributed 92% of the Company's sales in fiscal year 1997, 87.2% in
1996 and 90.2% in 1995. At the end of fiscal 1997, the Company operated 1,953
permanent portrait studios in the United States.
The Company seeks to maintain an advertising presence throughout the year in
all geographic markets where the Company operates permanent studios by
advertising under the name of its retail partners. Customers are attracted to
the studio through a variety of advertising methods including in-store
point-of-sale merchandising, television and newspaper advertising, and direct
mail to current and prospective customers.
In fiscal 1997, PCA became the nationwide portrait studio operator for
Wal-Mart, building on a 15-year partnership established by ASI. As of May 3,
1998, the Company operated approximately 1,000 permanent studios in U.S.
Wal-Mart stores and supercenters. The Company also services approximately 1,400
Wal-Mart stores in the United States approximately six times a year with
non-digital traveling studios. The Company currently plans to open approximately
70 net new permanent studios domestically in 1998. The Company assumed ASI's
license agreement with Wal-Mart when it acquired ASI on January 27, 1997. The
license agreement with Wal-Mart may be terminated by either party at any time.
Between January 26, 1997 and the end of the fiscal year, the Company
acquired ASI (adding 832 U.S. permanent studios in Wal-Mart stores), opened 150
new U.S. permanent studios and closed 401 underperforming permanent studios,
resulting in a net increase of 581 U.S. permanent studios. (As described more
fully in "Management's Discussion and Analysis of Financial Conditions and
Results of Operations," PCA's fiscal 1996 financial results do not reflect the
operating results of ASI; however, studio counts at the end of 1996 do reflect
the combined companies.) The Company also discontinued ASI's fashion photography
services in Wal-Mart as well as PCA's pilot pet portraiture program in PETsMart.
The Company utilized the assets from the discontinued services, including
digital photography equipment, to upgrade former ASI Wal-Mart non-digital
studios to PCA's integrated digital system and to upgrade certain existing Kmart
locations.
The Company has maintained a continuous business relationship with Kmart
since 1967. The Company is party to a license agreement with Kmart that allows
the Company to operate its permanent studios in U.S. Kmart stores under the
Kmart name in exchange for a commission from the Company based on a percentage
of sale from the permanent studio in each store. The license agreement expires
May 9, 2001, and may be terminated by either party at any time before May 9,
2001 upon 180-days' notice.
The Company assumed ASI's license agreement with Wal-Mart when it acquired
ASI on January 27, 1997. The Company's U.S. license agreement with Wal-Mart may
be terminated by either party at any time. The loss of the license to do
business in U.S. Kmart stores, or U.S. Wal-Mart stores, or the closing of a
significant number of U.S. Kmart or Wal-Mart stores, without replacement, could
have a material adverse effect on the Company. See "--Recent Developments."
U.S. INSTITUTIONAL PORTRAIT OPERATIONS. The Company's institutional
operations accounted for 3.1%, 4.7%, and 4.6% of sales in fiscal years 1997,
1996, and 1995, respectively. The Company contracts with
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institutions, primarily church congregations, to photograph and sell individual
and family group portraits of congregation members. The Company does not pay
commissions to the hosting institutions, but provides a free photo directory to
all members who agree to be photographed. Approximately three weeks after the
photography session, the finished portraits are sent to the church or directly
to the consumer. During fiscal 1997, the Company operated approximately 31
portable camera units on average each week for institutional promotions. The
Company does not expect the number of portable units in service to change
significantly during 1998.
INTERNATIONAL PORTRAIT OPERATIONS. At the end of fiscal year 1997, the
Company operated 122 portrait studios internationally in Wal-Mart stores, with
94 permanent digital studios in Canada, 26 in Mexico and 2 in Argentina. The
Company's international studios contributed 4.3%, 4.4%, and 4.5% of sales for
fiscal 1997, 1996, and 1995, respectively. International expansion added 38 new
studios in 1997. Fiscal 1998 studio expansion plans include up to 25 new studios
internationally.
On February 9, 1996, the Company's Canadian subsidiary entered into a
license agreement with Wal-Mart Canada, Inc. to operate portrait studios in
Wal-Mart's stores in Canada. The Company's license agreement with Wal-Mart for
Canada expires on a store-by-store basis five years after a store opens and may
be terminated by either party, on a store-by-store basis, if certain minimum
sales results are not achieved. See "RISK FACTORS--Risk of Loss of K-Mart and
Wal-Mart Licenses."
Over the last fiscal year, Wal-Mart has committed significant resources to
acquiring and building discount stores outside the United States, including
Cifra, S.A. a 400-store Mexican retail chain and Werthauf, a 21-store German
retailer.
SALES AND MARKETING
PCA's marketing team consists of 13 marketing professionals. The group's
responsibilities include the creation and cost effective production and
placement of all in-store advertising, in-studio displays and general
multi-media advertising. Strategic marketing, cross-promotion development and
communication with host store management is conducted by two senior marketing
directors, one dedicated to each of the Kmart and Wal-Mart channels. Daily
working relationships with external advertising agencies and free-lance support
are managed by two production coordinators that also have an exclusive host
store focus. The other members of the group provide a broad support base for
both Wal-Mart and Kmart distribution channels, including media planning and
analysis, studio sales support and customer/market research. The group also
manages the proprietary customer database that allows the Company to apply
targeted advertising strategies.
Customers are attracted to the studios through a variety of advertising
methods including in-store, point-of-sale merchandising, television and
newspaper advertising, direct mail to prior and prospective customers and
in-store cross-promotional efforts. The Company seeks to maintain an advertising
presence throughout the year in all geographic markets where it operates
permanent studios. Additionally, as a Wal-Mart and Kmart licensee, the Company
is able to place its media advertising under the Wal-Mart and Kmart name at
rates that are lower than those it could independently obtain.
Studio managers participate in a certification program that develops their
technical skills and ensures consistent portrait quality. This program permits
studio managers to progress from Portrait Specialist to Portrait Artist, finally
earning the Master Photographer designation. The studio managers are given the
skills, knowledge, and authority to respond to any customer concern with an
immediate solution, including support by a toll-free customer service line.
Production and headquarters personnel also participate in training specifically
designed to enhance the customer's total portrait experience.
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RESEARCH AND DEVELOPMENT
Led by Eric H. Jeltrup, the technology and development group consists of 22
employees that design and develop equipment and processes that are employed in
PCA's processing lab and field studios. The group is divided into three basic
areas: electronic engineering, mechanical engineering, and computer
systems/software. The group designs and develops equipment used in the
integrated automated production facility. Additionally, the group provides
programming support for a network of process control and data management
computers. Mechanical and electronic engineers also develop cameras, lighting
and other systems for field photographers.
The Company's software engineers designed the Company's proprietary digital
sales and point-of-sale systems. They provide system support for ongoing changes
in portrait-offer configurations and marketing promotions and advance the
Company's systems on a continual basis by enhancing system features and
incorporating evolving computer technologies.
In 1997, the Company initiated a two-year research grant with the Cornell
University Program of Computer Graphics. This relationship is directed by PCA
Board member Donald P. Greenberg, Ph.D., Gould Schurman Professor of Computer
Graphics at Cornell University. See "Management." The focus of the grant is to
investigate evolving digital photography and computer technologies for
commercial application and viability in the portrait studio industry. With the
convergence of digital photographic imaging and advanced communications
technologies, PCA continues to develop additional capabilities and technology
applications.
MANUFACTURING AND FACILITIES
The Company owns three facilities in the Charlotte, North Carolina, area.
The primary facility serves as the Company's corporate headquarters, production
facility, and warehouse and is approximately 166,000 square feet. The two other
facilities were acquired through the ASI acquisition and include a 60,000 square
foot processing and administrative facility and a 31,400 square foot
distribution center.
The PCA production facility handles approximately 85% of the Company's
permanent studio film development (70% of total film development). The former
ASI production facility is used for processing film for the traveling studios
and the remaining studios. During the Christmas selling season, the busiest time
during the year for the Company, PCA's manufacturing facilities operate at
approximately 85% of capacity. Management believes its current manufacturing
capacity is sufficient for the business going forward.
RAW MATERIALS AND SUPPLIERS
The Agfa Division of Bayer Corporation is PCA's primary supplier of
photographic film, paper, and processing chemicals. PCA renewed its supply
contract with Agfa in August 1997 after receiving bids from other suppliers. PCA
has not had significant difficulty obtaining its paper, film and portrait
processing chemical supplies, and management considers the available alternative
sources of such supplies to be adequate. Additionally, PCA has not found it
necessary to carry significant amounts of inventory to ensure itself of a
continuous allotment of raw materials.
PCA builds its own cameras and has an adequate supply of cameras and camera
components. The computer and video equipment used by PCA in its integrated
digital imaging system consists of standard components that are readily
available from multiple suppliers.
COMPETITION
The professional portrait photography industry, including both permanent and
traveling studios, is highly competitive and fragmented. The companies in the
industry compete on the basis of price, service, package size and technology. In
addition, for companies (such as the Company, CPI Corporation ("CPI")
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and Lifetouch, Inc. ("Lifetouch") located within retail hosts, the relative
convenience of each company's retail host and consumer preferences for such
retail hosts are important competitive factors. The major professional portrait
studio companies, including CPI, Lifetouch and Olan Mills, Inc. ("Olan Mills"),
operate permanent studios in retail chains and stand-alone locations. There are
three primary channels in which companies compete: discount department stores,
department stores, and stand-alone locations. The Company operates primarily in
the discount department store channel, with studios in both Wal-Mart and Kmart.
PCA competes directly with the department store segment for customer sittings
including CPI at Sears and Lifetouch at JC Penney. In addition, there are many
unaffiliated competitors. The following table summarizes the major industry
players and their respective distribution channels:
<TABLE>
<CAPTION>
# OF PERM. SALES(2)
COMPANY CHANNEL SITTINGS(1) STUDIOS(2) ($MM)
- ----------------------------------------------------- ------------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
PCA.................................................. Kmart/Wal-Mart 4.6 million 2,075 $ 234(3)
CPI.................................................. Sears 5.4 million 1,026 $ 304
Lifetouch(4)......................................... JC Penney/Target 2.9 million 560 $ 150
Olan Mills(5)........................................ Independent 7.0 million 1,005 $ 380
</TABLE>
- ------------------------
Sources: PCA, latest available CPI Annual Reports and the Photofinishing News,
Inc.
(1) PCA data as of fiscal year end 1997. All other data as of year end 1996.
(2) PCA and CPI data as of fiscal year end 1997. All other data as of year end
1996.
(3) Includes Kmart and Wal-Mart only.
(4) Excludes National School Studio, Senior Portrait and Yearbook divisions.
(5) Does not include school division or UK operations.
MARKET COVERAGE
The Company has operations throughout the United States, with no single
market representing more than 2.7% of sales and the Company's top 10 markets
representing less than 21% of sales. A market is typically represented as a
Designated Market Area (as defined by Nielsen Media Research, a division of the
Dun & Bradstreet Corp to be a rigidly defined geographical area used by Nielson
to identify television stations that best reach an area and attract the most
viewers).
SEASONALITY
Because of the retail nature of its services and its locations in discount
stores, the Company's business is very seasonal. The Christmas season accounts
for a high percentage of the Company's sales and earnings, and the Company's
fourth fiscal quarter (late October through late January) typically produces a
large percentage of annual sales and annual earnings. The fourth fiscal quarters
of 1997, 1996 and 1995 accounted for approximately 31.2%, 33.2% and 32.2%,
respectively, of sales, and 89.4%, 32.8% and 64.2%, respectively, of earnings
for those years. Fiscal 1997 fourth quarter earnings as a percentage of total
earnings were out of proportion compared to prior years due to significant costs
incurred for restructuring the Company's digital studio operations, which led to
operating losses in the first half of the year. The 1996 fourth quarter earnings
would have accounted for 69.5% of annual earnings before giving effect to the
$3.6 million after-tax charge for studio closure costs.
GOVERNMENTAL REGULATIONS
The Company is subject to various federal and state laws and regulations,
including the Occupational Safety and Health Act and federal and state
environmental laws. The Company is not aware of any
60
<PAGE>
material violation of such laws and regulations. Continued compliance is not
expected to have a material effect upon capital expenditures, earnings, or the
competitive position of the Company.
EMPLOYEES
At February 1, 1998, the Company had approximately 5,735 full-time and
part-time employees, none of which are now or ever have been represented by
labor unions. The Company believes employee relations are good.
INTELLECTUAL PROPERTY
The Company owns certain patents, trademarks and licenses that it does not
believe are material to its business.
LEGAL PROCEEDINGS
On April 22, 1998, the Company and the members of its Board of Directors
were sued by Harbor Finance Partners, a shareholder of the Company, to enjoin
the Merger, or in the alternative, for damages. The lawsuit was filed in the
Superior Court of Mecklenburg County, North Carolina. Harbor Finance Partners
has alleged that the Company and its Directors breached their fiduciary duty to
the shareholders in connection with the Merger. The Company and the Directors
have denied these allegations and have stated that they will defend the lawsuit
vigorously. However, should the plaintiffs be successful in the action, the
transaction could be enjoined or the Company may be required to pay the
plaintiffs the difference between the Cash Merger Consideration and the court's
determination of the fair value of the Shares.
On May 26, 1998, the Company and the Directors moved to dismiss the lawsuit
on the basis that Harbor Finance Partners had failed to state a claim for which
relief can be granted. As of July 21, 1998 a hearing date for that motion to
dismiss has not yet been set by the Court.
RECENT DEVELOPMENTS
In the fiscal year ended February 1, 1998, the Company eliminated certain
underperforming businesses to concentrate on its portrait studio operations. The
Company discontinued ASI's fashion photography services in Wal-Mart as well as
PCA's pilot pet portraiture program in PETsMART. The Company utilized the assets
from these discontinued services, including digital photography equipment, to
upgrade former ASI Wal-Mart non-digital studios to PCA's integrated digital
system and to upgrade certain existing Kmart locations.
In April 1998, Kmart notified the Company that it would close 75 studios in
which PCA is currently operating and would allow alternative portrait studio
operators to service such locations. While Kmart has stated that it plans no
further terminations in 1998, there can be no assurance that Kmart will not
close additional PCA studio locations in the future or that it will retain PCA
as its primary supplier of portrait photography services indefinitely. Under the
terms of the licensing agreement between Kmart and PCA, PCA is required to exit
these 75 studios within six months of notification, or around November 1, 1998.
Kmart will also pay to PCA a termination fee of approximately $500,000
representing PCA's unamortized investment in leasehold improvements made in
these specific 75 studios. These 75 studios generated approximately $8.0 million
in revenue (which represents 8.2% of all Kmart revenues for the period) and
approximately $1.7 million in income from operations before income taxes in
fiscal 1997. Any significant reduction in the number of Kmart stores in which
the Company operates, without replacement, could have a material adverse effect
on the Company. See "RISK FACTORS--Risk of Loss of Kmart and Wal-Mart Licenses."
61
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected historical consolidated financial and operating data for and as
of each of the fiscal years in the five-year period ended February 1, 1998 set
forth below under the captions "Statement of Operating Data," "Other Data" and
"Balance Sheet Data" have been derived from the Audited Consolidated Financial
Statements of the Company. The selected historical consolidated financial and
operating data set forth below for the quarters ended May 4, 1997 and May 3,
1998 have been derived from the Unaudited Consolidated Financial Statements of
the Company and, in each case, include, in the opinion of management all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited interim periods. Results of
operations for the quarter ended May3, 1998 are not necessarily indicative of
the results that may be expected for the entire year. The information presented
below is qualified in its entirety by, and should be read in conjunction with,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDING APPROXIMATELY JANUARY 31, QUARTER ENDED
---------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MAY 4, MAY 3,
1994 1995 1996 1997(1) 1998 1997 1998
---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
STATEMENT OF OPERATING DATA:
Sales.......................................... $ 149,150 $ 144,881 $ 144,715 $ 156,099 $ 242,899 $ 58,692 $ 54,662
Cost of sales(2)............................... 120,353 114,092 107,611 119,107 181,966 45,001 41,577
---------- ---------- ---------- ---------- ---------- --------- ---------
Gross profit................................... 28,797 30,789 37,104 36,992 60,933 13,691 13,085
General and administrative expenses(3)......... 20,594 22,936 23,782 31,676 38,070 10,632 10,428
---------- ---------- ---------- ---------- ---------- --------- ---------
Income from operations before interest and
income taxes................................. 8,203 7,853 13,322 5,316 22,863 3,059 2,657
Interest expense (income)...................... (5) 406 459 179 6,571 1,620 1,220
---------- ---------- ---------- ---------- ---------- --------- ---------
Income from operations before income taxes..... 8,208 7,447 12,863 5,137 16,292 1,439 1,437
Income tax provision........................... 3,296 3,074 5,246 2,143 7,557 796 659
---------- ---------- ---------- ---------- ---------- --------- ---------
Income from continuing operations.............. 4,912 4,373 7,617 2,994(4) 8,735 643 778
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income..................................... $ 2,712 $ 4,785 $ 7,617 $ 2,994(4) $ 8,735 $ 643 $ 778
---------- ---------- ---------- ---------- ---------- --------- ---------
---------- ---------- ---------- ---------- ---------- --------- ---------
OTHER DATA:
Ratio of long-term debt (noncurrent portion) to
total capitalization(5)...................... -- -- -- 0.64 0.48 0.64 0.47
Depreciation................................... $ 5,159 $ 7,136 $ 8,490 $ 9,498 $ 13,543 $ 3,286 $ 3,241
Amortization................................... -- -- -- -- 1,910 456 507
Capital expenditures........................... $ 21,875 $ 14,698 $ 6,309 $ 13,424 $ 12,086 $ 3,363 $ 1,785
Ratio of earnings to fixed charges(6).......... -- (7) 19.3x 29.0x 29.7x 3.5x 1.9x 2.2x
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDING APPROXIMATELY
JANUARY 31, QUARTER ENDED
--------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MAY 4, MAY 3,
1994 1995 1996 1997(1) 1998 1997 1998
------- ------- ------- -------- -------- -------- --------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT PERIOD END:
Cash and cash equivalents.................... $ 5,119 $ 312 $ 3,915 $ 1,536 $ 12,290 $ 3,735 $ 11,073
Working capital (deficit).................... (4,321) (6,697) (3,878) (18,472) (20,334) (20,200) (19,668)
Total assets................................. 56,751 59,557 59,884 146,661 153,301 151,308 146,916
Long-term debt (noncurrent portion).......... -- -- -- 58,680 42,064 63,228 41,105
Stockholders' equity......................... $30,296 $33,032 $31,235 $ 33,641 $ 44,689 $ 35,161 $ 45,712
</TABLE>
- ------------------------
(1) PCA's operating results for the fiscal year ended February2, 1997, do not
include operating results from ASI, as the acquisition was accounted for by
the purchase method at the fiscal year-end; balance sheet data include the
assets and liabilities of the combined companies.
(2) Includes advertising and promotional costs, costs of photographic sales and
store commissions and selling costs. Cost of sales February 1, 1998 includes
non-recurring expenses of $1,153 associated with the closure of
underperforming studios and redeployment of underutilized assets. See
"Business--Recent Developments."
(3) Includes amortization of intangibles. General and administrative expenses
for the quarter ended May 3, 1998 include non-recurring expenses of $618
associated with the Merger. General and administrative expenses for the
fiscal year ended February 2, 1997 include non-recurring expenses of $6,000
associated with the closure of underperforming studios and redeployment of
underutilized assets. See "Business--Recent Developments."
(4) Includes tax-effected non-recurring expenses of $3,600 associated with the
closure of underperforming studios and redeployment of underutilized assets.
(5) Total capitalization is long-term debt and total shareholders' equity.
(6) For purposes of computing this ratio, earnings consist of income from
operations before income taxes plus fixed charges. Fixed charges consist of
net interest expense and amortization of deferred financing costs.
(7) For the fiscal year 1994, fixed charges were less than zero because of net
interest income of $5.
63
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial information (the
"Pro Forma Financial Information") of the Company is based on historical audited
consolidated financial statements of the Company and gives effect to the Merger
and Merger Financing (collectively, the "Merger Transactions"). The pro forma
statements of operations for the year ended February 1, 1998 gives effect to the
Merger Transactions as if they had occurred at February 3, 1997 and for the
quarter ended May 3, 1998 as if they had occurred at February 2, 1998. The pro
forma balance sheet gives effect to the Merger Transactions as if they had
occurred on May 3, 1998. The pro forma adjustments are based upon available
information and upon certain assumptions that management believes are reasonable
under the circumstances. The Pro Forma Financial Information and accompanying
notes should be read in conjunction with the historical consolidated financial
statements of the Company, including the notes thereto, which are incorporated
by reference, and other financial information pertaining to the Company. The Pro
Forma Financial Information does not purport to represent what the Company's
actual results of operations or actual financial position would have been if the
Merger Transactions in fact occurred on such dates or to project the Company's
results of operations or financial position for any future period or date.
While the exact timing, nature and amount of these costs are subject to
change, the Company will incur various one-time cash charges currently estimated
to be $35.1 million (as well as a one-time non-cash charge currently estimated
to be $1.9 million) in connection with the proposed Merger Transactions.
64
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND OTHER DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
FEBRUARY 1, 1998 (1)
------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME DATA:
Sales.................................................................... $ 242,899 $ 242,899
Cost of sales (2)(3)..................................................... 181,966 181,966
---------- -----------
Gross profit............................................................. 60,933 60,933
General and administrative expenses (4).................................. 38,070 38,070
---------- -----------
Income from operations before interest and income taxes.................. 22,863 22,863
Interest expense, net.................................................... 6,571 $ 15,639(5) 22,210
---------- ----------- -----------
Income (loss) from operations before income taxes........................ 16,292 (15,639) 653
Income tax provision..................................................... 7,557 6,256(6) 1,301
---------- ----------- -----------
Net income (loss)........................................................ $ 8,735 $ (9,383) $ (648)
---------- ----------- -----------
---------- ----------- -----------
OTHER DATA:
Weighted average number of shares
Basic.................................................................. 7,779 2,387
Diluted................................................................ 8,195 2,426
Basic and diluted earnings (loss) per share
Basic.................................................................. $ 1.12 $ (0.21)
Diluted................................................................ $ 1.07 $ (0.21)
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME AND
OTHER DATA
65
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED MAY 3, 1998(1)
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME DATA:
Sales.................................................................... $ 54,662 $ 54,662
Cost of sales(2)......................................................... 41,577 41,577
----------- -----------
Gross profit............................................................. 13,085 13,085
General and administrative expenses(4)(7)................................ 10,428 10,428
----------- -----------
Income from operations before interest and income taxes.................. 2,657 2,657
Interest expense, net.................................................... 1,220 $ 4,188(5) 5,408
----------- ----------- -----------
Income (loss) from operations before income taxes........................ 1,437 (4,188) (2,751)
Income tax provision (benefit)........................................... 659 1,675(6) (1,016)
----------- ----------- -----------
Net income (loss)........................................................ $ 778 $ (2,513) $ (1,735)
----------- ----------- -----------
----------- ----------- -----------
OTHER DATA:
Weighted average number of shares
Basic.................................................................. 7,932 2,387
Diluted................................................................ 8,373 2,426
Basic and diluted earnings (loss) per share
Basic.................................................................. $ 0.10 $ (0.71)
Diluted................................................................ $ 0.09 $ (0.71)
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
OTHER DATA.
66
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER DATA
(1) It is estimated that the Company will incur non-recurring charges of
approximately $26,199 in the quarter in which the Merger is consummated.
These non-recurring charges consist of a cash payment upon cancellation of
stock options of approximately $19,660, a non-cash charge of $1,750 for
rollover of options, a certain change in control cash payment of
approximately $1,000, other cash fees of $1,860 and an estimated $1,929
non-cash write-off of unamortized financing expenses related to its existing
credit facilities. Because these expenses are non-recurring, they have been
excluded from the unaudited pro forma consolidated statements of income.
(2) Includes advertising and promotional costs, costs of photographic sales and
store commissions and selling costs.
(3) Includes non-recurring expenses of $1,153 associated with the closure of
underperforming studios and redeployment of underutilized assets. See
"Business--Recent Developments."
(4) Includes amortization of intangibles.
(5) Adjustments to net interest expense:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED QUARTER
FEBRUARY 1, ENDED
1998 MAY 3, 1998
--------------- -----------
<S> <C> <C>
NEW LONG-TERM DEBT INSTRUMENTS:
New revolving credit facility.................................................. $ 706 $ 53
New term loans................................................................. 9,821 2,426
The Senior Subordinated Debt................................................... 10,250 2,563
New commitment fees............................................................ 80 28
Other interest and bank charges................................................ 1,353 338
------- -----------
Total new interest expense................................................... 22,210 5,408
Less net interest expense relating to the existing credit facility............. 6,571 1,220
------- -----------
TOTAL PRO FORMA ADJUSTMENT:.................................................. $ 15,639 $ 4,188
------- -----------
------- -----------
</TABLE>
(6) The adjustments reflect the tax effect of the pro forma adjustments at a 40%
effective tax rate.
(7) Includes non-recurring expenses of $618 associated with the Merger.
67
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MAY 3, 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
---------- ----------------------- ---------
<CAPTION>
DEBITS CREDITS
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 11,073 $277,800(1) $286,817(2) $ 2,056
Accounts receivable (net less allowance of
$1,488)....................................... 7,518 7,518
Inventories..................................... 8,069 8,069
Deferred income taxes........................... 4,788 8,544(3) 13,332
Prepaid expenses................................ 1,247 1,247
---------- -------- -------- ---------
Total current assets.............................. 32,695 286,344 286,817 32,222
Property, net................................... 53,325 53,325
Intangible assets............................... 59,241 59,241
Other assets.................................... 1,655 7,840(4) 1,601(5) 7,894
---------- -------- -------- ---------
Total assets...................................... $ 146,916 $294,184 $288,418 $ 152,682
---------- -------- -------- ---------
---------- -------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt............... $ 8,750 $ 8,750(6) $ 4,500(1) $ 4,500
Accounts payable--trade......................... 23,798 23,798
Accrued insurance............................... 3,824 3,824
Accrued income tax.............................. 1,342 1,342(3) 0
Accrued compensation............................ 4,792 4,792
Other accrued liabilities....................... 9,858 9,858
---------- -------- -------- ---------
Total current liabilities......................... 52,364 10,092 4,500 46,772
Long-term debt.................................... 41,105 40,922(6)(7) 220,500(1) 220,683
Deferred income taxes............................. 107 107
Other liabilities................................. 7,628 7,628
---------- -------- -------- ---------
Total liabilities................................. 101,204 51,014 225,000 275,190
Stockholders' equity (deficit) (8)................ 45,712 1,929(5)(7) 52,800(1) (122,508)
200,169(9) 9,886(3)
20,010(10)
1,538(11)
7,260(12)
---------- -------- -------- ---------
Total liabilities and stockholders' equity
(deficit)....................................... $ 146,916 $281,920 $287,686 $ 152,682
---------- -------- -------- ---------
---------- -------- -------- ---------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET.
68
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(In thousands except for share prices, share amounts and percentages)
(1) Represents funds received from the issuance of 1,992,453 shares of PCA
common stock to Mergerco at $26.50 per share and issuance of new long-term
indebtedness totaling $225,000.
(2) Pro forma credits to cash and cash equivalents include:
(i) An adjustment of $50,000 representing the repayment of the Company's
existing long-term debt instruments (including an original issue discount
of $328);
(ii) An adjustment of $200,169 representing the repurchase of 7,553,539
shares of Common Stock at $26.50 per share;
(iii) An adjustment of $20,010 for cash payments for cancellation of
1,381,600 stock options, including an estimate of payroll tax
liabilities. (The rollover of options for 122,900 shares will be
expensed. The option value is determined by the difference between $26.50
and the average exercise price of $12.27.
(iv) An adjustment of $1,538 for the exercise of 150,000 warrants with an
average exercise price of $16.25 and the repurchase of the same 150,000
shares at $26.50 per share; and
(v) An adjustment of $15,100 for financing costs, professional fees and
other expenses incurred in connection with the Merger, including $7,840
for deferred financing costs that will be amortized over the life of the
related debt instruments.
(3) The adjustments reflect the tax effect of the pro forma adjustments at a
40% effective tax rate.
(4) Represents financing costs that will be amortized over the life of the
related debt agreements.
(5) Represents the write-off of unamortized deferred financing costs relating
to the repayment of the Company's existing long-term debt instruments of
$1,601.
(6) Represents repayment of debt outstanding under the Company's existing
long-term debt instruments.
(7) Includes an original issue discount of $328.
(8) Represents the impact of the pro forma adjustments to stockholders' equity:
<TABLE>
<CAPTION>
ANALYSIS OF EQUITY
(UNAUDITED) PRO FORMA ADJUSTMENTS
(IN THOUSANDS) -----------------------------------
STOCKHOLDERS EQUITY (DEFICIT) HISTORICAL DEBITS CREDITS PRO FORMA
- --------------------------------------------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Common Stock................................. $ 1,589 $ 1,511(9) $ 398(1) $ 477
Additional paid-in-capital................... $ 10,707 $198,658(9) $ 52,402(1) $ --
$ 1,538(11) $137,088(**)
Retained earnings (deficit).................. $ 33,416(*) $ 1,601(5) $ 9,886(3) $(122,985)
$ 328(7)
$ 20,010(10)
$ 7,260(12)
$137,088(**)
---------- -------- -------- ---------
Total Stockholders' Equity (deficit)....... $ 45,712 $367,994 $199,774 $(122,508)
---------- -------- -------- ---------
---------- -------- -------- ---------
</TABLE>
- ------------------------
* Includes cumulative foreign currency translation adjustment.
** Reclassification of paid-in-capital debit balance to retained deficit.
69
<PAGE>
(9) Represents the repurchase of 7,553,539 shares of Common Stock at $26.50 per
share.
(10) Represents cash payments for cancellation of 1,381,600 stock options,
including an estimate of payroll tax liabilities. The rollover of options
for 122,900 shares will be expensed. The option value is determined by the
difference between $26.50 and an average exercise price of $12.27.
(11) Represents the exercise of 150,000 warrants with an average exercise price
of $16.25 and the repurchase of the resulting 150,000 shares at $26.50 per
share.
(12) Represents financing costs, professional fees and other expenses incurred
in connection with the Merger that will not be amortized.
70
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the more
detailed information and the historical financial statements and pro forma
financial data included elsewhere in this Proxy Statement/ Prospectus. As used
in this discussion and in "THE COMPANY," the terms "fiscal 1997," "fiscal year
1997" and "1997" refer to the fiscal year ended February 1, 1998, the terms
"fiscal 1996," "fiscal year 1996" and "1996" refer to the fiscal year ended
February 2, 1997, and the terms "fiscal 1995," "fiscal year 1995" and "1995"
refer to the fiscal year ended January 28, 1996.
OPERATIONS
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997. Consolidated sales for
the first quarter 1998 were $54.7 million, a decrease of 6.9% compared to sales
of $58.7 million reported in the comparable fiscal 1997 quarter. The $4.0
million sales decline in the 1998 first quarter was due to discontinued and
closed operations in fiscal 1997. During the first half of fiscal 1997, the
Company discontinued its subsidiary's fashion photography business and PCA's
pilot pet portrait operations, and closed 401 underperforming discount store
portrait studios. These operations represented sales of approximately $8.0
million and losses before corporate overhead of $0.3 million in the fiscal 1997
first quarter. Excluding sales from these discontinued or closed operations in
the fiscal 1997 first quarter, sales for PCA's 1998 first quarter increased $4.0
million or 7.8%. The $4.0 million sales increase for the 1998 first quarter is
due principally to improved sales averages in the acquired Wal-Mart studios
which benefitted from the conversion to PCA's digital imaging technology.
Portrait studio sales through discount retailers represented $52.9 million or
96.7% of total sales for the fiscal 1998 first quarter. At May 3, 1998, the
Company operated 2,034 portrait studios in discount stores. During the quarter,
the Company opened 12 portrait studios and closed 53 studios, resulting in a net
reduction of 41 studios from the year-end studio count of 2,075.
Total costs and expenses as a percentage of sales increased to 95.1% in the
1998 first quarter from 94.8% in the first quarter of fiscal 1997. The 1998
quarter includes costs and expenses of $0.6 million or 1.1% of sales related to
the execution of the merger agreement with Jupiter. Advertising and promotional
expenses as a percentage of sales decreased to 6.2% for the fiscal 1998 first
quarter from 7.4% in the fiscal 1997 first quarter, reflecting a less
promotional environment in the discount retail segment. Cost of photographic
sales decreased to 35.4% of sales from 37.1% of sales in the year-ago quarter
principally due to cost savings resulting from the completion of the ASI
integration and the conversion of 600 ASI studios in Wal-Mart to PCA's
integrated digital technology system which lowered production costs per
customer. Store commissions and selling expense as a percentage of sales
increased to 34.4% in the 1998 first quarter versus 32.2% in the 1997 first
quarter principally due to increased labor expense required to operate more
traveling studio promotions and staffing requirements for additional seven-day
studios. General and administrative expenses increased as a percentage of sales
to 18.1% compared to 17.3% of sales in the fiscal 1997 quarter due to the $0.6
million of Merger costs.
Net interest expense for the quarter ended May 3, 1998 was $1.2 million, or
2.3% of sales, as compared to $1.6 million, or 2.8% of sales, in the fiscal 1997
first quarter. The net interest expense on borrowings decreased as a result of a
lower level of debt. See "Liquidity and Capital Resources."
The income tax provision for the first quarter of 1998 was $0.7 million.
This resulted in an effective tax rate for the 1998 quarter of 45.9% compared to
55.3% in the first quarter of 1997. The decrease in effective tax rate for the
1998 period is attributable to using the projected effective annual tax rate as
compared to using the first quarter actual calculated rate in the same period in
the prior year.
Net income for the first quarter of fiscal 1998 increased 21.0% to $0.8
million or 1.4% of sales as compared to $0.6 million or 1.1% of sales in the
same quarter of the prior year. Diluted earnings per share for the 1998 first
quarter were $0.09 as compared to $0.08 diluted earnings per share in the fiscal
1997
71
<PAGE>
quarter. Net income for the 1998 first quarter includes $0.4 million
tax-effected expense, or $0.04 per diluted share, for previously mentioned
expenses related to the execution of the merger agreement with Jupiter.
1997 FISCAL YEAR COMPARED WITH 1996 FISCAL YEAR. Sales for fiscal year 1997
increased 55.6% to $242.9 million, compared to $156.1 million in fiscal year
1996. Fiscal 1997 was a 52-week year versus 53 weeks in fiscal 1996. The sales
increase of $86.8 million in fiscal 1997 was attributable to the Company's
acquisition of ASI's Wal-Mart distribution channel, net of discontinued
businesses, and to a lesser degree, studio expansion and increased customer
purchase averages realized in each of the Company's retail channels. PCA's
financial results for fiscal 1996 do not include the operating results of ASI
while studio counts reflect the combined companies at the end of fiscal 1996.
Total operating costs and expenses as a percentage of sales declined 2.2
percentage points to 90.6% in fiscal 1997 compared to 92.8% in fiscal 1996,
before the 1996 fourth quarter pretax charge of $6.0 million to reflect the
closing of 401 underperforming portrait studios. Advertising and promotional
costs as a percentage of sales were 6.9% in 1997, versus 10.4% in 1996,
reflecting a less promotional environment in the discount retail segment. Costs
of photographic sales increased to 35.3% of sales in 1997, compared to 33.7% of
sales in 1996, principally due to higher labor costs to operate ASI's
non-digital studios for half the year and traveling studios for the full year.
Store commission and selling costs increased to 32.8% of sales in 1997, compared
to 32.3% the prior year. Increased labor expenses related to staffing
requirements to operate more seven-day studios in discount stores was a primary
factor for the rise in direct selling cost. General and administrative expenses
declined 1.5% to 14.9% of sales in fiscal 1997 compared to 16.4% (before the
$6.0 million 1996 fourth quarter pretax change) of sales in fiscal 1996. This
decline is principally the result of cost savings from the consolidation of
field and corporate general and administrative functions.
Income from operations increased to $22.9 million or 9.4% of sales in fiscal
1997 versus $11.3 million or 7.2% of sales in fiscal 1996 (stated before the
1996 studio closure charge). This 102.0% increase in 1997 reflects one full year
of operations of ASI, as well as the elimination of underperforming operations
and improved performance of the Company's portrait studio operations. Fiscal
1997 operating costs include $1.9 million for amortization of intangible assets
relating to the acquisition of ASI.
Pretax income increased to $16.3 million or 6.7% of sales in fiscal 1997
compared to $5.1 million or 3.3% of sales in the prior year. Fiscal 1996 pretax
income includes a $6.0 million charge for studio closure costs noted above.
Fiscal 1997 net interest expense was $6.6 million compared to $0.2 million in
1996, reflecting an increase in indebtedness related to the acquisition of ASI.
Income tax provision for 1997 was $7.6 million as compared to $2.1 million
in 1996. The fiscal 1997 tax provision as a percentage of pretax income was
46.4% versus 41.7% in 1996. The increase in the effective tax rate in 1997 was
due to amortization of intangibles related to the ASI acquisition, which are not
deductible for tax purposes. Net income in 1997 was $8.7 million or 3.6% of
sales compared to $3.0 million or 1.9% of sales in 1996. Fiscal 1997 earnings
per share on a diluted basis were $1.07 compared to $0.38 in fiscal 1996. Fiscal
1996 results include the previously mentioned studio closure charge, which
reduced net income by $3.6 million after tax or $0.46 per diluted share.
1996 FISCAL YEAR COMPARED WITH 1995 FISCAL YEAR. Sales for fiscal year 1996
increased 7.9% to $156.1 million, compared to $144.7 million in fiscal year
1995. The sales increase of $11.4 million in fiscal 1996 was attributable to the
Company's diversification strategy (expansion of Wal-Mart stores and the pilot
pet portraiture program), which led to an increase in the number of customers
served. Fiscal 1996 was a 53-week year versus 52 weeks in fiscal 1995. On a
comparable 52-week basis, sales increased 6.5%.
In 1996, PCA diversified its retail partnerships; consequently, sales
through the retail distribution channel increased to reflect this strategy.
Sales through U.S. Kmart portrait studios were $135.1 million, or 86.5% of total
sales; and Wal-Mart portrait studio sales, both international and domestic, were
$6.6
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<PAGE>
million, or 4.2% of sales. PCA's Institutional Division and pet portrait pilot
program provided an aggregate of $13.3 million, or 8.5% of sales. In 1995, U.S.
Kmart studios provided sales of $130.6 million, or 90.2% of sales; and PCA's
pilot pet portrait and institutional sales provided sales of $7.5 million, or
5.2% of sales.
Total operating costs and expenses increased 10.2%, before the fourth
quarter charge of $6.0 million to close underperforming portrait studios, and
accounted for 92.8% of sales compared to 90.8% of sales in 1995. Advertising and
promotional costs as a percentage of sales were 10.4%, versus 10.2% in 1995.
Cost of photographic sales increased $4.9 million, or 10.3%, to 33.7% of sales
in 1996, compared to 32.9% of sales in 1995, due principally to the increase in
customers photographed. Store commission and selling costs increased to 32.3% of
sales, compared to 31.2% the prior year. Labor costs associated with the pilot
pet portrait program and staffing requirements to operate more seven-day studios
in discount store permanent studios caused the increase in direct selling cost.
General and administrative expense levels before the fourth quarter charge
were 16.4% of sales for 1996, similar to prior year's level. The Company
recorded a pretax charge of $6.0 million for the closing of 401 portrait studios
which were not meeting the Company's profitability objectives. This charge
includes the write-off of leasehold improvements and other fixed assets in these
stores, separation pay, cost to restore the studios to the same condition they
were in prior to the Company installing the portrait studio, and customer
refunds.
Income from operations, before the charge to close 401 portrait studios,
declined to 7.2% of sales from 9.2% of sales in 1995, a direct result of the
investment spending initiatives to pursue the Company's diversification
objectives. The costs associated with the pilot pet portrait expansion, the
Wal-Mart expansion, and overall costs to support the diversification activities
were the principal reasons for the operating margin decline.
Pretax income declined 60.1% to $5.1 million, compared to $12.9 million in
1995. This pretax figure includes the $6.0 million charge for studio closure
costs noted above. Net interest expense declined 60.9% due to repayment of
borrowings to fund the Company's repurchase of over $7.7 million of stock in
1995. Income tax provision for 1996 was $2.1 million as compared to $5.2 million
in 1995. The tax provision as a percentage of income was 41.7% versus 40.8% in
1995. The increase in effective tax rate was generally attributable to losses in
the pet portraiture pilot operation which did not generate state tax benefits.
Net income in 1996 was $3.0 million, or $0.38 per diluted share, including the
previously mentioned charge, which reduced per share earnings by $0.46, compared
to $7.6 million, or $0.96 per diluted share in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Merger, the Company's principal sources of working capital were
cash flow from operations and borrowing under its revolving line of credit.
Generally, due to the seasonality of the Company's operations, cash is consumed
during the first fiscal quarter and generated during the remaining fiscal
quarters. Cash flow from operating activities was $29.5 million during fiscal
1997, up $11.9 million from fiscal 1996, principally the result of net income
increasing $5.7 million and an increase of $6.0 million in depreciation and
amortization in the first year following the merger with ASI. Cash flow from
operating activities was $1.3 million for the quarter ended May 3, 1998. At
February 1, 1998, the Company had $12.3 million in cash and cash equivalents,
$4.3 million in letters of credit, and $20.7 million available under its
revolving credit facility. At May 3, 1998, the Company had $11.1 million in cash
and cash equivalents and no short-term borrowings. Effective May 21, 1998, the
Company reduced the maximum balance of its revolving line of credit to $15.0
million from $25.0 million.
EBITDA was $38.3 million in fiscal 1997, up from $14.8 million in fiscal
1996. Cash flow enabled the Company to reduce long-term borrowings and pay
dividends. EBITDA for the quarter ended May 3, 1998 was $7.0 million, before
deducting costs associated with the Merger, up from $6.8 million the quarter
ended May 4, 1997.
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<PAGE>
During fiscal 1997, the Company had property additions of $12.1 million,
principally for materials and equipment for the addition of new permanent
studios in Wal-Mart and Kmart, the upgrading of certain processing equipment in
the Company's two laboratory and processing facilities, and new computing
equipment in the corporate office. During the 1998 first quarter, the Company
had property additions of $1.8 million principally for materials and equipment
for the new permanent studios in the U.S. and Canada. For the fiscal year 1998,
the Company expects to spend approximately $11.0 million in capital
expenditures, including the opening of new permanent portrait studios, the
refurbishment of existing studios and the purchase of laboratory equipment.
At February 1, 1998 shareholders' equity was $44.7 million, an increase of
$11.0 million. For the 1997 fiscal year, net income added $8.7 million to
shareholders' equity, and dividends paid totaled $1.6 million. During fiscal
1997, exercised stock options contributed $4.2 million to shareholders' equity.
At May 3, 1998, shareholders' equity was $45.7 million. Net income for the 1998
first quarter added $0.8 million to shareholders' equity and dividends paid in
the quarter amounted to $0.6 million. Options exercised in the first quarter of
fiscal 1998 contributed $0.7 million to shareholders' equity.
The Merger will have a substantial impact on the Company's current capital
structure. The recapitalized Company will be significantly more highly leveraged
and, accordingly, the Merger will result in substantial changes to the Company's
debt-to-equity ratio and its related debt service requirements.
The Company will also incur various non-recurring cash costs currently
estimated to be $35.1 million (as well as a non-recurring non-cash charge
currently estimated to be $1.9 million) in connection with the proposed Merger,
and the exact timing, nature and amount of these costs are subject to change. It
is currently estimated that the Company will incur non-recurring charges of
approximately $26.2 million in the quarter in which the Merger is consummated.
These non-recurring charges consist of a cash payment upon cancellation of stock
options of approximately $19.6 million, a non-cash charge of $1.8 million for
rollover of options, certain change in control cash payments of approximately
$1.0 million, other cash fees of $1.9 million, and an estimated $1.9 million
non-cash write-off of unamortized financing expenses related to its existing
credit facilities. The $19.6 million stock option cancellation expense assumes
that approximately 1,381,600 options are canceled and approximately 122,900
options are rolled over by current option holders. The unaudited pro forma
consolidated balance sheet at May 3, 1998 reflects the above costs, net of a
$9.9 million tax benefit. Because these expenses are non-recurring, they have
been excluded from the unaudited pro forma consolidated statement of income for
the year-ended February 2, 1998. In addition, financing-related expenses of
approximately $7.8 million will be capitalized and amortized over the expected
life of the Company's indebtedness. It is estimated that the Company will incur
additional non-recurring costs of $4.4 million in the quarter in which the
Merger is consummated related to the formation of Mergerco and other corporate
matters. As a result of the foregoing, the Company will incur a net loss in the
quarter in which the Merger is recorded. Because this loss will result directly
from the non-recurring charges incurred in connection with the Merger, the
Company does not expect this loss to materially impact its ongoing operations or
liquidity. See "Pro Forma Condensed Consolidated Financial Information."
Following the Merger, the Company's principal sources of liquidity will be
cash flow from operations and borrowings under the Revolving Credit Facility.
The Company's principal uses of cash will be debt service requirements, capital
expenditures, research and development and working capital. In connection with
future acquisitions, the Company may require additional funding which may be
provided in the form of additional debt, equity financing or a combination
thereof. No future acquisitions are under discussion at this time.
Concurrently with the consummation of the Merger, the Company is expected to
borrow all $125.0 million under the term loan portion of the New Credit
Facilities ("Term Loan Facilities"). As of May 3, 1998, on a pro forma adjusted
basis giving effect to the Merger and the Merger Transactions, approximately
$20.7 million would have been available for additional borrowing under the Bank
Facility, the
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Company having drawn $4.3 million in letters of credit. In addition, the Company
expects to incur $100.0 million of debt, represented by the Senior Subordinated
Debt. Each financing is subject to customary conditions, including the
negotiation, execution and delivery of definitive documentation with respect to
such financing.
Borrowings under the New Credit Facility will bear interest at a rate per
annum equal to a margin over, at the Company's option, LIBOR or a Base Rate. The
Revolving Credit Facility will mature five years after the closing date. The
Term Loan Facilities will be amortized over five and seven years, respectively.
The New Credit Facility will be secured by substantially all of the assets of
the Company and its direct and indirect domestic subsidiaries, subject to
certain limitations with respect to foreign subsidiaries, and contains customary
covenants and events of default, including substantial restrictions on the
Company's ability to declare dividends or distributions. In addition, the New
Credit Facility will be guaranteed by such subsidiaries. The New Credit Facility
will be subject to mandatory prepayment with the proceeds of certain asset
sales, certain equity issuances and certain funded debt issuances for borrowed
money, and with a portion of the Company's Excess Cash Flow (as defined in the
New Credit Facility).
The proceeds of the Offering, the New Credit Facility and the equity
contribution by Jupiter and management will be used to finance the payment of
the cash portion of the Merger consideration, to refinance the outstanding
indebtedness of the Company, to pay fees and expenses incurred in connection
with the Merger and to provide for working capital and general corporate
purposes of the Company.
The Company's ability to make scheduled payments of principal of, or to pay
the interest or other costs and expenses, if any, on, or to refinance, its
indebtedness (including the Senior Subordinated Debt), or to fund planned
capital expenditures and research and development expense will depend on its
future performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
available borrowings under the New Credit Facility, will be adequate to meet the
Company's future liquidity needs for at least the next several years. The
Company may, however, need to refinance all or a portion of the principal of the
Senior Subordinated Debt on or prior to maturity. There can be no assurance that
the Company's business will generate sufficient cash flow from operations or
that future borrowings will be available under the New Credit Facility in an
amount sufficient to enable the Company to service its indebtedness, including
the Senior Subordinated Debt, or to fund its other liquidity needs. In addition,
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all. See "Risk
Factors--Leverage."
YEAR 2000 ISSUES
During 1997, the Company upgraded its mainframe computer hardware to a
version that is designed to be year 2000 compliant and vendor-supported into the
new millennium. The Company has initiated plans to correct programming code in
existing computer software applications as the year 2000 approaches. The Company
will utilize both internal and external resources to reprogram Company-developed
applications, install up-to-date releases of purchased systems, and test all
systems for year 2000 compliance. The Company continues to evaluate its various
systems to determine the most cost-effective corrective action which could
include replacement of certain systems. The Company currently believes that
reprogramming will be completed by the first quarter of 1999. The cost to
correct year 2000 program code is expected to be $0.8 to $1.2 million and will
be expensed over the next two years.
INFLATION
Over the past few years, inflation has not had a significant impact on the
Company's financial condition or results of operations.
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<PAGE>
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires the reporting of
comprehensive income in financial statements by all entities that provide a full
set of financial statements. The Statement is effective for fiscal years
beginning after December 15, 1997. Management of the Company does not expect
that the adoption of SFAS No. 130 will have a material impact on the Company's
financial position or results of operation.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 requires disclosures of and provides accounting guidance for reporting
information about operating segments in annual financial statements. The
Statement is effective for fiscal years beginning after December 15, 1997. The
Company has not yet determined how the Statement will affect its reporting of
financial information.
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DESCRIPTION OF COMPANY CAPITAL STOCK
GENERAL
The Company is authorized under its Restated Articles of Incorporation, as
amended, to issue an aggregate of 20,000,000 shares of common stock, par value
$.20 per share, 2,000,000 shares of preferred stock, par value $10.00 per share,
which may be issued in one or more series ("Undesignated Preferred Stock"), and
69,790 shares of preferred stock, par value $8.00 per share ("Senior Preferred
Stock"; Senior Preferred Stock and Undesignated Preferred Stock are referred to
collectively as the "Preferred Stock"). Currently, there are no shares of
Preferred Stock issued or outstanding. The following is a summary of certain of
the rights and privileges pertaining to the PCA Common Stock and Preferred
Stock. For a full description of the Company's capital stock, reference is made
to the Company's Restated Articles of Incorporation, as amended, currently in
effect, a copy of which is on file with the Commission. The Company's Restated
Articles of Incorporation will not be amended by virtue of the Merger.
COMMON STOCK
VOTING RIGHTS
The holders of the Company's Common Stock are entitled to one vote per share
on all matters submitted for action by the shareholders.
DIVIDEND RIGHTS
Holders of the Company's Common Stock are entitled to share equally, share
for share, if dividends are declared on Common Stock, whether payable in cash,
property or securities of the Company. Rights of the holders of Common Stock
with respect to the declaration and payment of dividends are subject to the
senior rights of the holders of Preferred Stock, if any.
LIQUIDATION AND OTHER RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made from the funds available
therefore to the holders of Preferred Stock, if any, for the full amount to
which they are entitled, the holders of the shares of Common Stock are entitled
to share equally, share for share, in the assets available for distribution.
Holders of Common Stock have no conversion, redemption or preemptive rights.
UNDESIGNATED PREFERRED STOCK
The Board has the authority to issue shares of the Company's Undesignated
Preferred Stock in one or more series, and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Undesignated Preferred Stock. The rights, preferences, privileges and
restrictions with respect to shares of all series of Undesignated Preferred
Stock must be identical other than with respect to the dividend rate, if any,
the price and conditions of redemption, the amount payable upon voluntary or
involuntary liquidation, sinking fund provisions for redemption or purchase of
shares, and the terms and conditions on which shares may be converted. The
rights, preferences, privileges and restrictions with respect to shares issued
in any one series of Undesignated Preferred Stock must be identical.
SENIOR PREFERRED STOCK
SENIOR CLASS OF STOCK
The Company's Senior Preferred Stock, if issued, will rank senior to the PCA
Common Stock and any series of Undesignated Preferred Stock with respect to the
right to receive dividends and upon distribution of assets upon any liquidation
of the Company.
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DIVIDENDS
Holders of Senior Preferred Stock will be entitled to receive cumulative
dividends, when and as declared by the Board, at the rate of 8% per annum, and
no more, payable quarterly on the first day of each of the months of January,
April, July and October. Dividends will accrue and accumulate from the date the
shares are issued. So long as any shares of Senior Preferred Stock are
outstanding, the Company may not declare or pay any dividends on, or otherwise
make any distribution in respect of, or redeem or repurchase any, shares of
Common Stock or Undesignated Preferred Stock unless all accrued dividends on
outstanding shares of Senior Preferred Stock have been paid or funds for the
payment thereof have been irrevocably set aside in trust.
LIQUIDATION PREFERENCE
The Senior Preferred Stock will have a liquidation preference of $8.00 per
share, plus accrued and unpaid dividends, if any.
VOTING RIGHTS
Holders of the Senior Preferred Stock will have the right to vote on all
matters presented for approval of the Company's shareholders and shall have one
vote per share. Holders of Senior Preferred Stock will vote as a group with
holders of Common Stock on all matters presented for shareholder approval,
except that holders of Senior Preferred Stock will vote as a separate group as
required by law or to approve any amendment to the Company's articles of
incorporation to amend, alter or repeal any provision that would adversely
affect any of the rights, preferences or privileges with respect to the Senior
Preferred Stock.
REDEMPTION
If issued, shares of Senior Preferred Stock may be redeemed by the Company
at any time upon written notice and payment of $8.00 per share and all accrued
and unpaid dividends through the date of redemption. If less than all
outstanding shares of Senior Preferred Stock are to be redeemed, the shares to
be redeemed will be selected in such manner as the Board may determine.
CONVERSION
If issued, each share of Senior Preferred Stock may be converted at the
option of the holder thereof at any time after the last day of the sixtieth
month following the date the share was issued into one share of Common Stock. If
a share of Senior Preferred Stock is called for redemption, however, such share
may not be converted into a share of Common Stock at any time after the date
fixed for redemption.
NO PREEMPTIVE RIGHTS
Holders of Senior Preferred Stock will have no preemptive rights.
CERTAIN PROVISIONS OF NORTH CAROLINA CORPORATION LAW
SHAREHOLDER PROTECTION ACT
The NCBCA contains a Shareholder Protection Act, which severely limits
mergers with, and asset sales or leases to, any person that beneficially owns
20% or more of a North Carolina public corporation's voting shares without the
affirmative vote of the holders of 95% of the corporation's voting shares
entitled to vote on the matter. The Board has exercised the Company's right
under the Shareholder Protection Act to opt out of the coverage of such Act by
adopting a bylaw provision stating that the Company will not be covered by such
Act.
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CONTROL SHARE ACQUISITION ACT
The NCBCA contains a Control Share Acquisition Act which provides that
"control shares" of a North Carolina public corporation acquired in a "control
share acquisition" have no voting rights except to the extent approved by a vote
of two-thirds of the votes entitled to be cast by shareholders in the election
of directors, excluding shares of stock as to which the acquiring person,
officers of the corporation and directors of the corporation who are employees
of the corporation are entitled to exercise or direct the exercise of the voting
power of the shares in the election of directors. "Control shares" are voting
shares of stock which, if aggregated with all other shares of stock beneficially
owned by such person, would entitle the acquiror to exercise voting power in
electing directors equal to or greater than the following levels of voting
power: (i) one-fifth, (ii) one-third, or (iii) a majority of all voting power. A
"control share acquisition" means the acquisition, directly or indirectly, of
control shares, subject to certain exceptions. The Board has exercised the
Company's right under the Control Share Acquisition Act to opt out of the
coverage of such Act by adopting a bylaw provision stating that the Company will
not be covered by such Act.
EXCHANGE AGENT AND REGISTRAR
The Company's exchange agent and registrar for the PCA Common Stock
following the Merger will be Wachovia Bank, N.A.
CAPITAL STOCK OF THE COMPANY FOLLOWING THE MERGER
COMMON STOCK AND PREFERRED STOCK
After the Merger, the Restated Articles of Incorporation of the Company, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation and the Surviving Corporation will
have the same authorized capital stock as the Company. The Company has
authorized 20,000,000 shares of Common Stock and 2,000,000 shares of preferred
stock, par value $10.00 per share (the "10.00 Preferred Stock"), and 69,790
shares of preferred stock, par value $8.00 per share (the "$8.00 Preferred
Stock").
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MANAGEMENT AND BOARD OF DIRECTORS
OF THE COMPANY
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
- -------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John Grosso....................................... 51 President, Chief Executive Officer, and Director
Eric H. Jeltrup................................... 53 Executive Vice President and Chief Technical Officer
J. Robert Wren Jr................................. 51 Executive Vice President and General Counsel
Bruce A. Fisher................................... 48 Senior Vice President and Chief Financial Officer and
Secretary
R. Michael Spencer................................ 50 Senior Vice President and Treasurer
</TABLE>
Mr. Grosso joined PCA in 1987 as President and Chief Executive Officer.
Prior to joining PCA, Mr. Grosso was President and Chief Executive Officer of
Nimslo International, Ltd., a company that provided professional portrait
services to Sears in the Northeast United States. Mr. Grosso was Vice President
of Worldwide Marketing for that company prior to becoming its President and CEO.
Prior to working for Nimslo Corporation, Mr. Grosso worked for 10 years at
Polaroid Corporation, and during his last 3 years at Polaroid was director of
marketing for North American amateur photographic products. He is a 1969
graduate of George Washington University.
Mr. Jeltrup is responsible for developing the Company's integrated digital
imaging technology. He has been with the Company in various positions ranging
from research and development to production and distribution since 1976. From
1972 to 1976, he managed several engineering projects for Sperry Microwave, a
division of Sperry Rand, relating to airborne doppler radar. From 1967 to 1972,
Mr. Jeltrup held various positions in radar and telephone systems engineering,
while at General Precision, a division of Singer Kearfott. He received a
Bachelor of Electrical Engineering from Rensselaer Polytechnic Institute in 1967
and a Masters of Electrical Engineering from the University of South Florida in
1975.
Mr. Wren joined PCA in January 1997, with PCA's acquisition of ASI, as
Executive Vice President and General Counsel. Prior to that, and since 1995, Mr.
Wren served as Chief Executive Officer of ASI. From 1993 to 1995, Mr. Wren
served as Director, Executive Vice President and General Counsel of ASI. From
1980 to 1992, Mr. Wren worked as a partner and associate at various law firms
focusing on corporate law, mergers and acquisitions, tax and real estate. From
1974 to 1979, Mr. Wren was an associate, partner and Director of Tax with
Cherry, Bekaert and Holland, a regional firm of certified public accountants.
Mr. Wren is a 1969 graduate of Wake Forest University. He received his J.D.,
with honors, in 1972 from George Washington University Law School, and a Masters
in Business Administration in 1973 from the University of Pennsylvania, Wharton
Graduate School of Business.
Mr. Fisher has been with the Company in various positions in accounting and
finance since 1977. He was promoted to Chief Financial Officer and Secretary in
1994. From 1973 to 1977, Mr. Fisher worked as a financial analyst with Korf
Industries and Midrex Corporation. In 1973, he graduated from the University of
Toledo with a degree in finance.
Mr. Spencer has been with PCA in various positions in accounting and finance
since 1973. He was promoted to Senior Vice President and Treasurer in 1994. Mr.
Spencer worked with Haskins & Sells (currently Deloitte & Touche) in Greensboro,
NC, from 1970-1973 as a senior assistant accountant. He received his Accounting
degree from Wake Forest University in 1970 and his CPA license in 1972 from the
State of North Carolina.
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BOARD OF DIRECTORS
The following table sets forth certain information relating to each director
of the Company as of March 4, 1998. All directors, except Ms. Heller, have been
heretofore elected by the shareholders. Ms. Heller was appointed a director on
March 4, 1998.
<TABLE>
<CAPTION>
NAME, PRINCIPAL
OCCUPATION, BUSINESS EXPERIENCE
DURING LAST FIVE YEARS, POSITIONS AND OFFICES DIRECTOR
OTHER DIRECTORSHIPS AGE WITH THE COMPANY SINCE
- ------------------------------------------------------------------ --- ----------------------------- -----------
<S> <C> <C> <C>
JOSEPH H. REICH................................................... 63 Chairman of the Board 1987
Managing Partner of Centennial Associates, L.P. since
April 1989.
JOHN GROSSO....................................................... 51 President, Chief Executive 1987
President and Chief Executive Officer of the Company since 1987. Officer, and Director
PETER B. FOREMAN.................................................. 62 Director 1994
President of Sirius Corporation since 1994; Founding Partner of
Harris Associates, L.P. from 1976-1993. Director of Eagle Food
Centers, Inc. and Glacier Water Services, Inc. Director of
National Picture & Frame Company from 1994 to 1997.
GEORGE FRIEDMAN................................................... 63 Director 1994
Private investor. Chairman and CEO of Parallel Communications,
Inc. from 1994 to 1997, was engaged in private business in 1993
and was Chairman and CEO of Gryphon Developments Ltd. from 1986 to
1992.
DONALD P. GREENBERG, PH.D......................................... 64 Director 1996
Faculty of Cornell University since 1968. Director, Program of
Computer Graphics, Cornell University, since 1973. Founding
Director, National Science and Technology Center for Computer
Graphics and Scientific Visualization. Director of Data
Broadcasting Corporation since 1995 and Chyron Corporation since
1996.
BRIDGETTE P. HELLER............................................... 36 Director 1998
General Manager GEVALIA Kaffe, a division of Kraft Foods, since
1996. Various positions with Kraft Foods since 1985.
CHARLOTTE H. MASON, PH.D.......................................... 42 Director 1995
Associate Professor, The Kenan-Flagler Business School, The
University of North Carolina, since 1985.
ALBERT F. SLOAN................................................... 68 Director 1981
Director of Bassett Furniture Industries, Inc. and RichFood
Holdings, Inc. for more than five years, and Cato Corporation
since 1994.
STANLEY TULCHIN................................................... 71 Director 1987
Director and Chairman of the Board of Reprise Capital Corporation
and Stanley Tulchin Associates, Director of the Topps Company,
Inc. and Chairman of the Board of STA Credit Corporation for at
least five years.
</TABLE>
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EXECUTIVE COMPENSATION
The following sets forth certain compensation information with regard to the
Company's chief executive officer and each of the next four most highly
compensated executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
AWARDS
ANNUAL COMPENSATION -------------------
----------------------------------- SECURITIES
FISCAL SALARY BONUS UNDERLYING ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#) ($)(1)
- ----------------------------------- ----------- ---------- ---------- ------------------- -----------------------
<S> <C> <C> <C> <C> <C>
John Grosso........................ 1997 $ 254,100 $ 38,115 0 $ 6,560
President 1996 248,325 120,000 50,000 2,193
Chief Executive Officer 1995 228,881 68,664 0 7,566
J. Robert Wren, Jr................. 1997 250,000 31,250 0 6,560(2)
Executive Vice President 1996 0 0(3) 0(3) 0
General Counsel 1995 0 0 0 0
Eric H. Jeltrup.................... 1997 210,271 26,284 0 6,560
Executive Vice President 1996 194,987 41,248 0 2,193
Chief Technical Officer 1995 186,500 55,950 25,000 7,566
Bruce A. Fisher.................... 1997 155,250 15,525 0 6,413
Senior Vice President 1996 153,938 43,090 0 2,193
Chief Financial Officer 1995 148,750 44,625 0 7,532
R. Michael Spencer................. 1997 144,900 14,490 0 5,985
Senior Vice President 1996 143,675 31,551 0 2,110
Treasurer 1995 138,638 27,728 0 7,021
</TABLE>
- ------------------------
(1) Company's portion of Profit Sharing Plan contribution.
(2) The Company paid Mr. Wren $539,000 to terminate an employment and noncompete
agreement between Mr. Wren and ASI and $168,750 to purchase Mr. Wren's ASI
stock options.
(3) $75,000 was paid to Mr. Wren for services rendered to ASI and he received a
grant of 150,000 PCA options with an exercise price of $17.125 in connection
with the termination of his services to ASI.
OPTION GRANT TABLE
OPTIONS GRANTED IN THE LAST FISCAL YEAR AND POTENTIAL REALIZABLE VALUES
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION FOR
SECURITIES TOTAL OPTIONS EXERCISE OR OPTION TERM(2)
UNDERLYING OPTIONS GRANTED IN BASE SHARE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL YEAR(1) PRICE ($/SHARE) DATE 5%($) 10%($)
- ----------------------------- ------------------- --------------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John Grosso.................. 50,000 72.5% $ 16.25 3/5/02 $ 203,125 $ 406,250
J. Robert Wren, Jr........... 0 -- -- -- -- --
Eric H. Jeltrup.............. 0 -- -- -- -- --
Bruce A. Fisher.............. 0 -- -- -- -- --
R. Michael Spencer........... 0 -- -- -- -- --
</TABLE>
- ------------------------
(1) The options vested April 9, 1998.
(2) These values are hypothetical; there is no assurance that the stock will
achieve these rates of appreciation.
82
<PAGE>
The following table sets forth certain information with respect to options
exercised in the most recent fiscal year by the officers named in the Summary
Compensation Table and remaining options held at the end of the most recent
fiscal year.
OPTIONS EXERCISED AND YEAR-END VALUE TABLE
AGGREGATED OPTIONS EXERCISED IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-
OPTIONS HELD AT MONEY OPTIONS HELD
SHARES ACQUIRED VALUE FISCAL YEAR END - AT FISCAL YEAR END
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE (#) UNEXERCISABLE($)(1)
- -------------------------------------- --------------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C>
John Grosso........................... 0 0 144,500/65,000 1,851,625/488,750
J. Robert Wren, Jr.................... 0 0 50,000/100,000 256,500/513,000
Eric H. Jeltrup....................... 0 0 80,000/25,000 1,349,500/294,250
Bruce A. Fisher....................... 10,000 88,750 23,000/7,000 262,250/87,750
R. Michael Spencer.................... 15,000 310,925 27,000/3,000 263,250/36,750
</TABLE>
- ------------------------
(1) Based on closing price of $22.25 per Share on Feburary 1, 1998.
83
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the beneficial ownership as of March 31, 1998, of
each person known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of the Company's PCA Common Stock:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------------------------------------------------------------------- ---------------------- -----------
<S> <C> <C>
Centennial Associates, L.P................................................ 2,018,957(1) 25.4%
c/o Mr. Joseph H. Reich
900 Third Avenue
New York, New York 10022
Mr. Joseph H. Reich....................................................... 508,150(1) %(2)
900 Third Avenue 2,018,957(2) 31.8
New York, New York 10022 2,527,107(1)
Furman Selz, LLC.......................................................... 552,400 7.0%
c/o Ms. Valerie King
230 Park Avenue
New York, New York 10169
Reprise Capital Corporation............................................... 490,494(3) 6.2%
c/o Mr. Stanley Tulchin
400 Post Avenue
Westbury, New York 11590
Reich & Tang Asset Management............................................. 484,500 6.1%
600 Fifth Avenue
New York, New York 10020
Putnam Investments, Inc................................................... 427,200(4) 5.4%
One Post Office Square
Boston, Massachusetts 02109
</TABLE>
- ------------------------
(1) See Note (4) to the table under "Stock Ownership of Directors and Executive
Officers" below.
(2) Includes shares listed as owned by Centennial Associates, L.P. listed above.
Joseph H. Reich is deemed the beneficial owner of shares held by Centennial
Associates, L.P. due to his position as Managing Partner of that entity.
(3) Includes certain shares as to which Mr. Tulchin disclaims beneficial
ownership. See Notes (2) and (6) to the table under "Stock Ownership of
Directors and Executive Officers" below.
(4) Certain Putnam investment managers (together with their parent corporations,
Putnam Investments, Inc. and Marsh & McLennan Companies, Inc.) are
considered "beneficial owners" in the aggregate of 427,200 shares, or 5.4%
of shares outstanding, of the PCA Common Stock, which shares were acquired
for investment purposes by such investment managers for certain of their
advisory clients.
84
<PAGE>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the beneficial stock ownership as of March 31,
1998, of each of the current directors and executive officers of the Company and
of all directors and executive officers as a group of the outstanding shares of
the Company's Common Stock, which is the only class of voting securities
outstanding. Each of the individuals listed below possesses sole voting and
investment power with respect to the shares listed opposite his or her name,
unless noted otherwise:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Peter B. Foreman................................................. 283,908(2)(3) 3.6%
George Friedman.................................................. 28,100(2) *
Donald P. Greenberg.............................................. 13,200(2) *
John Grosso...................................................... 258,400(2) 3.2%
Bridgette P. Heller.............................................. 0 --
Charlotte H. Mason............................................... 6,300(2) *
Joseph H. Reich.................................................. 2,527,107(4) 31.8%
Albert F. Sloan.................................................. 17,950(2)(5) *
Stanley Tulchin.................................................. 490,494(2)(6) 6.2%
Eric H. Jeltrup.................................................. 109,300(2) 1.4%
J. Robert Wren, Jr............................................... 52,500(2) *
Bruce A. Fisher.................................................. 48,835(2) *
R. Michael Spencer............................................... 30,454(2) *
All Executive Officers and Directors as a group (13
persons)(7).................................................... 3,866,548(2) 46.0%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of PCA Common Stock.
(1) Pursuant to Rule 13d-3 promulgated under the Exchange Act, beneficial
ownership of a security consists of sole or shared voting power (including
power to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose or direct the disposition) with respect to
the security through any contract, arrangement, understanding, relationship
or otherwise.
(2) The numbers and percentages of shares shown in the table above include stock
options covering PCA Common Stock exercisable within 60 days of March 31,
1998 as follows: Mr. Fisher--23,000; Mr. Foreman--20,600; Mr.
Friedman--19,200; Mr. Greenberg--12,900; Mr. Grosso--194,500; Mr.
Jeltrup--80,000; Ms. Mason--6,000; Mr. Sloan--16,100; Mr. Spencer--27,000;
Mr. Tulchin-- 9,100; and Mr. Wren--50,000; and all executive officers and
directors as a group (including such individuals)--458,400. Such persons and
members of such group disclaim any beneficial ownership of the shares
subject to such Options.
(3) Mr. Foreman is a limited partner in Centennial Associates, L.P. owning less
than a 5% interest therein. The Shares shown exclude any indirect ownership
of the Company's shares which might be attributable to him by reason of his
limited partnership interest. The Shares shown are held by Descendants Trust
F/B/O Peter B. Foreman under Jane Revocable Trust DTD 1/30/84.
(4) Joseph H. Reich and Centennial Associates, L.P. have jointly reported
beneficial ownership of 312,050 and 2,018,957 Shares, respectively, and that
each of such persons had sole dispositive power or sole investment power
with respect to the Shares held individually by each of them. In addition,
the Pumpkin Foundation, a 501(c)(3) charitable organization has reported
beneficial ownership of 196,100 shares and that Joseph H. and Carol F.
Reich, of the Pumpkin Foundation as trustees, had shared dispositive power
or shared investment power with respect to such Shares. Such persons have
stated that the fact that their beneficial ownership was reported jointly
did not constitute an admission that each of them should be deemed to be
part of a group.
85
<PAGE>
(5) Includes 450 Shares beneficially owned by Mr. Sloan's wife as to which he
disclaims beneficial ownership.
(6) Includes (i) 77,591 Shares beneficially owned by Mr. Tulchin, (ii) 330,803
Shares beneficially owned by Reprise Capital Corporation of which Stanley
Tulchin is Chairman of the Board and he and his brother, Norman Tulchin, are
each 35% equity owners, (iii) 15,000 Shares owned by a trust for Jill
Tulchin of which Mr. Tulchin is a trustee and disclaims any beneficial
ownership and (iv) 58,000 Shares owned by a charitable trust of which Mr.
Tulchin is a trustee and disclaims any beneficial ownership. Stanley Tulchin
disclaims beneficial ownership of the Shares owned by Reprise Capital
Corporation.
(7) All Options held by such directors and executive officers vest upon the
occurrence of a change of control such as the Merger. On the Effective Date
of the Merger, the following Options will be vested: Peter B.
Foreman--25,400; George Friedman--24,000; Donald P. Greenberg--12,900; John
Grosso-- 209,500; Bridgette P. Heller--10,000; Charlotte H. Mason--10,000;
Albert F. Sloan--20,900; Stanley Tulchin--13,100; Eric H. Jeltrup--105,000;
J. Robert Wren, Jr.--150,000; Bruce A. Fisher--30,000; R. Michael
Spencer--30,000.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Mr. Grosso entered into an employment agreement with the Company in June
1997. The employment agreement provides for a base salary of $254,100 initially,
an increase to $304,000 as of June 9, 1998 and periodic reviews by, and
adjustments in the discretion of, the Board. The employment agreement also
allows Mr. Grosso to participate in any management bonus program and earn up to
60% of his base salary for the year. The employment agreement is terminable with
or without cause by the Company and at will by Mr. Grosso following a change in
control (as defined therein). Severance benefits payable to Mr. Grosso in the
event the Company terminates his employment without cause or in the event of his
death or disability consist of a cash payment of 48 months of average monthly
compensation received during the preceding five-year period and the vesting of
all options previously granted to Mr. Grosso. The amount Mr. Grosso is to
receive in the event he terminates his employment following a change of control
of the Company consists of a cash payment equal to 35.99 months of his average
monthly compensation received during the preceding five-year period and the
vesting of all options received to Mr. Grosso. Mr. Grosso has agreed not to
compete with the Company for a period of two years after termination of his
employment for any reason. Mr. Grosso has indicated that he will terminate his
employment agreement at the Effective Time and the Company will pay him the
amount due pursuant to the terms of the agreement. Mr. Grosso will enter into a
new employment agreement with the Company at the Effective Time substantially
identical to his current employment agreement except that it will not include a
"change in control" provision and will provide for an increase in annual salary
from $304,000 to $350,000 as well as participation in the New Options Plans for
3.0% of the outstanding shares. See "THE MERGER-- Interests of Certain Persons
in the Merger."
Mr. Jeltrup entered into an employment agreement with the Company in June
1997. The employment agreement provides for a base salary of $220,000 initially
and periodic reviews by, and adjustments in the discretion of, the Board. The
employment agreement also allows Mr. Jeltrup to participate in any management
bonus program and earn up to 50% of his base salary for the year. The employment
agreement is terminable with or without cause by the Company. Severance benefits
payable to Mr. Jeltrup in the event the Company terminates his employment
without cause or in the event of his death or disability consist of a cash
payment of 36 months of average monthly compensation received during the
preceding five-year period and the vesting of all options previously granted to
Mr. Jeltrup. Mr. Jeltrup has agreed not to compete with the Company for a period
of two years after termination of his employment for any reason. Mr. Jeltrup
will enter into an amendment to this employment agreement with the Company at
the Effective Time providing for a base annual salary increase from $220,000 to
$250,000 and participation in the New Options Plans for 1.0% of the outstanding
shares. See "THE MERGER--Interests of Certain Persons in the Merger."
86
<PAGE>
Mr. Fisher entered into an employment agreement with the Company in June
1997. The employment agreement provides for a base salary of $155,250 initially
and periodic reviews by, and adjustments in the discretion of, the Board. The
employment agreement also allows Mr. Fisher to participate in any management
bonus program and earn up to 40% of his base salary for the year. The employment
agreement is terminable with or without cause by the Company. Severance benefits
payable to Mr. Fisher in the event the Company terminates his employment without
cause or in the event of his death or disability consist of a cash payment of 36
months of average monthly compensation received during the preceding five-year
period and the vesting of all options previously granted to Mr. Fisher. Mr.
Fisher has agreed not to compete with the Company for a period of two years
after termination of his employment for any reason. Mr. Fisher will enter into
an amendment to this employment agreement with the Company at the Effective Time
providing for a base annual salary increase from $155,250 to $200,000 and a
participation in the New Options Plans for 0.6% of the outstanding shares. See
"THE MERGER--Interests of Certain Persons in the Merger."
Mr. Wren entered into an employment agreement with the Company as of January
28, 1997 for a non-renewable term of three years. The employment agreement
provides for a base salary of $250,000. The employment agreement is terminable
with or without cause by the Company. Severance payable to Mr. Wren in the event
the Company terminates his employment without cause (i) equals the base salary
for the balance of the term during the first twelve months of the term, (ii)
equals 200% of the base salary after the first twelve months of the term and
(iii) equals the base salary at the end of the term. Mr. Wren may terminate his
employment with the Company after the first twelve month of the term. Severance
payable to Mr. Wren in the event he terminates his employment (i) during the
second twelve months of the term equals 200% of the base salary, (ii) during the
third twelve months equals 100% of the base salary and (iii) at any time after
the three-year period equals the base salary in twelve monthly installments. Mr.
Wren has agreed not to compete with the Company for a period of two years after
termination of his employment.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual retainer of $12,000, whereas the
Chairman of the Board receives an annual retainer of $52,000. Directors serving
on a committee receive an additional $1,000, whereas committee chairs receive an
additional $1,500 for such service. Directors may chose to receive PCA Options
in lieu of the foregoing cash compensation, valued at the current PCA Common
Stock market price. All reasonable expenses incurred by the Directors in
connection with their service on the Board are reimbursed.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who own more than 10% of the Company's Common Stock to
file reports of ownership and changes in ownership with the Commission. Based on
Company records and other information, the Company believes that all such SEC
filing requirements with respect to the fiscal year ended February 1, 1998 were
met.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The spouse of Mr. Wren (an officer of PCA) is a partner in the law firm of
Kilpatrick Stockton LLP of Charlotte, North Carolina. The Company has engaged
Kilpatrick Stockton LLP on various legal matters during the year.
The Company has awarded a grant to the Cornell University Program of
Computer Graphics to support digital photographic research principally related
to the retail portrait studio business. Mr. Greenberg (a Director of PCA) is the
director of the Computer Graphics Department at Cornell University.
87
<PAGE>
MANAGEMENT FOLLOWING THE MERGER
BOARD OF DIRECTORS
The following table sets forth the name, age and position with the Company
of each person who is expected to serve as a director of the Company following
the Effective Time.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------- ----- -----------
<S> <C> <C>
Thomas A. Berglund......................................................... 38 Director
Terry J. Blumer............................................................ 39 Director
Donald P. Greenberg, Ph.D.................................................. 64 Director
John Grosso................................................................ 51 Director
Bridgette P. Heller........................................................ 36 Director
John F. Klein.............................................................. 35 Director
Joseph H. Reich............................................................ 63 Director
Eric F. Scheuermann........................................................ 32 Director
John A. Sprague............................................................ 46 Director
</TABLE>
THOMAS A. BERGLUND is a Principal of Jupiter and has been associated with
the firm since 1994. Prior to that time he served for three years with the Invus
Group, a privately funded buy-out group specializing in food-related companies.
TERRY J. BLUMER co-founded Jupiter Partners L.P. in 1994. Prior to that
time he was associated with Goldman, Sachs & Co. for over eight years, most
recently as an Executive Director.
DONALD P. GREENBERG, PH.D. has been a member of the faculty of Cornell
University since 1968 and Director, Program of Computer Graphics, Cornell
University, since 1973. He is the Founding Director of the National Science and
Technology Center for Computer Graphics and Scientific Visualization. He has
served as a director of Data Broadcasting Corporation since 1995 and Chyron
Corporation since 1996. He has been a director of the Company since 1996.
JOHN GROSSO has been President, Chief Executive Officer and a director of
the Company since 1987.
BRIDGETTE P. HELLER has been General Manager GEVALIA Kaffe, a division of
Kraft Foods, since 1996. She has held various positions with Kraft Foods since
1985. She has been a director of the Company since March 4, 1998.
JOHN F. KLEIN is a Principal of Jupiter and has been associated with the
firm since 1995. Prior to that time he served for three years as a consultant
with Bain & Company, a management consulting firm.
JOSEPH H. REICH has been the Managing Partner of Centennial Associates,
L.P. an investment firm, since April 1989. He has been a director of the Company
since 1987.
ERIC F. SCHEUERMANN is an Associate of Jupiter and joined the firm in
March, 1998. Prior to joining Jupiter, he served for three years with McKinsey &
Company, a management consulting firm, and as an associate with Latham &
Watkins, a law firm.
JOHN A. SPRAGUE co-founded Jupiter Partners L.P. in 1994. Prior to that
time he was associated with Forstmann Little & Co. for eleven years, most
recently as a partner. He is a director of Heartland Wireless Communications,
Inc. and Harmon Industries, Inc.
Messrs. Reich and Greenberg and Ms. Heller have been asked to remain on the
Board following the Merger by Jupiter. However, there is no agreement as to how
long such persons will remain on the Board and such Directors may be removed at
any time by Jupiter, with or without cause.
88
<PAGE>
OFFICERS
Pursuant to the Merger Agreement, the officers of the Company at the
Effective Time will be the officers of the Surviving Corporation.
REGULATORY CONSIDERATIONS
ANTITRUST
The Merger does not require any filings to be made under the Hart Scott
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). However,
at any time before or after the consummation of the Merger, the Antitrust
Division of the Department of Justice (the "Antitrust Division") or the Federal
Trade Commission (the "FTC") could take such action under the antitrust laws as
either deems necessary or desirable in the public interest, including seeking to
enjoin the Merger or seeking divestiture of the Company by Jupiter following
consummation of the Merger. Private parties (including individual states) may
also bring legal actions under the antitrust laws. Neither Jupiter nor the
Company believes that the consummation of the Merger will result in a violation
of any applicable antitrust laws. However, there can be no assurance that a
challenge to the Merger on antitrust grounds will not be made, or if such a
challenge is made, what the result will be.
In addition, the Company and Jupiter may be required to make other filings
with certain regulatory authorities, including a filing under Section 114 of the
Canadian Competition Act. Section 114 of the Canadian Competition Act requires
that advance notification of certain substantial mergers be made to the Director
of Investigation and Research. While a notification prior to the consummation of
the Merger may be required, the parties are not required under applicable law to
obtain the consent of the Director of Investigation and Research prior to the
consummation of the transaction.
MERGERCO AND JUPITER
Mergerco was organized in connection with the Merger and has not to date
carried on (and will not carry on) any activities other than those incident to
its formation and the transactions contemplated by the Merger Agreement. All of
the outstanding capital stock of Mergerco is owned by Jupiter.
EQUITY SPONSOR
Following the Merger, PCA will be controlled by Jupiter Partners II, L.P.
Jupiter is a private investment firm organized to invest in management buyouts,
industry consolidations and growth capital opportunities. Jupiter's principals,
John A. Sprague and Terry J. Blumer, are assisted by an experienced staff of
investment professionals.
Jupiter's predecessor fund ("Fund I") was formed in 1994 with over $350
million of capital available for investment. Fund I is approximately 85%
invested in seven portfolio companies. Companies which Jupiter seeks to purchase
typically have valuations between $100 million and $500 million, with Jupiter
providing equity from its own capital of between $30 million and $100 million
for each investment. Proceeds from the recently completed first closing of
Jupiter Partners II L.P., will be used to fund the Merger.
The principal executive officers of Partners, Jupiter and Mergerco are
located at 30 Rockefeller Plaza, Suite 4525, New York, New York 10112; telephone
number (212) 332-2800.
Jupiter, the parent of Mergerco, is expected to receive a transaction fee of
approximately $2.76 million from the Company upon consummation of the Merger.
The fee is calculated as one percent of the transaction size and is Jupiter's
principal form of compensation for arranging the Merger Financing.
After the Merger, Jupiter does not expect to change the general nature and
scope of the business of the Company.
89
<PAGE>
DISSENTING SHAREHOLDERS' RIGHTS
Under North Carolina law, holders of Common Stock who do not vote in favor
of the Merger and who comply with certain notice requirements and other
procedures will have the right to dissent and to be paid cash for the "fair
value" of their shares. The "fair value" of the Common Stock as finally
determined under such procedures may be more or less than the $26.50 per share
Cash Merger Consideration which will be paid in respect of shares held by
non-dissenting shareholders who receive cash in the Merger. Failure to follow
such procedures precisely may result in loss of Dissenters' Rights. The
following discussion is not a complete statement of the law pertaining to
Dissenters' Rights under Article 13 and is qualified in its entirety by the full
text of Article 13 which is reprinted in its entirety as Appendix C to this
Proxy Statement/Prospectus.
A record shareholder may assert Dissenters' Rights as to fewer than all the
shares of Common Stock registered in his name only if he dissents with respect
to all shares beneficially owned by any one person and notifies the Company in
writing of the name and address of each person on whose behalf he asserts
Dissenters' Rights. The rights of a partial dissenter will be determined as if
the shares as to which he dissents and his other shares were registered in the
names of different shareholders. A beneficial owner may assert Dissenters'
Rights as to shares of Common Stock held on his behalf only if he: (a) submits
to the Company the record shareholder's written consent to the dissent not later
than the time the beneficial shareholder asserts Dissenters' Rights and (b)
asserts Dissenters' Rights with respect to all shares of which he is the
beneficial owner.
A holder of shares of Common Stock wishing to exercise Dissenters' Rights
must: (a) give to the Company, and the Company must actually receive before the
vote on the Merger is taken, written notice of the holder's intent to demand
payment for his shares if the Merger is consummated and (b) must not vote his
shares in favor of the Merger. Such notice may be sent to the Company at the
following address: 815 Matthews-Mint Hill Road, Matthews, North Carolina 28105,
Attention: Bruce A. Fisher, Secretary.
If the Merger Agreement is approved by holders of the requisite number of
outstanding shares of Common Stock, the Company will, no later than 10 days
following the consummation of the Merger, mail a written dissenters' notice to
all of its shareholders who gave the aforementioned notice of intent to demand
payment. Such dissenters' notice will: (a) state where the payment demand must
be sent and where and when certificates for shares must be deposited; (b) supply
a form for demanding payment; (c) set a date by which the Company must receive
the payment demand, which date may not be fewer than 30 nor more than 60 days
after the date on which the dissenters' notice is sent; and (d) be accompanied
by a copy of Article 13.
To exercise his Dissenters' Rights, a shareholder sent a dissenters' notice
must demand payment and deposit his share certificates in accordance with the
terms of the notice. A shareholder failing to do so will not be entitled to
payment for his shares under Article 13. A shareholder who demands payment and
deposits his share certificates in accordance with the terms of the notice will
retain all other rights of a shareholder until consummation of the Merger.
As soon as the Merger is completed, or within 30 days after the Company's
receipt of a payment demand by a shareholder made in compliance with the
above-described procedures, the Company will pay such shareholder the amount the
Company estimates to be the value of his shares, plus interest accrued to the
date of payment. Such payment will be accompanied by: (a) the Company's balance
sheet as of the fiscal year ended February 1, 1998, an income statement and a
statement of cash flows for that year and the latest available interim financial
statements; (b) an explanation of how the Company estimated the fair value of
the shares; (c) an explanation of how the interest was calculated; (d) a
statement of the dissenter's right to notify the Company of his own estimate of
the value of his shares and the amount of interest due if (i) he believes the
amount paid by the Company is less than the fair value of his shares or that the
interest due was incorrectly calculated, (ii) the Company fails to make a
payment within the time period described in the first sentence of this
paragraph, or (iii) the Company, having failed to consummate the Merger, fails
90
<PAGE>
to return deposited share certificates within 60 days after the date set for
demanding payment; and (e) a copy of Article 13.
If: (a) a dissenter believes that the amount paid by the Company is less
than the fair value of his shares, or that the interest due is incorrectly
calculated; (b) the Company fails to make payment within the time period set
forth in the first sentence of the immediately preceding paragraph; or (c) the
Company, having failed to consummate the Merger, fails to return deposited stock
certificates to a dissenter within 60 days after the date set for demanding
payment, the dissenter may notify the Company in writing of his own estimate of
the fair value of his shares and amount of interest due and demand payment of
the amount in excess of the Company's payment to him. Such notice and demand may
be sent to the Company at the address set forth in the second immediately
preceding paragraph. A dissenter will waive his right to demand payment as
described in this paragraph, and will be deemed to have withdrawn his dissent
and demand for payment, unless he notifies the Company of his demand in writing
within 30 days after the Company (x) made payment for his shares or (y) fails to
take the actions described in clauses (b) and (c) of this paragraph, as the case
may be.
If a demand for payment as described above remains unsettled, a shareholder
may commence a proceeding within 60 days after the earlier of (i)the date of the
Company's payment to him as described in the second immediately preceding
paragraph, or (ii) the date of his payment demand as described in the
immediately preceding paragraph and file a complaint with the Superior Court
Division of the North Carolina Court of Justice to determine the fair value of
the shares and accrued interest. A dissenter who does not commence a proceeding
within this 60-day period will be deemed to have withdrawn his dissent and
demand for payment. The court may, in its discretion, make all dissenters whose
demands remain unsettled parties to the proceeding as in an action against their
shares and all parties must be served with a copy of the complaint. The
jurisdiction of the Superior Court is plenary and exclusive. The court may
appoint one or more appraisers to receive evidence and recommend a decision on
the question of fair value. Parties to the proceeding are entitled to the same
discovery rights as parties in other civil proceedings. The proceeding will be
tried as in other civil actions; however, since the Company is a "public
corporation," no party to any proceeding described herein will have the right to
trial by jury.
Each dissenter made a party to the proceeding by the court will be entitled
to judgment for the amount, if any, by which the court finds that the fair value
of his shares, plus interest, exceeds the amount paid by the Company. The court
may assess the costs of a proceeding described above, including the compensation
and expenses of appointed appraisers, as it finds equitable. With respect to the
fees and expenses of counsel and experts for the parties to the proceeding, the
court may assess such costs as it finds equitable (a) against the Company, and
in favor of any or all dissenters, if it finds that the Company did not
substantially comply with the above-described procedures or (b) against either
the Company or a dissenter or in favor of either or any other party, if it finds
that the party against whom such costs are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to the Dissenters' Rights
provided under Article 13. In addition, if the court finds that the services of
counsel to any dissenter were of substantial benefit to other dissenters and
that the costs of such services should not be assessed against the Company, the
court may award to such counsel reasonable fees to paid out of the amounts owed
to the dissenters who were benefited.
The provisions of Article 13 are technical in nature and complex.
Shareholders desiring to exercise Dissenters' Rights and to obtain a
determination of the fair value of their shares should consult counsel, since
the failure to comply strictly with the provisions of Article 13 may result in a
waiver or forfeiture of Dissenters' Rights.
91
<PAGE>
EXPERTS
The consolidated financial statements and schedule of PCA International,
Inc. and subsidiaries as of February 1, 1998 and February 2, 1997, and for each
of the years in the three-year period ended February 1, 1998, have been included
herein and in the Registration Statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. Representatives of KPMG Peat Marwick LLP are expected to attend the
Special Meeting with the opportunity to make a statement and/or respond to
questions from shareholders present at the meeting.
LEGAL MATTERS
The validity of the PCA Common Stock to be retained in connection with the
Merger will be passed upon for the Company by Schulte Roth & Zabel LLP, New
York, New York. Schulte Roth & Zabel LLP has delivered an opinion as to material
Federal income tax matters relating to the Merger.
92
<PAGE>
DRAFT 7/15/98
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets at February 1, 1998 and February 2, 1997................................ F-3--F-4
Consolidated Statements of Income for Fiscal Years Ended February 1, 1998; February 2, 1997; and
January 28, 1996.................................................................................. F-5
Consolidated Statements of Changes in Shareholders' Equity for Fiscal Years Ended February 1, 1998;
February 2, 1997; and January 28, 1996............................................................ F-6
Consolidated Statements of Cash Flows for Fiscal Years Ended February 1, 1998;
February 2, 1997; and January 28, 1996............................................................ F-7
Notes to Consolidated Financial Statements.......................................................... F-8--F-20
Consolidated Balance Sheets--Unaudited May 3, 1998 and Audited February 1, 1998..................... F-21
Unaudited Consolidated Statements of Income for the Three Months Ended May 3, 1998 and May 4,
1997.............................................................................................. F-22
Unaudited Consolidated Statements of Changes in Shareholders' Equity for the
Three Months Ended May 3, 1998.................................................................... F-23
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
May 3, 1998 and May 4, 1997....................................................................... F-24
Condensed Notes to Consolidated Financial Statements................................................ F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
PCA International, Inc.:
We have audited the consolidated financial statements of PCA International,
Inc. and subsidiaries as of February 1, 1998 and February 2, 1997 and for each
of the years in the three-year period ended February 1, 1998, as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PCA
International, Inc. and subsidiaries as of February 1, 1998 and February 2,
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended February 1, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
March 13, 1998
F-2
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 12,289,761 $ 1,536,234
Accounts receivable (net of allowance for doubtful
accounts of $1,315,666 and $867,961):
Due from licensor stores and customers....................................... 6,740,560 6,702,335
Other, including employee advances........................................... 763,925 602,349
Inventories.................................................................... 10,078,719 9,814,682
Deferred income taxes.......................................................... 5,827,324 6,853,985
Prepaid expenses............................................................... 1,043,708 1,490,918
-------------- --------------
TOTAL CURRENT ASSETS......................................................... 36,743,997 27,000,503
PROPERTY:
Land and improvements.......................................................... 2,305,293 2,443,939
Building and improvements...................................................... 12,148,732 12,883,962
Photographic and sales equipment............................................... 57,713,911 61,902,588
Photographic finishing equipment............................................... 15,599,525 18,660,080
Furniture and equipment........................................................ 13,872,058 14,188,792
Transportation equipment....................................................... 292,593 477,073
Leasehold improvements......................................................... 16,050,719 17,935,712
Construction in progress....................................................... 1,429,621 1,120,788
-------------- --------------
Total........................................................................ 119,412,452 129,612,934
Less: Accumulated depreciation and amortization................................ 64,488,965 71,348,374
-------------- --------------
PROPERTY, NET.................................................................. 54,923,487 58,264,560
INTANGIBLE ASSETS................................................................ 59,733,731 60,256,854
OTHER ASSETS..................................................................... 1,899,611 1,139,305
-------------- --------------
TOTAL ASSETS................................................................. $ 153,300,826 $ 146,661,222
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion long-term debt................................................. $ 8,750,000 $ --
Accounts payable-trade......................................................... 25,915,285 19,799,067
Accrued insurance.............................................................. 4,085,191 2,705,199
Accrued income taxes........................................................... 1,188,859 1,643,816
Accrued compensation........................................................... 6,474,414 5,924,407
Other accrued liabilities...................................................... 10,664,577 15,399,563
-------------- --------------
TOTAL CURRENT LIABILITIES.................................................... 57,078,326 45,472,052
LONG-TERM DEBT................................................................. 42,063,857 58,679,770
DEFERRED INCOME TAXES.......................................................... 1,738,255 --
OTHER LIABILITIES.............................................................. 7,730,964 8,868,660
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Preferred stock, $10.00 par value (authorized--2,000,000 shares;
outstanding--none)........................................................... -- --
Common stock, $0.20 par value (authorized--20,000,000 shares;
outstanding--7,901,579 and 7,607,129 shares)................................. 1,580,316 1,521,426
Additional paid-in capital..................................................... 9,995,238 5,838,131
Retained earnings.............................................................. 33,423,465 26,334,992
Cumulative foreign currency translation adjustments............................ (309,595) (53,809)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY................................................... 44,689,424 33,640,740
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 153,300,826 $ 146,661,222
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
-------------- -------------- --------------
SALES........................................................... $ 242,899,027 $ 156,099,050 $ 144,714,535
COSTS AND EXPENSES:
Advertising and promotional costs............................. 16,661,542 16,163,273 14,784,803
Costs of photographic sales................................... 85,707,294 52,558,425 47,635,178
Store commissions and selling costs........................... 79,597,084 50,384,753 45,190,783
General and administrative expenses........................... 36,160,218 31,676,471 23,781,509
Amortization of intangibles................................... 1,909,772 -- --
-------------- -------------- --------------
Total Costs and Expenses.................................... 220,035,910 150,782,922 131,392,273
INCOME FROM OPERATIONS BEFORE INTEREST AND INCOME TAXES......... 22,863,117 5,316,128 13,322,262
Interest expense, net......................................... 6,570,945 179,221 458,923
-------------- -------------- --------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES...................... 16,292,172 5,136,907 12,863,339
INCOME TAX PROVISION............................................ 7,557,320 2,143,053 5,246,170
-------------- -------------- --------------
NET INCOME...................................................... $ 8,734,852 $ 2,993,854 $ 7,617,169
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic......................................................... 7,779,176 7,522,188 7,632,297
-------------- -------------- --------------
-------------- -------------- --------------
Diluted....................................................... 8,195,108 7,835,613 7,894,656
-------------- -------------- --------------
-------------- -------------- --------------
BASIC AND FULLY DILUTED EARNINGS PER COMMON SHARE:
Basic......................................................... $ 1.12 $ 0.40 $ 1.00
-------------- -------------- --------------
-------------- -------------- --------------
Diluted....................................................... $ 1.07 $ 0.38 $ 0.96
-------------- -------------- --------------
-------------- -------------- --------------
CASH DIVIDENDS PER COMMON SHARE................................. $ 0.21 $ 0.21 $ 0.28
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998, FEBRUARY 2, 1997 AND JANUARY 28,
1996
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
-------------------------- PAID-IN RETAINED TRANSLATION UNEARNED
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS COMPENSATION
------------ ------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 29, 1995:......... 8,160,171 $ 1,632,035 $ 12,204,069 $ 19,444,035 $(215,087) $ (32,597)
Net income....................... 7,617,169
Exercise of stock options........ 66,200 13,240 415,533
Dividends........................ (2,142,495)
Acquisition of Company stock..... (744,300) (148,860) (7,565,092)
Compensatory stock options....... 23,665
Canceled compensatory stock
options........................ (8,932) 8,932
Foreign currency translation
adjustment..................... (11,006)
------------ ------------ ------------- ------------- ----------- -------------
BALANCE, JANUARY 28, 1996:......... 7,482,071 1,496,415 5,045,578 24,918,709 (226,093) --
Net income....................... 2,993,854
Exercise of stock options........ 434,300 86,860 4,372,329
Dividends........................ (1,577,571)
Acquisition of Company stock..... (309,242) (61,849) (4,128,776)
Issuance of warrants to purchase
common stock................... 549,000
Foreign currency translation
adjustment..................... 172,284
------------ ------------ ------------- ------------- ----------- -------------
BALANCE, FEBRUARY 2, 1997:......... 7,607,129 1,521,426 5,838,131 26,334,992 (53,809) --
Net income....................... 8,734,852
Exercise of stock options........ 294,450 58,890 4,157,107
Dividends........................ (1,646,379)
Foreign currency translation
adjustment..................... (255,786)
------------ ------------ ------------- ------------- ----------- -------------
BALANCE, FEBRUARY 1, 1998:......... 7,901,579 $ 1,580,316 $ 9,995,238 $ 33,423,465 $(309,595) $ --
------------ ------------ ------------- ------------- ----------- -------------
------------ ------------ ------------- ------------- ----------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income............................................................. $ 8,734,852 $ 2,993,854 $ 7,617,169
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization........................................ 15,453,159 9,498,315 8,489,754
Increase (decrease) in allowance for doubtful accounts............... 449,734 (167,303) 165,140
Provision for deferred income taxes.................................. 2,764,916 (1,421,999) 1,264,649
Loss on disposal of property......................................... 1,539,689 3,287,772 776,592
Compensatory stock option expense.................................... -- -- 23,665
(Increase) decrease in other liabilities............................. (1,147,285) (375,932) 177,572
Increase in other noncurrent assets.................................. (760,306) (156) (15,659)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........................... (660,510) 1,254,260 (530,433)
(Increase) decrease in inventories................................... (268,838) (4,489,573) 755,065
Decrease (increase) in prepaid expenses.............................. 454,106 (178,505) 122,987
Increase (decrease) in accounts payable.............................. 6,124,980 2,596,851 (2,246,715)
(Decrease) increase in accrued expenses.............................. (3,150,299) 4,679,050 3,686,168
----------- ----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES............................ 29,534,198 17,676,634 20,285,954
INVESTING ACTIVITIES:
Purchase of property................................................... (12,086,194) (13,423,544) (6,309,168)
Proceeds from sales of fixed assets.................................... 16,100 10,151 47,311
Purchase of Canadian assets............................................ -- (1,201,213) --
Purchase of American Studios, Inc...................................... (1,410,741) (52,689,671) --
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................................ (13,480,835) (67,304,277) (6,261,857)
FINANCING ACTIVITIES:
(Decrease) increase in borrowings...................................... (7,865,913) 48,334,816 (974,215)
Exercise of stock options.............................................. 4,215,997 4,459,189 428,773
Acquisition of Company stock........................................... -- (4,190,625) (7,713,952)
Cash dividends......................................................... (1,646,379) (1,577,571) (2,142,495)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED FROM FINANCING ACTIVITIES................ (5,296,295) 47,025,809 (10,401,889)
----------- ----------- -----------
Effect of exchange rate changes on cash.............................. (3,541) 223,555 (19,454)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 10,753,527 (2,378,279) 3,602,754
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 1,536,234 3,914,513 311,759
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $12,289,761 $ 1,536,234 $ 3,914,513
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Flow Data:
Interest paid........................................................ $ 7,749,779 $ 173,644 $ 364,041
----------- ----------- -----------
----------- ----------- -----------
Income taxes paid.................................................... $ 2,751,652 $ 3,160,160 $ 3,059,180
----------- ----------- -----------
----------- ----------- -----------
Schedule of Noncash Financing Activities:
Stock options canceled and unearned compensation credited............ $ -- $ -- $ 8,932
----------- ----------- -----------
----------- ----------- -----------
Warrants issued to purchase common stock............................. $ -- $ 549,000 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND CONCENTRATIONS OF CREDIT RISK:
The consolidated financial statements include the accounts of PCA
International, Inc. and its subsidiaries (the "Company"), all of which are
wholly owned. All material intercompany balances and transactions have been
eliminated in consolidation. The Company's operations in Kmart stores accounted
for approximately 40.0%, 87.2%, and 94.8% of consolidated sales during the
fiscal years ended February 1, 1998, February 2, 1997 and January 28, 1996,
respectively. The license agreement with Kmart Corporation was revised and
renewed on May 10, 1996. The license is for the period through May 9, 2001 and
may be terminated by either party upon 180-days' notice. Operations in Wal-Mart
stores accounted for approximately 56.2% of consolidated sales in the fiscal
year ended February 1, 1998, and less than 5% of total sales in fiscal years
ending in 1997 and 1996. The Company operates its U.S. studios in Wal-Mart
stores under the terms of the license agreement between Wal-Mart and American
Studios, Inc. (see note 2). Wal-Mart may amend or terminate this agreement at
any time at its sole discretion. The loss of the license to do business in Kmart
or Wal-Mart stores would have a materially adverse effect on the Company.
Kmart's or Wal-Mart's closing of a significant number of discount stores could
have a material impact on the Company's revenues and could result in a write-off
of leasehold improvements and furniture and equipment in the affected locations.
No estimate can be made of the impact to earnings if Kmart or Wal-Mart should
close a significant number of locations.
FISCAL YEAR:
The Company's fiscal year ends on the Sunday nearest the end of January. The
fiscal year ended February 2, 1997 was a 53-week year. The fiscal years ended
January 28, 1996 and February 1, 1998 were 52-week years. The Company's fiscal
year that will end January 31, 1999 will be 52 weeks.
FOREIGN CURRENCY TRANSACTIONS:
Gains and losses on foreign currency transactions are included in the
determination of net income for the period. The amount of such gain and (loss)
was ($78,748), $10,940 and $19,474 for the fiscal years ended February 1, 1998,
February 2, 1997 and January 28, 1996, respectively.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES:
Inventories are valued at the lower of cost or market, cost being determined
on the first-in, first-out basis.
PROPERTY AND DEPRECIATION:
Property is recorded at cost. Maintenance and repairs are charged to expense
as incurred, and property additions, renewals, and improvements are capitalized.
When property is retired or otherwise disposed of, the related costs and
accumulated depreciation are removed from the respective accounts and
F-8
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
any gain or loss is credited or charged to income. A summary of the estimated
useful lives used in computing depreciation and amortization, principally on the
straight-line method, is as follows:
<TABLE>
<S> <C>
10 to 30
Land improvements.................................... years
10 to 55
Building and improvements............................ years
Leasehold improvements............................... 3 to 10 years
Photographic and sales equipment..................... 3 to 13 years
Photographic finishing equipment..................... 3 to 15 years
Furniture and equipment.............................. 3 to 10 years
Transportation equipment............................. 3 years
</TABLE>
INTANGIBLE ASSETS:
Substantially all intangible assets are amortized over 35 years by the
straight-line method. The recoverability of intangible assets is evaluated by
the Company on the basis of undiscounted expected future cash flows from the
acquired operations before interest for the remaining amortization period. If
impairment exists, the carrying amount of the intangible assets is reduced based
on the greater of fair value or estimated shortfall of cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company periodically evaluates its long-lived assets for financial
impairment to determine if the carrying amount of such assets may not be fully
recoverable. The Company evaluates the recoverability of long-lived assets not
held for sale by measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with them. If such an
evaluation indicates that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are then adjusted to their fair values.
PHOTOGRAPHIC SALES AND DEFERRED COSTS:
Digital photographic sales are recorded when portraits are purchased at the
time of photography. Substantially all of the Company's sales are digital.
Traditional photographic sales are recorded when portraits are delivered to
studios and sold to customers. Costs relating to portraits processed, or in
process, but not recorded as sales prior to the fiscal year-end, are deferred.
Substantially all portraits are subsequently delivered and offered for sale to
the customer within three weeks.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or
F-9
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
POSTRETIREMENT BENEFITS:
The Company sponsors a postretirement health care plan for retirees and
certain current employees. The Company measures the cost of its obligations
based on actuarial assumptions. The cost of this program is not funded.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company is required to disclose in its consolidated financial statements
the fair value of all financial instruments, including assets and liabilities
both on- and off-balance sheet, for which it is practicable to estimate such
fair value. Fair value methods, assumptions, and estimates for the Company are
as follows:
- Cash and cash equivalents, accounts receivable, prepaid expenses,
short-term borrowings, accounts payable-trade, and accrued expenses--the
carrying amount approximates fair value because of the short maturity of
these instruments.
- Non-current liabilities--the carrying amount approximates fair value
because such liabilities consist primarily of actuarially determined
postretirement liabilities using current market rate assumptions and
long-term debt at market rates currently offered.
COSTS AND EXPENSES:
Advertising and promotional costs consist of the direct mail, television
broadcasting, and print media costs, and the payroll and related taxes, benefits
and other costs for employees in the adult/family market who directly promote
and acquire customers, as well as the cost of church directories.
Costs of photographic sales are all the direct and indirect portrait
production costs: salaries, commissions, payroll taxes, related benefits and
traveling costs for all photography personnel, as well as the recruiting and
training costs of these employees. The costs of film, accessories, photography
equipment depreciation and maintenance, supplies, and distribution are also
included in this category.
Store commissions and selling costs include the commissions paid to each
chain based on a percentage of net sales, salaries, commissions, payroll taxes,
related benefits and travel costs for all sales personnel, and recruiting and
training, sales supplies, sales equipment depreciation, and related distribution
costs.
RESEARCH AND DEVELOPMENT:
The Company spent $1,311,000, $1,321,000 and $1,033,000 on research and
development activities during the fiscal years ended February 1, 1998, February
2, 1997 and January 28, 1996, respectively. Such costs are charged to costs of
photographic sales as incurred.
F-10
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK OPTION PLAN:
Prior to January 28, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 29, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply provisions for APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE:
During fiscal 1997, the Company adopted the provisions of SFAS No. 128,
EARNINGS PER SHARE. SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS). Basic EPS is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted EPS reflects the
dilution that would occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. All prior period
EPS data presented have been restated to conform with the Statement's
provisions.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS:
Certain reclassifications have been made to the fiscal year 1996 amounts to
conform to the fiscal 1997 presentation.
2. ACQUISITION:
On January 27, 1997, PCA acquired 94.9% of the outstanding common stock of
American Studios, Inc. ("ASI") for $2.50 a share, or $50,833,770. In addition,
the Company incurred transaction costs of $1,855,901, resulting in an aggregate
purchase price of $52,689,671. ASI was based in Charlotte, North Carolina, and
was engaged in the sale of photographic color portraits of children, adults, and
families. The acquisition was accounted for by the purchase method at February
2, 1997. Since the acquisition was accounted for at February 2, 1997, the
results of operations of ASI were not included in PCA's consolidated financial
statements for the fiscal year ended February 2, 1997. The excess of the
purchase price over the
F-11
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
2. ACQUISITION: (CONTINUED)
fair value of the net identifiable assets acquired at February 2, 1997 of
$59,134,104 has been recorded as an intangible asset and is being amortized on a
straight-line basis over 35 years.
During the fiscal year ended February 1, 1998, PCA acquired an additional
4.8% of the outstanding common stock of ASI for $2.50 a share, or $2,601,968.
Intangible asset adjustments resulted in an addition to intangible assets of
$1,410,741.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and ASI as if the acquisition had
occurred as of the beginning of fiscal 1996 and 1995, after giving effect to
certain adjustments, including amortization of intangible assets, additional
depreciation expense, increased interest expense on debt related to the
acquisition, acquisition-related costs, and related income tax effects. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and ASI constituted a single
entity during such periods.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------
<S> <C> <C>
FEBRUARY 2, JANUARY 28,
1997 1996
(UNAUDITED) (UNAUDITED)
--------------- ---------------
Sales...................................................... $ 263,974,050 $ 246,614,535
--------------- ---------------
--------------- ---------------
Net loss................................................... $ (855,898) $ (1,168,645)
--------------- ---------------
--------------- ---------------
Basic loss per share....................................... $ (0.11) $ (0.15)
--------------- ---------------
--------------- ---------------
</TABLE>
During fiscal 1996, the Company also purchased certain assets of two
Canadian companies for $1.2 million. The effect of this acquisition is not
material to the results of operations of the Company. Such acquisitions were
accounted for by the purchase method.
3. DEBT:
The Company signed a new credit agreement with NationsBank of North
Carolina, N.A. ("NationsBank") on Februar y 28, 1997, for $90 million, which
includes a $65 million senior term loan and a $25 million revolving credit
facility. The senior term loan and the revolving credit facility bear interest
at a rate equal to LIBOR plus an applicable margin or an Alternate Base Rate
plus an applicable margin. The credit agreement was amended on September 15,
1997. The amendment reduced the applicable margin up to 0.75% from the range of
0.75% to 2.5% in the original loan agreement. The applicable margin is based on
a ratio of debt to EBITDA. Aggregate annual maturities for each of the five
fiscal years subsequent to February 2, 1997 are as follows: $0 in 1997, $10
million in 1998, $15 million in 1999, $20 million in 2000, and $20 million in
2001. The Company prepaid $10 million of the term loan on May 29, 1997, and $4
million on January 29, 1998, reducing the amount payable in 1998 to $8.5 million
and in 2001 to $10 million.
On February 2, 1997, the Company had available a $75.8 million senior tender
facility that included a $25 million revolving credit facility. The senior
tender facility matured on February 28, 1997, upon the
F-12
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
3. DEBT: (CONTINUED)
closing of the merger between the Company's wholly-owned subsidiary, ASI
Acquisition Corporation, and American Studios, Inc.
Borrowings under the agreements are secured by tangible property other than
property located in portrait studios. Minimum levels of adjusted earnings,
tangible net worth, an interest coverage ratio, and a fixed charge ratio must be
maintained in addition to other financial covenants. The Company has been in
compliance with all financial covenants throughout the life of the credit
agreement. The amount of debt is reduced by 150,000 stock warrants issued to
NationsBank to purchase common stock of the Company. The warrants expire January
27, 2002. The amount available under the revolving credit facility is reduced by
outstanding letters of credit. As of February 1, 1998 and February 2, 1997, the
Company had letters of credit of $4,300,000 and $3,560,750, respectively, for
its Workers' Compensation insurance.
The components of net interest expense (income) were:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
--------------- --------------- ---------------
Interest Income.......................... $ (218,622) $ (225,748) $ (123,865)
Interest Expense......................... 6,789,567 404,969 582,788
--------------- --------------- ---------------
Net...................................... $ 6,570,945 $ 179,221 $ 458,923
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
4. INCOME TAXES:
PCA International, Inc. and its domestic subsidiaries file a consolidated
federal income tax return. The components of income tax expense are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CURRENT:
Federal................................. $ 2,491,486 $ 2,824,740 $ 2,888,851
State................................... 714,587 957,859 1,082,736
--------------- --------------- ---------------
3,206,073 3,782,599 3,971,587
--------------- --------------- ---------------
DEFERRED:
Federal................................. 3,690,903 (1,270,094) 1,178,154
State................................... 660,344 (369,452) 96,429
--------------- --------------- ---------------
4,351,247 (1,639,546) 1,274,583
--------------- --------------- ---------------
TOTAL PROVISION........................... $ 7,557,320 $ 2,143,053 $ 5,246,170
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-13
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
4. INCOME TAXES: (CONTINUED)
A reconciliation of the amount computed by applying the statutory federal
income tax rate to income from operations to the consolidated income tax
provision follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ ------------ ------------
Tax expense at statutory federal rates.................................. $ 5,539,338 $ 1,746,548 $ 4,402,166
Tax effect of expenses not deductible................................... 218,392 71,011 65,338
State income taxes, net of federal income tax benefit................... 907,454 388,349 766,458
Tax effect related to foreign subsidiary................................ 73,078 14,200 13,203
Amortization of goodwill................................................ 620,107 -- --
Other................................................................... 198,951 (77,055) (995)
------------ ------------ ------------
Total Provision......................................................... $ 7,557,320 $ 2,143,053 $ 5,246,170
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at February 1,
1998 and February 2, 1997 are presented below:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
--------------- ---------------
<S> <C> <C>
DEFERRED TAX ASSETS:
CURRENT:
Accounts receivable, principally due to allowance for doubtful accounts........ $ 517,963 $ 346,360
Inventory, principally due to obsolescence reserve........................... 235,856 600,155
Life and health, principally due to adoption of SFAS No. 106................. 339,210 153,696
Stock options, principally due to compensation element....................... 118,379 139,806
Workers' compensation........................................................ 2,811,175 2,414,430
Reserves, principally due to accrual for financial reporting purposes........ 878,659 942,945
Studio closure costs, principally due to accrual for financial reporting
purposes................................................................... 93,426 2,396,400
--------------- ---------------
Gross current deferred tax assets............................................ 4,994,668 6,993,792
NONCURRENT:
Alternative minimum tax and other tax credits................................ 832,654 875,538
Net operating loss carryforward.............................................. 2,546,988 2,770,246
Life and health, principally due to adoption of SFAS No. 106................. 1,009,407 1,154,131
Intangibles.................................................................. 1,888,075 498,892
--------------- ---------------
Gross noncurrent deferred tax assets......................................... 6,277,124 5,298,807
--------------- ---------------
Gross deferred tax assets.................................................... 11,271,792 12,292,599
--------------- ---------------
DEFERRED TAX LIABILITIES:
NONCURRENT:
Plant and equipment, principally due to differences in depreciation.......... (7,182,724) (5,296,956)
--------------- ---------------
NET DEFERRED TAX ASSETS........................................................ $ 4,089,068 $ 6,995,643
--------------- ---------------
--------------- ---------------
</TABLE>
F-14
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
4. INCOME TAXES: (CONTINUED)
In assessing the ability to realize deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences that were available at
February 1, 1998.
At February 1, 1998, the Company has federal net operating loss
carryforwards of approximately $6,062,000 expiring in various amounts beginning
2010; however, net operating loss carryforwards may be subject to restriction
under Section 382 and the separate return limitation year rules of the Internal
Revenue Code due to the acquisition of ASI. Additionally, the Company has
minimum tax credit carryforwards with indefinite expiration of approximately
$786,000.
5. OTHER ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------- -------------
<S> <C> <C>
Costs accrued to complete church directories................... $ 1,043,437 $ 992,786
Accrued taxes other than income................................ 1,175,602 2,377,105
Accrued expenses............................................... 8,248,176 8,686,672
Costs to close approximately 400 underperforming studios....... 197,362 3,343,000
------------- -------------
TOTAL.......................................................... $ 10,664,577 $ 15,399,563
------------- -------------
------------- -------------
</TABLE>
6. EMPLOYEE BENEFITS:
The Company has a profit sharing plan with annual contributions by the
Company as directed by the Board of Directors for all employees who meet certain
eligibility requirements. For fiscal 1997, the contribution was equal to 10% of
consolidated income before income taxes and profit sharing less expenses
associated with the plan. Company contributions, net of forfeitures, are as
follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ --------------- ---------------
Contributions................................ $ 1,653,000 $ 421,000 $ 1,429,000
Forfeitures.................................. (146,000) (212,000) (172,000)
------------ --------------- ---------------
Net Contribution............................. $ 1,507,000 $ 209,000 $ 1,257,000
------------ --------------- ---------------
------------ --------------- ---------------
</TABLE>
F-15
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
6. EMPLOYEE BENEFITS: (CONTINUED)
The Company provides health and life insurance benefits to those persons
already retired on February 1, 1992 and to those employees who were 55 years of
age with 5 years of service on February 1, 1992. The plan provides for annual
benefits of $2,000 (single) or $4,000 (married) toward the purchase of
supplemental health care coverage. An eligible employee who retires after
February 1, 1992 can receive benefits after attaining the age of 65.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7% at February 1, 1998, February 2, 1997
and January 28, 1996. There were no assumptions for trends since the Company's
obligation was limited to the dollar amounts previously stated.
The Company's net periodic cost of this program, not included in the
accumulated obligation, including service cost and interest-related cost for the
most recent three years is:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
Service Cost........................................... $ -- $ -- $ --
Interest Related Cost.................................. 140,000 140,000 154,000
----------- ----------- -----------
NET PERIODIC COST...................................... $ 140,000 $ 140,000 $ 154,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
On February 1, 1998, the accrued cost was $2.5 million, of which $250,000
was classified as current liabilities.
7. COMMITMENTS AND CONTINGENCIES:
The Company is obligated under operating leases with initial or remaining
noncancelable terms in excess of one year which provide, in some instances, for
the payment of taxes, insurance, and maintenance. The future minimum rental
payments are not material.
Certain of the Company's operating lease agreements have renewal options.
Rental expense for all operating leases was $296,567, $237,923 and $249,444 for
the fiscal years ended February 1, 1998, February 2, 1997 and January 28, 1996,
respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a materially adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
8. STOCK OPTIONS:
The 1996 Omnibus Long-Term Compensation Plan (the "1996 Plan") provides for
the issuance of up to 811,550 shares of the Company's common stock (the same
number that had been available for issuance under the Company's 1990
Non-Qualified Stock Option Plan (the "1990 Plan") and the 1992 Non-Qualified
Stock Option Plan (the "1992 Plan"). The 1996 Plan replaced and superseded the
1990 Plan and the 1992 Plan, except with respect to options and shares of common
stock issued and outstanding under those plans which will continue to be
governed by the terms of such plans. The 1996 Plan is designed to
F-16
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
8. STOCK OPTIONS: (CONTINUED)
give the Board of Directors flexibility to adapt the long-term incentive
compensation of key employees to changing business conditions through a variety
of long-term incentive awards. Under the 1996 Plan, the Compensation Committee
may approve the grant of employee Stock Options, Stock Appreciation Rights
(SARs), Performance Restricted Stock Awards, Performance Awards, and performance
units ("Awards") to senior level employees of the Company. In addition, the 1996
Plan provides for the grant of stock options to nonemployee directors upon their
election to the Board and allows nonemployee directors to elect to take their
compensation as directors in the form of options. The exercise price for stock
options and stock Awards may not be less than the fair market value of the
common stock on the date of grant with terms up to 10 years. As of February 1,
1998 and February 2, 1997, options for 271,250 shares and 342,850 shares were
available for future grant under the 1996 Plan, and 287,300 shares and 200,000
shares were exercisable, respectively.
The 1990 Plan provides for the grant of non-qualified stock options to key
employees and nonemployee directors. As of February 1, 1998, February 2, 1997
and January 28, 1996, options for 498,400, 588,450 and 403,350 shares,
respectively, were exercisable.
The 1992 Plan provides for the grant of non-qualified stock options to key
employees and nonemployee directors of the Company. As of February 1, 1998,
February 2, 1997 and January 28, 1996, options for 303,800, 297,900 and 0
shares, respectively, were exercisable.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------
<S> <C> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ ------------ ------------
Net income.............................................. As reported $ 8,734,852 $ 2,993,854 $ 7,617,169
------------ ------------ ------------
------------ ------------ ------------
Pro forma $ 8,365,608 $ 2,374,079 $ 7,556,540
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per share................................ As reported $ 1.12 $ 0.40 $ 1.00
------------ ------------ ------------
------------ ------------ ------------
Pro forma $ 1.08 $ 0.32 $ 0.99
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share.............................. As reported $ 1.07 $ 0.38 $ 0.96
------------ ------------ ------------
------------ ------------ ------------
Pro forma $ 1.02 $ 0.30 $ 0.96
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-17
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
8. STOCK OPTIONS: (CONTINUED)
The following table sets forth information regarding the 1990, 1992, and
1996 Plans with respect to the exercise, cancellation, expiration, and grant of
options during the previous three fiscal years:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES OPTION PRICE
---------- -------------
<S> <C> <C>
OPTIONS OUTSTANDING JANUARY 29, 1995............................... 1,880,550 $ 9.49
Exercised........................................................ (66,200) $ 4.49
Canceled......................................................... (109,700) $ 10.70
Granted.......................................................... 199,800 $ 11.25
----------
OPTIONS OUTSTANDING JANUARY 28, 1996............................... 1,904,450 $ 9.76
Exercised........................................................ (434,300) $ 7.79
Canceled......................................................... (15,800) $ 10.10
Expired.......................................................... (87,000) $ 16.22
Granted.......................................................... 468,700 $ 17.10
----------
OPTIONS OUTSTANDING FEBRUARY 2, 1997............................... 1,836,050 $ 11.80
Exercised........................................................ (294,450) $ 10.86
Canceled......................................................... (72,200) $ 12.71
Granted.......................................................... 71,600 $ 16.87
----------
OPTIONS OUTSTANDING FEBRUARY 1, 1998............................... 1,541,000 $ 12.17
----------
----------
</TABLE>
At February 1, 1998, the range of exercise prices, the weighted average
exercise price, and the weighted average contractual remaining life of options
outstanding are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WGT. AVG. -------------------------
REMAINING WGT. AVG. WGT. AVG.
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------------- ----------- -------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$1.67 to $4.92................................... 172,400 2.1 years $ 1.68 172,400 $ 1.68
$9.25 to $12.88.................................. 685,500 4.0 years $ 10.46 478,000 $ 10.51
$14.12 to $18.50................................. 683,100 5.8 years $ 16.53 439,100 $ 16.31
----------- ------------
$1.67 to $18.50.................................. 1,541,000 5.4 years $ 12.17 1,089,500 $ 11.45
----------- ------------
----------- ------------
</TABLE>
Options outstanding with exercise price above market price:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
--------------- --------------- ---------------
Number.................................... -- 470,200 1,257,700
--------------- --------------- ---------------
--------------- --------------- ---------------
Price range............................... -- $16.25-$17.12 $10.00-$17.00
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-18
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
9. COMMON STOCK:
On March 20, 1996, the Company's Board of Directors increased the number of
shares authorized for repurchase by 744,300, bringing the total number of shares
authorized for repurchase to 1,000,000. During fiscal 1996, the Company
purchased, in various transactions, 309,242 shares. The credit agreement dated
February 28, 1997 restricts the Company from repurchasing any shares of the
Company's stock.
10. EARNINGS PER SHARE:
The following table sets forth a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for the previous three
fiscal years:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE:
EARNINGS APPLICABLE TO COMMON STOCK:
Net income.......................................................... $ 8,734,852 $ 2,993,854 $ 7,617,169
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares............................ 7,779,176 7,522,188 7,632,297
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per common share..................................... $ 1.12 $ 0.40 $ 1.00
------------ ------------ ------------
------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE:
EARNINGS APPLICABLE TO COMMON STOCK:
Net Income.......................................................... $ 8,734,852 $ 2,993,854 $ 7,617,169
------------ ------------ ------------
------------ ------------ ------------
COMPUTATION OF DILUTED COMMON SHARES:
Weighted average number of common shares outstanding................ 7,779,176 7,522,188 7,632,297
Dilutive effect of stock options.................................... 398,784 313,425 262,359
Dilutive effects of warrants........................................ 17,148 -- --
------------ ------------ ------------
Weighted average number of common shares of outstanding as
adjusted.......................................................... 8,195,108 7,835,613 7,894,656
------------ ------------ ------------
------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE:
Net income.......................................................... $ 1.07 $ 0.38 $ 0.96
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
11. UNAUDITED QUARTERLY FINANCIAL DATA:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
FEBRUARY 1, NOVEMBER 2, AUGUST 3, MAY 4,
1998 1997 1997 1997
------------- ------------- ------------- -------------
Sales............................................... $ 75,834,923 $ 61,235,465 $ 47,136,830 $ 58,691,809
Gross Profit*....................................... $ 25,569,922 $ 14,295,372 $ 7,376,925 $ 13,690,889
Net Income (Loss)................................... $ 7,811,302 $ 1,919,844 $ (1,639,620) $ 643,326
Basic Earnings Per Common Share..................... $ 0.99 $ 0.24 $ (0.21) $ 0.08
Diluted Earnings Per Common Share................... $ 0.94 $ 0.23 $ (0.20) $ 0.08
</TABLE>
F-19
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
FEBRUARY 2, 1997 AND JANUARY 28, 1996
11. UNAUDITED QUARTERLY FINANCIAL DATA: (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
FEBRUARY 2, OCTOBER 27, JULY 28, APRIL 28,
1997 1996 1996 1996
------------- ------------- ------------- -------------
Sales............................................... $ 51,801,203 $ 37,093,025 $ 31,116,836 $ 36,087,986
Gross Profit*....................................... $ 15,250,619 $ 7,165,823 $ 5,773,728 $ 8,802,429
Net Income.......................................... $ 981,667 $ 641,112 $ 232,297 $ 1,138,778
Basic Earnings Per Common Share..................... $ 0.13 $ 0.08 $ 0.03 $ 0.15
Diluted Earnings Per Common Share................... $ 0.12 $ 0.08 $ 0.03 $ 0.15
</TABLE>
- ------------------------
* SALES LESS ADVERTISING AND PROMOTIONAL COSTS, COSTS OF PHOTOGRAPHIC SALES,
AND STORE COMMISSIONS AND SELLING COSTS.
F-20
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 3, FEBRUARY 1,
1998 1998
(UNAUDITED) (AUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................... $11,073,455 $12,289,761
Accounts receivable (net of allowance for doubtful accounts of $1,488,299 and
$1,315,666):
Due from licensor stores and customers............................................ 7,079,533 6,740,560
Other, including employee advances................................................ 438,133 763,925
Inventories......................................................................... 8,069,236 10,078,719
Deferred income taxes............................................................... 4,788,074 5,827,324
Prepaid expenses.................................................................... 1,247,313 1,043,708
----------- -----------
Total Current Assets............................................................ 32,695,744 36,743,997
----------- -----------
Property:
Land and improvements............................................................... 2,305,293 2,305,293
Building and improvements........................................................... 12,160,430 12,148,732
Photographic and sales equipment.................................................... 57,685,314 57,713,911
Photographic finishing equipment.................................................... 15,607,775 15,599,525
Furniture and equipment............................................................. 13,923,558 13,872,058
Transportation equipment............................................................ 294,920 292,593
Leasehold improvements.............................................................. 16,022,441 16,050,719
Construction in progress............................................................ 2,296,667 1,429,621
----------- -----------
Total Property.................................................................. 120,296,398 119,412,452
Less: Accumulated depreciation and amortization..................................... 66,971,841 64,488,965
----------- -----------
Property, net................................................................... 53,324,557 54,923,487
----------- -----------
Intangible Assets..................................................................... 59,240,646 59,733,731
Other Assets.......................................................................... 1,655,283 1,899,611
----------- -----------
Total Assets.................................................................... $146,916,230 $153,300,826
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................................... $ 8,750,000 $ 8,750,000
Accounts payable-trade.............................................................. 23,797,823 25,915,285
Accrued insurance................................................................... 3,823,960 4,085,191
Accrued income taxes................................................................ 1,341,524 1,188,859
Accrued compensation................................................................ 4,791,914 6,474,414
Other accrued liabilities........................................................... 9,858,281 10,664,577
----------- -----------
Total Current Liabilities....................................................... 52,363,502 57,078,326
----------- -----------
Long-term debt........................................................................ 41,104,831 42,063,857
----------- -----------
Deferred Income Taxes................................................................. 107,019 1,738,255
----------- -----------
Other Liabilities..................................................................... 7,628,444 7,730,964
----------- -----------
Shareholders' Equity:
Preferred stock, $10.000 par value (authorized--2,000,000 shares;
outstanding--none)................................................................ -- --
Common Stock, $0.20 par value (authorized--20,000,000 shares; issued--7,947,879
shares and 7,901,579 shares)...................................................... 1,589,576 1,580,316
Additional paid-in capital.......................................................... 10,707,615 9,995,238
Retained earnings................................................................... 33,646,734 33,423,465
Cumulative foreign currency translation adjustments................................. (231,491) (309,595)
----------- -----------
Total Shareholders' Equity...................................................... 45,712,434 44,689,424
----------- -----------
Total Liabilities and Shareholders' Equity...................................... $146,916,230 $153,300,826
----------- -----------
----------- -----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-21
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
<S> <C> <C>
MAY 3, MAY 4,
1998 1997
------------- -------------
SALES.............................................................................. $ 54,661,925 $ 58,691,809
------------- -------------
COSTS AND EXPENSES:
Advertising and promotional costs................................................ 3,392,749 4,313,900
Costs of photographic sales...................................................... 19,361,353 21,794,658
Store commissions and selling costs.............................................. 18,822,775 18,892,362
General and administrative expenses.............................................. 9,921,037 10,176,412
Amortization of intangibles...................................................... 507,418 455,738
------------- -------------
Total costs and expenses....................................................... 52,005,332 55,633,070
------------- -------------
INCOME FROM OPERATIONS............................................................. 2,656,593 3,058,739
Interest expense, net............................................................ 1,219,709 1,619,383
------------- -------------
INCOME BEFORE INCOME TAXES......................................................... 1,436,884 1,439,356
INCOME TAX PROVISION............................................................... 658,811 796,030
------------- -------------
NET INCOME......................................................................... $ 778,073 $ 643,326
------------- -------------
------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic............................................................................ 7,931,757 7,631,209
------------- -------------
------------- -------------
Diluted.......................................................................... 8,373,084 7,932,863
------------- -------------
------------- -------------
BASIC AND FULLY DILUTED EARNINGS PER COMMON SHARE:
Basic............................................................................ $ 0.10 $ 0.08
------------- -------------
------------- -------------
Diluted.......................................................................... $ 0.09 $ 0.08
------------- -------------
------------- -------------
CASH DIVIDENDS PER COMMON SHARE.................................................... $ 0.07 $ --
------------- -------------
------------- -------------
</TABLE>
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-22
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MAY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------------ PAID-IN COMPREHENSIVE RETAINED TRANSLATION
SHARES AMOUNT CAPITAL INCOME EARNINGS ADJUSTMENT
---------- ------------ ------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1998........... 7,901,579 $ 1,580,316 $ 9,995,238 $ 33,423,465 $ (309,595)
Comprehensive Income
Net income........................ $ 778,073 778,073
Foreign currency translation
adjustment...................... 46,081 78,104
--------------
Total comprehensive income........ $ 824,154
Exercise of stock options........... 46,300 9,260 712,377
Dividends........................... (554,804)
---------- ------------ ------------- ------------- -----------
BALANCE MAY 3, 1998:................ 7,947,879 $ 1,589,576 $ 10,707,615 $ 33,646,734 $ (231,491)
---------- ------------ ------------- ------------- -----------
---------- ------------ ------------- ------------- -----------
</TABLE>
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-23
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
<S> <C> <C>
MAY 3, MAY 4,
1998 1997
------------- -------------
OPERATING ACTIVITIES:
Net income........................................................................ $ 778,073 $ 643,326
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................... 3,748,314 3,741,882
Increase (decrease) in allowance for doubtful accounts.......................... 172,312 (25,679)
Provision for deferred income taxes............................................. (591,986) (15,743)
Loss on disposal of property.................................................... 166,233 4,283
Decrease in other liabilities................................................... (112,109) (275,131)
Decrease (increase) in other noncurrent assets.................................. 244,328 (1,499,779)
Changes in operating assets and liabilities
Increase in accounts receivable............................................... (182,710) (902,267)
Decrease in inventories....................................................... 2,010,683 1,700,347
(Increase) decrease in prepaid expenses....................................... (193,772) 360,276
Decrease in accounts payable.................................................. (2,118,292) (3,412,559)
Decrease in accrued expenses.................................................. (2,603,743) (992,566)
------------- -------------
NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES............................... 1,317,331 (673,610)
------------- -------------
INVESTING ACTIVITIES:
Purchase of property.............................................................. (1,785,076) (3,363,219)
Purchase of American Studios, Inc................................................. -- (2,516,646)
Proceeds from sale of fixed assets................................................ 17,568 1,200
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES............................................. (1,767,508) (5,878,665)
------------- -------------
FINANCING ACTIVITIES:
(Decrease) increase in borrowings................................................. (959,026) 7,798,680
Exercise of stock options......................................................... 721,637 963,121
Cash dividends.................................................................... (554,804) --
------------- -------------
NET CASH (USED IN) PROVIDED FROM FINANCING ACTIVITIES............................... (792,193) 8,761,801
------------- -------------
Effect of exchange rate changes on cash........................................... 26,064 (11,106)
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................... (1,216,306) 2,198,420
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 12,289,761 1,536,234
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 11,073,455 $ 3,734,654
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Flow Data:
Interest paid................................................................... $ 901,935 $ 3,736,171
------------- -------------
------------- -------------
Income taxes paid............................................................... $ 986,472 $ 1,219,348
------------- -------------
------------- -------------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-24
<PAGE>
PCA INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MAY 3, 1998 AND MAY 4, 1997
With respect to the significant accounting policies of PCA International, Inc.,
and its subsidiaries ("PCA" or the "Company"), which are wholly owned, reference
is made to note 1 of the financial statements in the Company's Form 10-K filed
for the fiscal year ended February 1, 1998. The interim financial statements
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods presented.
F-25
<PAGE>
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT CHARGED TO WRITE-OFFS
BEGINNING OF COSTS AND NET OF BALANCE AT
CLASSIFICATION PERIOD EXPENSES RECOVERIES END OF PERIOD
- ----------------------------------------------------------- ------------ ----------- ----------- -------------
QUARTER ENDED MAY 3, 1998:
ALLOWANCE FOR DOUBTFUL ACCOUNTS.......................... $ 1,315,666 $ 172,263 $ 370 $ 1,488,299
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
FISCAL YEAR ENDED FEBRUARY 1, 1998:
ALLOWANCE FOR DOUBTFUL ACCOUNTS.......................... $ 867,961 $ 472,805 $ (25,100) $ 1,315,666
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
FISCAL YEAR ENDED FEBRUARY 2, 1997:
ALLOWANCE FOR DOUBTFUL ACCOUNTS.......................... $ 1,011,350 $ 129,563 $ (272,952) $ 867,961
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
FISCAL YEAR ENDED JANUARY 28, 1996:
ALLOWANCE FOR DOUBTFUL ACCOUNTS.......................... $ 845,843 $ 193,715 $ (28,208) $ 1,011,350
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
</TABLE>
S-1
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
PCA INTERNATIONAL, INC.
AND
JUPITER ACQUISITION CORP.
DATED AS OF
APRIL 20, 1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER..................................................................... 8
Section 1.1 The Merger............................................................. 8
Section 1.2 Effective Time......................................................... 9
Section 1.3 Closing................................................................ 9
Section 1.4 Directors and Officers of the Surviving Corporation.................... 9
Section 1.5 Shareholders' Meeting.................................................. 9
ARTICLE II CONVERSION OF SECURITIES...................................................... 10
Section 2.1 Conversion of Capital Stock............................................ 10
Section 2.2 Payment of Cash Merger Consideration................................... 12
Section 2.3 Dissenters' Rights..................................................... 14
Section 2.4 Exchange of Stock Certificates......................................... 14
Section 2.5 Stock Options.......................................................... 14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ 15
Section 3.1 Organization........................................................... 15
Section 3.2 Capitalization......................................................... 15
Section 3.3 Authorization; Validity of Agreement; Company Action................... 16
Section 3.4 Consents and Approvals; No Violations.................................. 17
Section 3.5 SEC Reports and Financial Statements................................... 17
Section 3.6 Absence of Certain Changes............................................. 18
Section 3.7 No Undisclosed Liabilities............................................. 18
Section 3.8 Litigation............................................................. 18
Section 3.9 Employee Benefit Plans; ERISA.......................................... 18
Section 3.10 Information in Proxy Statement......................................... 20
Section 3.11 No Default; Compliance With Applicable Laws............................ 20
Section 3.12 Licenses; Intellectual Property........................................ 21
Section 3.13 Taxes.................................................................. 22
Section 3.14 Insurance.............................................................. 24
Section 3.15 Contracts.............................................................. 25
Section 3.16 Related Party Transactions............................................. 25
Section 3.17 Real Property.......................................................... 26
Section 3.18 Vote Required.......................................................... 26
Section 3.19 Environmental Matters.................................................. 26
Section 3.20 Year 2000.............................................................. 28
Section 3.21 Fairness Opinion....................................................... 28
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERGERCO.................................... 28
Section 4.1 Organization........................................................... 28
Section 4.2 Capitalization......................................................... 29
Section 4.3 Authorization; Validity of Agreement; Necessary Action................. 29
Section 4.4 Consents and Approvals: No Violation................................... 29
Section 4.5 Information in Proxy Statement......................................... 30
Section 4.6 Litigation............................................................. 30
Section 4.7 Financing Commitment................................................... 30
Section 4.8 Fraudulent Conveyance.................................................. 30
ARTICLE V COVENANTS...................................................................... 31
Section 5.1 Interim Operations of the Company...................................... 31
Section 5.2 Access; Confidentiality................................................ 33
Section 5.3 Consents and Approvals................................................. 33
Section 5.4 No Solicitation........................................................ 33
Section 5.5 Brokers or Finders..................................................... 34
Section 5.6 Additional Agreements.................................................. 34
Section 5.7 Publicity.............................................................. 35
Section 5.8 Notification of Certain Matters........................................ 35
Section 5.9 Directors' and Officers' Insurance and Indemnification................. 35
Section 5.10 Tax Return Filing and Tax Elections.................................... 36
Section 5.11 Cooperation............................................................ 37
Section 5.12 Financing.............................................................. 37
Section 5.13 NASDAQ Listing......................................................... 37
Section 5.14 Fees................................................................... 37
Section 5.15 Consummation of the Merger............................................. 37
ARTICLE VI CONDITIONS.................................................................... 37
Section 6.1 Conditions to each Party's Obligation to Effect the Merger
Transaction............................................................ 38
Section 6.2 Conditions to Mergerco's Obligation to Effect the Merger............... 38
ARTICLE VII TERMINATION.................................................................. 40
Section 7.1 Termination............................................................ 40
Section 7.2 Effect of Termination.................................................. 42
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VIII MISCELLANEOUS............................................................... 42
Section 8.1 Fees and Expenses...................................................... 42
Section 8.2 Amendment and Modification............................................. 44
Section 8.3 Nonsurvival of Representations and Warranties.......................... 44
Section 8.4 Notices................................................................ 44
Section 8.5 Interpretation......................................................... 45
Section 8.6 Counterparts........................................................... 45
Section 8.7 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.... 45
Section 8.8 Severability........................................................... 45
Section 8.9 Governing Law.......................................................... 45
Section 8.10 Assignment............................................................. 45
</TABLE>
A-4
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM SECTION NO.
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Affiliate(s)......................................................................................... 8.5
Agreement............................................................................................ Recitals
Agreements........................................................................................... 3.4
Acquisition Proposal................................................................................. 5.4
Alternative Financing................................................................................ 5.12
Benefit Plans........................................................................................ 3.9(a)
Cash Merger.......................................................................................... 2.1(c)
Cash Merger Consideration............................................................................ 2.1(c)
Cash Merger Shares................................................................................... 2.1(c)
Certificates......................................................................................... 2.2(b)
Closing.............................................................................................. 1.3
Closing Date......................................................................................... 1.3
Code................................................................................................. 3.9(b)
Commitment Letter.................................................................................... 4.7(b)
Common Stock......................................................................................... 2.1
Company.............................................................................................. Recitals
Company SEC Documents................................................................................ 3.5
Company Shares....................................................................................... 3.2(a)
Continuing Share Election............................................................................ 2.1(d)
Continuing Shareholders.............................................................................. 2.1(d)
Continuing Shares.................................................................................... 2.1(d)
Disclosure Schedule.................................................................................. 2.1(d)
Dissenting Shareholders.............................................................................. 2.1(c)
Documents............................................................................................ 3.5
D&O Insurance........................................................................................ 5.9(b)
Effective Time....................................................................................... 1.2
Environment.......................................................................................... 3.19(a)
Environment Claims................................................................................... 3.19(b)
Environmental Compliance Costs....................................................................... 3.19(c)
ERISA................................................................................................ 3.9(a)
ERISA Affiliate...................................................................................... 3.9(a)
Exchange Act......................................................................................... 1.5(a)
Fees and Expenses.................................................................................... 8.1(b)
Financing............................................................................................ 4.7(b)
GAAP................................................................................................. 3.5
Governmental Entity.................................................................................. 3.4
Hazardous Substances................................................................................. 2.2
HSR Act.............................................................................................. 3.4
Indemnified Party.................................................................................... 5.9(a)
Intellectual Property................................................................................ 3.12
Jupiter.............................................................................................. 4.2
Licenses............................................................................................. 3.12
Material Adverse Effect.............................................................................. 7.1(a)
Material Agreements.................................................................................. 3.15
Maximum Continuing Number............................................................................ 2.1(d)
Maximum Continuing Percentage........................................................................ 2.1(d)
Merger............................................................................................... Recitals
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION NO.
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Mergerco............................................................................................. Recitals
Mergerco Common Stock................................................................................ 2.1
Minimum Continuing Number............................................................................ 2.1(d)
Minimum Continuing Percentage........................................................................ 2.1(d)
NationsBank Letter................................................................................... 4.7(b)
NationsBridge Letter................................................................................. 4.7(b)
NCBCA................................................................................................ Recitals
1998 Financial Statements............................................................................ 3.5
1998 Form 10-K....................................................................................... 3.5
Options.............................................................................................. 2.5
Option Consideration................................................................................. 2.5
Owned Real Property.................................................................................. 3.17(a)
Paying Agent......................................................................................... 2.2(a)
Preferred Stock...................................................................................... 3.2(a)
Proxy Statement...................................................................................... 1.5(a)
Release.............................................................................................. 3.19(e)
Remedial Action...................................................................................... 3.19(f)
Rollover Letters..................................................................................... 2.1(d)
Safety and Environmental Claims...................................................................... 3.19(g)
Safety and Environmental Law......................................................................... 3.19(h)
Schedule 13E-3....................................................................................... 1.5(b)
SEC.................................................................................................. 1.5(a)
SEC Documents........................................................................................ 3.5
Secretary of State................................................................................... 1.2
Securities Act....................................................................................... 3.5
Service.............................................................................................. 3.9(b)
Shares............................................................................................... 2.1
Special Meeting...................................................................................... 1.5(a)
Stock Option Plans................................................................................... 2.5
Subsidiary........................................................................................... 3.1
Surviving Corporation................................................................................ 1.1
Taxes................................................................................................ 3.13(c)
Tax Return........................................................................................... 3.13(c)
Termination Date..................................................................................... 7.1(b)
Title Defects........................................................................................ 3.17(a)
Trade Secrets........................................................................................ 3.12
Year 2000............................................................................................ 3.20
Voting Debt.......................................................................................... 3.2(a)
</TABLE>
A-6
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of April 20, 1998,
by and between PCA International, Inc., a North Carolina corporation (the
"Company") and Jupiter Acquisition Corp., a North Carolina corporation
("Mergerco").
RECITALS
The respective boards of directors of the Company and Mergerco deem it
advisable for the mutual benefit of the Company and Mergerco, and their
respective shareholders, that Mergerco be merged with and into the Company (the
"Merger") upon the terms and subject to the conditions set forth herein and in
accordance with the Business Corporation Act of the State of North Carolina (the
"NCBCA"). The Board of Directors and sole shareholder of Mergerco have approved
and adopted this Agreement. The Board of Directors of the Company has approved
this Agreement and has resolved to recommend to the shareholders of the Company
to vote to approve the principal terms of this Agreement in conjunction with
their approval of the principal terms of the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2 hereof), the Company
and Mergerco shall consummate the Merger pursuant to which (a) Mergerco shall be
merged with and into the Company and the separate corporate existence of
Mergerco shall thereupon cease, (b) the Company shall be the successor or
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of North Carolina, and (c) the separate corporate existence of the Company
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth in this Section 1.1.
Pursuant to the Merger, (x) the Articles of Incorporation of the Company, as in
effect immediately prior to the Effective Time, shall be the articles of
incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Articles of Incorporation, and (y) the Bylaws of Mergerco, as in
effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation until thereafter amended as provided by law, such Articles
of Incorporation and such Bylaws. The Merger shall have the effects specified in
the NCBCA.
Section 1.2 EFFECTIVE TIME. Mergerco and the Company will cause Articles
of Merger to be executed and filed on the date of the Closing (as defined in
Section 1.3) (or on such other date as Mergerco and the Company may agree) with
the Secretary of State of North Carolina (the "Secretary of State") as provided
in the NCBCA. The Merger shall become effective on the date on which the
Articles of Merger have been duly filed with the Secretary of State or such time
as is agreed upon by the parties and specified in the Articles of Merger, and
such time is hereinafter referred to as the "Effective Time."
Section 1.3 CLOSING. The closing of the Merger (the "Closing") shall take
place at 10:00 a.m. on a date to be specified by the parties, which shall be no
later than the third business day after satisfaction or waiver of all of the
conditions set forth in Article VI hereof (the "Closing Date"), at the offices
of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New
York, New York, unless another date or place is agreed to in writing by the
parties hereto.
Section 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors of Mergerco at the Effective Time shall, from and after the Effective
Time, be the directors of the Surviving Corporation until their successors shall
have been duly elected or appointed or qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's Articles
of Incorporation and Bylaws. Mergerco agrees that prior to the Effective Time,
it shall offer the following directors of the Company the opportunity to remain
as directors of the Company following the Effective Time until their
A-7
<PAGE>
successors shall have been duly elected or appointed or qualified or until their
earlier death, resignation or removal: Donald P. Greenberg, Bridgette P. Heller
and Joseph H. Reich. The officers of the Company at the Effective Time shall,
from and after the Effective Time, remain as the officers of the Surviving
Corporation until their successors shall have been duly elected or appointed or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Bylaws.
Section 1.5 SHAREHOLDERS' MEETING.
(a) The Company, acting through its Board of Directors, shall, in accordance
with applicable law:
(i) duly call, give notice of, convene and hold a special meeting (or
the annual meeting) of its shareholders (the "Special Meeting") as promptly
as practicable for the purpose of considering and taking action upon the
approval of this Agreement and the Merger;
(ii) prepare and, after consultation with Mergerco, file with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), a preliminary proxy statement
relating to the Merger and this Agreement and use its best efforts (x) to
obtain and furnish the information required to be included by the SEC in the
Proxy Statement (as hereinafter defined) and, after consultation with
Mergerco, to respond promptly to any comments made by the SEC with respect
to the preliminary proxy statement and cause a definitive proxy statement,
including any amendment or supplement thereto (the "Proxy Statement"), to be
mailed to its shareholders, provided that no amendment or supplement to the
Proxy Statement will be made by the Company without consultation with
Mergerco and its counsel and (y) to obtain the necessary approvals of the
Merger and this Agreement by its shareholders;
(iii) promptly notify Mergerco of the receipt of the comments of the SEC
and of any request from the SEC for amendments or supplements to the
preliminary proxy statement or the definitive Proxy Statement or for
additional information, and will promptly supply Mergerco with copies of all
correspondence between the Company or its representatives, on the one hand,
and the SEC or members of its staff, on the other hand, with respect to the
preliminary proxy statement, the definitive Proxy Statement or the Merger;
(iv) promptly inform Mergerco if at any time prior to the Special
Meeting any event should occur which is required by applicable law to be set
forth in an amendment of, or a supplement to, the Proxy Statement, in which
case, the Company, with the cooperation of Mergerco, will, upon learning of
such event, promptly prepare and mail such amendment or supplement;
provided, that prior to such mailing, the Company shall consult with
Mergerco with respect to such amendment or supplement and shall afford
Mergerco reasonable opportunity to comment thereon;
(v) notify Mergerco at least 24 hours prior to the mailing of the Proxy
Statement, or any amendment or supplement thereto, to the shareholders of
the Company; and
(vi) subject to the fiduciary obligations of the Board of Directors
under applicable law as advised by independent counsel, include in the Proxy
Statement the recommendation of the Board of Directors that shareholders of
the Company vote in favor of the approval of this Agreement and the Merger.
(b) The Company, if required, and Mergerco, if required, shall prepare and
file concurrently with the filing of the preliminary proxy statement, a
Statement on Schedule 13E-3 ("Schedule 13E-3") with the SEC. If at any time
prior to the Special Meeting any event should occur which is required by
applicable law to be set forth in an amendment of, or supplement to, the
Schedule 13E-3, the Company or Mergerco, as the case may be, shall file such
amendments or supplements.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders of any
shares of common stock, par value $.20 per share, of
A-8
<PAGE>
the Company ("Common Stock" or "Shares" and individually as "Share") or holders
of any shares of common stock, par value $.01 per share, of Mergerco (the
"Mergerco Common Stock"):
(a) MERGERCO COMMON STOCK. Each issued and outstanding share of Mergerco
Common Stock shall be converted into and become one (1) fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND PARENT-OWNED STOCK. All Shares that
are owned by the Company as treasury stock and any Shares owned by Mergerco or
any wholly owned Subsidiary (as defined in Section 3.1 hereof) of Mergerco
immediately prior to the Effective Time shall be canceled and retired and shall
cease to exist and no consideration shall be delivered in exchange therefor.
(c) EXCHANGE OF SHARES. Each issued and outstanding Share (other than
Shares to be canceled in accordance with Section 2.1(b), Shares to remain
outstanding pursuant to Section 2.1(d), and any Shares which are held by
shareholders exercising appraisal rights pursuant to Chapter 55-13 of the NCBCA
("Dissenting Shareholders")) shall, subject to Section 2.1(d) herein, be
converted into the right to receive $26.50 in cash without interest (the "Cash
Merger Consideration"), payable to the holder thereof. Such Cash Merger
Consideration shall be paid upon surrender of the certificate formerly
representing such Share in the manner provided in Section 2.2. The Shares
converted into the right to receive the Cash Merger Consideration are
hereinafter referred to as the "Cash Merger Shares." All such Cash Merger
Shares, when so converted, shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any Cash Merger Shares shall cease to have any
rights with respect thereto, except the right to receive the Cash Merger
Consideration therefor upon the surrender of such certificate in accordance with
Section 2.2, without interest.
(d) CONTINUING SHARES. Notwithstanding the provisions of Section 2.1(c),
in connection with the Merger, each holder of Shares of Common Stock shall have
the right to elect to have any or all Shares held by such holder to remain
outstanding (any Shares which so remain outstanding are herein referred to as
"Continuing Shares") and not be converted into the right to receive the Cash
Merger Consideration (subject to the upward or downward adjustment referred to
below in this Section 2.1(d)). Such election may be exercised by a holder of
Shares completing and returning to the Company by 5:00 P.M., New York City time,
on the last business day preceding the date of the Special Meeting, a form of
Continuing Share Election (the "Continuing Share Election") which shall be
mailed to holders together with the Proxy Statement and proxy. Each holder of
Shares (other than holders of Shares to be canceled as set forth in Section
2.1(b) and Dissenting Shareholders) shall have the right to specify in the
Continuing Share Election (i) the number of Shares owned by such holder that
such holder desires to have converted into the right to receive the Cash Merger
Consideration and (ii) the number of Shares owned by such holder that such
holder desires to remain outstanding as Continuing Shares and not be converted
into the right to receive the Cash Merger Consideration. If holders of Shares
elect in the aggregate to retain Continuing Shares in excess of the Maximum
Continuing Number (as hereinafter defined), then the number of Continuing Shares
to be owned by all such electing holders will be prorated based on the number of
Continuing Shares each shareholder that made a Continuing Share Election elected
to retain (with fractional Shares rounded down to the next whole number) so that
only the Maximum Continuing Number of Shares shall remain as Continuing Shares.
With respect to Shares as to which Continuing Share Elections are made but with
respect to which no Continuing Shares will be issued by reason of the preceding
sentence, such Continuing Share Elections shall be deemed revoked and
relinquished and such Shares shall be converted into the right to receive the
Cash Merger Consideration. If holders of Shares elect in the aggregate to retain
less than the Minimum Continuing Number (as hereinafter defined) of Shares, then
(i) each shareholder that made a Continuing Share Election shall retain the
number of Continuing Shares set forth in such election and (ii) each shareholder
(whether or not such shareholder made a Continuing Share Election) shall receive
a prorated (based on the total number of Shares owned by such Shareholder as to
which a Continuing Share Election has not been made) number of Continuing Shares
(with fractional Shares rounded up to the next whole number) so that the Minimum
Continuing Number of Shares shall remain outstanding as Continuing Shares. With
respect to Shares as to which no
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Continuing Share Election was made but which will remain outstanding as
Continuing Shares by reason of the preceding sentence, such a Continuing Share
Election shall be deemed to have been made. The Continuing Shares shall not be
converted or canceled as provided in Section 2.1(c), but the certificates
representing such Shares shall be exchanged as provided in Section 2.4(b). For
the purposes of this Agreement, "Maximum Continuing Number" shall mean 358,490
Shares (plus the number of Continuing Shares "beneficially owned" (as defined in
the Exchange Act) by the persons listed in Section 2.1(d) to the Disclosure
Schedule heretofore delivered to Mergerco (the "Disclosure Schedule")), and
"Minimum Continuing Number" shall mean 271,698 Shares (plus the number of
Continuing Shares "beneficially owned" by the persons listed in Section 2.1(d)
to the Disclosure Schedule).
(e) ADJUSTMENTS. If, between the date of this Agreement and the Effective
Time, the number of outstanding Shares or the number of shares of the Common
Stock of the Company shall have been changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split-up, combination, exchange of shares or
the like, the amount of the Cash Merger Consideration shall be correspondingly
adjusted.
Section 2.2 PAYMENT OF CASH MERGER CONSIDERATION.
(a) PAYING AGENT. Mergerco shall designate a bank or trust company to act
as agent for the holders of the Cash Merger Shares in connection with the Merger
(the "Paying Agent") to receive the funds to which holders of the Cash Merger
Shares shall become entitled pursuant to Section 2.1(c). Such funds shall be
invested by the Paying Agent as directed by Mergerco or the Surviving
Corporation in direct obligations of the United States, obligations for which
the full faith and credit of the United States is pledged to provide for the
payments of principal and interest, commercial paper rated of the highest
quality by Moody's Investor Services or Standard & Poors Rating Group or
certificates of deposit, issued by commercial banks having at least $1 billion
in assets.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each holder of record of a
certificate or certificates, which immediately prior to the Effective Time
represented outstanding Cash Merger Shares (the "Certificates"), whose Shares
were converted pursuant to Section 2.1 into the right to receive the Cash Merger
Consideration (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Paying Agent and shall be in such
form and have such other provisions as Mergerco and the Company may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for payment of the Cash Merger Consideration. Upon
surrender of a Certificate for cancellation to the Paying Agent or to such other
agent or agents as may be appointed by Mergerco, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor the Cash Merger Consideration for each Share
formerly represented by such Certificate and the Certificate so surrendered
shall forthwith be canceled. If payment of the Cash Merger Consideration is to
be made to a person other than the person in whose name the surrendered
Certificate is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or shall be otherwise in
proper form for transfer and that the person requesting such payment shall have
paid any transfer and other taxes required by reason of the payment of the Cash
Merger Consideration to a person other than the registered holder of the
Certificate surrendered or shall have established to the satisfaction of the
Surviving Corporation that such tax either has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Cash Merger Consideration in cash as contemplated by this Section
2.2.
(c) NO FURTHER OWNERSHIP RIGHTS IN THE SHARES. At the Effective Time,
there shall be no further registration of transfers of the Cash Merger Shares on
the records of the Company. From and after the Effective Time, the holders of
Certificates evidencing ownership of the Cash Merger Shares outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such Shares, except as otherwise provided for herein or by applicable
law. If, after the Effective Time, Certificates are presented
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to the Surviving Corporation for any reason, they shall be canceled and
exchanged as provided in this
Article II.
(d) TERMINATION OF FUND; NO LIABILITY. At any time following one year
after the Effective Time, the Surviving Corporation shall be entitled to require
the Paying Agent to deliver to it any funds (including any interest received
with respect thereto) which had been made available to the Paying Agent and
which have not been disbursed to holders of Certificates, and thereafter such
holders shall be entitled to look to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) with respect to the Cash
Merger Consideration payable upon due surrender of their Certificates, without
any interest thereon. Notwithstanding the foregoing, neither the Surviving
Corporation nor the Paying Agent shall be liable to any holder of a Certificate
for Cash Merger Consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
Section 2.3 DISSENTERS' RIGHTS. Any Dissenting Shareholder which perfects
its dissenter's rights pursuant to Chapter 55-13 of the NCGCA shall have the
rights to receive payment as provided in such Chapter for its Shares. If any
Dissenting Shareholder shall fail to perfect or shall have effectively withdrawn
or lost the right to dissent, the Shares held by such Dissenting Stockholder
shall thereupon be treated as though such Shares had been converted into the
Cash Merger Consideration pursuant to Section 2.1.
Section 2.4 EXCHANGE OF STOCK CERTIFICATES. Immediately after the
Effective Time, the Surviving Corporation shall deliver to the record holders of
the certificates which immediately prior to the Effective Time represented all
the outstanding shares of Mergerco Common Stock that were converted into the
right to receive Shares in accordance with Section 2.1(a), in exchange for such
certificates, duly endorsed in blank, Share certificates, registered in the
names of such record holders, representing the number of Shares to which such
record holder are so entitled by virtue of Section 2.1(a).
(b) As soon as reasonably practicable after the Effective Time, the Paying
Agent shall mail to each holder of record of Continuing Shares a letter of
instructions (which shall be in such form and have such other provisions as
Mergerco and the Company may reasonably specify) instructing such holders to
transmit their certificates representing Continuing Shares to the Paying Agent
in exchange for new certificates representing such Continuing Shares. Although
certificates representing Continuing Shares which are not so exchanged will be
deemed for all purposes to represent validly issued and outstanding Continuing
Shares, such certificates will not be transferable on the books of the Company
except for such new certificates. Any holder of a certificate which represents
some Shares entitled to receive the Cash Merger Consideration and some
Continuing Shares shall receive in exchange therefor the Cash Merger
Consideration for the Cash Merger Shares pursuant to Section 2.2(b) and a new
certificate for the Continuing Shares pursuant to this Section 2.4(b).
Section 2.5 STOCK OPTIONS. With respect to the Company's Amended and
Restated 1996 Omnibus Long-Term Compensation Plan, the 1990 Non-Qualified Stock
Option Plan and the 1992 Non-Qualified Stock Option Plan (collectively, the
"Stock Option Plans"), the Company shall take such action as shall be required
to effectuate the cancellation of all options under the Stock Option Plans (the
"Options") (whether or not then exercisable and without regard to the exercise
price of such Options), to take effect immediately prior to the Effective Time.
Each holder of an Option shall receive from the Company, in respect of each
Option so canceled, as soon as practicable following the Effective Time, an
amount equal to the excess, if any, of the Cash Merger Consideration over the
exercise price of such Option, multiplied by the number of Shares subject to
such Option, without any interest thereon and after deducting taxes required to
be withheld (the "Option Consideration"). Notwithstanding the foregoing, payment
may be withheld in respect of any Option until any required consent of the
holder thereof to its cancellation as contemplated hereby is obtained. The
surrender of an Option to the Company shall be deemed a release of any and all
rights the holder had or may have had in such Option, other than the right to
receive the Option Consideration in respect thereof. Notwithstanding the
foregoing, Mergerco may, by separate agreements with holders of any Options,
agree with such holders on alternate treatment of such Options.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Mergerco as follows:
Section 3.1 ORGANIZATION. Except as set forth in Section 3.1 of the
Company's disclosure schedule heretofore delivered to Mergerco (the "Disclosure
Schedule"), each of the Company and its Subsidiaries (as defined below) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization and has all requisite
corporate power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power, authority, and governmental approvals would not
have a material adverse effect on the Company and its Subsidiaries, taken as a
whole. As used in this Agreement, the term "Subsidiary" shall mean all
corporations or other entities in which the Company or Mergerco, as the case may
be, owns a majority of the issued and outstanding capital stock or similar
interests. As used in this Agreement, any reference to any event, change or
effect being material or having a material adverse effect on or with respect to
any entity (or group of entities taken as a whole) means such event, change or
effect is materially adverse to the condition (financial or other), businesses,
assets or results of operations of such entity (or, if used with respect
thereto, of such group of entities taken as a whole). The Company and each of
its Subsidiaries is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not in the aggregate have a material adverse
effect on the Company and its Subsidiaries, taken as a whole. The Company does
not own any equity interest in any corporation or other entity other than the
Subsidiaries. Section 3.1 of the Company's Disclosure Schedule sets forth a
complete list of the Company's Subsidiaries.
Section 3.2 CAPITALIZATION. (a) The authorized capital stock of the
Company consists of 20,000,000 shares of Common Stock, (the "Company Shares")
and 2,000,000 shares of preferred stock, par value $10.00 per share (the
"Preferred Stock"). As of the date hereof, (i) 7,941,379 Shares are issued and
outstanding, (ii) no Shares are issued and held in the treasury of the Company,
(iii) no shares of Preferred Stock are issued or outstanding, (iv) 1,511,000
Shares are reserved for issuance upon exercise of outstanding Options granted
under the Stock Option Plans and (v) 150,000 Shares are reserved for issuance
upon exercise of outstanding warrants. Section 3.2 of the Company's Disclosure
Schedule sets forth the exercise price, grant date and expiration date for all
outstanding Options. All the outstanding Shares of the Company's capital stock
are, and all Shares which may be issued pursuant to the exercise of outstanding
options will be, when issued in accordance with the respective terms thereof,
duly authorized, validly issued, fully paid and non-assessable. Except as set
forth in Section 3.2 of the Disclosure Schedule there are no bonds, debentures,
notes or other indebtedness having general voting rights (or convertible into
securities having such rights) ("Voting Debt") of the Company or any of its
Subsidiaries issued and outstanding. Except as set forth above and except for
the transactions contemplated by this Agreement, as of the date hereof, (i)
there are no shares of capital stock of the Company or any of its Subsidiaries
authorized, issued or outstanding, (ii) there are no existing options, warrants,
calls, preemptive rights, subscriptions or other rights, agreements,
arrangements or commitments of any character, relating to the issued or unissued
capital stock of the Company or any of its Subsidiaries, obligating the Company
or any of its Subsidiaries to issue, transfer or sell or cause to be issued,
transferred or sold any shares of capital stock or Voting Debt of, or other
equity interest in, the Company or any of its Subsidiaries or securities
convertible into or exchangeable for such shares or equity interests, or
obligating the Company or any of its Subsidiaries to grant, extend or enter into
any such option, warrant, call, subscription or other right, agreement,
arrangement or commitment, and (iii) there are no outstanding contractual
obligations of the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any Shares, or any capital
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stock of the Company, or any Subsidiary or affiliate of the Company or to
provide funds to make any investment (in the form of a loan, capital
contribution or otherwise) in any Subsidiary or any other entity.
(b) All of the outstanding shares of capital stock of each of the
Subsidiaries of the Company are beneficially owned by the Company, directly or
indirectly, and all such shares have been validly issued and are fully paid and
nonassessable and are owned by either the Company or one of its Subsidiaries
free and clear of all liens, charges, claims or encumbrances.
(c) There are no voting trusts or other agreements or understandings to
which the Company or any of its Subsidiaries is a party with respect to the
voting of the capital stock of the Company or any of its Subsidiaries.
(d) None of the Company or its Subsidiaries is required to redeem,
repurchase or otherwise acquire shares of capital stock of the Company, or any
of its Subsidiaries, respectively, as a result of the transactions contemplated
by this Agreement.
Section 3.3 AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY ACTION. The
Company has full corporate power and authority to execute and deliver this
Agreement and, subject to shareholder approval, to consummate the transactions
contemplated hereby. The execution, delivery and performance by the Company of
this Agreement, and the consummation by it of the transactions contemplated
hereby, have been duly authorized by its Board of Directors and, except for
obtaining the approval of its shareholders as contemplated by Section 1.5
hereof, no other corporate action on the part of the Company is necessary to
authorize the execution and delivery by the Company of this Agreement and the
consummation by it of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by the Company and, assuming due and valid
authorization, execution and delivery hereof by Mergerco, is a valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for the filings,
permits, authorizations, consents and approvals as may be required as set forth
in Section 3.4 of the Company's Disclosure Schedule, and other applicable
requirements of the Exchange Act, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), state securities or blue sky laws, and
the NCBCA, neither the execution, delivery or performance of this Agreement by
the Company nor the consummation by the Company of the transactions contemplated
hereby nor compliance by the Company with any of the provisions hereof will (i)
conflict with or result in any breach of any provision of the Articles of
Incorporation or the Bylaws of the Company or of any of its Subsidiaries, (ii)
require any filing with, or permit, authorization, consent or approval of, any
court, arbitral tribunal, administrative agency or commission or other
governmental or other regulatory authority or agency (a "Governmental Entity"),
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
payment, termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound (the "Agreements") or (iv) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company, any of its Subsidiaries or any of their properties or assets, excluding
from the foregoing clause (iii) such violations, breaches or defaults which
would not, individually or in the aggregate, have a material adverse effect on
the Company and its Subsidiaries, taken as a whole and which will not materially
impair the ability of the Company to consummate the transactions contemplated
hereby. Except as set forth in Section 3.4 of the Company's Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to or otherwise bound
by any contract or agreement (whether written or oral) providing for any
severance or other payment upon or following a change of control of the Company.
Section 3.4 of the Company's Disclosure Schedule describes in reasonable detail
the nature and amount of any such severance or other payments.
Section 3.5 SEC REPORTS AND FINANCIAL STATEMENTS. The Company has filed
with the SEC, and has heretofore made available to Mergerco true and complete
copies of, all forms, reports, schedules,
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statements and other documents required to be filed by it since January 1, 1995
under the Exchange Act or the Securities Act of 1933, as amended (the
"Securities Act") (as such documents have been amended since the time of their
filing, collectively, the "Company SEC Documents"). As of their respective dates
or, if amended, as of the date of the last such amendment, the Company SEC
Documents, including, without limitation, any financial statements or schedules
included therein (a) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading and (b) complied in all material respects with
the applicable requirements of the Exchange Act and the Securities Act, as the
case may be, and the applicable rules and regulations of the SEC thereunder.
None of the Subsidiaries is required to file any forms, reports or other
documents with the SEC. The financial statements of the Company (the "1998
Financial Statements") included in the Company's Annual Report on Form 10K for
the fiscal year ended February 1, 1998 (the "1998 10-K") have been prepared
from, and are in accordance with, the books and records of the Company and its
consolidated Subsidiaries, comply in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto)
and fairly present the consolidated financial position and the consolidated
results of operations and cash flows of the Company and its consolidated
Subsidiaries at the dates and for the periods covered thereby. The historical
financial information contained in the financial information attached as Section
3.5 of the Disclosure Schedule is, to the best of the knowledge of the Company,
true and correct in all material respects.
Section 3.6 ABSENCE OF CERTAIN CHANGES. Except as disclosed in Section 3.6
of the Company's Disclosure Schedule, since February 1, 1998, the Company and
its Subsidiaries have conducted their respective businesses only in the ordinary
and usual course and there has not occurred (i) any events or changes (including
the incurrence of any liabilities of any nature, whether or not accrued,
contingent or otherwise) having, individually or in the aggregate, a material
adverse effect on the Company and its Subsidiaries, taken as a whole; (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the equity interests of the
Company or of any of its Subsidiaries; or (iii) any change by the Company or any
of its Subsidiaries in accounting principles or methods, except insofar as may
be required by a change in GAAP.
Section 3.7 NO UNDISCLOSED LIABILITIES. Except (a) as disclosed in the
Company SEC Documents and (b) for liabilities and obligations as set forth in
Section 3.7 of the Company Disclosure Schedule, since February 1, 1998, neither
the Company nor any of its Subsidiaries has incurred any liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise, that
have, or would be reasonably likely to have, a material adverse effect on the
Company and its Subsidiaries, taken as a whole, or, subject to the foregoing
exceptions or for liabilities or obligations incurred in the ordinary course of
business and consistent with past practice, would be required by GAAP to be
reflected on a consolidated balance sheet of the Company and its Subsidiaries
(including the notes thereto).
Section 3.8 LITIGATION. Except as set forth in Section 3.8 of the
Company's Disclosure Schedule, none of the Company, any of its Subsidiaries and
any of their respective properties, assets, businesses, franchises, or
governmental approvals, is subject to any pending, or, to the knowledge of the
Company, threatened, legal action, suit, arbitration or other legal or
administrative proceeding or outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen after due inquiry, in the future
would have, individually or in the aggregate, a material adverse effect on the
Company and its Subsidiaries, taken as a whole, or a material adverse effect on
the ability of the Company to consummate the transactions contemplated hereby.
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Section 3.9 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Section 3.9 of the Company's Disclosure Schedule sets forth a list of
all material employee benefit plans, arrangements, contracts or agreements
(including, but not limited to, employment agreements, severance agreements,
executive compensation arrangements, equity arrangements, incentive plans, bonus
plans, deferred compensation agreements, health, accident, vacation or other
fringe benefit plans) of any type (including but not limited to plans described
in section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), maintained by the Company, any of its Subsidiaries or any
trade or business, whether or not incorporated (an "ERISA Affiliate"), which
together with the Company would be under "common control" within the meaning of
section 4001(a)(14) of ERISA ("Benefit Plans"). Neither the Company nor any
ERISA Affiliate has any formal plan or commitment, whether legally binding or
not, to create any additional Benefit Plan or modify or change any existing
Benefit Plan that would affect any employee or terminated employee of the
Company or any Subsidiary.
(b) With respect to each Benefit Plan: (i) if intended to qualify under
section 401(a), 401(k) or 403(a) of the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder (the "Code"), the
United States Internal Revenue Service (the "Service") has issued a favorable
letter of determination on such qualified status and on the exempt status under
section 501(a) of the Code and since such letter of determination no event has
occurred that would disqualify such plan; (ii) such plan has been administered
in all material respects in accordance with its terms and applicable law; (iii)
no breaches of fiduciary duty have occurred which might reasonably be expected
to give rise to material liability on the part of the Company; (iv) no disputes
are pending, or, to the knowledge of the Company, threatened that might
reasonably be expected to give rise to material liability on the part of the
Company; (v) no prohibited transaction (within the meaning of Section 406 of
ERISA) has occurred that might reasonably be expected to give rise to material
liability on the part of the Company; (vi) all contributions and premiums due as
of the date hereof (taking into account any extensions for such contributions
and premiums) have been made in full; and (vii) all reports required to be filed
with respect to such Benefit Plan have been properly, accurately and timely
filed.
(c) Neither the Company nor any ERISA Affiliate (a) has incurred, or
reasonably expects to incur, an accumulated funding deficiency, as defined in
the Code and ERISA or (b) has any material liability under Title IV of ERISA
with respect to any Benefit Plan that is subject to Title IV of ERISA.
(d) With respect to each Benefit Plan that is a "welfare plan" (as defined
in section 3(1) of ERISA), no such plan provides medical or death benefits with
respect to current or former employees of the Company or any of its Subsidiaries
beyond their termination of employment, other than on an employee-pay-all basis.
(e) Except as contemplated by Section 2.5, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any individual
to severance pay or accelerate the time of payment or vesting, or increase the
amount, of compensation or benefits due to any individual, (ii) constitute or
result in a prohibited transaction under section 4975 of the Code or section 406
or 407 of ERISA or (iii) subject the Company, any of its Subsidiaries, any ERISA
Affiliate, any of the Benefit Plans, any related trust, any trustee or
administrator of any thereof, or any party dealing with the Benefit Plans or any
such trust to either a civil penalty assessed pursuant to section 409 or 502(i)
of ERISA or a tax imposed pursuant to section 4976 or 4980B of the Code.
(f) There is no arrangement under any Benefit Plan that would result in the
payment of any amount that by operation of section 280G or 162(m) of the Code
would not be deductible by the Company or any of the Subsidiaries.
(g) There are no unfunded obligations under any Benefit Plan except to the
extent of reserves therefor shown in the Company SEC Documents.
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(h) No employees of the Company or any of its Subsidiaries who earn annual
compensation in 1998 in excess of $50,000 have threatened to terminate or are
reasonably expected to terminate, their employment prior to or after the
Effective Time.
(i) Neither the Company nor any ERISA Affiliate has at any time within the
preceding six years been obligated to contribute to any Benefit Plan that is a
"multiemployer plan," as such term is defined in section 3(37) of ERISA.
(j) With respect to each Benefit Plan, the Company has made available to
Mergerco or its representatives accurate and complete copies of all plan texts,
summary plan descriptions, summary of material modifications, trust agreements
and other related agreements including all amendments to the foregoing; the most
recent annual report; the most recent annual and periodic accounting of plan
assets; the most recent determination letter received from the Service; and the
most recent actuarial valuation, to the extent any of the foregoing may be
applicable to a particular Benefit Plan.
Section 3.10 INFORMATION IN PROXY STATEMENT. The information contained in
the Proxy Statement and the Schedule 13E-3, any amendment or supplement thereto
or any other documents filed with the SEC by the Company in connection with the
Merger, when filed with the SEC and, in case of the Proxy Statement, when mailed
to Company shareholders and at the time of the Special Meeting (except for
information supplied by Mergerco specifically for inclusion or incorporation by
reference therein, as to which no representation by the Company is made), will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
Section 3.11 NO DEFAULT; COMPLIANCE WITH APPLICABLE LAWS. The business of
the Company and each of its Subsidiaries is not being conducted in default or
violation of any term, condition or provision of (i) its respective Articles of
Incorporation or Bylaws, or (ii) any federal, state, local or foreign statute,
law, ordinance, rule, regulation, judgment, decree, order, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to the Company or any of its Subsidiaries, excluding from the
foregoing clause (ii), defaults or violations which would not, individually or
in the aggregate, have a material adverse effect on the Company and its
Subsidiaries, taken as a whole. Except as disclosed in Section 3.11 of the
Company's Disclosure Schedule, as of the date of this Agreement, no claim or, to
the best knowledge of the Company, investigation or review by any Governmental
Entity or other entity with respect to the Company or any of its Subsidiaries is
pending or, to the best knowledge of the Company, threatened nor to the best
knowledge of the Company has any Governmental Entity or other entity indicated
an intention to assert or conduct the same, other than, in each case, those the
outcome of which, as far as reasonably can be foreseen after due inquiry, in the
future will not, individually or in the aggregate have a material adverse effect
on the Company and its Subsidiaries, taken as a whole.
Section 3.12 LICENSES; INTELLECTUAL PROPERTY. Section 3.12 of the
Company's Disclosure Schedule sets forth a list of all registered and material
unregistered Intellectual Property (as defined below) owned by the Company and
used in the conduct of its business and all agreements granting any right to use
or practice any right relating to the Intellectual Property (as defined below)
currently used in the conduct of the Company's business (the "Licenses"). Except
as set forth in Section 3.12 of the Company's Disclosure Schedule, (i) the
Company or its Subsidiaries is the sole owner of all of its rights under the
Licenses free and clear of any liens, claims, encumbrances or interests; (ii)
the Company or its Subsidiaries is the sole owner of, or has a valid right to
use pursuant to a License, all patents and patent applications; registered and
unregistered trademarks, service marks, trade names, trade dress, logos, company
names and other source or business identifiers, including all goodwill
associated therewith; the names, likenesses and other attributes of individuals;
registered and unregistered copyrights, computer programs and databases; trade
secrets, inventions, discoveries, proprietary technology, know-how, industrial
designs, customer lists and other confidential information ("Trade Secrets");
any pending applications for any of the foregoing (collectively, the
"Intellectual Property") currently used in the conduct of the Company's
business, free
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and clear of any liens, claims, encumbrances or interests; (iii) to the
Company's best knowledge the present or past operations of the Company or the
Subsidiaries does not infringe upon, violate, interfere or conflict with the
rights of others with respect to any Intellectual Property and no claim is
pending or, to the Company's best knowledge, threatened, to this effect; (iv)
none of the Intellectual Property currently used is invalid or unenforceable, or
has not been used or enforced or has failed to be used or enforced in a manner
that would result in the abandonment, cancellation or unenforceability of any of
the Intellectual Property and no claim is pending or, to the Company's best
knowledge, threatened, to this effect; (v) no License provision or any other
contract, agreement or understanding to which the Company or any Subsidiary is a
party would prevent the continued use by the Company or the Subsidiaries (as
currently used by the Company or its Subsidiaries) of any Intellectual Property
following the consummation of the transactions contemplated hereby; (vi) to the
Company's best knowledge, no person is infringing upon or otherwise violating
any Intellectual Property or License; (vii) there are no claims pending or, to
the Company's best knowledge, threatened in connection with any License; and
(viii) to the Company's best knowledge, no Trade Secret has been disclosed by
the Company or its Subsidiaries to any third party except subject to an
appropriate confidentiality agreement or as required by a governmental
authority.
Section 3.13 TAXES. Except as set forth in Section 3.13 of the Company's
Disclosure Schedule:
(i) the Company and its Subsidiaries have (w) duly filed (or there have
been filed on their behalf) with the Service all United States federal
income Tax Returns (as hereinafter defined) required to be filed by them on
or prior to the date hereof, such Tax Returns are true, correct and complete
in all material respects (or the financial statements contain an adequate
charge, accrual or reserve for taxes in respect of such tax returns), and
all Taxes (as hereinafter defined) shown on such Tax Returns have been duly
paid, (x) duly filed (or there have been filed on their behalf) with the
appropriate governmental authorities all other Tax Returns required to be
filed by them on or prior to the date hereof, other than any filings which
the failure to make in a timely manner would not, whether singly or in the
aggregate, have a material adverse effect on the Company and its
Subsidiaries taken as a whole, such Tax Returns are true, correct and
complete in all material respects (or the financial statements contain an
adequate charge, accrual or reserve for taxes in respect of such tax
returns), and all Taxes shown on such Tax Returns and all other Taxes due or
claimed to be due, whether by proposed assessment or otherwise, by any
governmental authority have been duly paid, except for such Taxes, if any,
as are being contested in good faith and as to which adequate reserves have
been provided in accordance with GAAP and (y) duly made provision in
accordance with GAAP for all Taxes for all periods for which Tax Returns
have not yet been filed or with respect to which Taxes are not yet due;
(ii) there are no liens for Taxes upon any property or assets of the
Company or any Subsidiary thereof, except for liens for Taxes not yet due;
(iii) neither the Company nor any of its Subsidiaries has made any change
in accounting methods, there is no application pending with any taxing
authority requesting permission for any change in any accounting method of
any of the Company or its Subsidiaries and no taxing authority has proposed
any adjustment or change in accounting method, and neither the Company nor
any of its Subsidiaries has received a ruling from any taxing authority or
signed an agreement likely to have a material adverse effect on the Company
and its Subsidiaries, taken as a whole;
(iv) the Company and its Subsidiaries have complied in all respects with
all applicable laws, rules and regulations relating to the payment and
withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code or similar provisions under
any foreign laws) and have, within the time and the manner prescribed by
law, withheld from employee wages and other compensation and paid over to
the proper governmental authorities all amounts required to be so withheld
and paid over under applicable laws;
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(v) no federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any
Taxes or Tax Returns of the Company or its Subsidiaries and neither the
Company nor its Subsidiaries has received notice that such an audit or
proceedings may be commenced;
(vi) the Federal Income Tax Returns of or with respect to each of the
Company and its Subsidiaries have been examined by the Service (or the
applicable statutes of limitation for the assessment of Taxes for such
periods have expired) for all periods through and including January 31, 1994
(except for the returns of American Studios, Inc., which have been examined
through December 31, 1991), and no deficiencies were asserted as a result of
such examinations which have not been resolved and fully paid;
(vii) there are no outstanding requests, agreements, consents or waivers
to extend the statutory period of limitations applicable to the assessment
or collection of any Taxes or deficiencies against the Company or any of its
Subsidiaries, and no power of attorney granted by either the Company or any
of its Subsidiaries with respect to any Taxes is currently in force;
(viii) neither the Company nor any of its Subsidiaries is a party to, is
bound by or has any obligation under any agreement providing for the
allocation or sharing of Taxes and neither the Company nor any of its
Subsidiaries has any liability for Taxes of any person or entity other than
the Company and its Subsidiaries;
(ix) neither the Company nor its Subsidiaries is a party to any
agreement, contract or arrangement that could result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code, and none of the actions contemplated or
permitted by this Agreement will result in any such payments;
(x) neither the Company nor any of its Subsidiaries has, with regard to
any assets or property held, acquired or to be acquired by any of them,
filed a consent to the application of Section 341(f) of the Code, or agreed
to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset (as such term is defined in Section 341(f)(4) of the
Code);
(xi) the deductibility of compensation by the Company and/or its
Subsidiaries will not be limited by Section 162(m) of the Code;
(xii) all transactions that could give rise to an understatement of the
federal income tax liability of the Company or any of its Subsidiaries
within the meaning of Section 6662(d) of the Code are adequately disclosed
on Tax Returns in accordance with Section 6662(d)(2)(B) of the Code if there
is or was no substantial authority for the treatment giving rise to such
understatement;
(xiii) no closing agreement that could affect the Taxes of the Company or
any of its Subsidiaries for periods ending after the Closing Date pursuant
to Section 7121 of the Code or any similar provision of any state, local or
foreign law has been entered into by or with respect to any of the Company
or its Subsidiaries;
(xiv) no currently effective Federal Income Tax elections have been made
or filed by or with respect to the Company or any of its Subsidiaries;
(xv) none of the assets of the Company or any of its Subsidiaries are
assets or property that are or will be required to be treated as being: (a)
owned by another person pursuant to the provisions of Section 168(f)(8) of
the Internal Revenue Code of 1954 (as in effect immediately before the
enactment of the Tax Reform Act of 1986); (b) "tax-exempt use property"
within the meaning of Section 168(h)(1) of the Code; (c) property used
predominantly outside the United States within the meaning of Proposed
Treasury Regulation Section 1.168-2(g)(5) or (d) "tax-exempt bond financed
property" within the meaning of Section 168(g)(5) of the Code; and
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(xvi) all adjustments to Federal taxable income required to have been
reported to any state or local taxing authority have been so reported.
(b) The net operating loss and credit carryovers available to the Company
and its Subsidiaries are set forth in Section 3.13 of the Company's Disclosure
Schedule. Except as set forth in Section 3.13 of the Company's Disclosure
Schedule, as of the date of this Agreement, the net loss and credit carryovers
are not subject to limitations imposed by Sections 382, 383 or 384 of the Code
(or any predecessor thereto), the consolidated return regulations or otherwise.
(c) "Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts, estimated,
excise, real or personal property, sales, withholding, social security,
occupation, use, service, license, net worth, payroll, franchise, transfer and
recording taxes, fees and charges, imposed by the Service or any taxing
authority (whether domestic or foreign including, without limitation, any state,
county, local or foreign government or any subdivision or taxing agency thereof
(including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies or other assessments. "Tax Return" shall mean any report, return,
document, declaration or other information or filing required to be supplied to
any taxing authority or Jurisdiction (foreign or domestic) with respect to
Taxes, including, without limitation, information returns, any documents with
respect to or accompanying payments of estimated Taxes, or with respect to or
accompanying requests for the extension of time in which to file any such
report, return, document, declaration or other information.
Section 3.14 INSURANCE. As of the date hereof, the Company and each of its
Subsidiaries are insured by insurers of recognized financial responsibility and
solvency, against such losses and risks and in such amounts as are customary in
the businesses in which they are engaged. All material policies of insurance and
fidelity or surety bonds insuring the Company or any of its Subsidiaries or
their respective businesses, assets, employees, officers and directors have
previously been made available for inspection by Mergerco and are in full force
and effect. Section 3.14 of the Company's Disclosure Schedule describes all
self-insurance arrangements affecting the Company or any Subsidiary and the
aggregate amount of all claims made under such arrangements since January 1,
1994. As of the date hereof, there are no material claims by the Company or any
Subsidiary under any such policy or instrument as to which any insurance company
is denying liability or defending under a reservation of rights clause. To the
Company's best knowledge, all necessary notifications of claims have been made
to insurance carriers other than those which will not have a material adverse
effect on the Company and its Subsidiaries, taken as a whole.
Section 3.15 CONTRACTS. Each Agreement (as defined in Section 3.4) is
legally valid and binding against the Company or its Subsidiaries and, to the
Company's best knowledge, each other party thereto and in full force and effect,
except where failure to be legally valid and binding and in full force and
effect would not, individually or in the aggregate, have a material adverse
effect on the Company and its Subsidiaries, taken as a whole, and there are no
material defaults thereunder by the Company or its Subsidiaries and, to the
Company's best knowledge, any other party thereto, except those defaults that
would not have a material adverse effect on the Company and its Subsidiaries,
taken as a whole. The Company has previously made available for inspection by
Mergerco or its representatives all material Agreements. Each of the Agreements
set forth on section 3.15 of the Company's Disclosure Schedule (the "Material
Agreements") is legally valid and binding against the Company or its
Subsidiaries and, to the Company's best knowledge, each other party thereto and
in full force and effect, and there are no material defaults thereunder by the
Company or its Subsidiaries and, to the Company's best knowledge, any other
party thereto. The Company has delivered to Mergerco true and complete copies of
all Material Agreements. (a) No party to any of the Material Agreements within
the last twelve months has threatened to modify, cancel or otherwise terminate,
or to the Company's best knowledge, intends to modify, cancel or otherwise
terminate, any of the Material Agreements or the relationship evidenced thereby
and (b) no
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such party has during the last twelve months materially limited or, to the
Company's best knowledge, intends to materially limit the services or supplies
provided by it to the Company or any of its Subsidiaries, or by the Company or
any of its Subsidiaries to it.
Section 3.16 RELATED PARTY TRANSACTIONS. Except as set forth in Section
3.16 of the Company's Disclosure Schedule or in the Company SEC Reports, no
director, officer, partner, employee, "affiliate" or "associate" (as such terms
are defined in Rule 12b-2 under the Exchange Act) of the Company or any of its
Subsidiaries (i) has borrowed money from or has outstanding any indebtedness or
other similar obligations to the Company or any of its Subsidiaries; (ii) to the
best knowledge of the Company, owns any direct or indirect interest of any kind
in, or is a director, officer, employee, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to participate in
the management, operations or profits of, any person or entity which is (x) a
competitor, supplier, customer, distributor, lessor, tenant, creditor or debtor
of the Company or any of its Subsidiaries, (y) engaged in a business related to
the business of the Company or any of its Subsidiaries or (z) participating in
any transaction to which the Company or any of its Subsidiaries is a party or
(iii) is otherwise a party to any contract, arrangement or understanding with
the Company or any of its Subsidiaries.
Section 3.17 REAL PROPERTY.
(a) The Company is the owner of good, marketable and insurable fee title to
the parcels of land described in Section 3.17 of the Company's Disclosure
Schedule and to all of the buildings and other improvements located thereon
(collectively, the "Owned Real Property") free and clear of all Title Defects
(as hereinafter defined) except for the matters listed in Section 3.17 of the
Company's Disclosure Schedule or encumbrances that do not, individually or in
the aggregate (i) interfere in any material respect with the use and occupancy
of the Owned Real Property as currently used and occupied or (ii) materially
reduce the fair market value of the Owned Real Property below the fair market
value the Owned Real Property would have had but for such encumbrances. The
Owned Real Property constitutes all of the real property owned by the Company on
the date hereof. As used in this Agreement, "Title Defects" shall mean and
include any mortgage, deed of trust, lien, pledge, security interest, claim,
lease, option, right of first refusal, easement, restrictive covenant,
encroachment or other survey defect, encumbrance or other restriction or
limitation whatsoever.
(b) The Company does not own or hold, and is not obligated under or a party
to, any option, right of first refusal or other contractual right to purchase,
acquire, sell or dispose of the Owned Real Property or any portion thereof or
any other real property, or interest therein.
(c) The Owned Real Property is in full compliance with all applicable
building, zoning, subdivision, environmental and other land use and similar
laws, codes, regulations and orders of governmental authorities, except where
the failure to be in such compliance will not have a material adverse effect on
the Company and its Subsidiaries, taken as a whole.
(d) The Company has not received notice and has no knowledge of any pending,
threatened or contemplated condemnation proceeding affecting the Owned Real
Property or any part thereof or of any sale or other disposition of the Owned
Real Property or any part thereof in lieu of condemnation.
Section 3.18 VOTE REQUIRED. The affirmative vote of the holders of a
majority of the outstanding Shares is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve the Merger, this
Agreement and the transactions contemplated thereby and hereby.
Section 3.19 ENVIRONMENTAL MATTERS. Except as set forth on Section 3.19 of
the Company's Disclosure Schedule, the Company (a) is and has been for the past
five years in compliance in all material respects with all applicable Safety and
Environmental Laws; (b) there is no Environmental Claim pending, or, to the
knowledge of the Company, threatened, against the Company, and there is no
civil, criminal or administrative judgment, order or notice of violation extant
against the Company pursuant to Safety and Environmental Laws or principles of
common law relating to pollution, protection of the Environment or
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health and safety; and (c) there are no past or present events, conditions,
circumstances, activities, practices, incidents, agreements, actions or plans
which may prevent material compliance by the Company with Environmental Laws, or
which have given rise to, or which are reasonably likely to give rise to, an
Environmental Claim or to Environmental Compliance Costs in which the liability
to the Company is reasonably likely to exceed $100,000. For purposes of this
Section 3.19:
(a) "ENVIRONMENT" means navigable waters, waters of the contiguous zone,
ocean waters, natural resources, surface waters, ground water, drinking water
supply, land surface, subsurface strata, ambient air, both inside and outside of
buildings and structures, man-made buildings and structures, and plant and
animal life on earth;
(b) "ENVIRONMENT CLAIMS" means any notification, whether direct or
indirect, formal or informal, written or oral, pursuant to Safety and
Environmental Laws or principles of common law relating to pollution, protection
of the Environment or health and safety, that any of the current or past
operations of the Company or any of its Subsidiaries, or any by-product thereof,
or any of the property currently or formerly owned, leased or operated by the
Company or any of its Subsidiaries, or the operations or property of any
predecessor of the Company or any of its Subsidiaries is or may be implicated in
or subject to any claim, order, demand, hearing, notice, lawsuit, agreement or
evaluation by any Governmental Entity or any other person;
(c) "ENVIRONMENTAL COMPLIANCE COSTS" means any expenditures, costs,
assessments or expenses (including any expenditures, costs, assessments or
expenses in connection with the conduct of any Remedial Action, as well as
reasonable fees, disbursements and expenses of attorneys, experts, personnel and
consultants), whether direct or indirect, necessary to cause the operations,
real property, assets, equipment or facilities owned, leased, operated or used
by the Company or any of its Subsidiaries to be in compliance with any and all
requirements, as in effect at the Closing Date, of Safety and Environmental
Laws, principles of common law concerning pollution, protection of the
Environment or health and safety, or permits issued pursuant to Safety and
Environmental Laws; provided, however, that Environmental Compliance Costs do
not include expenditures, costs, assessments or expenses necessary in connection
with normal maintenance of such real property, assets, equipment or facilities
or the replacement of equipment in the normal course of events due to ordinary
wear and tear;
(d) "HAZARDOUS SUBSTANCE" means any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste, industrial
substance or waste, petroleum or petroleum-derived substance or waste,
radioactive substance or waste, or any constituent of any such substance or
waste, or any other substance regulated under or defined by any Safety and
Environmental Law;
(e) "RELEASE" means any release, spill, emission, leaking, pumping,
injection, deposit, discharge, dispersal, leaching or migration into or through
the indoor or outdoor Environment or into, through or out of any property,
including the movement of Hazardous Substances through or in the air, soil,
surface water, ground water or property;
(f) "REMEDIAL ACTION" means all actions, whether voluntary or involuntary,
reasonably necessary to comply with, or discharge any obligation under, Safety
and Environmental Laws to (i) clean up, remove, treat, cover or in any other way
adjust Hazardous Substances in the indoor or outdoor Environment; (ii) prevent
or control the Release of Hazardous Substances so that they do not migrate or
endanger or threaten to endanger public health or welfare or the Environment; or
(iii) perform remedial studies, investigations, restoration and post-remedial
studies, investigations and monitoring on, about or in any real property;
(g) "SAFETY AND ENVIRONMENTAL CLAIM" means any claims based upon, arising
out of or otherwise in respect of any inaccuracy in or any breach of any
representation or warranty of the Sellers contained in this Agreement or in any
Document delivered pursuant to this Agreement related to Safety and
Environmental Laws; and
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(h) "SAFETY AND ENVIRONMENTAL LAW" means all laws, statutes, codes,
ordinances, regulations or other requirements and orders, judgments, awards,
decrees or writs relating to pollution, protection of the Environment, public or
worker health and safety, or the emission, discharge, release or threatened
release of Hazardous Substances into the Environment or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances.
Section 3.20 YEAR 2000. The Company has developed and implemented a
program to address, on a timely basis, the "Year 2000 Problem" (that is, the
risk that computer applications used by the Company may be unable to recognize
and perform properly date-sensitive functions involving certain dates prior to
and any date after December 31, 1999) and reasonably anticipates that it will,
on a timely basis, successfully resolve the Year 2000 Problem for all material
computer applications used by the Company.
Section 3.21 FAIRNESS OPINION. The Company has received a fairness opinion
from Needham & Company in the form attached as Section 3.21 to the Disclosure
Schedule.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
MERGERCO
Mergerco represents and warrants to the Company as follows:
Section 4.1 ORGANIZATION. Mergerco is a corporation duly organized,
validly existing and in good standing under the laws of North Carolina and has
all requisite corporate or other power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority, and
governmental approvals would not have a material adverse effect on Mergerco.
Mergerco is duly qualified or licensed to do business and in good standing in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not, in the aggregate, have a material adverse effect on
Mergerco.
Section 4.2 CAPITALIZATION. The authorized capital stock of Mergerco will,
immediately prior to the Effective Time, consist of (i) 10,000,000 shares of
Mergerco Common Stock, of which there will be 1,905,661 shares outstanding. All
outstanding shares of capital stock of Mergerco will at such time be duly
authorized and validly issued and fully paid and nonassessable. As soon as
practicable after the Effective Time, the Company shall issue to Jupiter
Partners II L.P. ("Jupiter"), and Jupiter shall purchase from the Company, for
cash consideration of $26.50 per share, a number of Shares of the Company equal
to (i) the amount, if any, of equity provided by Jupiter to Mergerco or the
Company pursuant to Section 4.7(a) in excess of $50,500,000, divided by (ii)
$26.50.
Section 4.3 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY
ACTION. Mergerco has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance by Mergerco of this Agreement, and the
consummation of the Merger and of the transactions contemplated hereby have been
duly authorized by the Board of Directors of Mergerco and by the sole
stockholder of Mergerco and no other corporate action on the part of Mergerco is
necessary to authorize the execution and delivery by Mergerco of this Agreement
and the consummation of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by Mergerco, as the case may be, and, assuming
due and valid authorization, execution and delivery hereof by the Company, is a
valid and binding obligation of Mergerco, as the case may be, enforceable
against it in accordance with its terms.
Section 4.4 CONSENTS AND APPROVALS: NO VIOLATION. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the HSR Act, state
securities or blue sky laws and the NCBCA, neither the execution, delivery or
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performance of this Agreement by Mergerco nor the consummation by Mergerco of
the transactions contemplated hereby nor compliance by Mergerco with any of the
provisions hereof will (i) conflict with or result in any breach of any
provision of the articles of incorporation or by-laws of Mergerco, (ii) require
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity, (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which Mergerco is a
party or by which it or any of its properties or assets may be bound or (iv)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Mergerco or any of its properties or assets, excluding from the
foregoing clause (iii) such violations, breaches or defaults which would not,
individually or in the aggregate, have a material adverse effect on Mergerco and
will not materially impair the ability of Mergerco to consummate the
transactions contemplated hereby.
Section 4.5 INFORMATION IN PROXY STATEMENT. None of the information
supplied by Mergerco specifically for inclusion or incorporation by reference in
the Proxy Statement will, at the date mailed to shareholders and at the time of
the Special Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
Section 4.6 LITIGATION. Mergerco is not subject to any outstanding order,
writ, injunction or decree which, insofar as can be reasonably foreseen after
due inquiry, would have a material adverse effect on the ability of Mergerco to
consummate the transactions contemplated hereby.
Section 4.7 FINANCING COMMITMENT. Jupiter will provide to Mergerco not
less than $50.5 million and not more than $54.3 million (including the amount to
purchase additional Shares pursuant to Section 4.2 herein) in equity to
consummate the Merger, pay the Cash Merger Consideration and pay the related
transaction expenses.
(b) Jupiter has entered into commitment letters (the "Commitment Letters")
for $127 million in senior debt financing and for $100 million of senior
subordinated debt financing (collectively, the "Financing"). Such Financing,
together with the amount referred to in paragraph (a) above, is adequate to pay
in full in cash at closing the Cash Merger Consideration, together with all fees
and expenses of Mergerco associated with the transactions contemplated hereby,
and to make any other payments necessary to consummate the transactions
contemplated hereby, including refinancing any debt required to be refinanced.
True and correct copies of the Commitment Letters have been furnished to the
Company. Neither Mergerco, Jupiter nor their affiliates will terminate, amend or
modify in any respect the Commitment Letters or in a manner which will adversely
affect the probability that such financing will be actually funded, or the
timing thereof, without the prior written consent of the Company. Jupiter has
fully paid any and all commitment fees or other fees required by such Commitment
Letters to be paid as of the date hereof (and will duly pay any such fees due
after the date hereof). The Commitment Letters are valid and in full force and
effect and no event has occurred which (with or without notice, lapse of time or
both) would constitute a default on the part of Jupiter or Mergerco thereunder.
Section 4.8 FRAUDULENT CONVEYANCE. Assuming the accuracy of the
representations and warranties of the Company in this Agreement, Mergerco has no
reason to believe that the financing to be provided to effect the Merger will
cause (i) the fair salable value of the Surviving Corporation's assets to be
less than the total amount of its existing liabilities, (ii) the fair salable
value of the assets of the Surviving Corporation to be less than the amount that
will be required to pay its probable liabilities on its existing debts as they
mature, (iii) the Surviving Corporation not to be able to pay its existing debts
as they mature or (iv) the Surviving Corporation to have an unreasonably small
capital with which to engage in its business.
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ARTICLE V
COVENANTS
Section 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company covenants and
agrees that, except (i) as expressly contemplated by this Agreement, (ii) as set
forth in Section 5.1 of the Company's Disclosure Schedule or (iii) as agreed in
writing by Mergerco, after the date hereof, and prior to the Effective Time:
(a) the business of the Company and its Subsidiaries shall be conducted
only in the ordinary and usual course and, to the extent consistent
therewith, each of the Company and its Subsidiaries shall use its
commercially reasonable best efforts to preserve its business organization
intact and maintain its existing relations with material customers and
suppliers, key employees, material creditors and business partners
(including, without limitation, those party to the Material Agreements);
(b) the Company will not, directly or indirectly, (i) sell, transfer or
pledge or agree to sell, transfer or pledge any of the Shares, Preferred
Stock, or capital stock of it or of any of its Subsidiaries beneficially
owned by it; (ii) amend its Articles of Incorporation or Bylaws or similar
organizational documents; or (iii) split, combine or reclassify the
outstanding Shares or Preferred Stock, or any outstanding capital stock of
any of the Subsidiaries of the Company;
(c) neither the Company nor any of its Subsidiaries shall: (i) declare,
set aside or pay any dividend or other distribution payable in cash, stock
or property with respect to its capital stock; (ii) issue, sell, pledge,
dispose of or encumber any additional shares of, or securities convertible
into or exchangeable for, or options, warrants, calls, commitments or rights
of any kind to acquire any shares of, capital stock of any class of the
Company or its Subsidiaries, other than shares reserved for issuance on the
date hereof pursuant to the exercise of Options outstanding on the date
hereof; (iii) transfer, lease, license, sell, mortgage, pledge, dispose of,
or encumber any material assets other than in the ordinary and usual course
of business and consistent with past practice, or incur or modify any
material indebtedness or other liability; or (iv) redeem, purchase or
otherwise acquire directly or indirectly any of its capital stock;
(d) neither the Company nor any of its Subsidiaries shall: (i) grant any
increase in the compensation payable or to become payable by the Company or
any of its Subsidiaries to any of its executive officers or key employees;
(ii) (A) adopt any new, or (B) amend or otherwise increase, or accelerate
the payment or vesting of the amounts payable or to become payable under any
existing, bonus, incentive compensation, deferred compensation, severance,
profit sharing, stock option, stock purchase, insurance, pension, retirement
or other employee benefit plan agreement or arrangement; or (iii) enter into
any employment or severance agreement with or, except in accordance with the
existing written policies of the Company, grant any severance or termination
pay to, any officer, director or employee of the Company or any its
Subsidiaries;
(e) neither the Company nor any of its Subsidiaries shall modify, amend
or terminate any of its material Agreements or waive, release or assign any
material rights or claims thereunder;
(f) neither the Company nor any of its Subsidiaries shall permit any
material insurance policy naming it as a beneficiary or a loss payable payee
to be canceled or terminated without notice to Mergerco, and the Company
shall use its reasonable commercial best efforts to maintain all such
policies;
(g) neither the Company nor any of its Subsidiaries shall: (i) incur or
assume any long-term debt or any short-term indebtedness other than normal
borrowings under the Company's existing revolving credit facility; (ii)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, continentally or otherwise) for the obligations of any
other person, except in the ordinary course of business and consistent with
past practice; (iii) make any loans, advances or capital
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contributions to, or investments in, any other person (other than to wholly
owned Subsidiaries of the Company or customary expense advances to employees
in accordance with past practice); or (iv) enter into any material
commitment or transaction (including, but not limited to, any material
borrowing, capital expenditure or purchase, sale or lease of assets or real
estate);
(h) neither the Company nor any of its Subsidiaries shall change any of
the accounting methods used by it unless required by GAAP;
(i) neither the Company nor any of its Subsidiaries shall pay, discharge
or satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction of any such claims, liabilities or obligations
reflected or reserved against in, or contemplated by, the consolidated
financial statements (or the notes thereto) of the Company and its
consolidated Subsidiaries or those incurred in the ordinary course of
business subsequent to the date of such financial statements;
(j) neither the Company nor any of its Subsidiaries will adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or
any of its Subsidiaries (other than the Merger);
(k) neither the Company nor any of its Subsidiaries will take, or agree
to commit to take, any action that would make any representation or warranty
of the Company contained herein, in the case of any representation or
warranty not qualified by materiality, materially inaccurate or, in the case
of any other representation or warranty, inaccurate in any respect at, or as
of any time prior to, the Effective Time in each case without regard to any
knowledge qualification; and
(l) neither the Company nor any of its Subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing,
or to authorize, recommend, propose or announce an intention to do any of
the foregoing.
Section 5.2 ACCESS; CONFIDENTIALITY. Upon reasonable notice, the Company
shall (and shall cause each of its Subsidiaries to) afford to the officers,
employees, accountants, counsel, financing sources and other representatives of
Mergerco, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, the Company shall (and shall cause each of its
Subsidiaries to) furnish promptly to Mergerco (a) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws, (b)
all interim management reports, financial statements or similar documents or
information prepared by the Company, and (c) all other information concerning
its business, properties and personnel as Mergerco may reasonably request.
Unless otherwise required by law and until the Effective Time, Mergerco will
hold and will cause any Representative, as defined in the Confidentiality
Agreement, dated April 18, 1997 between the Company and Mergerco to hold any
such information which is nonpublic in confidence pursuant to the terms of such
Confidentiality Agreement.
Section 5.3 CONSENTS AND APPROVALS. Each of the Company and Mergerco will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to this Agreement and the
transactions contemplated hereby (which actions shall include, without
limitation, furnishing all information required under the HSR Act and in
connection with approvals of or filings with any other Governmental Entity) and
will promptly cooperate with and furnish information (except that Mergerco shall
have no obligation to share any information filed by it under the HSR Act with
the Company other than information relating to its businesses in industries
within the same SIC codes as the Company) to each other in connection with any
such requirements imposed upon any of them or any of their Subsidiaries in
connection with this Agreement and the transactions contemplated hereby. Each of
the Company and Mergerco will, and will cause its Subsidiaries to, take all
reasonable actions necessary to obtain (and will cooperate with each other in
obtaining) any consent, authorization, order or approval of,
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or any exemption by, any Governmental Entity or other public or private third
party required to be obtained or made by Mergerco, the Company or any of their
Subsidiaries in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement.
(b) The Company and Mergerco shall take all reasonable actions necessary to
file as soon as practicable notifications under the HSR Act and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other Governmental Entity in connection with antitrust matters.
Section 5.4 NO SOLICITATION. Neither the Company nor any of its
Subsidiaries or affiliates shall (and the Company shall use its best efforts to
cause its officers, directors, employees, representatives and agents, including,
but not limited to, investment bankers, attorneys and accountants, not to),
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than Mergerco,
any of its affiliates or representatives) concerning any merger, tender offer,
exchange offer, sale of assets, sale of shares of capital stock or debt
securities or similar transactions involving the Company or any Subsidiary,
division or operating or principal business unit of the Company (an "Acquisition
Proposal"). The Company will immediately cease any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. Notwithstanding the foregoing, the Company may furnish
information concerning its business, properties or assets to any corporation,
partnership, person or other entity or group pursuant to appropriate
confidentiality agreements, and may negotiate and participate in discussions and
negotiations with such entity or group concerning an Acquisition Proposal (x) if
such entity or group has on an unsolicited basis submitted a bona fide written
proposal to the Board of Directors of the Company relating to any such
transaction which the Board of Directors determines (based upon the advice of
independent investment bankers for the Company) represents a superior
transaction to the Merger for the shareholders of the Company, and (y) if the
Board of Directors of the Company determines, only after receipt of advice from
independent legal counsel to the Company and firm, that the failure to provide
such information or access or to engage in such discussions or negotiations
would cause the Board of Directors to violate its fiduciary duties to the
Company's shareholders under applicable law. The Company shall immediately (in
any event within 24 hours) communicate to Mergerco the terms of any proposal,
discussion, negotiation or inquiry (and will disclose any written materials
received by the Company in connection with such proposal, discussion,
negotiation or inquiry) and the identity of the party making such proposal or
inquiry which it may receive in respect of any such transaction.
Section 5.5 BROKERS OR FINDERS. The Company represents, as to itself, its
Subsidiaries and its affiliates, that, except as set forth in Section 5.5 of the
Company's Disclosure Schedule, no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement and the Company agrees to
indemnify and hold Mergerco harmless from and against any and all claims,
liabilities or obligations with respect to any other fees, commissions or
expenses asserted by any person on the. basis of any act or statement alleged to
have been made by the Company or its affiliates. The expenses of the Company in
connection with the transactions contemplated by this Agreement, including the
fees and expenses of attorneys, accountants, investment bankers, financial
advisors or similar agents or reasonable estimates thereof, are set forth in
Section 5.5 of the Company's Disclosure Schedule.
Section 5.6 ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations, or
to remove any injunctions or other impediments or delays, legal or otherwise, to
consummate and make effective the Merger and the other transactions contemplated
by this Agreement. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement
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the proper officers and directors of Mergerco shall use all reasonable efforts
to take, or cause to be taken, all such necessary actions.
Section 5.7 PUBLICITY. The initial press release with respect to the
execution of this Agreement shall be a joint press release acceptable to
Mergerco and the Company. Thereafter, so long as this Agreement is in effect,
neither the Company, Mergerco nor any of their respective affiliates shall issue
or cause the publication of any press release or other announcement with respect
to the Merger, this Agreement or the other transactions contemplated hereby
without the prior consultation of the other party, except as may be required by
law or by any listing agreement with a national securities exchange or trading
market.
Section 5.8 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to Mergerco and Mergerco shall give prompt notice to the Company, of (i)
the occurrence or non-occurrence of any event the occurrence or non-occurrence
of which would cause any representation or warranty contained in this Agreement
to be untrue or inaccurate in any material respect at or prior to the Effective
Time and (ii) any material failure of the Company, or Mergerco, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; PROVIDED, HOWEVER, that the delivery
of any notice pursuant to this Section 5.8 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
Section 5.9 DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION. After
the Effective Time the Surviving Corporation (or any successor to the Surviving
Corporation) shall indemnify, defend and hold harmless the present and former
officers and directors of the Company and its Subsidiaries (each an "Indemnified
Party") against all losses, claims, damages, liabilities, fees and expenses
(including reasonable fees and disbursements of counsel and judgments, fines,
losses, claims, liabilities and amounts paid in settlement (provided that any
such settlement is effected with the written consent of the Surviving
Corporation, such consent not to be unreasonably withheld)) arising out of
actions or omissions occurring at or prior to the Effective Time to the full
extent permitted under North Carolina law, such right to include advancement of
expenses incurred in the defense of any action or suit; PROVIDED that any
determination required to be made with respect to whether such Indemnified Party
is entitled to indemnity hereunder (including without limitation whether, with
respect to the indemnification of such Indemnified Party by the Surviving
Corporation, an Indemnified Party's conduct complies with the standards set
forth under the NCBCA), shall be made at the Surviving Corporation's expense by
independent counsel mutually acceptable to the Surviving Corporation and the
Indemnified Party; PROVIDED FURTHER, that nothing herein shall impair any rights
or obligations of any present or former directors or officers of the Company.
(b) The Surviving Corporation shall maintain the Company's existing
officers' and directors' liability insurance covering claims arising from facts
or events which occurred before the Effective Time ("D&O Insurance"), for a
period of not less than six years after the Effective Date; PROVIDED, that the
Surviving Corporation may substitute therefor policies of substantially similar
coverage and amounts containing terms no less favorable to such former directors
or officers; PROVIDED, FURTHER, if the existing D&O Insurance expires, is
terminated or canceled during such period, the Surviving Corporation will obtain
substantially similar D&O Insurance; PROVIDED FURTHER, HOWEVER, that in no event
shall the Surviving Corporation be required to pay aggregate annual premiums for
insurance under this Section in excess of 150% of the aggregate annual premiums
paid by the Company in 1998 on an annualized basis for such purpose and, in the
event that the annual premium for insurance required to be obtained hereunder
shall exceed such amount, the Surviving Corporation shall maintain as much of
such insurance as may be maintained for such amount.
(c) To the extent permitted by applicable law, the articles of incorporation
and the bylaws of the Surviving Corporation for so long as it continues to exist
shall contain the provisions with respect to advancement of expenses,
indemnification and exculpation from liability set forth in the Articles of
Incorporation and Bylaws of the Company on the date of this Agreement, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner
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that would adversely affect the rights thereunder of individuals who on or prior
to the Effective Time were directors or officers of the Company, unless such
modification is required by law.
(d) In the event the Surviving Corporation or any of its respective
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity in such
consolidation or merger or (ii) transfers all or substantially all its
properties and assets to any person, then, and in each case, proper provision
shall be made so that the successors and assigns of the Surviving Corporation
honor the indemnification obligations set forth in this Section 5.9. The
Surviving Corporation shall honor the indemnification provisions of Section 5.9
of the Agreement and Plan of Merger dated December 17, 1996, as amended, by and
among the Company, ASI Acquisition Corp. and American Studios, Inc.
(e) The obligations of the Surviving Corporation under this Section 5.9
shall not be terminated, modified or assigned in such a manner as to adversely
affect any director or officer to whom this Section 5.9 applies without the
consent of such affected director or officer (it being expressly agreed that the
directors and officers to whom this Section 5.9 applies shall be third-party
beneficiaries of this Section 5.9).
Section 5.10 TAX RETURN FILING AND TAX ELECTIONS. The Company shall, and
the Company shall cause each Subsidiary to, prepare, in a manner consistent with
past practices, and timely file all Tax Returns required to be filed by the
Company and each Subsidiary the due date of which occurs on or before the
Closing Date and pay all Taxes due with respect to any such Tax Returns. The
Company shall, and the Company shall cause each Subsidiary to, deliver drafts of
such Tax Returns to Mergerco for its review no later than 10 business days prior
to the date, including extensions, on which such Tax Returns are required to be
filed and neither the Company nor any Subsidiary shall unreasonably fail to make
any changes to such Tax Returns as Mergerco may request sufficiently in advance
of the due date of such Tax Return to permit the making of such change. Except
upon the prior written consent of Mergerco, the Company shall not, and the
Company shall not permit any Subsidiary to, make any Tax elections on or prior
to the Closing Date.
Section 5.11 COOPERATION. After the date hereof and prior to the Effective
Time, the Company shall, and shall cause its management to, cooperate with
Jupiter in connection with Jupiter's arranging the financing for the Merger,
including (a) providing to Jupiter's financing sources all information
reasonably requested by them to complete syndications of their loans, (b)
assisting such financing sources upon their reasonable request in the
preparation of information memoranda to be used in connection with such
syndications and (c) otherwise assisting such financing sources in their
syndication efforts, including by making reasonably available officers of the
Company and its subsidiaries, as appropriate, at meetings of prospective lenders
in various locations. In the event that the Merger is not consummated and
Mergerco is not entitled to reimbursement pursuant to Section 8.1 for its Fees
and Expenses, Mergerco shall bear the out-of-pocket costs the Company incurred
as a result of the cooperation required under this Section 5.11.
Section 5.1 FINANCING. Mergerco shall use commercially reasonable efforts
to consummate the Financing or alternative financing on terms similar to the
Financing and no more onerous than the terms of the Financing ("Alternative
Financing") .
Section 5.13 NASDAQ LISTING. Mergerco will not take any action, for at
least three years after the Effective Time of the Merger, to cause the Common
Stock to be de-listed from the NASDAQ; provided, however, that Mergerco may
cause or permit the Common Stock to be de-listed in connection with any
transaction (including the Merger) which results in the termination of
registration of such securities under Section 12 of the Exchange Act, and
provided, further, that nothing in this Section 5.13 shall require the Company
to take any affirmative action to prevent the Common Stock from being de-listed
by NASDAQ if the Common Stock ceases to meet the applicable listing standards.
Section 5.14 FEES. The Company shall take reasonable actions to insure
that all legal, investment banking, accounting, advisory, consulting, and other
third party professional, printing and SEC fees and
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expenses incurred, paid or accrued by the Company and its Subsidiaries in
connection with the negotiation, execution and delivery of this Agreement and
the other documents contemplated hereby and the special Meeting shall be
reasonable and customary for such a Merger and the contemplated transactions
under this Agreement.
Section 5.15 CONSUMMATION OF THE MERGER. The Company shall use its
commercially reasonable efforts to consummate the Merger and the other
transactions contemplated by this Agreement.
ARTICLE VI
CONDITIONS
Section 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER
TRANSACTION. The respective obligation of each party to effect the Merger shall
be subject to the satisfaction on or prior to the Closing Date of each of the
following conditions, any and all of which may be waived in whole or in part by
the Company, or Mergerco, as the case may be, to the extent permitted by
applicable law:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the requisite vote of the holders of the Shares.
(b) STATUTES: CONSENTS. No statute, rule, order, decree or regulation
shall have been enacted or promulgated by any government or any governmental
agency or authority of competent jurisdiction which prohibits the consummation
of the Merger and all governmental consents, orders and approvals required for
the consummation of the Merger and the transactions contemplated hereby shall
have been obtained and shall be in effect at the Effective Time;
(c) INJUNCTIONS. There shall be no order or injunction of a court or other
governmental authority of competent jurisdiction in effect precluding,
restraining, enjoining or prohibiting consummation of the Merger; and
(d) HSR APPROVAL. The applicable waiting period under the HSR Act shall
have expired or been terminated.
Section 6.2 CONDITIONS TO MERGERCO'S OBLIGATION TO EFFECT THE MERGER. The
obligation of Mergerco to effect the Merger shall be subject to the satisfaction
on or prior to the Closing Date of each of the following conditions, any and all
of which may be waived in whole or in part by Mergerco to the extent permitted
by applicable law:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement (other than in Section 3.2 and
considered without regard to any materiality or material adverse effect
qualification) shall be true and correct in all respects in each case when made
and on the Closing Date as though made on and as of the Closing Date except at
either time to the extent that the failure of such representations and
warranties to be true and correct would not have or be reasonably likely to have
a material adverse effect on the Company and its Subsidiaries taken as a whole
or on the consummation of the transactions contemplated hereby or the Company's
ability to perform its obligations hereunder in a timely manner. The
representations and warranties of the Company set forth in Section 3.2 shall be
true and correct in all material respects on and as of the date made and as of
the Closing Date. The Company shall have delivered to Mergerco a certificate,
dated the Closing Date and signed by the Chief Executive Officer or Chief
Operating Officer of the Company, to the foregoing effects.
(b) COVENANTS. The Company shall have performed or complied in all
material respects with all obligations, agreements or covenants required by this
Agreement to be performed or complied with by it. The Company shall have
delivered to Mergerco a certificate, dated the Closing Date and signed by the
Chief Executive Officer or Chief Operating Officer of the Company, to the
foregoing effect.
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(c) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no material adverse change in the business, assets, operations
or condition (financial or otherwise) of the Company and its Subsidiaries, taken
as a whole. The Company shall have delivered to Mergerco a certificate, dated
the Closing Date and signed by the Chief Executive Officer or Chief Financial
Officer of the Company, to the foregoing effect.
(d) LITIGATION. There shall have been no action taken, or statute, rule,
regulation, judgment, order or injunction promulgated, entered, enforced,
enacted, issued or deemed applicable to the Merger by any Governmental Entity
which directly or indirectly (i) prohibits, or imposes any material limitations
on, the Company's ownership or operation (or that of its Subsidiaries or
affiliates) of all or a material portion of their businesses or assets, or
compels the Company to dispose of or hold separate any material portion of the
business or assets of the Company and its Subsidiaries, in each case taken as a
whole, (ii) prohibits or makes illegal the consummation of the Merger or the
other transactions contemplated by this Agreement, or (iii) otherwise materially
adversely affects the business, assets, operations or condition (financial or
otherwise) of the Company and its Subsidiaries, taken as a whole; PROVIDED that
Mergerco shall have used all reasonable efforts to cause any such judgment,
order or injunction to be vacated or lifted.
(e) FINANCING. All conditions to the availability of the Financing
contemplated by the Commitment Letters shall have been met and such Financing
shall be available or Alternative Financing shall be available.
(f) CONSENTS. All consents and waivers from third parties necessary in
connection with the consummation of the Merger shall have been obtained, except
to the extent that the failure to obtain such consents and waivers would not,
individually or in the aggregate, have a materially adverse effect to the
Company as a whole or a material adverse effect on the consummation of the
transactions contemplated hereby.
(g) CODE SECTION 1445 STATEMENT. The Company shall have furnished Mergerco
with a statement meeting the requirements of Treasury Regulation Section
1.1445-2(c)(3).
(h) OPTION CONSENTS. The Company shall have caused the cancellation of all
Options as contemplated by Section 2.5 hereof other than Options which Mergerco
and the holders thereof agree will remain outstanding and other than Options
covering not more than 10,000 Shares.
(i) DISSENTING SHARES. The number of Dissenting Shares shall constitute no
greater than 10% of the total number of Shares outstanding immediately prior to
the Effective Time.
Section 6.3 CONDITIONS TO THE COMPANY'S OBLIGATION TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger shall be subject to
the satisfaction on or prior to the Closing Date of each of the following
conditions, any and all of which may be waived in whole or in part by the
Company, to the extent permitted by applicable law:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Mergerco set forth in this Agreement that are qualified as to materiality shall
be true, and the representations and warranties of Mergerco set forth in this
Agreement that are not so qualified shall be true in all material respects, in
either case when made and immediately prior to the Closing Date as though made
on or as of the Closing Date, and in each case without giving effect to any
knowledge qualifiers contained therein. Mergerco shall have delivered to the
Company a certificate, dated the Closing Date and signed by the Chief Executive
Officer or Chief Operating Officer of Mergerco, to the foregoing effect.
(b) COVENANTS. Mergerco shall have performed or complied with all
obligations, agreements or covenant required by this Agreement to be performed
or complied with by it. Mergerco shall have delivered to the Company a
certificate, dated the Closing Date and signed by the Chief Executive Officer or
Chief Financial Officer of Mergerco, to the foregoing effect.
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(c) LITIGATION. There shall have been no action taken, or statute, rule,
regulation, judgment, order or injunction promulgated, entered, enforced,
enacted, issued or deemed applicable to the Merger by any Governmental Entity
which directly or indirectly prohibits or makes illegal the consummation of the
Merger or the other transactions contemplated by this Agreement; PROVIDED that
the Company shall have used all reasonable efforts to cause any such judgment,
order or injunction to be vacated or lifted.
ARTICLE VII
TERMINATION
Section 7.1 TERMINATION. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after stockholder approval thereof:
(a) By the mutual consent of the Board of Directors of Mergerco and the
Board of Directors of the Company.
(b) By either of the Board of Directors of the Company or the Board of
Directors of Mergerco:
(i) if the Merger shall not have been consummated before October 31,
1998 (the "Termination Date"); provided, that a party that has willfully
and materially breached a representation, warranty or covenant set forth
in this Agreement shall not be entitled to exercise its right to
terminate under this Section 7.1(b)(i);
(ii) if, upon a vote at a duly held meeting of the shareholders of
the Company or any adjournment thereof, the shareholders of the Company
shall not approve the Merger or this Agreement; or
(iii) if any Governmental Entity shall have issued an order, decree
or ruling or taken any other action (which order, decree, ruling or other
action the parties hereto shall use their reasonable efforts to lift), in
each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree,
ruling or other action shall have become final and non-appealable.
(c) By the Board of Directors of the Company:
(i) if, prior to the Effective Time, the Board of Directors of the
Company shall have (A) withdrawn, or modified or changed in a manner
adverse to Mergerco its approval or recommendation of this Agreement or
the Merger in order to permit the Company to execute an agreement in
principle or a definitive agreement providing for the acquisition of the
Company by merger, consolidation or otherwise, on terms (including the
per share consideration) determined by the Board of Directors of the
Company (based upon the advice of independent investment bankers for the
Company), to be superior for the shareholders of the Company as compared
to the terms of the acquisition of the Company contemplated by this
Agreement, and (B) determined, only after receipt of advice from
independent legal counsel to the Company, that the failure to take such
action as set forth in the preceding clause (A) could cause the Board of
Directors to violate its fiduciary duties to the Company's shareholders
under applicable law; or
(ii) if, prior to the Effective Time, Mergerco breaches or fails in
any material respect to perform or comply with any of its material
covenants and agreements contained herein or breaches its representations
and warranties in any material respect, or if any representation or
warranty of Mergerco set forth in this Agreement shall have become untrue
such that any of the conditions set forth in Section 6.1 or Section 6.3
is reasonably likely to be incapable of being satisfied by the
Termination Date (as such date may otherwise be extended by agreement of
the parties); PROVIDED, HOWEVER, that the Board of Directors of the
Company may terminate this Agreement under this Section 7.1(c)(ii) only
if such breach, failure of compliance or untruth, if it is capable of
being cured, continues uncured for a period of ten (10) days after
receipt by Mergerco of notice thereof from the Company.
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(d) By the Board of Directors of Mergerco:
(i) if prior to the Effective Time, the Board of Directors of the
Company shall have withdrawn, failed to reaffirm or modified or changed
in a manner adverse to Mergerco its approval or recommendation of this
Agreement or the Merger or shall have recommended an Acquisition Proposal
or offer, or shall have executed an agreement in principle (or similar
agreement) or definitive agreement providing for a tender offer or
exchange offer for any shares of capital stock of the Company, or a
merger, consolidation or other business combination with a person or
entity other than Mergerco or its affiliates (or the Board of Directors
of the Company resolves to do any of the foregoing); or
(ii) if, prior to the Effective Time, the Company breaches or fails
to perform or comply with any of its covenants and agreements contained
herein or breaches any of its representations or warranties contained
herein, or if any representation or warranty of the Company shall have
become untrue such that any of the conditions set forth in Section 6.1
and Section 6.2 is reasonably likely to be incapable of being satisfied
by the Termination Date (as such date may otherwise be extended by the
agreement of the parties); PROVIDED, HOWEVER, that the Board of Directors
of Mergerco may terminate this Agreement under this Section 7.1(d)(ii)
only if the breach, failure of compliance or untruth referred to herein
would have or would be reasonably likely to have a material adverse
effect on the Company and its Subsidiaries taken as a whole or on the
consummation of the transactions contemplated hereby or the Company's
ability to perform its obligations hereunder in a timely manner and, if
such breach, failure of compliance or untruth is capable of being cured,
the same continues uncured for a period of ten (10) days after receipt by
the Company of notice thereof from Mergerco.
Section 7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7. 1, written notice thereof shall forthwith be
given to the other party specifying the provision hereof pursuant to which such
termination is made, and this Agreement, except for the last sentence of Section
5.2 hereof shall forthwith become null and void, and there shall be no liability
on the part of Mergerco or the Company except (A) for fraud and (B) as set forth
in this Section 7.2 and Section 8.1.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 FEES AND EXPENSES. (a) Except as otherwise contemplated by
this Agreement, including Section 8.1(b) hereof, all costs and expenses incurred
in connection with this Agreement and the consummation of the transactions
contemplated hereby shall be paid by the party incurring such expenses.
(b) If (v) the Board of Directors of the Company shall terminate this
Agreement pursuant to Section 7.1(c)(i) hereof, (w) the Board of Directors
of Mergerco shall terminate this Agreement pursuant to Section 7.1(d)(i)
hereof, (x) the Board of Directors of Mergerco shall terminate this
Agreement pursuant to Section 7.1(b)(i) hereof and the Company has breached
the covenant set forth in Section 5.15, or (y) this Agreement shall be
terminated pursuant to Section 7.1(b)(i) or Section 7.1(b)(ii) hereof and,
in the case of this subclause (y) only, at the time of such termination an
Acquisition Proposal or an intention to make an Acquisition Proposal
(whether or not such Acquisition Proposal has been made subject to certain
contingencies) shall have been made to the Company (whether or not it is
pending at the time of such termination) or shall have been publicly
announced by any person and, if, in the case of this subclause (y) only,
within one year of such termination, the Company or any of its Subsidiaries
enters into an agreement relating to an Acquisition Proposal, the Company
shall pay to or at the direction of Mergerco (not later than two business
days after termination of this Agreement or the execution of the agreement
referred to in subclause (y) in the case of subclause (y) above) an amount
equal to $6,000,000 and shall promptly assume and pay, or reimburse Mergerco
for, all reasonable out-of-pocket fees and expenses (collectively "Fees and
Expenses") incurred, or to be incurred, by Mergerco and its affiliates
(including the fees and expenses
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of legal counsel, accountants, financial advisors, other consultants,
financial printers and financing sources) in connection with the Merger and
the consummation of the transactions contemplated by this Agreement. In the
event of any breach or failure set forth in subclause (x) above, such
$6,000,000 amount shall be paid by the Company to Mergerco as liquidated
damages and not as a penalty. In any such event recovery of such liquidated
damages shall be the sole right of Mergerco and payment of such amount shall
be the sole liability of the Company. Such amount is being fixed as
liquidated damages in any such event by reason of the fact that the actual
damages to be suffered by Mergerco are by their nature uncertain and
unascertainable with exactness. In any such event, Mergerco shall not seek
any money or other judgment against the Company, or any officer, director or
shareholder of the Company or against the assets of the Company, and the
sole recourse of Mergerco shall be to recover liquidated damages in the
foregoing amount.
(c) If this Agreement is terminated pursuant to Section 7.1(d)(ii) or
terminated by the Company at a time after Mergerco has given notice to the
Company that Mergerco is (or with notice or lapse of time or both, would be)
entitled to terminate this Agreement under Section 7.1(d)(ii), the Company
shall promptly assume and pay, or reimburse Mergerco for, all Fees and
Expenses.
(d) If this Agreement is terminated pursuant to Section 7.1(b)(i) or
Section 7.1(b)(ii) and, at the time of such termination, any person or group
of persons (the "Acquiror") has acquired beneficial ownership (as defined in
Rule 13d-3 under the Exchange Act) of more than 20% (other than for
investment purposes only) (or, in the case of Centennial Partners L.P., 35%)
in the aggregate of the outstanding Common Stock of the Company and if,
within one year of such termination, the Company or any of its Subsidiaries
enters into an agreement relating to an Acquisition Proposal, then the
Company shall pay to or at the direction of Mergerco (not later than two
business days after the execution of such agreement), an amount equal to
$6,000,000.
Section 8.2 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the shareholders of the Company contemplated
hereby, by written agreement of the parties hereto, by action taken by their
respective boards of directors, at any time prior to the Closing Date with
respect to any of the terms contained herein; provided, however, that after the
approval of this Agreement by the shareholders of the Company, no such
amendment, modification or supplement shall reduce the amount or change the form
of the Merger consideration.
Section 8.3 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time unless otherwise specified therein.
Section 8.4 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by an overnight courier service, such as Federal
Express, to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(a) if to Mergerco or Jupiter, to:
Jupiter Partners II L.P.
30 Rockefeller Plaza, Suite 4525
New York, New York 10112
Attention: Mr. John A. Sprague
Telephone No.: (212) 332-2800
Fax No.: (212) 332-2828
and
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<PAGE>
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Richard S. Borisoff, Esq.
Telephone No.: (212) 373-3000
Fax No.: (212) 757-3990
(b) if to the Company, to:
PCA International, Inc.
815 Matthews-Mint Hill Road
Matthews, NC 28105
Attention: John Grosso
Telephone No.: (704) 847-8011
Fax No.: (704) 847-1548
with a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Marc Weingarten, Esq.
Telephone No.: (212) 756-2000
Fax No.: (212) 593-5955
Section 8.5 INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include," "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation." As used in this Agreement, the term "affiliate(s)" shall have the
meaning set forth in Rule 12b-2 of the Exchange Act.
Section 8.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 8.7 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement and the Confidentiality Agreement (including the
documents and the instruments referred to herein and therein): (a) constitute
the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and (b) except as provided in Section 5.9 is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
Section 8.8 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 8.9 GOVERNING LAW. Except to the extent that the laws of the State
of North Carolina are mandatorily applicable, this Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
giving effect to the principles of conflicts of law thereof.
Section 8.10 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Mergerco may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to any
of its affiliates. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
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<PAGE>
IN WITNESS WHEREOF, Mergerco and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the date
first written above.
<TABLE>
<S> <C> <C>
JUPITER ACQUISITION CORP.
By: /s/ JOHN A. SPRAGUE
-----------------------------------------
Name: John A. Sprague
Title: President
PCA INTERNATIONAL, INC.
By: /s/ JOSEPH H. REICH
-----------------------------------------
Name: Joseph H. Reich
Title: Chairman of the Board
</TABLE>
A-35
<PAGE>
ANNEX B
April 20, 1998
Board of Directors
PCA International, Inc.
815 Matthews-Mint Hill Road
Matthews, North Carolina 28105
Ladies and Gentlemen:
We understand that PCA International, Inc. ("PCA" or the "Company") and
Jupiter Acquisition Corp. ("Mergerco"), a corporation formed by Jupiter Partners
II L.P. (the "Fund"), propose to enter into an Agreement and Plan of Merger (the
"Merger Agreement") whereby Mergerco will be merged with and into PCA (the
"Merger") and PCA will be the surviving corporation. The terms of the Merger
will be set forth more fully in the Merger Agreement.
Pursuant to the proposed Merger Agreement, we understand that at the
Effective Time (as defined in the Merger Agreement), each issued and outstanding
share of common stock, par value $.20 per share, of PCA (collectively, the
"Shares") (other than Shares held by the Company as treasury stock, Shares owned
by Mergerco or a wholly owned subsidiary thereof, and Dissenting Shares (as
defined in the Merger Agreement)) will be converted, subject to the Merger
Agreement and certain proration and adjustment provisions therein, into either
the right to receive $26.50 in cash or the right to retain at the election of
the holder thereof one Share. For purposes of this opinion, the term
"Consideration" means the aggregate amount of cash to be received and Shares to
be retained by holders of Shares in the Merger as set forth in the immediately
preceding sentence.
You have asked us to advise you as to the fairness, from a financial point
of view, of the proposed Consideration to be received by the holders of Shares
(other than Mergerco and its affiliates) in the Merger. Needham & Company, Inc.,
as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations. We have acted as financial advisor to PCA in
connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent on the consummation of the Merger. In
addition, PCA has agreed to indemnify us for certain liabilities arising out of
the rendering of this opinion. The Chairman of the Board of Directors of PCA is
a director of Needham & Company, Inc.
For purposes of this opinion we have, among other things: (a) reviewed a
draft of the Merger Agreement dated April 17, 1998; (b) reviewed certain other
documents relating to the Merger; (c) reviewed certain publicly available
information concerning PCA and certain other relevant financial and operating
data of PCA made available from the internal records of PCA; (d) reviewed the
historical stock prices and trading volumes of the Shares; (e) held discussions
with members of senior management of the Fund and PCA concerning the current and
future business prospects of PCA; (f) reviewed certain financial forecasts and
projections prepared by the management of PCA and information relating to
certain pro forma effects on the Company's capital structure after the Merger
provided by management of the Company and the Fund; (g) compared certain
publicly available financial data of companies whose securities are traded in
the public markets, which we deemed generally comparable to the business of PCA,
to similar data for PCA; (h) reviewed the financial terms of certain other
business combinations that we deemed generally relevant; and (i) performed
and/or considered such other studies, analyses, inquiries and investigations as
we deemed appropriate.
In connection with our review and in arriving at our opinion, we have
assumed and relied on the accuracy and completeness of all of the financial and
other information reviewed by us for purposes of this
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<PAGE>
opinion and have neither attempted to verify independently nor assumed
responsibility for verifying any of such information. In addition, we have
assumed, with your consent, that (i) the Merger will be accounted for as a
recapitalization under generally accepted accounting principles, (ii) any
material liabilities (contingent or otherwise, known or unknown) of PCA are as
set forth in the consolidated financial statements of PCA, (iii) the terms set
forth in the executed Merger Agreement will not differ materially from the
proposed terms provided to us in the draft Merger Agreement dated April 17,
1998, and (iv) the conditions precedent to the Merger will be satisfied and the
Merger will be consummated in accordance with the terms of the Agreement. While
we have discussed the financial forecasts and the assumptions, estimates and
judgments on which they are based with PCA management, with respect to financial
forecasts provided to us by the management of PCA, we have assumed for purposes
of our opinion that such forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of PCA
management, at the time of preparation, of the future operating and financial
performance of PCA. We express no opinion with respect to such forecasts or the
assumptions on which they were based. We have not assumed any responsibility for
or made or obtained any independent evaluation, appraisal or physical inspection
of the assets or liabilities of PCA. Further, our opinion is based on economic,
monetary and market conditions as they exist and can be evaluated as of the date
hereof. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, of the Consideration to be received by the holders of
Shares (other than Mergerco and its affiliates) in the Merger and does not
address PCA's underlying business decision to engage in the Merger. Our opinion
does not constitute a recommendation to any shareholder of PCA as to how such
shareholder should vote on the proposed Merger or what election such shareholder
should make with respect to the retention of such holder's Shares.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or any
part of the Company. We are not expressing any opinion as to what the value of
Shares will be after consummation of the Merger or the prices at which the
Shares will actually trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of PCA for our own account or for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This letter and the opinion expressed herein are provided at the request and
for the information of the Board of Directors of PCA and may not be quoted or
referred to or used for any purpose without our prior written consent, except
that this letter may be disclosed in connection with any registration statement
or proxy statement used in connection with the Merger so long as this letter is
quoted in full in such registration statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the holders of Shares (other
than Mergerco and its affiliates) in the Merger is fair to such holders from a
financial point of view.
<TABLE>
<S> <C> <C>
Very truly yours,
NEEDHAM & COMPANY, INC.
/S/ JOHN C. MICHAELSON
---------------------------------------------
John C. Michaelson
MANAGING DIRECTOR
</TABLE>
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<PAGE>
ANNEX C
ARTICLE 13 OF THE NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13.
DISSENTER'S RIGHTS.
PART I. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
SECTION 55-13-01. DEFINITIONS.
In this Article:
(1) "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.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when
and in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "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.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances, giving due consideration to the rate
currently paid by the corporation on its principal bank loans, if any,
but not less than the rate provided in G.S. 24-1.
(5) "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.
(6) "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.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 55-13-02. RIGHT TO DISSENT.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his
shares in the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other than
a parent corporation in a merger under G.S. 55-11-04) is a party
unless (i) approval by the shareholders of that corporation is not
required under G.S. 55-11-03(g) or (ii) such shares are then
redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater
than the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than as permitted by G.S.
55-12-01, including a sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan by which all or
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substantially all of the net proceeds of the sale will be distributed
in cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because
it (i) alters or abolishes a preferential right of the shares; (ii)
creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares; (iii) alters or abolishes a preemptive
right of the holder of the shares to acquire shares or other
securities; (iv) excludes or limits the right of the shares to vote
on any matter, or to cumulate votes; (v) 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 G.S. 55-6-04; or
(vi) changes the corporation into a nonprofit corporation or
cooperative organization;
(5) 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.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in
exchange for cash or other property, unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger
or share exchange or the sale or exchange of property is to be acted on,
were (i) listed on a national securities exchange or (ii) held by at
least 2,000 recorded shareholders, unless in either case:
(1) The articles of incorporation of the corporation issuing the shares
provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share
exchange to accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation
which, at the record date fixed to determine the shareholders
entitled to receive notice of and vote at the meeting at which
the plan of merger or share exchange is to be acted on, were
either listed subject to notice of issuance on a national
securities exchange or held of record by at least 2,000 record
shareholders; or
c. A combination of cash and shares as set forth in sub-subdivisions
a, and b, of this subdivision.
SECTION 55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he 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 he
asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and
his other shares were registered in the names of different shareholders.
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(b) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(1) He 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
(2) He does so with respect to all shares of which he is the beneficial
shareholder.
SECTION 55-13-04 TO 55-13-19. RESERVED FOR FUTURE CODIFICATION PURPOSES.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.
SECTION 55-13-20. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this Article and be accompanied by a copy of
this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no later than
10 days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the
dissenters' notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered
from such failure in a civil action brought in his own name within three
years after the taking of the corporate action creating dissenters'
rights under G.S. 55-13-02 unless he voted for such corporate action.
SECTION 55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to
demand payment for his shares if the proposed action is effectuated;
and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this Article.
SECTION 55-13-22. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall
mail by registered or certified mail, return receipt requested, a written
dissenters' notice to all shareholders who satisfied the requirement of
G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after
approval of the board of directors, of the corporate action creating
dissenters' rights under 6.S.55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
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(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the
date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
SECTION 55-13-23. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the
terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this Article.
SECTION 55-13-24. SHARE RESTRICTION.
(a) 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 G.S.
55-13-26.
(b) 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.
SECTION 55-13-25. PAYMENT.
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each
dissenter who complied with G.S. 55-13-23 the amount the corporation
estimates to be the fair value of his shares, plus interest accrued to
the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available 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, a statement of cash flows
for that year, and the latest available interim financial statements,
if any;
(2) As explanation of how the corporation estimated the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
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SECTION 55-13-26. FAILURE TO TAKE ACTION.
(a) 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.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a
new dissenters' notice under G.S. 55-13-22 and repeat the payment demand
procedure.
SECTION 55-13-27. RESERVED FOR FUTURE CODIFICATION PURPOSES.
SECTION 55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S OFFER
OR FAILURE TO PERFORM.
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand
payment of the amount in excess of the payment by the corporation under
G.S. 55-13-25 for the fair value of his shares and interest due, if;
(1) The dissenter believes that the amount offered under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) 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.
(b) A dissenter waives his rights to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation made payment for
his shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days
after the corporation has failed to perform timely. A dissenter who fails
to notify the corporation of his demand under subsection (a) within such
30-day period shall be deemed to have withdrawn his dissent and demand
for payment.
SECTION 55-13-29. RESERVED FOR FUTURE CODIFICATION PURPOSES.
PART 3. JUDICIAL APPRAISAL OF SHARES.
SECTION 55-13-30. COURT ACTION.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of
(i) the date payment is made under G.S. 55-13-28, or (ii) the date of the
dissenter's payment demand under G.S. 55-13-28 by filing a complaint with
the Superior Court Division of the General Court of Justice to determine
the fair value of the shares and accrued interest. A dissenter who takes
no action within the 60-day period shall be deemed to have withdrawn his
dissent and demand for payment.
(a)(1) Repealed by Session Laws 1997-202, s.4, effective October 1, 1997.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to 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 and all parties must
be served with a copy of the complaint. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
C-5
<PAGE>
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (a) 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 order appointing them, or any amendment to it. The parties are
entitled to the same discovery rights as parties in other civil
proceedings. The proceeding shall be tried as in other civil actions.
However, in a proceeding by a dissenter in a corporation that was a
public corporation immediately prior to consummation of the corporate
action giving rise to the right of dissent under G.S. 55-13-02, there is
no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation.
SECTION 55-13-31. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall
assess the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amount the court finds equitable;
(1) 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 G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either or
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 Article.
(c) 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 these counsel reasonable fees to be
paid out of the amounts awarded the dissenters who were benefited.
C-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 55-2-02 of the North Carolina Business Corporation Act (the "North
Carolina Corporation Act") enables a North Carolina corporation in its articles
of incorporation to eliminate or limit, with certain exceptions, the personal
liability of a director for monetary damages for breach of duty as a director.
No such provision is effective to eliminate or limit a director's liability for
(i) acts or omissions that the director at the time of the breach knew or
believed to be clearly in conflict with the best interests of the corporation,
(ii) improper distributions described in Section 55-8-33 of the North Carolina
Corporation Act, (iii) any transaction from which the director derived an
improper personal benefit, or (iv) acts or omissions occurring prior to the date
the exculpatory provision became effective. The Company's Articles of
Incorporation provide that no person who is serving or who has served as a
director of the Company shall be personally liable to the Company or any of its
shareholders for monetary damages for breach of duty as a director, except for
liability with respect to (i) acts or omissions that the director at the time of
such breach knew or believed were clearly in conflict with the best interest of
the Corporation, (ii) any transaction from which the director derived an
improper personal benefit, (iii) acts or omissions occurring prior to the
effective date of this article or (iv) acts or omissions with respect to which
the North Carolina Corporation Act does not permit the limitation of liability.
As used in the Company's Articles of Incorporation, the term "improper personal
benefit" is defined not to include a director's reasonable compensation or other
reasonable incidental benefit for or on account of his service as a director,
officer, employee, independent contractor, attorney or consultant of the
Corporation. The Company's Articles of Incorporation provide that such provision
may not be amended or repealed and that no other provision may be adopted
eliminates or reduces the protection granted thereby with respect to any matter
that occurred prior to such amendment, repeal or adoption.
Sections 55-8-50 through 55-8-58 of the North Carolina Corporation Act
permit a corporation to indemnify its directors, officers, employees or agents
under either or both a statutory or nonstatutory scheme of indemnification.
Under the statutory scheme, a corporation may, with certain exceptions,
indemnify a director, officer, employee or agent of the corporation who was, is
or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative, or
investigative, because of the fact that such person was a director, officer,
agent or employee of the corporation , or is or was serving at the bequest of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding(including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (1) that any
action taken in his official capacity with the corporation was in the best
interest of the corporation or (2) that in all other cases his conduct at least
was not opposed to the corporation's best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit. In addition to, and
notwithstanding the conditions of and limitations on indemnification described
above under the statutory scheme, Section 55-8-57 of the North Carolina
Corporation Act permits a corporation to indemnify or agree to indemnify any of
its directors, officers, employees or agents against liability and expenses
(including attorneys' fees) in any proceedings (including
II-1
<PAGE>
proceedings brought by or on behalf of the corporation) arising out of their
status as such or their activities in such capacities, except for any
liabilities or expenses incurred on account of activities that were, at the time
taken, known or believed by the person seeking indemnification to be clearly in
conflict with the best interests of the corporation. The company's Bylaws
provide that any person who at any time serves or has served as a director of
the Company, or in such capacity at the request of the Company for any other
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise shall have the right to be indemnified by the
Company to the fullest extent from time to time permitted by law in the event he
is made, or is threatened to be made, a party to any threatened, pending or
completed civil, criminal, administrative, investigative or arbitrative action,
suit or proceeding and any appeal therein (and any inquiry or investigation that
could lead to such action, suit or proceeding), whether or not brought by or on
behalf of the Company, seeking to hold him liable by reason of the fact that he
was or is acting in such capacity or in his or her capacity as an officer, agent
or employee of the Company.
Sections 55-88-52 and 55-8-56 of the North Carolina Corporation Act requires
a corporation, unless its articles of incorporation provide otherwise, to
indemnify a director or officer who has been wholly successful on the merits or
otherwise in the defense of any proceeding to which such director or officer
was, or was threatened to be made, a party. Unless prohibited by the articles of
incorporation, a director or officer also may make application and obtain
court-ordered indemnification if the court determines that such director or
officer is fairly and reasonably entitled to such indemnification as provided in
Section 55-8-54 and 55-8-56.
Additionally, Section 55-8-57 of the North Carolina Corporation Act
authorizes a corporation to purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation against certain liabilities incurred by such persons, whether or not
the corporation is otherwise authorized by the North Carolina Corporation Act to
indemnify such party. The Company's director and officers are currently covered
under directors' and officers' insurance policies maintained by the Company that
will indemnify such persons against certain liabilities arising from acts or
omissions in the discharge of their duties. Such insurance policies provided $20
million coverage for liabilities, including liabilities of alleged violation of
securities laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following is a list of exhibits filed as part of this Registration
Statement on Form S-4. Where so indicated, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated April 20, 1998, by and between PCA International, Inc. and
Jupiter Acquisition Corp. (included as Annex A to the Proxy Statement/Prospectus).
3.1 Restated Charter, as amended to date, incorporated by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-2, Commission File No. 33-50738, dated August 12, 1992.
3.2 Bylaws of PCA International, Inc. as amended to date, incorporated by reference to Exhibit 3.4 to
the Company's Quarterly Report on Form 10-Q, Commission File No. 0-8550, for the quarter ended May
3, 1992.
3.3 Bylaws of PCA International, Inc. after the Merger.
5.1 Opinion of Schulte Roth & Zabel LLP regarding legality.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
8.1 Opinion of Schulte Roth & Zabel LLP regarding tax matters.
10.1 License Agreement dated July 29, 1992, between Wal-Mart Corporation and American Studios, Inc.,
incorporated by reference to Exhibit 10.1 to American Studios, Inc. 1992 Form S-1 (Registration No.
33-58958).
10.2 License Agreement dated May 10, 1996, between Kmart and PCA International, Inc., incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended
April 28, 1996.
10.3* The 1990 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-36793).
10.4* The 1992 Non-Qualified Stock Option Plan, as amended, incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form S-8 (Registration No. 33-51458).
10.5 Loan Agreement dated February 28, 1997, between PCA International, Inc., PCA Photo Corporation of
Canada, Inc., PCA Specialty Retail Photo Corporation, Inc., Photo Corporation of America, PCA
National, Inc., ASI Acquisition Corp., and NationsBank, N.A., as Agent, incorporated by reference
to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended February 2, 1997.
10.6 Merger Agreement dated December 17, 1996, between PCA International, Inc., ASI Acquisition Corp.,
and American Studios, Inc., incorporated by reference to the Company's Form 8-K dated January 23,
1997.
10.7* 1996 Omnibus Long-Term Compensation Plan, incorporated by reference to Exhibit 10(j) to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 28, 1996.
10.8* Employment and Noncompete Agreement dated December 17, 1996, between Randy J. Bates and PCA
International, Inc., incorporated by reference to Exhibit 10(l) to the Company's Annual Report on
Form 10-K for the year ended February 2, 1997.
10.9* Employment and Noncompete Agreement dated December 17, 1996, between Robert Kent Smith and PCA
International, Inc., incorporated by reference to Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended February 2, 1997.
10.10* Employment and Noncompete Agreement dated December 17, 1996, between J. Robert Wren, Jr., and PCA
International, Inc., incorporated by reference to exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended February 2, 1997.
10.11* Employment and Noncompete Agreement dated June 9, 1997, between John Grosso and PCA International,
Inc., incorporated by reference to Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 3, 1997.
10.11(a) Form of Employment and Noncompete Agreement to be entered into by and between John Grosso and PCA
International, Inc. in connection with the Merger.
10.12* Employment and Noncompete Agreement dated June 9, 1997, between Eric Jeltrup and PCA International,
Inc., incorporated by reference to Exhibit 10(p) to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 3, 1997.
10.12(a) Form of Amendment No. 1 to Employment and Noncompete Agreement to be entered into by and between
Eric H. Jeltrup and PCA International, Inc. in connection with the Merger.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10.13* Employment and Noncompete Agreement dated June 9, 1997, between Bruce Fisher and PCA International,
Inc., incorporated by reference to Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 3, 1997.
10.13(a) Form of Amendment No. 1 to Employment and Noncompete Agreement to be entered into by and between
Bruce A. Fisher and PCA International, Inc. in connection with the Merger.
10.14 Sales contract dated August 1, 1997, between PCA International, Inc., and Agfa Division of Bayer
Corporation, incorporated by reference to Exhibit 10(r) to the Company's Quarterly Report on Form
10-Q for the quarter ended November 2, 1997.
10.15 Investor Agreement.
11. Computation of Earnings Per Share.
12. Computation of Ratios of Earnings to Fixed Charges.
21. Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Schulte Roth & Zabel LLP (incorporated in Exhibits 5.1 and 8.1).
23.3 Consent of Terry J. Blumer to serve as a director of the Company pursuant to Rule 438.
23.4 Consent of John A. Sprague to serve as a director of the Company pursuant to Rule 438.
23.5 Consent of John F. Klein to serve as a director of the Company pursuant to Rule 438
23.6 Consent of Thomas A. Berglund to serve as a director pursuant to Rule 438.
23.7 Consent of Eric F. Scheuermann to serve as a director pursuant to Rule 438.
24. Power of Attorney (incorporated on signature pages of the Registration Statement)
27.1 Financial Data Schedule dated May 3, 1998.
27.2 Financial Data Schedule dated February 1, 1998.
27.3 Financial Data Schedule dated February 2, 1997.
99.1 Form of Proxy
99.2 Form of Continuing Share Election Form
99.3 Form Letter of Transmittal
99.4 Consent of Needham & Company, Inc.
99.5 W-9 Tax Guidelines
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules of PCA International, Inc. and subsidiaries
for the fiscal years ended January 28, 1996, February 2, 1997 and February 1,
1998, and the quarter ended May 3, 1998 (unaudited).
II-4
<PAGE>
II. Valuation and Qualifying Accounts
(C) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES.
The Opinion of Needham & Company, Inc. is included as Annex B to the Proxy
Statement/ Prospectus.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the last
quarterly
II-5
<PAGE>
report that is specifically incorporated by reference in the prospectus to
provide such interim financial information.
(e) The undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Matthews, State of North
Carolina, July 23, 1998.
PCA INTERNATIONAL, INC.
BY: /S/ JOHN GROSSO
-----------------------------------------
John Grosso
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints JOHN GROSSO and Bruce A. Fisher and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b) (a "Rule
462(b) Registration Statement") and any and all pre-or-post-effective amendments
thereto, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing which they, or either of them, may
deem necessary or advisable to be done in connection with this Registration
Statement or any Rule 462(b) Registration Statement, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each said attorneys-in-fact and agents or any of them or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOSEPH H. REICH Chairman of the Board
- ------------------------------ July 23, 1998
Joseph H. Reich
/s/ JOHN GROSSO President, Chief Executive
- ------------------------------ Officer and Director July 23, 1998
John Grosso
/s/ ERIC H. JELTRUP Executive Vice President
- ------------------------------ and Chief Technical July 23, 1998
Eric H. Jeltrup Officer
/s/ J. ROBERT WREN, JR. Executive Vice President
- ------------------------------ and General Counsel July 23, 1998
J. Robert Wren, Jr.
/s/ BRUCE A. FISHER Senior Vice President,
- ------------------------------ Chief Financial Officer July 23, 1998
Bruce A. Fisher and Secretary
/s/ R. MICHAEL SPENCER Senior Vice President and
- ------------------------------ Treasurer July 23, 1998
R. Michael Spencer
/s/ PETER B. FOREMAN Director
- ------------------------------ July 23, 1998
Peter B. Foreman
/s/ GEORGE FRIEDMAN Director
- ------------------------------ July 23, 1998
George Friedman
/s/ DONALD P. GREENBERG Director
- ------------------------------ July 23, 1998
Donald P. Greenberg
/s/ BRIDGETTE P. HELLER Director
- ------------------------------ July 23, 1998
Bridgette P. Heller
/s/ CHARLOTTE H. MASON Director
- ------------------------------ July 23, 1998
Charlotte H. Mason
/s/ ALBERT F. SLOAN Director
- ------------------------------ July 23, 1998
Albert F. Sloan
/s/ STANLEY TULCHIN Director
- ------------------------------ July 23, 1998
Stanley Tulchin
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated April 20, 1998, by and between PCA International, Inc. and
Jupiter Acquisition Corp. (included as Annex A to the Proxy Statement/Prospectus).
3.1 Restated Charter, as amended to date, incorporated by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-2, Commission File No. 33-50738, dated August 12, 1992.
3.2 Bylaws of PCA International, Inc. as amended to date, incorporated by reference to Exhibit 3.4 to
the Company's Quarterly Report on Form 10-Q, Commission File No. 0-8550, for the quarter ended May
3, 1992.
3.3 Bylaws of PCA International, Inc. after the Merger.
5.1 Opinion of Schulte Roth & Zabel LLP regarding legality.
8.1 Opinion of Schulte Roth & Zabel LLP regarding tax matters.
10.1 License Agreement dated July 29, 1992, between Wal-Mart Corporation and American Studios, Inc.,
incorporated by reference to Exhibit 10.1 to American Studios, Inc. 1992 Form S-1 (Registration No.
33-58958).
10.2 License Agreement dated May 10, 1996, between Kmart and PCA International, Inc., incorporated by
reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended
April 28, 1996.
10.3* The 1990 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 (Registration No. 33-36793).
10.4* The 1992 Non-Qualified Stock Option Plan, as amended, incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form S-8 (Registration No. 33-51458).
10.5 Loan Agreement dated February 28, 1997, between PCA International, Inc., PCA Photo Corporation of
Canada, Inc., PCA Specialty Retail Photo Corporation, Inc., Photo Corporation of America, PCA
National, Inc., ASI Acquisition Corp., and NationsBank, N.A., as Agent, incorporated by reference
to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended February 2, 1997.
10.6 Merger Agreement dated December 17, 1996, between PCA International, Inc., ASI Acquisition Corp.,
and American Studios, Inc., incorporated by reference to the Company's Form 8-K dated January 23,
1997.
10.7* 1996 Omnibus Long-Term Compensation Plan, incorporated by reference to Exhibit 10(j) to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 28, 1996.
10.8* Employment and Noncompete Agreement dated December 17, 1996, between Randy J. Bates and PCA
International, Inc., incorporated by reference to Exhibit 10(l) to the Company's Annual Report on
Form 10-K for the year ended February 2, 1997.
10.9* Employment and Noncompete Agreement dated December 17, 1996, between Robert Kent Smith and PCA
International, Inc., incorporated by reference to Exhibit 10(m) to the Company's Annual Report on
Form 10-K for the year ended February 2, 1997.
10.10* Employment and Noncompete Agreement dated December 17, 1996, between J. Robert Wren, Jr., and PCA
International, Inc., incorporated by reference to exhibit 10(n) to the Company's Annual Report on
Form 10-K for the year ended February 2, 1997.
10.11* Employment and Noncompete Agreement dated June 9, 1997, between John Grosso and PCA International,
Inc., incorporated by reference to Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 3, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ---------------------------------------------------------------------------------------------------
<C> <S>
10.11(a) Form of Employment and Noncompete Agreement to be entered into by and between John Grosso and PCA
International, Inc. in connection with the Merger.
10.12* Employment and Noncompete Agreement dated June 9, 1997, between Eric Jeltrup and PCA International,
Inc., incorporated by reference to Exhibit 10(p) to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 3, 1997.
10.12(a) Form of Amendment No. 1 to Employment and Noncompete Agreement to be entered into by and between
Eric H. Jeltrup and PCA International, Inc. in connection with the Merger.
10.13* Employment and Noncompete Agreement dated June 9, 1997, between Bruce Fisher and PCA International,
Inc., incorporated by reference to Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 3, 1997.
10.13(a) Form of Amendment No. 1 to Employment and Noncompete Agreement to be entered into by and between
Bruce A. Fisher and PCA International, Inc. in connection with the Merger.
10.14 Sales contract dated August 1, 1997, between PCA International, Inc., and Agfa Division of Bayer
Corporation, incorporated by reference to Exhibit 10(r) to the Company's Quarterly Report on Form
10-Q for the quarter ended November 2, 1997.
10.15 Investor Agreement.
11. Computation of Earnings Per Share.
12. Computation of Ratios of Earnings to Fixed Charges.
21. Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Schulte Roth & Zabel LLP (incorporated in Exhibits 5.1 and 8.1).
23.3 Consent of Terry J. Blumer to serve as a director of the Company pursuant to Rule 438.
23.4 Consent of John A. Sprague to serve as a director of the Company pursuant to Rule 438.
23.5 Consent of John F. Klein to serve as a director of the Company pursuant to Rule 438
23.6 Consent of Thomas A. Berglund to serve as a director pursuant to Rule 438.
23.7 Consent of Eric F. Scheuermann to serve as a director pursuant to Rule 438.
24. Power of Attorney (incorporated on signature pages of the Registration Statement)
27.1 Financial Data Schedule dated May 3, 1998.
27.2 Financial Data Schedule dated February 1, 1998.
27.3 Financial Data Schedule dated February 2, 1997.
99.1 Form of Proxy
99.2 Form of Continuing Share Election Form
99.3 Form Letter of Transmittal
99.4 Consent of Needham & Company, Inc.
99.5 W-9 Tax Guidelines
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
JUPITER ACQUISITION CORP.
ARTICLE I
OFFICES
Section 1.1 Principal Office. The principal office of the Corporation
shall be located at such place, within or without the State of North Carolina,
as shall be determined from time to time by the Board of Directors (the
"Board"). The location of the principal office shall have be designated in the
annual report of the Corporation or amendment thereto filed pursuant to the
North Carolina Business Corporation Act.
Section 1.2 Registered Office. The Corporation shall maintain a
registered office in the State of North Carolina as required by law, which may
be, but need not be, identical with the principal office.
Section 1.3 Other Offices. The Corporation may have offices at such
other places, either within or without the State of North Carolina, as the Board
may from time to time determine, or as the affairs of the Corporation may
require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1 Place of Meetings. All meetings of shareholders shall be
held at the principal office of the Corporation, or at such other place, either
within or without the State of North Carolina, as shall be designated by the
Board or the Chief Executive Officer of the Corporation.
Section 2.2 Annual Meetings. The annual meeting of the shareholders
shall be held each year at such date and time as shall be designated by the
Board or the Chief Executive Officer of the Corporation, for the purpose of
electing directors of the Corporation and for the transaction of such other
business as may be properly brought before the meeting.
Section 2.3 Substitute Annual Meetings. If the annual meeting shall not
be held on the day provided for by these Bylaws, a substitute annual meeting may
be called in accordance
<PAGE>
with the provisions of Section 2.4. A meeting so called shall be designated and
treated for all purposes as the annual meeting.
Section 2.4 Special Meetings. Special meetings of the shareholders may
be called at any time by or at the request of the Chief Executive Officer or the
Board.
Section 2.5 Notice of Meetings. Written or printed notice stating the
date, time and place of the meeting shall be given not less than 10 nor more
than 60 days before the date thereof, either personally or by mail, at the
direction of the person or persons calling the meeting, to each shareholder
entitled to vote at such meeting and each other shareholder entitled to notice
pursuant to the Articles of Incorporation or applicable law.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called. In
the case of an annual meeting, the notice of meeting need not specifically state
the purpose or purposes thereof or the business to be transacted thereat unless
such statement is expressly required by the provisions of these Bylaws or by
applicable law.
If a meeting is adjourned for more than 120 days after the date fixed
for the original meeting, or if a new record date is fixed for the adjourned
meeting, or if the date, time and place for the adjourned meeting is not
announced prior to adjournment, then notice of the adjourned meeting shall be
given as in the case of an original meeting; otherwise, it is not necessary to
give any notice of the adjourned meeting other than by announcement at the
meeting at which the adjournment is taken.
A shareholder's attendance at a meeting constitutes a waiver by such
shareholder of (a) objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting and (b) objection to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the notice of the meeting, unless the
shareholder objects to considering the matter before it is voted upon.
Section 2.6 Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or in order to make a determination of shareholders for any
other proper purpose, the Board may fix in advance a date as the record date for
one or more voting groups for any such determination of shareholders, such
record date in any case to be not more than 70 days immediately preceding the
date of the meeting or the date on which the particular action, requiring such
determination of shareholders, is to be taken.
If no record date is fixed for the determination of shareholders
entitled to notice of or to
<PAGE>
vote at a meeting of shareholders, the close of business on the day before the
date on which notice of the meeting is first mailed to shareholders shall be the
record date for such determination of shareholders.
A determination of shareholders entitled to notice of or to vote at a
shareholders' meeting is effective for any adjournment of the meeting unless the
Board fixes a new record date for the adjourned meeting, which it shall do if
the meeting is adjourned to a date more than 120 days after the date fixed for
the original meeting.
Section 2.7 Shareholders' List. Not later than two business days after
the date notice of a meeting of shareholders is first given, the Secretary or
other officer or person having charge of the stock transfer books of the
Corporation shall prepare an alphabetical list of the shareholders entitled to
notice of such meeting, with the address of and number of shares held by each
shareholder, arranged by voting group (and by class or series of shares within
each voting group), which list shall be kept on file at the principal office of
the Corporation (or such other place in the city where the meeting is to be held
as may be identified in the notice of the meeting) for the period commencing two
business days after notice of the meeting is first given and continuing through
such meeting, and which list shall be available for inspection by any
shareholder, or his or her agent or attorney, upon his or her demand, at any
time during regular business hours. This list shall also be produced and kept
open at the time and place of the meeting and shall be subject to inspection by
any shareholder, or his or her agent or attorney, during the whole time of the
meeting and any adjournment thereof.
Section 2.8 Quorum. Unless a greater number of votes is required by the
North Carolina Business Corporation Act or by the Articles of Incorporation or
the Bylaws of the Corporation, the holders of shares entitled to a majority of
votes entitled to be cast by a voting group (as described in Section 2.10),
present in person or represented by proxy, shall constitute a quorum of such
voting group at all meetings of shareholders for purposes of acting on any
matter for which action by such voting group is required. If there is no quorum
at the opening of a meeting of shareholders, such meeting may be adjourned from
time to time by the vote of a majority of the votes cast on the motion to
adjourn; and, at any adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the original
meeting.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment thereof unless a new record date is set for that adjourned meeting.
Section 2.9 Organization. Each meeting of shareholders shall be
presided over by the Chief Executive Officer, or, in the absence or at the
request of the Chief Executive Officer, by such other officer as the Chief
Executive Officer or the Board may designate, or in their absence
<PAGE>
and in the absence of such designation, by any person selected to preside by
plurality vote of the shares represented and entitled to vote at the meeting,
with each share having the same number of votes to which it would be entitled on
any other matter on which all shares represented and entitled to vote at the
meeting would be entitled to vote. The Secretary, or in the absence or at the
request of the Secretary, any person designated by the person presiding at the
meeting, shall act as secretary of the meeting.
Section 2.10 Voting of Shares. Except as otherwise provided in the
Articles of Incorporation, each outstanding share, regardless of class, having
the right to vote on a matter or matters submitted to a vote at a meeting of
shareholders shall be entitled to one vote on each such matter.
A shareholder may vote his shares in person or may appoint a proxy to
vote or otherwise act for him by signing an appointment form, either personally
or by his attorney-in-fact. An appointment of a proxy is effective when received
by the Secretary or other officer or agent authorized to tabulate votes. An
appointment is valid for eleven months unless a different period is expressly
provided in the appointment form.
If the name signed on a vote, consent, waiver, or proxy appointment
corresponds to the name of a shareholder, the Corporation, if acting in good
faith, is entitled to accept the vote, consent, waiver, or proxy appointment and
give it effect as the act of the shareholder. The shareholder is the person in
whose name shares are registered in the records of the Corporation or the
beneficial owner of shares to the extent of the rights granted by a nominee
certificate on file with the Corporation.
The Corporation may establish a procedure by which the beneficial owner
of shares that are registered in the name of a nominee is recognized by the
Corporation as a shareholder, in accordance with the provisions of the North
Carolina Business Corporation Act.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the Secretary or other officer or agent authorized to tabulate
votes, acting in good faith, has reasonable basis for doubt about the validity
of the signature on it or about the signatory's authority to sign for the
shareholder.
Except in the election of directors (as provided in Section 3.3), if a
quorum of a voting group exists, action on a matter by such voting group is
approved by such voting group if the votes cast within such voting group
favoring the action exceed the votes cast within such voting group opposing the
action, unless a greater number of affirmative votes is required by law or the
Articles of Incorporation or a Bylaw adopted by the shareholders. If the
Articles of Incorporation, a Bylaw adopted by the shareholders or applicable law
provides for voting on a matter by two or more voting groups, action is taken on
that matter only when approved by each
<PAGE>
of those voting groups counted separately; provided, that action may be taken by
one voting group on a matter even though no action is taken at the same time by
another voting group entitled to vote on the matter.
Redeemable shares shall not be entitled to vote after notice of
redemption is given to the holders and a sum sufficient to redeem the shares has
been deposited with a bank, trust company, or other financial institution, under
a irrevocable obligation to pay the holders the redemption price on surrender of
the shares.
As used in these Bylaws, the term "voting group" means all shares of
one or more classes or series that, under the Articles of Incorporation or
applicable law, are entitled to vote and be counted together collectively on a
matter at a meeting of shareholders. All shares entitled by the Articles of
Incorporation or applicable law to vote generally on the matter are for that
purpose a single voting group. So long as the Corporation shall have only one
class of shares outstanding and the voting rights of all shares of such class
are identical, then all such outstanding shares shall constitute a single voting
group and the sole voting group, except to the extent that applicable law or the
Articles of Incorporation requires that any of such shares be treated as a
separate voting group.
Section 2.11 Action Without Meeting. Any action required or permitted
to be taken at a meeting of the shareholders may be taken without a meeting if
one or more written consents, setting forth the action so taken, shall be signed
by all of the persons who would be entitled to vote upon such action at a
meeting, whether before or after the action so taken, and delivered to the
Corporation to be included in the corporate minute book or filed with the
corporate records. Such consent has the same effect as a meeting vote and may be
described as such in any document.
If the North Carolina Business Corporation Act requires that notice of
proposed action be given to holders of shares who are not entitled to vote on
the matter at a meeting and action is to be taken by unanimous consent of the
voting shareholders, the Corporation shall give holders of shares who are not
entitled to vote on the matter written notice of the proposed action at least
ten days before the action is taken. The notice shall contain or be accompanied
by the same material that, under the North Carolina Business Corporation Act,
would have been required to be sent to holders of shares who are not entitled to
vote on the matter in the notice of meeting at which the proposed action would
have been submitted to the shareholders for action.
ARTICLE III
DIRECTORS
Section 3.1 General Powers. All corporate powers shall be exercised by
or under the
<PAGE>
authority of, and the business and affairs of the Corporation managed under the
direction of, the Board or, to the extent permitted under the North Carolina
Business Corporation Act, by such committees as the Board may establish pursuant
to these Bylaws or pursuant to the North Carolina Business Corporation Act.
Section 3.2 Number, Term and Qualification. The number of directors
constituting the Board of Directors shall be not less than three (3) nor more
than fifteen (15), as shall be determined from time to time by resolution
adopted by the Board of Directors or the shareholders. The number of
directors fixed pursuant to such a resolution shall be deemed to be the
number of directors prescribed by these Bylaws.
Directorships created by a resolution increasing the number of
directors shall constitute vacancies on the Board from the date of such
resolution and may be filled in accordance with the provisions of Section 3.5 of
this Article III as in the case of vacancies resulting from the death,
resignation, retirement, removal or disqualification of a director. A resolution
decreasing the number of directors shall not terminate the term of office of any
director elected by the shareholders, and such director shall be entitled to
continue in office until expiration of the term for which he was elected, or his
sooner death, resignation, retirement, removal or disqualification.
Directors shall be elected at each annual or adjourned annual meeting
of the shareholders, or special meeting of the shareholders called for such
purpose. Each director shall hold office until his death, resignation,
retirement, removal, disqualification or until his successor shall have been
elected and qualified. If the shareholders shall fail at any election of
directors to elect the full number of directors to be elected, the resulting
vacancies may be filled by the Board in accordance with the provisions of
Section 3.5 of this Article III as in the case of vacancies resulting from
death, resignation, retirement, removal or disqualification of a director.
Directors need not be residents of the State of North Carolina nor
shareholders of the Corporation.
Section 3.3 Voting for Directors. Directors shall be elected by a
plurality of the votes cast by the shares entitled to vote in the election of
directors at a meeting at which a quorum is present. Except as provided in the
Articles of Incorporation or required by applicable law, shareholders have no
right to cumulate their votes for directors.
Section 3.4 Removal. Except as otherwise provided in the Articles of
Incorporation or by applicable law, a director may be removed from office at any
time, with or without cause, by a vote of shareholders of the voting group
entitled to elect such director, provided a quorum exists and the number of
votes cast in favor of such removal exceeds the number of votes cast against
such removal; and the entire Board may be removed from office at any time, with
or
<PAGE>
without cause, by the affirmative vote of a majority of the votes entitled to be
cast at any election of directors. A director may not be removed by the
shareholders at a meeting unless the notice of the meeting states that a purpose
of the meeting is removal of such director. If any directors are so removed, new
directors may be elected at the same meeting.
Section 3.5 Vacancies. A vacancy occurring in the Board, including
positions not filled by the shareholders or those resulting from an increase in
the number of directors, may be filled by a majority of the remaining directors,
though less than a quorum, or by the sole remaining director. Any director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office, if any.
Section 3.6 Compensation. The Board, in its discretion, may compensate
directors for their services as such and may provide for the payment of all
expenses reasonably incurred by directors in attending meetings of the Board or
of any Committee or in the performance of their other duties as directors.
Nothing herein contained, however, shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
Section 3.7 Committees. The Board, by resolution adopted by a majority
of the number of directors then in office, may designate and appoint from among
its members one or more Committees, each consisting of two or more directors,
who shall serve as members of such Committee at the pleasure of the Board. Each
such Committee, to the extent provided in such resolution, shall have and may
exercise all of the authority of the Board in the management of the Corporation,
except that no such Committee shall have authority to: (a) authorize dividends
or other distributions not permitted by applicable law to be authorized by a
Committee; (b) approve or propose to shareholders action that applicable law
requires to be approved by shareholders; (c) fill vacancies on the Board or on
any Committee; (d) amend the Articles of Incorporation; (e) adopt, amend or
repeal bylaws; (f) approve a plan of merger not requiring shareholder approval;
(g) authorize or approve reacquisition of shares, except according to a formula
or method prescribed by the Board; (h) authorize or approve the issuance or sale
or contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares (except that
the Board may authorize a Committee or a senior executive officer to do so
within limits specifically prescribed by the Board); or (i) amend or repeal any
resolution of the Board that by its terms provides that it is not so amendable
or repealable. Nothing herein shall preclude the Board from establishing and
appointing any committee, whether of directors or otherwise, not having or
exercising the authority of the Board.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 4.1 Regular Meetings. A regular annual meeting of the Board
shall be held
<PAGE>
immediately after, and at the same place as, the annual meeting or substitute
annual meeting of shareholders. In addition, the Board may provide the time and
place, either within or without the State of North Carolina, for the holding of
additional regular meetings.
Section 4.2 Special Meetings. Special meetings of the Board may be
called by or at the request of the Chairman of the Board (if there shall be a
person holding such office), the Chief Executive Officer or any two directors.
Such meetings may be held either within or without the State of North Carolina.
Section 4.3 Notice of Meetings. Regular meetings of the Board may be
held without notice.
The person or persons calling a special meeting of the Board shall, at
least one day before the meeting, give notice thereof, either written or oral,
by any usual means of communication, e.g., letter, telephone call, facsimile
transmission, telegram, direct contact. Written notice is effective at the
earliest of the following: (i) when received; (ii) five days after its deposit
in the United States mail, as evidenced by the postmark, if mailed with postage
thereon prepaid and correctly addressed; or (iii) on the date shown on the
return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee. Oral
notice is effective when actually communicated to the person entitled thereto.
Such notice need not specify the purpose for which the meeting is called.
A director's attendance at or participation in a meeting shall
constitute a waiver by such director of notice of such meeting, unless the
director at the beginning of the meeting (or promptly upon his or her arrival)
objects to holding the meeting or to the transaction of business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
Section 4.4 Quorum. A majority of the number of directors fixed or
prescribed by these Bylaws shall be required for, and shall constitute, a quorum
for the transaction of business at any meeting of the Board.
Section 4.5 Manner of Acting. Except as otherwise provided in these
Bylaws or required by applicable law, the affirmative vote of a majority of the
directors present at a meeting of the Board shall be the act of the Board, if a
quorum is present when the vote is taken.
Section 4.6 Organization. Each meeting of the Board shall be presided
over by the Chairman of the Board (if there shall be a person holding such
office), or, in the absence or at the request of the Chairman of the Board, by
the Chief Executive Officer, and in their absence or at their request, by any
person selected to preside by vote of a majority of the directors present. The
Secretary, or in the absence or at the request of the Secretary, any person
designated by the person presiding at the meeting, shall act as secretary of the
meeting.
<PAGE>
Section 4.7 Action Without Meeting. Action required or permitted to be
taken by the Board or a Committee at a meeting may be taken without a meeting if
one or more written consents describing the action taken are signed by each of
the directors or members of the Committee, as the case may be, whether before or
after the action so taken, and filed with corporate records or the minutes of
the proceedings of the Board or Committee. Action so taken is effective when the
last director or Committee member signs such consent, unless the consent
specifies a different effective date. Such consent has the effect of a meeting
vote and may be described as such in any document.
Section 4.8 Participation by Conference Telephone. Any one or more
directors or members of a Committee may participate in a meeting of the Board or
Committee by means of a conference telephone or similar communications device
that allows all directors participating in the meeting to simultaneously hear
each other during the meeting, and such participation in a meeting shall be
deemed presence in person at such meeting.
ARTICLE V
OFFICERS
Section 5.1 Positions. The officers of the Corporation shall be a
President, a Secretary, a Treasurer and such other officers as the Board may
appoint, including a Chairman, one or more Vice Presidents and one or more
Assistant Secretaries and Assistant Treasurers, who shall exercise such powers
and perform such duties as shall be determined from time to time by the Board.
The Board may designate one or more Vice Presidents as Executive Vice Presidents
and may use descriptive words or phrases to designate the standing, seniority or
areas of special competence of the Vice Presidents elected or appointed by it.
Any number of offices may be held by the same person unless the Articles of
Incorporation or these Bylaws otherwise provide.
Section 5.2 Appointment. The officers of the Corporation shall be
chosen by the Board at its annual meeting or at such other time or times as the
Board shall determine.
Section 5.3 Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that the officer
is also a Director.
Section 5.4 Term of Office. Each officer of the Corporation shall hold
office for the term for which he or she is elected and until such officer's
successor is chosen and qualifies or until such officer's earlier death,
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. Such resignation shall take
<PAGE>
effect at the date of receipt of such notice or at such later time as is therein
specified, and, unless otherwise specified, the acceptance of such resignation
shall not be necessary to make it effective. The resignation of an officer shall
be without prejudice to the contract rights of the Corporation, if any. Any
officer elected or appointed by the Board may be removed at any time, with or
without cause, by vote of a majority of the entire Board. Any vacancy occurring
in any office of the Corporation shall be filled by the Board. The removal of an
officer without cause shall be without prejudice to the officer's contract
rights, if any. The election or appointment of an officer shall not of itself
create contract rights.
Section 5.5 Fidelity Bonds. The Corporation may secure the fidelity of
any or all of its officers or agents by bond or otherwise.
Section 5.6 Chairman. The Chairman, if one shall have been appointed,
shall preside at all meetings of the Board and shall exercise such powers and
perform such other duties as shall be determined from time to time by the Board.
Section 5.7 President. The President shall be the Chief Executive
Officer of the Corporation and shall have general supervision over the business
of the Corporation, subject, however, to the control of the Board and of any
duly authorized committee of Directors. The President shall preside at all
meetings of the Stockholders and at all meetings of the Board at which the
Chairman (if there be one) is not present. The President may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts and other
instruments except in cases in which the signing and execution thereof shall be
expressly delegated by the Board or by these Bylaws to some other officer or
agent of the Corporation or shall be required by statute otherwise to be signed
or executed and, in general, the President shall perform all duties incident to
the office of President of a corporation and such other duties as may from time
to time be assigned to the President by the Board.
Section 5.8 Vice Presidents. At the request of the President, or, in
the President's absence, at the request of the Board, the Vice Presidents shall
(in such order as may be designated by the Board, or, in the absence of any such
designation, in order of seniority based on age) perform all of the duties of
the President and, in so performing, shall have all the powers of, and be
subject to all restrictions upon, the President. Any Vice President may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments, except in cases in which the signing and execution thereof
shall be expressly delegated by the Board or by these Bylaws to some other
officer or agent of the Corporation, or shall be required by statute otherwise
to be signed or executed, and each Vice President shall perform such other
duties as from time to time may be assigned to such Vice President by the Board
or by the President.
<PAGE>
Section 5.9 Secretary. The Secretary shall attend all meetings of the Board and
of the Stockholders and shall record all the proceedings of the meetings of the
Board and of the stockholders in a book to be kept for that purpose, and shall
perform like duties for committees of the Board, when required. The Secretary
shall give, or cause to be given, notice of all special meetings of the Board
and of the stockholders and shall perform such other duties as may be prescribed
by the Board or by the President, under whose supervision the Secretary shall
be. The Secretary shall have custody of the corporate seal of the Corporation,
and the Secretary, or an Assistant Secretary, shall have authority to impress
the same on any instrument requiring it, and when so impressed the seal may be
attested by the signature of the Secretary or by the signature of such Assistant
Secretary. The Board may give general authority to any other officer to impress
the seal of the Corporation and to attest the same by such officer's signature.
The Secretary or an Assistant Secretary may also attest all instruments signed
by the President or any Vice President. The Secretary shall have charge of all
the books, records and papers of the Corporation relating to its organization
and management, shall see that the reports, statements and other documents
required by statute are properly kept and filed and, in general, shall perform
all duties incident to the office of Secretary of a corporation and such other
duties as may from time to time be assigned to the Secretary by the Board or by
the President.
Section 5.10 Treasurer. The Treasurer shall have charge and custody of,
and be responsible for, all funds, securities and notes of the Corporation;
receive and give receipts for moneys due and payable to the Corporation from any
sources whatsoever; deposit all such moneys and valuable effects in the name and
to the credit of the Corporation in such depositaries as may be designated by
the Board; against proper vouchers, cause such funds to be disbursed by checks
or drafts on the authorized depositaries of the Corporation signed in such
manner as shall be deter mined by the Board and be responsible for the accuracy
of the amounts of all moneys so disbursed; regularly enter or cause to be
entered in books or other records maintained for the purpose full and adequate
account of all moneys received or paid for the account of the Corporation; have
the right to require from time to time reports or statements giving such
information as the Treasurer may desire with respect to any and all financial
transactions of the Corporation from the officers or agents transacting the
same; render to the President or the Board, whenever the President or the Board
shall require the Treasurer so to do, an account of the financial condition of
the Corporation and of all financial transactions of the Corporation; exhibit at
all reasonable times the records and books of account to any of the Directors
upon application at the office of the Corporation where such records and books
are kept; disburse the funds of the Corporation as ordered by the Board; and, in
general, perform all duties incident to the office of Treasurer of a corporation
and such other duties as may from time to time be assigned to the Treasurer by
the Board or the President.
Section 5.11 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the President.
<PAGE>
ARTICLE VI
CONTRACTS, LOANS AND DEPOSITS
Section 6.1 Contracts. The Board may authorize any officer or officers,
agent or agents, to enter into any contract or execute and deliver any document
or instrument on behalf of the Corporation, and such authority may be general or
confined to specific instances.
Section 6.2 Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by the Board. Such authority may be general or confined to specific
instances.
Section 6.3 Checks and Drafts. All checks, drafts or other orders for
the payment of money issued in the name of the Corporation shall be signed by
such officer or officers, agent or agents of the Corporation, and in such
manner, as shall from time to time be determined by resolution of the Board.
Section 6.4 Deposits. All funds of the Corporation not otherwise
employed or invested shall be deposited from time to time to the credit of the
Corporation in such depositories as the Board direct.
ARTICLE VII
SHARE CERTIFICATES
Section 7.1 Consideration for Shares. The consideration for the
issuance of shares may consist of any tangible or intangible property or benefit
to the Corporation, including cash, promissory notes, services performed,
contracts for services to be performed, or other securities of the Corporation.
Before the Corporation issues shares, the Board shall determine that the
consideration received or to be received for shares to be issued is adequate.
When the Corporation receives consideration for which the Board
authorized the issuance of shares, then such shares shall be deemed to be fully
paid and nonassessable. The determination by the Board as to the adequacy of
consideration is conclusive as to whether the shares are validly issued, fully
paid and nonassessable.
Section 7.2 Certificates for Shares. Certificates representing shares
of the Corporation shall be in such form as shall be determined by the Board.
The Corporation may issue and deliver to each shareholder certificates
representing all shares owned by him. Certificates shall be signed by the Chief
Executive Officer or President and by the Secretary or
<PAGE>
an Assistant Secretary and may be sealed with the corporate seal; provided,
however, that the signatures of said corporate officers and the seal of the
Corporation may be facsimiles if the certificates are signed by the independent
transfer agent of the Corporation. All certificates for shares shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number and
class of shares and the date of issue, shall be entered on the stock transfer
books of the Corporation.
Section 7.3 Shares without Certificate. The Board may authorize the
issue of some or all of the shares of any or all of its classes or series
without certificates. The authorization shall not affect shares already
represented by certificates until they are surrendered to the Corporation.
Within a reasonable time after the issue or transfer of shares
without certificates, the Corporation shall send to the shareholder a written
statement of the information required on certificates by the North Carolina
Business Corporation Act.
Section 7.4 Transfer of Shares. Transfer of shares shall be made on the
stock transfer books of the Corporation upon surrender of the certificates for
certificated shares or upon a transfer instruction initiated by an appropriate
person for uncertificated shares, for the shares sought to be transferred by the
holder thereof or by his duly authorized agent, transferee or legal
representative.
Section 7.5 Lost Certificate. The Board, or its duly designated agent,
may direct a new certificate to be issued in place of any certificate
theretofore issued by the Corporation claimed to have been lost or destroyed,
upon receipt of an affidavit of such fact from the person claiming the
certificate to have been lost or destroyed. When authorizing such issue of a new
certificate of stock, the Board, or its duly designated agent, shall require
that the owner of such lost or destroyed certificate, or his legal
representative, give the Corporation a bond in such sum as the Corporation may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate claimed to have been lost or destroyed, except
where the Board by resolution finds that in the judgment of the directors the
circumstances justify omission of a bond.
ARTICLE VIII
RECORDS AND REPORTS
Section 8.1 General. The Corporation shall keep all records and submit
and file all reports and filings as are required by applicable law. Unless the
Board otherwise directs, the Treasurer shall be responsible for keeping, or
causing to be kept, all financial and accounting records of the Corporation and
for submitting or filing, or causing to be submitted or filed, all
<PAGE>
reports and filings of a financial or accounting nature, and the Secretary shall
be responsible for keeping, or causing to be kept, all other records and for
submitting or filing, or causing to be submitted or filed, all other reports and
filings.
The Corporation shall keep as permanent records minutes of all meetings
of its incorporators, shareholders and Board, a record of all actions taken by
the shareholders or Board without a meeting, and a record of all actions taken
by Committees of the Board. The Corporation shall maintain appropriate
accounting records. The Corporation or its agent shall maintain a record of its
shareholders, in a form that permits preparation of a list of the names and
addresses of all shareholders, in alphabetical order by class of shares showing
the number and class of shares held by each. The Corporation shall maintain its
records in written form or in another form capable of conversion into written
form within a reasonable time.
Section 8.2 Records at Principal Office. The Corporation shall keep a
copy of the following records at the Corporation's principal office: (a) its
Articles or restated Articles of Incorporation and all amendments to them
currently in effect; (b) its Bylaws or restated Bylaws and all amendments to
them currently in effect; (c) resolutions adopted by the Board creating one or
more classes or series of shares, and fixing their relative rights, preferences,
and limitations, if shares issued pursuant to those resolutions are outstanding;
(d) the minutes of all shareholders' meetings, and records of all action taken
by shareholders without a meeting, for the past three years; (e) all written
communications to shareholders generally within the past three years and the
financial statements required by law to be made available to the shareholders
for the past three years; (f) a list of the names and business addresses of its
current directors and officers; and (g) its most recent annual report delivered
pursuant to the North Carolina Business Corporation Act.
Section 8.3 Financial Statements. The Corporation shall make available
to its shareholders annual financial statements, which may be consolidated or
combined statements of the Corporation and one or more of its subsidiaries, as
appropriate, that include a balance sheet as of the end of the fiscal year, an
income statement for that year, and a statement of cash flows for the year
unless that information appears elsewhere in the financial statements. If
financial statements are prepared for the Corporation on the basis of generally
accepted accounting principles, the annual financial statements shall also be
prepared on that basis.
The Corporation shall mail the annual financial statements, or a
written notice of their availability, to each shareholder within 120 days after
the close of each fiscal year; provided that the failure of the Corporation to
comply with this requirement shall not constitute the basis for any claim of
damages by any shareholder unless such failure was in bad faith. Thereafter, on
written request from a shareholder who was not mailed the statements, the
Corporation shall mail such shareholder the latest financial statements.
<PAGE>
Section 8.4 Annual Report. The Corporation shall prepare and deliver
for filing each year the annual report required by the North Carolina Business
Corporation Act, at such time as is then required by applicable law. The
Corporation may, and when required by law shall, file all necessary or
appropriate corrections and amendments to such annual report, and shall promptly
file an amendment to its annual report to reflect any change in the location of
the principal office of the Corporation.
ARTICLE IX
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 9.1 Indemnification. Any person who at any time serves or has
served as a director of the Corporation shall have a right to be indemnified by
the Corporation to the fullest extent permitted by law against (a) expenses,
including reasonable attorneys' fees, actually and necessarily incurred by him
or her in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, whether
formal or informal, and whether or not brought by or on behalf of the
Corporation, arising out of his or her status as such director, or his or her
status as an officer, employee or agent of the Corporation, or his or her
service, at the request of the Corporation, as a director, officer, partner,
trustee, employee or agent of any other corporation, partnership, joint venture,
trust or other enterprise or as a trustee or administrator under an employee
benefit plan, or his or her activities in any of the foregoing capacities, and
(b) any liability incurred by him or her, including without limitation,
satisfaction of any judgment, money decree, fine (including any excise tax
assessed with respect to an employee benefit plan), penalty or settlement, for
which he or she may have become liable in connection with any such action, suit
or proceeding.
The Board of the Corporation shall take all such action as may be
necessary and appropriate to authorize the Corporation to pay the
indemnification required by this Bylaw, including without limitation, to the
extent necessary, (a) making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him
or her and (b) giving notice to and obtaining approval by the shareholders of
the Corporation.
Expenses incurred by a director in defending an action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the director to pay such amount unless it shall ultimately be determined that
he or she is entitled to be indemnified by the Corporation against such
expenses.
Any person who at any time after the adoption of this Bylaw serves or
has served as a director of the Corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the right of
indemnification provided herein, and any modification or repeal
<PAGE>
of these provisions for indemnification shall be prospective only and shall not
affect any rights or obligations existing at the time of such modification or
repeal. Such right shall inure to the benefit of the legal representatives of
any such person, shall not be exclusive of any other rights to which such person
may be entitled apart from the provisions of this Bylaw, and shall not be
limited by the provisions for indemnification in Sections 55-8-51 through
55-8-56 of the North Carolina Business Corporation Act or any successor
statutory provisions.
Any person who is entitled to indemnification by the Corporation
hereunder shall also be entitled to reimbursement of reasonable costs, expenses
and attorneys' fees incurred in obtaining such indemnification.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Dividends. The Board may from time to time declare, and
the Corporation may pay, dividends on its outstanding shares in the manner and
upon the terms and conditions provided by law and the Articles of Incorporation
of the Corporation. The Board may fix in advance a record date for determining
the shareholders entitled to a dividend. If such record date is not fixed by the
Board, the date the Board authorizes such dividend shall be the record date.
Section 10.2 Seal. The corporate seal of the Corporation shall consist
of two concentric circles between or within which are the name of the
Corporation, the state of incorporation, the year of incorporation and the word
"SEAL." The seal may be used by causing it or a facsimile thereof to be
impressed, affixed, stamped or reproduced by any means. Any officer of the
Corporation authorized to execute or attest a document on behalf of the
Corporation may affix or reproduce on such document, as and for the corporate
seal of the Corporation, a seal in any other form sufficient to evidence that it
is intended by such officer to represent the corporate seal of the Corporation,
in which case such seal shall be as effective as the corporate seal in the form
herein prescribed.
Section 10.3 Notice and Waiver of Notice. Except as otherwise provided
in the Articles of Incorporation or these Bylaws, any notice permitted or
required to be given pursuant to these Bylaws may be given in any manner
permitted by applicable law and with the effect therein provided. Without
limiting the generality of the forgoing, written notice by the Corporation to a
shareholder is effective when deposited in the United States mail with postage
thereon prepaid and correctly addressed to the shareholder's address shown in
the Corporation's current record of shareholders.
Whenever any notice is required to be given to any shareholder or
director under the
<PAGE>
provisions of the North Carolina Business Corporation Act or under the
provisions of the Articles of Incorporation or Bylaws, a waiver thereof in
writing signed by the person or persons entitled to such notice and included in
the minutes or filed with the corporate records, whether done before or after
the time stated in the notice, shall be equivalent to the giving of such notice.
Section 10.4 Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board.
Section 10.5 Construction. All references in these Bylaws to
"shareholder" or "shareholders" refer to the person or persons in whose names
shares are registered in the records of the Corporation, except to the extent
that a beneficial owner of shares that are registered in the name of a nominee
is recognized by the Corporation as a "shareholder" in accordance with a
procedure therefor that the Corporation may, but need not, establish pursuant to
applicable law. All personal pronouns used in these Bylaws shall include persons
of any gender. All terms used herein and not specifically defined herein but
defined in the North Carolina Business Corporation Act shall have the same
meanings herein as given under the North Carolina Business Corporation Act,
unless the context otherwise requires.
Section 10.6 Amendments. The Board may amend or repeal these Bylaws,
except to the extent otherwise provided in the Articles of Incorporation or a
Bylaw adopted by the shareholders or the North Carolina Business Corporation
Act, and except that a Bylaw adopted, amended or repealed by the shareholders
may not be readopted, amended or repealed by the Board if neither the Articles
of Incorporation nor a Bylaw adopted by the shareholders authorizes the Board to
adopt, amend or repeal that particular Bylaw or the Bylaws generally.
Section 10.7 Exemption from the North Carolina Shareholder Protection
Act. The provisions of Article 9 of the North Carolina Business Corporation Act,
N.C.G.S. Section 55-9-01 et seq., known as "The North Carolina Shareholder
Protection Act," shall not be applicable to the Corporation.
Section 10.8 Exemption from the North Carolina Control Share
Acquisition Act. The provisions of Article 9A of the North Carolina Business
Corporation Act, N.C.G.S. Section 55 9A- 01 et seq., known as "The North
Carolina Control Share Acquisition Act," shall not be applicable to the
Corporation.
<PAGE>
Exhibit 5.1
SR&Z DRAFT
071398
July 23, 1998
------------
PCA International, Inc.
815 Matthews - Mint Hill Road
Matthews, North Carolina 28105
Ladies and Gentlemen:
We have acted as special counsel for PCA International, Inc., a North
Carolina corporation (the "Company"), in connection with the preparation of
the joint Proxy/Registration Statement, as amended (the "Registration
Statement"), filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act") [and the Securities Exchange Act of 1934, as amended,] related to up to
358,490 shares of the Company's Common Stock, par value $.20 per share (the
"Common Stock"), which is the maximum number of shares that may be retained
by existing shareholders of the Company in connection with the merger between
the Company and Jupiter Acquisition Corp. ("Mergerco"), as more fully
described in the Merger Agreement, dated April 20, 1998, between the Company
and Mergerco (the "Merger Agreement"). Capitalized terms used but not defined
herein shall have the meaning set forth in the Registration Statement.
As special counsel to the Company, in connection with this opinion we have
examined and relied upon such records, documents, certificates and other
instruments as in our judgment are necessary or appropriate to form the basis
for the opinions set forth herein. In our examinations, we have assumed the
genuineness of all signatures, the legal capacity of natural persons signing or
delivering any instrument, the authenticity of all documents submitted to us as
<PAGE>
PCA International, Inc.
July 23, 1998
- -----------------
Page 2
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies and the authenticity of the originals of such
latter documents.
We are attorneys admitted to practice in the State of New York, and the
opinion set forth below and any reference to statutes, rules or regulations
herein are limited to the laws of the United States of America. With respect to
matters in such opinion as to the laws of the State of South Carolina, we have
relied upon the legal opinion of Robinson, Bradshaw & Hinson, P.A. attached
hereto as Exhibit A. The opinion of Robinson, Bradshaw & Hinson, P.A. is in form
and substance satisfactory to us and, in our opinion, the Company is, and we
are, justified in relying thereon.
Based upon the foregoing, we are of the opinion that the shares of common
stock in the surviving corporation, when retained in the manner and on the terms
described in the Registration Statement (after it is declared effective) and the
Merger Agreement, will be duly authorized, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm appearing under the
heading "Legal Matters" in the Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the General Rules and Regulations of
the Commission thereunder.
Very truly yours,
/s/ Schulte Roth & Zabel LLP
<PAGE>
EXHIBIT 8.1
July 23, 1998
PCA International, Inc.
815 Matthews-Mint Hill Road
Matthews, North Carolina 28105
Dear Sirs:
We have acted as special tax counsel to PCA International, Inc. (the
"Corporation") in connection with the Proxy Statement/Prospectus on Form S-4
(the "Proxy Statement/Prospectus"), filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934 pursuant to
Regulation 14A. The Proxy Statement/Prospectus relates to the merger of the
Corporation with Jupiter Acquisition Corp., (the "Merger").
We hereby confirm that, although the discussion set forth in the Proxy
Statement/Prospectus under the heading "Federal Income Tax Consequences" does
not purport to discuss all possible United States federal income tax
consequences of the Merger, in our opinion such discussion constitutes, in all
material respects, a fair and accurate summary of the United States federal
income tax consequences of the Merger, based upon current law. Our opinion is
not binding on the Internal Revenue Service (the "Service") or any court and it
is therefore possible that the Service could take positions contrary to those
described in the discussion and that a court could agree with those positions.
This opinion is furnished to you for your benefit in connection with the
filing of the Proxy Statement/Prospectus and, except as set forth below, is
not to be used, circulated, quoted or otherwise referred to for any other
purpose or relied upon by any other person without our prior written consent.
We hereby consent to the filing of this opinion as an
<PAGE>
exhibit to the Proxy Statement/Prospectus and to the reference to this firm
appearing under the heading "Legal Matters" in the Proxy Statement/Prospectus.
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
General Rules and Regulations of the Commission thereunder.
This opinion is expressed as of the date hereof and applies only to the
disclosure under the heading "Federal Income Tax Consequences" set forth in the
Proxy Statement/Prospectus filed as of the date thereof. We disclaim any
undertaking to advise you of any subsequent changes of the facts stated or
assumed herein or any subsequent changes in applicable law.
Very truly yours,
/s/ Schulte Roth & Zabel LLP
<PAGE>
EXHIBIT 10.11(a)
EMPLOYMENT AND NONCOMPETE AGREEMENT
THIS EMPLOYMENT AND NONCOMPETE AGREEMENT ("Agreement"), made and entered
into as of the ____ day of ________, 1998, by and between JOHN GROSSO, an
individual resident of Charlotte, North Carolina ("Employee"), and PCA
INTERNATIONAL, INC., a North Carolina corporation with its principal
executive offices located in Matthews, North Carolina (the "Company").
BACKGROUND STATEMENT
On June 9, 1997, Employee and the Company entered into an Employment and
Noncompete Agreement (the "Prior Employment Agreement"). The Prior
Employment Agreement has terminated in accordance with paragraph 5(a)(iii)
thereof and Employee has been paid the amounts due thereunder. The Company
now desires to ensure that the services of Employee will continue to be
available to it on a mutually satisfactory basis. In the course of his
employment with the Company, Employee has had access to trade secrets and
proprietary information of the Company and will, as an employee of the
Company, continue to have access to trade secrets and proprietary information
of the Company. Accordingly, Employee has and will continue to acquire the
knowledge and ability to compete with the Company. The Company has offered
Employee an employment agreement on the terms and pursuant to the conditions
hereof, including the stability and security provided to Employee by the
arrangement provided for herein. The parties agree that the execution and
delivery of this Employment Agreement is a condition precedent to the
benefits extended to Employee hereunder. Employee agrees that the benefits
provided for herein are adequate and sufficient consideration for the
covenants made by Employee hereunder, including, without limitation, the
covenants not to compete.
IN CONSIDERATION of the promises and the mutual covenants contained
herein, the parties hereto agree as follows:
1. Employment. Subject to the terms and conditions stated herein, and
in consideration of Employee's obligations and covenants, including without
limitation, those obligations and covenants set forth in Section 6 hereof,
the Company agrees to employ Employee on an active and full-time basis, and
Employee accepts such employment, as President, Chief Executive Officer and a
member of the Board of Directors, subject to the order, supervision and
direction of the Board of Directors of the Company (the "Board").
2. Duties. Employee shall serve the Company as President, Chief
Executive Officer and a Director and shall devote substantially all of his
business time, skill and best efforts to the business of the Company and
faithfully perform such executive, administrative and supervisory duties as
may be prescribed by the Board. Employee shall act at all times in
compliance, in all material respects, with all policies, rules and decisions
adopted from time to time by the Board of
<PAGE>
which Employee shall have received written notice. The Board shall deal with
the Employee in good faith and shall not require that Employee be required to
relocate his residence, travel to the extent that he must spend more nights
away from home than are reasonably required to further the Company's
business, or perform tasks which would be demeaning or degrading to one in
his position.
3. Term of Employment; Evergreen Provisions. (a) The term of
Employee's employment by the Company hereunder shall commence as of the date
hereof, _______, 1998, and shall continue for a period of four (4) years
after such commencement date or to such later date to which the term of this
Agreement may be extended pursuant to this Section 3 (the "Term of
Employment"). The Term of Employment shall be evergreen and shall be
extended automatically for one day effective at 5:00 p.m. of each day. As a
result, the remaining Term of Employment shall always be, and never be less
than, four (4) years.
4. Base Compensation and Benefits. (a) The annual base compensation
rate to be paid to Employee for the services to be rendered hereunder shall
be Three Hundred Fifty Thousand Dollars ($350,000.00), payable in accordance
with the Company's normal payroll practices, subject to applicable federal
and state income and social security tax withholding requirements (the "Base
Rate").
(b) Employee's Base Rate may be reviewed from time to time by the
Board and adjusted upward as Employee's performance, the performance of the
Company and other pertinent factors warrant at any time during the term of
this Agreement.
(c) Employee shall have the right to fully participate in any
Management Bonus Program to the same extent or greater than as previously
provided to Employee prior to the execution of this Agreement. Any bonus
payable to Employee under such Management Bonus Program shall be paid in a
manner consistent with the Company's past practice with respect to payment of
bonuses. Notwithstanding the foregoing, any bonus opportunity provided to
Employee under a current or future Management Bonus Program shall at least
equal an opportunity to earn up to sixty percent (60%) of the Base Rate for
the year to which such bonus relates. Any operating or financial objectives
on an annual basis related to the payment of the annual bonus award to the
Employee will be consistent with and equal to the same operating or financial
objectives for any of the Company's other senior executives.
(d) Employee shall be entitled to receive such benefits as were
afforded to Employee prior to the execution of this Agreement including but
not limited to the following:
(i) Employee shall be entitled to twenty-one (21) days of
paid vacation during each year of employment plus all Company sponsored
holidays;
(ii) Employee shall be entitled to sick leave in accordance
with the plans and policies established by the Company for all employees;
2
<PAGE>
(iii) Employee shall be entitled to such medical insurance,
life insurance and disability and salary continuation benefit programs, if
any, as are provided by the Company to its employees from time to time; and
(iv) Employee shall be entitled to participation in the
Company's 401K Plan, pension plan and/or profit sharing plans.
(e) The Company shall reimburse Employee for those expenses that are
incurred by him in connection with the performance of his duties under this
Agreement, are consistent with Company policies and practices, and are
reasonably related to the business of the Company.
5. Events of Termination. (a) The following shall be events of
termination under this Agreement: (i) termination by the Company without
cause; (ii) termination as a result of Employee's death or total disability
(as defined in the long term disability plan maintained by the Company); and
(iii) termination by the Company for Cause. The effective date for all such
terminations shall hereafter be referred to as the "Termination Date".
(b) In the event of a termination of this Agreement in accordance
with subparts (i) or (ii) above, within ten (10) business days after the
Termination Date, the Company shall pay to Employee, (or, in the event of his
death, his written designee or, if he has no written designee, to his spouse
or, if he leaves no spouse and has no written designee, to his estate,) in
cash a lump sum amount equal to forty-eight (48) months of average monthly
compensation received during the preceding five (5) year period and
calculated as follows: Employee's total cash and non-cash compensation from
the Company as reported on line one (1) of his form W-2s (total wages, tips,
and other compensation) for the five (5) calendar year period immediately
preceding the Termination Date will be divided by sixty (60) to determine an
average monthly compensation rate for the prior five (5) year period and then
such amount shall be multiplied by forty-eight (48). In addition, all
options or other rights to acquire the Company's Common Stock, $.20 par value
per share, (the "Stock") previously granted to Employee shall immediately
become fully vested without any further action on behalf of either Employee
or the Company and notwithstanding any contrary provision in any stock option
plan, agreement or similar document and Employee shall have a period
beginning on the Termination Date and ending twelve months thereafter to
exercise any stock options or right to acquire the Stock.
(c) The Board of Directors shall have the right at any time,
without advance notice, to terminate Employee's employment for cause, as
hereinafter defined ("Termination for Cause") or without cause. Termination
for Cause shall mean termination because of conviction by a court of
competent jurisdiction of theft from the Company, conviction by a court of
competent jurisdiction of embezzlement of the Company's funds, conviction by
a court of competent jurisdiction of falsification of the Company's records,
conviction by a court of competent jurisdiction of fraud committed against
the Company, conviction by a court of competent jurisdiction of a felonious
criminal act involving the Company or while engaged in conduct of the
Company's business, incompetence due to the use of or reporting to work under
the influence of alcohol, narcotics, other unlawful drugs or controlled
substances, legal incapacity, insanity, act or
3
<PAGE>
acts involving dishonesty or misconduct which have or may reasonably be
expected to have a material adverse effect on the business or reputation of
the Company, breach of fiduciary duty to the Company, willful and substantial
failure to perform stated duties or lawful directives of the Board subject to
the provisions of Section 2 hereof, or material breach of any provision of
this Agreement.
(d) In the event of a Termination for Cause, Employee shall have
no right thereafter to receive any compensation or other benefits from the
Company, except for base salary accrued but unpaid and expenses incurred but
not repaid to Employee, in each case only until the effective date of
Termination for Cause, and COBRA and rights under vested stock option grants,
401(k), vacation plans and other accrued and vested employee benefits.
(e) The provisions of Section 6 hereof shall continue to be
binding on the parties hereto notwithstanding the termination without cause
or Termination for Cause of Employee.
6. Noncompetition, Secrecy and Inventions.
(a) Employee specifically acknowledges and agrees that his
employment with the Company will bring him in personal contact with accounts
and customers of the Company, and will enable him to acquire valuable
information as to the nature and character of the business of the Company and
the requirements of the accounts and customers of the Company. Employee
acknowledges and agrees that in the event he were to become employed by some
other employer or enter the same or similar business as the Company on his
own or in conjunction with others in competition with the Company, such
personal contacts with the customers and accounts of the Company and the
knowledge of such valuable information would give to Employee an unfair
competitive advantage.
Throughout the Term of Employment and for a period of two (2) years
thereafter (Employee's Term of Employment and the two-year period thereafter,
together, the "Term of the Covenants"), Employee shall not, directly or
indirectly, as principal, agent, manager, employee, partner, shareholder,
director, officer, consultant or otherwise, participate in or engage in the
Lines of Business, as hereinafter defined; provided, however, that Employee
may own up to one percent (1%) of the outstanding securities of any
corporation which is engaged in the Lines of Business, so long as such
securities are traded on a national securities exchange or are included in
the National Association of Securities Dealers Quotation System. "Lines of
Business" for purposes of this Section 6 shall mean the provision of portrait
photography services through itinerant or traveling operations or permanent
studios or any other portrait photography service, the processing or
developing of photographic film in connection with such provision and any
other lines of business in which the Company may engage during the Term of
Employment.
(b) In performing the covenants set forth in this Section 6 (all
of the covenants of Employee set forth in this Section 6, together, the
"Covenants Not to Compete"), Employee shall not, without limitation, during
the Term of the Covenants engage in the Lines of Business with any of the
following:
4
<PAGE>
1. any client, account or customer of the Company, or any subsidiary or
affiliate of the Company, that has done business with the Company or
such affiliate or subsidiary within two (2) years of the date of any
alleged competitive act by Employee;
2. any client, account or customer of the Company, or any subsidiary or
any affiliate of the Company, that has transacted any business with
the Company within the twelve months preceding the date of this
Agreement;
3. Wal-Mart Stores, Inc. or any subsidiary thereof ("Wal-Mart");
4. any affiliate of Wal-Mart, including without limitation Sam's
Wholesale Club, HYPERMART*USA and Wal-Mart SuperCenters (a "Wal-Mart
Affiliate");
5. KMart Corporation or any subsidiary thereof ("KMart");
6. any affiliate of KMart, including without limitation KMart
SuperCenters (a "KMart Affiliate");
7. PETsMART, Inc. or any subsidiary thereof ("PETsMART");
8. any affiliate of PETsMART (a "PETsMART Affiliate");
9. any current or prospective institutional customer ("Institutional
Customer");
10. CPI Corp.;
11. Lifetouch National School Studios, Inc.;
12. any Wal-Mart store that does business with the Company during the Term
of the Covenants;
13. any Wal-Mart Affiliate store that does business with the Company
during the Term of the Covenants;
14. any Wal-Mart store with which the Company previously conducted
business but no longer conducts business or the Board of Directors
reasonably expects to do business during the Term of the Covenants;
15. any Wal-Mart Affiliate store with which the Company previously
conducted business but no longer conducts business or the Board of
Directors reasonably expects to do business during the Term of the
Covenants;
5
<PAGE>
16. any PETsMART store that does business with the Company during the Term
of the Covenants;
17. any PETsMART Affiliate store that does business with the Company
during the Term of the Covenants;
18. any PETsMART store with which the Company previously conducted
business but no longer conducts business or the Board of Directors
reasonably expects to do business during the Term of the Covenants;
19. any PETsMART Affiliate store with which the Company previously
conducted business but no longer conducts business or the Board of
Directors reasonably expects to do business during the Term of the
Covenants;
20. any Institutional Customer with which the Company previously conducted
business but no longer conducts business or the Board of Directors
reasonably expects to do business during the Term of the Covenants;
21. any KMart store that does business with the Company during the Term of
the Covenants;
22. any KMart store that does business with the Company during the Term of
the Covenants;
23. any KMart store with which the Company previously conducted business
but no longer conducts business or the Board of Directors reasonably
expects to do business during the Term of the Covenants;
24. any KMart Affiliate store with which the Company previously conducted
business but no longer conducts business or the Board of Directors
reasonably expects to do business during the Term of the Covenants;
25. Cifra, S.A. de C.V.;
26. Aurrera, S.A. de C.V., a subsidiary of Cifra, S.A. de C.V.;
27. any other subsidiary of Cifra, S.A. de C.V.;
28. Olan Mills;
29. Expressly Portraits;
6
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30. any employee or former employee of the Company, whose employment with
the Company terminated less than two (2) years prior to Employee's
association with such employee or former employee, within a ten-mile
radius of any Wal-Mart store or any store in which the Company has
engaged in the Lines of Business within six (6) months prior to
Employee's engaging in the Lines of Business; or
31. any person or entity in the geographic areas listed in paragraph 10(c)
hereinbelow.
(c) In performing the Covenants Not to Compete, Employee shall not,
without limitation, during the Term of the Covenants engage in the Lines of
Business in any of the following geographic areas:
1. The United States of America;
2. The State of Alabama;
3. The State of Arizona;
4. The State of Arkansas;
5. The State of California;
6. The State of Colorado;
7. The State of Connecticut;
8. The State of Delaware;
9. The District of Columbia;
10. The State of Florida;
11. The State of Georgia;
12. The State of Idaho
13. The State of Illinois;
14. The State of Indiana;
15. The State of Iowa;
16. The State of Kansas;
17. The State of Kentucky;
7
<PAGE>
18. The State of Louisiana;
19. The State of Maine;
20. The State of Maryland;
21. The State of Massachusetts;
22. The State of Michigan;
23. The State of Minnesota;
24. The State of Mississippi;
25. The State of Missouri;
26. The State of Montana
27. The State of Nebraska;
28. The State of Nevada
29. The State of New Hampshire;
30. The State of New Jersey;
31. The State of New Mexico
32. The State of New York;
33. The State of North Carolina;
34. The State of North Dakota;
35. The State of Ohio;
36. The State of Oklahoma;
37. The State of Oregon;
38. The State of Pennsylvania;
39. The Commonwealth of Puerto Rico;
40. The State of Rhode Island;
41. The State of South Carolina;
42. The State of South Dakota;
8
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43. The State of Tennessee;
44. The State of Texas;
45. The State of Utah
46. The State of Vermont;
47. The State of Virginia;
48. The State of Washington;
49. The State of West Virginia;
50. The State of Wisconsin;
51. The State of Wyoming;
52. Mexico;
53. Canada;
54. Puerto Rico;
55. South America;
56. Latin America;
57. Asia;
58. China; and
59. Counties in each State of the United States where the Company has
customers.
(d) As applied to the categories of persons, firms and entities and
geographic areas covered by the Covenants Not to Compete, the provisions of
paragraphs 6(b) and 6(c), respectively, shall be completely severable and
independent, and any invalidity or unenforceability thereof as applied to any
of such persons, firms or entities or geographic areas shall not affect the
validity or enforceability thereof as applied to any one or more of the other
persons, firms or entities or geographic areas.
(e) Throughout the Term of the Covenants, Employee shall not directly
or indirectly cause or attempt to cause any supplier or customer of the
Company, or any of its subsidiaries or affiliates, or any governmental body
or public agency, not to do business with the Company or such subsidiary or
affiliate or to transfer all or part of its business from the Company, or
such subsidiary or affiliate, or otherwise interfere or attempt to interfere
with any business
9
<PAGE>
relationship between the Company, or any of its subsidiaries or affiliates,
and any of such suppliers, customers, government bodies or public agencies.
(f) Employee acknowledges that irreparable injury will result to the
Company from any breach of the Covenants Not to Compete and there is no
adequate remedy at law to redress a breach or threatened breach of the
Covenants Not to Compete As a result of the foregoing, Employee agrees that
the parties seeking to enforce any of such provisions shall be entitled to an
injunction or other equitable relief against Employee to restrain him from
such breach, and Employee waives any claim or defense that the Company has an
adequate remedy at law for any such breach; provided, however, that nothing
contained herein shall prohibit the Company, or any subsidiary or affiliate
of the Company, from pursuing any other remedy it may have, including without
limiting the generality of the foregoing the recovery of damages.
(g) If any court determines that any provision of this Section 6, or
any part thereof, is invalid or unenforceable, the remainder of this Section
6 shall not thereby be affected and shall be given full effect, without
regard to the invalid portions. If any court determines that any provision
of this Section 6, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, the parties agree that such
court shall have the power to reduce the duration or scope of such provision,
as the case may be, and the parties agree to request the court to exercise
such power, and, in its reduced form, such provision shall then be
enforceable and shall be enforced. The provisions of this Section 6 shall
survive the termination of this Agreement, for whatever reason.
(h) At all times, both during and after the termination of his
employment, Employee shall keep and retain in confidence and shall not,
without the prior written consent of the Company, disclose to any persons,
firm or corporation or otherwise use for his own benefit or the benefit of
another any of the proprietary, confidential or secret information or trade
secrets of the Company. Further, Employee and the Company agree to keep
confidential the terms and conditions of this Agreement except for such
disclosure as may be required (i) in the event of a breach of this Agreement,
(ii) compulsion by law or court order, or (iii) as may be required by any
applicable provision of law.
(i) In consideration of employment, and the compensation paid to
Employee as an employee of the Company, Employee hereby recognizes as the
exclusive property of, and assigns, transfers and conveys to, the Company
without further consideration each invention, discovery or improvement
(hereinafter collectively referred to as "inventions") made, conceived,
developed or first reduced to practice by Employee (whether alone or jointly
with others) during the Term of Employment or within one (1) year thereafter
which relates in any way to Employee's work at the Company or any of its
subsidiaries or affiliates. Employee will communicate to the Company current
written records of all such inventions, which records shall be and remain the
property of the Company. Upon request by the Company, Employee will at any
time execute documents assigning to the Company, or its designees, any such
invention or any patent application or patent granted therefor, and will
execute any papers relating thereto. Employee also will give all reasonable
assistance to the Company, or its designee, regarding any
10
<PAGE>
litigation or controversy in connection with his inventions, patent
applications, or patents, all expenses incident thereto to be assumed by the
Company.
7. Governing Law. This Agreement shall be construed and governed
under the laws of the State of North Carolina.
8. Binding Nature. Except as expressly provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, successors and assigns. The obligations
and covenants of Employee are personal in nature and, as such, are not
assignable by him.
9. Entire Agreement; Prior Oral Agreement; Amendment. This Agreement
contains the entire agreement of the parties with respect to the matters set
forth herein and supersedes all prior written and prior or contemporaneous
oral agreements or understandings of the parties hereto. This Agreement
confirms and sets forth the prior oral agreement of the parties as to the
terms and conditions of Employee's employment by the Company stated herein,
including without limitation, the obligations and covenants of Employee set
forth in Section 6 hereof, and Employee's agreement to enter into a written
employment agreement with the Company, as of the date his employment by the
Company commenced, stating such terms and conditions. This Agreement may be
changed or amended only by an agreement in writing signed by both parties
hereto.
10. Severability, Invalidity or Unenforceability. The severability,
invalidity or unenforceability of any paragraph or part of any paragraph
herein shall not in any way affect the validity or enforceability of any
other paragraph or any part of any other paragraph.
11. Prior Agreements and Covenants of Employee. Employee hereby
warrants and represents that he is not a party to any agreement or binding
obligation, oral or written, that would prevent his employment by the
Company, and Employee's execution of this Agreement and his fulfillment of
his duties and obligations hereunder do not and will not violate the
provisions of any agreement, contract, loan document or other binding written
or oral obligation.
12. Time of the Essence. Time is of the essence.
13. Arbitration. Any dispute arising in connection with this Agreement
(other than with respect to Section 6) shall be finally and conclusively
determined in accordance with the rules of the American Arbitration
Association of Charlotte, North Carolina, whose determination shall be final
and binding on the parties, be entitled to be enforced to the fullest extent
permitted by law and be entered in any court of competent jurisdiction. Each
party shall pay all fees, costs and expenses, including legal fees and
expenses, incurred by such party in connection with any such arbitration, and
the fees, costs and expenses of any arbitrator(s) appointed or selected
pursuant to this Section 13 shall be shared equally by the parties hereto.
14. Indemnification. To the fullest extent permitted or required by
the laws of the State of North Carolina, the Company shall indemnify and hold
harmless (including the
11
<PAGE>
advance payment of expenses) Employee, in accordance with the terms of such
laws, if Employee is made a party, or threatened to be made a party, to any
threatened, pending, or contemplated suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that
Employee is or was an officer or director of the Company or any subsidiary or
affiliate of the Company, against expenses (including reasonable attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any such action, suit or
proceeding. The Company's obligations under this paragraph will survive the
termination of this Agreement for any reason whatsoever.
15. D&O Liability Insurance. During the Term of Employment, the
Company shall maintain customary directors' and officers' liability insurance.
16. Notices. Any notice, offer, acceptance or other document required
or permitted to be given pursuant to any provisions of this Agreement shall
be in writing, signed by or on behalf of the person giving the same, and (as
elected by the person giving such notice) delivered by hand or mailed to the
parties at the following addresses by registered or certified mail, postage
prepaid, return receipt requested, or by a third party company or
governmental entity providing delivery services in the ordinary course of
business, which guarantees delivery on a specified date:
If to Employee: John Grosso
9603 Tresanton Drive
Charlotte, North Carolina 28210
If to the Company: PCA International, Inc.
815 Matthews-Mint Hill Road
Matthews, North Carolina 28105
With copies to: Thomas B. Henson
ROBINSON, BRADSHAW & HINSON, P.A.
One Independence Center
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246-1900
(704) 377-2536
or to such other address as any party hereto may designate by complying with
the provisions of this Section 16.
Such notice shall be deemed given (i) as of the date of written
acknowledgment by Employee or an officer of the Company if delivered by hand,
(ii) seventy-two (72) hours after deposit in United States mail if sent by
registered or certified mail or (iii) on the delivery date guaranteed by the
third party delivery service if sent by such service.
Rejection or other refusal to accept or inability to deliver because of
changed address of which no notice has been received shall not affect the
date upon which the notice is deemed to have been given pursuant hereto.
Notwithstanding the foregoing, no notice of change of address shall be
effective until the date of receipt hereof.
12
<PAGE>
IN WITNESS WHEREOF, John Grosso has set his hand and seal hereto and PCA
International, Inc. has caused this Agreement to be executed and sealed in
its name by its duly authorized officials as of the day and year first above
written.
EMPLOYEE:
-----------------------------(SEAL)
JOHN GROSSO
COMPANY:
PCA INTERNATIONAL, INC.
By:
---------------------------
----------------------------
Chairman of the Board
By:
---------------------------
Bruce A. Fisher
Senior Vice President and Chief
Financial Officer
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<PAGE>
EXHIBIT 10.12(a)
AMENDMENT NO. 1 TO EMPLOYMENT AND NONCOMPETE AGREEMENT
This Amendment No. 1 To Employment and Noncompete Agreement (the
"Amendment") is made and entered into as of the ____ day of ______, 1998, by
and between PCA INTERNATIONAL, INC., a North Carolina corporation (the
"Company"); and ERIC H. JELTRUP, a citizen and resident of the State of North
Carolina ("Employee").
Background Statement
Employee and the Company entered into an Employment Agreement (the
"Agreement") dated as of June 9, 1997. Employee and the Company have agreed
to amend paragraph 4(a) to increase Employee's Base Rate. Capitalized words
or phrases used herein without definition shall have the meanings ascribed to
them in the Agreement.
NOW, THEREFORE, in consideration of the mutual duties and obligations
set forth herein, and intending to be legally bound, the parties hereto agree
as follows:
1. The Agreement is hereby amended by deleting paragraph 4(a) and
replacing it with the following:
"The annual base compensation rate to be paid to Employee for the
services to be rendered hereunder shall be Two Hundred Fifty
Thousand Dollars ($250,000.00), payable in accordance with the
Company's normal payroll practices, subject to applicable federal
and state income and social security tax withholding requirements
(the "Base Rate").
2. Except as set forth herein, the Agreement is ratified and confirmed
in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
Employee:
-------------------------------
Eric H. Jeltrup
Company:
PCA International, Inc.
By:
----------------------------
Its:
---------------------------
<PAGE>
EXHIBIT 10.13(a)
AMENDMENT NO. 1 TO EMPLOYMENT AND NONCOMPETE AGREEMENT
This Amendment No. 1 To Employment and Noncompete Agreement (the
"Amendment") is made and entered into as of the ____ day of ______, 1998, by and
between PCA INTERNATIONAL, INC., a North Carolina corporation (the "Company");
and BRUCE A. FISHER, a citizen and resident of the State of North Carolina
("Employee").
Background Statement
Employee and the Company entered into an Employment Agreement (the
"Agreement") dated as of June 9, 1997. Employee and the Company have agreed to
amend paragraph 4(a) to increase Employee's Base Rate. Capitalized words or
phrases used herein without definition shall have the meanings ascribed to them
in the Agreement.
NOW, THEREFORE, in consideration of the mutual duties and obligations set
forth herein, and intending to be legally bound, the parties hereto agree as
follows:
1. The Agreement is hereby amended by deleting paragraph 4(a) and
replacing it with the following:
"The annual base compensation rate to be paid to Employee for the services
to be rendered hereunder shall be Two Hundred Thousand Dollars
($200,000.00), payable in accordance with the Company's normal payroll
practices, subject to applicable federal and state income and social
security tax withholding requirements (the "Base Rate").
2. Except as set forth herein, the Agreement is ratified and confirmed in
all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
Employee:
--------------------------------
Bruce A. Fisher
Company:
PCA International, Inc.
By:
------------------------------
Its:
-----------------------------
<PAGE>
EXHIBIT 10.15
JUPITER PARTNERS LP
April 20, 1998
Mr. John Grosso
Chief Executive Officer
PCA International, Inc.
815 Matthews Mint Hill Road
Matthews, North Carolina 18105
Dear John:
We are delighted that you and your management team have agreed
to continue as principal executives of PCA International, Inc. (the "Company")
following the consummation of the merger (the "Merger") pursuant to the Merger
Agreement entered into today between our affiliate and the Company.
This letter agreement will confirm your and our agreement with
respect to the arrangements between the Company and you as well as between the
Company and your management team in connection with, and following, the Merger.
In connection with the Merger, you agree that you will
maintain $1,950,000 of equity in the surviving company. In addition, other
members of your management team will maintain at least $1,550,000 and not more
than $3,050,000 of equity in the surviving company. Such equity will be made up
of a combination of the "roll-over" of shares of the Company which you had the
other members of your management team currently own and/or the roll-over of
"in-the-money" options of the Company. In addition, in your case, part of such
equity will be purchased for cash.
We have also reached agreements regarding several other
matters directly affecting the management and other employees of the Company.
Our agreements cover the following:
1. The Employment and Noncompete Agreement with you
dated as of June 9, 1997 will be terminated
contemporaneously with the closing of the Merger and
you will be paid $975,714.09 by the Company in
connection therewith.
<PAGE>
2. Contemporaneously with the closing of the Merger, you
and the Company will enter into an Employment and
Noncompete Agreement, a copy of which is attached
hereto as Exhibit A.
3. Contemporaneously with the closing of the Merger, the
Company and Bruce Fisher will enter into an Amendment
No. 1 to Employment and Noncompete Agreement, a copy
which is attached hereto as Exhibit B.
4. Contemporaneously with the closing of Merger, the
Company and Eric Jeltrup will enter into an Amendment
No. 1 to Employment and Noncompete Agreement, a copy
of which is attached hereto as Exhibit C.
5. Attached hereto as Exhibit D is a Management Term
Sheet describing certain option grants and stock and
option ownership arrangements between the Company and
management and other employees of the Company.
Although such arrangements are expected to be
ultimately governed by a complete set of definitive
documents entered into prior to the effectiveness of
the Merger (including a Stock Option Plan and related
Stop Option Agreements and a Stockholders Agreement),
this letter agreement, when countersigned by you,
will constitute a binding agreement between us with
respect to the matters contained herein and in the
Management Term Sheet. Attached hereto as Exhibit E
are the Stock Option Plan, form of Stock Option
Agreement and Stockholders Agreement used by us in
another transaction. The definitive form of the
agreements entered into between the Company, us and
the management and other employees of the Company
will follow the form and substance of the documents
attached as Exhibit E, with the changes therein
necessary to conform the business arrangements among
the parties to the arrangements reflected in the
Management Sheet.
This letter agreement, when countersigned by you, will
constitute a binding agreement on all of our parties to proceed in accordance
with the terms hereof.
2
<PAGE>
Please indicate your agreement by signing and returning to us
the enclosed copy of this letter agreement.
Sincerely yours,
JUPITER PARTNERS II L.P.
By: Ganymede II LLC
By: /s/ John F. Klein
-------------------------
John F. Klein
ACCEPTED AND AGREED
/s/ John Grosso
- -----------------------------------
John Grosso
<PAGE>
EMPLOYMENT AND NONCOMPETE AGREEMENT
THIS EMPLOYMENT AND NONCOMPETE AGREEMENT ("Agreement"), made
and entered into as of the ____ day of ________, 1998, by and between JOHN
GROSSO, an individual resident of Charlotte, North Carolina ("Employee"), and
PCA INTERNATIONAL, INC., a North Carolina corporation with its principal
executive offices located in Matthews, North Carolina (the "Company").
BACKGROUND STATEMENT
On June 9, 1997, Employee and the Company entered into an
Employment and Noncompete Agreement (the "Prior Employment Agreement"). The
Prior Employment Agreement has terminated in accordance with paragraph 5(a)(iii)
thereof and Employee has been paid the amounts due thereunder. The Company now
desires to ensure that the services of Employee will continue to be available to
it on a mutually satisfactory basis. In the course of his employment with the
Company, Employee has had access to trade secrets and proprietary information of
the Company and will, as an employee of the Company, continue to have access to
trade secrets and proprietary information of the Company. Accordingly, Employee
has and will continue to acquire the knowledge and ability to compete with the
Company. The Company has offered Employee an employment agreement on the terms
and pursuant to the conditions hereof, including the stability and security
provided to Employee by the arrangement provided for herein. The parties agree
that the execution and delivery of this Employment Agreement is a condition
precedent to the benefits extended to Employee hereunder. Employee agrees that
the benefits provided for herein are adequate and sufficient consideration for
the covenants made by Employee hereunder, including, without limitation, the
covenants not to compete.
IN CONSIDERATION of the promises and the mutual covenants
contained herein, the parties hereto agree as follows:
1. Employment. Subject to the terms and conditions stated
herein, and in consideration of Employee's obligations and covenants, including
without limitation, those obligations and covenants set forth in Section 6
hereof, the Company agrees to employ Employee on an active and full-time basis,
and Employee accepts such employment, as President, Chief Executive Officer and
a member of the Board of Directors, subject to the order, supervision and
direction of the Board of Directors of the Company (the "Board").
2. Duties. Employee shall serve the Company as President,
Chief Executive Officer and a Director and shall devote substantially all of his
business time, skill and best efforts to the business of the Company and
faithfully perform such executive, administrative and supervisory duties as may
be prescribed by the Board. Employee shall act at all times in compliance, in
all material respects, with all policies, rules and decisions adopted from time
to time by the Board of which Employee shall have received written notice. The
Board shall deal with the Employee in good faith and shall not require that
Employee be required to relocate his residence, travel to the extent that he
must spend more nights away from home than are reasonably required to further
the
<PAGE>
Company's business, or perform tasks which would be demeaning or degrading to
one in his position.
3. Term of Employment; Evergreen Provisions. (a) The term of
Employee's employment by the Company hereunder shall commence as of the date
hereof, _______, 1998, and shall continue for a period of four (4) years after
such commencement date or to such later date to which the term of this Agreement
may be extended pursuant to this Section 3 (the "Term of Employment"). The Term
of Employment shall be evergreen and shall be extended automatically for one day
effective at 5:00 p.m. of each day. As a result, the remaining Term of
Employment shall always be, and never be less than, four (4) years.
4. Base Compensation and Benefits. (a) The annual base
compensation rate to be paid to Employee for the services to be rendered
hereunder shall be Three Hundred Fifty Thousand Dollars ($350,000.00), payable
in accordance with the Company's normal payroll practices, subject to applicable
federal and state income and social security tax withholding requirements (the
"Base Rate").
(b) Employee's Base Rate may be reviewed from time to time
by the Board and adjusted upward as Employee's performance, the performance of
the Company and other pertinent factors warrant at any time during the term of
this Agreement.
(c) Employee shall have the right to fully participate in
any Management Bonus Program to the same extent or greater than as previously
provided to Employee prior to the execution of this Agreement. Any bonus payable
to Employee under such Management Bonus Program shall be paid in a manner
consistent with the Company's past practice with respect to payment of bonuses.
Notwithstanding the foregoing, any bonus opportunity provided to Employee under
a current or future Management Bonus Program shall at least equal an opportunity
to earn up to sixty percent (60%) of the Base Rate for the year to which such
bonus relates. Any operating or financial objectives on an annual basis related
to the payment of the annual bonus award to the Employee will be consistent with
and equal to the same operating or financial objectives for any of the Company's
other senior executives.
(d) Employee shall be entitled to receive such benefits as
were afforded to Employee prior to the execution of this Agreement including but
not limited to the following:
(i) Employee shall be entitled to twenty-one (21) days
of paid vacation during each year of employment plus all
Company sponsored holidays;
(ii) Employee shall be entitled to sick leave in
accordance with the plans and policies established by the
Company for all employees;
(iii) Employee shall be entitled to such medical
insurance, life insurance and disability and salary
continuation benefit programs, if any, as are provided by
the Company to its employees from time to time; and
<PAGE>
(iv) Employee shall be entitled to participation in the
Company's 401K Plan, pension plan and/or profit sharing
plans.
(e) The Company shall reimburse Employee for those expenses
that are incurred by him in connection with the performance of his duties under
this Agreement, are consistent with Company policies and practices, and are
reasonably related to the business of the Company.
5. Events of Termination. (a) The following shall be events of
termination under this Agreement: (i) termination by the Company without cause;
(ii) termination as a result of Employee's death or total disability (as defined
in the long term disability plan maintained by the Company); and (iii)
termination by the Company for Cause. The effective date for all such
terminations shall hereafter be referred to as the "Termination Date".
(b) In the event of a termination of this Agreement in
accordance with subparts (i) or (ii) above, within ten (10) business days after
the Termination Date, the Company shall pay to Employee, (or, in the event of
his death, his written designee or, if he has no written designee, to his spouse
or, if he leaves no spouse and has no written designee, to his estate,) in cash
a lump sum amount equal to forty-eight (48) months of average monthly
compensation received during the preceding five (5) year period and calculated
as follows: Employee's total cash and non-cash compensation from the Company as
reported on line one (1) of his form W-2s (total wages, tips, and other
compensation) for the five (5) calendar year period immediately preceding the
Termination Date will be divided by sixty (60) to determine an average monthly
compensation rate for the prior five (5) year period and then such amount shall
be multiplied by forty-eight (48). In addition, all options or other rights to
acquire the Company's Common Stock, $.20 par value per share, (the "Stock")
previously granted to Employee shall immediately become fully vested without any
further action on behalf of either Employee or the Company and notwithstanding
any contrary provision in any stock option plan, agreement or similar document
and Employee shall have a period beginning on the Termination Date and ending
twelve months thereafter to exercise any stock options or right to acquire the
Stock.
(c) The Board of Directors shall have the right at any
time, without advance notice, to terminate Employee's employment for cause, as
hereinafter defined ("Termination for Cause") or without cause. Termination for
Cause shall mean termination because of conviction by a court of competent
jurisdiction of theft from the Company, conviction by a court of competent
jurisdiction of embezzlement of the Company's funds, conviction by a court of
competent jurisdiction of falsification of the Company's records, conviction by
a court of competent jurisdiction of fraud committed against the Company,
conviction by a court of competent jurisdiction of a felonious criminal act
involving the Company or while engaged in conduct of the Company's business,
incompetence due to the use of or reporting to work under the influence of
alcohol, narcotics, other unlawful drugs or controlled substances, legal
incapacity, insanity, act or acts involving dishonesty or misconduct which have
or may reasonably be expected to have a material adverse effect on the business
or reputation of the Company, breach of fiduciary duty to the Company, willful
and substantial failure to perform stated duties or lawful directives of the
<PAGE>
Board subject to the provisions of Section 2 hereof, or material breach of any
provision of this Agreement.
(d) In the event of a Termination for Cause, Employee shall
have no right thereafter to receive any compensation or other benefits from the
Company, except for base salary accrued but unpaid and expenses incurred but not
repaid to Employee, in each case only until the effective date of Termination
for Cause, and COBRA and rights under vested stock option grants, 401(k),
vacation plans and other accrued and vested employee benefits.
(e) The provisions of Section 6 hereof shall continue to be
binding on the parties hereto notwithstanding the termination without cause or
Termination for Cause of Employee.
6. Noncompetition, Secrecy and Inventions.
(a) Employee specifically acknowledges and agrees that his
employment with the Company will bring him in personal contact with accounts and
customers of the Company, and will enable him to acquire valuable information as
to the nature and character of the business of the Company and the requirements
of the accounts and customers of the Company. Employee acknowledges and agrees
that in the event he were to become employed by some other employer or enter the
same or similar business as the Company on his own or in conjunction with others
in competition with the Company, such personal contacts with the customers and
accounts of the Company and the knowledge of such valuable information would
give to Employee an unfair competitive advantage.
Throughout the Term of Employment and for a period of two (2)
years thereafter (Employee's Term of Employment and the two-year period
thereafter, together, the "Term of the Covenants"), Employee shall not, directly
or indirectly, as principal, agent, manager, employee, partner, shareholder,
director, officer, consultant or otherwise, participate in or engage in the
Lines of Business, as hereinafter defined; provided, however, that Employee may
own up to one percent (1%) of the outstanding securities of any corporation
which is engaged in the Lines of Business, so long as such securities are traded
on a national securities exchange or are included in the National Association of
Securities Dealers Quotation System. "Lines of Business" for purposes of this
Section 6 shall mean the provision of portrait photography services through
itinerant or traveling operations or permanent studios or any other portrait
photography service, the processing or developing of photographic film in
connection with such provision and any other lines of business in which the
Company may engage during the Term of Employment.
(b) In performing the covenants set forth in this Section 6
(all of the covenants of Employee set forth in this Section 6, together, the
"Covenants Not to Compete"), Employee shall not, without limitation, during the
Term of the Covenants engage in the Lines of Business with any of the following:
1. any client, account or customer of the Company, or any
subsidiary or affiliate of the Company, that has done
business with the Company
<PAGE>
or such affiliate or subsidiary within two (2) years
of the date of any alleged competitive act by Employee;
2. any client, account or customer of the Company, or any
subsidiary or any affiliate of the Company, that has
transacted any business with the Company within the
twelve months preceding the date of this Agreement;
3. Wal-Mart Stores, Inc. or any subsidiary thereof
("Wal-Mart");
4. any affiliate of Wal-Mart, including without limitation
Sam's Wholesale Club, HYPERMART*USA and Wal-Mart
SuperCenters (a "Wal-Mart Affiliate");
5. KMart Corporation or any subsidiary thereof ("KMart");
6. any affiliate of KMart, including without limitation
KMart SuperCenters (a "KMart Affiliate");
7. PETsMART, Inc. or any subsidiary thereof ("PETsMART");
8. any affiliate of PETsMART (a "PETsMART Affiliate");
9. any current or prospective institutional customer
("Institutional Customer");
10. CPI Corp.;
11. Lifetouch National School Studios, Inc.;
12. any Wal-Mart store that does business with the Company
during the Term of the Covenants;
13. any Wal-Mart Affiliate store that does business with
the Company during the Term of the Covenants;
14. any Wal-Mart store with which the Company previously
conducted business but no longer conducts business or
the Board of Directors reasonably expects to do
business during the Term of the Covenants;
15. any Wal-Mart Affiliate store with which the Company
previously conducted business but no longer conducts
business or the Board of Directors reasonably expects
to do business during the Term of the Covenants;
16. any PETsMART store that does business with the Company
during the Term of the Covenants;
<PAGE>
17. any PETsMART Affiliate store that does business with
the Company during the Term of the Covenants;
18. any PETsMART store with which the Company previously
conducted business but no longer conducts business or
the Board of Directors reasonably expects to do
business during the Term of the Covenants;
19. any PETsMART Affiliate store with which the Company
previously conducted business but no longer conducts
business or the Board of Directors reasonably expects
to do business during the Term of the Covenants;
20. any Institutional Customer with which the Company
previously conducted business but no longer conducts
business or the Board of Directors reasonably expects
to do business during the Term of the Covenants;
21. any KMart store that does business with the Company
during the Term of the Covenants;
22. any KMart store that does business with the Company
during the Term of the Covenants;
23. any KMart store with which the Company previously
conducted business but no longer conducts business or
the Board of Directors reasonably expects to do
business during the Term of the Covenants;
24. any KMart Affiliate store with which the Company
previously conducted business but no longer conducts
business or the Board of Directors reasonably expects
to do business during the Term of the Covenants;
25. Cifra, S.A. de C.V.;
26. Aurrera, S.A. de C.V., a subsidiary of Cifra, S.A. de
C.V.;
27. any other subsidiary of Cifra, S.A. de C.V.;
28. Olan Mills;
29. Expressly Portraits;
30. any employee or former employee of the Company, whose
employment with the Company terminated less than two
(2) years prior to Employee's association with such
employee or former employee, within a ten-mile radius
of any Wal-Mart store or any
<PAGE>
store in which the Company has engaged in the Lines of
Business within six (6) months prior to Employee's
engaging in the Lines of Business; or
31. any person or entity in the geographic areas listed in
paragraph 10(c) hereinbelow.
(c) In performing the Covenants Not to Compete, Employee shall
not, without limitation, during the Term of the Covenants engage in the Lines of
Business in any of the following geographic areas:
1. The United States of America;
2. The State of Alabama;
3. The State of Arizona;
4. The State of Arkansas;
5. The State of California;
6. The State of Colorado;
7. The State of Connecticut;
8. The State of Delaware;
9. The District of Columbia;
10. The State of Florida;
11. The State of Georgia;
12. The State of Idaho
13. The State of Illinois;
14. The State of Indiana;
15. The State of Iowa;
16. The State of Kansas;
17. The State of Kentucky;
18. The State of Louisiana;
19. The State of Maine;
<PAGE>
20. The State of Maryland;
21. The State of Massachusetts;
22. The State of Michigan;
23. The State of Minnesota;
24. The State of Mississippi;
25. The State of Missouri;
26. The State of Montana
27. The State of Nebraska;
28. The State of Nevada
29. The State of New Hampshire;
30. The State of New Jersey;
31. The State of New Mexico
32. The State of New York;
33. The State of North Carolina;
34. The State of North Dakota;
35. The State of Ohio;
36. The State of Oklahoma;
37. The State of Oregon;
38. The State of Pennsylvania;
39. The Commonwealth of Puerto Rico;
40. The State of Rhode Island;
41. The State of South Carolina;
42. The State of South Dakota;
43. The State of Tennessee;
44. The State of Texas;
<PAGE>
45. The State of Utah
46. The State of Vermont;
47. The State of Virginia;
48. The State of Washington;
49. The State of West Virginia;
50. The State of Wisconsin;
51. The State of Wyoming;
52. Mexico;
53. Canada;
54. Puerto Rico;
55. South America;
56. Latin America;
57. Asia;
58. China; and
59. Counties in each State of the United States where the
Company has customers.
(d) As applied to the categories of persons, firms and
entities and geographic areas covered by the Covenants Not to Compete, the
provisions of paragraphs 6(b) and 6(c), respectively, shall be completely
severable and independent, and any invalidity or unenforceability thereof as
applied to any of such persons, firms or entities or geographic areas shall not
affect the validity or enforceability thereof as applied to any one or more of
the other persons, firms or entities or geographic areas.
(e) Throughout the Term of the Covenants, Employee shall
not directly or indirectly cause or attempt to cause any supplier or customer of
the Company, or any of its subsidiaries or affiliates, or any governmental body
or public agency, not to do business with the Company or such subsidiary or
affiliate or to transfer all or part of its business from the Company, or such
subsidiary or affiliate, or otherwise interfere or attempt to interfere with any
business relationship between the Company, or any of its subsidiaries or
affiliates, and any of such suppliers, customers, government bodies or public
agencies.
<PAGE>
(f) Employee acknowledges that irreparable injury will
result to the Company from any breach of the Covenants Not to Compete and there
is no adequate remedy at law to redress a breach or threatened breach of the
Covenants Not to Compete As a result of the foregoing, Employee agrees that the
parties seeking to enforce any of such provisions shall be entitled to an
injunction or other equitable relief against Employee to restrain him from such
breach, and Employee waives any claim or defense that the Company has an
adequate remedy at law for any such breach; provided, however, that nothing
contained herein shall prohibit the Company, or any subsidiary or affiliate of
the Company, from pursuing any other remedy it may have, including without
limiting the generality of the foregoing the recovery of damages.
(g) If any court determines that any provision of this
Section 6, or any part thereof, is invalid or unenforceable, the remainder of
this Section 6 shall not thereby be affected and shall be given full effect,
without regard to the invalid portions. If any court determines that any
provision of this Section 6, or any part thereof, is unenforceable because of
the duration or geographic scope of such provision, the parties agree that such
court shall have the power to reduce the duration or scope of such provision, as
the case may be, and the parties agree to request the court to exercise such
power, and, in its reduced form, such provision shall then be enforceable and
shall be enforced. The provisions of this Section 6 shall survive the
termination of this Agreement, for whatever reason.
(h) At all times, both during and after the termination of
his employment, Employee shall keep and retain in confidence and shall not,
without the prior written consent of the Company, disclose to any persons, firm
or corporation or otherwise use for his own benefit or the benefit of another
any of the proprietary, confidential or secret information or trade secrets of
the Company. Further, Employee and the Company agree to keep confidential the
terms and conditions of this Agreement except for such disclosure as may be
required (i) in the event of a breach of this Agreement, (ii) compulsion by law
or court order, or (iii) as may be required by any applicable provision of law.
(i) In consideration of employment, and the compensation
paid to Employee as an employee of the Company, Employee hereby recognizes as
the exclusive property of, and assigns, transfers and conveys to, the Company
without further consideration each invention, discovery or improvement
(hereinafter collectively referred to as "inventions") made, conceived,
developed or first reduced to practice by Employee (whether alone or jointly
with others) during the Term of Employment or within one (1) year thereafter
which relates in any way to Employee's work at the Company or any of its
subsidiaries or affiliates. Employee will communicate to the Company current
written records of all such inventions, which records shall be and remain the
property of the Company. Upon request by the Company, Employee will at any time
execute documents assigning to the Company, or its designees, any such invention
or any patent application or patent granted therefor, and will execute any
papers relating thereto. Employee also will give all reasonable assistance to
the Company, or its designee, regarding any litigation or controversy in
connection with his inventions, patent applications, or patents, all expenses
incident thereto to be assumed by the Company.
<PAGE>
7. Governing Law. This Agreement shall be construed and
governed under the laws of the State of North Carolina.
8. Binding Nature. Except as expressly provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, successors and assigns. The obligations and
covenants of Employee are personal in nature and, as such, are not assignable by
him.
9. Entire Agreement; Prior Oral Agreement; Amendment. This
Agreement contains the entire agreement of the parties with respect to the
matters set forth herein and supersedes all prior written and prior or
contemporaneous oral agreements or understandings of the parties hereto. This
Agreement confirms and sets forth the prior oral agreement of the parties as to
the terms and conditions of Employee's employment by the Company stated herein,
including without limitation, the obligations and covenants of Employee set
forth in Section 6 hereof, and Employee's agreement to enter into a written
employment agreement with the Company, as of the date his employment by the
Company commenced, stating such terms and conditions. This Agreement may be
changed or amended only by an agreement in writing signed by both parties
hereto.
10. Severability, Invalidity or Unenforceability. The
severability, invalidity or unenforceability of any paragraph or part of any
paragraph herein shall not in any way affect the validity or enforceability of
any other paragraph or any part of any other paragraph.
11. Prior Agreements and Covenants of Employee. Employee
hereby warrants and represents that he is not a party to any agreement or
binding obligation, oral or written, that would prevent his employment by the
Company, and Employee's execution of this Agreement and his fulfillment of his
duties and obligations hereunder do not and will not violate the provisions of
any agreement, contract, loan document or other binding written or oral
obligation.
12. Time of the Essence. Time is of the essence.
13. Arbitration. Any dispute arising in connection with this
Agreement (other than with respect to Section 6) shall be finally and
conclusively determined in accordance with the rules of the American Arbitration
Association of Charlotte, North Carolina, whose determination shall be final and
binding on the parties, be entitled to be enforced to the fullest extent
permitted by law and be entered in any court of competent jurisdiction. Each
party shall pay all fees, costs and expenses, including legal fees and expenses,
incurred by such party in connection with any such arbitration, and the fees,
costs and expenses of any arbitrator(s) appointed or selected pursuant to this
Section 13 shall be shared equally by the parties hereto.
14. Indemnification. To the fullest extent permitted or
required by the laws of the State of North Carolina, the Company shall indemnify
and hold harmless (including the advance payment of expenses) Employee, in
accordance with the terms of such laws, if Employee is made a party, or
threatened to be made a party, to any threatened, pending, or contemplated suit
or proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that
<PAGE>
Employee is or was an officer or director of the Company or any subsidiary or
affiliate of the Company, against expenses (including reasonable attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any such action, suit or proceeding. The
Company's obligations under this paragraph will survive the termination of this
Agreement for any reason whatsoever.
15. D&O Liability Insurance. During the Term of Employment,
the Company shall maintain customary directors' and officers' liability
insurance.
16. Notices. Any notice, offer, acceptance or other document
required or permitted to be given pursuant to any provisions of this Agreement
shall be in writing, signed by or on behalf of the person giving the same, and
(as elected by the person giving such notice) delivered by hand or mailed to the
parties at the following addresses by registered or certified mail, postage
prepaid, return receipt requested, or by a third party company or governmental
entity providing delivery services in the ordinary course of business, which
guarantees delivery on a specified date:
If to Employee: John Grosso
9603 Tresanton Drive
Charlotte, North Carolina 28210
If to the Company: PCA International, Inc.
815 Matthews-Mint Hill Road
Matthews, North Carolina 28105
With copies to: Thomas B. Henson
ROBINSON, BRADSHAW & HINSON, P.A.
One Independence Center
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246-1900
(704) 377-2536
or to such other address as any party hereto may designate by complying with the
provisions of this Section 16.
Such notice shall be deemed given (i) as of the date of
written acknowledgment by Employee or an officer of the Company if delivered by
hand, (ii) seventy-two (72) hours after deposit in United States mail if sent by
registered or certified mail or (iii) on the delivery date guaranteed by the
third party delivery service if sent by such service.
Rejection or other refusal to accept or inability to deliver
because of changed address of which no notice has been received shall not affect
the date upon which the notice is deemed to have been given pursuant hereto.
Notwithstanding the foregoing, no notice of change of address shall be effective
until the date of receipt hereof.
<PAGE>
IN WITNESS WHEREOF, John Grosso has set his hand and seal
hereto and PCA International, Inc. has caused this Agreement to be executed and
sealed in its name by its duly authorized officials as of the day and year first
above written.
EMPLOYEE:
(SEAL)
---------------------------------
JOHN GROSSO
COMPANY:
PCA INTERNATIONAL, INC.
By:
----------------------------------
--------------------
Chairman of the Board
By:
----------------------------------
Bruce A. Fisher
Senior Vice President and Chief
Financial Officer
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AND NONCOMPETE AGREEMENT
This Amendment No. 1 To Employment and Noncompete Agreement
(the "Amendment") is made and entered into as of the ____ day of ______, 1998,
by and between PCA INTERNATIONAL, INC., a North Carolina corporation (the
"Company"); and BRUCE A. FISHER, a citizen and resident of the State of North
Carolina ("Employee").
Background Statement
--------------------
Employee and the Company entered into an Employment Agreement
(the "Agreement") dated as of June 9, 1997. Employee and the Company have agreed
to amend paragraph 4(a) to increase Employee's Base Rate. Capitalized words or
phrases used herein without definition shall have the meanings ascribed to them
in the Agreement.
NOW, THEREFORE, in consideration of the mutual duties and
obligations set forth herein, and intending to be legally bound, the parties
hereto agree as follows:
1. The Agreement is hereby amended by deleting paragraph 4(a)
and replacing it with the following:
"The annual base compensation rate to be paid to Employee for
the services to be rendered hereunder shall be Two Hundred
Thousand Dollars ($200,000.00), payable in accordance with the
Company's normal payroll practices, subject to applicable
federal and state income and social security tax withholding
requirements (the "Base Rate").
2. Except as set forth herein, the Agreement is ratified and
confirmed in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first above written.
Employee:
-------------------------
Bruce A. Fisher
Company:
PCA International, Inc.
-------------------------
By:
-------------------------
Its:
<PAGE>
JUPITER PARTNERS LP
April 20, 1998
Mr. Eric Jeltrup
PCA International, Inc.
815 Matthews Mint Hill Road
Matthews, North Carolina 18105
Dear Eric:
We are delighted that you have agreed to continue as a
principal executive of PCA International, Inc. (the "Company") following the
consummation of the merger (the "Merger") pursuant to the Merger Agreement
entered into today between our affiliate and the Company.
This letter agreement will confirm your and our agreement with
respect to the arrangements between the Company and you in connection with, and
following, the Merger.
In connection with the Merger, you agree that you will
maintain $900,000 of equity in the surviving company. Such equity will be made
up of a combination of the "roll-over" of shares of the Company which you
currently own and/or the roll-over of "in-the-money" options of the Company.
We have also reached agreements on the following:
1. Contemporaneously with the closing of the Merger, you
and the Company will enter into an amendment No. 1 to
Employment and Noncompete Agreement, a copy of which
is attached hereto as Exhibit A.
2. Attached hereto as Exhibit B is a Management Term
Sheet describing certain option grants and stock and
option ownership arrangements between the Company and
management and other employees of the Company.
Although such arrangements are expected to be
ultimately governed by a complete set of definitive
documents entered into prior to the effectiveness of
the merger (including a Stock Option Plan and related
Stock Option Agreements and a Stockholders
Agreement), this letter agreement, when countersigned
by you, will constitute a binding agreement between
us with respect to the matters contained herein and
in the Management Term Sheet. Attached hereto as
Exhibit E are the Stock Option Plan, form of Stock
Option Agreement and Stockholders Agreement used by
us in another transaction. The definitive form of the
<PAGE>
agreements entered into between the Company, us and
the management and other employees of the Company
will follow the form and substance of the documents
attached as Exhibit E, with the changes therein
necessary to conform the business arrangements among
the parties to the arrangements reflected in the
Management Term Sheet.
This letter agreement, when countersigned by you, will
constitute a binding agreement on all of our parts to proceed in accordance with
the terms hereof.
2
<PAGE>
Please indicate your agreement by signing and returning to us
the enclosed copy of this letter agreement.
Sincerely yours,
JUPITER PARTNERS II L.P.
By: Ganymede II LLC
By: /s/ John F. Klein
------------------------------
John F. Klein
ACCEPTED AND AGREED
/s/ Eric Jeltrup
- ------------------------------
Eric Jeltrup
JFK/nb
3
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AND NONCOMPETE AGREEMENT
This Amendment No. 1 To Employment and Noncompete Agreement (the
"Amendment") is made and entered into as of the ____ day of ______, 1998, by and
between PCA INTERNATIONAL, INC., a North Carolina corporation (the "Company");
and ERIC H. JELTRUP, a citizen and resident of the State of North Carolina
("Employee").
Background Statement
Employee and the Company entered into an Employment Agreement (the
"Agreement") dated as of June 9, 1997. Employee and the Company have agreed to
amend paragraph 4(a) to increase Employee's Base Rate. Capitalized words or
phrases used herein without definition shall have the meanings ascribed to them
in the Agreement.
NOW, THEREFORE, in consideration of the mutual duties and obligations
set forth herein, and intending to be legally bound, the parties hereto agree as
follows:
1. The Agreement is hereby amended by deleting paragraph 4(a) and
replacing it with the following:
"The annual base compensation rate to be paid to Employee for
the services to be rendered hereunder shall be Two Hundred
Fifty Thousand Dollars ($250,000.00), payable in accordance
with the Company's normal payroll practices, subject to
applicable federal and state income and social security tax
withholding requirements (the "Base Rate").
2. Except as set forth herein, the Agreement is ratified and confirmed
in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
Employee:
---------------------------------
Eric H. Jeltrup
Company:
PCA International, Inc.
By:
-----------------------------
Its:
-----------------------------
<PAGE>
JUPITER PARTNERS L.P. PCA International Management Term Sheet
- --------------------------------------------------------------------------------
TRANSACTION SUMMARY
- -------------------
<TABLE>
<S> <C>
Company and Transaction Jupiter Partners II L.P. ("Jupiter"), a
Delaware limited partnership, will acquire
outstanding common stock (the "Shares" or
"Common Stock") of PCA International, Inc. (the
"Company") (such purchase and related
transactions hereafter identified as the
"Transaction"). The Transaction would be
accomplished through a cash and share merger of
the Company with an affiliate to be formed by
Jupiter and would be accounted for as a
recapitalization.
Management Current and future managers of the Company
("Management" or "Managers").
Jupiter Transaction Fee and Jupiter Partners Inc., an affiliate of Jupiter
Management Fee Partners II L.P., will be paid a transaction
fee by the Company of 1% of the enterprise
value of the Company upon the closing of the
transaction, in addition to expenses incurred.
The Company will not be charged (i) an annual
"management" fee by Jupiter, or (ii) any
director's fees for individuals affiliated with
Jupiter.
COMMON STOCK
- ------------
Roll Over of Options and Jupiter has committed to invest up to $54.3
Common Stock million to purchase Common Stock of the Company
at $26.50 per share (the "Transaction Price").
Each Senior Management shareholder (John
Grosso, Eric Jeltrup, Bruce Fisher, Robert Wren
and Michael Spencer) is required to roll over
shares and in-the-money options. The minimum
aggregate roll over by Senior Management
shareholders is $3.5 million, the allocation of
which has been previously scheduled by John
Grosso.
Management shareholders in aggregate (including
Senior Management shareholders) may roll over
up to $5.0 million of the value of their shares
and in-the-money options.
The roll over of equity by management will be
in the form of roll-over shares for John Grosso
and a combination of roll-over shares and
roll-over options by each manager will be in
ascending order or strike price (i.e. those
options with the
</TABLE>
<PAGE>
<TABLE>
<S> <C>
lowest strike price will be rolled over or
retained by the manager.) The option roll-over
will be structured in order to minimize the
dilution allowable by accounting.
Jupiter will endeavor to structure the
transaction so that the use of existing stock
to purchase Common Stock and existing options
to purchase Roll-over Options in the Company
can be done in a tax-efficient manner. However,
this may not be possible and Managers are
advised to consult their own counsel on this
matter.
Roll over of Options and As used hereafter in this document, unless
Common Stock otherwise specifically noted, both Shares and
(continued) Common Stock refer to both Shares acquired by
exercise of Roll-over Options and Management
Options ("Option Shares") and Shares acquired
for cash or roll-over stock at the Transactions
date ("Purchased Shares").
Additional Common Stock may be available for
purchase at fair market value ("FMV") by
Managers expected to fill vacant positions on
the Management team.
Dividends and Cash In the event on a dividend or cash
Distributions distribution, Roll-over Option holders will be
provided the opportunity to either: (i) pay-in
the exercise price of the Roll-over Option and
receive the distribution, or (ii) incur a
reduction in the exercise price of such
Roll-over Option to reflect such distribution.
Transferability Management Shares, Management Options and
of shares Roll-over Options are saleable when Jupiter is
achieving or has achieved liquidity in its
Shares.
Management may sell or transfer any Option
Shares or Purchased Shares pursuant to the
appropriate provisions herein on the earlier of
(i) the public listing of the Company's stock,
(ii) the date Jupiter owns less than 20% of the
shares it held as of the Transaction, (iii) six
months prior to the expiration of the Options,
(iv) a tag-along transaction, or (v) an
applicable drag-along transaction.
If the Company is public and Jupiter owns more
than 20% of the Shares it held as of the
Transaction, Management may only sell via the
Piggyback Registration process (see below) or
in proportion (utilizing the same methodology
as in the Piggyback Registration provisions
below) to Jupiter sales under Rule 144.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
If the Company is public and Jupiter owns less
than 20% of the shares it held as of the
Transaction, Management sales are only subject
to normal securities law limitations.
Managers may not elect to sell Roll-over
Options or Management Options that are still
subject to the Repurchase Rights provisions
below related to termination without cause,
resignation and death or disability.
Managers may sell or transfer Shares when
electing the Tag-Along provision and must sell
when subject to the Jupiter Drag-Along
provision.
Repurchase Rights on The Company, first, (for a period of 90 days)
Management Options and and Jupiter, second, (for a period of an
Roll-over Options additional 90 days) have the right, but not the
obligation, Roll-over Options to purchase a
Manager's or Management Options under the
following circumstances at the prices outlined
below:
</TABLE>
<TABLE>
<CAPTION>
Event Repurchase Right
----- ----------------
<S> <C>
Death or Disability No repurchase right
Termination for Cause Lower of Cost or Fair Market
Value
Repurchase Formula
Termination without Cause Lower of Cost or Fair
Resignation Market Value
</TABLE>
<TABLE>
<S> <C>
The Fair Market Value will be determined by the
Board of Directors. If the Company is private
and the parties disagree regarding the Fair
Market Value of the options then the parties
will select an appraiser to determine the fair
market value of the options (taking into
consideration the lack of liquidity and
non-control nature of such option). This
appraisal remedy is only available to managers
holding options valued in excess of $500,000.
It is further understood that the holder will
be responsible for the cost of the appraisal
unless it is determined that the Board's
initial valuation was inadequate.
If the Company is public, the Fair Market Value
will be equal to the average of the closing
prices of the Common Stock over the prior
thirty day period.
The Company may utilize either cash or, if this
is constrained by financing or other
arrangements, a subordinated note (interest
rate equals prime rate; maturity equals 2
years) as
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
consideration when exercising its Repurchase
Rights.
The percent of a Manager's Roll-over Options or
Management Options on which the Company has a
repurchase right in the cases of termination
without Cause and resignation is as follows:
</TABLE>
<TABLE>
<CAPTION>
Anniversary from Closing Repurchase Percentage
------------------------ ---------------------
<S> <C>
Before 1st anniversary 100%
Between 1st and 2nd anniversary 80%
Between 2nd and 3rd anniversary 60%
Between 3rd and 4th anniversary 40%
Between 4th and 5th anniversary 20%
After 5th anniversary 0%
</TABLE>
<TABLE>
<S> <C>
If a Manager is terminated for Cause or
breaches the Non-Compete agreement, the
Repurchase Percentage on Roll-over Options and
Management Options shall be 100% (excluding
Shares previously sold in compliance with the
various provision of this agreement) until the
fifth anniversary of the Transaction.
Repurchase Rights on After the fifth anniversary, the Repurchase
Management Options and Percentage shall be 100% of Management Options
Roll-over Options only (excluding Option Shares previously sold
(continued) in compliance with the various provisions of
this agreement) in cases of termination for
Cause or breaches of the Non-Compete.
The exercise of the Repurchase Right by either
the Company or Jupiter will not be subject to
any Tag-Along or similar provisions available
to other Management stockholders.
The Repurchase Rights shall terminate only upon
a Change in Control (see below).
Repurchase Rights shall not apply to Shares
previously sold subject to the Tag-Along,
Drag-Along and Piggyback provisions (see
below).
The Repurchase Rights will apply to all
Management Options and Roll-over Options but
will not apply to Shares owned by the manager
prior to the Transaction.
"Tag Along" Rights In private transactions between Jupiter and
third parties, the Managers have the right to
sell a proportional number of their Shares,
Management Options and Roll-over Options on the
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
same terms and conditions which Jupiter is
selling its Shares. For purposes of this
provision, proportionality will be measured by
including all Shares and Roll-over Options that
are not subject to Repurchase Rights and all
Management Options that are vested, exercisable
and in-the-money.
In public transactions, the Piggyback
Registration provisions apply. Jupiter has
similar tag-along rights when Management is
eligible and proceeds to sell their shares in a
non-public setting.
"Drag Along" Rights At any time that Jupiter has agreed to sell
Shares of Common Stock to any person, Jupiter
shall be entitled to require all other holders
to sell an equivalent portion of their Shares
and Options in the transaction.
OPTIONS
- -------
Management Options The Company will arrange an Option plan
that will make available to Managers Management
Options that represent 12% of the primary
shares outstanding of the Company as of the
closing of the Transaction.
Management Options will be granted at the
closing of the Transaction. The remainder, if
any, will be granted to new Managers within 18
months of closing.
Of these Management Options, half (6% of the
primary shares outstanding at the date of the
Transaction) will vest over time (the "Time
Options"), and the remainder (6% of the primary
shares outstanding at the date of the
Transaction) will vest provided the Company
generates cumulative earnings before interest,
taxes, depreciation and amortization ("EBITDA")
for fiscal years ended January 1999, 2000, 2001
and 2002 (the "Performance Option Calculation
Period") equivalent to or greater than the sum
of Management's projection of EBITDA for the
comparable time period (the "Performance
Options"). Both the Time Options and the
Management Options will be exercisable at the
Transaction Price per share.
Time Options will vest in equal portions on
each of the first five anniversaries from
grant. At the conclusion of the Performance
Option Calculation Period, a portion of the
Performance Options will vest provided the
Company achieves at least 90% of the cumulative
EBITDA target; all Performance Options will
vest if the Company achieves 100%
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
of the cumulative EBITDA target (vesting to be
pro rata between 90% and 100%). In the event of
a Change in Control prior to the conclusion of
the Performance Option Calculation Period, the
vesting of the Performance Options will be
based on Company performance versus
Management's projection of cumulative EBITDA
from the Transaction date to the Change in
Control. The EBITDA test will be adjusted if
the Company makes any material acquisitions or
divestitures.
John Grosso will receive Management Options on
3% of the primary shares outstanding at the
date of the Transaction (1.5% Time Options and
1.5% Performance Options).
The exercise prices of Management Options not
granted at the closing of the Transaction will
be determined by the Board of Directors at the
time of grant.
Time Options will expire 8 years from grant.
Performance Options will expire 8 years from
grant. The expiration of Roll-over Options will
be extended to the earlier of: (i) a liquidity
event; (ii) a Change in Control, or (iii) 8
years.
Any shares acquired on exercise of Options will
be subject to provisions of Repurchase Rights,
Drag-Along, Tag-Along and Registration Rights.
Acceleration of Vesting on On a Change in Control, all Options will vest
Change in Control and must be exercised prior to or simultaneous
with the Change in Control transaction. Upon a
Change of Control, unexercised Options are
canceled.
If more than 50% of the Company's Shares are
sold but a Change in Control has not occurred,
the Board may, at its sole discretion,
immediately vest all, or a portion of, unvested
Options and then require exercise on all vested
options within a specific time period.
Definition of Change in A Change in Control will occur when (i) Jupiter
Control has received cash proceeds from the sale of 50%
or more of the Common Stock purchased on the
Transaction date, and (ii) the Company is not
public following the transaction by which
Jupiter sold its stake.
Cancellation of Management The Company has the right to cancel Management
Options Options under the following circumstances as
follows:
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Event Options Cancelable
----- ------------------
<S> <C>
Death or Disability Unvested Options only
Termination for Cause All Options
Termination without Cause Unvested Options only
Resignation Unvested Options only
</TABLE>
<TABLE>
<S> <C>
Required Exercise of Under the following circumstances, vested
Management Options Management Options must be exercised within the
time frames outlined below. Any Management
Options not exercised during the appropriate
period are canceled.
</TABLE>
<TABLE>
<CAPTION>
Event Accelerated Exercise Period
----- ---------------------------
<S> <C>
Death or Disability No acceleration
Termination for Cause All Options canceled
Termination without Cause No acceleration
Resignation 60 days
</TABLE>
<TABLE>
<S> <C>
REGISTRATION RIGHTS
- -------------------
Demand Registration Rights Jupiter shall be allowed six Demand
Registrations at the Company's expense at any
time.
Piggyback Registration Rights In a public offering of shares, the Management
shareholders have the right to sell their
Shares and Roll-over Options in a proportion
equal to one-half the proportion of the number
of shares sold by Jupiter until Jupiter has
sold 50% of the shares it held prior to an
initial public offering. For purposes of this
provision, proportionality will be measured by
including all Shares and Roll-over Options that
are not subject to Repurchase Rights and all
Management Options that are vested, exercisable
and in-the-money.
After Jupiter has sold 50% of the shares it
held prior to an initial public offering, the
Management shareholders may register their
shares in equal proportion to Jupiter in any
registered offering.
Former Management will only retain these
registration rights to the extent that their
employment ended due to death or disability or
they were terminated without Cause.
In any public offering of shares, Jupiter shall
have Piggyback Registration rights.
</TABLE>
7
<PAGE>
EXHIBIT 11
PCA INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal year ended approximately January 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Basic Income (Loss) per share:
Weighted average number of shares:
Number of shares at beginning of year $8,016,371 $8,138,071 $8,160,177 $7,482,071 $7,607,129
Average number of shares issued for options
exercised 75,639 10,774 48,169 277,976 172,047
Average number of shares repurchased 0 0 (576,049) (237,859) 0
---------- ---------- ---------- ---------- ----------
Total weighted average common shares 8,092,010 8,148,845 7,632,297 7,522,188 7,779,176
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings per common share:
Income from continuing operations $0.61 $0.54 $1.00 $0.40 $1.12
Discontinued operations ($0.27) $0.05 - - -
Net income $0.34 $0.59 $1.00 $0.40 $1.12
Diluted Income (Loss) per share:
Weighted average number of shares:
Number of shares at beginning of year $8,016,371 $8,138,071 $8,160,177 $7,482,071 $7,607,129
Average number of shares issued for options
exercised 75,639 10,774 48,169 277,976 172,047
Average number of shares repurchased 0 0 -576,049 -237,859 0
Dilutive effect of stock options 421,120 249,270 262,359 313,425 398,784
Dilutive effect of warrants 17,148
---------- ---------- ---------- ---------- ----------
Total weighted average common shares
outstanding as adjusted 8,513,130 8,398,115 7,894,656 7,835,613 8,195,108
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted earnings per common share:
Income from continuing operations $0.58 $0.52 $0.96 $0.38 $1.07
Discontinued operations ($0.26) $0.05 - - -
Net income $0.32 $0.57 $0.96 $0.38 $1.07
</TABLE>
<PAGE>
EXHIBIT 12
PCA INTERNATIONAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PRO FORMA
-----------
FISCAL YEAR ENDED APPROXIMATELY JANUARY 31, FISCAL YEAR
QUARTER QUARTER ENDED
----------------------------------------------------- ENDED ENDED FEBRUARY 1,
1994 1995 1996 1997 1998 5/4/97 5/4/97 1998
--------- --------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from
continuing operations
before income
taxes................ $ 8,208 $ 7,447 $ 12,883 $ 5,137 $ 16,292 $ 1,439 $ 1,437 $ 903
Fixed charges.......... $ (5) $ 406 $ 459 $ 179 $ 6,571 $ 1,619 $ 1,220 $ 21,960
--------- --------- --------- --------- --------- ----------- ----------- -----------
Earnings:................ $ 8,203 $ 7,853 $ 13,322 $ 5,316 $ 22,863 $ 3,058 $ 2,657 $ 22,863
Fixed charges:
Interest expense(1).... $ 0 $ 406 $ 459 $ 179 $ 5,346 $ 1,441 $ 887 $ 20,847
Amortization of debt
expense and discount
or premium on debt... $ 1,225 $ 178 $ 333 $ 1,113
--------- --------- --------- --------- --------- ----------- ----------- -----------
Total fixed charges...... $ (5) $ 406 $ 459 $ 179 $ 6,571 $ 1,619 $ 1,220 $ 21,960
Ratio of earnings to
fixed charges (1)...... NM 19.3 29.0 29.7 3.5 1.9 2.2 1.0
<CAPTION>
TWELVE
QUARTER MONTHS
ENDED ENDED
MAY 3, 1998 MAY 3, 1998
------------- -------------
<S> <C> <C>
Earnings:
Income (loss) from
continuing operations
before income
taxes................ $ (2,688) $ 501
Fixed charges.......... $ 5,345 $ 21,960
------------- -------------
Earnings:................ $ 2,657 $ 22,461
Fixed charges:
Interest expense(1).... $ 5,067 $ 20,847
Amortization of debt
expense and discount
or premium on debt... $ 278 $ 1,113
------------- -------------
Total fixed charges...... $ 5,345 $ 21,960
Ratio of earnings to
fixed charges (1)...... 0.5(2) 1.0
</TABLE>
- ------------------------------
(1) Fixed charges defined as total of capitalization or expensed interest and
amortization of debt expense. Earnings as defined as pretax income from
continuing operations adjusted to include fixed charges and exclude the
amount of any interest capitalized during the period.
(2) Earnings were not sufficient to cover fixed charges by $2,688 for the pro
forma quarter ended May 3, 1998.
<PAGE>
EXHIBIT 21
PCA INTERNATIONAL, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the Company(1)s subsidiaries and affiliates at
May 3, 1998 indicting the percentage of ownership and the state or country of
incorporation:
<TABLE>
<CAPTION>
PERCENTAGE
OF VOTING
STATE OR COUNTRY SECURITIES
OF OWNED BY THE
NAME INCORPORATION COMPANY
- ------------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Photo Corporation of America................................................... North Carolina 100%
PCA National, Inc.............................................................. North Carolina *
PCA Specialty Photo Retail Corporation......................................... North Carolina **
PCA Photo Corporation of Canada, Inc........................................... North Carolina 100%
PCA of Mexico SA DE CV......................................................... Mexico 99%
PCA of Argentina S.A........................................................... Argentina 100%
American Studios, Inc.......................................................... North Carolina 100%
</TABLE>
- ------------------------
* PCA National, Inc. is a subsidiary of Photo Corporation of America.
** PCA Specialty Photo Retail Corporation is a subsidiary of PCA National, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors and Shareholders
PCA International, Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the proxy statement/prospectus.
(signed) KPMG PEAT MARWICK LLP
Charlotte, North Carolina
July 23, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF TERRY J. BLUMER
I hereby consent to the reference in the Proxy Statement/Prospectus
constituting part of the Registration Statement on Form S-4 (and all amendments
thereto) of PCA International, Inc. to my name as a person about to become a
director of PCA International, Inc.
<TABLE>
<S> <C> <C>
/s/ TERRY J. BLUMER
---------------------------------------------
Terry J. Blumer
</TABLE>
July 23, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF JOHN A. SPRAGUE
I hereby consent to the reference in the Proxy Statement/Prospectus
constituting part of the Registration Statement on Form S-4 (and all amendments
thereto) of PCA International, Inc. to my name as a person about to become a
director of PCA International, Inc.
<TABLE>
<S> <C> <C>
/s/ JOHN A. SPRAGUE
---------------------------------------------
John A. Sprague
</TABLE>
July 23, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF JOHN F. KLEIN
I hereby consent to the reference in the Proxy Statement/Prospectus
constituting part of the Registration Statement on Form S-4 (and all amendments
thereto) of PCA International, Inc. to my name as a person about to become a
director of PCA International, Inc.
<TABLE>
<S> <C> <C>
/s/ JOHN F. KLEIN
---------------------------------------------
John F. Klein
</TABLE>
July 23, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF THOMAS A. BERGLUND
I hereby consent to the reference in the Proxy Statement/Prospectus
constituting part of the Registration Statement on Form S-4 (and all amendments
thereto) of PCA International, Inc. to my name as a person about to become a
director of PCA International, Inc.
/s/ THOMAS A. BERGLUND
------------------------------------------------------------------------------
Thomas A. Berglund
July 23, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF ERIC F. SCHEUERMANN
I hereby consent to the reference in the Proxy Statement/Prospectus
constituting part of the Registration Statement on Form S-4 (and all amendments
thereto) of PCA International, Inc. to my name as a person about to become a
director of PCA International, Inc.
/s/ ERIC F. SCHEUERMANN
------------------------------------------------------------------------------
ERIC F. SCHEUERMANN
July 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> MAY-03-1998
<CASH> 11,073,455
<SECURITIES> 0
<RECEIVABLES> 9,005,965
<ALLOWANCES> 1,488,299
<INVENTORY> 8,069,236
<CURRENT-ASSETS> 32,695,744
<PP&E> 120,296,398
<DEPRECIATION> 66,971,841
<TOTAL-ASSETS> 146,916,230
<CURRENT-LIABILITIES> 52,363,502
<BONDS> 0
0
0
<COMMON> 1,589,576
<OTHER-SE> 44,122,858
<TOTAL-LIABILITY-AND-EQUITY> 146,916,230
<SALES> 54,661,925
<TOTAL-REVENUES> 54,661,925
<CGS> 41,576,877
<TOTAL-COSTS> 41,576,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,219,709
<INCOME-PRETAX> 1,436,884
<INCOME-TAX> 658,811
<INCOME-CONTINUING> 778,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 778,073
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-1-1998
<PERIOD-START> FEB-3-1997
<PERIOD-END> FEB-1-1998
<CASH> 12,289,761
<SECURITIES> 0
<RECEIVABLES> 8,820,151
<ALLOWANCES> 1,315,666
<INVENTORY> 10,078,719
<CURRENT-ASSETS> 36,743,997
<PP&E> 119,412,452
<DEPRECIATION> 64,488,965
<TOTAL-ASSETS> 153,300,826
<CURRENT-LIABILITIES> 57,078,326
<BONDS> 42,063,857
1,580,316
0
<COMMON> 0
<OTHER-SE> 43,109,108
<TOTAL-LIABILITY-AND-EQUITY> 153,300,826
<SALES> 242,899,027
<TOTAL-REVENUES> 242,899,027
<CGS> 181,965,920
<TOTAL-COSTS> 181,965,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,570,945
<INCOME-PRETAX> 16,292,172
<INCOME-TAX> 7,557,320
<INCOME-CONTINUING> 8,734,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,734,852
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-2-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> FEB-2-1997
<CASH> 1,536,234
<SECURITIES> 0
<RECEIVABLES> 8,172,645
<ALLOWANCES> 867,961
<INVENTORY> 9,814,682
<CURRENT-ASSETS> 28,191,972
<PP&E> 129,612,934
<DEPRECIATION> 71,348,374
<TOTAL-ASSETS> 147,077,118
<CURRENT-LIABILITIES> 108,316,847
<BONDS> 0
1,521,426
0
<COMMON> 0
<OTHER-SE> 33,640,740
<TOTAL-LIABILITY-AND-EQUITY> 147,077,118
<SALES> 156,099,050
<TOTAL-REVENUES> 156,099,050
<CGS> 119,106,451
<TOTAL-COSTS> 119,106,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179,221
<INCOME-PRETAX> 5,136,907
<INCOME-TAX> 2,143,053
<INCOME-CONTINUING> 2,993,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,993,854
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.38
</TABLE>
<PAGE>
EXHIBIT 99.1
PCA INTERNATIONAL, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
, 1998
The undersigned hereby appoint(s) John Grosso and Bruce A. Fisher, or any of
them, each with full power of substitution, as proxies to vote all stock in PCA
International, Inc. that the undersigned would be entitled to vote on all
matters that may come before the Special Meeting of Shareholders on
, 1998 and any adjournments thereof. Returned proxy forms will be voted:
(1) as specified on the matter listed on the reverse side of this form; (2) in
accordance with the Directors' recommendations when a choice is not specified;
and (3) in accordance with the judgment of the proxies on any other matters that
properly come before the meeting.
Your shares will not be voted unless your signed Proxy Form is returned to PCA
International, Inc. or you otherwise vote at the meeting. You may revoke your
proxy at any time prior to the time it is voted at the Special Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE MERGER
PROPOSAL.
PLEASE MARK, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENVELOPE
PROVIDED.
Please sign exactly as your name appears on this Proxy Card. If shares are
registered in more than one name, all such persons should sign. A corporation
should sign in its full corporate name by a duly authorized officer, stating
full title. Trustees, guardians, executors and administrators should sign in
their official capacity, giving their full title as such. A partnership should
sign in its partnership name by a duly authorized person. This Proxy Card
votes all shares held in all capacities.
HAS YOUR ADDRESS CHANGED?
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
DO YOU HAVE ANY COMMENTS?
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
PCA INTERNATIONAL, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
, 1998
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE [X]
MERGER PROPOSAL:
Approval and adoption of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of April 20, 1998 by and between PCA International, Inc.
(the "Company") and Jupiter Acquisition Corp., a North Carolina corporation
("Mergerco"), pursuant to which Mergerco will be merged with and into the
Company (the "Merger"). If the Merger is consummated, each share of PCA Common
Stock outstanding immediately prior to the effective time of the Merger (other
than shares of PCA Common Stock for which appraisal rights have been exercised
or shares held by the Company as treasury stock or owned by Mergerco) will, at
the election of the holder thereof and subject to certain limitations, either
(x) be converted into the right to receive $26.50 in cash or (y) remain
outstanding as one share of PCA Common Stock.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
/ / / / / /
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
MERGER PROPOSAL
Please sign below exactly as your name appears on this Proxy Card. If shares are
registered in more than one name, all such persons should sign. A corporation
should sign in its full corporate name by a duly authorized officer, stating
full title. Trustees, guardians, executors and administrators should sign in
their official capacity, giving their full title as such. A partnership should
sign in its partnership name by a duly authorized person. This Proxy Card votes
all shares held in all capacities.
Dated: , 1998 Signature: ________________________________________
Signature: ________________________________________
(if held jointly)
Title or
authority: _____________________________
(if
applicable)
PLEASE MARK, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENVELOPE
PROVIDED.
FOLD AND DETACH HERE
<PAGE>
EXHIBIT 99.2
IF YOU WISH TO RECEIVE $26.50 PER SHARE IN CASH FOR ALL OF YOUR SHARES OF
PCA COMMON STOCK, YOU DO NOT NEED TO RETURN THIS CONTINUING SHARE ELECTION FORM
TO THE COMPANY. SHAREHOLDERS WHO DO NOT RETURN A CONTINUING SHARE ELECTION FORM
WILL BE DEEMED TO HAVE ELECTED TO CONVERT THEIR SHARES OF PCA COMMON STOCK INTO
CASH.
CONTINUING SHARE ELECTION FORM
TO ACCOMPANY CERTIFICATES REPRESENTING
SHARES OF COMMON STOCK
OF
PCA INTERNATIONAL, INC.
("PCA" OR THE "COMPANY")
TO: PCA INTERNATIONAL, INC.
815 MATTHEWS-MINT HILL ROAD
MATTHEWS, NORTH CAROLINA 28105
Facsimile: (704) 847-1548
Confirm facsimile by telephone ONLY: (704) 847-8011 ext. 2260
FOR INFORMATION OR ASSISTANCE CALL EITHER JEAN VEATCH, HEAD OF INVESTOR
RELATIONS, AT (704) 847-8011 OR WACHOVIA SHAREHOLDER SERVICES, AT (800)
633-4236.
{ }CHECK HERE IF YOU CANNOT LOCATE CERTIFICATES AND CALL (800) 633-4236 TO
RECEIVE INFORMATION REGARDING REPLACEMENT INSTRUCTIONS. TO MAKE A VALID
CONTINUING SHARE ELECTION, LOST CERTIFICATES MUST BE REPLACED AND FORWARDED
TO THE COMPANY BEFORE 5:00 P.M., NEW YORK CITY TIME, ON (AUGUST 13, 1998).
<PAGE>
BOX I
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) SHARES SUBMITTED
(PLEASE FILL IN, IF BLANK) (ATTACH ADDITIONAL LIST IF NECESSARY)
<S> <C> <C> <C>
CERTIFICATE TOTAL NUMBER NUMBER OF
NUMBER OF SHARES SHARES
REPRESENTED BY SUBMITTED**
CERTIFICATE(S)
- ---------------------------------------------------------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
TOTAL NUMBER
OF SHARES OF
PCA COMMON
STOCK
<CAPTION>
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* ONLY CERTIFICATES REGISTERED IN A SINGLE FORM MAY BE DEPOSITED WITH THIS CONTINUING SHARE
ELECTION FORM. IF CERTIFICATES ARE REGISTERED IN DIFFERENT FORMS (E.G. JOHN R. DOE AND
J.R. DOE), IT WILL BE NECESSARY TO FILL IN, SIGN AND SUBMIT AS MANY SEPARATE CONTINUING
SHARE ELECTION FORMS AS THERE ARE DIFFERENT REGISTRATIONS OF CERTIFICATES OR THE
STOCKHOLDER MAY PROVIDE ONLY ONE CONTINUING SHARE ELECTION FORM AND SIGN IT EACH WAY HIS
OR HER NAME APPEARS ON DIFFERENT STOCK CERTIFICATES. HOWEVER, EACH SIGNATURE MUST BE
GUARANTEED AS DESCRIBED IN INSTRUCTION D(7).
** UNLESS OTHERWISE INDICATED, IT WILL BE ASSUMED THAT ALL SHARES SUBMITTED ARE TO BE TREATED
AS HAVING MADE A CONTINUING SHARE ELECTION (AS DEFINED BELOW).
------------------------------------------------------------------------------------------
</TABLE>
DELIVERY OF THIS CONTINUING SHARE ELECTION FORM TO AN ADDRESS, OR
TRANSMISSION VIA A TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE,
DOES NOT CONSTITUTE A VALID DELIVERY AND YOU WILL BE DEEMED TO HAVE MADE AN
ELECTION TO CONVERT THE SHARES REFLECTED ON SUCH FORM INTO CASH.
THE INSTRUCTIONS ACCOMPANYING THIS CONTINUING SHARE ELECTION FORM SHOULD BE
READ CAREFULLY BEFORE THIS CONTINUING SHARE ELECTION FORM IS COMPLETED.
This Continuing Share Election Form is to accompany certificates for shares
("Shares") of common stock, par value $.01 per share, of PCA ("PCA Common
Stock"), submitted pursuant to an election ("Continuing Share Election") to
retain shares of Surviving Corporation Common Stock (as defined below) in
connection with the proposed merger (the "Merger") of Jupiter Acquisition Corp.
("Mergerco") with and into PCA.
This Continuing Share Election Form is being sent under separate cover from
the Proxy Statement (as defined below) and Proxy Card (the Proxy Statement and
the Proxy Card, collectively referred to as the "Proxy Materials"). If you have
not received the Proxy Materials, please contact Wachovia Shareholder Services
at (800) 633-4236.
HOLDERS OF PCA COMMON STOCK WHO DO NOT WISH TO MAKE A CONTINUING SHARE
ELECTION (ANY SUCH HOLDER, A "NON-ELECTING HOLDER") DO NOT NEED TO SUBMIT THIS
CONTINUING SHARE ELECTION FORM. UPON APPROVAL OF THE MERGER AND FILING OF THE
CERTIFICATE OF MERGER IN CONNECTION THEREWITH (THE
2
<PAGE>
"EFFECTIVE TIME"), EACH SHARE OF PCA COMMON STOCK OWNED BY ANY SUCH NON-ELECTING
HOLDER WILL AUTOMATICALLY, SUBJECT TO PRORATION AS DESCRIBED IN THE PROXY
STATEMENT, BE CONVERTED INTO THE RIGHT TO RECEIVE AN AMOUNT EQUAL TO $26.50 IN
CASH FROM THE SURVIVING CORPORATION (AS DEFINED BELOW) FOLLOWING THE MERGER.
TO MAKE A VALID CONTINUING SHARE ELECTION, THIS CONTINUING SHARE ELECTION
FORM (AND THE ACCOMPANYING STOCK CERTIFICATES) MUST BE RECEIVED BY THE COMPANY
BEFORE 5:00 P.M., NEW YORK CITY TIME, ON (AUGUST 13, 1998) (THE "ELECTION DATE")
OR BOX V, GUARANTEE OF DELIVERY, MUST BE COMPLETED AND RECEIVED BY SUCH TIME AND
THE STOCK CERTIFICATES SUBJECT THERETO MUST BE RECEIVED BY THE COMPANY NO LATER
THAN 5:00 P.M., NEW YORK CITY TIME, ON THE THIRD NASDAQ NATIONAL MARKET TRADING
DAY AFTER THE DATE OF EXECUTION OF SUCH GUARANTY OF DELIVERY AND IN NO CASE
LATER THAN THREE TRADING DAYS AFTER THE ELECTION DATE.
3
<PAGE>
Ladies and Gentlemen:
In connection with the Merger of Mergerco with and into PCA, with PCA
continuing as the surviving corporation (the "Surviving Corporation"), the
undersigned hereby submits the certificate(s) for Shares of PCA Common Stock
listed above and elects to have all or a portion of the Shares of PCA Common
Stock represented by such certificates as set forth above retained as shares of
common stock of the Surviving Corporation ("Surviving Corporation Common Stock")
following the Merger. The undersigned understands that, in connection with the
Merger, each Share of PCA Common Stock (other than any such Shares held in
treasury by the Company, owned by Mergerco or any wholly-owned subsidiary
thereof, Shares to remain outstanding pursuant to the following sentence or
Shares with respect to which appraisal rights are exercised) will be converted,
at the option of the holder, subject to certain restrictions set forth in the
Proxy Statement, into the right to receive $26.50 per Share in cash without
interest (the "Cash Merger Consideration"). Notwithstanding the foregoing
sentence, in connection with the Merger, each holder of Shares of PCA Common
Stock shall have the right to elect to retain one share of Surviving Corporation
Common Stock for each Share of PCA Common Stock held by such holder. The
undersigned further understands that, due to the restrictions on the number of
shares of Surviving Corporation Common Stock which may be retained by existing
holders of PCA Common Stock, the undersigned may receive fewer shares of
Surviving Corporation Common Stock than indicated in this Continuing Share
Election Form. The undersigned further understands that no fractional shares of
Surviving Corporation Common Stock will be issued and that the undersigned will
receive cash in lieu of any such fraction of a share to which the undersigned
would otherwise be entitled.
The following Continuing Share Election is subject to (i) the terms,
conditions and limitations set forth in the Proxy Statement/Prospectus, dated
{August 13,} 1998, relating to the Merger (the "Proxy Statement"), receipt of
which is acknowledged by the undersigned, (ii) the terms of the Agreement and
Plan of Merger by and between PCA and Jupiter, dated as of April 20, 1998 (the
"Merger Agreement"), a conformed copy of which appears as Annex A to the Proxy
Statement, and (iii) the accompanying Instructions to this Continuing Share
Election Form.
If certificates of PCA Common Stock are not delivered herewith, there is
furnished below a Guarantee of Delivery of such certificates representing Shares
of PCA Common Stock from a member of a national securities exchange, a member of
the National Association of Securities Dealers, Inc. or a commercial bank (not a
savings bank or a savings and loan association) or trust company having an
office in the United States.
Unless otherwise indicated under Special Payment Instructions below, please
issue any certificate for Continuing Shares and/or any check issuable in
exchange for the Shares of PCA Common Stock represented by the certificates(s)
submitted hereby in the name of the registered holder(s) of such PCA Common
Stock. Similarly, unless otherwise indicated under Special Delivery
Instructions, please mail any certificate(s) for shares of Surviving Corporation
Common Stock and/or any check for cash issuable in exchange for the Shares of
PCA Common Stock represented by the certificate(s) submitted hereby to the
registered holder(s) of the PCA Common Stock at the address or addresses shown
above.
THE UNDERSIGNED UNDERSTANDS THAT IF THE UNDERSIGNED WISHES TO
RECEIVE CASH ONLY, THE UNDERSIGNED DOES NOT NEED TO COMPLETE THIS
FORM; A LETTER OF TRANSMITTAL AND ADDITIONAL INSTRUCTIONS WILL BE
SENT TO THE UNDERSIGNED FOLLOWING THE EFFECTIVE TIME.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to sell, transfer and assign the Shares of PCA Common Stock
accompanying this Continuing Share Election Form and that such Shares are free
and clear of all liens, claims, restrictions, charges and encumbrances and not
subject to any adverse claim. The undersigned will, upon request, execute and
deliver any
3
<PAGE>
additional documents deemed by the Company to be necessary or desirable in
connection with the Continuing Share Election made hereby.
All authority herein conferred or agreed to be conferred by the undersigned
shall survive the death or incapacity of the undersigned, and any obligations of
the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.
Please direct all questions with respect to this Continuing Share Election
Form either to Jean Veatch at (704) 847-8011 or Wachovia Shareholder Services at
(800) 633-4236.
4
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
BOX II
-----------------------------------------------
SPECIAL ISSUANCE AND
PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS D(6) AND D(7))
To be completed ONLY if the certificates for Continuing Shares are to be
registered in the name of, or the checks are to be made payable to, someone
other than the registered holder(s) of Shares of PCA Common Stock.
Issue certificate and/or check to:
Name
-----------------------------------------------
(PLEASE PRINT)
------------------------------------------------------------
(PLEASE PRINT)
Address
-----------------------------------------------
-----------------------------------------------
(INCLUDING ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
(Note: If this box is completed, endorsement on the surrendered
certificate(s) or signature(s) on the accompanying instrument of transfer
MUST BE MEDALLION GUARANTEED in the usual form as described in Instruction
D(7). PLEASE ALSO COMPLETE THE SUBSTITUTE FORM W-9 ENCLOSED HEREWITH.)
- -------------------------------------------
BOX III
-----------------------------------------------
SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTION D(8))
To be completed ONLY if the certificates for Continuing Shares are to be
registered in the name of, and/or the checks are to be made payable to, the
registered holder(s) of Shares of PCA Common Stock, but are to be sent to
someone other than the registered holder(s) or to an address other than the
address of the registered holder(s) set forth in Box I, above.
Mail certificate and/or check to:
Name
-----------------------------------------------
(PLEASE PRINT)
-----------------------------------------------
(PLEASE PRINT)
Address
-----------------------------------------------
-----------------------------------------------
(INCLUDING ZIP CODE)
- -----------------------------------------------------
5
<PAGE>
BOX IV
- --------------------------------------------------------------------------------
ALL HOLDERS OF PCA COMMON STOCK MUST SIGN BELOW
(SEE INSTRUCTIONS D(1) AND D(7) CONCERNING SIGNATURE GUARANTEE)
<TABLE>
<S> <C>
------------------------------------------------------------ Name(s) ----------------------------
------------------------------------------------------------ (Please Print)
Signature(s) of Owner(s) Name(s) ----------------------------
Must be signed by registered holder(s) exactly as name(s) appear(s) on (Please Print)
stock certificate(s) or by person(s) authorized to become registered Name(s) ----------------------------
holder(s) by certificates and documents transmitted herewith. If signature (Please Print)
is by a trustee, executor, administrator, guardian, officer of a ----------------------------
corporation, attorney-in-fact or any other person acting in a fiduciary (Address)
capacity, set forth full title in such capacity and see Instruction D(3). ----------------------------
Medallion ----------------------------
Signature (Including Zip Code)
Guarantee: ------------------------------------------------------------ ----------------------------
FINANCIAL INSTITUTION NAME (Daytime Area Code and
(If Required--See Instruction D(7)) Telephone Number(s))
------------------------------------
(Tax Identification or Social
Security
Number(s)) (See Substitute Form W-9)
Dated:
------------------------------------
1998
- ---------------------------------------------------------------------------
</TABLE>
BOX V
- --------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(TO BE USED ONLY IF CERTIFICATES ARE NOT SURRENDERED HEREWITH)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The undersigned is: (Firm-Please Print)
- a member of a national securities exchange, ----------------------------
- a member of the National Association of Securities Dealers, Inc., or (Authorized Signature)
- a commercial bank or trust company in the United States; ----------------------------
and guarantees to deliver to the Company the certificates for Shares of PCA (Address)
Common Stock to which this Continuing Share Election Form relates, duly ----------------------------
endorsed in blank or otherwise in form acceptable for transfer on the books ----------------------------
of PCA, no later than 5:00 P.M., New York City time, on the third Nasdaq (Including Zip Code)
National Market trading day after the date of execution of this Guarantee ----------------------------
of Delivery and in no case later than three trading days after the Election (Daytime Area Code and
Date. Telephone Number(s))
----------------------------
(Contact Name)
- ---------------------------------------------------------------------------
</TABLE>
6
<PAGE>
SUBSTITUTE FORM W-9
(SEE THE ENCLOSED GUIDELINES FOR CERTIFICATE OF TAXPAYER IDENTIFICATION
NUMBER ON FORM W-9 (THE "GUIDELINES"))
Payer: Wachovia Bank, N.A.
Name (if joint names, list first and circle the name of the person or entity
whose number you enter below)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Business Name (Sole proprietors see the instructions in the enclosed Guidelines)
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State and Zip Code
- --------------------------------------------------------------------------------
7
<PAGE>
<TABLE>
<C> <S> <C>
- -----------------------------------------------------------------------------------------
SUBSTITUTE PART I--TAXPAYER Social Security Number
FORM W-9 IDENTIFICATION NUMBER --------------------
Department of the Treasury Enter your taxpayer OR
Internal Revenue Service identification number in Employer Identification Number
the appropriate box. For ----------------------------
individuals, this is your
social security number.
For sole proprietors, see
the instructions in the
Guidelines. For other
entities, it is your
employer identification
number.
------------------------------------------------------------
Payer's Request for / / If you do not have a number, check the box here and see
Taxpayer "Obtaining a Number" in the Guidelines.
Identification Number and NOTE: If the account is in more than one name, see the chart
Certification on page 1 of the Guidelines on whose number to enter.
------------------------------------------------------------
PART II--If you are a Payee Exempt from Backup Withholding,
see Instructions in the Guidelines.
- -----------------------------------------------------------------------------------------
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number (or I am
waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from backup
withholding, (b) I have not been notified by the Internal Revenue Service ("IRS") that I
am subject to backup withholding as result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified
by the IRS that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
SIGNATURE: ---------------------------------------------- DATE:-----------------, 1998
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF CERTAIN PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED
GUIDELINES FOR ADDITIONAL DETAILS.
8
<PAGE>
INSTRUCTIONS
A. SPECIAL CONDITIONS.
1. TIME IN WHICH TO ELECT. To be effective, a Continuing Share Election
pursuant to the terms and conditions set forth herein on this Continuing Share
Election Form or a facsimile hereof, accompanied by the above-described
certificates representing Shares of PCA Common Stock or a proper Guarantee of
Delivery thereof, must be received by the Company, at the address set forth
above, no later than 5:00 P.M., New York City time, on {August 13, 1998} (the
"Election Date"). Holders of PCA Common Stock whose stock certificates are not
immediately available may also make an effective Continuing Share Election by
completing this Continuing Share Election Form or facsimile hereof, having Box
V--Guarantee of Delivery properly completed and duly executed by an eligible
institution (subject to the condition that the certificates for which delivery
is thereby guaranteed are in fact delivered to the Company, duly endorsed in
blank or otherwise in form acceptable for transfer on the books of PCA, no later
than 5:00 P.M., New York City time, on the third Nasdaq National Market trading
day after the date of execution of such Guarantee of Delivery and in no case
later than three trading days after the Election Date). Subject to the proration
provisions of the Merger Agreement, each Share of PCA Common Stock outstanding
at the Effective Time of the Merger with respect to which the Company shall not
have received an effective Continuing Share Election prior to the Election Date,
or with respect to which the proration procedures set forth in the Proxy
Statesmen pertain, will be converted into the right to receive an amount equal
to $26.50 in cash from the Surviving Corporation following the Merger. See
Instruction C.
2. REVOCATION OF CONTINUING SHARE ELECTION. Any Continuing Share Election
may be revoked by the person who submitted this Continuing Share Election Form
to the Company, and the certificate(s) for shares withdrawn by written notice
duly executed and received by the Company prior to the Election Date shall be
returned to the submitting party. Such notice must specify the person in whose
name the Shares of PCA Common Stock to be withdrawn had been deposited, the
number of Shares to be withdrawn, the name of the registered holder thereof, and
the serial numbers shown on the certificate(s) representing the Shares to be
withdrawn. If a Continuing Share Election is revoked, and the certificate(s) for
Shares withdrawn, the PCA Common Stock certificate(s) submitted therewith will
be promptly returned by the Company to the person who submitted such
certificate(s).
3. TERMINATION OF RIGHT TO ELECT. If for any reason the Merger is not
consummated or is abandoned, all Continuing Share Election Forms will be void
and of no effect. Certificate(s) for PCA Common Stock previously received by the
Company will be returned promptly by the Company to the person who submitted
such stock certificate(s).
B. CONTINUING SHARE ELECTION AND PRORATION PROCEDURES.
A description of the stock election and proration procedures is set forth in
the Proxy Statement under "THE MERGER--Continuing Share Election," "THE
MERGER--Possible Effects of Proration" and "THE MERGER--Continuing Share
Election Procedure." A full statement of the Continuing Share Election and
proration procedures is contained in the Merger Agreement, and all Continuing
Share Elections are subject to compliance with such procedures. IN CONNECTION
WITH MAKING A CONTINUING SHARE ELECTION, A HOLDER OF PCA COMMON STOCK SHOULD
READ CAREFULLY, AMONG OTHER MATTERS, THE AFORESAID DESCRIPTION AND STATEMENT AND
THE INFORMATION CONTAINED IN THE PROXY STATEMENT UNDER "THE MERGER--FEDERAL
INCOME TAX CONSEQUENCES" AND "RISK FACTORS--RISKS ASSOCIATED WITH THE
MERGER--TAXATION OF STOCKHOLDERS RECEIVING CASH--POSSIBLE DIVIDEND TREATMENT"
FOR A DISCUSSION OF THE POSSIBILITY THAT THE RECEIPT OF CASH AS A RESULT OF
PRORATION BY A HOLDER WHO HAS MADE A CONTINUING SHARE ELECTION MAY BE TREATED AS
A DIVIDEND AS OPPOSED TO A CAPITAL GAIN.
9
<PAGE>
AS A RESULT OF THE PRORATION PROCEDURES, HOLDERS OF PCA COMMON STOCK WHO
MAKE A CONTINUING SHARE ELECTION MAY RECEIVE SURVIVING CORPORATION COMMON STOCK
OR CASH IN AMOUNTS WHICH MAY VARY FROM THE AMOUNTS SUCH HOLDERS ELECT TO
RECEIVE. SUCH HOLDERS WILL NOT BE ABLE TO CHANGE THE NUMBER OF SHARES OF
SURVIVING CORPORATION COMMON STOCK OR THE AMOUNT OF CASH ALLOCATED TO THEM
PURSUANT TO SUCH PROCEDURES.
C. RECEIPT OF SURVIVING CORPORATION COMMON STOCK OR CASH.
As soon as practicable after the Effective Time of the Merger and after the
Election Date, Wachovia Bank, N.A., as Exchange Agent, will mail certificate(s)
for Surviving Corporation Common Stock and/or cash payments by check to the
holders of PCA Common Stock with respect to each Share of PCA Common Stock which
is included in any effective Continuing Share Election. Subject to the proration
provisions of the Merger Agreement, holders of PCA Common Stock who declined to
make a Continuing Share Election, or failed to make an effective Continuing
Share Election, with respect to any or all of their Shares will receive, for
each such Share, the right to receive an amount equal to $26.50 in cash, as soon
as practicable after the certificate(s) representing such Share or Shares have
been submitted, together with a Letter of Transmittal (which will be sent to
such holders after the Effective Time of the Merger).
No fractional shares of Surviving Corporation Common Stock will be issued in
connection with the Merger. In lieu thereof, Wachovia Bank, N.A., as agent for
the holders of PCA Common Stock who become entitled to a fraction of a Share of
Surviving Corporation Common Stock, shall receive the product of (a) the
aggregate of the fractional Share interests of such holder and (b) $26.50 and
shall remit the proceeds thereof to such holders according to their respective
interests therein.
D. GENERAL.
1. EXECUTION AND DELIVERY. This Continuing Share Election Form or a
facsimile hereof must be properly filled in, dated and signed in Box
IV--Endorsement and Signature Guarantee, and must be delivered (together with
stock certificates representing the Shares of PCA Common Stock as to which the
Continuing Share Election is made or with a duly signed Guarantee of Delivery of
such certificates) to the Company at any of the addresses set forth above.
THE METHOD OF DELIVERY OF ALL DOCUMENTS IS AT THE OPTION AND RISK OF THE
STOCKHOLDER. IF SENT BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY ISSUED, IS RECOMMENDED.
2. INADEQUATE SPACE. If there is insufficient space on this Form to list
all your stock certificates being submitted to the Company, please attach a
separate list.
3. SIGNATURES. The signature (or signatures, in the case of certificates
owned by two or more joint holders) on this Continuing Share Election Form
should correspond exactly with the name(s) as written on the face of the
certificate(s) submitted unless the Shares of PCA Common Stock described on this
Continuing Share Election Form have been assigned by the registered holder(s),
in which event this Continuing Share Election Form should be signed in exactly
the same form as the name of the last transferee indicated on the transfers
attached to or endorsed on the certificates.
If this Continuing Share Election Form is signed by a person or persons
other than the registered owners of the certificates listed, the certificates
must be endorsed or accompanied by appropriate stock powers, in either case
signed exactly as the name(s) of the registered owner(s) appear on the
certificates.
If this Continuing Share Election Form or any stock certificate(s) or stock
power(s) are signed by a trustee, executor, administrator, guardian, officer of
a corporation, attorney-in-fact or any other person acting in a representative
or fiduciary capacity, the person signing must give such person's full title in
such
10
<PAGE>
capacity and appropriate evidence of authority to act in such capacity must be
forwarded with this Continuing Share Election Form.
4. PARTIAL EXCHANGES. If fewer than all the Shares represented by any
certificate delivered to the Company are to be submitted for exchange, fill in
the number of Shares which are to be submitted in the box entitled "Shares
Submitted." In such case, a check in an amount equal to $26.50 in cash per Share
for the remainder of the Shares represented by the old certificate will be sent
to the registered owners as soon as practicable following the Effective Time of
the Merger, subject to proration. No Shares of PCA Common Stock represented by
certificates submitted hereunder will be deemed to have been submitted for
exchange into shares of Surviving Corporation Common Stock unless so indicated.
5. LOST OR DESTROYED CERTIFICATES. If your stock certificate(s) has been
either lost or destroyed, please check the box on the front page of this
Continuing Share Election Form and contact the Exchange Agent at (800) 633-4236
to have the appropriate forms for replacement sent to you. You will then be
instructed as to the steps you must take in order to receive a stock
certificate(s) representing Surviving Corporation Common Stock and/or any checks
in accordance with the Merger Agreement. If you have lost some but not all of
your certificates, check the box on the front page and forward the certificates
that you possess and that represent Shares which you are electing to retain as
Continuing Shares to the Company along with this Continuing Share Election Form.
6. NEW CERTIFICATES AND CHECKS IN SAME NAME. If any stock certificate(s)
representing shares of Surviving Corporation Common Stock or any check(s) in
respect of fractional shares of Surviving Corporation Common Stock or as a
result of proration are to be registered in, or payable to the order of, exactly
the same name(s) that appears on the certificate(s) representing Shares of PCA
Common Stock submitted with this Form, no endorsement of certificate(s) or
separate stock power(s) are required.
7. NEW CERTIFICATES AND CHECKS IN DIFFERENT NAME. If any stock
certificate(s) representing Continuing Shares or any check(s) issued as a result
of proration or in respect of fractional shares of Surviving Corporation Common
Stock or in respect of the Cash Merger Consideration are to be registered in, or
payable to the order of, a name other than exactly the name that appears on the
face of the certificate(s) representing Shares of PCA Common Stock submitted for
exchange herewith, such exchange shall not be made by the Company unless the
certificates submitted are endorsed, Box II-- Special Issuance and Payment
Instructions is completed, and the signature is guaranteed in Box IV--
Endorsement and Signature Guarantee by a financial institution or brokerage firm
having membership in good standing in a recognized guarantee program (Securities
Transfer Agent Medallion Program, New York Stock Exchange Medallion Signature
Program or Stock Exchange Medallion Program) (a "Qualified Guarantor"). If this
General Instruction 7 applies, please check with your financial insitution or
brokerage firm right away to determine whether it is a Qualified Guarantor or
will need to help you locate a Qualified Guarantor. No guarantee will be
accepted if the aggregate value of the shares subject to the signature guarantee
exceeds the limit authorized for the Qualified Guarantor. Notaries Public cannot
execute acceptable guarantees of signatures.
8. SPECIAL DELIVERY INSTRUCTIONS. If the checks are to be payable to the
order of, and/or the certificates for the Continuing Shares are to be registered
in, the name of the registered holder(s) of Shares of PCA Common Stock, but are
to be sent to someone other than the registered holder(s) or to an address other
than the address of the registered holder, it will be necessary to indicate such
person or address in Box III.
9. MISCELLANEOUS. A single check and/or or a single stock certificate
representing the Cash Merger Consideration or Continuing Shares, as applicable,
will be issued to each holder for all Shares of PCA Common Stock registered in
the same manner.
Please direct all questions with respect to this Continuing Share Election
Form and any Continuing Share Election (including, without limitation, questions
relating to the timeliness or effectiveness of
11
<PAGE>
revocation or any Continuing Share Election and computations as to proration)
either to Jean Veatch at (704) 847-8011 or Wachovia Shareholder Services at
(800) 633-4236.
10. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W-9. Under
the "backup withholding" provisions of Federal income tax law, the Company may
be required to withhold 31% of the "reportable payments" made to holders of the
PCA Common Stock pursuant to the Merger. To prevent backup withholding, each
holder (including a holder that makes a Continuing Share Election) should
complete and sign the Substitute Form W-9 included with this Continuing Share
Election Form and either: (a) provide the correct taxpayer identification number
("TIN") and certify, under penalties of perjury, that the TIN provided is
correct (or that such holder is awaiting a TIN), and that (i) the holder has not
been notified by the Internal Revenue Service ("IRS") that the holder is subject
to backup withholding as a result of failure to report all interest or
dividends, or (ii) the IRS has notified the holder that the holder is no longer
subject to backup withholding; or (b) provide an adequate basis for exemption.
If the box in Part I (indicating that you do not have a TIN) of the Substitute
Form W-9 is checked, the Company shall retain 31% of all reportable payments
made to a holder during the 60 day period following the date of the Substitute
Form W-9. If the holder furnishes the Company with his or her TIN within 60 days
of the date of the Substitute Form W-9, the Company shall remit such amounts
retained during the 60 day period to the holder, and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Company with his or her TIN within such sixty
(60) day period, the Company shall remit such previously retained amounts to the
IRS as backup withholding and shall withhold 31% of all reportable payments to
the holder thereafter until the holder furnishes a TIN to the Company. In
general, if a holder is an individual, the TIN is the Social Security Number of
such individual. If the certificates for PCA Common Stock are registered in more
than one name or are not in the name of the actual owner, consult the Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9
("Guidelines") included with this Continuing Share Election Form for additional
guidance on which number to report. If the Company is not provided with the
correct TIN or an adequate basis for exemption, the holder may be subject to a
$50 penalty imposed by the IRS and backup withholding at a rate of 31%. Certain
holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. In order to satisfy the Company that a foreign individual
qualifies as an exempt recipient, such holder must submit a statement
(generally, IRS Form W-8), signed under penalties of perjury, attesting to that
individual's exempt status. A form for such statements can be obtained from the
Company.
For further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a TIN if you do not
have one and how to complete the Substitute Form W-9 if Stock is held in more
than one name), consult the Guidelines.
Failure to complete the Substitute Form W-9 will not, by itself, cause the
Continuing Share Election to be deemed invalid, but may require the Company to
withhold 31% of the amount of any reportable payments made pursuant to the
Merger as of the Effective Date, regardless of when the Shares are actually
tendered to the Company. Backup withholding is not an additional Federal income
tax. Rather, the Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the IRS (not
from the Company or the Surviving Corporation).
11. TRANSFER TAXES. The Surviving Corporation will pay all transfer taxes,
if any, applicable to, and arising solely out of, the transfer of PCA Common
Stock to it or to its order and to the transfer, in exchange thereof, of
Surviving Corporation Common Stock to holders pursuant to the Merger. If,
however, Surviving Corporation Common Stock is to be delivered to, or is to be
registered or issued in the name of, any person other than the registered holder
of the PCA Common Stock surrendered hereby, if the surrendered PCA Common Stock
is registered in the name of any person other than the person signing this
Continuing Share Election Form, or if a transfer tax is imposed for any reason
other than the transfers referred to in the first sentence of this paragraph,
the amount of any such transfer taxes (whether imposed
12
<PAGE>
on the registered holder or any other person) will be payable by the
surrendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted herewith, the amount of such transfer taxes
will be billed directly to such surrendering holder.
Please direct all questions with respect to this Continuing Share Election
Form to either Jean Veatch at (704) 847-8011 or Wachovia Shareholder Services at
(800) 633-4236.
13
<PAGE>
EXHIBIT 99.3
LETTER OF TRANSMITTAL
TO ACCOMPANY
CERTIFICATES WHICH REPRESENTED SHARES OF COMMON STOCK
OF
PCA INTERNATIONAL, INC.
SURRENDERED IN EXCHANGE FOR THE CASH MERGER CONSIDERATION
To: Wachovia Bank, N.A., Exchange Agent ("Exchange Agent")
<TABLE>
<CAPTION>
BY MAIL: BY HAND: BY OVERNIGHT COURIER:
<S> <C> <C>
DELIVERING BY REGISTERED MAIL PERSONALLY DELIVERING DELIVERING BY OVERNIGHT
Wachovia Bank, N.A.--Exchange Wachovia Bank, N.A.--Exchange COURIER
Agent Agent Wachovia Bank, N.A.--Exchange
Corporate Reorganizations Shareholder Services Agent
P.O. Box 9061 Department Corporate Reorganizations
Boston, MA 02205 Wachovia East Building, 2nd 70 Campanelli Drive
Floor Braintree, MA 02184
301 North Church Street
Winston-Salem, NC 27101
</TABLE>
For Information or Assistance call: Wachovia Shareholder Services at (800)
633-4236.
This Letter of Transmittal is to be completed by all holders of PCA Common
Stock (as defined below) who did not make an election ("Continuing Share
Election") to retain shares of Surviving Corporation Common Stock (as defined
below), or who previously made a Continuing Share Election for only a portion of
the shares of PCA Common Stock held by them. Certificates which represented
shares of PCA Common Stock are to be forwarded herewith.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
/ / CHECK HERE IF YOU CANNOT LOCATE CERTIFICATES AND CALL (800) 633-4236 TO
RECEIVE INFORMATION REGARDING REPLACEMENT CERTIFICATES.
BOX I
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
NUMBER OF SHARES
NAMES AND ADDRESS(ES) OF REGISTERED HOLDERS CERTIFICATE REPRESENTED BY
(ATTACH ADDITIONAL LIST IF NECESSARY) NUMBER(S)* CERTIFICATE(S)
<S> <C> <C>
- ----------------------------------------------------------------------------------------
----------------------------------
----------------------------------
----------------------------------
----------------------------------
TOTAL NUMBER OF
SHARES OF PCA
COMMON STOCK:
- ----------------------------------------------------------------------------------------
</TABLE>
* NEED NOT BE COMPLETED IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY HOLDERS.
Please issue, subject to the terms and conditions provided herein, upon
surrender of certificates which represented shares of PCA Common Stock, a check
for the Cash Merger Consideration (as defined below) to which I am entitled, in
the name and to the address indicated above, unless I have provided other
instructions under "Special Payment Instructions" or "Special Delivery
Instructions" below.
<PAGE>
Ladies and Gentlemen:
The merger (the "Merger") of Jupiter Acquisition Corp. ("Mergerco") with and
into PCA International, Inc. ("PCA" or the "Company") pursuant to the terms of
the Agreement and Plan of Merger, dated as of April 20, 1998, by and between
Mergerco and the Company (the "Merger Agreement") was approved by the
stockholders of PCA at the Special Meeting held on , 1998 (the
"Effective Time"). At the Effective Time, each outstanding share of common
stock, par value $.20 per share, of the Company ("PCA Common Stock") (other than
shares as to which a valid Continuing Share Election was made and accepted,
shares held as treasury stock of PCA, and shares as to which appraisal rights
were exercised), was converted into and now represents the right to receive
$26.50 in cash, subject to proration as set forth in the Merger Agreement (the
"Cash Merger Consideration"). The undersigned understands that the terms of this
Letter of Transmittal are subject to (i) the terms, conditions and limitations
set forth in the Proxy Statement/Prospectus dated , 1998 (the "Proxy
Statement"), receipt of which is acknowledged by the undersigned, (ii) the terms
of the Merger Agreement, a conformed copy of which appears as Annex A to the
Proxy Statement and (iii) the accompanying Instructions to this Letter of
Transmittal.
The undersigned surrenders the certificate(s) listed above which represented
shares of PCA Common Stock in exchange for the Cash Merger Consideration.
The undersigned understands that upon delivery of this Letter of Transmittal
to the Exchange Agent in accordance with the Instructions contained herein,
together with the certificates, a check in payment of $26.50 per share
represented by the certificates transmitted will be issued as soon as
practicable after the Effective Time at the address of the registered holder,
unless otherwise indicated below under Special Payment Instructions or Special
Delivery Instructions. It is further understood that pursuant to the Merger
Agreement no interest will accrue on such Cash Merger Consideration.
The undersigned authorizes and instructs you, as Exchange Agent, to pay the
Cash Merger Consideration upon surrender by the undersigned of certificates that
represented shares of PCA Common Stock as soon as practicable after the
Effective Time. All authority herein conferred or agreed to be conferred by the
undersigned shall survive the death or incapacity of the undersigned
hereinunder, shall be binding upon heirs, personal representatives, successors
and assigns of the undersigned.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to sell, transfer and assign the certificates surrendered
hereby, and the shares of PCA Common Stock represented by such certificates are
free and clear of all liens, claims, restrictions, charges and encumbrances and
not subject to any adverse claim. The undersigned, upon request, will execute
and deliver any additional documents deemed by the Exchange Agent or PCA to be
necessary or desirable in connection with the surrender of such certificates.
2
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
BOX II
- -------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1 AND 7)
To be completed ONLY if the check is to be made payable to someone other
than the undersigned.
Issue check to:
Name
-----------------------------------------------
(PLEASE PRINT)
Address
-----------------------------------------------
(PLEASE PRINT)
------------------------------------------------------------
(INCLUDING ZIP CODE)
------------------------------------------------------------
(TAX IDENTIFICATION OR
SOCIAL SECURITY NUMBER)
(Note: If this box is completed, endorsement on the surrender
certificate(s) or signature(s) on the accompanying instrument of transfer
MUST BE MEDALLION GUARANTEED in the usual form as described in Instruction
6. PLEASE ALSO COMPLETE THE SUBSTITUTE FORM W-9 ENCLOSED HEREWITH.)
- -------------------------------------------
BOX III
- -------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1 AND 7)
To be completed ONLY if the check is to be made payable to the
registered holder(s), but is to be mailed to someone other than the
registered holder(s) or to an address other than the address of the
registered holder(s) set forth above.
Mail check to:
Name
-----------------------------------------------
(PLEASE PRINT)
Address
-----------------------------------------------
(PLEASE PRINT)
------------------------------------------------------------
(INCLUDING ZIP CODE)
- -----------------------------------------------------
3
<PAGE>
BOX IV
- --------------------------------------------------------------------------------
SIGN HERE
ALL HOLDERS OF COMMON STOCK MUST SIGN BELOW
(SEE INSTRUCTIONS 1 AND 6 CONCERNING SIGNATURE GUARANTEE)
<TABLE>
<S> <C>
- ------------------------------------------------------------ Name(s)
- ------------------------------------------------------------ ----------------------------
Signature(s) Owner(s) (Please print)
Must be signed by the registered holder(s) exactly as Name(s)
name(s) appear(s) on stock certificate(s) or by person(s) ----------------------------
authorized to become registered holder(s) by certificates (Please print)
and documents transmitted herewith. If signature is by a Name(s)
trustee, executor, administrator, guardian, officer of a ----------------------------
corporation, attorney-in-fact, or any other person acting in (Please print)
a fiduciary capacity, set forth full title in such capacity -----------------------------
and see Instruction 3). (Address)
Medallion -----------------------------
Signature (Including Zip Code)
Guarantee: -----------------------------
- ------------------------------------------------------------ (Daytime Area Code and
(SEE INSTRUCTION 6) Telephone Number(s))
-----------------------------
Tax Identification or Social
Security
Number (See Substitute Form
Dated: W-9))
----------------------------
1998
- ------------------------------------------------------------
</TABLE>
4
<PAGE>
SUBSTITUTE FORM W-9
(SEE THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 (THE "GUIDELINES"))
Payer: Wachovia Bank, N.A.
Name (if joint names, list first and circle the name of the person or entity
whose number you enter below)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Business Name (Sole proprietors see the instructions in the enclosed Guidelines)
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State and Zip Code
- --------------------------------------------------------------------------------
5
<PAGE>
<TABLE>
<C> <S> <C>
- -----------------------------------------------------------------------------------------
SUBSTITUTE PART I--TAXPAYER Social Security Number
FORM W-9 IDENTIFICATION NUMBER --------------------
Department of the Treasury Enter your taxpayer OR
Internal Revenue Service identification number in Employer Identification Number
the appropriate box. For ----------------------------
individuals, this is your
social security number.
For sole proprietors, see
the instructions in the
Guidelines. For other
entities, it is your
employer identification
number.
------------------------------------------------------------
Payer's Request for / / If you do not have a number, check the box here and see
Taxpayer "Obtaining a Number" in the Guidelines.
Identification Number and NOTE: If the account is in more than one name, see the chart
Certification on page 1 of the Guidelines on whose number to enter.
------------------------------------------------------------
PART II--If you are a Payee Exempt from Backup Withholding,
see Instructions in the Guidelines.
- -----------------------------------------------------------------------------------------
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number (or I am
waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from backup
withholding or (b) I have not been notified by the Internal Revenue Service ("IRS") that
I am subject to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
SIGNATURE: ---------------------------------------------- DATE:-----------------, 1998
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF CERTAIN PAYMENTS MADE TO YOU. PLEASE REVIEW THE GUIDELINES FOR
ADDITIONAL DETAILS.
6
<PAGE>
INSTRUCTIONS
1. EXECUTION AND DELIVERY. To receive the Cash Merger Consideration, this
Letter of Transmittal or a facsimile hereof must be property filled in, dated
and signed in Box IV -Endorsement and Signature Guarantee, and must be
delivered, together with stock certificates which represented shares of PCA
Common Stock, to the Exchange Agent at any of the addresses set forth above.
The method of delivery of all documents is at the option and risk of the
stockholder. If sent by mail, registered mail with return receipt requested,
properly insured, is recommended. The check for any cash payment to which a
holder may be entitled will be mailed as soon as practicable following the
processing by the Exchange Agent of the properly completed Letter of Transmittal
pursuant to and in accordance with the provisions contained herein, together
with the stock certificate(s) which represented shares of PCA Common Stock. If
Special Payment Instructions or Special Delivery Instructions are provided in
this Letter of Transmittal, or if these Instructions are not properly followed,
the mailing of the check may be delayed.
2. INADEQUATE SPACE. If there is insufficient space on this Letter of
Transmittal to list all your stock certificates being submitted to the Exchange
Agent, please attach a separate list.
3. SIGNATURES. The signature (or signatures, in the case of certificates
owned by two or more joint holders) on this Letter of Transmittal should
correspond exactly with the name(s) as written on the face of the certificate(s)
submitted unless the shares of PCA Common Stock described in this Letter of
Transmittal have been assigned by the registered holder(s), in which event this
Letter of Transmittal should be signed in exactly the same form as the name of
the last transferee indicated on the transfers attached to or endorsed on the
certificates.
If this Letter of Transmittal is signed by a person or persons other than
the registered owners of the certificates listed, the certificates must be
endorsed or accompanied by appropriate stock powers, in either case signed
exactly as the name(s) of the registered owner(s) appear on the certificates.
If this Letter of Transmittal or any stock certificate(s) or stock power(s)
is signed by a trustee, executor, administrator, guardian, officer of a
corporation, attorney-in-fact or any other person acting in a representative or
fiduciary capacity, the person signing must give such person's full title in
such capacity and appropriate evidence of authority to act in such capacity must
be forwarded with this Letter of Transmittal. If any stockholder's shares are
registered in different ways on different stock certificates, it will be
necessary for the stockholder to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations, or the stockholder
may provide only one Letter of Transmittal and sign it each way his or her name
appears on different stock certificates. However, each signature must be
guaranteed as described in Instruction 6.
4. LOST OR DESTROYED CERTIFICATES. If your stock certificate(s) has been
either lost or destroyed, please check the box on the front page of this Letter
of Transmittal above Box I, and the appropriate forms for replacement will be
sent to you. You will then be instructed as to the steps you must take in order
to receive the Cash Merger Consideration in accordance with the Merger
Agreement.
5. CHECKS IN SAME NAME. If any check(s) are to be payable to the order of
exactly the same name(s) that appears on the certificate(s) which represented
shares of PCA Common Stock submitted with this Letter of Transmittal, no
endorsement of the certificate(s) or separate stock power(s) are required.
6. CHECKS IN DIFFERENT NAME. If any check(s) are to be payable to the
order of other than exactly the name that appears on the face of the
certificate(s) which represented shares of PCA Common Stock submitted for
exchange herewith, such exchange shall not be made by the Exchange Agent unless
the certificates submitted are endorsed, Box II--Special Payment Instructions is
completed, and the signature is guaranteed in Box IV--Endorsement and Signature
Guarantee by a financial institution or brokerage firm having membership in good
standing in a recognized guarantee program (Securities Transfer Agent Medallion
Program, New York Stock Exchange Medallion Signature Program or Stock Exchange
Medallion Program) (a "Qualified Guarantor"). If this Instruction 6 applies,
please check with your financial institution or brokerage firm right away to
determine whether it is a Qualified Guarantor or will need to help you locate a
Qualified Guarantor. No guarantee will be accepted if the aggregate value
7
<PAGE>
of the shares subject to the signature guarantee exceeds the limit authorized
for the Qualified Guarantor. Notaries Public cannot execute acceptable
guarantees of signatures.
7. SPECIAL DELIVERY INSTRUCTIONS. If the checks are to be payable to the
order of the name of the registered holder(s) of shares of PCA Common Stock, but
are to be sent to someone other than the registered holder(s) or to an address
other than the address of the registered holder, it will be necessary to
indicate such person or address in Box III--Special Delivery Instructions.
8. MISCELLANEOUS. A single check representing the Cash Merger
Consideration will be issued to each holder for all shares registered in the
same manner.
9. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W-9. Under
the "backup withholding" provisions of Federal income tax law, the Exchange
Agent may be required to withhold 31% of the amount of any "reportable payments"
made to holders of PCA Common Stock pursuant to the Merger. To prevent backup
withholding, each holder should complete and sign the Substitute Form W-9
included in this Letter of Transmittal and either (a) provide the correct
taxpayer identification number ("TIN") and certify, under penalties of perjury,
that the TIN provided is correct (or that such holder is awaiting a TIN), and
that (i) the holder has not been notified by the Internal Revenue Service
("IRS") that the holder is subject to backup withholding as a result of failure
to report all interest or dividends, or (ii) the IRS has notified the holder
that the holder is no longer subject to backup withholding; or (b) provide an
adequate basis for exemption. If the box in Part I (indicating that you do not
have a TIN) of the Substitute Form W-9 is checked, the Exchange Agent shall
retain 31% of all reportable payments made to a holder during the sixty (60) day
period following the date of the Substitute Form W-9. If the holder furnishes
the Exchange Agent with his or her TIN within sixty (60) days of the date of the
Substitute Form W-9, the Exchange Agent shall remit such amounts retained during
the sixty (60) day period to the holder, and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Exchange Agent with his or her TIN within such
sixty (60) day period, the Exchange Agent shall remit such previously retained
amounts to the IRS as backup withholding and shall withhold 31% of all
reportable payments to the holder thereafter until the holder furnishes a TIN to
the Exchange Agent. In general, if a holder is an individual, the TIN is the
Social Security Number of such individual. If the certificates for PCA Common
Stock are registered in more than one name or are not in the name of the actual
owner, consult the Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 (the "Guidelines") included with this Letter of
Transmittal for additional guidance on which number to report. If the Exchange
Agent is not provided with the correct TIN or an adequate basis for exemption,
the holder may be subject to a $50 penalty imposed by the IRS and backup
withholding at a rate of 31%. Certain holders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. In order to satisfy the Exchange Agent
that a foreign individual qualifies as an exempt recipient, such holder must
submit a statement (generally, IRS Form W-8), signed under penalties of perjury,
attesting to that individual's exempt status. A form for such statements can be
obtained from the Exchange Agent.
For further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a TIN if you do not
have one and how to complete the Substitute Form W-9 if Stock is held in more
than one name), consult the Guidelines.
Failure to complete the Substitute Form W-9 may require the Exchange Agent
to withhold 31% of the amount of any reportable payments made pursuant to the
Merger. Backup withholding is not an additional Federal income tax. Rather, the
Federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained from the IRS (not from the Surviving
Corporation or the Exchange Agent).
10. UNCLAIMED MERGER CONSIDERATION. If certificates which represented
shares of PCA Common Stock are not surrendered in exchange for cash immediately
prior to such time on which the Cash Merger Consideration would otherwise
escheat to or become the property of any governmental entity, the unclaimed cash
shall, to the extent required by applicable law, become the property of the
State of such shareholder's residence. The Surviving Corporation will not be
liable to any holder of shares of PCA Common Stock for any amount paid to a
8
<PAGE>
public official pursuant to applicable abandoned property laws. One year after
the Effective Time, cash made available to the Exchange Agent shall be returned
to the Surviving Corporation upon its request and thereafter holders of
certificates formerly representing shares of PCA Common Stock shall look only to
the Surviving Corporation (subject to abandoned property, escheat and other
similar laws) for cash to which they are entitled.
11. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to, and arising solely out of, the transfer of PCA Common Stock to it
or to its order pursuant to the Merger. If, however, the surrendered PCA Common
Stock is registered in the name of any person other than the person signing this
Letter of Transmittal or if a transfer tax is imposed for any reason other than
the transfers referred to in the first sentence of this paragraph, the amount of
any such transfer taxes (whether imposed on the registered holder or any other
person) will be payable by the surrendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted herewith, the
amount of such transfer taxes will be billed directly to such surrendering
holder.
Please direct all questions with respect to this Letter of Transmittal to
the Exchange Agent, Wachovia Shareholder Services at (800)633-4236.
9
<PAGE>
EXHIBIT 99.4
CONSENT OF NEEDHAM & COMPANY, INC.
We hereby consent to the inclusion in the Proxy Statement/Prospectus of PCA
International, Inc. forming part of this Registration Statement on Form S-4 of
our opinion dated April 20, 1998 to the Board of Directors of PCA International,
Inc. attached as Annex B to such Proxy Statement/Prospectus and to the
references to our opinion under the captions "Summary and Special Factors--The
Merger--Opinion of Financial Advisor to the Company's Board of Directors" and
"The Merger--Background of the Merger," "--Recommendation of the Board of
Directors; Reasons for the Merger" and "--Opinion of Financial Advisor." In
giving such consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933 and the
rules and regulations of the Securities and Exchange Commission thereunder, nor
do we thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
NEEDHAM & COMPANY, INC.
July 23, 1998
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
WHAT NAME AND NUMBER TO PROVIDE:
<TABLE>
<CAPTION>
- -----------------------------------------------------
GIVE THE
SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT NUMBER OF
- -----------------------------------------------------
<S> <C> <C>
1. Individual The individual
2. Two or more The actual owner of
individuals (joint the account or, if
account) combined funds, the
first individual on
the account(1)
3. Custodian account of The minor(2)
a minor (Uniform
Gift to Minors Act)
4. a. The usual The grantor-
revocable savings trustee(1)
trust account
(grantor is also
trustee)
b. So-called trust The actual owner(1)
account that is
not a legal or
valid trust under
State law
5. Sole proprietorship The owner(3)
6. Sole proprietorship The owner(3)
- -----------------------------------------------------
<CAPTION>
GIVE THE
EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF
<S> <C> <C>
- -----------------------------------------------------
7. A valid trust, Legal entity (Do not
estate or pension furnish the
trust identifying number
of the personal
representative or
trustee unless the
legal entity itself
is not designated in
the account
title.)(4)
8. Corporate The corporation
9. Association, club, The organization
religious,
charitable,
educational or other
tax-exempt
organization
10. Partnership The partnership
11. A broker or The broker or
registered nominee nominee
12. Account with the The public entity
Department of
Agriculture in the
name of a public
entity (such as a
State or local
government, school
district or prison)
that receives
agricultural program
payments
</TABLE>
- ---------------------------------------------
- ---------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the individual's name. If you are a sole proprietor, you must furnish
your individual name and either your Social Security number or your employer
identification number. You may also enter your business name or "doing
business as" name on the business name line. Enter your name(s) as shown on
your social security card and/or as it was used to apply for your employer
identification number on Form SS-4.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE:
(i) If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
(ii) If you are an individual, you must generally provide the name shown on your
social security card. However, if you have changed your last name, for
instance, due to marriage, without informing the Social Security
Administration of the name change, please enter your first name, the last
name shown on your social security card, and your new last name.
(iii) For a joint account, only the person whose taxpayer identification number
("TIN") is shown on Substitute Form W-9 should sign the form.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
OBTAINING A NUMBER
If you do not have a TIN, apply for one immediately. To apply, obtain Form SS-5,
Application for a Social Security Number Card (for individuals), from your local
office of the Social Security Administration, or Form SS-4, Application for
Employer Identification Number (for businesses and all other entities), from
your local office of the Internal Revenue Service.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees that are generally exempt from backup withholding include the following:
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under section 501(a), or an individual
retirement account or a custodial account under section 403(b)(7).
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- - An international organization or any agency or instrumentality thereof.
- - A dealer in securities or commodities required to register in the United
States or a possession of the United States.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - An entity registered at all times under the Investment Company Act of 1940.
- - A foreign central bank of issue.
EXEMPT PAYEES DESCRIBED ABOVE SHOULD FILE SUBSTITUTE FORM W-9 TO AVOID POSSIBLE
ERRONEOUS BACKUP WITHHOLDING. SUCH PAYEES SHOULD FURNISH THEIR TINS, WRITE
"EXEMPT" ON THE FACE OF THE FORM (PART II), AND SIGN AND DATE THE FORM.
EXEMPT FOREIGN PAYEES:
A payee that is a nonresident alien individual or foreign entity not subject to
backup withholding should complete and execute Form W-8, Certificate of Foreign
Status, and return the executed form with the Continuing Share Election Form.
PENALTIES
(1) FAILURE TO FURNISH A TIN.--If you fail to furnish your correct TIN to a
payor, you are subject to a penalty of $50 for each such failure unless your
failure is due to reasonable cause and not to willful neglect. You must provide
your TIN whether or not you are required to file a tax return. Payors must
generally withhold 31% of taxable interest, dividend, and certain other payments
to a payee who does not furnish a TIN to a payor. Certain penalties may also
apply.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
(4) MISUSE OF TINS.--If the requester discloses or uses TINs in violation of
Federal law, the requestor may be subject to civil and criminal penalties.
(5) PRIVACY ACT NOTICE.--Section 6109 requires you to furnish your correct TIN
to persons who must file information returns with the IRS to report interest,
dividends, and certain other income paid to you, mortgage interest you paid, the
acquisition or abandonment of secured property, or contributions you made to an
IRA. The IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
required to file a tax return. Payors must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payor. Certain penalties may also apply.
