<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998
REGISTRATION NO. 333-60835
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FAMILY CHRISTIAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
MICHIGAN 5942 38-3200794
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
Incorporation or Organization) Classification Code Number) Identification
Number)
</TABLE>
5300 PATTERSON AVE. S.E.
GRAND RAPIDS, MICHIGAN 49530
(616) 554-8700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
MR. LESLIE E. DIETZMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FAMILY CHRISTIAN STORES, INC.
5300 PATTERSON AVE. S. E.
GRAND RAPIDS, MICHIGAN 49530
(616) 554-8700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
William R. Kunkel, Esq. Lawrence D. Levin, Esq.
Skadden, Arps, Slate, Meagher & Flom Herbert S. Wander, Esq.
(Illinois)
333 West Wacker Drive Katten Muchin & Zavis
Chicago, Illinois 60606-1285 525 West Monroe Street, Suite 1600
(312) 407-0700 Chicago, Illinois 60661-3693
(312) 902-5200
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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. / / 333-_______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
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. / / 333-_______
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 statement number of the earlier effective registration statement
for the same offering. / / 333-_______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
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 THEREAFTER 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 SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SHARES
[LOGO]
CLASS A COMMON STOCK
OF THE SHARES OF CLASS A COMMON STOCK ("CLASS A COMMON STOCK")
OFFERED HEREBY, SHARES ARE BEING SOLD BY THE COMPANY AND SHARES
ARE BEING SOLD BY THE SELLING SHAREHOLDERS. SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY THE SELLING SHAREHOLDERS.
THE COMPANY'S COMMON STOCK ("COMMON STOCK") CONSISTS OF CLASS A COMMON STOCK
AND CLASS B COMMON STOCK ("CLASS B COMMON STOCK"). THE RIGHTS OF EACH SHARE OF
COMMON STOCK ARE SIMILAR OTHER THAN WITH RESPECT TO VOTING RIGHTS. THE CLASS A
COMMON STOCK ENTITLES THE HOLDERS THEREOF TO ONE VOTE PER SHARE, AND THE CLASS B
COMMON STOCK ENTITLES THE HOLDERS THEREOF TO TEN VOTES PER SHARE. UPON THE
CLOSING OF THE OFFERING, THE HOLDERS OF CLASS B COMMON STOCK WILL REPRESENT
APPROXIMATELY % OF THE TOTAL VOTING POWER OF THE OUTSTANDING COMMON STOCK
(APPROXIMATELY % IF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS EXERCISED IN
FULL) AND WILL THEREFORE EXERCISE CONTROL OVER THE BUSINESS AND AFFAIRS OF THE
COMPANY. EACH SHARE OF CLASS B COMMON STOCK CONVERTS AUTOMATICALLY INTO ONE
SHARE OF CLASS A COMMON STOCK UPON SALE OR OTHER TRANSFER TO A PARTY OTHER THAN
PERMITTED TRANSFEREES (AS DEFINED HEREIN). SEE "DESCRIPTION OF CAPITAL STOCK."
PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE CLASS A
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE OF THE CLASS A COMMON STOCK WILL BE BETWEEN $14.00 AND $16.00 PER
SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS BEEN MADE FOR
QUOTATION OF THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "FMLY."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A
COMMON STOCK OFFERED HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
PER SHARE.................. $ $ $ $
TOTAL(3)................... $ $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
AN ADDITIONAL SHARES OF CLASS A COMMON STOCK AT THE PRICE TO PUBLIC
LESS THE UNDERWRITING DISCOUNT SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF
THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL
TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , PROCEEDS TO
COMPANY WILL TOTAL $ AND PROCEEDS TO SELLING SHAREHOLDERS WILL NOT BE
AFFECTED. SEE "PRINCIPAL AND SELLING SHAREHOLDERS" AND "UNDERWRITING."
THE SHARES OF CLASS A COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED
HEREIN WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT
TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE
OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES REPRESENTING THE
SHARES WILL BE MADE AGAINST
PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES LLC ON OR
ABOUT , 1998.
-------------------
NationsBanc Montgomery Securities LLC
BancBoston Robertson Stephens
BT Alex. Brown
, 1998
<PAGE>
[MISSION STATEMENT; VISION STATEMENT; STORE SCHEMATIC;
INTERIOR/EXTERIOR PHOTOGRAPHS OF STORE; PHOTOGRAPHS OF
PRODUCTS/CUSTOMERS/EMPLOYEES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING
SYNDICATE COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
-------------------
Family Christian Stores-Registered Trademark-, Family Bookstores-Registered
Trademark- and Joshua's Christian Stores-TM- are trademarks
owned by the Company. All other trademarks and trade names referred to in this
Prospectus
are the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO
FISCAL YEARS OF THE COMPANY ARE TO THE COMPANY'S 52- OR 53-WEEK FISCAL YEAR,
WHICH ENDS ON THE LAST SUNDAY IN JANUARY OF EACH YEAR AND IS IDENTIFIED AS THE
FISCAL YEAR FOR THE IMMEDIATELY PRECEDING CALENDAR YEAR. FOR EXAMPLE, THE FISCAL
YEAR ENDED JANUARY 25, 1998, IS REFERRED TO AS "FISCAL 1997." REFERENCES TO
FISCAL YEARS OF JOSHUA'S CHRISTIAN STORES ("JOSHUA'S") ARE TO JOSHUA'S TWELVE
MONTHS ENDED MARCH 31 AND ARE IDENTIFIED AS THE FISCAL YEAR FOR THE IMMEDIATELY
PRECEDING CALENDAR YEAR. FOR EXAMPLE, THE TWELVE MONTHS ENDED MARCH 31, 1998, IS
REFERRED TO AS "FISCAL 1997." EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN
THIS PROSPECTUS: (I) REFLECTS A -FOR-1 STOCK SPLIT OF THE COMMON STOCK TO BE
EFFECTED PRIOR TO THE CLOSING OF THE OFFERING; (II) REFLECTS THE FILING OF THE
RESTATED ARTICLES OF INCORPORATION AND RESTATED BYLAWS OF THE COMPANY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING; (III) REFLECTS THE AUTOMATIC
CONVERSION OF ALL OF THE COMPANY'S CURRENTLY OUTSTANDING COMMON STOCK INTO
SHARES OF NEWLY CREATED CLASS B COMMON STOCK UPON THE FILING OF THE RESTATED
ARTICLES OF INCORPORATION; (IV) ASSUMES THE EXERCISE OF ALL OUTSTANDING WARRANTS
TO PURCHASE COMMON STOCK; AND (V) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. EXCEPT AS OTHERWISE INDICATED IN THIS PROSPECTUS OR THE
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS, ALL REFERENCES TO
"FAMILY" AND THE "COMPANY" REFER TO FAMILY CHRISTIAN STORES, INC., FORMERLY
FAMILY BOOKSTORES COMPANY, INC.
THE COMPANY
Family Christian Stores, Inc. ("Family" or the "Company") is the largest
retailer in the United States dedicated solely to Christian-related products.
The Company, as the category-dominant retailer of Christian books and Bibles,
gifts and cards, music, children's merchandise and church supplies, seeks to
fulfill the growing demand for products that address Christian and family
values. The Company's net sales increased from $126.1 million in fiscal 1995 to
$168.1 million in fiscal 1997, representing a compound annual growth rate of
15.4%. Operating income increased from a loss of $2.5 million to income of $5.5
million over the same period. The growth has been driven by comparable store
sales, acquisitions and new store openings. As of July 31, 1998, the Company
operated 276 stores in 36 states, having grown from 148 stores in 28 states,
which the Company acquired from the Family Bookstores Division of The Zondervan
Corporation ("Zondervan") on October 31, 1994.
Family is the primary consolidator in the Christian retail industry, which
is highly fragmented and characterized by numerous small independent operators.
On June 1, 1998, the Company completed the acquisition of Joshua's Christian
Stores, a leading retailer of Christian-related products with 56 stores. The
Joshua's acquisition expands Family's presence in both existing and new markets
and provides an opportunity to capture greater operating efficiencies across its
expanded store base. On a pro forma basis, after giving effect to the
acquisition of Joshua's, the Company had net sales of $197.8 million in fiscal
1997. The Company believes that numerous opportunities exist to continue making
acquisitions and opening new stores and plans to continue its strategy of
clustering stores in both existing and new markets.
The Company differentiates itself from other retailers of Christian-related
products by offering products to consumers of all ages and denominations in the
environment of a focused specialty retailer with value pricing. The Company's
mission is to offer an extensive selection of high-quality, Christian-related
products of exceptional value in a warm, family atmosphere. In addition, Family
seeks to reinforce Christian and family values as well as impact the lives of
its customers by offering meaningful and inspirational products. The Company's
core customers are individuals who characterize themselves as active Christians,
as well as others who are searching for meaning in their lives. The Company
believes that its ability to deliver an extensive product assortment to a broad
range of consumers provides it with a competitive advantage in the Christian
retail industry.
The Company's principal objective is to enhance its position as the leading
provider of Christian-related products in the United States. Family's business
strategy includes maintaining category dominance,
3
<PAGE>
serving a diverse Christian customer base, providing the highest value to its
customers, promoting recognition of its brand name and implementing its guiding
principles throughout its business. The Company's growth strategy includes
increasing sales and profitability in its existing stores, expanding its store
base through focused acquisitions and new store openings as well as utilizing
additional distribution channels.
RECENT DEVELOPMENTS
JOSHUA'S ACQUISITION. On June 1, 1998, Family acquired Joshua's, a division
of The Development Association, Inc., a subsidiary of Tandycrafts, Inc. Joshua's
was a leading Christian retail chain headquartered in Fort Worth, Texas that
operated 56 stores in 10 states, including a major presence in Texas, Georgia,
Colorado and Southern California. For its twelve months ended March 31, 1998
(fiscal 1997), Joshua's had net sales of $32.0 million. The acquisition expands
Family's presence in existing and new markets and creates a stronger platform
for future growth. Management has completed several important steps to integrate
Joshua's operations, including the introduction of the Company's (i)
point-of-sale, automatic product replenishment and information systems, (ii)
enhanced product assortment and (iii) targeted marketing and preferred customer
programs. Substantially all of the acquired stores have been renamed Family
Christian Stores and exterior signage has been changed, except for six stores
which will remain Joshua's Christian Stores and be operated as bargin-format
stores. All store managers of former Joshua's stores who are currently employed
by Family have completed the Company's formal management training. The Company
believes that the successful integration of Joshua's will enhance its existing
store base and result in future operating efficiencies and increased brand
awareness. See "Pro Forma Combined Condensed Financial Statements (unaudited)"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OTHER ACQUISITIONS AND OPENINGS. Since January 25, 1998, in addition to the
Joshua's acquisition, the Company has acquired 21 stores and opened two new
stores through July 31, 1998. The Company is operating these stores under the
Family Christian Stores name, has completed a limited amount of remodeling and
has integrated these stores into its point-of-sale, automatic product
replenishment and information systems.
The Company was incorporated in Michigan in 1994. The Company's executive
office is located at 5300 Patterson Avenue, S.E., Grand Rapids, Michigan 49530,
and its telephone number is (616) 554-8700.
THE OFFERING
<TABLE>
<CAPTION>
Class A Common Stock offered
<S> <C>
by the Company............................. shares
by the Selling Shareholders................ shares
Common Stock to be outstanding after the Offering(1)
Class A Common Stock....................... shares
Class B Common Stock....................... shares
Use of proceeds.............................. To finance store acquisitions and new store
openings and to repay outstanding bank
indebtedness. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... FMLY
</TABLE>
- ------------------------------
(1) Excludes: (i) shares of Common Stock issuable upon exercise of
options outstanding under the Company's stock option plans as of ,
1998, with a weighted average exercise price of $ per share; (ii)
shares of Common Stock issuable upon exercise of options to be
granted under the Company's stock option plans upon the closing of the
Offering, with an exercise price per share equal to the initial public
offering price; and (iii) shares reserved for issuance pursuant to
the Company's stock option plans. See "Capitalization,"
"Management--Employee Benefit Plans" and Note J of the Notes to the
Company's Consolidated Financial Statements.
4
<PAGE>
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements that are based
on the beliefs of, as well as assumptions made by and information currently
available to, the Company's management. The words "believe," "anticipate,"
"intend," "estimate," "expect" and similar expressions are intended to identify
such forward-looking statements, but are not the exclusive means of identifying
such statements. Such statements reflect the current views of the Company or its
management and are subject to certain risks, uncertainties and assumptions,
including, but not limited to, those set forth under the heading "Risk Factors."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements in 1998 and beyond could differ materially from
those expressed in, or implied by, such forward-looking statements. The Company
undertakes no obligation to release publicly any revisions to any such
forward-looking statements that may reflect events or circumstances after the
date of this Prospectus.
RISK FACTORS
An investment in the Class A Common Stock offered hereby involves a high
degree of risk. For a discussion of certain risks that a potential investor
should evaluate carefully prior to making an investment in the Class A Common
Stock, see "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR -------------------------------------
-------------------------------------------- PRO FORMA
PRO FORMA JULY 26, JULY 27, JULY 27,
1995 1996 1997 1997(1) 1997 1998 1998(1)
--------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 126,125 $ 139,280 $ 168,063 $ 197,786 $ 67,708 $ 84,763 $ 93,629
Gross profit........................... 35,158 39,058 49,590 58,143 18,170 23,535 25,973
Store contribution(2).................. 12,612 15,573 21,982 23,999 5,718 7,435 7,865
Store opening expenses................. 991 414 739 739 353 1,739 1,739
Operating income (loss)................ (2,516) 891 5,487 5,925 (2,027) (3,621) (3,869)
Net earnings (loss).................... (5,134) (1,844) 2,693 2,507 (3,465) (5,110) (5,670)
Net earnings (loss) per
share--diluted........................ $ (3.33) $ (1.18) $ 1.22 $ 1.13 $ (2.21) $ (2.92) $ (3.24)
Weighted average common shares
outstanding--diluted(3)............... 1,541 1,559 2,215 2,215 1,566 1,752 1,752
SELECTED OPERATING DATA:
Number of stores open at end of
period................................ 174 184 197 253 192 276 276
Net sales growth....................... 19.5% 10.4% 20.7% 42.0% 18.8% 25.2% 38.3%
Comparable store sales increase(4)..... 1.2% 3.1% 12.8% 12.1% 12.5% 8.2% 6.2%
Average gross square feet per store at
end of period......................... 4,268 4,382 4,593 4,287 4,478 4,449 4,449
Average net sales per square foot(5)... $ 177 $ 178 $ 194 $ 188 $ 198 $ 198 $ 198
</TABLE>
<TABLE>
<CAPTION>
JULY 27, 1998
----------------------
AS
ACTUAL ADJUSTED(6)
--------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................................... $ 8,873 $
Total assets....................................................................... 83,924
Total debt......................................................................... 38,900
Redeemable common stock warrants(7)................................................ 12,878
Shareholders' equity (deficit)..................................................... (13,891)
</TABLE>
- ------------------------------
(1) Pro Forma Combined Condensed Statement of Operations data reflects the
acquisition of Joshua's on June 1, 1998, as if it had occurred at the
beginning of 1997. See "Pro Forma Combined Condensed Financial Statements
(unaudited)" including the notes thereto.
(2) Store contribution represents gross profit less direct selling expenses
which include store labor, point-of-sale information system rental and
maintenance and other direct store expenses.
(3) Weighted average diluted common shares outstanding excludes the effect of
employee stock options and redeemable common stock warrants for periods with
a net loss since such inclusion would be antidilutive.
(4) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired.
(5) Average net sales per square foot is calculated by dividing total net sales
by the weighted average gross square footage of stores open during the
period. Periods less than a full year are annualized based on historical
seasonal trends. See "Business-- Properties."
(6) Adjusted to reflect the sale of shares of Common Stock at an
assumed initial public offering price of $ per share and the estimated
net proceeds therefrom after deducting the estimated underwriting discount
and the estimated expenses of this Offering. See "Use of Proceeds." Also
adjusted to reflect the conversion of redeemable common stock warrants in
connection with the closing of the Offering.
(7) Redeemable common stock warrants were issued in connection with the
Company's senior subordinated notes. Subsequent to December 31, 1999, the
holder may, at its option, require the Company to purchase the warrants at
fair value. As a result, the redeemable common stock warrants are recorded
at estimated fair value at the respective balance sheet dates.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
EVALUATING AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF ACQUISITIONS; POSSIBLE INABILITY TO
MANAGE GROWTH
The Company's growth has been achieved primarily through acquisitions.
Certain of these acquisitions, including the acquisition of Joshua's, were large
transactions which involve significant risks and uncertainties for the Company.
The success of past and future acquisitions is largely dependent on the ability
of Family to integrate the operations of the acquired companies into Family's
operations in an efficient manner and to manage its larger store base
effectively. Most of the acquisition candidates that may be available to the
Company in the future are small chains or independent stores. The lack of large
acquisition candidates will require the Company to make many small acquisitions
in order to achieve its growth strategy, which may make integration more
difficult. There can be no assurance that the Company's acquisitions will be
successfully integrated on a timely basis or that the anticipated benefits of
these acquisitions will be realized. Failure to effectively accomplish the
integration of acquired companies could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's business has grown considerably in size and geographic scope,
increasing from 148 stores located in 28 states at October 31, 1994, to 276
stores in 36 states at July 31, 1998. The Company's continued growth may place a
significant strain on the Company's management and operating systems. There can
be no assurance that the Company will anticipate all of the changing demands of
its expanding operations and adapt systems and procedures accordingly. To
support its planned store growth, the Company will be required to hire and train
a substantial number of additional store managers and store employees, and there
can be no assurance that the training and supervision of a larger number of
employees will not adversely affect the performance of the Company's stores or
the level of customer service that the Company seeks to maintain in such stores.
The Company's inability to manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business."
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY
The Company intends to continue to pursue an aggressive growth strategy. The
Company's ability to continue to expand its operations depends upon a number of
factors, including its ability to: (i) locate acquisition targets and negotiate
acceptable acquisition terms; (ii) hire, train and integrate management and
store employees; (iii) access adequate capital resources; (iv) identify markets
that meet its site selection criteria; (v) locate suitable store sites and
negotiate acceptable lease terms; and (vi) expand into new markets. There can be
no assurance that the Company will be able to identify additional acquisition
candidates or locate appropriate sites for relocation of existing stores or for
new stores. The Company believes that, other than Family, the largest Christian
retail chain is comprised of approximately 75 stores. The lack of large
acquisition candidates could have an adverse effect on the ability of the
Company to realize its growth strategy. The Company pursues a strategy of
clustering stores in each of its markets to increase overall sales, achieve
operating efficiencies and further penetrate markets. In the past, the Company
has opened additional stores in markets where it has existing store locations.
The Company plans to continue doing so, which may result in a decline in the net
sales and operating results at its existing stores in these markets.
The Company anticipates acquiring nine additional stores and opening five
new stores during the remainder of fiscal 1998 and acquiring or opening
approximately 45 to 55 stores in fiscal 1999. Certain of these stores may be in
areas where the Company currently has no operations. There can be no assurance
that the Company will achieve its planned expansion in existing markets, enter
new markets or integrate and operate its newly-acquired or newly-opened stores
profitably. Failure to do so could have a material
7
<PAGE>
adverse effect on the Company's business, financial condition and results of
operations. See "Business-- Growth Strategy."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its net sales and net earnings. Similar to
many retailers, the Company typically realizes a significant portion of its net
sales and all of its net earnings in the fourth quarter of its fiscal year
primarily as a result of the holiday selling season. Any significant adverse
trend in net sales for such period would have a material adverse effect on the
Company's results of operations for the full fiscal year. Historically, the
first and third quarters of the Company's fiscal year have been the weakest
quarters. Due to the fluctuations in net sales and net earnings, the results of
operations of any quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year or any future quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Fluctuations."
FLUCTUATIONS IN COMPARABLE STORE SALES
The Company's results of operations have fluctuated and are expected to
continue to fluctuate significantly from period to period as the result of a
number of factors, including: (i) the number and timing of store acquisitions
and openings and related expenses; (ii) the number of relocated and remodeled
stores; (iii) the integration of new stores into the operations of the Company;
(iv) the relative mix of store types; (v) the opening of stores by the Company
or its competitors in markets where the Company has existing stores; and (vi)
the timing of new releases. In addition, the results of comparable store sales
differ from period to period, due to a variety of factors, including the
relative proportion of new stores to mature stores, the timing of promotional
events, the Company's ability to execute its operating strategy effectively,
changes in consumer preferences for Christian retail products and general
economic conditions. There can be no assurance that comparable store sales for
any particular period will not decrease in the future. As a result, following
the Offering, the Company's comparable store sales could cause the price of the
Class A Common Stock to fluctuate substantially. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Christian retail industry is highly competitive. Historically,
competition has included independent stores and franchises, with an increasing
presence from large retail chains, including those primarily focused on the sale
of secular books and merchandise. Many independent stores and regional chains
across the country have become more aggressive in their approach to retail,
growing the size and improving the look of their stores through expansion and
remodeling. Many independent stores are becoming more aggressive in their
marketing as well, by utilizing extensive mailing lists and by participating in
marketing groups. The largest marketing group, Parable Group, Inc. ("Parable"),
is reported to presently consist of approximately 330 stores.
The growing market for Christian-related products has attracted competition
in the area of books and music from retailers whose primary focus is secular
merchandise. Large retailers such as Barnes & Noble, Inc. ("Barnes & Noble"),
Media Play, Inc. ("Media Play"), Borders Group, Inc. ("Borders") and
Books-A-Million, Inc. ("Books-A-Million") are expanding their selection of
Christian books and music while also increasing the size and number of their
stores. Discount store chains, such as Target Stores, Inc. ("Target"), The
Wal-Mart Stores, Inc. ("Wal-Mart") and Best Buy Co., Inc. ("Best Buy"), as well
as Internet retailers, such as Amazon.com, Inc. ("Amazon.com"), direct marketers
and book clubs present additional competition. In order to remain competitive in
certain markets, the Company may be required to implement price reductions,
which could have an adverse impact on its business, financial condition and
results of operations. As Family enters new geographic markets, its success will
depend in part on its ability to gain market share from established competitors,
some of which are larger and have substantially greater resources than the
Company. The Company expects competition from both existing and new competitors
8
<PAGE>
to increase, and there can be no assurance that the Company will be able to
compete effectively in the future. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the leadership
and performance of the Company's senior management, particularly Mr. Leslie E.
Dietzman, Family's President and Chief Executive Officer. The loss of the
services of Mr. Dietzman or any of the Company's other key personnel could have
a material adverse effect on the Company. In addition, as the Company grows, it
will be required to continue to hire management personnel and other employees.
Given its dedication to Christian and family values, the Company seeks to hire
experienced professionals who also demonstrate a commitment to such principles.
There can be no assurance that the Company will be able to attract and retain
sufficient qualified employees. See "Management."
DEPENDENCE ON VENDORS; POSSIBLE DISRUPTIONS OF PRODUCT SUPPLY
The Company's business is dependent on its ability to purchase Christian
books, music, gifts and other products in sufficient quantities at competitive
prices. The Company relies upon a small number of major publishers and
distributors and a large number of relatively small vendors for its merchandise.
During the Company's 1997 fiscal year, its four largest vendors each supplied
approximately 9.9%, 8.6%, 7.9% and 7.6% of the Company's products. The Company
has no material supply contracts, and any vendor or distributor could
discontinue selling to the Company at any time. The Company is dependent on its
major distributors for products which are available only from a limited number
of sources. Approximately 65% of the Company's revenues and gross profit are
attributable to these products, which include books, bibles, music and
children's merchandise. Each such product is available from only one primary
source and is also available, in a limited quantity, from a number of secondary
sources but at an increased cost to the Company. The failure of one of these
major vendors or distributors to meet the Company's demands could disrupt
store-level merchandise selection. Any such disruption in its product supply
could have a material adverse effect on the Company's business, financial
condition and results of operations. For other products, the Company relies upon
a larger number of relatively small vendors. Although the Company believes it
has access to alternative sources of supply among these small vendors, there can
be no assurance that smaller suppliers will be able to meet the Company's needs
as the Company grows. See "Business-- Purchasing and Distribution."
CONSUMER TRENDS AND SPENDING PATTERNS
Although interest in Christian and family values in the United States has
been increasing, there can be no assurance that such trend will continue. Sales
of Christian books, music, gifts and other products are dependent upon
discretionary consumer spending, which may be affected by general economic
conditions such as employment levels, business conditions, interest rates,
availability of credit, inflation and taxation, consumer confidence and other
factors beyond the control of the Company. The Company's failure to anticipate,
identify and react appropriately to changing consumer preferences, or a decline
in consumer spending on Christian merchandise generally, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON THIRD PARTY FOR SUPPORT OF MANAGEMENT INFORMATION SYSTEMS
The Company's information systems are currently managed by Andersen
Consulting ("Andersen") pursuant to a consulting agreement that is scheduled to
terminate in 2001. Andersen is responsible for maintaining the Company's current
systems, developing new systems and enhanced programs to support the Company's
growth and working with the Company's management in using the systems for
inventory and price management, sales tracking, merchandise planning and
accounting. The Company is dependent on the satisfactory performance of Andersen
for the continued successful management of its information systems and on its
ability to provide such services at prices acceptable to the Company. Although
the Company has dedicated systems personnel who assist Andersen and believes
that its relationship with
9
<PAGE>
Andersen is good, there can be no assurance that Andersen will continue to
supply information services successfully or will not terminate its arrangement
with Family, either of which could have a material adverse effect on the
Company's operating systems and on the Company's business, financial condition
and results of operations. See "Business--Management Information Systems."
YEAR 2000 IMPACT
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date field. Beginning in the year 2000,
these date fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, over the
next two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
The Company purchases third-party hardware and software products and
modifies such software internally, as appropriate. The Company's software is
provided by two primary vendors and is utilized for merchandise management,
financial recordkeeping and management, store systems (P.O.S.) and human
resources and payroll purposes. Currently, the Company does not purchase any new
software or hardware unless it is certified to be Year 2000 compliant.
The Company is relying upon the third-party certification of its primary
software vendors that they are Year 2000 compliant and is in the process of
installing updates to such systems in order to be Year 2000 compliant. Such
installation with respect to the Company's primary systems is anticipated to be
complete by early April 1999 and with respect to all systems is anticipated to
be complete by July 1999. In addition to the testing performed by such vendors
and the third parties certifying their systems, upon installation of updates,
the Company and Andersen, its information systems consultant, will conduct
testing and verification procedures. Thus, the Company expects that all of its
computer systems will be Year 2000 compliant before the end of 1999. The Company
is currently in the process of developing a contingency plan should compliance
not be achieved by such date.
In addition to assessing its own systems, the Company is conducting an
external survey of its vendors and suppliers to determine their vulnerability to
Year 2000 problems and any potential impact on the Company. In particular, the
Company may experience problems to the extent that merchandise vendors are
unable to process orders or distribute merchandise to the Company's stores if
such vendors are not Year 2000 compliant. In the event the Company's internal
computer systems or the computer systems of its third-party vendors are not Year
2000 compliant, such non-compliance could have a material adverse effect on the
business, results of operations and financial condition of the Company.
The Company expects to complete all of the phases of the process described
above and that all of its computer systems will be Year 2000 compliant by July
1999. However, there can be no assurance that such process will be completed
prior to such date, or prior to the year 2000, or that any problems will be
properly identified and, if identified, that they will be adequately corrected.
Any failure by the Company to properly assess and correct Year 2000 computer
problems could have a material adverse effect on its business, results of
operations and financial condition.
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
Holders of the Company's Class A Common Stock are entitled to one vote per
share, and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Immediately following the Offering, through their ownership of
all of the shares of Class B Common Stock outstanding, the directors,
executive officers and current shareholders of the Company will represent, in
the aggregate, % of the total voting power of the outstanding Common Stock.
As a result, the holders of Class B Common Stock will be able to effectively
control the Company and direct its affairs and business, including any
determination with respect to significant corporate transactions and the
election of directors. Such concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of the Company,
including transactions in which the holders of Class A Common Stock might
10
<PAGE>
receive a premium for their shares over prevailing market prices. Pursuant to an
agreement to be entered into by the Company and certain investors upon the
closing of the Offering, the Company will agree to nominate one director
designated by such investors to the Board of Directors for so long as such
investors hold more than 5% of the outstanding Common Stock. See "Principal and
Selling Shareholders" and "Description of Capital Stock."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Class A Common Stock at a premium over the
market price of the Class A Common Stock and may adversely affect the market
price of the Class A Common Stock and the voting and other rights of the holders
of the Class A Common Stock. These provisions include, but are not limited to, a
classified Board of Directors and the authority of the Board of Directors to
issue shares of Preferred Stock and to fix the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the shareholders. The rights of the holders of Class A
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The Company
has no present plans to issue shares of Preferred Stock. Furthermore, the loan
agreement with respect to the Company's existing indebtedness contains certain
covenants restricting the sale of assets. These restrictions may have the effect
of delaying or preventing a sale of the Company. See "--Covenant Restrictions."
In addition, certain provisions of Michigan law applicable to the Company could
have the effect of discouraging certain attempts to acquire the Company which
could deprive the Company's shareholders of the opportunities to sell their
shares of Class A Common Stock at prices higher than prevailing market prices.
See "Description of Capital Stock."
COVENANT RESTRICTIONS
The Company's Amended and Restated Loan Agreement, dated as of October 31,
1994, and amended and restated on July 17, 1998 (the "Amended and Restated Loan
Agreement"), contains certain restrictive financial and operating covenants with
respect to liens, indebtedness, capital expenditures, sales of assets,
investments, prepayments of debt, dividends, requirements to maintain certain
financial ratios and certain other corporate actions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The ability of the Company to
comply with these covenants will depend on its future performance, which will,
in part, be subject to prevailing economic, financial and business factors
beyond the Company's control. These restrictions also could prohibit the Company
from taking actions which would otherwise be in the best interests of the
Company, including limiting the Company's ability to implement its new store
expansion plan to the extent that the provisions that limit capital expenditures
and additional indebtedness, among others, prevent implementation of such plan.
Management believes that the Company will be able to comply with such provisions
while implementing its growth strategy; however, there can be no assurance that
it will be able to do so. Pursuant to the Securities Purchase Agreement, dated
as of November 14, 1994 (the "Securities Agreement"), between the Company and
its existing shareholders, the Company is subject to covenant restrictions that
are substantially similar to those of the Amended and Restated Loan Agreement.
Upon the exercise of the Company's outstanding warrants in connection with the
Offering, such covenants will no longer apply.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. Accordingly, there can be no assurance that an active trading
market for the Class A Common Stock will develop or be sustained upon completion
of the Offering. The initial public offering price of the shares of Class A
Common Stock offered hereby will be established by negotiations among the
Company, the Selling Shareholders and the representatives of the Underwriters.
See "Underwriting" for factors to be considered in determining the initial
public offering price. The market price of the shares of Class A Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other
11
<PAGE>
factors, including conditions in the Christian retail market. In addition, the
stock market in recent years has experienced price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as a shortfall in net sales or net
earnings compared to public market analysts' expectations, fluctuations in the
Company's comparable store sales, changes in analysts' recommendations or
projections and general economic and market conditions, may adversely affect the
market price of the Class A Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following the Offering or the perception that such sales could occur
could adversely affect the market price of the Common Stock. Upon the closing of
the Offering, the Company will have outstanding an aggregate of shares
of Common Stock ( shares if the Underwriters' over-allotment option is
exercised in full). In addition, the Company has reserved for issuance
shares issuable upon exercise of outstanding options. The shares of
Common Stock sold in the Offering will be freely transferable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act.
The remaining shares of Common Stock held by existing shareholders
are "restricted securities" as that term is defined in Rule 144 ("Restricted
Shares"), and may be sold in the public market only if they are registered or if
they qualify for exemption from registration under Rules 144 or 701 under the
Securities Act. Restricted Shares are subject to lock-up agreements
pursuant to which the holders have agreed not to sell or otherwise dispose of
any of their shares of Common Stock for a period of 180 days following the date
of this Prospectus without the prior written consent of NationsBanc Montgomery
Securities LLC. Following the 180-day period, Restricted Shares will be
eligible for sale in the public market without restriction under Rule 144(k).
Restricted Shares will be eligible for sale subject to the volume and
other limitations of Rule 144. Of the Restricted Shares held by existing
shareholders not subject to lock-up agreements, shares will be eligible
for immediate sale in the public market without restriction under Rule 144(k).
The remaining Restricted Shares not subject to lock-up agreements will
become eligible for sale, subject to certain volume, manner of sale and other
limitations, under Rule 144 commencing 90 days following the date of this
Prospectus. The Company intends to file one or more registration statements on
Form S-8 to register shares of Common Stock authorized for issuance
under the Company's equity incentive plans. See "Management--Employee Benefit
Plans," "Description of Capital Stock--Registration Rights," and "Shares
Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The proposed initial public offering price per share of Class A Common Stock
is substantially higher than the net tangible book value per share of the Class
A Common Stock. Purchasers of shares of the Class A Common Stock offered hereby
will incur immediate and substantial dilution of $ per share. See
"Dilution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Class A Common Stock offered by the Company hereby (at an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discount and estimated Offering expenses) are estimated to be $ million
($ million if the Underwriters' over-allotment option is exercised in full).
The Company will not receive any proceeds from the sale of the shares
of Class A Common Stock offered by the Selling Shareholders hereby. See
"Principal and Selling Shareholders."
The Company intends to use approximately $12.0 million of the net proceeds
from the Offering to finance new store openings and store acquisitions over the
next 12 to 18 months. Family plans to open five additional stores at a projected
cost of $0.7 million and acquire nine additional stores for approximately $3.0
million during the second half of fiscal 1998. The Company also anticipates
acquiring up to 45 stores in fiscal 1999 at a projected cost of approximately
$10.0 million and opening up to eight new stores at a projected cost of
approximately $1.0 million to $2.0 million. It is anticipated that additional
costs will be financed with internal cash flow, seller financing, and the
Company's credit facility. Although the Company has no present commitments or
agreements with respect to any acquisitions planned for fiscal 1999, funds will
be used in connection with future acquisitions if such opportunities develop.
Costs to acquire stores could vary materially from the cost of opening new
stores. There can be no assurance that the Company will achieve its planned
expansion in existing markets or enter new markets.
Approximately $5.7 million of the net proceeds will be used to fund
obligations under the financing provided in connection with the Joshua's
acquisition. The note evidencing such obligations was entered into by the
Company on June 1, 1998, has an interest rate of 7.25% and requires annual
payments of $2.9 million on December 31, 1998 and 1999 and $2.8 million on
December 31, 2000. The final payment is subject to acceleration upon the closing
of the Offering.
In addition, the Company intends to use approximately $10.0 million of the
net proceeds of the Offering to repay certain bank indebtedness. Such repayment
will first be applied to a $5 million term note bearing interest at the greater
of (i) the lender's prime rate or (ii) the Federal Funds Rate plus .50% (each,
as applicable, the "Base Rate"), plus 2.00%, with interest payable quarterly and
a final maturity of May 31, 2004. The repayment of bank indebtedness will next
be applied to a $9.5 million term note bearing interest at the Base Rate plus
1.00% with interest payable quarterly and quarterly principal payments totaling
$0.5 million in fiscal 1999, $1.0 million in fiscal 2000 and $2.67 million in
each of fiscal 2001, 2002 and 2003 and with a final maturity date of May 31,
2004.
The Company intends to use the remaining proceeds of approximately $
million to repay amounts outstanding under the Company's revolving line of
credit (the "Revolving Line"), which bears interest at LIBOR plus 3.25% or the
Base Rate plus .50% and has a final maturity of May 31, 2004, subject to
one-year extensions as agreed upon by the parties. Upon the consummation of the
Offering and the application of the net proceeds therefrom, the Revolving Line
will bear interest at LIBOR plus 2.75% or the Base Rate. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company. In addition, the Company's
Amended and Restated Loan Agreement contains various financial covenants which
restrict, among other things, the Company's ability to pay dividends. As of the
date of this Prospectus, the Company may not pay dividends pursuant to the terms
of the Amended and Restated Loan Agreement. Upon completion of the Offering and
the application of the net proceeds therefrom as described in "Use of Proceeds,"
the Company may pay dividends, subject to certain limitations of the Amended and
Restated Loan Agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
27, 1998: (i) on an actual basis, after giving effect to the change in
capitalization and stock split completed on September , 1998 as discussed in
Note M to the Company's financial statements and (ii) as adjusted to reflect the
sale of the shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $ per share, after deducting
estimated underwriting discount and estimated Offering expenses), and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's Financial Statements and Notes thereto and the
Pro Forma Combined Condensed Financial Statements (unaudited) included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
JULY 27, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................................................ $ 3,150 $
Long-term debt........................................................................... 35,750
Redeemable common stock warrants......................................................... 12,878
Shareholders' equity (deficit)(1)(2):
Preferred stock, no par value--5,000,000 shares authorized; no shares issued, pro
forma; no shares issued, pro forma as adjusted -- --
Class A Common stock, $.01 par value; 10,000,000 shares authorized; no shares issued,
pro forma; shares issued, pro forma as adjusted.............................. --
Class B Common stock, $.01 par value; 10,000,000 shares authorized; shares
issued, pro forma; shares issued, pro forma as adjusted...................... 18
Additional paid-in capital............................................................. 8,792
Retained earnings (deficit)............................................................ (22,358)
Notes receivable from shareholders..................................................... (343)
---------- -----------
Total shareholders' equity (deficit)................................................. (13,891)
---------- -----------
Total capitalization............................................................... $ 37,887 $
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
(1) Excludes: (i) shares of Common Stock issuable upon exercise of
options outstanding under the Company's stock option plans as of
, 1998 with a weighted average exercise price of $ per share;
(ii) shares of Common Stock issuable upon exercise of options to be
granted under the Company's stock option plans upon the closing of the
Offering, with an exercise price per share equal to the initial public
offering price; and (iii) shares reserved for issuance pursuant to
the Company's stock option plans. See "Management--Employee Benefit Plans"
and Note J of the Notes to the Company's Consolidated Financial Statements.
(2) Share numbers are presented on a pro forma basis to give effect to the
conversion of the Company's currently outstanding common stock into shares
of newly created Class B Common Stock concurrently with the closing of the
Offering.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of July 27, 1998 was
approximately $ million or $ per share. Pro forma net tangible
book value per share is equal to net tangible assets (tangible assets of the
Company less total liabilities) divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in net tangible book
value after July 27, 1998, other than to give effect to the sale by the Company
of the shares of Class A Common Stock offered by the Company hereby (at
an assumed initial public offering price of $ per share) and the receipt
of the estimated net proceeds therefrom, the pro forma net tangible book value
of the Company as of July 27, 1998, would be approximately $ million, or
$ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing shareholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share...................................... $
Pro forma net tangible book value per share before the Offering.................... $
Increase per share attributable to new investors...................................
---------
Pro forma net tangible book value per share after the Offering.......................
---------
Dilution per share to new investors.................................................. $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of July 27, 1998,
the differences between directors, officers and affiliates, other existing
shareholders and new investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by the existing shareholders and by the investors
purchasing shares of Class A Common Stock in the Offering (based upon an assumed
initial public offering price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Directors, officers and affiliates........................ % $ % $
Other existing shareholders(1)............................
New investors.............................................
----- ----- ---------- -----
Total................................................... 100.0% $ 100.0%
----- ----- ---------- -----
----- ----- ---------- -----
</TABLE>
- ------------------------------
(1) Sales by the Selling Shareholders in the Offering will reduce the number of
shares held by the existing shareholders to or % ( or %
if the over-allotment option is exercised in full) of the total number of
shares of Common Stock to be outstanding after the Offering and will
increase the number of shares to be purchased by new investors to or
% ( or % if the over-allotment option is exercised in full) of
the total shares of Common Stock to be outstanding. See "Principal and
Selling Shareholders."
The foregoing discussion and table include on a pro forma basis as of July
27, 1998, the acquisition of Joshua's on June 1, 1998, and exclude
shares of Common Stock issuable upon exercise of options outstanding under the
Company's stock option plans as of , 1998, with a weighted average
exercise price of $ per share and shares reserved for issuance
pursuant to the Company's stock option plans. To the extent such options are
exercised in the future, there will be further dilution to new investors. See
"Capitalization," "Management--Employee Benefit Plans" and Note J of the Notes
to the Company's Financial Statements.
15
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA OF FAMILY CHRISTIAN STORES, INC.
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
The statement of operations and balance sheet data have been derived from
the audited financial statements of the Company. The selected financial data for
the six months ended July 27, 1998, and July 26, 1997, have been derived from
the unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for those periods. Operating
results for the six months ended July 27, 1998, are not necessarily indicative
of the results that may be expected for the full year or for any future period.
The selected operating data for all periods presented below have been derived
from internal records of the Company's operations. The data set forth below
should be read in conjunction with the Financial Statements of Family Christian
Stores, Inc., including notes thereto, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ------------------------
-------------------------------------------- JULY 26, JULY 27,
1994(1) 1995 1996 1997 1997 1998
----------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 41,612 $ 126,125 $ 139,280 $ 168,063 $ 67,708 $ 84,763
Cost of products sold, including store occupancy costs.... 30,708 90,967 100,222 118,473 49,538 61,228
----------- --------- --------- --------- ----------- -----------
Gross profit.............................................. 10,904 35,158 39,058 49,590 18,170 23,535
Operating expenses:
Selling, general and administrative expenses............ 10,155 34,283 34,923 40,284 18,363 23,723
Depreciation and amortization........................... 504 2,400 2,830 3,080 1,481 1,694
Store opening expenses.................................. 167 991 414 739 353 1,739
----------- --------- --------- --------- ----------- -----------
10,826 37,674 38,167 44,103 20,197 27,156
----------- --------- --------- --------- ----------- -----------
Operating income (loss)................................... 78 (2,516) 891 5,487 (2,027) (3,621)
Interest expense, net..................................... 329 2,618 2,735 2,794 1,438 1,489
----------- --------- --------- --------- ----------- -----------
Earnings (loss) before income taxes....................... (251) (5,134) (1,844) 2,693 (3,465) (5,110)
Income tax provision...................................... -- -- -- -- -- --
----------- --------- --------- --------- ----------- -----------
Net earnings (loss)....................................... $ (251) $ (5,134) $ (1,844) $ 2,693 $ (3,465) $ (5,110)
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Net earnings (loss) per share:
Basic................................................... $ (0.17) $ (3.33) $ (1.18) $ 1.63 $ (2.21) $ (2.92)
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Diluted................................................. $ (0.17) $ (3.33) $ (1.18) $ 1.22 $ (2.21) $ (2.92)
----------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- ----------- -----------
Weighted average common shares outstanding:
Basic................................................... 1,500 1,541 1,559 1,653 1,566 1,752
Diluted(2).............................................. 1,500 1,541 1,559 2,215 1,566 1,752
SELECTED OPERATING DATA:
Number of stores open at end of period.................... 153 174 184 197 192 276
Net sales growth.......................................... n/a 19.5% 10.4% 20.7% 18.8% 25.2%
Comparable store sales increase(3)........................ 10.0% 1.2% 3.1% 12.8% 12.5% 8.2%
Average gross square feet per store at end of period...... 4,107 4,268 4,382 4,593 4,478 4,449
Average net sales per square foot(4)...................... $ 178 $ 177 $ 178 $ 194 $ 198 $ 198
BALANCE SHEET DATA:
Working capital........................................... $ 7,887 $ 6,529 $ 219 $ 739 $ 3,869 $ 8,873
Total assets.............................................. 47,195 56,587 52,383 61,286 54,716 83,924
Total debt................................................ 16,808 22,163 20,518 16,973 25,000 38,900
Redeemable common stock warrants(5)....................... 1,317 1,499 5,519 9,199 5,519 12,878
Shareholders' equity (deficit)............................ 4,149 (866) (6,657) (5,128) (6,420) (13,891)
</TABLE>
- ------------------------------
(1) Family Christian Stores, Inc., formerly Family Bookstores Company, Inc., was
formed for the purpose of acquiring substantially all of the assets of the
Family Bookstores Division of The Zondervan Corporation on October 31, 1994.
Amounts reported for fiscal 1994 represent results of operations for the
period from October 31, 1994 to January 29, 1995.
(2) Weighted average diluted common shares outstanding excludes the effect of
employee stock options and redeemable common stock warrants for periods with
a net loss since such inclusion would be antidilutive.
(3) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired.
(4) Average net sales per square foot is calculated by dividing total sales by
the weighted average gross square footage of stores open during the period.
Periods less than a full year are annualized based on historical seasonal
trends. See "Business--Properties."
(5) Redeemable common stock warrants were issued in connection with the
Company's senior subordinated notes. Subsequent to December 31, 1999, the
holder may, at its option, require the Company to purchase the warrants at
fair value. As a result, the redeemable common stock warrants are recorded
at estimated fair value at the respective balance sheet dates.
16
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA OF JOSHUA'S CHRISTIAN STORES
(IN THOUSANDS, EXCEPT OPERATING DATA)
The statement of operations and balance sheet data as of and for the twelve
months ended March 31, 1998 (fiscal 1997), have been derived from the audited
financial statements of Joshua's Christian Stores. The selected financial data
for the four months ended May 31, 1998, have been derived from the unaudited
financial statements of Joshua's Christian Stores and include all adjustments,
consisting only of normal recurring adjustments, that the management of Joshua's
considers necessary for a fair presentation of the financial position and
results of operations for the period. Operating results of Joshua's subsequent
to June 1, 1998, the date of the acquisition, are included in the operating
results of Family. The selected operating data presented below have been derived
from internal records of Joshua's. The data set forth below should be read in
conjunction with the Financial Statements Joshua's Christian Stores, including
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL FOUR MONTHS ENDED
1997 MAY 31, 1998
--------- --------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................ $ 32,007 $ 9,131
Cost of products sold, including store occupancy costs (1)....................... 22,934 6,684
--------- -------
Gross profit..................................................................... 9,073 2,447
Operating expenses:
Selling, general and administrative expenses................................... 8,126 2,551
Depreciation and amortization.................................................. 612 176
--------- -------
8,738 2,727
--------- -------
Earnings (loss) before income taxes.............................................. 335 (280)
Income tax provision (benefit)................................................... 11 (95)
--------- -------
Net earnings (loss).............................................................. $ 324 $ (185)
--------- -------
--------- -------
SELECTED OPERATING DATA:
Number of stores open at end of period........................................... 58 56
Net sales growth (decrease)...................................................... 1.3% (11.3)%
Comparable store net sales increase (decrease) (2)............................... 8.6% (2.4)%
Average gross square feet per store at end of period............................. 3,247 3,286
Average net sales per square foot (3)............................................ $ 159 $ 186
BALANCE SHEET DATA:
Working capital.................................................................. $ 4,675 $ 5,569
Total assets..................................................................... 12,110 11,180
</TABLE>
- ------------------------------
(1) The historical financial statements of Joshua's Christian Stores have been
adjusted to reclassify store occupancy costs to cost of products sold in
order to conform to the presentation used by the Company.
(2) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired.
(3) Average net sales per square foot is calculated by dividing total net sales
by the weighted average gross square footage of stores open during the
period. See "Business--Properties."
17
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
On June 1, 1998, the Company acquired the assets of Joshua's Christian
Stores in a transaction accounted for as a purchase. The purchase price of
approximately $11.7 million was financed with a combination of cash and seller
financing and resulted in goodwill of approximately $3.6 million. The pro forma
combined condensed statements of operations for fiscal 1997 and the six months
ended July 27, 1998 give effect to the acquisition of Joshua's as if the
transaction had occurred at the beginning of 1997. A pro forma combined
condensed balance sheet is not presented as the effect of the Joshua's
acquisition is reflected in the Company's unaudited July 27, 1998 condensed
balance sheet which is included elsewhere in this Prospectus. The pro forma
statements of operations do not give effect to other acquisitions completed by
the Company during this period as they were not material to operating results
individually or in the aggregate.
In the opinion of the Company all adjustments necessary to present fairly
such pro forma combined statements of operations have been made. These unaudited
pro forma statements of operations are not necessarily indicative of what actual
results would have been had the transactions occurred at the beginning of 1997,
nor do they purport to be indicative of the results that may be expected for the
full year or any future period. These unaudited pro forma statements of
operations should be read in conjunction with the accompanying notes and the
historical financial statements and notes thereto of Family Christian Stores,
Inc. and Joshua's Christian Stores, respectively, included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
18
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR FISCAL YEAR 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
FAMILY JOSHUA'S
CHRISTIAN CHRISTIAN PRO FORMA PRO FORMA
STORES(A) STORES(A)(B) ADJUSTMENTS COMBINED
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales................................................... $ 168,063 $ 32,007 $ (2,284)(c) $ 197,786
Cost of products sold, including store occupancy costs...... 118,473 22,934 (1,764)(c) 139,643
---------- ----------- ------------- -----------
Gross profit................................................ 49,590 9,073 (520)(c) 58,143
Operating expenses:
Selling, general and administrative expenses.............. 40,284 8,126 (658)(c) 47,752
Depreciation and amortization............................. 3,080 612 (68)(c) 3,727
103(d)
Store opening expenses.................................... 739 739
---------- ----------- ------------- -----------
44,103 8,738 (623) 52,218
---------- ----------- ------------- -----------
Operating income.......................................... 5,487 335 103 5,925
Interest expense, net....................................... 2,794 -- 624(e) 3,418
---------- ----------- ------------- -----------
Income before income taxes.................................. 2,693 335 (521) 2,507
Income tax expense.......................................... -- 11 (11)(f) --
---------- ----------- ------------- -----------
Net earnings................................................ $ 2,693 $ 324 $ (510) $ 2,507
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
Net earnings per share:
Basic..................................................... $ 1.63 $ 1.52
---------- -----------
---------- -----------
Diluted................................................... $ 1.22 $ 1.13
---------- -----------
---------- -----------
Weighted average common shares outstanding:
Basic..................................................... 1,653 1,653
---------- -----------
---------- -----------
Diluted................................................... 2,215 2,215
---------- -----------
---------- -----------
</TABLE>
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 27, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
FAMILY JOSHUA'S
CHRISTIAN CHRISTIAN PRO FORMA PRO FORMA
STORES(A) STORES(A)(B) ADJUSTMENTS COMBINED
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales...................................................... $ 84,763 $ 9,131 $ (265)(c) $ 93,629
Cost of products sold, including store occupancy costs......... 61,228 6,684 (256)(c) 67,656
----------- ----------- ------ -----------
Gross profit................................................... 23,535 2,447 (9)(c) 25,973
Operating expenses:
Selling, general and administrative expenses................. 23,723 2,551 (86)(c) 26,188
Depreciation and amortization................................ 1,694 176 (7)(c) 1,915
52(d)
Store opening expenses....................................... 1,739 -- -- 1,739
----------- ----------- ------ -----------
27,156 2,727 (41) 29,842
----------- ----------- ------ -----------
Operating loss................................................. (3,621) (280) 32 (3,869)
Interest expense, net.......................................... 1,489 -- 312(e) 1,801
----------- ----------- ------ -----------
Loss before income taxes....................................... (5,110) (280) (280) (5,670)
Income tax benefit............................................. -- (95) 95(f) --
----------- ----------- ------ -----------
Net loss....................................................... $ (5,110) $ (185) $ (375) $ (5,670)
----------- ----------- ------ -----------
----------- ----------- ------ -----------
Net loss per share:
Basic........................................................ $ (2.92) $ (3.24)
----------- -----------
----------- -----------
Diluted...................................................... $ (2.92) $ (3.24)
----------- -----------
----------- -----------
Weighted average common shares outstanding:
Basic........................................................ 1,752 1,752
----------- -----------
----------- -----------
Diluted...................................................... 1,752 1,752
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(a) The pro forma combined condensed statement of operations for fiscal 1997
combines the historical condensed statement of operations for Family for the
year ended January 25, 1998 and the historical condensed statement of
operations for Joshua's for the twelve months ended March 31, 1998. The pro
forma combined condensed statement of operations for the six months ended
July 27, 1998 combines the historical condensed statement of operations for
Family for the six months ended July 27, 1998 and the historical condensed
statement of operations for Joshua's for the four months ended May 31, 1998.
Operating results of Joshua's from June 1, 1998, the date of the
acquisition, through July 27, 1998 are included in the historical results of
Family.
(b) The historical financial statements of Joshua's have been adjusted to
reclassify store occupancy costs from selling, general and administrative
expenses to cost of products sold in order to conform to the presentation
used by Family.
(c) Historical financial statements for Joshua's for fiscal 1997 include the
operation of 71 stores and for the four months ended May 31, 1998, include
the operation of 61 stores. Since Family acquired only the 56 stores open at
the acquisition date, June 1, 1998, a pro forma adjustment was recorded to
remove the operating results directly attributable to stores not acquired in
the asset purchase.
(d) Amortization of the incremental excess of the acquisition cost over the
related fair value of net assets acquired, totaling $3,604, over 35 years on
a straight-line basis, in connection with the Joshua's acquisition based on
the following purchase price allocation.
<TABLE>
<CAPTION>
<S> <C>
Cash purchase price...................................................................... $ 2,900
Note payable to seller................................................................... 8,600
Fees and expenses........................................................................ 225
---------
Total purchase price..................................................................... 11,725
Fair value of net assets of Joshua's less assets and liabilities not acquired............ 8,121
---------
Excess of cost over fair value of net assets acquired.................................... $ 3,604
---------
---------
</TABLE>
(e) Recording of interest on seller financing of $8,600 at the stated interest
rate of 7.25%. Payments are due in installments of $2,900 on December 31,
1998 and 1999, and $2,800 on December 31, 2000. The final payment on the
seller financing will become due within 30 days of the successful completion
of the Offering.
(f) No income tax expense or benefit is recognized on a combined basis in fiscal
1997 or the six months of fiscal 1998 as Family is currently not permitted
to recognize the benefit of net deferred income tax assets which includes
net operating loss and credit carryforwards.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Family is the largest retailer in the United States dedicated solely to
Christian-related products. The Company was formed to acquire the Family
Bookstores Division of The Zondervan Corporation on October 31, 1994. At that
time, Family had 148 stores in 28 states. As of July 31, 1998, the Company had
276 stores in 36 states. Family is the primary consolidator in the Christian
retail industry, which is highly fragmented and characterized by numerous small
independent operators.
The Company's results of operations have been and will continue to be
affected by, among other things, the number, timing and mix of store
acquisitions, openings and closings in a given period. The Company's growth in
sales and earnings has been and is expected to continue to be driven primarily
by increased comparable store sales, increased productivity at existing stores,
acquisitions and new store openings. The Company will also cluster its stores in
certain markets, primarily by opening new stores that will provide greater
coverage in these markets.
To date, all of the Company's acquisitions have been accounted for by the
purchase method, resulting in the recording of goodwill which is amortized on a
straight-line basis over a period of 35 years.
Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store is opened or acquired. Relocated and remodeled stores
remain in the comparable store base.
Store opening expenses include advertising, labor, supplies and certain
other costs and are expensed as incurred. Such expenses have averaged
approximately $26,000 per store over the past 18 months, although the amount per
store varies depending on the store format and whether the store is the first to
be opened in a market, or is part of a cluster of stores in that market.
ACQUISITION OF JOSHUA'S
On June 1, 1998, Family acquired Joshua's Christian Stores, a division of
The Development Association, Inc., a subsidiary of Tandycrafts, Inc. Joshua's
was a leading Christian retail chain headquartered in Fort Worth, Texas and
operated 56 stores in 10 states, including a major presence in Texas, Georgia,
Colorado and Southern California. For fiscal 1997, Joshua's had net sales of
$32.0 million and operating income of $335,000. The acquisition expands Family's
presence in new and existing markets and creates a stronger platform for future
growth.
Management has completed several important steps to integrate Joshua's
operations, including the introduction of the Company's (i) point-of-sale,
automatic product replenishment and information systems, (ii) enhanced product
assortment and (iii) targeted marketing and preferred customer programs.
Substantially all of the acquired stores have been renamed Family Christian
Stores and exterior signage has been changed, except for six stores which will
remain Joshua's Christian Stores and will be operated as bargain-format stores.
All store managers of former Joshua's stores who are currently employed by
Family have completed the Company's formal management training. The Company
believes that the successful integration of Joshua's will enhance its existing
store base and result in future operating efficiencies and increased brand
awareness. In connection with the acquisition, the Company recorded goodwill of
approximately $3.6 million which is being amortized on a straight-line basis
over 35 years.
The Company will operate the former Joshua's stores under the name Family
Christian Stores, although the Joshua's Christian Stores name will be used for a
limited number of bargain-format stores in certain markets, near other Family
store locations. There can be no assurance that the Company will not
21
<PAGE>
encounter unanticipated problems or liabilities in connection with the
integration of Joshua's or that the integration will result in enhanced store
operations or improved profitability. See "Risk Factors--No Assurance of
Successful Integration of Acquisitions; Possible Inability to Manage Growth" and
"Pro Forma Combined Condensed Financial Statements (unaudited)."
RESULTS OF OPERATIONS
The following table presents the Company's statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ------------------------
------------------------------- JULY 26, JULY 27,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold, including store
occupancy costs........................ 72.1 72.0 70.5 73.2 72.2
--------- --------- --------- ----- -----
Gross profit............................. 27.9 28.0 29.5 26.8 27.8
Operating expenses:
Selling, general and administrative
expenses............................. 27.2 25.1 24.0 27.1 28.0
Depreciation and amortization.......... 1.9 2.0 1.8 2.2 2.0
Store opening expenses................. 0.8 0.3 0.4 0.5 2.0
--------- --------- --------- ----- -----
29.9 27.4 26.2 29.8 32.0
--------- --------- --------- ----- -----
Operating income (loss).................. (2.0) 0.6 3.3 (3.0) (4.2)
Interest expense, net.................... 2.1 1.9 1.7 2.1 1.8
--------- --------- --------- ----- -----
Income (loss) before income taxes........ (4.1) (1.3) 1.6 (5.1) (6.0)
Income tax expense (benefit)............. 0.0 0.0 0.0 0.0 0.0
--------- --------- --------- ----- -----
Net earnings (loss)...................... (4.1)% (1.3)% 1.6% (5.1)% (6.0)%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
Number of stores open at end of period... 174 184 197 192 276
</TABLE>
SIX MONTHS ENDED JULY 27, 1998 COMPARED TO SIX MONTHS ENDED JULY 26, 1997
Net sales in the six months ended July 27, 1998 were $84.8 million,
representing an increase of $17.1 million, or 25.2%, compared to $67.7 million
in the six months ended July 26, 1997. Comparable store sales increased 8.2%
during the first six months of fiscal 1998. Also contributing to the increase in
net sales was the net addition of 79 stores opened during the six months ended
July 27, 1998 (including the 56 Joshua's stores purchased on June 1, 1998) and
stores acquired in fiscal 1997 not yet qualifying as comparable stores. The
increase in comparable store sales is the result of (i) increased sales
generated by the Company's preferred customer buying programs and direct
marketing to customers in these programs, (ii) improved merchandising, (iii)
relocation of existing stores and (iv) in-store promotions.
Gross profit consists of net sales, less costs of goods sold and occupancy
costs. Gross profit in the six months ended July 27, 1998 was $23.5 million,
representing an increase of $5.3 million, or 29.5%, compared to $18.2 million
for the six months ended July 26, 1997. Gross profit percentage was 27.8% in the
first six months of the current year, up from 26.8% in the first six months of
the prior year. The increase in gross profit percentage is the result of fewer
product returns to vendors, improved control of inventory shrinkage and reduced
store occupancy costs as a percent of net sales.
22
<PAGE>
Selling, general and administrative expenses in the six months ended July
27, 1998 were $23.7 million, representing an increase of $5.3 million, or 29.2%,
compared to $18.4 million in the six months ended July 26, 1997. The increase is
primarily attributable to increased selling costs, payroll expenses and
advertising costs related to the operation of a greater number of stores and
certain non-recurring charges in the amount of approximately $0.7 million. The
non-recurring charges are comprised of (i) the write-off of unamortized loan
issuance costs of $0.3 million associated with the refinancing of the Company's
credit facility and (ii) the write-off of $0.4 million for exterior store
signage carrying the Company's former name. As a percentage of net sales,
selling, general and administrative expenses for the first six months of the
current year were 28.0%, compared with 27.1% in the first six months of the
prior year. Excluding these non-recurring charges, selling, general and
administrative expenses would have been 27.2% of net sales.
Store opening expenses in the six months ended July 27, 1998 were $1.7
million, representing an increase of $1.3 million, compared to $0.4 million in
the six months ended July 26, 1997. The increase is primarily attributable to
the acquisition of Joshua's Christian Stores, Inc. on June 1, 1998.
No income tax expense was recorded in the six months ended July 27, 1998 or
July 26, 1997 due to cumulative operating losses incurred since the Company's
formation in 1994 which resulted in nonrecognition of deferred income tax assets
for a portion of the net operating loss carryforwards. Management does not
expect to fully utilize existing net operating loss carryforwards in fiscal
1998.
Operating loss for the six months ended July 27, 1998 was $3.6 million
compared to an operating loss of $2.0 million in the six months ended July 26,
1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales in fiscal 1997 were $168.1 million, representing an increase of
$28.8 million, or 20.7%, compared to $139.3 million in fiscal 1996. This
increase was due to comparable store sales increases of 12.8%, the net addition
of 13 stores opened during the period and stores acquired in fiscal 1996 not yet
qualifying as comparable stores. The increase in comparable store sales is the
result of (i) increased sales generated by the Company's preferred customer
buying programs and direct marketing to customers in these programs, (ii)
relocation of existing stores and (iii) improved in-stock positions resulting
from enhancements to the Company's automatic replenishment system.
Gross profit in fiscal 1997 was $49.6 million, representing an increase of
$10.5 million, or 27.0%, compared to $39.1 million in fiscal 1996. As a percent
of net sales, gross profit improved to 29.5% in fiscal 1997, from 28.0% in
fiscal 1996. The increase in gross profit percentage is the result of reduced
store occupancy costs as a percent of net sales, fewer product returns to
vendors and management's focus on tighter control of inventory shrinkage.
Selling, general and administrative expenses in fiscal 1997 were $40.3
million, representing an increase of $5.4 million, or 15.4%, compared to $34.9
million in fiscal 1996. The increase is primarily attributable to increased
selling costs, payroll expenses and advertising costs related to the operation
of a greater number of stores. As a percent of net sales, selling, general and
administrative expenses were 24.0% in fiscal 1997, compared with 25.1% in fiscal
1996. The decrease as a percentage of net sales is attributable to increased net
sales and greater store-level productivity.
Operating income in fiscal 1997 was $5.5 million, representing an increase
of $4.6 million, compared to $0.9 million in fiscal 1996. As a percentage of net
sales, operating income improved to 3.3% in fiscal 1997, compared to 0.6% in
fiscal 1996.
No income tax expense was recorded in fiscal 1997 or 1996 due to cumulative
operating losses incurred since the Company's formation in 1994 which resulted
in non-recognition of deferred income tax assets for a portion of the net
operating loss carryforwards.
23
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in fiscal 1996 were $139.3 million, representing an increase of
$13.2 million, or 10.4%, compared to $126.1 million in fiscal 1995. This
increase was due to comparable store sales increases of 3.1%, the net addition
of 10 stores opened during the period and stores acquired in fiscal 1995 not yet
qualifying as comparable stores. The increase in comparable store sales is the
result of the relocation of existing stores and improved merchandising during
the holiday selling season.
Gross profit in fiscal 1996 was $39.1 million, representing an increase of
$3.9 million, or 11.1%, compared to $35.2 million in fiscal 1995. As a percent
of net sales, gross profit improved slightly to 28.0% in 1996, compared to 27.9%
in fiscal 1995.
Selling, general and administrative expenses in fiscal 1996 were $34.9
million, representing an increase of $0.6 million, or 1.9%, compared to $34.3
million in fiscal 1995. The increase is primarily attributable to increased
payroll expenses related to the operation of a greater number of stores,
partially offset by reduced advertising costs due to improved co-op advertising
efforts. As a percent of net sales, selling, general and administrative expenses
were 25.1% in fiscal 1996, compared with 27.2% in fiscal 1995. The decrease as a
percent of net sales is attributable to increased net sales, greater store-level
productivity, reduced advertising costs and reduced corporate overhead as a
percentage of net sales.
Operating income was $0.9 million in fiscal 1996, representing an
improvement of $3.4 million, compared to a loss of $2.5 million in fiscal 1995.
As a percentage of net sales, operating income amounted to 0.6% in fiscal 1996.
No income tax expense was recorded in fiscal 1996 or 1995 due to cumulative
operating losses incurred since the Company's formation in 1994. The Company had
a net loss of $1.8 million in fiscal 1996, compared with a net loss of $5.1
million in fiscal 1995.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations may fluctuate significantly from
period-to-period as the result of a variety of factors, including: (i) the
number, timing and mix of store openings, acquisitions and closings; (ii) the
ratio of stores opened to stores acquired; (iii) the opening of stores by the
Company or its competitors in markets where the Company has existing stores;
(iv) comparable store sales results; and (v) the ratio of mall stores to strip
shopping center format stores. The Company incurs significant store opening
expenses and new stores sometimes experience an initial period of operating
losses. As a result, the opening of a significant number of stores in a single
period may have an adverse effect on the Company's results of operations. Due to
the foregoing factors, the Company believes that period-to-period comparisons of
its operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indicators of future financial performance.
The Company's business is highly seasonal, with significantly higher net
sales and all net earnings realized during the fourth quarter of its fiscal
year, primarily as a result of the holiday selling season. Any significant
adverse trend in net sales for such period would have a material adverse effect
on the Company's results of operations for the full fiscal year. Historically,
the first and third quarters of the Company's fiscal year have been the weakest
quarters. The following table includes certain selected unaudited financial
information for the quarters indicated.
24
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
-------------------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT OPERATING AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 27,430 $ 29,560 $ 29,440 $ 52,850 $ 32,438 $ 35,270 $ 35,413
Cost of products sold, including
store occupancy costs......... 20,003 21,454 21,604 37,161 23,940 25,598 25,762
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.................... 7,427 8,106 7,836 15,689 8,498 9,672 9,651
Operating expenses:
Selling, general and
administrative expenses..... 7,997 8,334 9,056 9,536 9,050 9,313 9,601
Depreciation and
amortization................ 671 704 731 724 725 756 800
Store opening expenses........ 124 139 97 54 152 201 216
----------- ----------- ----------- ----------- ----------- ----------- -----------
8,792 9,177 9,884 10,314 9,927 10,270 10,617
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)......... (1,365) (1,071) (2,048) 5,375 (1,429) (598) (966)
Interest expense, net........... 686 701 712 636 725 713 777
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (2,051) (1,772) (2,760) 4,739 (2,154) (1,311) (1,743)
Income tax provision............ -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)............. $ (2,051) $ (1,772) $ (2,760) $ 4,739 $ (2,154) $ (1,311) $ (1,743)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
SELECTED OPERATING DATA:
Number of stores at end of
period........................ 180 182 183 184 187 192 197
Comparable store net sales
increase (decrease)........... (0.3)% (0.6)% 6.3% 5.2% 12.4% 12.6% 12.8%
AS A PERCENTAGE OF NET SALES:
Gross profit.................... 27.1% 27.4% 26.6% 29.7% 26.2% 27.4% 27.3%
Selling, general and
administrative expenses....... 29.2 28.2 30.8 18.0 27.9 26.4 27.1
Operating income (loss)......... (5.0) (3.6) (7.0) 10.2 (4.4) (1.7) (2.7)
Net earnings (loss)............. (7.5) (6.0) (9.4) 9.0 (6.6) (3.7) (4.9)
SEASONALITY:
Net sales....................... 19.7% 21.2% 21.1% 38.0% 19.3% 21.0% 21.1%
Gross profit.................... 19.0 20.7 20.1 40.2 17.1 19.5 19.5
<CAPTION>
FISCAL 1998
------------------------
FOURTH FIRST SECOND
QUARTER QUARTER QUARTER
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 64,942 $ 38,257 $ 46,506
Cost of products sold, including
store occupancy costs......... 43,173 27,516 33,712
----------- ----------- -----------
Gross profit.................... 21,769 10,741 12,794
Operating expenses:
Selling, general and
administrative expenses..... 12,320 10,643 13,080
Depreciation and
amortization................ 799 770 924
Store opening expenses........ 170 356 1,383
----------- ----------- -----------
13,289 11,769 15,387
----------- ----------- -----------
Operating income (loss)......... 8,480 (1,028) (2,593)
Interest expense, net........... 579 647 842
----------- ----------- -----------
Income (loss) before income
taxes......................... 7,901 (1,675) (3,435)
Income tax provision............ -- -- --
----------- ----------- -----------
Net earnings (loss)............. $ 7,901 $ (1,675) $ (3,435)
----------- ----------- -----------
----------- ----------- -----------
SELECTED OPERATING DATA:
Number of stores at end of
period........................ 197 211 276
Comparable store net sales
increase (decrease)........... 13.2% 8.2% 8.1%
AS A PERCENTAGE OF NET SALES:
Gross profit.................... 33.5% 28.1% 27.5%
Selling, general and
administrative expenses....... 19.0 27.8 28.1
Operating income (loss)......... 13.1 (2.7) (5.6)
Net earnings (loss)............. 12.2 (4.4) (7.4)
SEASONALITY:
Net sales....................... 38.6% n/a n/a
Gross profit.................... 43.9 n/a n/a
</TABLE>
A variety of factors affect the Company's comparable store sales results,
including, among others, the timing and frequency of store relocations, the
relative proportion of new stores to mature stores, the opening of stores in
existing markets by the Company or its competitors and the timing of promotional
events and new product releases, as well as general economic conditions. Past
increases in comparable store sales may not be indicative of future operating
performance. There can be no assurance that comparable store sales for any
particular period will not decrease in the future. See "Risk Factors--
Seasonality and Quarterly Fluctuations."
LIQUIDITY AND CAPITAL RESOURCES
Family has historically funded its growth through a combination of funds
generated from operations and its bank credit facilities. Additionally, the
Company relies on credit arrangements with vendors for purchases of inventory.
These arrangements generally provide for terms requiring payment within 90 days
of receipt of ordered merchandise, with special extended payment terms often
granted for new releases and new store or acquisition store inventory purchases.
Cash has been used primarily for financing store openings and acquisitions.
Net cash provided by operating activities was $3.3 million, $6.4 million and
$11.5 million in fiscal 1995, 1996, and 1997, respectively. For the first six
months of fiscal 1998, cash used by operating activities was $4.6 million,
compared to $2.3 million in the first six months of the prior year due to
additional working capital requirements.
25
<PAGE>
Net earnings improved from a loss of $5.1 million in fiscal 1995, to a loss
of $1.8 million in fiscal 1996 and to income of $2.7 million in fiscal 1997,
contributing to the improvement in cash provided by operating activities.
Another significant influence on cash provided from operating activities was a
$5.4 million increase in accounts payable in fiscal 1997, a $1.0 million
decrease in fiscal 1996 and a $7.8 million increase in fiscal 1995. Other
operating liabilities increased by $1.8 million during fiscal 1997, $0.1 million
in fiscal 1996 and $0.6 million in fiscal 1995. A portion of the increase in
accounts payable and other operating liabilities resulted from the acquisition
of 16 stores, 11 stores, and 19 stores during fiscal 1997, 1996, and 1995,
respectively.
Acquisitions have historically been structured as asset purchases. Such
investments, primarily for inventory, store fixtures and goodwill, totaled $4.3
million in fiscal 1997, $4.5 million in fiscal 1996, and $4.8 million in fiscal
1995. Investments in fixed assets as part of Family's program to remodel or
relocate stores as leases expire, totaled $2.1 million in fiscal 1997, $1.5
million in fiscal 1996, and $2.4 million in fiscal 1995. The Company believes
that its remodel and relocation strategy has contributed to the improvement in
comparable store sales.
Cash used by financing activities totaled $1.1 million in fiscal 1997 and
$1.6 million in fiscal 1996, while financing activities provided cash of $5.4
million in fiscal 1995. Financing activities in fiscal 1997 included the
issuance of 186,381 shares of Common Stock, resulting in net proceeds to the
Company of $2.5 million. During fiscal 1997, the Company made quarterly payments
on its term note payable to a bank totaling $2.0 million, reducing the amount
outstanding on the note to $10.0 million at January 25, 1998. Other financing
activities included increased borrowing on the Company's revolving credit
facility of $5.3 million in fiscal 1995 and net reductions of $1.7 million in
fiscal 1996 and $1.6 million in fiscal 1997. The Company's borrowing needs
fluctuate seasonally, reaching their peak around October. In the Company's two
most recent fiscal years, approximately 38% of its net sales occurred in the
fourth quarter.
On July 17, 1998, the Company entered into the Amended and Restated Loan
Agreement, which includes: (i) a $22.0 million revolving credit facility with
interest payable quarterly at the Base Rate plus 0.50% or LIBOR plus 3.25% and a
final maturity of May 31, 2004, subject to one-year extensions as agreed upon by
the parties; (ii) a $9.5 million term note with interest payable quarterly at
the Base Rate plus 1.00%, and quarterly principal payments totaling $0.5 million
in fiscal 1999, $1.0 million in fiscal 2000 and $2.67 million in each of fiscal
2001, 2002 and 2003; and (iii) a $5.0 million term note with interest payable
quarterly at the Base Rate plus 2.00% and a final maturity of May 31, 2004. Upon
the closing of the Offering and the Company's pro forma compliance with all loan
covenants, the revolving credit facility will automatically increase to $25.0
million and the interest rate will be reduced to the Base Rate or LIBOR plus
2.75%.
The Amended and Restated Loan Agreement is collateralized by substantially
all the Company's assets and requires the Company to maintain certain financial
ratios and minimum levels of working capital and tangible net worth to repay the
term notes referred to above and to draw on the Revolving Line. Following the
Offering, the Company will have approximately $ million of available
borrowing capacity, subject to certain covenants and other restrictions
applicable to the Revolving Line (including a borrowing base restriction equal
to 75% of eligible inventory).
The Company anticipates that it will open five additional stores at a
projected cost of $0.7 million and acquire nine additional stores for
approximately $3.0 million during the second half of fiscal 1998. The Company
also anticipates acquiring up to 45 stores in fiscal 1999 at a projected cost of
approximately $10.0 million and opening up to eight new stores at a projected
cost of approximately $1.0 million to $2.0 million. Since 1995, the Company's
cash requirements to acquire a store, including inventory net of payables,
leasehold improvements, fixtures, goodwill and remodeling have averaged
approximately $200,000, excluding store opening expenses. Store opening expenses
are approximately $26,000 per store and are expensed when incurred. The amounts
and timing of such expenditures will depend upon the timing of these
acquisitions and other factors, including the location of the store and whether
it is in a new
26
<PAGE>
or existing market for the Company. There can be no assurance that actual
capital expenditures will not exceed anticipated levels.
The Company believes that the net proceeds of the Offering, together with
cash generated from operations and funds available under the Amended and
Restated Loan Agreement, will be sufficient to satisfy its cash requirements at
least through fiscal 1999.
EFFECTS OF INFLATION
The Company's management does not believe inflation has had a material
impact on its operating results or financial position for the periods presented.
EFFECTS OF YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date field. Beginning in the year 2000,
these date fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, over the
next two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
The Company purchases third-party hardware and software products and
modifies such software internally, as appropriate. The Company's software is
provided by two primary vendors and is utilized for merchandise management,
financial recordkeeping and management, store systems (P.O.S.) and human
resources and payroll purposes. Currently, the Company does not purchase any new
software or hardware unless it is certified to be Year 2000 compliant.
The Company is relying upon the third-party certification of its primary
software vendors that they are Year 2000 compliant and is in the process of
installing updates to such systems in order to be Year 2000 compliant. Such
installation with respect to the Company's primary systems is anticipated to be
complete by early April 1999 and with respect to all systems is anticipated to
be complete by July 1999. In addition to the testing performed by such vendors
and the third parties certifying their systems, upon installation of updates,
the Company and Andersen, its information systems consultant, will conduct
testing and verification procedures. Thus, the Company expects that all of its
computer systems will be Year 2000 compliant before the end of 1999.
In addition to assessing its own systems, the Company is conducting an
external survey of its vendors and suppliers to determine their vulnerability to
Year 2000 problems and any potential impact on the Company. In particular, the
Company may experience problems to the extent that merchandise vendors are
unable to process orders or distribute merchandise to the Company's stores if
such vendors are not Year 2000 compliant. In the event the Company's internal
computer systems or the computer systems of its third-party vendors are not Year
2000 compliant, such non-compliance could have a material adverse effect on the
business, results of operation and financial condition of the Company.
The Company has utilized internally available personnel to address the Year
2000 issue. The Company believes that the resources devoted to this effort have
not had a significant impact on other information systems initiatives which
would be considered critical to the Company's business. The Company does not
anticipate that future costs to address the Year 2000 issue will be material,
although the Company's evaluation of the Year 2000 problem is not yet complete.
The Company is evaluating any potential hardware costs necessary to become Year
2000 compliant. Due to the Company's strategy of utilizing only commercial,
state-of-the-market computer products, the Company believes it has successfully
minimized Year 2000 costs.
27
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
"Comprehensive Income" which is the total of net income and all other non-owner
changes in shareholders' equity and its components. The Company adopted the
standard in the first quarter of fiscal 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, which supersedes SFAS Nos.
14, 18, 24 and 30, establishes new standards for segment reporting in which
reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. The Company will adopt the standard in fiscal 1998 and does not
expect the new standard to have a significant effect on previously reported
information.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which provides a consistent standard
for recognition and measurement of derivatives and hedging activities. The
Company is in the process of evaluating SFAS No. 133 and its impact and plans to
adopt the standard in fiscal 2000.
28
<PAGE>
BUSINESS
INTRODUCTION
Family Christian Stores is the largest retailer in the United States
dedicated solely to Christian-related products. The Company, as the
category-dominant retailer of Christian books and Bibles, gifts and cards,
music, children's merchandise and church supplies, seeks to fulfill the growing
demand for products that address Christian and family values. The Company's net
sales increased from $126.1 million in fiscal 1995 to $168.1 million in fiscal
1997, representing a compound annual growth rate of 15.4%. Operating income
increased from a loss of $2.5 million to income of $5.5 million over the same
period. The growth has been driven by comparable store sales, acquisitions and
new store openings. As of July 31, 1998, the Company operated 276 stores in 36
states, having grown from 148 stores in 28 states which the Company acquired
from The Zondervan Corporation on October 31, 1994.
Family is the primary consolidator in the Christian retail industry, which
is highly fragmented and characterized by numerous small independent operators.
On June 1, 1998, the Company completed the acquisition of Joshua's Christian
Stores, a leading retailer of Christian-related products with 56 stores. The
Joshua's acquisition expands Family's presence in both existing and new markets
and provides the opportunity to capture greater operating efficiencies across
its expanded store base. On a pro forma basis, after giving effect to the
acquisition of Joshua's, the Company had net sales of $197.8 million in fiscal
1997. The Company believes that numerous opportunities exist to continue making
acquisitions and opening new stores and plans to continue its strategy of
clustering stores in both existing and new markets.
The Company differentiates itself from other retailers of Christian-related
products by offering products to consumers of all ages and denominations in the
environment of a focused specialty retailer with value pricing. The Company's
mission is to offer an extensive selection of high-quality, Christian-related
products of exceptional value in a warm, family atmosphere. In addition, Family
seeks to reinforce Christian and family values and impact the lives of its
customers by offering meaningful and inspirational products. The Company's core
customers are individuals who characterize themselves as active Christians, as
well as others who are searching for meaning in their lives. The Company
believes that its ability to deliver an extensive product assortment to a broad
range of consumers provides it with a competitive advantage in the Christian
retail industry.
THE CHRISTIAN RETAIL INDUSTRY
According to a recent news report, the evangelical Christian market is
composed of approximately 88 million individuals. The growing interest in
Christian and family values in the United States is evidenced by the greater
cross-over appeal and mainstream acceptance of media and entertainment that
focus on such ideals and principles. A recent book purchasing study indicates
that the number of religious books purchased by Americans increased
approximately 52% from 1993 to 1997. Christian artists such as Amy Grant, Jars
of Clay and Michael W. Smith have become increasingly popular as their music is
embraced by audiences outside the traditional Christian market. On television, a
larger number of programs, such as "Touched By An Angel," "Promised Land" and
"7th Heaven," are focusing on family values and spiritual themes. According to
Nielsen Media Research, "Touched By An Angel" was ranked in the top ten among
prime-time programs for both the 1996-1997 and 1997-1998 television seasons. In
addition, more channel space is being devoted to programming that emphasizes
Christian and family values. Existing pay television channels, including the
Trinity Broadcasting Network and the Family Channel, were recently joined by PAX
NET, the nation's seventh broadcast network, launched in over 70% of U.S.
television households on August 31, 1998. PAX NET features existing and original
programs, as well as feature films, that emphasize family, faith and
spirituality.
Despite the growth in the Christian retail market, the industry remains
highly fragmented. The Christian retail industry today is reminiscent of other
consolidating retail sectors where disciplined national chains developed higher
standards of retailing and then pursued economies of scale through a
29
<PAGE>
nationwide store base. CBA, an international trade association of Christian
product suppliers and retailers, estimates that the industry's annual sales are
approximately $3.0 billion. CBA estimates that the total number of retail stores
dedicated to Christian-related products is between 4,000 and 5,000. The small
independent retailers that represent a large portion of the Christian retail
industry face significant challenges in competing with mass retailers and
national and regional chains. Their smaller size and sales volume limit, among
other things, their depth and breadth of product offerings, purchasing and co-op
advertising economies, marketing and customer retention programs and ability to
invest in sophisticated information systems. Increased demand for family and
Christian-related products and the fragmented state of the industry have also
resulted in participation by mass merchandisers, most of which currently limit
their product offerings to books and music. While these mass merchants present
additional competition, the Company believes they do not generally offer the
breadth or depth of product, maintain the standards for customer service and
product knowledge or offer the inspirational store environment that Family
offers.
BUSINESS STRATEGY
Family's principal objective is to enhance its position as the leading
provider of Christian-related products in the United States. The key elements of
the Company's business strategy are as follows:
- CATEGORY DOMINANCE. The Company has grown from a traditional Christian
bookstore to its current position as the nation's largest retailer
dedicated to Christian-related products. Family seeks to offer both breadth
and depth in each of its focused product assortments, including books and
Bibles, gifts and cards, music, children's merchandise and church supplies.
The Company currently offers approximately 35,000 stock-keeping units
("SKUs") in each of its stores. In order to further enhance its category
dominance, the Company created its own private label publishing imprint,
Family Christian Press, and is continuing to develop other proprietary
products to augment its product assortment.
- DIVERSE CHRISTIAN CUSTOMER BASE. In order to address the broad-based
growth and interest in Christian and family values in the United States,
Family seeks to offer products that serve the needs of all Christian
denominations and attract customers of all age groups. The Company
continually works with its vendors to identify new product offerings and
evaluates its existing products and services in order to meet the varied
needs of its core customers and attract new customers.
- VALUE LEADER. The Company's size and leadership position in Christian
retailing allow it to leverage operating efficiencies, thereby providing
value to its customers through an extensive selection of high-quality
merchandise, low prices and a warm and inspirational environment. Family is
continually seeking opportunities to offer additional value to its
customers through efforts such as: special purchases; the Company's
proprietary publishing imprint, Family Christian Press; and its proprietary
product programs. See "Merchandising." In addition, the Company's preferred
customer buying programs, Family Perks and Pastors' Perks (collectively,
"Perks"), encourage customer loyalty and provide value for members through
additional price savings.
- BRAND NAME IDENTITY. The Company seeks to develop widespread recognition
of its Family Christian brand name, both within the Christian retail
industry and with mainstream consumers. The Company believes its store
clustering strategy enables it to maximize the impact of its marketing
efforts by supporting a targeted media advertising campaign to build brand
identity. Due to the highly fragmented nature of the Christian retail
industry, the Company believes that many of its competitors lack the
marketing power to differentiate their stores, products and services. In
addition, the Company's convenient locations and visible exterior signage
serve to provide increased name recognition within a community. The
Company's goal is to convert brand identity into brand preference, an
effort which is supported by Family Christian Press and the Company's
proprietary product programs.
30
<PAGE>
- GUIDING PRINCIPLES. Led by an experienced management team with a shared
Christian faith, Family emphasizes Christian and family values in all
aspects of its business, including employee and vendor relations and
customer service, while maintaining its commitment to being the nation's
leading retailer of Christian merchandise. Family seeks to treat its
employees with integrity, care and respect and promotes similar treatment
of customers and business partners. The Company's employees are trained to
provide customer-oriented service and to meet customers' needs. In
addition, the Company has instituted a vendor partnership program to
develop cooperative relationships with its key vendors.
GROWTH STRATEGY
Family's growth strategy includes increasing sales and profitability in its
existing stores, expanding its store base through focused acquisitions and new
store openings as well as utilizing additional distribution channels.
- INCREASE COMPARABLE STORE SALES AND PROFITABILITY. The Company believes
that execution of its retail strategy, as well as increased interest in
Christian and family values in the United States, will generate growth in
existing store sales. Family has implemented several initiatives to
increase comparable store sales, including relocation of certain mall
stores to strip centers or freestanding locations, scheduled store
remodeling, use of preferred customer buying programs, improved
merchandising and expanded advertising efforts, including national
television campaigns. In addition, through the integration of additional
stores, the Company intends to increase profitability by realizing
operating efficiencies. Such efficiencies would include marketing,
centralized management, information systems and volume purchasing.
- EXPAND STORE BASE. Family's strategy for developing additional store
locations has two components: (i) acquiring existing Christian stores and
(ii) opening new stores. The Company expects that over the next five years
it will expand its store base primarily through acquisitions. Given the
fragmented nature of the industry and the growing trend towards
consolidation, the Company believes that many small, independent stores, as
well as certain regional chains, will be available for acquisition. The
Company's position as the primary consolidator in the industry provides
additional acquisition opportunities. In addition to acquired stores,
Family plans to open new stores, primarily in clustered markets. The
Company believes that multiple store markets will be an important component
of its future growth, increasing its ability to leverage operating costs
across its store base.
- UTILIZE ADDITIONAL DISTRIBUTION CHANNELS. The Company intends to further
increase its market share and sales by expanding its use of superstores,
college stores and the Internet. Family currently operates 15 stores which
range in size from 9,000 to 13,000 square feet and four stores which are
larger than 13,000 square feet. This larger format allows the Company to
display a broader assortment of products. As part of its effort to expand
its use of such stores, the Company intends to establish superstores to
serve as the centerpiece of a clustered market. Another growth opportunity
is the operation of college campus stores, which offer traditional college
bookstore products, such as textbooks, supplies and college logo apparel,
with the addition of Family's core product assortment. Family currently
operates one store on the campus of Cornerstone College in Grand Rapids,
Michigan and is evaluating possibilities for additional stores in response
to interest expressed by a number of the nation's Christian colleges.
College campus stores are expected to provide additional sales volume
during non-peak selling periods. The Company has a website
(WWW.FAMILYCHRISTIAN.COM) which offers substantially all of the Company's
advertised products for sale. Family believes its website will increase
brand awareness and generate incremental sales. The Company intends to
continue to evaluate the market potential for Internet selling.
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<PAGE>
STORE LOCATIONS
As of July 31, 1998, the Company operated 276 stores in 36 states. The
following map shows the states in which the Company operates and the number of
stores located in such states:
[MAP]
MERCHANDISING
By introducing, expanding and improving key merchandise categories, further
developing proprietary product programs and implementing standardized marketing
programs, Family is seeking to attract new customers, generate repeat business
and increase the size of the average transaction.
PRODUCT ASSORTMENT. The Company offers a broad and deep assortment of
Christian merchandise that appeals to a number of Christian denominations and
various age groups. The Company typically offers
32
<PAGE>
approximately 35,000 SKUs in its stores. The Company's extensive product
assortment includes items in the following product categories:
<TABLE>
<CAPTION>
PERCENT OF NET
SALES IN FISCAL
PRODUCT CATEGORY 1997 DESCRIPTION
- -------------------------- ------------------- ------------------------------------------------------------------
<S> <C> <C>
Books and Bibles 39.3% Written, audio and video books and Bibles
Gifts and Cards 26.8% Decorative home products; t-shirts and hats; jewelry; cards and
stationery
Music 20.5% Recorded Christian music in a variety of styles (e.g., Amy Grant,
Jars of Clay, Michael W. Smith)
Children's Merchandise 9.7% Children's books, videos, music, toys and clothing (e.g., Veggie
Tales-Registered Trademark-)
Church Supplies 3.7% Sunday school curricula and supplies; home schooling materials
</TABLE>
The Company offers a full selection of bestselling merchandise, while
emphasizing in-stock consistency of all titles basic to the assortment. Family's
commitment to its customers includes a goal to be 100% in stock on best sellers
and at least 95% in stock on the balance of basic assortments. The Company uses
an automatic reorder system to maintain in-stock positions on over 30,000 SKUs.
A recent survey of Christian bookstores consumers, which indicated that 61% of
customers choose to shop at a Christian bookstore because they have a specific
product in mind, emphasizes the importance of the Company's in-stock policies.
The Company also offers special orders on products that are not stocked on an
everyday basis.
The Company continually seeks to update its product mix. In January 1998,
the Company established its own publishing imprint, Family Christian Press, in
order to produce titles under its own name. The Company has filed an application
to register a trademark for its publishing imprint, under which the Company
publishes certain book titles. The Company does not have an exclusive right to
publish any titles published under its imprint. The ability of the Company to
identify and provide national distribution of novel merchandise with broad
consumer appeal is demonstrated by the recent retail success of products such as
WWJD-TM- (What Would Jesus Do?) products and Veggie Tales-Registered Trademark-
licensed children's products. In addition, Family has developed its own novel
products, such as its proprietary Christmas ornament. The Company believes that
items such as these will help differentiate Family from its competitors and
provide it with opportunities for higher gross profits. The Company has not,
however, obtained intellectual property protection for its proprietary products.
Revenues attributable to the sale of proprietary products, including products
that carry the Company's publishing imprint, currently account for less than 1%
of the Company's total revenues.
VALUE PRICING. The Company believes that consumers are shopping for value
and will favor retailers who can deliver value consistently. Family is committed
to providing this value through a broad assortment of high-quality products at
low prices. In addition to its size and industry leadership position, which
offer numerous operating efficiencies, a number of the Company's strategic
initiatives are designed to increase its ability to deliver value to its
customers. These initiatives include consistent availability of products, strong
customer service and cooperative vendor partnerships.
VENDOR RELATIONSHIPS. In keeping with its guiding principles, the Company
has established a formal partnership program with several of its key vendors.
This program is designed to foster cooperation between Family and its vendors in
order to improve sales, increase operating efficiencies and provide additional
value to customers. The vendor program includes quarterly meetings between
cross-functional teams to discuss areas for improvement and progress in their
implementation.
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<PAGE>
STORE ENVIRONMENT
Family seeks to provide a unique shopping experience within a comfortable
and friendly environment. The Company's store design creates a warm, family
atmosphere with visual, audio and interactive entertainment to engage the
customer. Family's stores offer a children's area, with books, toys and apparel,
that many stores use for storytelling and other children's activities. Many
stores have listening centers in their music departments which enable customers
to sample music selections of their choice. Gift departments display a variety
of decorative home products, such as framed art and figurines. The Company's
stores are well-lit with wide aisles and provide clearly marked signs to assist
shoppers in locating merchandise, and, when desired, friendly and knowledgeable
sales associates are available to assist customers. Space planning and the use
of point-of-purchase materials are designed to increase the size of the average
transaction by highlighting key selling areas and promoting browsing. The
Company attempts to offer merchandise that meets a variety of its customers'
needs and has designed its stores to attract customers of all denominations and
ages to a number of different product areas.
CULTURE AND STORE OPERATIONS
In keeping with its guiding principles, the Company seeks to emphasize
Christian and family values in all aspects of its business. Family recruits
people who understand the importance of recognizing and addressing customer
needs. The Company trains its store employees and empowers them to meet each
customer's needs with friendly service. Sales associates working more than 20
hours per week participate in an incentive program that rewards them if the
store in which they work achieves its operating profit goals for the year.
Family treats store managers as partners and rewards them with a percentage of
store operating profits when performance targets are achieved. The Company
believes that its unique culture encourages greater employee loyalty, as
evidenced by its historical average annual turnover rate among store managers of
approximately 15%.
Each Family store is managed by a full-time store manager, who works with a
district manager. District managers focus on the training and development of
store managers, as well as on store standards, merchandise presentation,
inventory positioning, human resources and local marketing initiatives.
STORE FORMAT AND SITE SELECTION
Family's stores currently average approximately 4,500 square feet, with
stores ranging in size from 1,200 square feet to as large as 32,000 square feet.
The Company's prototype store is approximately 4,500 square feet, with high
visibility signage, easy access and ample parking. The Company utilizes a
standard store layout which it adapts to individual markets in order to address
local trends and preferences.
The Company's stores are generally located in the commercial district of
densely populated residential areas. Prior to opening or acquiring a store, the
Company analyzes the local market, including: (i) demographic data, such as
education levels, average income, population density and age distribution; (ii)
lifestyle data, such as church attendance; and (iii) existing competition. When
the Company acquires a store, it remodels the store in accordance with the
Company's specifications.
The Company's research indicates that its customers are primarily
destination shoppers. As a result, Family has relocated and will continue to
relocate mall stores to nearby strip shopping centers or freestanding locations,
as leases expire or when otherwise possible. Historically, the Company's
relocated stores have resulted in reduced cost per square foot, lower common
area maintenance expenses and a more enjoyable shopping experience for the
customer.
As of July 31, 1998, the Company operated 276 stores in 180 strip shopping
centers, 67 malls and 29 freestanding locations.
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<PAGE>
STORE-LEVEL ECONOMICS
The Company's 179 stores that were in operation for all of fiscal 1997
generated average net sales of approximately $880,000 and average net sales per
gross square foot of approximately $199. These stores generated average
store-level operating cash flow (defined as store operating income before
depreciation and home office allocation and excluding changes in working
capital) of approximately $106,000, or 12.0% of average net sales. There can be
no assurance that the Company will maintain such store-level averages in the
future or that such averages will not decrease.
MARKETING AND PROMOTION
Due to its relative size and cluster strategy, the Company believes it has a
competitive advantage within its industry to conduct coordinated and systematic
advertising and marketing campaigns. These marketing campaigns include Perks
programs, catalogs, directed mailings, advertising in Christian media, in-store
promotion and sponsored Christian-oriented community and store events. Such
efforts have permitted Family to attain broad market exposure that would not be
cost-effective for a single store or small store chain. The Company receives
substantial co-op advertising reimbursement for certain forms of general
advertising from its vendors.
FAMILY AND PASTORS' PERKS PROGRAMS. The Company's Perks database allows it
to market its products directly to existing customers. The Family Perks program
rewards frequent customers with certain promotions and discounts and currently
includes over five million members. The average Family Perks customer spends $32
per visit versus the $18 average for the Company's customers as a whole. The
Pastors' Perks program offers full-time pastors an everyday 20% discount, which
allows Family to compete effectively with mail order houses. In addition, the
Company believes that pastors provide valuable word-of-mouth publicity for the
Company to the members of their congregations.
CATALOG. The Company believes that its high-quality catalogs offer an
attractive opportunity for it to market its products. Catalogs allow the Company
to illustrate the breadth and depth of its stores' product offerings and draw
consumers into Family's stores. The Company's suppliers also rely in part on the
Company's catalog to help launch major titles. The catalog is targeted to
customers in the Company's Perks database, which allows the Company to directly
promote its product assortment in an attractive format to current Family
customers.
MAILINGS. Family utilizes direct mailings to target its Perks members. The
Company's database tracks the purchases of approximately 5 million customers by
product category, which allows quick response to specific store promotional
needs and provides additional reporting capabilities. Suppliers have been very
supportive of these targeted mailings, which has resulted in incremental vendor
co-op advertising revenue.
TELEVISION AND RADIO. Christian radio has been a primary focus in the
Company's advertising efforts and the Company plans to increase its use of
television advertising. Christian radio provides the ability to reach
individuals likely to purchase Christian-related merchandise. A research study
indicated that 55% of Family Perks customers listen to Christian radio daily and
another 21% listen weekly. In markets where Christian radio is ineffective or
unavailable, a limited use of appropriate secular radio is used. Selective
television advertising, such as Family commercials during the "Dove" awards, is
used to promote the Company's name and product focus to a targeted group of
consumers.
IN-STORE PROMOTION. Promotion of its products within its stores is an
important part of Family's strategy to increase its average transaction size.
The Company attempts to capture as many impulse sales as possible through an
ongoing, aggressive point-of-purchase campaign in partnership with its key
vendors. The Company's store design encourages customers to browse through
different departments, increasing the opportunity for multiple-item purchases.
35
<PAGE>
COMMUNITY AND STORE EVENTS. Management believes that the degree to which
its stores relate to their local community serves to build customer loyalty and
encourages word-of-mouth publicity and free media coverage. Many stores have
areas dedicated to public and children's events and organize community-based
events, such as author signings, children's storytelling and live music.
PURCHASING AND DISTRIBUTION
The Company's purchasing decisions are centralized and are made by the
Company's merchandising department. The Company's buyers negotiate terms,
discounts and co-op advertising allowances for all Family's stores and decide
which products to purchase, in what quantity and for which stores. The buyers
use current inventory and sales information provided by the Company's in-store
point-of-sale computer system to make reorder decisions. Although the majority
of purchases are made by the five senior buyers in the Company's merchandising
department, individual store managers have the flexibility to influence
purchasing decisions in order to respond to local demand.
Substantially all product is shipped directly to the Company's stores from
vendors. No one vendor accounted for more than 10% of the Company's overall
merchandise purchases in fiscal 1997. In general, approximately 60% of the
Company's inventory, primarily books and recorded music, may be returned by the
Company for full credit, which substantially reduces the Company's risk of
inventory obsolescence.
MANAGEMENT INFORMATION SYSTEMS
Family utilizes integrated information systems centralized at the corporate
level for inventory and price management, sales tracking, merchandise planning
and accounting. The Company's systems have the capacity to manage a store base
in excess of 350 stores and can be easily expanded to manage a store base of
approximately 1,000 stores, using the current AS/400 and software. The Company
uses an automatic reorder system to maintain in-stock positions on all reorder
items. Currently, Family has over 30,000 items on automatic replenishment. The
system provides management with the information needed to determine the proper
timing and quantity of reorders. The Company's information systems are currently
managed by on-site staff members of Andersen, supported by dedicated systems
personnel of Family.
The Company's EDI capabilities include the transmission of purchase orders
directly to the Company's key vendors. Management believes the Company's EDI
efforts with vendors will continue to grow in the future as retailers and
suppliers focus on further increasing operating efficiencies. The Company plans
to require its suppliers to provide electronic invoicing by the first quarter of
fiscal 1999.
COMPETITION
Family's competition consists primarily of other retailers of
Christian-related products, primarily small independents and franchises, as well
as book and music retailers that have expanded their offerings to include
Christian merchandise. Many of the independents belong to a buying/marketing
group. The largest of these, Parable, is believed to presently consist of
approximately 330 stores.
Over the last five years, many independent Christian retailers have
continued to increase the size of their store base and improve store appearance
through expansion and remodeling, offering a more up-to-date appearance and a
better shopping experience. Many of these stores have increased their marketing
efforts by utilizing extensive mailing lists and by participating in marketing
groups and appear to be growing stronger. Consolidation trends in the industry
have put pressure on the ability of independent stores, many of which are
undercapitalized, to compete with larger, better capitalized operators. The
total number of independent outlets remains relatively unchanged. The Company
also faces competition from Christian retail chains such as Lemstone, Inc. (75
stores), The Baptist Bookstores (75 stores), Berean Christian Stores (21 stores)
and Mardel, Inc. (11 stores).
36
<PAGE>
The Company also experiences competition in books and music from general
retailers. Due to the growing interest in Christian-related products, large
retailers such as Barnes & Noble, Media Play, Borders and Books-A-Million are
expanding their selection of Christian books and music while also increasing the
size and number of their stores. In addition, discount store chains such as
Target, Wal-Mart and Best Buy have become more competitive in music and video
selection and pricing. Family is responding to this competition with its
dominant product selection and low prices on new releases. The Company expects
increased competition from Internet retailers, such as Amazon.com, direct
marketers and book and music clubs in the future.
PROPERTIES
At July 31, 1998, the Company operated 276 stores in 36 states. Family
operates stores in strip shopping centers, malls and freestanding locations. All
of the Company's stores are leased, generally with terms ranging from five to
ten years. The leases require the Company to pay a fixed minimum rental fee
and/or a rental fee based on a percentage of net sales together with certain
customary costs (such as property taxes, common area maintenance and insurance).
The Company's corporate offices are located in Grand Rapids, Michigan in a
building shared with Zondervan. The space occupied by Family comprises 51,381
square feet for office space and 9,831 square feet for warehouse space. The
space is subleased from Zondervan for a term expiring on December 31, 2001, the
expiration date of a lease Zondervan has with the property owner. All of the
leases are accounted for as operating leases. See Note E of Notes to Financial
Statements of Family Christian Stores, Inc.
EMPLOYEES
As of July 27, 1998, Family employed 725 full-time individuals and 2,802
part-time individuals. Approximately 3,345 of these employees are engaged at the
store-level and 182 are devoted to administrative and corporate support
activities. The Company believes that it maintains good relations with its
employees.
LEGAL PROCEEDINGS
From time-to-time, the Company is involved in legal proceedings that the
Company considers to be in the normal course of its business, none of which has
resulted in any material losses to date. The Company is not currently involved
in any material legal proceedings.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Leslie E. Dietzman........................ 55 President, Chief Executive Officer and Director
Craig G. Wassenaar........................ 42 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
J. Hal Bailey............................. 41 Executive Vice President, Operations and Human Resources
William S. Nielsen........................ 40 Vice President, Merchandising and Marketing
Richard M. Butler......................... 54 Vice President, Administration
Craig B. Klamer........................... 42 Vice President, Merchandise Administration
George Craig(1)........................... 58 Chairman of the Board
Peter A. Carnwath(1)...................... 51 Director
Scott D. Steele(2)........................ 34 Director
Neil Topham(2)............................ 49 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
LESLIE E. DIETZMAN has served as the Company's President, Chief Executive
Officer and as a Director since the Company's inception in October 1994. From
September 1992 to October 1994, Mr. Dietzman was the President of Family
Bookstores, at that time a division of Zondervan, and was a Vice President of
Zondervan. Mr. Dietzman has over 30 years of experience in retailing with
various organizations, including The Wal-Mart Stores, Inc., Ames Department
Stores, Mervyns and J.L. Hudson Department Stores in various senior management
positions.
CRAIG G. WASSENAAR has served as the Company's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary since June 1997. From January 1996 to
June 1997, Mr. Wassenaar was Vice President and Chief Financial Officer of
Ameriwood Industries International Corporation, a manufacturer of home and
office furnishing products, responsible for finance, accounting, treasury, risk
management, budgeting and information systems. From October 1994 to October
1995, Mr. Wassenaar was Vice President of Finance--Baby Care Division of Gerber
Products ("Gerber"), a manufacturer of infant care products. From May 1992 to
October 1994, Mr. Wassenaar served as Corporate Comptroller of Gerber.
J. HAL BAILEY has served as Executive Vice President, Operations and Human
Resources since January 1, 1997. Prior to 1997, Mr. Butler served the Family
Bookstores division of Zondervan in various capacities, including as Executive
Vice President, Merchandise and Marketing from July 1995 to January 1997, as
Vice President, Human Resources from December 1994 to July 1995 and as Corporate
Director of Human Resources from February 1992 to December 1994.
WILLIAM S. NIELSEN has served as the Company's Vice President, Merchandise
and Marketing since April 1997. Prior to that time, Mr. Nielsen served the
Company as Director of Marketing from August 1995 to April 1997 and as Senior
Buyer--Books from September 1994 to August 1995. From August 1989 to September
1994, Mr. Nielsen was Merchandise Manager of The Baptist Bookstores, responsible
for merchandise and marketing planning.
RICHARD M. BUTLER has served as the Company's Vice President, Administration
since October 1994. Prior to that time, Mr. Butler served the Family Bookstores
Division of Zondervan in various capacities, including as Business Manager from
May 1989 to October 1994, as Controller from March 1986 to May 1989 and as
Assistant Controller from February 1985 to March 1986.
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<PAGE>
CRAIG B. KLAMER has served as the Company's Vice President, Merchandise
Administration since April 1997. Prior to that time, Mr. Klamer served the
Company and the Family Bookstores Division of Zondervan in various capacities,
including as Vice President of Human Resources and Strategic Planning from July
1995 to April 1997, as Vice President of Merchandise and Marketing from June
1992 to July 1995 and as Vice President of Purchasing and Merchandising from
February 1988 to June 1992.
GEORGE CRAIG has served as the Chairman of the Board of Directors of the
Company since November 1994. From April 1988 to March 1996, Mr. Craig was
President and Chief Executive Officer of
HarperCollins Publishers, Inc., a subsidiary of News Corporation.
PETER A. CARNWATH has served as a Director of the Company since May 1997.
Since January 1988, Mr. Carnwath has been a Managing Director of Electra Fleming
Inc., an investor in private companies.
SCOTT D. STEELE has served as a Director of the Company since November 1994.
Since May 1993, Mr. Steele has been employed by Electra Fleming, Inc., an
investor in private companies, currently serving as a principal of such entity.
NEIL TOPHAM has served as a Director of the Company since November 1994.
Since April 1997, Mr. Topham has been Chief Financial Officer of Newstar Media
Inc., an independent television producer and leading independent publisher of
audio books. From April 1996 to April 1997, Mr. Topham served as a consultant,
providing business advisory services in the publishing and retail industries.
Mr. Topham was Chief Financial Officer of HarperCollins Publishers, Inc. from
August 1987 to March 1996.
In July 1998, the Company's Board of Directors approved, subject to
shareholder approval, the Company's Restated Articles of Incorporation, which
provide for, among other things, a classified Board of Directors. In accordance
with the terms of the Restated Articles of Incorporation, the terms of office of
the Board of Directors will be divided into three classes, as nearly equal in
number as possible. Class I directors have terms that expire at the annual
meeting of shareholders to be held in 1999 and will initially be . The
Class II directors have terms that expire at the annual meeting of shareholders
to be held in 2000 and will initially be and a director to be designated
by the Electra Entities (as described below). Class III directors have terms
that expire at the annual meeting of shareholders to be held in 2001 and will
initially be . At each annual meeting of shareholders beginning with the
1999 annual meeting, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election and until their successors have been
duly elected. Pursuant to an agreement to be entered into in connection with the
Offering (the "Electra Agreement"), among the Company, Electra Investment Trust
P.L.C. and Electra Associates, Inc. (collectively the "Electra Entities"), the
Company will agree to nominate to the Board of Directors one director designated
by the Electra Entities for so long as the Electra Entities collectively
beneficially own greater than 5% of the outstanding Common Stock. See
"Description of Capital Stock--Shareholders' Agreement."
The Restated Articles of Incorporation also provide for a minimum of five
directors and a maximum of nine directors, and such limits may be revised only
with the approval of 80% of the entire Board of Directors. In connection with
the Offering, the Board of Directors intends to elect at least two independent
directors. The identity of the independent directors has not yet been determined
and may not be determined until after completion of the Offering.
There is no family relationship between any of the directors or between any
director and any executive officer of the Company. For information regarding
certain business relationships between the Company and certain of its directors
and executive officers, see "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has an Audit Committee and a Compensation
Committee, the principal functions of which are described below. The Audit
Committee, among other things, makes
39
<PAGE>
recommendations to the Board regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by the
Company's independent certified public accountants and reviews the Company's
accounting practices and controls. The Audit Committee currently consists of Mr.
Topham and Mr. Steele. The Compensation Committee administers the Company's
compensation and benefit programs and makes recommendations to the Board
concerning salaries and incentive compensation for employees and consultants of
the Company. The Compensation Committee also reviews and establishes the
compensation structure for the Company's officers and directors, including
salary rates, participation in incentive compensation and benefit programs,
401(k) plans, stock purchase plans and other forms of compensation, including
stock options. The Compensation Committee currently consists of Mr. Craig and
Mr. Carnwath. In connection with the Offering and the election of independent
directors, the Audit Committee and the Compensation Committee will be
reconstituted to include the new independent directors.
DIRECTOR COMPENSATION
Directors who are also employees of the Company are not separately
compensated for serving on the Board of Directors. Non-employee directors
receive an annual retainer of $ per year. Messrs. Craig and Topham also each
receive compensation of $75,000 per year in payment for strategic planning,
financial and investment advisory services rendered to the Company by them in
their capacities as directors. See "Certain Transactions." In addition, each
non-employee director receives $ for attendance at each meeting of the Board
of Directors. The Company reimburses its non-employee directors for the
reasonable out-of-pocket expenses incurred in connection with attending meetings
of the Board of Directors and its committees. [Pursuant to the 1998 Stock Plan
(as defined), each non-employee director will be granted an option on the date
of each annual meeting of shareholders to purchase shares of Common
Stock. The per share exercise price of options granted to directors under the
1998 Stock Plan will be 100% of the fair market value of the Common Stock on the
date each option is granted.] See "--Stock Option and Restricted Stock Plan of
1998."
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Restated Articles of Incorporation and Bylaws provide that directors and
officers of the Company shall be indemnified against liabilities arising from
their service as directors and officers of the Company to the fullest extent
permitted by the Michigan Business Corporation Act ("MBCA"). Additionally, the
Company will enter into indemnification agreements with each of its executive
officers and directors to reimburse them for certain liabilities incurred in
connection with the performance of their fiduciary duties. The MBCA provides
that a director of a corporation will not be personally liable for monetary
damages to the corporation or its shareholders for breach of fiduciary duty as a
director, except for liability for (i) the amount of a financial benefit
received by a director to which he or she is not entitled; (ii) intentional
infliction of harm to the corporation or its shareholders; (iii) a violation of
Section 551 of the MBCA (relating to unlawful declaration of dividends and
distributions); or (iv) an intentional criminal act. The MBCA further provides
that a corporation may not limit a director's liability for violation of, or
otherwise relieve its directors from the necessity of complying with, federal or
state securities laws, or affect the availability of non-monetary remedies such
as injunctive relief or rescission.
The provisions are intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, shareholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to shareholders in any particular
situation, shareholders may not have an effective remedy against a director in
connection with such conduct.
40
<PAGE>
As permitted by the MBCA, the Company's Bylaws provide that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to (i) any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise and (ii) any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses (including attorneys' fees), judgments,
fines and amount paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such conduct was unlawful.
However, no claim for indemnification by any person pursuant to (ii) shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Company. The Company has purchased and
maintains insurance on behalf of its directors and officers against any
liability asserted against them in any such capacity, or arising out of their
status as such, whether or not the Company would have the power to indemnify
such directors and officers against such liabilities under the Bylaws.
There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or person controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. In the last completed fiscal year, matters with respect to the
compensation of executive officers of the Company were determined by the full
Board of Directors.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal year ended
January 25, 1998 for the Company's Chief Executive Officer and each of its four
most highly compensated executive officers whose annual salary and bonus
exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)
- -------------------------------------------------------- ---------- --------- ------------- ----------------
<S> <C> <C> <C> <C>
Leslie E. Dietzman,
President and Chief Executive Officer.................. $ 262,053 $ 83,030 $ 23,309(1)
Craig G. Wassenaar
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (2)............................ 95,497 24,696 (3) 1,834(4)
J. Hal Bailey
Executive Vice President, Operations
and Human Resources.................................... 114,066 30,337 -- 9,004(5)
Richard M. Butler
Vice President, Administration......................... 97,189 25,814 -- 12,608(6)
Craig B. Klamer
Vice President, Merchandise Administration............. 93,028 24,749 -- 7,374(7)
</TABLE>
- ------------------------------
(1) Consists of $14,675 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Dietzman and $8,634 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Dietzman has been allocated an
interest in the cash surrender value under such policy.
(2) Mr. Wassenaar commenced employment with the Company on June 23, 1997. The
amounts reported for Mr. Wassenaar are for services rendered to the Company
from June 23, 1997, until January 25, 1998.
(3) Mr. Wassenaar was granted an option to purchase shares of Common Stock
with an exercise price of $.01 per share at the commencement of his
employment with the Company. Such option vests at the rate of 20% per year
on each of the first five anniversaries of the date of his employment.
(4) Consists of premiums paid by the Company for life insurance, a portion of
which was paid with respect to term life insurance and a portion of which
Mr. Wassenaar has been allocated an interest in the cash surrender value
under such policy.
(5) Consists of $7,496 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Bailey and $1,508 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Bailey has been allocated an
interest in the cash surrender value under such policy.
(6) Consists of $10,772 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Butler and $1,836 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Butler has been allocated an
interest in the cash surrender value under such policy.
(7) Consists of $5,582 in contributions made by the Company to its 401(k)
Savings Plan on behalf of Mr. Klamer and $1,792 in premiums paid by the
Company for life insurance, a portion of which was paid with respect to term
life insurance and a portion of which Mr. Klamer has been allocated an
interest in the cash surrender value under such policy.
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<PAGE>
The following tables set forth information with respect to stock options
granted to and exercised by the Named Executive Officers during the fiscal year
ended January 25, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR GRANT DATE
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE ($)(1)
- ------------------------------------ ------------------ --------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Leslie E. Dietzman(2)............... 14.3% $ 1/22/03 $
Craig G. Wassenaar(3)............... 85.7 None
</TABLE>
- ------------------------------
(1) Based on the Black-Scholes option pricing model expressed as a ratio of
times the number of shares. The actual value, if any, an option holder may
realize will depend on the excess of the stock price over the exercise price
on the date the option is exercised, so that there is no assurance the value
realized by an option holder will be at or near the value estimated by the
Black-Scholes model. No adjustments were made for the non-transferability of
the options or to reflect any risk of forfeiture before vesting. The
Company's use of the Black-Scholes model to indicate the present value of
each grant is not an endorsement of this valuation method.
(2) The per share exercise price of the option is equal to the market value of
Common Stock on the date each option was granted. The outstanding option has
a five year term.
(3) The option granted to Mr. Wassenaar vests at the rate of 20% per year on
each of the first five anniversaries of the date of his employment and has
no expiration date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END(#) FISCAL YEAR END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Leslie E. Dietzman........................................ -- $ $
Craig G. Wassenaar........................................ --
</TABLE>
- ------------------------------
(1) Based on the fair market value as of January 25, 1998 ($ per share),
minus the per share exercise price multiplied by the number of shares.
EMPLOYMENT AGREEMENTS
In connection with the closing of the Offering, the Company will enter into
employment agreements with each of Messrs. Dietzman, Wassenaar, Bailey, Butler
and Klamer. Mr. Dietzman's employment agreement will provide for a term of two
years and each of the other executives' agreements will provide for a term of
one year, each with automatic one-year extensions until either the executive or
the Company notifies the other of its desire not to extend the agreement.
Pursuant to their respective employment agreements, Messrs. Dietzman, Wassenaar,
Bailey, Butler and Klamer will be paid base salaries of $ , $ ,
$ , $ and $ per year, respectively. In addition, such agreements
will provide for discretionary annual bonuses as determined by the Board of
Directors. The employment agreements will also provide for standard employee
benefits, including participation in the Company's welfare and benefit programs.
Each of the employment agreements will provide that if the Company
terminates the executive's employment without "cause" (as defined in the
employment agreements), then such executive shall be entitled to receive his
base salary at the rate then in effect for a period of two years, in the case of
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<PAGE>
Mr. Dietzman, or one year, in the case of the other executives, a bonus equal to
the average annual discretionary bonus paid to such executive in the preceding
two-year period prior to such termination for two years, in the case of Mr.
Dietzman, or one year, in the case of the other executives, and vesting of all
outstanding equity awards. In addition, Mr. Dietzman's agreement will provide
that his employment shall continue for a period of two years following a Change
of Control (as defined in the employment agreement). If Mr. Dietzman voluntarily
terminates his employment for any reason during the 30-day period following the
expiration of the six-month period commencing upon the occurrence of a Change of
Control, Mr. Dietzman will be entitled to receive a lump-sum severance payment,
continued welfare benefits and payment of certain awards under any long-term
performance plans. In addition, on each anniversary date of the employment
agreement, each executive will be eligible to receive a grant of options to
purchase additional shares of Common Stock as approved by the Compensation
Committee, in its discretion.
The employment agreements will provide that during the term of employment,
each executive will be subject to certain confidentiality and non-solicitation
restrictions.
EMPLOYEE BENEFIT PLANS
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1998. In , the Company's
Board of Directors adopted, and the shareholders approved, the Family Christian
Stores 1998 Stock Option and Restricted Stock Plan (the "1998 Stock Plan"). The
1998 Stock Plan will be administered by the Compensation Committee of the Board
of Directors (the "Committee"). All officers (including officers who are also
directors), employees, consultants and advisors of the Company are eligible for
discretionary awards under the 1998 Stock Plan. The 1998 Stock Plan provides for
stock-based incentive awards, including incentive stock options, non-qualified
stock options, restricted stock, performance shares, stock appreciation rights
and deferred stock. The 1998 Stock Plan permits the Board of Directors, or the
Committee, as the case may be, to select eligible persons to receive awards and
to determine certain terms and conditions of such awards, including the vesting
schedule and exercise price of each award, and whether such award shall
accelerate upon the occurrence of a change in control of the Company. Under the
1998 Stock Plan, options to purchase Class A Common Stock may be granted with an
option exercise price that is less than the then current market value of such
stock.
Under the 1998 Stock Plan, options, restricted stock, performance shares or
stock appreciation rights covering no more than % of the shares reserved
for issuance under the 1998 Stock Plan may be granted to any participant in any
one year. A total of shares have been reserved for issuance under the 1998
Stock Plan. Pursuant to such discretionary awards, the Company has granted to
certain officers, employees, advisors and consultants, options to purchase an
aggregate of approximately shares of Class A Common Stock under the 1998
Stock Plan at the initial public offering price.
The 1998 Stock Plan may be amended, suspended or terminated at any time.
However, the maximum number of shares that may be sold or issued under the 1998
Stock Plan may not be increased, nor may the class of persons eligible to
participate in the 1998 Stock Plan be altered, without the approval of the
Company's shareholders; provided, however, that adjustments to the number of
shares subject to the 1998 Stock Plan and to individual awards thereunder and/or
to the exercise price of awards previously granted are permitted without
shareholder approval upon the occurrence of certain events affecting the capital
structure of the Company. With respect to any other amendments to the 1998 Stock
Plan, the Board of Directors or the Committee may, in its discretion, determine
that such amendment shall become effective only upon approval by the
shareholders of the Company if the Board of Directors or the Committee
determines that such shareholder approval may be advisable, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
federal or state securities law, federal or state tax laws or any other laws or
for the purpose of satisfying applicable stock exchange listing requirements.
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<PAGE>
MANAGEMENT STOCK OPTION PLAN. The Company's Management Stock Option Plan
(the "Management Plan") was adopted by the Board of Directors on November 21,
1997, to be effective as of November 1, 1994. The Management Plan provides for
the issuance of options to purchase Class B Common Stock on a fully-diluted
basis upon the attainment of certain performance goals. Options issued under the
Management Plan are intended to provide performance-based compensation under
Section 162(m) of the Code. A maximum of 5% of the Company's outstanding shares
of Common Stock as of November 17, 1994 (subject to adjustment) was allocated
for grant under the Management Plan. As of the date hereof, options to purchase
an aggregate of shares have been granted pursuant to the Management Plan.
The Management Plan provides for automatic achievement of fiscal 1994
performance goals, in consideration of the successful management buyout, and
options to purchase an aggregate of shares of Common Stock were granted in
recognition of such performance. The Management Plan does not provide for
performance goals for fiscal 1995 and 1996 and no awards were granted in such
years. In fiscal 1997, the Management Plan established performance goals related
to EBITDA. These goals were met and options to purchase an aggregate of
shares of Common Stock were granted.
The Management Plan is administered by the Compensation Committee.
Participation in the Management Plan is limited to senior Company officers
authorized by the Compensation Committee as participants and other senior
Company officers named as initial participants in the Management Plan. Options
granted under the Management Plan have a price per share of $ and are
exercisable on the date of the Company's public announcement of an initial
public offering, or earlier upon the occurrence of certain events set forth in
the Management Plan. All exercise rights under the Management Plan terminate
five years after the consummation of an initial public offering, or earlier upon
the occurrence of certain events set forth in the Management Plan.
The Board may amend the Management Plan provided that an amendment may not
increase the benefits to participants, increase the number of shares of stock
available or modify the eligibility requirements unless approved by
shareholders. The Management Plan will terminate when all shares subject to
options that have become exercisable have been purchased or the rights to
purchase such stock have expired or been forfeited. Upon certain changes in
control of the Company, including a reorganization, reclassification, merger or
consolidation, the successor corporation must assume the duty to observe and
perform the terms and conditions of any outstanding options under the Management
Plan and all obligations and liabilities thereof. After the Offering, no further
option grants will be made pursuant to the Management Plan.
INCENTIVE GROUP STOCK OPTION PLAN. The Company's Incentive Group Stock
Option Plan (the "Incentive Plan") was adopted by the Board of Directors on
November 21, 1997, to be effective as of November 1, 1994. The Incentive Plan
provides for the issuance of options to purchase Class B Common Stock on a
fully-diluted basis upon the attainment of certain performance goals. The
Incentive Plan is administered by the Compensation Committee. Participation in
the Incentive Plan is limited to members of middle and senior management of the
Company. A maximum of 3% of the Company's outstanding shares of Common Stock as
of November 17, 1994 (subject to adjustment) was allocated for grant under the
Incentive Plan. As of the date hereof, options to purchase an aggregate of
shares have been granted pursuant to the Incentive Plan. The Incentive Plan
provides for automatic achievement of fiscal 1994 performance goals, in
consideration of the successful management buyout, and options to purchase an
aggregate of shares of Common Stock were granted in recognition of such
performance. The Incentive Plan does not provide for performance goals for
fiscal 1995 and 1996 and no awards were granted in such years. In fiscal 1997,
the Incentive Plan established performance goals related to EBITDA. These goals
were met and options to purchase an aggregate of shares of Common Stock
were granted. The Incentive Plan will terminate when all shares subject to
options that have become exercisable have been purchased or the rights to
purchase such shares have expired or been forfeited. After the Offering, no
further option grants will be made pursuant to the Incentive Plan.
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The Incentive Plan has substantially similar terms and conditions to those
described above in "Management Stock Option Plan," including those with respect
to exercise price and powers of the Compensation Committee.
1997 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1997 Employee Stock
Purchase Plan (the "Employee Stock Plan") was adopted by the Board of Directors
on November 21, 1997, to be effective as of November 30, 1997. A maximum of
shares of the Company's Class A Common Stock is available under the
Employee Stock Plan (subject to adjustment). The Employee Stock Plan is
administered by the Compensation Committee. The Employee Stock Plan provides for
the purchase of Class A Common Stock by employees of the Company. Purchases are
made from an individual participant's contribution account funded through
payroll deductions. The Employee Stock Plan is not intended to qualify as an
employee stock purchase plan under Section 423 of the Code. Subject to certain
conditions and limitations, all employees of the Company are eligible to
participate in the Employee Stock Plan. The purchase price per share for the
first $2,000 of Class A Common Stock purchased pursuant to the Employee Stock
Plan by any participant in any calendar year is 85% of the established value on
the commencement date of the plan quarter. The price per share for Class A
Common Stock purchased in excess of $2,000 in a calendar year is 100% of the
established value. Following the consummation of the Offering, the Company
intends to amend the Employee Stock Plan to provide that the purchase price for
the first $2,000 is 85% of the average of the low and high sales price reported
on The Nasdaq Stock Market on the last day of a plan quarter and 100% of such
price for amounts over $2,000. No employee may acquire the right to purchase
Class A Common Stock pursuant to the Employee Stock Plan if (i) immediately
after receiving the right, the employee would own 5% or more of the total
combined voting power or value of all classes of stock of the Company, (ii) the
right would permit the employee to own an aggregate cumulative value of Class A
Common Stock in excess of $50,000 or (iii) the purchase would result in the
purchase of Class A Common Stock with an aggregate purchase price in excess of
$5,000 in any calendar year.
The Board of Directors may amend the Employee Stock Plan at any time;
subject to certain limitations. The Board of Directors can suspend operation of
the Employee Stock Plan for any period. The Employee Stock Plan automatically
terminates upon the earlier of the purchase by participants of all shares of
Class A Common Stock subject to the Employee Stock Plan or November 30, 2007.
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<PAGE>
CERTAIN TRANSACTIONS
On November 14, 1994, the Company entered into an agreement (the
"Shareholders' Agreement") with certain shareholders of the Company, including
the Electra Entities, which provides for, among other things, a maximum number
of directors, the election of up to two directors at the direction of the
Electra Entities and certain preemptive rights. Upon consummation of the
Offering, the Shareholders' Agreement will be terminated and the Company will
enter into the Electra Agreement which will provide for, among other things, the
nomination by the Company to the Board of Directors of a director designated by
the Electra Entities.
On July 31, 1997, shares of Common Stock were issued to Mr. Topham,
a director of the Company, as payment for consulting and other services provided
to the Company in connection with the private placement of Common Stock on
August 31, 1997.
In connection with the purchase of shares of Common Stock by Mr.
Dietzman, Chief Executive Officer, President and a director of the Company, on
November 14, 1994, the Company entered into a term loan with Mr. Dietzman in the
amount of $225,000, with an annual rate of interest of 8%, which loan matures on
November 14, 2001. The loan is payable in full in annual installments of
$43,216, principal and interest.
In connection with the purchase of shares of Common Stock by Mr.
Dietzman on July 31, 1997, the Company entered into a term loan with Mr.
Dietzman in the amount of $37,500, with an annual rate of interest of 8%, which
loan matures on July 31, 2004. The loan is payable in full in annual
installments of $7,000, principal and interest.
In connection with the purchase of shares of Common Stock by Mr.
Bailey, Executive Vice President, Operations and Human Resources of the Company,
on November 14, 1994, the Company entered into a term loan with Mr. Bailey in
the amount of $60,000, with an annual rate of interest of 8%, which loan matures
on November 14, 2001. The loan is payable in full in equal annual installments
of $11,524, principal and interest.
In connection with the purchase of shares of Common Stock by Mr.
Butler, Vice President, Administration of the Company, on November 14, 1994, the
Company entered into a term loan with Mr. Butler in the amount of $80,000, with
an annual rate of interest of 8%, which loan matures on November 14, 2001. The
loan is payable in full in equal annual installments of $15,366, principal and
interest.
In connection with the purchase of shares of Common Stock by Mr.
Klamer, Vice President, Merchandise Administration of the Company, on November
14, 1994, the Company entered into a term loan with Mr. Klamer in the amount of
$50,000, with an annual rate of interest of 8%, which loan matures on November
14, 2001. The loan is payable in full in equal annual installments of $9,604,
principal and interest.
Messrs. Topham and Craig, directors of the Company, are parties to
consulting agreements, each dated November 2, 1994, which provide that in
exchange for their services as consultants and directors, the Company will pay
them $100,000 and $50,000, respectively. On November 21, 1997, the Company
extended the terms of such agreements to November 30, 2000, and adjusted the
annual payments to $75,000 for each of Messrs. Topham and Craig.
Messrs. Carnwath and Steele, directors of the Company, are Managing Director
and Principal, respectively, of Electra. Pursuant to the Securities Agreement,
on November 15, 1994, the Electra Entities purchased the Company's Senior
Subordinated Notes due 2003, in the aggregate principal amount of $5.0 million
(which notes were repaid in connection with the execution of the Company's
Amended and Restated Loan Agreement) and warrants to purchase Common Stock. The
Electra Entities received certain anti-dilution, registration, and other rights
in connection with their purchase of the notes and
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warrants. See "Description of Capital Stock--Warrants", "--Registration Rights"
and "--Shareholders' Agreement."
Pursuant to the terms of an agreement, between the Company and Electra Inc.,
an affiliate of the Electra Entities, dated as of November 14, 1994 (the
"Advisory Agreement"), the Company is required to pay Electra Inc. an annual fee
of $100,000, plus all reasonable expenses related thereto for providing
consulting services to the Company. This obligation will terminate upon
consummation of the Offering.
Pursuant to Buy and Sell Agreements among the Company and its existing
shareholders, including the Electra Entities, dated as of November 14, 1994 and
May 4, 1995 (collectively, the "Buy and Sell Agreements"), existing shareholders
(other than the Electra Entities) are restricted from transferring (other than
to Permitted Transferees, as defined therein) their shares of Common Stock
unless they obtain the consents of (A) (i) 75% of the shares held by non-Electra
entities, (ii) the Electra Entities and (iii) the Company (in the case of
certain transfers) or (B) (i) the Electra Entities and (ii) the Company (in the
case of certain other transfers). Pursuant to the terms of one of such
agreements the Electra Entities have certain "tag-along" rights and may
participate in a proposed sale of shares to a third party on a pro rata basis.
If a shareholder proposed to transfer any of its shares, then in certain
circumstances the Electra Entities also have the option to purchase such shares.
The Buy and Sell Agreements automatically terminate upon the consummation of the
Offering. See "Description of Capital Stock--Buy and Sell Agreement."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on the date of this Prospectus and as
adjusted to reflect the sale of the Common Stock offered hereby of (i) each
shareholder of the Company selling Common Stock in this Offering (a "Selling
Shareholder"), (ii) each person known to the Company to be the beneficial owner
of 5% or more of the outstanding shares of Common Stock, (iii) each of the Named
Executive Officers, (iv) each director of the Company and (v) all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP AFTER OFFERING(2)(3)
BEFORE OFFERING -------------------------------
---------------------- PERCENT PERCENT
PERCENT NUMBER OF SHARES OF OF
OF TO BE SOLD EQUITY VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES CLASS IN THE OFFERING SHARES INTEREST INTEREST
- ----------------------------------------- ----------- --------- ----------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cayman National Trust Co. Ltd.(4)........
Fourth Floor, Cayman National Building
Elgin Avenue
Georgetown, Grand Cayman
Electra Investment Trust P.L.C.(5).......
320 Park Avenue - 28th
New York, NY 10022
Electra Associates, Inc.(6)..............
320 Park Avenue - 28th
New York, NY 10022
Bruce E. and Jeralyn G. Ryskamp(7).......
5300 Patterson SE
Grand Rapids, MI 49530
Charles E. Cook..........................
James G. and Pamela B. Reimann...........
The Jeffrey R. Smith Trust...............
The Susan K. Smith Trust.................
Leslie E. Dietzman(8)(9).................
Craig G. Wassenaar.......................
J. Hal Bailey(9).........................
William S. Nielsen.......................
Richard M. Butler(9).....................
Craig B. Klamer(9).......................
George Craig(4)..........................
Peter A. Carnwath(10)....................
Scott D. Steele(11)......................
Neil Topham..............................
All executive officers and directors of
the Company as a group
(10 persons)...........................
</TABLE>
- --------------------------
* Less than one percent.
(FOOTNOTES ON FOLLOWING PAGE)
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<PAGE>
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the Company believes that each
shareholder named in this table has sole investment and voting power with
respect to the shares set forth opposite such shareholder's name.
Percentage ownership is calculated in acccordance with Rule 13d-3
promulgated under the Exchange Act. Shares of Common Stock subject to
options and warrants currently exercisable or excercisable within 60 days
of , 1998 are deemed outstanding for purposes of computing
the percentage of the person or entity holding such securities but are not
deemed outstanding for purposes of computing the percentage of any other
person or entity.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) All existing shares of Common Stock outstanding prior to the Offering will
be converted into the same number of shares of Class B Common Stock upon
the consummation of the Offering.
(4) Consists of shares of Common Stock owned by the Cayman National Trust
Co. Ltd., as trustee for the Jamestown Trust, of which Mr. Craig is a
beneficiary.
(5) Includes shares of Common Stock issuable upon exercise of warrants
owned by Electra Investment Trust P.L.C. which are exercisable within 60
days of , 1998. Also includes shares of Common Stock held by
Electra Associates, Inc., an affiliate of Electra Investment Trust P.L.C.
(6) Consists of shares of Common Stock issuable upon exercise of warrants
owned by Electra Associates, Inc. which are exercisable within 60 days of
, 1998. Also includes shares of Common Stock held by Electra
Investment Trust P.L.C., an affiliate of Electra Associates, Inc.
(7) Includes shares of Common Stock owned by the Bruce E. Ryskamp Living
Trust and shares of Common Stock owned by the Jeralyn G. Ryskamp
Living Trust, for each of which Mr. and Mrs. Ryskamp act as co-trustees.
(8) Includes shares of Common Stock issuable upon exercise of outstanding
stock options which are exercisable within 60 days of , 1998.
(9) Consists of shares of Common Stock issuable upon exercise of
outstanding stock options which are exercisable within 60 days
of , 1998.
(10) Does not include shares of Common Stock owned by Electra Investment
Trust P.L.C. and Electra Associates, Inc. Mr. Carnwath is a Managing
Director of Electra Fleming, Inc. Electra Fleming, Inc. is 50% owned by
Electra Investment Trust P.L.C. and manages all of its assets. However,
Electra Fleming, Inc. does not control the voting power of the shares of
Common Stock owned by Electra Investment Trust P.L.C. Mr. Carnwath
disclaims beneficial ownership of such shares.
(11) Does not include shares of Common Stock owned by Electra Investment
Trust P.L.C. and Electra Associates, Inc. Mr. Steele is a Principal of
Electra Fleming, Inc. Electra Fleming, Inc. is 50% owned by Electra
Investment Trust P.L.C. and manages all of its assets. However, Electra
Fleming, Inc. does not control the voting power of the shares of Common
Stock owned by Electra Investment Trust P.L.C. Mr. Steele disclaims
beneficial ownership of such shares.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Articles of Incorporation and Bylaws is a
summary and is qualified in its entirety by reference to the provisions of the
Restated Articles of Incorporation and Bylaws, which have been filed as exhibits
to the Company's Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Restated Articles of Incorporation authorize the issuance of 10,000,000
shares of Class A Common Stock and 10,000,000 shares of Class B Common Stock.
Upon the consummation of the Offering, each share of the Company's existing
Common Stock will be converted into one share of Class B Common Stock.
VOTING. The holders of Common Stock will generally be entitled to vote as a
single class on all matters upon which shareholders have a right to vote,
subject to the requirements of the applicable laws and the rights of any series
of Preferred Stock to a separate class vote. Each share of Class A Common Stock
entitles its holder to one vote and each share of Class B Common Stock entitles
its holder to 10 votes. Unless otherwise required by law, and so long as their
rights would not be adversely affected, the holders of Common Stock will not be
entitled to vote on any amendment to the Restated Articles of Incorporation that
relates solely to the terms of one or more outstanding series of Preferred
Stock.
DIVIDENDS AND OTHER DISTRIBUTIONS. The holders of Class A Common Stock and
Class B Common Stock will be entitled to equal dividends when declared by the
Board of Directors, except that all dividends payable in Common Stock will be
paid in the form of Class A Common Stock to holders of Class A Common Stock and
in the form of Class B Common Stock to holders of Class B Common Stock. Neither
class of Common Stock may be split, divided or combined unless the other class
isproportionally split, divided or combined.
In the event of a liquidation or winding up of the Company, the holders of
Class A Common Stock and Class B Common Stock will be treated on an equal per
share basis, and will be entitled to receive all of the remaining assets of the
Company following distribution of the preferential and/or other amounts to be
distributed to any holders of preferred stock.
ISSUANCE OF CLASS B COMMON STOCK, OPTIONS, RIGHTS OR WARRANTS. Subject to
certain provisions regarding dividends and other distributions described above,
the Company will not be entitled to issue additional shares of Class B Common
Stock, or issue options, rights or warrants to subscribe for additional shares
of Class B Common Stock, except that the Company may make a pro rata offer to
all holders of Common Stock of rights to purchase additional shares of the class
of Common Stock held by them. The Class A Common stock and the Class B Common
Stock will be treated equally with respect to any offer by the Company to
holders of Common Stock of options, rights or warrants to subscribe for any
other capital stock of the Company.
MERGER. In the event of a merger, the holders of Class A Common Stock and
Class B Common Stock will be entitled to receive the same per share
consideration, if any, except that if such consideration includes voting
securities (or the right to acquire voting securities or securities exchangeable
for or convertible into voting securities), the Company may (but is not required
to) provide for the holders of Class B Common Stock to receive consideration
entitling them to 10 times the number of votes per share as the consideration
being received by holders of the Class A Common Stock.
CONVERSION OF CLASS B COMMON STOCK. The Class B Common Stock will be
convertible into Class A Common Stock on a share-for-share basis (i) at the
option of the holder thereof at any time, (ii) upon transfer of a person or
entity which is not a Permitted Transferee (as defined in the Restated Articles
of Incorporation), (iii) at such time as a corporation, partnership, limited
liability company, trust or charitable organization ceases to be 100% controlled
by Permitted Transferees and (iv) on the date on which the number of shares of
Class B Common Stock outstanding is less than 15% of the then outstanding shares
of
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<PAGE>
Common Stock (without regard to voting rights). In general, Permitted
Transferees will include natural persons who currently hold shares of Class B
Common Stock, their spouses, ancestors and descendants, their descendant's
spouses and certain charitable organizations and trusts (including charitable
trusts) or other entities controlled by such persons.
PREEMPTIVE RIGHTS. The holders of shares of capital stock of the Company
will not have any preemptive rights with respect to any outstanding or newly
issued capital stock of the Company.
PREFERRED STOCK
Upon the approval of 80% of the entire Board of Directors of the Company,
the Board of Directors is authorized to issue, without further shareholder
approval, up to 5,000,000 shares of Preferred Stock, no par value, from time to
time in one or more series and to fix such designations, powers, preferences and
relative voting, distribution, dividend, liquidation, transfer, redemption,
conversion and other rights, preferences, qualifications, limitations or
restrictions thereon. Any such Preferred Stock could have priority over Common
Stock as to dividends and as to the distribution of the Company's assets upon
any liquidation, dissolution or winding up of the Company. The Company has no
present plan to issue any shares of preferred stock. See "Certain Charter and
Bylaws Provisions--Blank Check Preferred Stock."
WARRANTS
In connection with the Company's formation, the Company entered into the
Securities Agreement with certain shareholders including the Electra Entities.
Under the terms of the Securities Agreement, the Electra Entities received
warrants to purchase up to 28% of the fully diluted Common Stock of the Company
at an exercise price of $.01 per share. The warrants were exercisable as to 18%
of the shares of Common Stock outstanding as of November 14, 1994 ("Series A
Warrants") and as to the following amounts based upon the timing of a
"Triggering Event": (i) an additional 2% of the total shares of Common Stock
outstanding on December 31, 1996 if a Triggering Event did not occur by December
31, 1996 ("Series B Warrants"), which warrants have been issued to the Electra
Entities; (ii) an additional 4% of the total shares of Common Stock outstanding
on December 31, 1998 if a Triggering Event does not occur by December 31, 1998;
and (iii) an additional 4% of the total shares of Common Stock outstanding on
December 31, 1999 if a Triggering Event does not occur by December 31, 1999. The
Securities Agreement defines a "Triggering Event" as the occurrence of (i) the
payment in full of all of the senior subordinated notes which are the subject of
the Securities Agreement and (ii) either (a) an initial public offering or (b) a
sale of all or substantially all of the capital stock or assets of the Company
for certain specified amounts. Upon consummation of the Offering, the Company
will not be required to issue additional warrants under the Securities
Agreement. The expiration date of all of the described warrants is November 14,
2004. The Series A Warrants and the Series B Warrants currently are exercisable.
The Electra Entities have informed the Company that they will exercise the
Series A Warrants and the Series B Warrants upon consummation of the Offering.
SHAREHOLDERS' AGREEMENT
Pursuant to the terms of the Shareholders' Agreement, the maximum number of
directors comprising the Board of Directors of the Company may not exceed five
prior to an initial public offering, and eight after the consummation of an
initial public offering, provided that the Electra Entities and any permitted
transferees (the "Institutional Investors") own at least 10% of the fully
diluted shares of the Company. The Shareholders' Agreement further provides that
the current shareholders will elect two directors (the "Institutional
Directors") designated by the Institutional Investors to the Board. If the
Institutional Investors cease to hold at least (i) 10% of the fully diluted
shares of the Company, then the current shareholders must elect only one
Institutional Director or (ii) 5% of the fully diluted shares, then the current
shareholders have no obligation to elect an Institutional Director. The
Institutional Investors also have certain rights to direct voting as to all
matters submitted to a shareholder vote for shareholder consent. See
"Description of Capital Stock--Registration Rights." Upon the consummation of
the Offering, the Shareholders' Agreement will terminate and the Electra
Entities and the Company will enter
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<PAGE>
into the Electra Agreement. The Electra Agreement will provide for, among other
things, the Electra Entities to designate one director to be nominated by the
Company, so long as the Electra Entities collectively beneficially own greater
than 5% of the Common Stock.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with the Electra Entities covering in the
aggregate shares of Common Stock. The Registration Rights Agreement
provides that upon request from a holder or holders ("Initiating Holders") of
certain amounts of registrable securities, requesting that the Company effect
the registration under the Securities Act of all or any part of the Initiating
Holders' registrable securities, the Company will effect the registration under
the Securities Act of (i) the registrable securities which the Company has been
requested to register by the Initiating Holders, and (ii) all other registrable
securities which the Company has been requested to register by other holders
thereof. The Company has agreed to pay all costs associated with these
registrations.
BUY AND SELL AGREEMENTS
Pursuant to the Buy and Sell Agreements, existing shareholders (other than
the Electra Entities) are restricted from transferring (other than to Permitted
Transferees, as defined therein) their shares of Common Stock unless they obtain
the consents of (A) (i) 75% of the shares held by non-Electra Entities, (ii) the
Electra Entities and (iii) the Company (in the case of certain transfers) or (B)
(i) the Electra Entities and (ii) the Company (in the case of certain other
transfers). The Company has the option to purchase shares proposed to be
transferred by any shareholder and, if the Company does not do so, the remaining
shareholders have a similar option. If neither the Company nor shareholders
exercise their options to purchase shares proposed to be sold by an existing
shareholder to a third party under one of such agreements, then the Electra
Entities have certain "tag-along" rights and may participate in the sale on a
pro rata basis. Certain Shareholders also are subject to certain "drag-along"
provisions, which provide that in the event 50% or more of the Common Stock is
transferred, such shareholders may be required to sell also. The Buy and Sell
Agreements automatically terminate upon the consummation of the Offering. See
"Certain Transactions."
CERTAIN CHARTER AND BYLAW PROVISIONS
In addition to the control of the Company that the holders of Class B Common
Stock will have upon consummation of the Offering, the following provisions of
the Company's Restated Articles of Incorporation and Bylaws could have the
effect of discouraging, delaying or making more difficult certain attempts to
acquire the Company or to remove an incumbent director even if the majority of
shareholders were to deem such an attempt to be in the best interests of the
Company and its shareholders.
PROVISIONS REGARDING THE BOARD OF DIRECTORS. The Company's Restated
Articles of Incorporation will provide that the Company's Board of Directors be
classified into three classes serving staggered, three-year terms. As a result,
only one class of directors will be elected at each annual meeting of
shareholders of the Company, with the other classes continuing for their
respective terms. See "Management."
The Company's Restated Articles of Incorporation and Bylaws will establish
an advance notice procedure for nomination, other than by or at the direction of
the Board of Directors, of candidates for election as directors and for
submission of shareholder proposals to be considered at meetings of
shareholders. In general, notice of intent to nominate a director or raise
business at such meeting must be received by the Company not less than 120 days
prior to the date of an annual meeting and must contain certain specified
information concerning the person to be nominated or the matter to be brought
before the meeting.
The Company's Restated Articles of Incorporation will provide, subject to
the rights of any series of Preferred Stock then outstanding, that directors may
be removed from office only for cause and only upon the affirmative vote of at
least a majority of the total number of directors then in office, or by at least
a
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<PAGE>
majority vote of the shares of the Company then entitled to vote at an election
for directors. Vacancies on the Board of Directors, including those resulting
from an increase in the number of directors, may be filled only by the remaining
directors, not by shareholders.
SUPERMAJORITY VOTE PROVISIONS. The Restated Articles of Incorporation will
provide that, in addition to any vote required by law or other provisions of the
Restated Articles of Incorporation, the affirmative vote of not less than 80% of
the outstanding shares of voting stock is required for the approval of certain
business combinations between the Company or a subsidiary and any interested
shareholder. The provisions would not apply if the proposed transaction is
approved by a majority of continuing directors who are unaffiliated with the
interested shareholder.
AMENDMENTS TO THE RESTATED ARTICLES OF INCORPORATION. Certain provisions of
the Company's Restated Articles of Incorporation, including those relating to
powers of the Board of Directors, indemnification, actions by written consent of
shareholders, classification of the Board of Directors, the removal of directors
and limitations of certain director liability may only be amended by (i) the
affirmative vote of the holders of not less than two-thirds of the outstanding
stock of the Company entitled to vote for the election of directors, or (ii) the
affirmative vote of a majority of the full Board of Directors and of the holders
of a majority of the outstanding stock of the Company entitled to vote for the
election of directors.
ACTION BY SHAREHOLDERS; SPECIAL MEETING OF SHAREHOLDERS. The Restated
Articles of Incorporation will provide that shareholders are permitted to take
action only at a duly called annual or special meeting of shareholders and may
not take action by consent in writing by shareholders except by unanimous
written consent. The Restated Bylaws will not grant the shareholders the right
to call a special meeting of shareholders. Under the Restated Bylaws, special
meetings of shareholders may be called only by the Company's President or the
Board of Directors.
BLANK CHECK PREFERRED STOCK. The Restated Articles of Incorporation will
provide for authorized shares of Preferred Stock, none of which has been
issued. The existence of authorized but unissued Preferred Stock may enable the
Board of Directors to render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary obligations, the
Board of Directors were to determine that a takeover proposal is not in the
Company's best interests, the Board of Directors could cause shares of Preferred
Stock to be issued without shareholder approval in one or more private offerings
or other transactions that might dilute the voting or other rights of the
proposed acquirer or insurgent shareholder or shareholder group. In this regard,
the Restated Articles of Incorporation will provide the Board of Directors broad
power to establish the rights and preferences of authorized but unissued
Preferred Stock. The issuance of shares of Preferred Stock pursuant to the Board
of Directors' authority described above could decrease the amount of earnings
and assets available for distribution to holders of Common Stock and adversely
affect the rights of, including voting rights in the event a particular series
of Preferred Stock is given a disproportionately large number of votes per
share, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company that may be favored by certain
shareholders. The Board of Directors does not currently intend to seek
shareholder approval prior to any issuance of Preferred Stock, unless required
by law.
CERTAIN STATUTORY PROVISIONS
The Company is subject to Chapter 7A of the MBCA, which provides that
business combinations subject to Chapter 7A between a Michigan corporation and a
beneficial owner of shares entitled to 10% or more of the voting power of such
corporation generally require the affirmative vote of 90% of the votes of each
class of stock entitled to vote, and not less than 2/3 of each class of stock
entitled to vote (excluding voting shares owned by such 10% owner), voting as a
separate class. Such requirements do not apply if (i) the corporation's board of
directors approves the transaction prior to the time the 10% owner becomes such
or (ii) the transaction satisfies certain fairness standards, certain other
conditions are met and the 10% owner has been such for at least five years.
54
<PAGE>
Chapter 7B of the MBCA provides that, unless a corporation's articles of
incorporation or bylaws provide that Chapter 7B does not apply, "control shares"
of a corporation acquired in a control share acquisition have no voting rights
except as granted by the shareholders of the corporation. "Control shares" are
shares which, when added to shares previously owned by a shareholder, increase
such shareholder's ownership of voting stock to more than 20% but less than
33 1/3%, more than 33 1/3% but less than a majority, or more than a majority, of
the votes to which all of the capital stock of the corporation is entitled. A
control share acquisition must be approved by the affirmative vote of a majority
of all shares entitled to vote excluding voting shares owned by the acquiror and
certain officers and directors. However, no such approval is required for gifts
or other transactions not involving consideration, for a merger to which the
corporation is a party or certain other transactions described in Chapter 7B.
The bylaws of the Company currently contain a provision pursuant to which the
Company has opted not to be subject to Chapter 7B, but the board of directors
may, in its sole discretion, elect to become subject to Chapter 7B by amending
such bylaws.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York has been appointed as the transfer
agent and registrar for the Company's Common Stock.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Class A Common Stock by the Company's current
shareholders could adversely affect the market price of the Class A Common
Stock. Upon the closing of the Offering, based upon the number of shares
outstanding at , 1998, the Company will have outstanding an aggregate of
shares of Class A Common Stock ( shares if the Underwriters'
over-allotment option is exercised in full). In addition, based upon the number
of shares outstanding at , 1998, the Company has reserved for issuance
shares issuable upon exercise of outstanding options. The shares of
Class A Common Stock offered hereby will be freely transferable without
restriction or further registration under the Securities Act, except for such
shares acquired by affiliates of the Company. Shares purchased by affiliates of
the Company would be subject to certain volume and other restrictions upon
resale as described below. The remaining shares of Class A Common Stock
and shares of Class B Common Stock held by existing shareholders are
"restricted securities" as that term is defined by Rule 144 under the Securities
Act. Pursuant to certain "lock-up" agreements, the Company's directors, officers
and certain of its shareholders who collectively hold an aggregate of
shares of Class A Common Stock and shares of Class B Common Stock,
together with the Company, have agreed that they will not offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Class A Common Stock, other than the
shares of Class A Common Stock offered hereby, without the prior written consent
of NationsBanc Montgomery Securities LLC for a period of 180 days following the
date of this Prospectus. Following the 180-day period, approximately
shares of Class A Common Stock will be eligible for sale in the public market
without restriction pursuant to Rule 144(k), and an additional shares will
be eligible for sale under Rule 144, subject to certain volume, manner of sale
and other restrictions of Rule 144. Of the shares of restricted Class A
Common Stock held by existing shareholders of the Company not subject to lock-up
agreements, shares will be eligible for immediate sale in the public
market without restriction under Rule 144(k). The remaining shares of
Class A Common Stock not subject to lock-up agreements will become eligible for
sale, subject to certain volume, manner of sale and other limitations under Rule
144 commencing 90 days following the date of this Prospectus. In addition,
holders of stock options, exercisable for an aggregate of shares of Class
A Common Stock, have entered into agreements prohibiting the sales of the
underlying Class A Common Stock for 180 days following the date of this
prospectus. See "Principal and Selling Shareholders" and "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any person who has beneficially owned restricted
securities for at least one year will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of the Company's Class A Common Stock (approximately
shares immediately after the Offering); or (ii) the average weekly trading
volume of the Company's Class A Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned the shares proposed to be sold for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
The Company intends to file registration statements under the Securities Act
covering shares of Class A Common Stock reserved for issuance under the
Company's stock plans. Based on the options outstanding and shares reserved for
issuance as of the date of this Prospectus, such registration statements would
cover approximately shares. Such registration statements are expected to
be filed and to become effective as soon as practicable after the date of this
Prospectus. Shares registered in such registration will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market upon expiration of the contractual restrictions discussed above.
56
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancBoston Robertson Stephens Inc. and BT
Alex. Brown Incorporated (the "Representatives"), have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement (the
"Underwriting Agreement") by and among the Company, the Selling Shareholders and
the Underwriters, to purchase from the Company and the Selling Shareholders the
number of shares of Common Stock indicated below opposite their respective
names, at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the shares,
if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
NationsBanc Montgomery Securities LLC..............................................
BancBoston Robertson Stephens Inc..................................................
BT Alex. Brown Incorporated........................................................
-----------
Total............................................................................
-----------
-----------
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose initially to offer the shares of Class A Common
Stock to the public on the terms set forth on the cover page of this Prospectus.
The Underwriters may allow selected dealers a concession of not more than
$ per share and the Underwriters may allow, and such dealers may reallow,
a concession of not more than $ per share to certain other dealers. After
the public offering, the offering price and other selling terms may be changed
by the Representatives. The Class A Common Stock is offered subject to receipt
and acceptance by the Underwriters, and to certain other conditions, including
the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of additional shares of Class A Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.
Each director and executive officer and certain other shareholders of the
Company have agreed, subject to certain limited exceptions, that they will not,
without the prior written consent of NationsBanc Montgomery Securities LLC
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose
of any shares of Class A Common Stock, options or warrants to acquire shares of
Class A Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Class A Common Stock, currently or hereafter owned
either of record or beneficially (as defined in Rule 13d-3 under the Exchange
Act) by such party, or publicly announce such party's intention to do any of the
foregoing, for a period of 180 days after the date of this Prospectus. In
addition, the Company has agreed in the Underwriting Agreement that, during the
period of 180 days after the date of this Prospectus, without the prior written
consent of NationsBanc Montgomery Securities LLC (which consent may be withheld
in its sole discretion), it will not, directly or indirectly, sell, offer,
contract or grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of
57
<PAGE>
Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or
announce the offering of, or file any Registration Statement under the
Securities Act in respect of, any shares of the Company's Class A Common Stock,
options or warrants to acquire shares of the Class A Common Stock or securities
exchangeable or exercisable for or convertible into shares of Class A Common
Stock. NationsBanc Montgomery Securities LLC may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
these Lock-up Agreements. See "Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain civil liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock,
including over-allotment, stabilizing transactions, syndicate-covering
transactions and penalty bids. In an over-allotment, the Underwriters would
allot more shares of Common stock to their customers in the aggregate than are
available for purchase by the Underwriters under the Underwriting Agreement. A
stabilizing transaction means the placing of any bid, or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of a
security. In a syndicate-covering transaction, the Underwriters would place a
bid or effect a purchase to reduce a short position created in connection with
this offering. Pursuant to a penalty bid, NationsBanc Montgomery Securities LLC,
on behalf of the Underwriters, would be able to reclaim a selling concession
from shares of Common Stock sold by such Underwriter that are purchased in
syndicate-covering transactions. These transactions may result in the price of
the Common Stock originally being higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise and, if commenced,
may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to confirm sales of Class A Common Stock to accounts over which they
exercise discretionary authority in excess of 5% of the number of shares of
Class A Common Stock offered hereby.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to shares of Class A Common Stock
(5% of the shares offered in the Offering) for employees, directors and certain
other persons associated with the Company who have expressed an interest in
purchasing such shares of Class A Common Stock in the Offering. The number of
shares available for sale to the general public in the Offering will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same terms as the other shares offered hereby.
Prior to this Offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price will be determined
by negotiations among the Representatives of the Underwriters, the Company and
the Selling Shareholders. Among the factors to be considered in such negotiation
will be the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present earnings and the trend of such earnings, the prospects for future
earnings of the Company, the present state of the Company's development, the
general condition of securities markets at the time of the Offering and the
market price of publicly traded stock of comparable companies in recent periods.
58
<PAGE>
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Skadden, Arps, Slate, Meagher and Flom (Illinois), Chicago,
Illinois. Certain legal matters relating to the offering will be passed upon for
the Underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The financial statements of Family Christian Stores, Inc. at January 25,
1998 and January 26, 1997 and for each of the three fiscal years in the period
ended January 25, 1998 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The financial statements of Joshua's Christian Stores (a division of The
Development Association, Inc.) as of March 31, 1998 and for the twelve months
then ended included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (as amended and together with all
exhibits thereto, the "Registration Statement") under the Securities Act, with
respect to the shares of Class A Common Stock offered by this Prospectus. This
Prospectus constitutes a part of the Registration Statement and does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted from this Prospectus as permitted by the rules and regulations
of the SEC. Statements in this Prospectus about the contents of any contract or
other document are not necessarily complete; reference is made in each instance
to the copy of the contract or other document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by such
reference. The Registration Statement and accompanying exhibits and schedules
may by inspected and copies may be obtained (at prescribed rates) at the public
reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. Copies of the Registration Statement also may be
inspected at the SEC's regional offices at 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. In addition, the Common Stock will be listed on
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006-1500,
where such material also may be inspected and copied.
As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities and regional offices
referred to above. In addition, these reports, proxy statements and other
information also may be obtained from the web site that the SEC maintains at
www.sec.gov.
The Company intends to furnish its shareholders annual reports containing
consolidated financial statements certified by its independent auditors and
quarterly reports for each of the first three quarters of each fiscal year
containing unaudited financial information.
59
<PAGE>
FAMILY CHRISTIAN STORES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FAMILY CHRISTIAN STORES, INC.
Audited Financial Statements:
Report of Independent Auditors........................................................................... F-2
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statements of Shareholders' Equity (Deficit)............................................................. F-5
Statements of Cash Flows................................................................................. F-6
Notes to Financial Statements............................................................................ F-7
Unaudited Interim Financial Statements:
Balance Sheets........................................................................................... F-17
Statements of Operations................................................................................. F-18
Statements of Cash Flows................................................................................. F-19
Notes to Financial Statements............................................................................ F-20
JOSHUA'S CHRISTIAN STORES
Audited Financial Statements:
Report of Independent Accountants........................................................................ F-22
Statement of Income...................................................................................... F-23
Balance Sheet............................................................................................ F-24
Statement of Cash Flows.................................................................................. F-25
Statement of Changes in Investment by Parent............................................................. F-26
Notes to Financial Statements............................................................................ F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Family Christian Stores, Inc.
We have audited the accompanying balance sheets of Family Christian Stores,
Inc. as of January 26, 1997 and January 25, 1998, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
fiscal years in the period ended January 25, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Family Christian Stores,
Inc. at January 26, 1997 and January 25, 1998, and the results of its operations
and its cash flows for each of the three fiscal years in the period ended
January 25, 1998 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Grand Rapids, Michigan
March 2, 1998, except for Note M,
as to which the date is September , 1998
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note M to the financial
statements.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
September 14, 1998
F-2
<PAGE>
FAMILY CHRISTIAN STORES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 1,398 $ 5,370
Accounts receivable, less allowance for doubtful accounts
(1997--$66; 1998--$89)....................................................... 1,276 1,498
Merchandise inventories........................................................ 28,247 32,109
Prepaid store rent............................................................. 1,187 1,279
Other.......................................................................... 952 588
------------- ---------------
Total current assets............................................................. 33,060 40,844
Fixed assets:
Leasehold improvements......................................................... 7,314 8,338
Fixtures and equipment......................................................... 9,723 11,415
------------- ---------------
17,037 19,753
Less accumulated depreciation.................................................. 5,143 7,540
------------- ---------------
11,894 12,213
Other assets:
Intangible assets.............................................................. 6,913 7,782
Deposits and miscellaneous..................................................... 516 447
------------- ---------------
7,429 8,229
------------- ---------------
$ 52,383 $ 61,286
------------- ---------------
------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 25,809 $ 31,238
Compensation and payroll taxes................................................. 1,929 3,137
Other accrued liabilities...................................................... 3,103 3,730
Current maturities of long-term debt........................................... 2,000 2,000
------------- ---------------
Total current liabilities........................................................ 32,841 40,105
Long-term debt, less current maturities.......................................... 18,518 14,973
Deferred rent liability.......................................................... 1,782 1,771
Other liabilities................................................................ 380 366
Redeemable common stock warrants................................................. 5,519 9,199
Shareholders' equity (deficit):
Preferred stock, no par value--authorized 5,000,000 shares; no shares issued
and outstanding.............................................................. -- --
Class A common stock, par value $.01 per share--authorized 10,000,000 shares;
no shares issued and outstanding............................................. -- --
Class B common stock, par value $.01 per share--authorized 10,000,000 shares;
issued and outstanding: 1997--1,565,750 shares; 1998--1,752,131 shares....... 16 18
Additional paid-in capital..................................................... 6,277 8,817
Retained earnings (deficit).................................................... (12,582) (13,569)
Notes receivable from shareholders............................................. (368) (394)
------------- ---------------
(6,657) (5,128)
------------- ---------------
$ 52,383 $ 61,286
------------- ---------------
------------- ---------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
FAMILY CHRISTIAN STORES, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
-------------- -------------- --------------
Net sales....................................................... $ 126,125 $ 139,280 $ 168,063
Costs of products sold, including store occupancy costs......... 90,967 100,222 118,473
-------------- -------------- --------------
Gross profit.................................................... 35,158 39,058 49,590
Operating expenses:
Selling, general and administrative expenses.................. 34,283 34,923 40,284
Depreciation and amortization................................. 2,400 2,830 3,080
Store opening expenses........................................ 991 414 739
-------------- -------------- --------------
37,674 38,167 44,103
-------------- -------------- --------------
Operating income (loss)......................................... (2,516) 891 5,487
Other expense (income):
Interest expense.............................................. 2,660 2,771 2,858
Interest income............................................... (42) (36) (64)
-------------- -------------- --------------
2,618 2,735 2,794
-------------- -------------- --------------
Net earnings (loss)............................................. $ (5,134) $ (1,844) $ 2,693
-------------- -------------- --------------
-------------- -------------- --------------
Net earnings (loss) per share--basic............................ $ (3.33) $ (1.18) $ 1.63
-------------- -------------- --------------
-------------- -------------- --------------
Net earnings (loss) per share--diluted.......................... $ (3.33) $ (1.18) $ 1.22
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
FAMILY CHRISTIAN STORES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
CLASS A CLASS B ADDITIONAL RETAINED RECEIVABLE SHAREHOLDERS'
COMMON COMMON PAID-IN EARNINGS FROM EQUITY
STOCK STOCK CAPITAL (DEFICIT) SHAREHOLDERS (DEFICIT)
----------- ------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 30, 1995................... $ -- $ 15 $ 5,985 $ (1,402) $ (449) $ 4,149
Net loss....................................... (5,134) (5,134)
Issuance of 55,000 shares related to store
acquisition.................................. 1 249 250
Net payments from shareholders................. 51 51
Change in value of redeemable common stock
warrants..................................... (182) (182)
----------- --- ----------- ---------- ----- -------------
Balances at January 28, 1996................... -- 16 6,234 (6,718) (398) (866)
Net loss....................................... (1,844) (1,844)
Purchase and retirement of 18,000 shares....... (72) (72)
Issuance of 28,750 shares...................... 115 115
Net payments from shareholders................. 30 30
Change in value of redeemable common stock
warrants..................................... (4,020) (4,020)
----------- --- ----------- ---------- ----- -------------
Balances at January 26, 1997................... -- 16 6,277 (12,582) (368) (6,657)
Net earnings................................... 2,693 2,693
Issuance of 186,381 shares..................... 2 2,540 (52) 2,490
Net payments from shareholders................. 26 26
Change in value of redeemable common stock
warrants..................................... (3,680) (3,680)
----------- --- ----------- ---------- ----- -------------
Balances at January 25, 1998................... $ -- $ 18 $ 8,817 $ (13,569) $ (394) $ (5,128)
----------- --- ----------- ---------- ----- -------------
----------- --- ----------- ---------- ----- -------------
</TABLE>
( ) Denotes deduction.
See accompanying notes to financial statements.
F-5
<PAGE>
FAMILY CHRISTIAN STORES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net earnings (loss)............................................................... $ (5,134) $ (1,844) $ 2,693
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation.................................................................... 2,118 2,491 2,667
Amortization of intangible assets............................................... 282 339 413
Amortization of software and other costs........................................ 124 129 128
Amortization of debt discount................................................... 55 55 55
Store rent expense in excess of (less than) amounts paid........................ 153 59 (11)
Changes in operating assets and liabilities:
Accounts receivable............................................................. 519 (206) (161)
Merchandise inventories......................................................... (2,380) 6,155 (1,912)
Other current assets............................................................ (902) 106 310
Accounts payable................................................................ 7,834 (1,005) 5,429
Other operating liabilities, excluding debt..................................... 592 77 1,846
--------- --------- ---------
Net cash provided by operating activities......................................... 3,261 6,356 11,457
INVESTING ACTIVITIES
Store acquisitions................................................................ (4,830) (4,501) (4,326)
Additions to fixed assets......................................................... (2,399) (1,497) (2,122)
Other............................................................................. (77) 47
--------- --------- ---------
Net cash used in investing activities............................................. (7,306) (5,998) (6,401)
FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................... 10,000 11,300 10,400
Payments on revolving credit facility............................................. (4,700) (13,000) (12,000)
Payments on term note............................................................. (2,000)
Purchase of shares of common stock................................................ (72)
Issuance of shares of common stock................................................ 115 2,490
Net payments on shareholder notes receivable...................................... 51 30 26
--------- --------- ---------
Net cash provided by (used in) financing activities............................... 5,351 (1,627) (1,084)
--------- --------- ---------
Increase (decrease) in cash....................................................... 1,306 (1,269) 3,972
Cash at beginning of fiscal year.................................................. 1,361 2,667 1,398
--------- --------- ---------
Cash at end of fiscal year........................................................ $ 2,667 $ 1,398 $ 5,370
--------- --------- ---------
--------- --------- ---------
OTHER CASH FLOW INFORMATION
Interest payments................................................................. $ 2,508 $ 2,712 $ 2,794
--------- --------- ---------
--------- --------- ---------
Income taxes paid (refunds)....................................................... $ 65 $ (100) $ 90
--------- --------- ---------
--------- --------- ---------
</TABLE>
( ) Denotes reduction in cash.
See accompanying notes to financial statements.
F-6
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 25, 1998
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Family Christian Stores, Inc. (the Company) is the largest retailer in the
United States dedicated solely to Christian-related products. The Company
operated 197 stores in 33 states at the end of fiscal 1997. Product offerings
include Christian books and Bibles, gifts and cards, music, children's
merchandise and church supplies.
FISCAL YEAR END
The Company's fiscal year is the 52- or 53-week period that ends on the last
Sunday in January and is identified as the fiscal year for the immediately
preceding calendar year. The fiscal years ended January 28, 1996, January 26,
1997 and January 25, 1998 were all 52-week periods.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of first-in, first-out cost
or market and are composed of product offerings available for retail sale.
FIXED ASSETS
Fixed assets are stated at cost and include costs for major renewals and
betterments. Expenditures for normal repairs and maintenance are charged to
expense as incurred. Depreciation is computed using the straight-line method
over estimated useful lives for fixtures and equipment (3 to 10 years) and over
the lease term for leasehold improvements (3 to 15 years).
ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to $2,850,000 in
fiscal 1995, $2,138,000 in fiscal 1996 and $2,280,000 in fiscal 1997.
STOCK OPTIONS
The Company follows Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for its employee stock
options. The Company has not adopted the fair value method encouraged, but not
required, by Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
INTANGIBLE ASSETS
Financing costs incurred in obtaining the Company's credit facilities were
capitalized and are being amortized using the interest method over the term of
the debt agreement. Covenants not to compete
F-7
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related to store acquisitions are being amortized using the straight-line method
over periods ranging from three to five years.
Goodwill arose from the excess of the cost of acquisitions over the
estimated fair value of the underlying net assets acquired and is being
amortized using the straight-line method over 35 years.
The Company evaluates the recoverability of goodwill not allocable to
acquired business assets and considers whether this goodwill should be
completely or partially written off or the amortization periods accelerated. The
Company assesses the recoverability of this goodwill based upon several factors,
including management's intention with respect to the acquired operations and
those operations' projected undiscounted cash flows.
STORE OPENING EXPENSES
Costs incurred in connection with the start-up and promotion of a new store
are expensed as incurred.
DEFERRED RENT LIABILITY
Store rent expense related to fixed lease obligations is recognized using
the straight-line method over the lease term. Deferred rents payable represent
the cumulative difference between recorded rent expense and the fixed rent
payments, which may vary over the lease term.
INCOME TAXES
A provision for income taxes is provided based on the earnings or loss
reported in the financial statements. A deferred income tax asset or liability
is determined by applying currently enacted tax laws and rates to the cumulative
temporary differences between the carrying value of assets and liabilities for
financial reporting and income tax purposes. Deferred income tax expense or
credit is measured by the change in the deferred income tax asset or liability
during the period.
FINANCIAL INSTRUMENTS
The Company's financial instruments, as defined by SFAS No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, consist of cash, accounts receivable,
notes receivable, accounts payable and short-and long-term debt. The Company's
estimate of the fair value of these financial instruments approximates their
carrying amounts at January 26, 1997, and January 25, 1998. The fair value of
long-term debt was determined using discounted cash flow analyses and current
interest rates for similar instruments.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE, which simplifies the standards for computing earnings
per share, replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share are computed by dividing earnings available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share are computed similar to fully diluted
earnings per share pursuant to APB Opinion No. 15, EARNINGS PER SHARE, which is
superseded by SFAS No. 128. All earnings per share amounts for all periods have
been presented to conform to the SFAS No. 128 requirements.
F-8
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B--STORE ACQUISITIONS
During fiscal 1997, in 13 separate transactions, the Company acquired 16
existing retail stores serving the Christian market. Purchases are typically
made for cash ($4,830,000, $4,501,000 and $4,326,000 in the aggregate during
fiscal 1995, 1996 and 1997, respectively) and are accounted for using the
purchase method, whereby the acquisition cost is allocated to the net assets
acquired based on their relative fair values. Goodwill in the amount of
$586,000, $1,208,000 and $1,091,000 was recognized as a result of new store
acquisitions in fiscal 1995, 1996 and 1997, respectively.
In one of these transactions during fiscal 1995, the Company acquired the
outstanding common stock of a retailer in exchange for $1,176,000 in cash and
55,000 shares of Class B common stock with an estimated fair value of $250,000.
The acquisition was accounted for by the purchase method and resulted in
recording goodwill of $586,000.
Reported net sales would have approximated $152.7 million in fiscal 1996 and
$171.9 million in fiscal 1997 on a pro forma basis, if the fiscal 1996 and 1997
acquisitions had occurred at the beginning of fiscal 1996. Pro forma net
earnings (loss) would not have been materially different from reported amounts.
NOTE C--INTANGIBLE ASSETS
Intangible assets are composed of the following (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
COST AMORTIZATION NET
--------- ------------- ---------
<S> <C> <C> <C>
JANUARY 26, 1997
Deferred financing costs........................................................ $ 626 $ 176 $ 450
Covenants not to compete........................................................ 374 153 221
Goodwill........................................................................ 6,592 350 6,242
--------- ------ ---------
$ 7,592 $ 679 $ 6,913
--------- ------ ---------
--------- ------ ---------
JANUARY 25, 1998
Deferred financing costs........................................................ $ 626 $ 254 $ 372
Covenants not to compete........................................................ 565 278 287
Goodwill........................................................................ 7,683 560 7,123
--------- ------ ---------
$ 8,874 $ 1,092 $ 7,782
--------- ------ ---------
--------- ------ ---------
</TABLE>
F-9
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D--LONG-TERM DEBT
Long-term debt consists of the following obligations (in thousands):
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
----------- -----------
<S> <C> <C>
Revolving credit facility, maturing in October 2002, with interest payable quarterly at
the prime rate (8.5% at January 25, 1998) plus 2%..................................... $ 3,600 $ 2,000
Term note payable to bank under senior credit facility, with quarterly principal
payments of $500 commencing January 31, 1997 and interest payable quarterly at the
prime rate plus 2%, through October 2002.............................................. 12,000 10,000
$5,000 senior subordinated notes, maturing in May 2003, net of unamortized discount of
$82 in fiscal 1996 and $27 in fiscal 1997............................................. 4,918 4,973
Less current maturities................................................................. (2,000) (2,000)
----------- -----------
$ 18,518 $ 14,973
----------- -----------
----------- -----------
</TABLE>
The Company has a senior credit facility with a bank consisting of a
$12,000,000 revolving credit facility and a term loan that are collateralized by
substantially all the Company's assets. The Company is obligated to pay a
facilities fee equal to 0.5% of the unused revolving credit balance and an
annual agent's fee of $50,000.
The Company issued $5,000,000 in senior subordinated notes to an investor
group in connection with the initial acquisition of its net assets in 1994. The
notes are due in May 2003 with interest payable quarterly at 8% through December
1996, 11% through November 1998 and 14% thereafter. Redeemable common stock
warrants were issued in connection with the notes, with an estimated fair value
of $206,000 at issuance calculated by discounting payments under the senior
subordinated notes at an imputed interest rate of 12% based on management's
assessment that such an interest rate was available for similar debt without
warrants. The resulting debt discount is being amortized over the expected life
of the notes through July 1998. Two executives of the investor group were
appointed to the Company's Board of Directors in connection with the
transaction, and the Company is also required to pay an affiliate of the
investor group an annual advisory fee of $100,000. Future maturities of
long-term debt for years subsequent to fiscal 1998 are as follows:
1999--$2,000,000; 2000--$2,000,000; 2001--$2,000,000; 2002-- $4,000,000;
2003--$5,000,000.
The senior credit facility and senior subordinated notes contain restrictive
covenants that, among other things, require the Company to maintain certain
financial ratios and minimum levels of working capital and tangible net worth.
NOTE E--LEASES
The Company has operating lease arrangements for the rental of retail store
space as well as computer and other equipment for periods ranging from three to
ten years. Store lease agreements require the payment of fixed and, in certain
instances, contingent amounts based on individual store sales volumes. Many of
the store leases obligate the Company to pay real estate taxes, insurance and
maintenance costs and also contain renewal options.
F-10
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E--LEASES (CONTINUED)
Fixed and contingent rent expense was as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Fixed rent expense.................................................. $ 10,847 $ 12,180 $ 13,251
Contingent rent expense............................................. 137 135 256
------------- ------------- -------------
$ 10,984 $ 12,315 $ 13,507
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Aggregate annual minimum lease obligations for all operating leases
subsequent to January 25, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
STORE EQUIPMENT
FISCAL YEAR LEASES LEASES TOTAL
- --------------------------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
1998................................................................. $ 10,416 $ 1,370 $ 11,786
1999................................................................. 9,515 360 9,875
2000................................................................. 8,081 113 8,194
2001................................................................. 6,342 6,342
2002................................................................. 4,954 4,954
Thereafter........................................................... 12,443 12,443
------------- ------------ -------------
$ 51,751 $ 1,843 $ 53,594
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
NOTE F--SERVICE CONTRACT FOR INFORMATION SYSTEMS SUPPORT
The Company entered into an agreement with a national consulting firm to
outsource its information systems development and support functions. The
consulting firm incurred certain up-front system development, software licensing
and implementation costs, which a third party has financed through a licensing
agreement. Payment for these services represents noncancelable obligations of
the Company that are payable in monthly installments of $66,000 through June
1998, increasing to $98,000 through June 2001. Annual noncancelable license fee
payments subsequent to January 25, 1998 are as follows: 1998-- $1,016,000;
1999--$1,180,000; 2000--$1,180,000; 2001--$492,000.
In addition, a service agreement requires the Company to pay monthly fees
ranging from $110,000 to $200,000 through June 2001 for system maintenance and
other support services related to the retail information system. The service
agreement expires in June 2001, with an option to extend the agreement for four
consecutive three-year periods.
Expenses totaling $2,208,000, $2,454,000 and $2,560,000 for fiscal 1995,
1996 and 1997, respectively, under the support contract and service agreement
have been reported as selling, general and administrative expenses in the
accompanying statement of operations.
NOTE G--SHAREHOLDERS' EQUITY AND OTHER SHAREHOLDER TRANSACTIONS
On July 31, 1997, the Company announced a fifty-for-one stock split on
shares of common stock outstanding on July 31, 1997. All share and per share
data included in the financial statements have been retroactively adjusted for
the increased shares resulting from the stock split.
F-11
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G--SHAREHOLDERS' EQUITY AND OTHER SHAREHOLDER TRANSACTIONS (CONTINUED)
On August 31, 1997, the Company completed an equity offering of 186,381
shares of common stock that generated net proceeds of $2,490,000 after deducting
expenses. The net proceeds were used for the acquisition of new stores. In
connection with the offering, 4,000 shares of common stock were issued to a
director on July 31, 1997 as payment for consulting and other services provided
to the Company.
Notes receivable from shareholders represent amounts due from employees for
the purchase of common stock and are payable over a seven-year period ending in
July 2004 in equal annual installments of principal and interest at 8%.
The individual shareholders have entered into stock repurchase agreements
with the Company and each other whereby the Company will have a first option and
the shareholders a second option to purchase shares tendered by existing
shareholders. The tendered shares will be purchased at an amount as defined in
the agreements. In the event that these options are not exercised, the investor
group has the right to participate in a proposed sale of shares to a third party
on a pro rata basis. In accordance with the agreements, all transfers of stock
are subject to approval by the Company, the investor group, and, for certain
transfers, the other existing shareholders. The agreements terminate upon the
occurrence of a Triggering Event, which is defined as a repayment in full of the
senior subordinated notes and either (1) an Initial Public Offering or (2) a
sale of the Company at certain predetermined valuation levels.
Pursuant to the issuance of senior subordinated notes, the Company entered
into a Securities Purchase Agreement that granted the investor group warrants to
purchase common stock with an exercise price of $0.01 per share. At January 25,
1998, warrants to purchase common stock totaling 367,950 shares are outstanding
which, if exercised, would represent 17.4% of the Company's equity.
In the absence of a Triggering Event, additional warrants to purchase common
stock will be granted to the lender equal to 4% of outstanding common stock at
December 31, 1998 and 4% of outstanding common stock at December 31, 1999. The
additional warrants are considered in the computation of diluted net earnings
per share. Also, subsequent to December 31, 1999, in the absence of a Triggering
Event, the lender may at its option require the Company to purchase the warrants
at an amount representing the fair value at the date of exercise. As a result,
the redeemable common stock warrants are recorded at estimated fair value in the
accompanying balance sheets as determined by the Company's Board of Directors
using factors including recent sales of common stock to third parties and
estimates of enterprise value based on a multiple of earnings. Changes in the
estimated fair value of the warrants outstanding have been reported as a charge
to retained earnings during each period presented.
If the Company is required to issue additional warrants to the investor
group in 1998 and 1999, the estimated fair value of such warrants will be
recorded as a charge to operations.
The payment of dividends is not permitted under the Company's financing
arrangements.
Two directors of the Company are party to consulting agreements which
provide for total payments of $150,000 annually in exchange for their services
as consultants and directors to the Company.
NOTE H--FEDERAL INCOME TAXES
No income tax expense was recorded in fiscal 1995, 1996 or 1997 due to
operating losses incurred and the Company's nonrecognition of deferred income
tax assets for a portion of the net operating loss carryforwards. A
reconciliation of the Company's total federal income tax expense and the amount
F-12
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE H--FEDERAL INCOME TAXES (CONTINUED)
computed by applying the statutory federal income tax rate of 34% to earnings
(loss) before income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1995 1996 1997
------------- ----------- ----------
<S> <C> <C> <C>
Income tax expense (credit) at statutory rate............................. $ (1,746) $ (627) $ 916
Reconciling items:
Impact of net operating loss carryforward not recognized (recognized)..... 1,703 597 (945)
Items not deductible for tax purposes..................................... 43 30 29
------------- ----------- ----------
Federal income tax expense................................................ $ -- $ -- $ --
------------- ----------- ----------
------------- ----------- ----------
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 25,
1997 1998
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward..................................................... $ 3,170 $ 1,984
General business credit carryforward................................................ 230 230
Accrued expenses not deductible until paid.......................................... 566 587
Store rent expense not deductible until paid........................................ 606 602
Accounts receivable and inventory valuation adjustments............................. 201 203
Inventory costs capitalized for tax purposes........................................ 311 276
Other............................................................................... 22 198
------------ ------------
Total deferred income tax assets...................................................... 5,106 4,080
Deferred income tax liabilities:
Information system costs currently deductible....................................... 1,338 1,207
Other............................................................................... 87 17
------------ ------------
Total deferred income tax liabilities................................................. 1,425 1,224
Valuation allowance................................................................... (3,681) (2,856)
------------ ------------
Net deferred income tax assets........................................................ $ -- $ --
------------ ------------
------------ ------------
</TABLE>
The valuation allowance has been recorded as a result of cumulative losses
in recent years and because recognition of the net deferred income tax assets is
dependent upon the Company's ability to generate future taxable income. Deferred
income tax assets include the income tax benefit of net operating loss
carryforwards that are available to reduce future taxable income of
approximately $5,836,000. These carryforwards will begin expiring in 2011. Also,
general business credit carryforwards of approximately $230,000 are available to
reduce future income tax obligations and begin expiring in 2009.
In the event that deferred income tax assets can be recognized in future
years, the reversal of the valuation allowance of $865,000 recorded at the
Company's formation date in 1994 will be recognized as a reduction of goodwill.
F-13
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I--EMPLOYEE BENEFITS
The Company has a 401(k) retirement plan covering substantially all
employees who meet certain eligibility requirements. The Company contributes
$0.50 for each $1.00 contributed by employees. Employee contributions eligible
for matching contributions are limited to 6% of annual compensation. In
addition, the Plan provides for defined contributions based on age and service.
Charges of $630,000 $613,000 and $675,000 related to the Plan were recognized
for fiscal 1995, 1996 and 1997, respectively. Employee contributions and Company
matching contributions vest immediately, while any other employer contributions
under the Plan are subject to a five-year vesting period.
On January 31, 1998, the Company's shareholders approved an employee stock
purchase plan under which 60,000 shares of the Company's Class B nonvoting
common stock are reserved for purchase by employees. The first $2,000 of each
eligible employee's purchases is at 85% of the fair market value of the common
stock and the remainder of the allowable $5,000 in annual purchases is at fair
market value.
NOTE J--STOCK OPTION PLANS
The Company currently has two incentive plans approved by shareholders on
January 31, 1998, under which stock options may be granted to officers and key
employees of the Company, the 1997 Management Stock Option Plan and the 1997
Incentive Group Stock Option Plan.
Options to purchase common shares under the plans generally are granted only
if certain performance objectives are achieved. The options are granted at $0.01
per share and vest over the period from the date of grant through December 31,
2001, with accelerated vesting under certain conditions, including an initial
public offering. Options expire on December 31, 2004, also subject to
acceleration under certain conditions.
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations for its stock option grants. Generally,
compensation expense is recognized for stock option grants under the plans over
the vesting period based on the fair market value of the underlying stock on the
date it becomes apparent that the performance objective has been achieved.
Options to purchase 73,171 shares of Class A common stock were granted
subsequent to January 25, 1998, under the two incentive plans. Compensation
expense of approximately $200,000 per year will be recognized ratably over the
vesting period, which is generally fiscal 1998 through fiscal 2001. Under the
two plans, which provide for annual performance periods through fiscal 1998,
options to purchase a total of an additional 32,927 shares may be granted.
In addition to the two incentive plans, the Company has granted stock
options to certain key executives. The vesting terms and contractual lives of
these grants are similar to that of the incentive plans. In June 1997, options
to purchase 30,000 shares of Class A common stock were granted, vesting ratably
over the period through fiscal 2002, at a price of $0.01 per share. The
estimated fair value of these options at the date of grant was $15 per share.
Compensation expense is being recognized over the vesting period and was not
significant in fiscal 1997.
In addition, options to purchase 5,000 shares at a price of $25 per share
were granted in fiscal 1997 with an initial term of five years. Since the
options were granted at a fixed price not less than the estimated fair market
value of the Company's common stock on the date of grant, no compensation
expense has been recognized.
At January 25, 1998, options to purchase 35,000 shares were outstanding, and
options to purchase 5,000 shares were exercisable at $25 per share. There were
no options granted in fiscal 1995 or 1996.
F-14
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J--STOCK OPTION PLANS (CONTINUED)
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and has been
determined as if the Company had accounted for its stock option awards using the
fair value method. The fair value of these awards was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rate of 6%; no dividend yield;
expected market price volatility factor of 0.2; and an expected option life of
five years.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting provisions and are fully
transferable. In addition, the model requires input of highly subjective
assumptions. Because the Company's stock options have characteristics
significantly different from traded options and the input assumptions can
materially affect the estimate of fair value, in management's opinion, the
Black-Scholes option model does not necessarily provide a reliable measure of
the fair value of its stock options.
Under SFAS No. 123, the Company would have recorded compensation expense of
$39,000 in fiscal 1997 which would result in pro forma net earnings of
$2,654,000 and pro forma net earnings per share of $1.61--basic and
$1.20--diluted. Pro forma net earnings would not differ from amounts reported in
fiscal 1995 and 1996 as no options were granted in those years.
NOTE K--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (dollars in thousands, except share and per share data):
<TABLE>
<CAPTION>
FISCAL
------------------------------------------
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
Numerator:
Net earnings (loss)................................................. $ (5,134) $ (1,844) $ 2,693
------------- ------------- ------------
------------- ------------- ------------
Denominator:
Basic--weighted average shares...................................... 1,541,250 1,558,603 1,653,312
Effect of dilutive securities:
Warrants............................................................ 544,201
Employee stock options.............................................. 17,885
------------- ------------- ------------
Diluted............................................................. 1,541,250 1,558,603 2,215,398
------------- ------------- ------------
------------- ------------- ------------
Basic earnings (loss) per share....................................... $ (3.33) $ (1.18) $ 1.63
------------- ------------- ------------
------------- ------------- ------------
Diluted earnings (loss) per share..................................... $ (3.33) $ (1.18) $ 1.22
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
F-15
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE L--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of quarterly financial information for each of the last two fiscal
years is as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
FISCAL 1996
Net sales........................... $ 27,430 $ 29,560 $ 29,440 $ 52,850 $ 139,280
Gross profit........................ 7,427 8,106 7,836 15,689 39,058
Operating income (loss)............. (1,365) (1,071) (2,048) 5,375 891
Net earnings (loss)................. (2,051) (1,772) (2,760) 4,739 (1,844)
Basic net earnings (loss) per
share............................. (1.32) (1.14) (1.77) 3.03 (1.18)
Diluted net earnings (loss) per
share (1.32) (1.14) (1.77) 2.30 (1.18)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Net sales.................... $ 32,438 $ 35,270 $ 35,413 $ 64,942 $ 168,063
Gross profit................. 8,498 9,672 9,651 21,769 49,590
Operating income (loss)...... (1,429) (598) (966) 8,480 5,487
Net earnings (loss).......... (2,154) (1,312) (1,742) 7,901 2,693
Basic net earnings (loss) per
share...................... (1.38) (0.84) (0.99) 4.51 1.63
Diluted net earnings (loss)
per share.................. (1.38) (0.84) (0.99) 3.38 1.22
</TABLE>
Quarterly basic per share amounts do not add up to the full year per share
amount due to the timing of the issuance of new shares. Diluted net earnings
(loss) per share for periods with a net loss do not include the impact of
warrants and employee stock options since such inclusion would be antidilutive.
NOTE M--CHANGE IN CAPITALIZATION
Effective September , 1998, the Company restated its articles of
incorporation to include, among other things, the following: (1) increase
authorized shares of all classes of capital stock to 25,000,000 shares,
consisting of 10,000,000 shares of Class A common stock, $.01 par value per
share, 10,000,000 shares of Class B common stock, $.01 par value per share, and
5,000,000 shares of preferred stock, no par value per share; (2) conversion of
all existing Class A voting and Class B nonvoting common stock into newly issued
Class B common stock; (3) entitle the holder of each share of Class A common
stock to one vote and the holder of each share of Class B common stock to ten
votes; and (4) provide equal rights to dividends and distributions to holders of
Class A and Class B common stock.
All share and authorized share amounts have been restated for all periods
presented to give effect to the foregoing transactions.
F-16
<PAGE>
FAMILY CHRISTIAN STORES, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 25, JULY 27,
1998 1998
----------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................................. $ 5,370 $ 2,989
Merchandise inventories............................................................... 32,109 48,385
Other................................................................................. 3,365 4,501
----------- -----------
Total Current Assets................................................................ 40,844 55,875
----------- -----------
Fixed assets, net....................................................................... 12,213 16,516
Intangible assets, net.................................................................. 7,782 11,036
Deposits and miscellaneous.............................................................. 447 497
----------- -----------
Total Assets............................................................................ $ 61,286 $ 83,924
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable...................................................................... $ 31,238 $ 36,108
Accrued liabilities................................................................... 6,867 7,744
Current portion of long-term debt..................................................... 2,000 3,150
----------- -----------
Total current liabilities........................................................... 40,105 47,002
----------- -----------
Long-term debt, less current maturities................................................. 14,973 35,750
Deferred rent and other liabilities..................................................... 2,137 2,185
Redeemable common stock warrants........................................................ 9,199 12,878
Shareholders' Equity (Deficit):
Common stock.......................................................................... 18 18
Additional paid-in capital............................................................ 8,817 8,792
Retained earnings (deficit)........................................................... (13,569) (22,358)
Notes receivable from shareholders.................................................... (394) (343)
----------- -----------
Total Shareholders' Equity (Deficit)................................................ (5,128) (13,891)
----------- -----------
Total Liabilities and Shareholders' Equity (Deficit).................................... $ 61,286 $ 83,924
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-17
<PAGE>
FAMILY CHRISTIAN STORES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JULY 26, JULY 27,
1997 1998
--------- ---------
<S> <C> <C>
Net sales................................................................................... $ 67,708 $ 84,763
Cost of products sold, including store occupancy costs...................................... 49,538 61,228
--------- ---------
Gross profit................................................................................ 18,170 23,535
--------- ---------
Operating Expenses:
Selling, general and administrative expenses.............................................. 18,363 23,723
Depreciation and amortization............................................................. 1,481 1,694
Store opening expenses.................................................................... 353 1,739
--------- ---------
20,197 27,156
--------- ---------
Operating loss.............................................................................. (2,027) (3,621)
Interest expense, net....................................................................... 1,438 1,489
--------- ---------
Net loss.................................................................................... $ (3,465) $ (5,110)
--------- ---------
--------- ---------
Net loss per share--basic................................................................... $ (2.21) $ (2.92)
--------- ---------
--------- ---------
Net loss per share--diluted................................................................. $ (2.21) $ (2.92)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-18
<PAGE>
FAMILY CHRISTIAN STORES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JULY 26, JULY 27,
1997 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................................................... $ (3,465) $ (5,110)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation............................................................................. 1,287 1,486
Amortization of software and other costs................................................. 66 30
Amortization of intangible assets........................................................ 194 208
Amortization of debt discount............................................................ 27 27
Other nonrecurring charges............................................................... -- 982
Changes in operating assets and liabilities:
Merchandise inventories.................................................................. 446 (6,946)
Other current assets..................................................................... 204 (761)
Accounts payable......................................................................... (1,456) 4,870
Other operating liabilities, excluding debt.............................................. 375 567
--------- ---------
Net cash used by operating activities.................................................. (2,322) (4,647)
--------- ---------
Cash Flows from Investing Activities:
Store acquisitions......................................................................... (3,296) (7,416)
Additions to fixed assets.................................................................. (822) (3,189)
--------- ---------
Net cash used by investing activities.................................................. (4,118) (10,605)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from revolving credit facility, net............................................... 5,400 13,800
Payments on term note...................................................................... (1,000) (500)
Proceeds from the issuance of common stock................................................. 2,051 --
Deferred financing costs................................................................... -- (455)
Other...................................................................................... 15 26
--------- ---------
Net cash provided by financing activities.............................................. 6,466 12,871
--------- ---------
Net increase (decrease) in cash and equivalents.............................................. 26 (2,381)
Cash and Equivalents at Beginning of Period.................................................. 1,399 5,370
--------- ---------
Cash and Equivalents at End of Period........................................................ $ 1,425 $ 2,989
--------- ---------
--------- ---------
Other cash flow information:
Interest payments............................................................................ $ 1,319 $ 1,320
--------- ---------
--------- ---------
Income taxes refunded........................................................................ 23 106
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-19
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JULY 27, 1998
NOTE 1--GENERAL
The accompanying financial statements reflect the accounts of Family
Christian Stores, Inc. (the Company). The Company is the largest retailer in the
United States dedicated solely to Christian-related products. Product offerings
include Christian books and Bibles, gifts and cards, music, children's
merchandise and church supplies.
The unaudited statements as of July 27, 1998, and July 26, 1997, include, in
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position of the
Company as of July 27, 1998, and the results of operations and cash flows for
the six months ended July 27, 1998 and July 26, 1997. These financial statements
are condensed and therefore do not include all of the information and footnotes
required by generally accepted accounting principles.
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 as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Accordingly, actual results could differ
from those estimates.
Due to the seasonal nature of the Company's business, the results of
operations for the six months ended July 27, 1998, are not necessarily
indicative of the results of operations to be achieved for the fiscal year
ending January 31, 1999.
NOTE 2--EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common shares and common share equivalents outstanding during the
periods presented (1,752,000 at July 27, 1998, and 1,566,000 at July 26, 1997,
basic and diluted). The effects of stock options and redeemable common stock
warrants are not included in the computation of diluted earnings per share
because they are anti-dilutive for all periods presented.
NOTE 3--INCOME TAXES
No income tax provision was recorded for the six months ended July 27, 1998,
and July 26, 1997 due to operating losses incurred and the Company's
nonrecognition of deferred income tax assets for a portion of net operating loss
carryforwards.
NOTE 4--COMPREHENSIVE INCOME (LOSS)
At the beginning of fiscal 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and
display of "comprehensive income," which is the total of net income (loss) and
all other non-owner changes in shareholders' equity (deficit) and its
components. The Company has no components of comprehensive income (loss) other
than its net loss, and consequently its comprehensive loss is equal to its net
loss for all periods presented.
NOTE 5--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131, which supersedes SFAS Nos. 14,
F-20
<PAGE>
FAMILY CHRISTIAN STORES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JULY 27, 1998
NOTE 5--RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
18, 24 and 30, establishes new standards for segment reporting in which
reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. The Company will adopt the standard by the end of fiscal 1998 and
does not expect the new standard to have a significant effect on previously
reported information.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES
INSTRUMENTS AND HEDGING ACTIVITIES, which provides a consistent standard for
recognition and measurement of derivatives and hedging activities. The Company
is in the process of evaluating SFAS No. 133 and its impact and plans to adopt
the standard in fiscal 2000.
NOTE 6--ACQUISITION AND REFINANCING
On June 1, 1998, the Company acquired Joshua's Christian Stores (Joshua's)
for $11.7 million including transaction costs. Joshua's is a leading Christian
retail chain headquartered in Fort Worth, Texas, with sales of $32.0 million for
its fiscal year ended March 31, 1998. The transaction has been accounted for as
a purchase and, accordingly, Joshua's assets, liabilities and results of
operations have been consolidated with those of the Company since acquisition.
Goodwill of $3.6 million was recorded in connection with the acquisition and is
being amortized on a straight-line basis over thirty-five years.
On July 17, 1998, the Company amended and restated its outstanding long-term
credit facility. The restated loan agreement provides for a revolving credit
facility of $22 million and term notes payable of $9.5 million and $5 million,
and is collateralized by substantially all of the Company's assets.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tandycrafts, Inc.
In our opinion, the accompanying balance sheet and related statement of
income, changes in investment by parent and cash flows present fairly, in all
material respects, the financial position of Joshua's Christian Stores (a
division of Development Association, Inc.) at March 31, 1998, and the results of
its operations and its cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Joshua's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Fort Worth, Texas
May 27, 1998
F-22
<PAGE>
JOSHUA'S CHRISTIAN STORES
STATEMENT OF INCOME
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Net sales...................................................................... $32,006,948
Cost of goods sold............................................................. 19,184,638
----------
Gross profit................................................................... 12,822,310
Expenses:
Selling, general and administrative.......................................... 11,875,229
Depreciation and amortization................................................ 611,661
----------
Total expenses............................................................. 12,486,890
----------
Income before provision for income taxes....................................... 335,420
Provision for income taxes..................................................... 11,020
----------
Net income............................................................... $ 324,400
----------
----------
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-23
<PAGE>
JOSHUA'S CHRISTIAN STORES
BALANCE SHEET
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 125,728
Trade accounts receivable, net............................................... 84,843
Inventories.................................................................. 7,441,783
Other current assets......................................................... 883,837
----------
Total current assets....................................................... 8,536,191
----------
Property and equipment, at cost................................................ 5,330,637
Accumulated depreciation....................................................... (3,127,084)
----------
Property and equipment, net................................................ 2,203,553
----------
Other assets................................................................... 15,285
Goodwill....................................................................... 1,354,774
----------
$12,109,803
----------
----------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................................................. 2,366,817
Payable to affiliates........................................................ 60,962
Accrued payroll and bonuses.................................................. 610,062
Accrued liabilities and other................................................ 823,304
----------
Total current liabilities.................................................. 3,861,145
----------
Investment by Parent........................................................... 8,248,658
----------
$12,109,803
----------
----------
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-24
<PAGE>
JOSHUA'S CHRISTIAN STORES
STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 324,400
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 611,661
Changes in operating assets and liabilities:
Receivables............................................................... (5,191)
Inventories............................................................... 3,104,340
Other current assets...................................................... 167,569
Accounts payable and accrued expenses..................................... (788,947)
---------
Net cash flows from operating activities........................................ $3,413,832
---------
Cash flows from investing activities:
Additions to property and equipment........................................... (439,595)
---------
Net cash used for investing activities.......................................... (439,595)
---------
Cash flows from financing activities:
Repayments to Parent.......................................................... (3,447,033)
---------
Net cash used by financing activities........................................... (3,447,033)
---------
Decrease in cash................................................................ (472,796)
Balance, beginning of period.................................................... 598,524
---------
Balance, end of period.......................................................... $ 125,728
---------
---------
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-25
<PAGE>
JOSHUA'S CHRISTIAN STORES
STATEMENT OF CHANGES IN INVESTMENT BY PARENT
MARCH 31, 1998
<TABLE>
<S> <C>
Balance at March 31, 1997...................................................... $11,371,291
Repayments to Parent......................................................... (3,447,033)
Net income................................................................... 324,400
----------
Balance at March 31, 1998...................................................... $8,248,658
----------
----------
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-26
<PAGE>
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Joshua's Christian Stores ("Joshua's" or "Company") is a retail chain of 58
stores specializing in inspirational books, music and gifts. Joshua's is a
division of The Development Association, Inc., which is a wholly-owned
subsidiary of Tandycrafts, Inc. ("Parent"). Under this corporate structure, the
Parent incurs various costs in connection with the operations of Joshua's. The
accompanying financial statements include an allocation of such costs on a
reasonable basis in order to present the stand-alone historical operations of
the Company. See Note 3 for further discussion of these allocated expenses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
INVENTORIES
Inventories consist entirely of finished goods and are stated at the lower
of average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment is depreciated using the straight-line method over
its estimated useful life, ranging from 3 to 10 years. Expenditures for
maintenance, repairs, renewals and betterments which do not materially prolong
the useful lives of the assets are charged to income as incurred.
GOODWILL
The cost of stores and/or businesses acquired in excess of the fair value of
the net identifiable assets acquired has been allocated to goodwill. Goodwill is
amortized using the straight-line basis over the estimated useful life of forty
years. Accumulated goodwill amortization at March 31, 1998 was $211,747.
Goodwill amortization expense for the twelve months ended March 31, 1998
approximated $37,000.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events indicate the
carrying value of an asset or group of assets may not be recoverable. The
impairment review includes a comparison of future cash flows expected to be
generated by the asset or group of assets with their associated net book values.
If the net book value exceeds expected undiscounted cash flows, an impairment
loss is recognized to the extent net book value exceeds fair value.
PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are expensed as incurred.
ADVERTISING EXPENSES
Advertising costs are expensed the first time the advertising takes place.
Advertising expense for the twelve months ended March 31, 1998 was $798,450.
Prepaid advertising costs at March 31, 1998 were approximately $107,000.
F-27
<PAGE>
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are recorded at cost, which approximates fair
value due to the short maturities of these instruments. During the twelve months
ended March 31, 1998, no financial instruments were held or issued for trading
purposes.
INCOME TAXES
Income taxes are calculated in accordance with the liability method which
requires that deferred tax assets and liabilities be recognized based on
differences between financial statement and tax bases of assets and liabilities
using presently enacted rates. Joshua's is included in the consolidated federal
tax return filed by the Parent. The income tax provision included in the
accompanying financial statements is based on items attributable to Joshua's
which are anticipated to be utilized in the consolidated tax return. Valuation
allowances are provided when in the opinion of management, it is more likely
than not that deferred tax assets will not be realized at the consolidated
level. The payable or receivable arising from the intercompany income tax
allocation is recorded as an increase or decrease in Investment by Parent.
NOTE 2--SUBSEQUENT EVENT
On April 20, 1998, Tandycrafts announced that it had signed a Definitive
Agreement to sell Joshua's to Family Christian Stores for $11,500,000, subject
to contractual adjustments. The sale is expected to close on or about June 1,
1998.
NOTE 3--RELATED PARTY TRANSACTIONS
The Company has received services provided by the Parent which include
employee benefits administration, treasury, risk management, payroll and human
resource administration, tax compliance, management information services and
other miscellaneous services. The costs associated with these services have been
allocated to the Company based on expenses incurred by the Parent directly
related to the Company or the Company's proportionate share of the Parent's
costs related to these services. Management of the Company believes that these
methods of allocation are reasonable. The total amount allocated from the Parent
for the twelve months ended March 31, 1998 approximated $1,017,500.
The Company also leases office and distribution space from the Parent at its
headquarters in Fort Worth, Texas. The lease is a month-to-month lease and
during the twelve months ended March 31, 1998, the Company paid rent of $157,000
to the Parent under this lease arrangement.
All cash advances from the Parent to the Company outstanding at March 31,
1998 are considered to be permanent advances and, as such, are classified as
Investment by Parent in the accompanying balance sheet. Interest expense has not
been allocated to the Company.
NOTE 4--REPOSITIONING CHARGE
During the quarter ended March 31, 1997, the Company recorded a
repositioning charge of $5,300,000 in cost of sales and selling, general and
administrative expenses to write-down and liquidate discontinued inventory and
to close certain underperforming stores. During the twelve months ended March
31, 1998, a significant portion of the discontinued inventory was liquidated and
thirteen underperforming stores were closed. Sales and operating losses for the
twelve months ended March 31,
F-28
<PAGE>
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--REPOSITIONING CHARGE (CONTINUED)
1998 for the thirteen stores closed or targeted for closure were $1,609,800 and
$222,600, respectively. Due to favorable settlements on leases of closed stores,
during the twelve months ended March 31, 1998, the Company reversed $250,000 of
the reserve initially established for lease terminations and has included such
amount as a credit to selling, general and administrative expenses.
NOTE 5--PROPERTY AND EQUIPMENT
AS OF MARCH 31, 1998:
<TABLE>
<S> <C>
Property and equipment, at cost:
Fixtures and equipment........................................ $4,531,467
Leasehold improvements........................................ 799,170
----------
5,330,637
Less accumulated depreciation................................... (3,127,084)
----------
Property and equipment, net..................................... $2,203,553
----------
----------
</TABLE>
NOTE 6--ACCRUED LIABILITIES
ACCRUED LIABILITIES CONSISTED OF THE FOLLOWING AT MARCH 31, 1998:
<TABLE>
<S> <C>
Store closing accrual............................................. 212,707
Accrued rent...................................................... 211,311
Other............................................................. 399,286
---------
$ 823,304
---------
---------
</TABLE>
NOTE 7--INCOME TAXES
The provision for income taxes for the twelve months ended March 31, 1998 is
as follows:
<TABLE>
<S> <C>
Current tax expense (benefit).................................... $(917,994)
Deferred tax expense............................................. 929,014
---------
Total provision.................................................. $ 11,020
---------
---------
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
<TABLE>
<S> <C>
Statutory U.S. tax provision..................................... $ 114,043
Increase (decrease) in rates resulting from:
Charitable contribution of inventory........................... (116,325)
Other.......................................................... 13,302
---------
Tax provision.................................................... $ 11,020
---------
---------
</TABLE>
F-29
<PAGE>
JOSHUA'S CHRISTIAN STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities classified as Investment by Parent on
the accompanying balance sheet totaled $889,896 (net of a valuation allowance of
$282,950 related to state tax loss carryforwards) and $200,447, respectively, at
March 31, 1998. Deferred tax assets result from differences in the timing of the
recognition of inventory reserves, store closing accruals and goodwill
amortization for financial and tax purposes, as well as charitable contribution
carryforwards. Deferred tax liabilities result from differences in depreciation
of fixed assets for financial and tax purposes.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company leases certain properties, primarily retail stores, under
operating leases which expire through November 2005. Real estate taxes,
maintenance and certain other costs are generally borne by the Company. The
composition of total rent expense for operating leases for the twelve months
ended March 31, 1998 is as follows:
<TABLE>
<S> <C>
Rentals:
Minimum....................................................... $2,469,135
Contingent (percentage of sales).............................. 37,262
---------
$2,506,397
---------
---------
</TABLE>
Minimum rental commitments for noncancellable operating leases (retail store
leases only) at March 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 1,965,500
2000............................................................................ 1,694,100
2001............................................................................ 1,405,300
2002............................................................................ 1,126,600
2003............................................................................ 811,900
2004 and thereafter............................................................. 1,725,800
------------
$ 8,729,200
------------
------------
</TABLE>
NOTE 9--TANDYCRAFTS RETIREMENT SAVINGS PLAN
All eligible employees of Joshua's may participate in the Tandycrafts
Retirement Savings Plan. Participants may contribute between 3% and 15% of gross
salary and wages into the 401(k) portion of the plan which becomes immediately
vested. Participants also have the ability to direct their contributions into
various investment options. The Company's matching contribution is 100% of the
first 5% of the participant's contribution and is invested in the Parent's
common stock. The Company's contribution becomes vested upon the completion of
five years of credited service. The employee and Company contributions are
maintained by a corporate trustee. Company contributions to the plan for the
twelve months ended March 31, 1998 totaled $108,288.
F-30
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
SHAREHOLDER OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 7
USE OF PROCEEDS........................................................... 13
DIVIDEND POLICY........................................................... 13
CAPITALIZATION............................................................ 14
DILUTION.................................................................. 15
SELECTED FINANCIAL AND OPERATING DATA OF FAMILY CHRISTIAN STORES, INC..... 16
SELECTED FINANCIAL AND OPERATING DATA OF JOSHUA'S CHRISTIAN STORES........ 17
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS..................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 21
BUSINESS.................................................................. 29
MANAGEMENT................................................................ 38
CERTAIN TRANSACTIONS...................................................... 47
PRINCIPAL AND SELLING SHAREHOLDERS........................................ 49
DESCRIPTION OF CAPITAL STOCK.............................................. 51
SHARES ELIGIBLE FOR FUTURE SALE........................................... 56
UNDERWRITING.............................................................. 57
LEGAL MATTERS............................................................. 59
EXPERTS................................................................... 59
ADDITIONAL INFORMATION.................................................... 59
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
----------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO]
CLASS A COMMON STOCK
----------------------
PROSPECTUS
--------------------
NationsBanc Montgomery
Securities LLC
BancBoston Robertson Stephens
BT Alex. Brown
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All amounts are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq application fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 13,275
NASD filing fee.................................................... 5,000
Nasdaq application fee............................................. *
Blue sky qualification fee and expenses............................ *
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Transfer agent, custodian and registrar fees....................... *
Miscellaneous...................................................... *
---------
Total.............................................................. $ *
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 561 of the Michigan Business Corporation Act ("MBCA") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The Registrant's Restated Articles of Incorporation and
Bylaws provide that the Registrant shall indemnify its directors and such
officers, employees and agents as the Board of Directors may determine from time
to time, to the fullest extent permitted by the MBCA. The Registrant will enter
into indemnification agreements with its directors and certain of its officers,
employees and agents, which will provide that the Registrant shall indemnify
such parties pursuant to Section 561 of the MBCA.
The MBCA permits a Michigan corporation to include in its certificate of
incorporation a provision eliminating or limiting a director's liability to a
corporation or its shareholders for monetary damages for breaches of fiduciary
duty. The enabling statute provides, however, that a corporation may indemnify
such persons for liability for the amount of a financial benefit received by a
director to which he or she is not entitled, intentional infliction of harm to
the Company or its shareholders, a violation of Section 551 of the MBCA, or an
intentional criminal act cannot be eliminated or limited in this manner. The
Registrant's Restated Articles of Incorporation and Bylaws include a provision
which eliminates, to the fullest extent permitted, director liability for
monetary damages for breaches of fiduciary duty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 21, 1998, the Registrant issued shares of Common Stock to its
employees pursuant to the terms of its Employee Stock Purchase Plan. The shares
of Common Stock were issued in reliance upon the exemption from registration
available under Rule 701 of the Securities Act of 1933 and Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
II-1
<PAGE>
On March 20, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Incentive Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On March 20, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Management Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On February 2, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Incentive Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On February 2, 1998, the Registrant granted stock options to purchase an
aggregate of shares of Common Stock to certain employees, at an exercise
price of $ per share, pursuant to its Management Stock Option Plan. The
options were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On August 31, 1997, the Registrant completed a private placement of
shares of Common Stock at a price of $ per share. The shares of Common
Stock issued in connection with the August 31, 1997 offering were offered and
sold by the Registrant without registration, in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act and Rules
501-503 and 506-508 of Regulation D promulgated thereunder.
On August 31, 1997, the Registrant issued shares of Common Stock to Neil
Topham, a director, as payment for consulting services rendered. The shares of
Common Stock were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On July 31, 1997, the Registrant sold shares of Common Stock to Leslie
E. Dietzman, an officer, at a purchase price of $ per share. The shares of
Common Stock were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On July 31, 1997, the Registrant sold shares of Common Stock to Richard
M. Butler, an officer, at a purchase price of $ per share. The shares of
Common Stock were not registered under the Securities Act, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
On June 23, 1997, the Registrant granted an option to purchase
shares of Common Stock, at an exercise price of $ per share, to Craig G.
Wassenaar as consideration for entering into an employment agreement. Such
option becomes exercisable at a rate of 20% per year on the first five
anniversaries of the date of grant. On June 23, 1998, Mr. Wassenaar exercised
such option to purchase shares of Common Stock, at an aggregate
purchase price of $ . Such option and shares of Common Stock were not
registered under the Securities Act, in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
On September 27, 1996, the Registrant sold shares of Common Stock at a
purchase price of $ per share to certain employees who were appointed to the
Company's senior management team. The
II-2
<PAGE>
shares of Common Stock issued in connection with the payment for services were
offered and sold by the Registrant without registration, in reliance upon the
exemption from registration available under Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement among the Registrant, the Selling Shareholders and the Underwriters*
3.1 Articles of Incorporation**
3.2 Bylaws**
3.3 Form of Restated Articles of Incorporation**
3.4 Form of Restated Bylaws**
4.1 Specimen Class A Common Stock Certificate*
5.1 Opinion of Counsel*
10.1 Incentive Group Stock Option Plan*
10.2 Management Stock Option Plan*
10.3 1997 Employee Stock Purchase Plan*
10.4 Stock Option and Restricted Stock Plan of 1998*
10.5 Amended and Restated Loan Agreement among the Registrant, certain financial institutions and Bank of
Scotland, dated as of October 31, 1994 and amended and restated on July 17, 1998**
10.6 Amended and Restated Promissory Note (Tranche A Term Note) issued by the Registrant to the Bank of
Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17, 1998**
10.7 Promissory Note (Tranche B Term Note) issued by the Registrant to the Bank of Scotland, as Agent, dated
July 17, 1998**
10.8 Amended and Restated Promissory Note (Revolving Credit Note) issued by the Registrant to the Bank of
Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17, 1998**
10.9 General Security Agreement between the Registrant and the Bank of Scotland, as Agent, dated as of
October 31, 1994**
10.10 Amendment to Security Agreement and Acknowledgment of Security Interests, dated as of July 17, 1998**
10.11 Securities Purchase Agreement among the shareholders of the Registrant, including Electra Investment
Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994
10.12 Shareholders' Agreement among the shareholders of the Registrant, including Electra Investment Trust,
P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994 (the Shareholders'
Agreement)**
10.13 Amendment No. 1 to the Shareholders' Agreement, dated May 1, 1995**
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.14 Buy and Sell Agreement among the Shareholders of the Registrant, including Electra Investment Trust,
P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994**
10.15 Asset Purchase Agreement among the Registrant, Tandycrafts, Inc. and The Development Association, Inc.,
dated April 19, 1998**
10.16 Series A Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of November 17,
1994**
10.17 Series A Warrant issued by the Registrant to Electra Associates, Inc., dated as of November 17, 1994**
10.18 Series B Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of December 31,
1996**
10.19 Series B Warrant issued by the Registrant to Electra Associates, Inc., dated as of December 31, 1996**
10.20 Base Software License Agreement between Andersen Consulting and The Zondervan Corporation, dated May 9,
1994**
10.21 Strategic Technology License and Services Agreement between Andersen Consulting and The Zondervan
Corporation, dated May 9, 1994**
10.22 Modification Agreement between Andersen Consulting, Zondervan Corporation, HarperCollins Publishers
Inc., General Electric Capital Computer Leasing Corporation and the Registrant, dated November 1,
1994**
10.23 Advisory Agreement between the Registrant and Electra Inc., dated as of November 14, 1994**
10.24 Form of Lease*
10.25 Form Director and Officer Indemnity Agreement*
10.26 Promissory Note, dated November 14, 1994, between the Registrant and Leslie E. Dietzman**
10.27 Promissory Note, dated November 14, 1994, between the Registrant and Richard M. Butler**
10.28 Promissory Note, dated November 14, 1994, between the Registrant and J. Hal Bailey**
10.29 Promissory Note, dated November 14, 1994, between the Registrant and Craig B. Klamer**
10.30 Form of Employment Agreement for Executive Officers*
10.31 Consulting Agreement, dated November 2, 1994, between the Registrant and George Craig*
10.32 Consulting Agreement, dated November 2, 1994, between the Registrant and Neil Topham*
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1)*
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts and Reserves.
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
II-4
<PAGE>
UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant further undertakes that:
(1) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus as filed as
part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of the registration statement as of the time it was declared
effective;
(2) for the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
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; and
(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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Grand
Rapids, County of Kent, State of Michigan, on the 17th day of September, 1998.
<TABLE>
<S> <C> <C>
FAMILY CHRISTIAN STORES, INC.
By: /s/ LESLIE E. DIETZMAN
-----------------------------------------
Leslie E. Dietzman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President and Chief
* Executive Officer and
- ------------------------------ Director (Principal September 17, 1998
Leslie E. Dietzman Executive Officer)
* Senior Vice President
- ------------------------------ (Principal Accounting September 17, 1998
Craig G. Wassenaar Officer)
*
- ------------------------------ Chairman of the Board September 17, 1998
George Craig
*
- ------------------------------ Director September 17, 1998
Peter A. Carnwath
*
- ------------------------------ Director September 17, 1998
Scott D. Steele
*
- ------------------------------ Director September 17, 1998
Neil Topham
<TABLE>
<S> <C> <C> <C>
*By: /s/ CRAIG G. WASSENAAR
*
-------------------------
Craig G. Wassenaar
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholders
Family Christian Stores, Inc.
We have audited the financial statements of Family Christian Stores, Inc. as of
January 26, 1997 and January 25, 1998, and for each of the three fiscal years in
the period ended January 25, 1998 and have issued our report thereon dated March
2, 1998, except for Note M as to which the date is September , 1998 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
Grand Rapids, Michigan
March 2, 1998
The foregoing report is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note M to the financial
statements.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
September 14, 1998
S-1
<PAGE>
FAMILY CHRISTIAN STORES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS FOR
BEGINNING COSTS AND ACCOUNTS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES WRITTEN OFF END OF PERIOD
- --------------------------------------------------------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
Fiscal year ended January 25, 1998
Allowance for doubtful accounts........................ $ 66 $ 36 $ 13 $ 89
Allowance for sales returns............................ 30 10 -- 40
Allowance for inventory obsolescence and shrinkage..... 1,294 2,173 1,713 1,754
Fiscal year ended January 26, 1997
Allowance for doubtful accounts........................ 73 10 17 66
Allowance for sales returns............................ 30 -- -- 30
Allowance for inventory obsolescence and shrinkage..... 1,226 2,831 2,763 1,294
Fiscal year ended January 28, 1996
Allowance for doubtful accounts........................ 67 15 9 73
Allowance for sales returns............................ 30 -- -- 30
Allowance for inventory obsolescence and shrinkage..... 902 2,566 2,242 1,226
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Registrant, the Selling Shareholders and the
Underwriters*
3.1 Articles of Incorporation**
3.2 Bylaws**
3.3 Form of Restated Articles of Incorporation**
3.4 Form of Restated Bylaws**
4.1 Specimen Class A Common Stock Certificate*
5.1 Opinion of Counsel*
10.1 Incentive Group Stock Option Plan*
10.2 Management Stock Option Plan*
10.3 1997 Employee Stock Purchase Plan*
10.4 Stock Option and Restricted Stock Plan of 1998*
10.5 Amended and Restated Loan Agreement among the Registrant, certain financial institutions and
Bank of Scotland, dated as of October 31, 1994 and amended and restated on July 17, 1998**
10.6 Amended and Restated Promissory Note (Tranche A Term Note) issued by the Registrant to the Bank
of Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17,
1998**
10.7 Promissory Note (Tranche B Term Note) issued by the Registrant to the Bank of Scotland, as
Agent, dated July 17, 1998**
10.8 Amended and Restated Promissory Note (Revolving Credit Note) issued by the Registrant to the
Bank of Scotland, as Agent, dated as of November 17, 1994 and amended and restated on July 17,
1998**
10.9 General Security Agreement between the Registrant and the Bank of Scotland, as Agent, dated as
of October 31, 1994**
10.10 Amendment to Security Agreement and Acknowledgment of Security Interests, dated as of July 17,
1998**
10.11 Securities Purchase Agreement among the shareholders of the Registrant, including Electra
Investment Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14,
1994
10.12 Shareholders' Agreement among the shareholders of the Registrant, including Electra Investment
Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994 (the
Shareholders' Agreement)**
10.13 Amendment No. 1 to the Shareholders' Agreement, dated May 1, 1995**
10.14 Buy and Sell Agreement among the Shareholders of the Registrant, including Electra Investment
Trust, P.L.C. and Electra Associates, Inc., and the Registrant, dated November 14, 1994**
10.15 Asset Purchase Agreement among the Registrant, Tandycrafts, Inc. and The Development
Association, Inc., dated April 19, 1998**
10.16 Series A Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of
November 17, 1994**
10.17 Series A Warrant issued by the Registrant to Electra Associates, Inc., dated as of November 17,
1994**
10.18 Series B Warrant issued by the Registrant to Electra Investment Trust P.L.C., dated as of
December 31, 1996**
10.19 Series B Warrant issued by the Registrant to Electra Associates, Inc., dated as of December 31,
1996**
10.20 Base Software License Agreement between Andersen Consulting and The Zondervan Corporation, dated
May 9, 1994**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.21 Strategic Technology License and Services Agreement between Andersen Consulting and The
Zondervan Corporation, dated May 9, 1994**
10.22 Modification Agreement between Andersen Consulting, Zondervan Corporation, HarperCollins
Publishers Inc., General Electric Capital Computer Leasing Corporation and the Registrant,
dated November 1, 1994**
10.23 Advisory Agreement between the Registrant and Electra Inc., dated as of November 14,1994**
10.24 Form of Lease*
10.25 Form Director and Officer Indemnity Agreement*
10.26 Promissory Note, dated November 14, 1994, between the Registrant and Leslie E. Dietzman**
10.27 Promissory Note, dated November 14, 1994, between the Registrant and Richard M. Butler**
10.28 Promissory Note, dated November 14, 1994, between the Registrant and J. Hal Bailey**
10.29 Promissory Note, dated November 14, 1994, between the Registrant and Craig B. Klamer**
10.30 Form of Employment Agreement for Executive Officers*
10.31 Consulting Agreement, dated November 2, 1994, between the Registrant and George Craig*
10.32 Consulting Agreement, dated November 2, 1994, between the Registrant and Neil Topham*
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1)*
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 10.11
EXECUTION COPY
- ---------------------------------------------------------------------------
FAMILY BOOKSTORES COMPANY, INC.
--------------------------------------------------
SECURITIES PURCHASE AGREEMENT
--------------------------------------------------
Senior Subordinated Notes due 2003
($5,000,000)
Warrants to Purchase
Shares of Common Stock
(Initially Equal on an Aggregate Basis to 18%
of the Outstanding Fully-Diluted Common Stock
Subject to Increase in Certain Events)
Dated as of November 14, 1994
- ---------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. AUTHORIZATION OF FINANCING. . . . . . . . . . . . . . . . . . . . . .1
2. PURCHASE AND SALE OF SECURITIES . . . . . . . . . . . . . . . . . . .2
3. CLOSING OF SALE OF SECURITIES . . . . . . . . . . . . . . . . . . . .2
4. CONDITIONS OF CLOSING . . . . . . . . . . . . . . . . . . . . . . . .3
4A. PURCHASERS' CONDITIONS. . . . . . . . . . . . . . . . . . . .3
(i) OPINIONS OF COUNSEL . . . . . . . . . . . . . . . . . . . . .3
(ii) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. . . . . . . . . .3
(iii) REGISTRATION RIGHTS AGREEMENT . . . . . . . . . . . . . . . .3
(iv) PURCHASE PERMITTED BY APPLICABLE LAWS . . . . . . . . . . . .3
(v) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION . . . . . . .4
(vi) APPROVALS AND CONSENTS. . . . . . . . . . . . . . . . . . . .4
(vii) NO MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . .4
(viii) PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . .4
(ix) CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . .5
(x) FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT . . . . . . . . .5
(xi) EMPLOYMENT AGREEMENT. . . . . . . . . . . . . . . . . . . . .5
(xii) SHAREHOLDERS' AGREEMENT . . . . . . . . . . . . . . . . . . .5
(xiii) TRANSACTION FEE AND COUNSEL FEES. . . . . . . . . . . . . . .5
(xiv) ASSET PURCHASE AGREEMENT. . . . . . . . . . . . . . . . . . .5
(xv) ADVISORY AGREEMENT. . . . . . . . . . . . . . . . . . . . . .5
(xvi) LETTER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . .5
(xvii) EQUITY INVESTMENT . . . . . . . . . . . . . . . . . . . . . .5
(xviii) BOARD APPROVAL. . . . . . . . . . . . . . . . . . . . . . . .6
(xix) BUY AND SELL AGREEMENT. . . . . . . . . . . . . . . . . . . .6
4B. COMPANY'S CONDITIONS. . . . . . . . . . . . . . . . . . . . .6
(i) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. . . . . . . . . .6
(ii) PURCHASE PERMITTED BY APPLICABLE LAWS . . . . . . . . . . . .6
(iii) APPROVALS AND CONSENTS. . . . . . . . . . . . . . . . . . . .6
(iv) PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . .6
(v) AGREEMENTS WITH PURCHASERS. . . . . . . . . . . . . . . . . .6
(vi) EQUITY INVESTMENT . . . . . . . . . . . . . . . . . . . . . .6
(vii) ASSET PURCHASE AGREEMENT. . . . . . . . . . . . . . . . . . .7
(viii) SENIOR DEBT . . . . . . . . . . . . . . . . . . . . . . . . .7
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<PAGE>
5. PREPAYMENTS AND PURCHASE OF NOTES . . . . . . . . . . . . . . . . . .7
5A. REQUIRED PREPAYMENTS. . . . . . . . . . . . . . . . . . . . .7
5B. OPTIONAL PREPAYMENT . . . . . . . . . . . . . . . . . . . . .7
5C. NOTICE OF OPTIONAL PREPAYMENTS. . . . . . . . . . . . . . . .7
5D. PARTIAL PREPAYMENT PRO RATA . . . . . . . . . . . . . . . . .7
5E. RETIREMENT OF NOTES . . . . . . . . . . . . . . . . . . . . .8
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . .8
6A. FINANCIAL STATEMENTS AND OTHER REPORTS. . . . . . . . . . . .8
6B. INSPECTION OF PROPERTY. . . . . . . . . . . . . . . . . . . 11
6C. COVENANT TO SECURE NOTES EQUALLY. . . . . . . . . . . . . . 11
6D. MAINTENANCE OF PROPERTIES; INSURANCE. . . . . . . . . . . . 11
6E. CORPORATE EXISTENCE, ETC. . . . . . . . . . . . . . . . . . 12
6F. PAYMENT OF TAXES, CLAIMS AND SENIOR DEBT. . . . . . . . . . 12
6G. COMPLIANCE WITH LAWS, ETC.. . . . . . . . . . . . . . . . . 12
6H. ATTENDANCE AT BOARD MEETINGS; BOARD MEMBERS . . . . . . . . 13
6I. SECURITIES FILINGS. . . . . . . . . . . . . . . . . . . . . 13
6J. PAYMENTS BY SUBSIDIARIES. . . . . . . . . . . . . . . . . . 13
6K. RESERVATION OF SHARES . . . . . . . . . . . . . . . . . . . 13
6L. HART-SCOTT FILINGS. . . . . . . . . . . . . . . . . . . . . 13
6M. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . 14
6N. MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 14
6O. CONSENT TO TRANSFER BY BANK OF SCOTLAND . . . . . . . . . . 14
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 14
7A. FINANCIAL COVENANTS . . . . . . . . . . . . . . . . . . . . 14
7B. RESTRICTIONS ON DEBT. . . . . . . . . . . . . . . . . . . . 16
7C. RESTRICTIONS ON SALES, MERGERS AND CONSOLIDATIONS . . . . . 18
7D. RESTRICTIONS ON LIENS . . . . . . . . . . . . . . . . . . . 18
7E. RESTRICTIONS ON DIVIDENDS . . . . . . . . . . . . . . . . . 20
7F. RESTRICTIONS ON TRANSACTIONS WITH CERTAIN PARTIES . . . . . 20
7G. RESTRICTIONS ON INVESTMENTS AND CAPITAL EXPENDITURES. . . . 21
7G (b) ADJUSTED CAPITAL EXPENDITURES. . . . . . . . . . . . . . . 22
7H. RESTRICTIONS ON SALE AND LEASE-BACK TRANSACTIONS. . . . . . 23
7I. RESTRICTIONS ON SALES OF ASSETS . . . . . . . . . . . . . . 23
7J. RESTRICTIONS ON SUBSIDIARIES. . . . . . . . . . . . . . . . 23
7K. CHANGE IN BUSINESS. . . . . . . . . . . . . . . . . . . . . 24
7L. PAYMENT OF NOTES. . . . . . . . . . . . . . . . . . . . . . 24
7M. NO DEBT SENIOR TO OR PARI PASSU WITH NOTES. . . . . . . . . 24
7N. NO AMENDMENT OF CHARTER OR BY-LAWS. . . . . . . . . . . . . 24
7O. COMPLIANCE WITH ERISA . . . . . . . . . . . . . . . . . . . 24
7P. FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT . . . . . . . . 25
7Q. ISSUANCE OF ADDITIONAL CAPITAL STOCK. . . . . . . . . . . . 25
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<PAGE>
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . 25
8A. DEFAULT; ACCELERATION . . . . . . . . . . . . . . . . . . . 25
8B. RESCISSION OF ACCELERATION. . . . . . . . . . . . . . . . . 28
8C. OTHER REMEDIES. . . . . . . . . . . . . . . . . . . . . . . 28
9. REPRESENTATIONS, COVENANTS AND WARRANTIES . . . . . . . . . . . . . 28
9A. ORGANIZATION; CORPORATE AUTHORITY . . . . . . . . . . . . . 28
9B. BUSINESS; FINANCIAL STATEMENTS. . . . . . . . . . . . . . . 29
9C. CAPITAL STOCK AND RELATED MATTERS . . . . . . . . . . . . . 29
9D. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . 30
9E. OUTSTANDING DEBT. . . . . . . . . . . . . . . . . . . . . . 30
9F. TITLE TO PROPERTIES . . . . . . . . . . . . . . . . . . . . 30
9G. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9H. CONFLICTING AGREEMENTS AND OTHER MATTERS. . . . . . . . . . 31
9I. PATENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . 31
9J. OFFERING OF SECURITIES. . . . . . . . . . . . . . . . . . . 32
9K. BROKER'S OR FINDER'S COMMISSIONS. . . . . . . . . . . . . . 32
9L. COMPLIANCE WITH LAW . . . . . . . . . . . . . . . . . . . . 32
9M. INVESTMENT COMPANY ACT. . . . . . . . . . . . . . . . . . . 33
9N. PUBLIC UTILITY HOLDING COMPANY ACT. . . . . . . . . . . . . 33
9O. GOVERNMENTAL CONSENTS, ETC. . . . . . . . . . . . . . . . . 33
9P. COMPLIANCE WITH ERISA . . . . . . . . . . . . . . . . . . . 33
9Q. MATERIAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . 34
9R. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . 34
9S. FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT . . . . . . . . 35
9T. LEASES. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9U. INVENTORY . . . . . . . . . . . . . . . . . . . . . . . . . 36
9V. EMPLOYEE MATTERS. . . . . . . . . . . . . . . . . . . . . . 36
9W. PRODUCTS LIABILITY. . . . . . . . . . . . . . . . . . . . . 36
10. REPRESENTATIONS OF THE PURCHASERS . . . . . . . . . . . . . . . . . 37
11. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
12. ADVISORY FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
-iii-
<PAGE>
13. WARRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
13A. SERIES OF WARRANTS AND TRIGGERING EVENT . . . . . . . . . . 49
13B. PUT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
13C. PENALTY WARRANTS. . . . . . . . . . . . . . . . . . . . . . 51
14. MISCELLANEOUS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
14A. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 51
14B. EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . 51
14C. CONSENT TO AMENDMENTS; WAIVERS. . . . . . . . . . . . . . . 52
14D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF
NOTES; LOST NOTES . . . . . . . . . . . . . . . . . . . . . 53
14E. PERSONS DEEMED OWNERS; PARTICIPATIONS . . . . . . . . . . . 53
14F. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS; ENTIRE AGREEMENT . . . . . . . . . . . . . . . . 53
14G. TRANSFERS: SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . 54
14H. DISCLOSURE TO OTHER PERSONS . . . . . . . . . . . . . . . . 54
14I. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . 54
14J. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . 55
14K. DESCRIPTIVE HEADINGS, ETC . . . . . . . . . . . . . . . . . 55
14L. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . 55
14M. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . 55
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<PAGE>
SECURITIES PURCHASE AGREEMENT ("AGREEMENT"), dated as of
November 14, 1994, by and among FAMILY BOOKSTORES COMPANY, INC., a
Michigan corporation (the "COMPANY"), ELECTRA INVESTMENT TRUST PLC, a
corporation organized under the laws of England ("EIT"), and ELECTRA
ASSOCIATES, INC., a Delaware corporation ("ASSOCIATES" and, together
with EIT, the "PURCHASERS"). Capitalized terms used in this Agreement
are defined in paragraph 12.
WHEREAS, the Purchasers desire, upon the terms and subject to the
conditions set forth herein, to purchase from the Company the Securities
(as hereinafter defined); and
WHEREAS, the Company desires, upon the terms and conditions
hereinafter provided, to sell the Securities to the Purchasers.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. AUTHORIZATION OF FINANCING. In order to provide funds for
the purchase by the Company of the assets of the Family Bookstores division
("FBS") of The Zondervan Corporation, a Michigan corporation ("ZONDERVAN"),
a wholly owned subsidiary of HarperCollins Publishers, Inc., a Delaware
corporation ("HARPERCOLLINS"), pursuant to that certain Asset Purchase
Agreement, dated as of October 28, 1994 (the "ASSET PURCHASE AGREEMENT"),
among the Company, Zondervan and HarperCollins, the Company has authorized
the issuance and delivery pursuant to this Agreement of:
(a) its senior subordinated notes, substantially in the form of
EXHIBIT L(A) hereto (herein, together with any such notes which
may be issued pursuant to any provision of this Agreement and any
such notes which may be issued hereunder in substitution or
exchange therefor, collectively called the "NOTES" and
individually called a "NOTE"), in the aggregate principal amount
of $5,000,000 to be dated the date of issue thereof (the "ISSUE
DATE"), to mature May 17, 2003, or if such day is not a Business
Day, the next succeeding Business Day, to bear interest on the
unpaid balance thereof, from the Issue Date until the principal
thereof shall become due and payable, at the rate of 8.00% per
annum through the second anniversary of the Issue Date,
increasing to 11.00% through the fourth anniversary of the Issue
Date and to 14.00% thereafter, and on overdue principal, premium
and interest at the rate specified therein; and
(b) warrants, substantially in the form of EXHIBIT 1(B) hereto
(herein, together with any such warrants which may be issued
pursuant to any provision of this Agreement or any provision
contained in the warrants and any such warrants which may be
issued in addition to or in substitution or exchange therefor,
the "WARRANTS"), to purchase for a price of $.01 per share that
<PAGE>
number of shares of common stock, par value $1.00 per share (the
"COMMON STOCK"), of the Company as shall be initially equal, on
an aggregate basis, to 18% of the issued and outstanding Common
Stock of the Company on a Fully Diluted basis (subject to
increase in the event of default in timely payment of the Notes
and if no Triggering Event has occurred as specified in Section
14A of this Agreement, and as specified in the Warrants).
The Notes and the Warrants, and any security of the Company issued to the
Purchasers in addition to or in substitution or exchange therefor, are
referred to herein as the "SECURITIES".
2. PURCHASE AND SALE OF SECURITIES. The Company hereby agrees
to sell to the Purchasers and, subject to the terms and conditions herein
set forth, the Purchasers agree to purchase from the Company, the following
Securities on the Closing Date:
(a) Notes, in the form of one or more Notes registered in the
Purchasers' name, and in such denominations as the Purchasers
shall request subject to paragraph 15D hereof, in the aggregate
principal amount of $5,000,000, at a purchase price of 100% of
the aggregate principal amount thereof; and
(b) Warrants, in the form of one or more Warrants registered in
the Purchasers' name, and in such denominations as the Purchasers
shall request, to purchase for a price of $0.01 per share that
number of shares of Common Stock as shall be initially equal to
18% of the issued and outstanding Common Stock of the Company on
a Fully Diluted basis, which percentage is subject to adjustment
as set forth in this Agreement and in the Warrants.
3. CLOSING OF SALE OF SECURITIES. The purchase and delivery of
the Securities shall take place at the offices of Willkie Farr & Gallagher,
One Citicorp Center, 153 East 53rd Street, New York, New York, at a closing
(the "CLOSING") two Business Days after the date on which all the
conditions specified in paragraph 4 shall have been satisfied, or at such
other place or on such other date as the Purchasers and the Company may
agree upon, but in no event later than November 17, 1994 (the "CLOSING
DATE"). The Company will give the Purchasers five days, notice of the
Closing Date and the time of Closing. At the Closing, the Company will
deliver to the Purchasers the Notes and the Warrants, against payment of
the purchase price therefor, in each case by transfer of immediately
available funds to such bank as the Company may direct in writing for
credit to the Company's account. At the Closing, the Company will pay to
Electra Inc., a Delaware corporation ("ELECTRA"), in lawful money of the
United States of America in immediately available funds to such bank and
account as Electra may direct, (i) a transaction fee in the amount of
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<PAGE>
$150,000 (the "TRANSACTION FEE") and (ii) a pro rated amount of the
Advisory Fee for the quarter ending December 31, 1994. If at the Closing
the Company shall fail to (i) tender to the Purchasers any of the
Securities, (ii) pay to Electra the Transaction Fee or (iii) have satisfied
any of the closing conditions specified herein, or if such closing
conditions shall not have been waived by the Purchasers, the Purchasers
shall, at the Purchasers, election, be relieved of all further obligations
under this Agreement, without thereby waiving any other rights the
Purchasers may have by reason of such failure.
4. CONDITIONS OF CLOSING.
4A. PURCHASERS' CONDITIONS. The Purchasers, obligation to
purchase and pay for the Securities is subject to the satisfaction prior to
or at the Closing of the following conditions:
(i) OPINIONS OF COUNSEL. The Purchasers shall have received a
favorable opinion from each of (a) Warner, Norcross & Judd, counsel for the
Company, substantially in the form set forth in EXHIBIT 4A(I)(A),
(b) Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, counsel to Zondervan,
substantially in the form set forth in EXHIBIT 4A (I) (B), and (c) internal
counsel to HarperCollins, substantially in the form set forth in Exhibit
4A(i) (c), each addressed to the Purchasers and dated the date of the
Closing. To the extent that the opinions referred to above in this
paragraph 4A are rendered in reliance upon the opinion of any other
counsel, the Purchasers shall have received a copy of such opinion of such
other counsel, dated the date of the Closing and addressed to the
Purchasers, or a letter from such other counsel, dated the date of the
Closing and addressed to the Purchasers, authorizing the Purchasers to rely
on such other counsel's opinion.
(ii) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The
representations and warranties of the Company contained in this Agreement
and those otherwise made in writing by or on behalf of the Company in
connection with the transactions contemplated by this Agreement shall be
true in all material respects when made and at the time of the Closing
except to the extent of changes caused by the transactions contemplated
herein; PROVIDED, HOWEVER, that there shall exist at the time of the
Closing and after giving effect to such transactions no Event of Default or
Default; and the Company shall have delivered to the Purchasers an
Officers, Certificate, dated the date of the Closing, to all such effects.
(iii) REGISTRATION RIGHTS AGREEMENT. The Purchasers shall have
received a fully executed counterpart of the Registration Rights Agreement
substantially in the form of EXHIBIT 4(A) (III) (the "REGISTRATION RIGHTS
AGREEMENT") and, at the time of the Closing, the Registration Rights
Agreement shall be in full force and effect and no term or condition
thereof shall have been amended, modified or waived.
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<PAGE>
(iv) PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and
payment for the Securities shall not violate any applicable domestic law or
governmental regulation (including, without limitation, section 5 of the
Securities Act) and shall not subject the Purchasers to any tax, penalty,
liability or other onerous condition under or pursuant to any applicable
law or governmental regulation or order. The Purchasers shall have
received such certificates or other evidence as the Purchasers may request
to establish compliance with the conditions set forth in this paragraph
4A(iv).
(v) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION. After the
date hereof no legislation, order, rule, ruling or regulation shall have
been enacted or made by or on behalf of any governmental body, department
or agency of the United States, nor shall have any legislation with an
effective date on or prior to the date hereof, been introduced and
favorably reported for passage to either House of Congress by any committee
of either such House to which such legislation has been referred for
consideration, nor shall any decision of any court of competent
jurisdiction within the United States have been rendered which, in the
Purchasers, reasonable judgment, would materially and adversely affect any
of the Securities as an investment or the business, condition (financial or
other), assets, properties, operations or prospects of the Company or FBS.
There shall be no action, suit, investigation or proceeding pending or, to
the best of the Purchasers, or the Company's knowledge, threatened, against
or affecting the Purchasers, the Company, FBS, any of the Purchasers', the
Company's or FBS' properties or rights, or any of the Purchasers', the
Company's or FBS' Affiliates, officers or directors, before any court,
arbitrator or administrative or governmental body which (i) seeks to
restrain, enjoin, prevent the consummation of or otherwise affect the
transactions contemplated by this Agreement or the Asset Purchase Agreement
or (ii) questions the validity or legality of any such transactions or
seeks to recover damages or to obtain other relief in connection with any
such transactions, and, to the best of the Purchasers' and the Company's
knowledge, there shall be no valid basis for any such action, proceeding or
investigation.
(vi) APPROVALS AND CONSENTS. The Company shall have duly
received all authorizations, waivers, consents, approvals, licenses,
franchises, permits and certificates (collectively, "CONSENTS") by or of
all federal, state and local governmental authorities and all material
consents by or of all other Persons necessary or advisable for the issuance
of the Securities and as may be required (except as may be waived, with the
consent of EIT) under the terms of the Asset Purchase Agreement and all
thereof shall be in full force and effect at the time of Closing. The
Company shall have delivered to the Purchasers an Officers' Certificate,
dated the date of Closing, to such effect.
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<PAGE>
(vii) NO MATERIAL ADVERSE CHANGE. There shall not have occurred
or been threatened, nor to the best of the Company's knowledge will there
be threatened, any material adverse change in the business, condition
(financial or other), assets, properties, operations or prospects of the
Company, any of its Subsidiaries or FBS, or any condition, event or act
which is likely to lead to a material adverse change in the business,
condition (financial or otherwise), assets, properties, operations or
prospects of the Company, any of its Subsidiaries or FBS or which would
materially and adversely affect the Company's ability to repay the Notes or
consummate the transactions contemplated by the Asset Purchase Agreement,
as determined in the sole discretion of the Purchasers.
(viii) PROCEEDINGS. All corporate and other proceedings taken or
to be taken in connection, with the transactions contemplated hereby and by
the Asset Purchase Agreement, and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Purchasers and their
counsel, and the Purchasers and their counsel shall have received all such
counterpart originals or certified or other copies of such documents as the
Purchasers or their counsel may reasonably request.
(ix) CREDIT FACILITY. The Company shall have entered into the
Loan Agreement, which shall be in form and substance reasonably
satisfactory to the Purchasers. The Loan Agreement shall expressly
acknowledge and permit the Debt represented by the Securities and the
transactions contemplated hereby.
(x) FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT. The Purchasers
shall have received a certificate relating to the Foreign Investment in
Real Property Tax Act substantially in the form of EXHIBIT 4A(X).
(xi) EMPLOYMENT AGREEMENT. The Purchasers shall have received a
fully executed counterpart of the Employment Agreement between the Company
and Leslie E. Dietzman, substantially in the form of EXHIBIT 4A(XI).
(xii) SHAREHOLDERS' AGREEMENT. The Purchasers shall have
received a fully executed counterpart of the Shareholders, Agreement
substantially in the form of EXHIBIT 4A(XII).
(xiii) TRANSACTION FEE AND COUNSEL FEES. Electra shall have
received payment of the Transaction Fee in accordance with paragraph 3 and
the Purchasers' counsel shall have received payment in full for its fees
and expenses incurred in connection with this transaction, simultaneously
with the Closing.
(xiv) ASSET PURCHASE AGREEMENT. The Closing (as defined therein)
shall have been consummated (or shall be consummating concurrently with the
Closing hereunder) under the Asset Purchase Agreement in the form of
EXHIBIT 4A (XIV), without any waivers thereunder.
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<PAGE>
(xv) ADVISORY AGREEMENT. The Purchasers shall have received a
fully executed counterpart of the Advisory Agreement, substantially in the
form of EXHIBIT 4A (XV), and the first payment shall have been made to
Electra thereunder.
(xvi) LETTER AGREEMENTS. The Company shall have entered into the
Letter Agreements, substantially in the form of EXHIBIT 4A(XVI), with
George Craig and Neil Topham.
(xvii) EQUITY INVESTMENT. The Investors shall have purchased a
minimum of $5,000,000 of the Common Stock on terms reasonably satisfactory
to the Purchasers.
(xviii) BOARD APPROVAL. The Boards of Directors of the
Purchasers shall have approved the transactions contemplated hereby and by
the Asset Purchase Agreement.
(xix) BUY AND SELL AGREEMENT. The Purchasers shall have received
a fully executed counterpart of the Buy and Sell Agreement substantially in
the form of EXHIBIT 4A(XIX).
4B. COMPANY'S CONDITIONS. The Company's obligation to sell the
Securities to the Purchasers is subject to the satisfaction prior to or at
the Closing of the following conditions:
(i) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The
representations and warranties of the Purchasers contained in this
Agreement and those otherwise made in writing by or on behalf of the
Purchasers in connection with the transactions contemplated by this
Agreement shall be true in all material respects when made and at the time
of the Closing except to the extent of changes caused by the transactions
contemplated herein.
(ii) PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and
payment for the Securities shall not violate any applicable domestic law or
governmental regulation (including, without limitation, section 5 of the
Securities Act).
(iii) APPROVALS AND CONSENTS. The Company shall have duly
received all authorizations, waivers, consents, approvals, licenses,
franchises, permits and certificates (collectively, "CONSENTS") by or of
all federal, state and local governmental authorities and all material
consents by or of all other Persons it deems necessary or advisable for the
issuance of the Securities and the consummation of the transactions
contemplated by the Asset Purchase Agreement and all thereof shall be in
full force and effect at the time of Closing.
-6-
<PAGE>
(iv) PROCEEDINGS. All corporate and other proceedings taken or
to be taken in connection with the transactions contemplated hereby and by
the Asset Purchase Agreement, and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Company and its
counsel, and the Company and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as the
Company or its counsel may reasonably request.
(v) AGREEMENTS WITH PURCHASERS. The Company shall have entered
into the Shareholders' Agreement, in form and substance satisfactory to the
Company.
(vi) EQUITY INVESTMENT. The Company shall have completed its
sale of not less than $5,000,000 of the Common Stock to the Investors on
terms satisfactory to the Company.
(vii) ASSET PURCHASE AGREEMENT. The Closing (as defined therein)
shall have been consummated under the Asset Purchase Agreement, or be
consummating concurrently with the Closing under this Agreement.
(viii) SENIOR DEBT. The Company shall have consummated or be
consummating simultaneously with the Closing the senior debt facility as
set forth in the Loan Agreement, which shall be in form and substance
reasonably satisfactory to the Company.
5. PREPAYMENTS AND PURCHASE OF NOTES. The Notes shall be
subject to prepayment with respect to the required prepayments specified in
paragraph 5A and also under the circumstances set forth in paragraph 5B.
Any such prepayment shall be at a price equal to 100% of the principal
amount of the Notes being prepaid, together with all accrued and unpaid
interest thereon to the date of such prepayment (the "PURCHASE PRICE").
5A. REQUIRED PREPAYMENTS. The Notes shall, at the option of the
holders thereof and upon written notice by such holders, become immediately
due and payable upon the occurrence of (i) a Change of Control or (ii) an
Initial Public Offering. Upon the occurrence of a Change of Control or an
Initial Public Offering and receipt of written notice, the Company will pay
to each such holder an amount in cash equal to the Purchase Price by
transferring immediately available funds to such bank and account therein
as shall be designated by such holders, against delivery of the Notes being
prepaid.
5B. OPTIONAL PREPAYMENT. Subject to the provisions of the Loan
Agreement, the Notes shall be subject to prepayment, without penalty in
whole at any time or from time to time in part (and, if in part, only in
integral multiples of $500,000), at the option of the Company, by paying to
each holder an amount in cash equal to the Purchase Price for the amount of
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<PAGE>
the Notes being prepaid by transferring immediately available funds to such
bank and account therein as shall be designated by such holders, against
delivery of the Notes being prepaid.
5C. NOTICE OF OPTIONAL PREPAYMENTS. The Company shall give each
holder of the Notes written notice of any prepayment pursuant to paragraph
5B (the "PREPAYMENT NOTICE") not less than 30 Business Days prior to the
prepayment date, specifying such prepayment date and the principal amount
of the Notes to be prepaid on such date. Notice of prepayment having been
given as aforesaid, the Purchase Price for the Notes specified in such
notice shall become due and payable on such prepayment date.
5D. PARTIAL PREPAYMENT PRO RATA. Upon any partial prepayment of
Notes, the principal amount so prepaid shall be allocated to all Notes at
the time outstanding in proportion to the respective outstanding principal
amounts thereof.
5E. RETIREMENT OF NOTES. Without the prior written consent of
the Purchasers, the Company will not, and will not permit any of its
Subsidiaries or Affiliates to, purchase, redeem or otherwise acquire any
Note except upon the payment or prepayment thereof in accordance with the
terms of this Agreement and such Note.
6. AFFIRMATIVE COVENANTS. The Company covenants that from and
after the date of this Agreement through the Closing and thereafter so long
as any Notes or Warrants remain outstanding, except that, the covenant set
forth in paragraph 6C hereof shall be extinguished upon payment in full of
the Notes, (it being understood, that following the occurrence of an
Initial Public Offering and the payment in full of the Notes, the Company
may request that the holders of the Securities at that time permanently
waive (in compliance with paragraph 14C) compliance with some or all of the
Company's covenants set forth in this paragraph 6):
6A. FINANCIAL STATEMENTS AND OTHER REPORTS. The Company will
deliver, or cause to be delivered to the Purchasers or any Transferee:
(i) as soon as practicable prior to the beginning of each fiscal
year and in any event promptly after approval thereof by the Company's
Board of Directors, monthly budgets prepared on an annual basis, in
reasonable detail and reasonably satisfactory in form and scope to the
Purchasers;
(ii) as soon as practicable and in any event within 30 days after
the end of each fiscal month of the Company (other than the last month
of each fiscal quarter), unaudited consolidated statements of income
and cash flow of the Company and its Subsidiaries, in summary form
without footnotes, for such month and for the period from the
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<PAGE>
beginning of the current fiscal year to the end of such month and a
consolidated balance sheet of the Company and its Subsidiaries as at
the end of such month, setting forth, in each case, in comparative
form, figures for the corresponding month and period in the preceding
fiscal year and the budget for such month and for the period from the
beginning of the current fiscal year to the end of such month, all in
reasonable detail and reasonably satisfactory in form and scope to the
Purchasers;
(iii) From and after the date upon which the Company has
completed an initial public offering of its Common Stock or any other
Capital Stock, or if the Company prepares such statements in the
ordinary course, as soon as practicable and in any event within 45
days after the end of each fiscal quarter of the Company, unaudited
consolidated statements of income and cash flow of the Company and its
Subsidiaries for such quarter and for the period from the current
fiscal year to the end of such quarter and an unaudited consolidated
balance sheet of the Company and its Subsidiaries as at the end of
such quarter, setting forth, in each case, in comparative form,
figures for the corresponding quarters in the preceding fiscal year,
all in reasonable detail and satisfactory in form and scope to the
Purchasers, and certified by an authorized financial officer or member
of the Board of Directors of the Company as fairly presenting in all
material respects the financial condition and results of operations of
the Company and its Subsidiaries on a consolidated basis in accordance
with generally accepted accounting principles, subject to changes
resulting from year-end adjustments;
(iv) as soon as practicable and in any event within 90 days after
the end of each fiscal year, consolidating and consolidated statements
of income and cash flow of the Company and its Subsidiaries for such
year, and consolidating and consolidated balance sheets of the Company
and its Subsidiaries as at the end of such year, setting forth, in
each case, in comparative form, corresponding figures from the
preceding fiscal year, all in reasonable detail and reasonably
satisfactory in form and scope to the Purchasers, and, as to the
consolidated statements, reported upon by independent public
accountants of recognized standing whose report shall be in scope and
form reasonably satisfactory to the Purchasers and, as to the
consolidating statements, certified by an authorized financial officer
or member of the Board of Directors of the Company;
(v) promptly upon transmission thereof, copies of all such
financial statements, proxy statements, notices, reports and other
information as it shall send to all of its security holders and
holders of Senior Debt and copies of all reports and all registration
statements (without exhibits) which it files with the Commission, and,
promptly upon release thereof, copies of all press releases;
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<PAGE>
(vi) promptly upon receipt thereof, a copy of each other report
submitted to the Board of Directors of the Company or of any
Subsidiary of the Company and each management letter submitted to the
Company by independent accountants in connection with any annual,
interim or special audit of the books of the Company or any of its
Subsidiaries made by such accountants, or any other reports prepared
by such accountants.
(vii) together with each delivery of financial statements
required by clauses (iii) and (iv) above, an Officers' Certificate of
the Company stating that the signers have reviewed the terms of this
Agreement and the Securities and have made, or caused to be made under
their supervision, a review in reasonable detail of the transactions
and condition of the Company and its Subsidiaries during the fiscal
period covered by such financial statements and that such review has
not disclosed the existence during or at the end of such fiscal
period, and that the signers do not have knowledge of the existence,
as at the date of the Officers' Certificate, of any condition or event
which constitutes a Default or Event of Default or, if any such
condition or event existed or exists, specifying the nature and period
of existence thereof and what action the Company has taken or is
taking or proposes to take with respect thereto, excluding, however,
(y) matters which have been rectified within permitted cure periods
and (x) matters not having, in the reasonable, good faith opinion of
management of the Company, a material adverse effect on the business,
condition (financial or otherwise), assets, properties, or operations
or prospects of the Company and its Subsidiaries, taken as a whole;
(viii) together with each delivery of consolidated financial
statements required by clause (iv) above, a report of the independent
public accountants giving the opinion thereon, but only if, in making
the audit of such financial statements, such accountants have obtained
knowledge of any Event of Default or Default, specifying in such
report the nature and period of existence thereof; PROVIDED, that such
accountants shall not be liable to anyone by reason of their failure
to obtain knowledge of any Event of Default or Default which would not
be disclosed in the course of an audit conducted in accordance with
generally accepted auditing standards;
(ix) promptly upon any Responsible Officer of the Company
obtaining knowledge (a) of any condition or event which constitutes a
Default or Event of Default, (b) of any condition or event which, in
the opinion of management of the Company would have a material adverse
effect on the business, condition (financial or other), assets,
properties or operations or prospects of the Company and its
Subsidiaries, taken as a whole, other than conditions or events
applicable to the economy as a whole or to any industry in which the
-10-
<PAGE>
Company and its Subsidiaries are engaged, (c) that any Person has
given any notice to the Company or any Subsidiary of the Company or
taken any other adverse action against the Company with respect to a
claimed Default or event or condition of the type referred to in
clause (ii) of paragraph 9A or (d) of the institution of any
litigation involving claims against the Company or any of its
Subsidiaries, unless such litigation is defended by the insurance
carrier without any reservation of rights and is reasonably expected
to be fully covered by a creditworthy insurer, in an amount equal to
or greater than $500,000 with respect to any single cause of action or
of any adverse determination in any litigation involving a potential
liability to the Company or any of its Subsidiaries equal to or
greater than $500,000 with respect to any single cause of action, an
Officers' Certificate specifying the nature and period of existence of
any such condition or event, or specifying the notice given or action
taken by such holder or Person and the nature of such claimed Default,
Event of Default, event or condition, and what action the Company has
taken, is taking or proposes to take with respect thereto;
(x) promptly upon any Responsible Officer of the Company or any
of its ERISA Affiliates becoming aware of the occurrence of (i) any
"reportable event," as such term is defined in section 4043 of ERISA,
in connection with any Plan subject to Title IV of ERISA or section
412 of the Code or trust, insurance contract or other funding
arrangement maintained or created thereunder or an event requiring the
Company or any ERISA Affiliate to provide security to a Plan under
section 401(a)(29) of the Code or (ii) any "prohibited transaction,"
as such term is defined in section 4975 of the Code or in section 406
of ERISA in connection with any Plan or any trust, insurance contract
or other funding arrangement maintained or created thereunder, or in
connection with any Welfare Plan or Multiemployer Plan or (iii) the
institution of proceedings or the taking or expected taking of action
by the PBGC or the Company or any of its ERISA Affiliates to terminate
or withdraw or partially withdraw, in connection with any Plan subject
to Title IV of ERISA or section 412 of the Code or any Multiemployer
Plan or any trust, insurance contract or other funding arrangement
maintained or created thereunder, a written notice specifying the
nature thereof, what action the Company or any such Subsidiary has
taken, is taking or proposes to take with respect thereto, and, when
known, any action taken or threatened by the Internal Revenue Service
or the PBGC with respect thereto;
(xi) promptly upon any material revision to the budgets referred
to in clause (i) above, such monthly budgets, as revised; and
(xii) with reasonable promptness, such other information and data
with respect to the Company or any of its Subsidiaries as the
Purchasers may reasonably request.
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<PAGE>
6B. INSPECTION OF PROPERTY. The Company will permit any Person
designated by the Purchasers to visit and inspect any of the properties of
the Company and its Subsidiaries, to examine the books and financial
records of the Company and its Subsidiaries and make copies thereof or
extracts therefrom and to discuss its affairs, finances and accounts with
its officers and its independent public accountants, all at reasonable
times and upon reasonable prior notice to the Company. Any such inspection
shall be in the presence of an officer of the Company, unless an officer is
unavailable for such purpose. The Company may exclude matters with respect
to Persons other than the Purchasers subject to attorney-client privilege,
and access to matters with respect to Persons other than the Purchasers
involving trade secrets or other confidential information will be subject
to execution of an appropriate confidentiality agreement.
6C. COVENANT TO SECURE NOTES EQUALLY. The Company will, if it
or any Subsidiary of the Company shall create or assume any Lien upon any
of its property or assets, whether now owned or hereafter acquired, other
than Liens permitted by the provisions of paragraph 7D (unless prior
written consent to the creation or assumption thereof shall have been
obtained pursuant to paragraph 14C), make or cause to be made effective
provision whereby the Notes will be secured by such Lien equally and
ratably with any and all other Debt thereby secured as long as any such
other Debt shall be so secured; PROVIDED that such security shall not in
any way alter the rights under paragraph 8 of the holders of Senior Debt.
6D. MAINTENANCE OF PROPERTIES; INSURANCE. The Company and its
Subsidiaries will maintain or cause to be maintained in good repair,
working order and condition all properties used or useful in the business
of the Company and its Subsidiaries and from time to time will make or
cause to be made all appropriate repairs, renewals and replacements thereof
necessary for the business to be properly and advantageously conducted at
all times in accordance with prudent business management. The Company and
its Subsidiaries will maintain or cause to be maintained, with financially
sound and reputable insurers (or, as to workers, compensation or similar
insurance, in an insurance fund or by self-insurance authorized by the laws
of the jurisdiction in question), insurance with respect to their
respective properties and businesses against loss or damage of the kinds
customarily insured against by corporations of established reputation
engaged in the same or similar businesses and similarly situated, of such
type and in such amounts as are customarily carried under similar
circumstances by such other corporations and as are in good faith believed
by the Company to be sufficient to prevent the Company or a Subsidiary from
becoming a co-insurer within the terms of the policies in question.
6E. CORPORATE EXISTENCE, ETC. The Company and each of its
Subsidiaries will at all times preserve and keep in full force and effect
its corporate existence, and rights, licenses and franchises material to
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<PAGE>
its business, and will qualify to do business in any jurisdiction where the
failure to do so would have a material adverse effect on the business,
condition (financial or other), assets, properties or operations of the
Company and its Subsidiaries, taken as a whole. Notwithstanding the
foregoing, a Subsidiary may be merged or consolidated into the Company,
PROVIDED, HOWEVER, that the Company is the surviving entity, and a
Subsidiary may sell or otherwise dispose of its assets to the Company, and
may dissolve if its assets will be transferred to the Company.
6F. PAYMENT OF TAXES, CLAIMS AND SENIOR DEBT. The Company and
each of its Subsidiaries will pay all taxes, assessments and other
governmental charges imposed upon them or any of their respective
properties or assets or in respect of any of their respective franchises,
business income or properties before any penalty or significant interest
accrues thereon, and all claims (including, without limitation, claims for
labor, services, materials and supplies) for sums which have become due and
payable and which by law have or may become a Lien upon any of its
properties or assets, PROVIDED that no such charge or claim need be paid if
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if such accrual or other
appropriate provision, if any, as shall be required by generally accepted
accounting principles shall have been made therefor. The Company will duly
and punctually pay when due all payments required to be made under and
pursuant to the Senior Debt.
6G. COMPLIANCE WITH LAWS, ETC. The Company will, and will cause
each of its Subsidiaries to, comply with the requirements of all applicable
laws, rules, regulations, and orders of any court or other governmental
authority (including, without limitation, those related to environmental or
ERISA compliance), noncompliance with which would be reasonably likely to
materially adversely affect the business, condition (financial or other),
assets, property, operations or prospects of the Company and its
Subsidiaries taken as a whole.
6H. ATTENDANCE AT BOARD MEETINGS; BOARD MEMBERS. The Purchasers
shall have such rights and the Company shall have such obligations with
respect to members nominated and elected to the Company's Board of
Directors and attendance at meetings of the Company's Board of Directors as
are set forth in section 2 of the Shareholders' Agreement.
6I. SECURITIES FILINGS. To the extent required, the Company
will, and will cause each of its Subsidiaries to, (i) comply, in all
material respects, with the reporting requirements of the Exchange Act and
(ii) comply, in all material respects, with all other public information
reporting requirements of the Commission that are a condition to the
availability of an exemption from the Securities Act (under Rule 144 and
Rule 144A thereof, as amended from time to time, or successor rules thereto
-13-
<PAGE>
or otherwise) for the sale of Common Stock by the Purchasers. The Company
will cooperate with the Purchasers in supplying such information as may be
necessary for the Purchasers to complete and file any information reporting
forms presently or hereafter required by the Commission as a condition to
the availability of an exemption from the Securities Act (under Rule 144
and Rule 144A thereof or otherwise) for the sale of Common Stock by the
Purchasers.
6J. PAYMENTS BY SUBSIDIARIES. To the extent any Subsidiaries
are created or established, the Company will cause each Subsidiary to
declare and pay cash dividends and other cash distributions or make loans
to the Company as needed to enable the Company to make payments required to
be made under and pursuant to any outstanding Notes, including payments of
principal, premium, if any, and interest, in a timely manner, subject,
however, to restrictions of corporate law and restrictions imposed by the
Senior Debt.
6K. RESERVATION OF SHARES. The Company will reserve and keep
reserved at all times sufficient shares of its Common Stock for issuance
upon exercise of the Warrants (other than Penalty Warrants) and, upon such
exercise, the Company will promptly issue and deliver the shares required
to be delivered and an opinion of counsel, reasonably acceptable to the
Purchasers, to the effect that such shares, when issued and delivered, will
be validly issued, fully paid and nonassessable. At such time as the
Purchasers may reasonably request, the Company shall take all action
necessary to enable it to issue the Penalty Warrants.
6L. HART-SCOTT FILINGS. From time to time, at the request of
the Purchasers, the Company or its "ultimate parent" (as defined in the
Hart-Scott Act) will promptly prepare and file, or cause to be prepared and
filed, any notification or response to any request for additional
information required to be filed under the Hart-Scott Act and the rules and
regulations promulgated thereunder with respect to the acquisition, from
time to time, of shares of Common Stock by the Purchasers, including,
without limitation, upon exercise of any of the Warrants, preemptive
rights, rights of first offer or otherwise.
6M. USE OF PROCEEDS. The Company will use the proceeds from the
sale and issuance of the Notes solely to fund the acquisition of the assets
of FBS pursuant to the Asset Purchase Agreement and transaction costs
incurred by the Company in connection therewith.
6N. MANAGEMENT. The Company will continue the employment of
Leslie E. Dietzman upon terms satisfactory to the Purchasers, or if such
employment is not continued, his replacement shall be reasonably acceptable
to the Purchasers.
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<PAGE>
6O. CONSENT TO TRANSFER BY BANK OF SCOTLAND. During the period
that the Notes are outstanding, the Company agrees that, before giving
approval to a transfer by the Bank of Scotland under Section 12.4(d) of the
Loan Agreement, the Company will (i) give the Purchasers written notice of
its intent to approve such a transfer and (ii) discuss the matter with the
Purchasers for a period of up to 30 days following receipt by the
Purchasers of such notice. After the expiration of such period, the
Company may act or not act on such matter as the Company may determine in
its sole and absolute discretion.
7. NEGATIVE COVENANTS. The provisions of this paragraph 7
shall remain in effect (x) so long as any Notes shall remain outstanding
and (y) in the case of paragraphs 7A(i), 7A (ii), 7B, 7C, 7D, 7E, 7F,
7G(b), 7H, 7I, 7K, 7N and 7P, so long as any Warrants shall remain
outstanding.
7A. FINANCIAL COVENANTS. The Company shall comply, and shall
cause each of its Subsidiaries to comply, in all respects with each of the
following covenants:
(i) TANGIBLE NET WORTH. The Company will not permit the
sum of (x) the consolidated Tangible Net Worth of the Consolidated
Group on the last day of any calendar quarter, plus (y) the aggregate
principal amount of the Debt to the Purchasers incurred pursuant to
this Agreement outstanding on the last day of such calendar quarter,
to be less than $1,425,000 on the last day of any calendar quarter in
Fiscal Year 1995 or Fiscal Year 1996 or less than $3,800,000 on the
last day of any calendar quarter in Fiscal Year 1997 or thereafter.
(ii) DEBT: NET WORTH RATIO. The Company will not permit
the ratio of (x) Long-Term Debt of the Consolidated Group (including,
without limitation, all Indebtedness for Borrowed Money of the
Consolidated Group) on the last day of any calendar quarter to (y) the
sum of (i) its Tangible Net Worth on the last day of such calendar
quarter and (ii) the aggregate principal amount of the Debt to the
Purchasers incurred pursuant to this Agreement outstanding on the last
day of such calendar quarter, to exceed 3.68:1 on the last day of any
calendar quarter in Fiscal Year 1995 or Fiscal Year 1996 or 2.10:1 on
the last day of any calendar quarter in Fiscal Year 1997 or
thereafter. For purposes of this paragraph 7A(ii), "Long-Term Debt of
the Consolidated Group" shall not include the principal amount of
outstanding Debt to the Purchasers incurred pursuant to this
Agreement.
(iii) INTEREST COVERAGE RATIO. (a) Borrower will not
permit the Interest Coverage Ratio of the Consolidated Group for the
8-month period ending on June 30, 1995 or the 11-month period ending
on September 30, 1995 to be less than 2.61:1.
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<PAGE>
(b) Borrower will not permit the Interest Coverage Ratio of
the Consolidated Group for any Four-Quarter Period ending on any date
during the Fiscal Year specified in the first column below to be less
than the ratio set forth alongside such Fiscal Year in the second
column below:
<TABLE>
<CAPTION>
FISCAL YEAR RATIO
----------- -----
<S> <C> <C>
1996 2.61:1
1997 2.61:1
1998 3.33:1
1999 and each Fiscal Year thereafter 4.75:1
</TABLE>
(c) For purposes of computations under paragraphs 7A(iii)(a),
7A(iv) (a), 7A(v) (a), the required ratios shall be computed as if the
financial statements of FBS for the period from the Acquisition
Effectiveness Date through the Closing Date were the financial
statements of the Company for such relevant period (except that, in
connection with any relevant computation of liabilities for the period
from the Acquisition Effectiveness Date through the Closing Date, any
liabilities not assumed by the Company pursuant to the acquisition of
assets of FBS pursuant to the Asset Purchase Agreement shall be
excluded).
(iv) FUNDED DEBT: CASH FLOW. (a) The Company will not permit
the ratio of (x) Long-Term Debt of the Consolidated Group to (y)
EBITDA of the Consolidated Group for the 8-month period ending on June
30, 1995 or the 11-month period ending on September 30, 1995 to exceed
2.36:1. For purposes of this paragraph 7A(iv)(a) and 7A(iv)(b), "Long-
Term Debt of the Consolidated Group" shall not include the principal
amount of outstanding Debt to the Purchasers incurred pursuant to this
Agreement.
(b) Borrower will not permit the ratio of (x) Long Term Debt of
the Consolidated Group to (y) EBITDA of the Consolidated Group for any
Four-Quarter Period ending on any date during the Fiscal Year
specified in the first column below to exceed the ratio set forth
alongside such Fiscal Year in the second Column below:
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<TABLE>
<CAPTION>
FISCAL YEAR RATIO
----------- -----
<S> <C> <C>
1995 2.36:1
1996 2.36:1
1997 2.36:1
1998 2.10:1
1999 and each Fiscal Year thereafter 1.58:1
</TABLE>
(v) FIXED CHARGE COVERAGE RATIO. (a) The Company will not
permit the Fixed Charge Coverage Ratio of the Consolidated Group for
the 8-month period ending on June 30, 1995 or the 11-month period
ending on September 30, 1995 to be less than 1.66:1.
(b) The Company will not permit the Fixed Charge Coverage Ratio
of the Consolidated Group for any Four-Quarter Period ending on any
date during the Fiscal Year specified in the first column below to be
less than the ratio set forth alongside such Fiscal Year in the second
column below:
<TABLE>
<CAPTION>
FISCAL YEAR RATIO
----------- -----
<S> <C> <C>
1995 1.66:1
1996 1.66:1
1997 1.66:1
1998 1.43:1
1999 and each Fiscal Year thereafter 1.90:1
</TABLE>
(vi) ASSETS: FUNDED DEBT. The Company will not permit the ratio
of (x) the Tangible Assets of the Consolidated Group to (y) the Long-
Term Debt of the Consolidated Group to be less than 1.66:1 on the last
day of any calendar quarter. For purposes of this Section 7A(vi),
"Long-Term Debt of the Consolidated Group" shall not include the
principal amount of outstanding Debt to the Purchasers incurred
pursuant to this Agreement.
7B. RESTRICTIONS ON DEBT. The Company will not, and will not
permit any Subsidiary to, create, assume or incur, or become or at any time
be liable in respect of, any Debt, except:
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(i) Senior Debt and Debt to the Purchasers incurred pursuant to
this Agreement;
(ii) Current Liabilities for accounts payable which constitute
Debt, which accounts payable were incurred or assumed in the ordinary
course of business, the amount or validity of which are currently
being contested by the Company in good faith by appropriate
proceedings diligently prosecuted and as to which an adequate reserve
is maintained on the books of the Company in accordance with generally
accepted accounting principles; and other Current Liabilities for
accounts payable which constitute Debt, which accounts payable were
incurred or assumed in the ordinary course of business and are not
considered more then 60 days past due under customary trade practices,
in an aggregate amount outstanding at any time not to exceed $500,000;
(iii) Liabilities for taxes, assessments or governmental charges
or claims the payment of which is not at the time required by
paragraph 6F;
(iv) Debt secured by Liens permitted pursuant to paragraph 7D;
(v) Indebtedness existing on the Closing Date and obligations
under Contracts (as defined in paragraph 10Q) existing on the Closing
Date, in each case as listed on SCHEDULE 7B to this Agreement;
(vi) The Company's obligations under the IFA Lease, PROVIDED that
such obligations do not exceed $2.6 million on a capitalized basis
(net of interest expenses) over the term of the IFA Lease, and that
there shall be no increase in the annual financial amount of the
Company's obligations thereunder from those in effect on the Closing
Date, except as may be permitted by the Purchasers;
(vii) The Company's obligations under the Andersen Agreement,
provided that there shall be no increase in the annual financial
amount of the Company's obligations thereunder from those in effect on
the Closing Date, except as may be permitted by the Purchasers;
(viii) The unpaid purchase price for one or more retail outlets
similar to the Stores (a "SIMILAR STORE"); PROVIDED that such
acquisition was permitted by the terms of this Agreement and the
aggregate amount of such purchase prices at any time remaining unpaid
does not exceed $1,000,000;
(ix) obligations not in excess of $100,000 incurred in connection
with the lease of miscellaneous office furniture and equipment and
secured by the Liens specified in paragraph 7D(x) hereof;
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<PAGE>
(x) Debt at any one time outstanding not in excess of
$1,000,000, reduced by the amount of Debt permitted by clause (viii)
above, PROVIDED that no portion thereof is secured;
(xi) Debt associated with the purchase of Warrants or Capital
Stock from the Purchasers or their transferees; and
(xii) Obligations under the Asset Purchase Agreement in existence
on the Closing Date.
Notwithstanding the foregoing provisions of this paragraph 7E,
the Company will not create, assume or incur, or become or at any time be
liable in respect of, any Debt (other than Senior Debt) for money borrowed,
advances made or goods purchased, if the lender of such money or the Person
making such advances or the vendor of such goods (or any Person who
guarantees or becomes surety for all or any part of such Debt or acquires
any right or incurs any obligation to become, either immediately or upon
the occurrence of some future contingency, the owner of all or any part
thereof) shall have any right, by reason of any statute or otherwise, to
have any claim in respect of such Debt first satisfied out of the general
assets of the Company in priority to the claims of its general creditors,
except as permitted in paragraph 7D.
7C. RESTRICTIONS ON SALES, MERGERS AND CONSOLIDATIONS. The
Company will not, and will not permit any Subsidiary to: (i) lease its
properties (or any of its divisions or businesses) substantially as an
entirety to any Person; (ii) consolidate or merge with any other Person;
(iii) liquidate, wind up or dissolve (or suffer any liquidation or
dissolution); nor (iv) convey, sell, transfer, or otherwise dispose of, in
any one transaction or series of transactions over a period of twelve
months or less, any Substantial Part of the assets of the Company;
PROVIDED, HOWEVER, that the Company may consolidate or merge with another
Person so long as (A) the Company is the surviving entity in any merger or
consolidation, (B) the Company is in compliance with all of its covenants
and agreements in this Agreement after giving effect to such merger or
consolidation, and (C) such merger or consolidation is for cash or cash
equivalents which do not exceed $500,000 for any such merger or
consolidation. Notwithstanding anything in subsection (C) hereof, the
aggregate expenditures under such subsection will not exceed $2,000,000 in
any one year.
7D. RESTRICTIONS ON LIENS. Except as hereinafter in this
paragraph 7D expressly provided, the Company will not, and will not permit
any Subsidiary to create, assume, incur or suffer to be created, assumed or
incurred or to exist any Lien in respect of any property of any character
of the Company, whether owned on the date hereof or hereafter acquired;
excluding, however, from the operation of this paragraph:
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<PAGE>
(i) Liens for taxes, assessments or governmental charges or
claims the payment of which is not at the time required by paragraph
6F;
(ii) Statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet
delinquent or for sums being contested in good faith, if such reserve
or other appropriate provision, if any, as shall be required by
generally accepted accounting principles shall have been made
therefor;
(iii) Liens (other than any Lien imposed by ERISA) incurred or
deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of
social security, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds (including
performance bonds relating to equipment purchase contracts) and other
similar obligations;
(iv) Any attachment or judgment Lien, unless the judgment it
secures shall not, within 75 days after the entry thereof, have been
discharged or execution thereof stayed pending appeal, or shall not
have been discharged within 75 days after the expiration of any such
stay;
(v) Easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering with the ordinary conduct of
the business of the Company;
(vi) Liens arising from (i) the giving simultaneously with or
within one hundred eighty (180) days after the latest to occur of the
acquisition, completion of construction or placement in service of
tangible personal property, of any purchase money Lien (including
vendor's rights under an agreement whereby title is retained for the
purpose of securing the purchase price thereof including Capitalized
Lease Obligations) on tangible personal property hereafter acquired or
constructed and not heretofore owned by the Company or any Subsidiary,
(ii) the acquiring hereafter of tangible personal property not
heretofore owned by the Company subject to any then existing Lien
(whether or not assumed); PROVIDED, HOWEVER, that in each case (x)
such Lien is limited to such acquired or constructed tangible personal
property, and (y) the principal amount of the Debt secured by each
such Lien, together (without duplication) with the principal amount of
all other Debt secured by Liens on such property, shall not exceed the
cost (which shall be deemed to include the amount of Debt secured by
-20-
<PAGE>
Liens, including existing Liens, on such property) of such property to
the Company or such Subsidiary; and PROVIDED, FURTHER, that the
aggregate amount of Debt incurred in any fiscal year that is secured
by all such Liens shall not exceed $1,000,000 in the aggregate;
(vii) Liens securing Senior Debt;
(viii) Liens existing on the Closing Date and described on
SCHEDULE 7D to this Agreement, and replacements and substitutions of
such items arising in the ordinary course of business of the Company;
(ix) Liens on equipment furnished pursuant to the IFA Lease as
security for the obligations of the Company under such lease;
(x) Liens on miscellaneous office furniture and equipment
incurred in connection with the lease thereof; PROVIDED that the
aggregate amount of obligations secured by such Liens does not exceed
$100,000 at any one time; and
(xi) Liens, if any, which may arise as a result of the
noncompliance by the Company and FBS, in accordance with the Asset
Purchase Agreement, with state laws relating to the transfer in bulk
of assets, such as bulk sales act laws and similar statutory and
common law provisions ("BULK SALES LAWS").
The Company will not sign or file in any state or other
jurisdiction a financing statement under the Uniform Commercial Code which
names the Company as debtor, or sign any security agreement authorizing any
secured party thereunder to file, any such financing statement, if the
financing statement would perfect or protect a security interest which the
Company is not entitled to create, assume or incur or permit to exist under
the foregoing provisions of this paragraph.
7E. RESTRICTIONS ON DIVIDENDS. The Company will not pay any
dividends, in cash or otherwise, or make any distributions, to its
shareholders, or purchase, redeem or otherwise acquire any of its
outstanding Capital Stock, or set apart assets for a sinking or other
analogous fund for the purchase, redemption, retirement or other
acquisition of, any shares of its Capital Stock; PROVIDED, HOWEVER, that
the Company may, so long as at the time of and after giving effect thereof
no Default or Event of Default has occurred and is continuing:
(i) repurchase shares of its Common Stock issued or to be issued by the
Company upon exercise of stock options granted to employees and directors
of the Company pursuant to the terms of plans adopted by the Board of
Directors of the Company; (ii) repurchase shares of its Common Stock
pursuant to the Buy and Sell Agreement; and (iii) pay cash in lieu of
fractional shares of its Common Stock on exercise of outstanding warrants
to purchase its Common Stock, pursuant to the terms of such warrants.
-21-
<PAGE>
7F. RESTRICTIONS ON TRANSACTIONS WITH CERTAIN PARTIES. The
Company will not, and will not permit any Subsidiary to, make any loans or
advances to any of its officers, directors, shareholders or Affiliates,
other than: (i) expense advances made by the Company or such Subsidiary to
its officers and employees in the ordinary course of business; (ii) long-
term loans to its officers and directors in an aggregate principal amount
outstanding at any time not to exceed $600,000, for the purchase of the
Company's Common Stock upon Closing; and (iii) other loans and advances to
officers of the Company or such Subsidiary in an aggregate principal amount
outstanding at any time not to exceed $10,000 and with terms not to exceed
90 days. The Company will not, and will not permit any Subsidiary to,
engage in any transactions with Affiliates other than in the ordinary
course of business and on terms no less favorable to the Company or such
Subsidiary than those obtainable from unaffiliated third parties. The
Purchasers acknowledge and consent to the arrangements expressly
contemplated hereunder, including the agreements described in paragraph
4A(xvi), and the arrangements among the Company, Zondervan and
HarperCollins described in the Asset Purchase Agreement.
7G. RESTRICTIONS ON INVESTMENTS AND CAPITAL EXPENDITURES.
7G (a) RESTRICTIONS ON INVESTMENTS. Other than as permitted
pursuant to paragraphs 6M, 7C and 7G(b) hereof, the Company will not
purchase, acquire or agree to purchase or acquire or invest in (by capital
contribution or otherwise) the business, or any debt or equity securities
of, any other Person, PROVIDED, HOWEVER, that the Company may invest its
excess cash in:
(i) securities issued or directly and fully guaranteed or
insured by the United States government or any agency thereof having
maturities of not more than one year from the date of acquisition;
(ii) certificates of deposit or eurodollar certificates of
deposit, having maturities of not more than one hundred eighty days
from the date of acquisition, or one year from the date of acquisition
in the case of certificates of deposit or eurodollar certificates of
deposit being used to secure the Company's reimbursement obligations
under letters of credit (provided that nothing contained herein shall
be construed to permit letters of credit not otherwise permitted under
this Agreement);
(iii) commercial paper of any Person that is not a subsidiary or
an Affiliate of the Company, maturing within one hundred eighty days
after the date of acquisition;
(iv) bank loan participations; and
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(v) money market instruments having maturities of not more than
one hundred eighty days from the date of acquisition or one year from
the date of acquisition in the case of money market instruments being
used to secure the Company's reimbursement obligations under letters
of credit (provided that nothing contained herein shall be construed
to permit letters of credit not otherwise permitted under this
Agreement);
in all cases of such credit quality as a prudent business person would
invest in. Notwithstanding anything else in this Agreement, the Company
will not make an investment in or otherwise acquire an ownership interest
in real property.
7G (b) ADJUSTED CAPITAL EXPENDITURES. The Company will not
make capital expenditures (by Capitalized Lease Obligations or otherwise)
for acquisitions, construction or improvement of fixed assets, or purchase,
lease, open or otherwise acquire or establish any new Store or Similar
store, or permit any of its Subsidiaries so to do, unless, after giving
effect thereto, the aggregate amount of all such capital expenditures made
by the Company and its Subsidiaries during such Fiscal Year (when combined
with the aggregate acquisition price for Stores and Similar Stores
purchased, leased, opened or otherwise acquired during such Fiscal Year as
permitted by this paragraph 7G(b)) would not exceed (x) during the period
from the Acquisition Effectiveness Date through the end of Fiscal Year
1995, $4,500,000 and (y) during any Fiscal Year listed in the first column
below, an amount equal to the sum of (1) the amount set forth opposite such
Fiscal Year in the second column below, plus (2) the Unused Amount:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C> <C>
1996 $6,000,000
1997 $7,500,000
1998 $8,000,000
1999 $9,000,000
2000 $9,000,000
2001 $9,000,000
2002 $9,000,000
2003 $9,000,000;
</TABLE>
PROVIDED THAT for purposes of this paragraph 7G(b):
(i) an amount equal to the present value of any Operating Lease
Obligations (other than Store Leases) entered into by Borrower or a
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Subsidiary on or after the Acquisition Effectiveness Date shall be
deemed to be an Adjusted Capital Expenditure during the Fiscal Year in
which said Operating Lease Obligations were entered into;
(ii) with respect to any Store Lease entered into by the Company
or a Subsidiary on or after the Acquisition Effectiveness Date (other
than renewal leases and Substitute Leases), an amount equal to (x) the
monthly rent payable under such lease multiplied by (y) 12, shall be
deemed to be an Adjusted Capital Expenditure during the Fiscal Year in
which said Store Lease was signed by any such member of the
Consolidated Group;
(iii) expenditures of the Net Proceeds from any sale, transfer or
disposition of Stores permitted by paragraph 7I(e) hereof, which are
used within six months following such sale, transfer or disposition to
purchase Similar Stores, shall not, to the extent of any such proceeds
so used, be considered an Adjusted Capital Expenditure; and
(iv) in computing the Adjusted Capital Expenditure with respect
to any acquisition of a Similar Store, the cost of such Similar Store,
including, without limitation the inventory and receivables (if any)
purchased, shall be included.
As used in this paragraph 7G(b), "UNUSED AMOUNT" shall mean, as to each
Fiscal Year, the amount (but not any amount in excess of $1,000,000), if
any, by which the aggregate amount of Adjusted Capital Expenditures
permitted to be made during the immediately preceding Fiscal Year exceeded
the aggregate amount of Adjusted Capital Expenditures made during such
immediately preceding Fiscal Year.
7H. RESTRICTIONS ON SALE AND LEASE-BACK TRANSACTIONS. The
Company will not sell or transfer any of its properties to anyone with the
intention of taking back a lease of the same property or leasing other
property for substantially the same use as the property being sold or
transferred, except where the aggregate outstanding unpaid amounts with
respect to all such arrangements does not exceed $500,000 at any one time,
and PROVIDED, FURTHER, that subject to paragraph 7A hereof, the Company may
continue and extend its existing leasing arrangements and may lease, under
operating leases, fixtures, equipment and real estate in the ordinary
course of business of the Company.
7I. RESTRICTIONS ON SALES OF ASSETS. The Company will not sell,
transfer or dispose of any property except as permitted under paragraph 7C
and except for (a) Inventory sold in the ordinary course of business, (b)
sales of obsolete Inventory, (c) sales permitted pursuant to paragraph 7H
above, (d) sales of obsolete equipment having a book value at the time of
sale of not more than $50,000 in the aggregate in any fiscal year, and
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(e) the sale of up to five Stores in a single transaction, and up to 10
Stores during a twelve month period, together with the associated
inventory, fixtures, and leases; PROVIDED, that in each such case, such
assets are sold for a price in cash at least equal to their fair market
value (as determined in good faith by the Company's Board of Directors).
7J. RESTRICTIONS ON SUBSIDIARIES. The Company will not, without
the written consent of the Purchasers, organize, or transfer any assets to,
any Subsidiaries, PROVIDED that, if any Subsidiaries are organized, or
assets transferred, in compliance with this paragraph 7J, the Company will
not permit such Subsidiaries to enter into any transaction or agreement
which would violate any of the provisions of this paragraph 7 if such
provisions were applicable to such Subsidiary.
7K. CHANGE IN BUSINESS. The Company will not cause or effect a
Change in Business.
7L. PAYMENT OF NOTES. The Company will not enter into, become a
party to or otherwise become subject to any instrument evidencing or
governing the terms of any Debt or other contract or agreement or any
amendments or modifications of the foregoing, the provisions of which
restrict or limit the Company's ability or obligation to make payments on
the Notes and under this Agreement, except for the Loan Agreement.
7M. NO DEBT SENIOR TO OR PARI PASSU WITH NOTES. Except as
permitted by paragraphs 7B and 7D hereof, the Company will not create,
assume or incur, or become at any time liable in respect of, any Debt,
other than the Bank Debt, which is or purports to be senior in any respect
to, or pari passu with, the Debt represented by the Notes.
7N. NO AMENDMENT OF CHARTER OR BY-LAWS. The Company will not
permit any amendment of or modification to its Articles of Incorporation or
By-Laws which amendment or modification would alter or impair the rights of
any holder of the Notes or the Warrants.
7O. COMPLIANCE WITH ERISA. The Company will not, and will not
permit any of its ERISA Affiliates to:
(i) engage in any transaction that will subject the Company or
any of its Subsidiaries to either a material civil penalty assessed
pursuant to section 502 (i) or (1) of ERISA or a material tax imposed
by section 4975 of the Code;
(ii) terminate or partially terminate any Plan, or withdraw or
partially withdraw from a Multiemployer Plan, in a manner, or take any
other action, which in any case may reasonably be expected to result
in any material liability of the Company or any of its ERISA
Affiliates to the PBGC;
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<PAGE>
(iii) fail to make full payment when due of all amounts which,
under the provisions of any Plan, the Company or any of its ERISA
Affiliates is required to pay as contributions thereto under section
302 of ERISA and section 412 of the Code, or permit to exist any
accumulated funding deficiency, whether or not waived, with respect to
any such Plan;
(iv) fail to make full payment when due of all amounts which,
under the provisions of any Multiemployer Plan or collective
bargaining agreement, the Company or any of its ERISA Affiliates is
required to pay as contributions thereto. The Company agrees (x) upon
the request of any Purchaser to obtain a current statement of
withdrawal liability from each Multiemployer Plan to which the Company
or any of its ERISA Affiliates contributes or to which the Company or
any of ERISA Affiliates has an obligation to contribute and (y)
transmit a copy of such statement to each Purchaser, so long as such
Purchaser or such Purchaser's nominee shall be the holder of any
Notes, within 15 days after the Company receives the same;
(v) amend or permit an ERISA Affiliate to amend a Plan resulting
in an increase in current liability for the plan year such that either
the Company or an ERISA Affiliate is required to provide security to
such Plan under section 401(a)(29) of the Code; or
(vi) amend or permit an ERISA Affiliate to amend a Welfare Plan
resulting in an increase in current liability in an amount that is
material to the Company or such ERISA Affiliate for the plan year.
7P. FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT. The Company
will not become a "United States real property holding corporation," as
defined in section 897 of the Code and in applicable regulations
thereunder.
7Q. ISSUANCE OF ADDITIONAL CAPITAL STOCK. The Company covenants
that, without the prior written consent of the Purchasers, except as
contemplated by this Agreement, neither it nor any of its Subsidiaries will
issue any shares of its capital stock or securities convertible into or
exchangeable for, or warrants, options or other rights to acquire, shares
of its or their capital stock, including, without limitation, any
preemptive rights or similar rights to subscribe for shares of capital
stock of the Company, other than the Common Stock to be issued upon the
exercise of the Warrants, and such rights described in Schedule 9C hereto.
8. EVENTS OF DEFAULT.
8A. DEFAULT; ACCELERATION. If any of the following events shall
occur and be continuing for any reason whatsoever (and whether such
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<PAGE>
occurrence shall be voluntary or involuntary or come about or be effected
by operation of law or otherwise):
(i) the Company defaults in the payment of any principal or
premium on any Note at its maturity or when otherwise due or in the
payment of any purchase or redemption obligation or in the payment of
interest on any Note when the same shall become due, either by the
terms thereof or otherwise as herein provided and, in the case of
interest, such default shall continue for five days after the same
shall have become due; or
(ii) the Company or any of its Subsidiaries fails to perform or
observe any of its obligations under paragraph ___ hereof; or
(iii) the Company or any of its Subsidiaries defaults in any
payment of principal of or interest on any Debt (excluding trade
payables) in excess of $500,000 for more than 60 days beyond any
period of grace provided with respect thereto and the effect of such
failure is to cause such Debt to become due prior to any stated
maturity; or
(iv) any representation or warranty made in writing by or on
behalf of the Company in this Agreement or in any writing furnished in
connection with or pursuant to this Agreement or in connection with
the transactions contemplated by this Agreement shall be false in any
material respect on the date as of which made; or
(v) the Company fails to perform or observe any agreement
contained in clause (ix) of paragraph 6A, in paragraphs 6C, 6G, 6H,
6J, 6K or 6L, which failure continues for 30 days following notice of
the failure from the Purchasers to the Company; or
(vi) the Company fails to perform or observe any material
agreement contained in the Registration Rights Agreement, the
Warrants, the Advisory Agreement or the Shareholders" Agreement, which
failure continues for 30 days following notice of the failure from the
Purchasers to the Company; or
(vii) the Company fails to perform or observe any other
agreement, term or condition contained in this Agreement, and such
failure shall not have been remedied within 30 days after such failure
shall first have become known to any Responsible Officer of the
Company or written notice thereof shall have been received by the
Company; or
(viii) the Company or any Subsidiary (except for a Subsidiary
which is not material) makes an assignment for the benefit of
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<PAGE>
creditors or is generally not paying its debts as such debts become
due; or
(ix) any order or decree for relief in respect of the Company or
any Subsidiary (except for a Subsidiary which is not material) is
entered under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or
similar law, whether now or hereafter in effect (herein called the
"BANKRUPTCY LAW"), of any jurisdiction; or
(x) the Company or any of its Subsidiaries (except for a
Subsidiary which is not material) petitions or applies to any tribunal
for, or consents to, the appointment of, or taking possession by, a
trustee, receiver, custodian, liquidator or similar official of the
Company or any of such Subsidiaries, or of any Substantial Part of the
assets of the Company or any of such Subsidiaries, or commences a
voluntary case under the Bankruptcy Law of the United States or any
proceedings (other than proceedings for the voluntary liquidation and
dissolution of a Subsidiary) relating to the Company or any of such
Subsidiaries under the Bankruptcy Law of any other jurisdiction; or
(xi) any petition or application described in clause (x) above is
filed, or any such proceedings are commenced, against the Company or
any of its Subsidiaries (except for a Subsidiary which is not
material) and the Company or such Subsidiary by any act indicates its
approval thereof, consent thereto or acquiescence therein, or an
order, judgment or decree is entered appointing any such trustee,
receiver, custodian, liquidator or similar official, or approving the
petition in any such proceedings, and such order, judgment or decree
remains unstayed and in effect for more than 60 days; or
(xii) any order, judgment or decree is entered in any proceedings
against the Company or any of its Subsidiaries (except for a
Subsidiary which is not material) decreeing the dissolution of the
Company or such Subsidiary and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or
(xiii) any order, judgment or decree is entered in any
proceedings against the Company or any of its Subsidiaries (except for
a Subsidiary which is not material) decreeing a split-up of the
Company or such Subsidiary which requires the divestiture of a
Substantial Part, or the divestiture of the stock of such Subsidiary
of the Company the assets of which constitute a Substantial Part, of
the assets of the Company and its Subsidiaries and such order,
judgment or decree remains unstayed and in effect for more than 60
days; or
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<PAGE>
(xiv) a final judgment (not fully covered by insurance and
reasonable deductibles thereunder) in an amount in excess of $500,000
is rendered against the Company or any of its Subsidiaries and, within
10 Business Days after entry thereof, such judgment is not discharged
or execution thereof stayed pending appeal, or within 10 days after
the expiration of any such stay, such judgment is not discharged;
then (a) if such event is an Event of Default specified in clause (ix), (x)
or (xi) of this paragraph 8A, all of the Notes at the time outstanding
shall automatically become due and payable at par, together with interest
accrued thereon; (b) if such event is any other Event of Default, the
Purchasers may, at their option, by notice in writing to the Company,
declare all of the Notes to be, and all of the Notes shall thereupon be and
become, immediately due and payable together with interest accrued thereon,
in each of the cases referred to in clauses (a) and (b) above, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company; and (c) in addition to the remedies of the
Purchasers in clause (b) above, if such event is an Event of Default
specified in clause (i) of this paragraph 8A, and, in the case of a default
in the payment of any principal or premium on any Note, such default shall
continue for more than five days after such payment shall have become due,
the Company shall promptly deliver to the Purchasers Penalty Warrants in
accordance with the provisions of paragraph 13C hereof.
8B. RESCISSION OF ACCELERATION. At any time after any or all of
the Notes shall have been declared immediately due and payable pursuant to
paragraph 8A, the holders of a majority of the Notes may, by notice in
writing to the Company, rescind and annul such declaration and its
consequences if (i) the Company shall have paid all overdue interest on the
Notes, the principal of and premium, if any, payable with respect to any
Notes which have become due otherwise than by reason of such declaration,
and interest on such overdue interest and overdue principal and premium at
the rate specified in the Notes, (ii) the Company shall not have paid any
amounts which have become due solely by reason of such declaration, (iii)
all Events of Default and Defaults, other than non-payment of amounts which
have become due solely by reason of such declaration, shall have been cured
or waived pursuant to paragraph 14C, and (iv) no judgment or decree shall
have been entered for the payment of any amounts due pursuant to the Notes
or this Agreement. No such rescission or annulment shall extend to or
affect any subsequent Event of Default or Default or impair any right
arising therefrom.
8C. OTHER REMEDIES. If any Event of Default or Default shall
occur and be continuing, the holder of any Note may proceed to protect and
enforce its rights under this Agreement and such Note by exercising such
remedies as are available to such holder in respect thereof under
applicable law, either by suit in equity or by action at law, or both,
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<PAGE>
whether for specific performance of any covenant or other agreement
contained in this Agreement or in aid of the exercise of any power granted
in this Agreement. No remedy conferred in this Agreement upon the holder
of any Note is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to every
other remedy conferred herein or now or hereafter existing at law or in
equity or by statute or otherwise.
9. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company
represents, covenants and warrants to the Purchasers as follows:
9A. ORGANIZATION; CORPORATE AUTHORITY. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has all requisite corporate
power and authority to own and operate its properties and to carry on its
business. The Company has all requisite corporate power and authority to
enter into and perform all of its obligations under this Agreement and to
issue and sell the Securities (and to issue shares of Common Stock upon the
exercise of the Warrants) as contemplated hereby. The Company is duly
qualified and in good standing as a foreign corporation duly authorized to
do business in each jurisdiction where it is or will be on the Closing Date
required so to qualify, except where the failure so to qualify would not
have a material adverse effect on the business, condition (financial or
other), prospects, assets or properties of the Company. The Company has no
Subsidiaries or any other equity investments in any other entity.
9B. BUSINESS; FINANCIAL STATEMENTS. The Company has furnished
the Purchasers with the following unaudited financial statements: (i) the
divisional income statements and balance sheets of FBS for each of the
fiscal years ended June 30, 1994 and June 30, 1993 and (ii) the interim
income and cash flow statements and balance sheet for FBS for the period
ended September 30, 1993 and September 30, 1994 (the "FINANCIAL
STATEMENTS") . The Financial Statements (i) have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis (except as described in EXHIBIT F to the Asset Purchase
Agreement) and disclose all liabilities, direct and contingent, required to
be shown in accordance with such principles and (ii) given that they are
divisional statements, present fairly the financial position of FBS at the
dates indicated and results of operations for the periods indicated. The
Financial Statements did not, as of their respective dates, and this
Agreement does not, contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein
and herein, in light of the circumstances under which they were made, not
misleading. There is no fact (other than facts related to general economic
conditions) peculiar to the Company or FBS which materially adversely
affects or in the future would reasonably be expected to (so far as the
Company can now foresee) materially adversely affect the business,
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<PAGE>
prospects, condition (financial or otherwise) or operations of the Company
or FBS which has not been set forth or reflected in this Agreement.
Neither the Company nor FBS has sustained since June 30, 1993 any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree which is material to the
Company or FBS, as the case may be; and, since June 30, 1993, there has not
been any material adverse change, or any development which the Company has
reasonable cause to believe (so far as the Company can now foresee) will
involve a prospective material adverse change, in or effecting the
business, condition (financial or other), assets, properties, operations or
prospects of the Company or FBS.
9C. CAPITAL STOCK AND RELATED MATTERS. As of the Closing (or
other indicated date) and after giving effect to the transactions
contemplated hereby (i) the authorized Capital Stock of the Company will
consist of (a) 60,000 shares of Common Stock, par value $1.00 per share, of
which 30,000 shares will be issued and outstanding at November 14, 1994, no
shares will be held by the Company as treasury stock, no shares will be
reserved for issuance upon the exercise of currently outstanding stock
options, no shares will be reserved for issuance upon the exercise of
authorized stock options that have not been granted, and 11,667 shares will
be reserved for issuance upon the exercise of outstanding Warrants to
purchase Common Stock, (ii) no shares of Common Stock will be owned or held
by or for the account of the Company, (iii) the Company will not have
outstanding any stock or securities convertible into or exchangeable for
any shares of Capital Stock, any rights to subscribe for or to purchase, or
any options for the purchase of, or any agreements providing for the
issuance (contingent or other) of, or any calls, commitments or claims of
any other character relating to the issuance of, any Capital Stock or any
stock or securities convertible into or exchangeable for any Capital Stock
(other than (x) stock options or stock appreciation rights issued pursuant
to the Performance Plan described in SCHEDULE 9C hereto, (y) the Warrants
and (z) subscription rights with respect to any shares not purchased on the
Closing Date as a part of the Company's initial equity offering of up to a
maximum of $6,300,000, including the Common Stock sold on the Closing Date
as described in paragraph 4A(xviii)) and (iv) the Company will not be
subject to any obligation (contingent or other) to repurchase, otherwise
acquire or retire any shares of Capital Stock. The Company has not granted
or agreed to grant any rights relating to the registration of its
securities under applicable federal and state securities laws, including
piggyback rights, except as provided in the Registration Rights Agreement.
9D. LITIGATION. Except as set forth in SCHEDULE 9D, there are
no claims, actions, suits, proceedings, labor disputes or investigations in
process by or against the Company or, to the best knowledge of the Company,
threatened either by a written communication directed to the Company or by
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an oral communication directed to the Company by a stockholder of the
Company, before any federal or state court, arbitrator or governmental
authority by or against the Company which, if adversely determined, may
reasonably be expected to result in any material adverse change in the
business, condition (financial or otherwise), assets, properties,
operations or prospects of the Company or in any liability on the part of
the Company which would be material to the Company or which, to the best
knowledge of the Company, includes a claim against or involving the Company
in excess of $500,000 or which questions the validity or legality of or
seeks damages in connection with this Agreement or any of the transactions
contemplated hereby or any action taken or to be taken pursuant to this
Agreement or any of the transactions contemplated hereby. There are no
outstanding judgments, decrees or orders of any court or governmental
authority against the Company which may reasonably be expected to result in
any material adverse change in the business, condition (financial or
other), assets, properties, operations or prospects of the Company or in
any liability on the part of the Company which would be material to the
Company.
9E. OUTSTANDING DEBT. The Company does not have any outstanding
secured or unsecured Debt or commitments for any Debt except the Bank Debt
and Debt permitted pursuant to paragraph 7B, and there exists no default by
the Company under the provisions of any instrument evidencing such Debt or
of any agreement relating thereto.
9F. TITLE TO PROPERTIES. The Company has good and marketable
title to all of its respective properties and assets, free and clear of all
Liens except Liens permitted by paragraph 7D. The Company enjoys peaceful
and undisturbed possession under all leases necessary in any material
respect for the operation of its properties and businesses, and none of
such leases contain any unusual or burdensome provisions which can be
reasonably expected to materially affect or impair the operation of such
properties and businesses. Except to perfect and protect security
interests of the character permitted by paragraph 7D, at the time of the
Closing (i) no effective financing statement under the Uniform Commercial
Code which names the Company as debtor or lessee will be on file in any
jurisdiction and (ii) the Company will not have signed any effective
financing statement or any effective security agreement authorizing any
secured party thereunder to file any such financing statement.
9G. TAXES. The Company has filed all tax returns required by
law to be filed by it (or obtained valid extensions thereof), and all
taxes, assessments and other governmental charges levied upon the Company
or any of its properties, assets, income or franchises which are due and
payable, other than those presently payable without penalty or interest,
have been paid. There are no tax liens upon any assets of the Company.
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<PAGE>
9H. CONFLICTING AGREEMENTS AND OTHER MATTERS. The Company is
not a party to any contract or agreement or subject to any restriction
which materially and adversely affects its business, condition (financial
or otherwise), prospects, assets or properties. Neither the execution or
delivery of this Agreement or the Securities or any of the related
documents nor the offering, issuance and sale of the Securities, nor
fulfillment of or any compliance with the terms and provisions hereof and
thereof, will conflict with, or result in a breach of the terms, conditions
or provisions of, or constitute a default under, or result in any violation
of, or result in the creation of any Lien upon any of the properties or
assets of the Company pursuant to, the charter or By-Laws of the Company,
any award of any arbitrator or any material agreement, instrument, order,
judgment, decree, statute, law, rule or regulation to which the Company, or
any of its respective property or assets is subject, except (i) the Company
will not be obtaining comments to the assignment of all leases and
agreements associated with FBS, as is described in Sections 4.11, 4.14 and
5.1(f) of the Asset Purchase Agreement and (ii) the Company and Zondervan
will be waiving compliance with Bulk Sales Laws. The Company is not a
party to or otherwise subject to any contract or agreement which limits the
amounts of, or otherwise imposes restrictions on the incurring of, Debt of
the type to be evidenced by the Notes or which contains dividend or
redemption limitations on any Capital Stock of the Company, except for this
Agreement and the Loan Agreement.
9I. PATENTS, ETC. All patents, trademarks, service-marks, trade
names, permits, licenses, franchises or other rights (collectively,
"INTANGIBLE RIGHTS") owned or held by the Company that are material to the
business of the Company are described on SCHEDULE 9I hereto. Except as
described on Schedule 9I hereto, all such Intangible Rights are free and
clear of any Lien. Nothing has come to the attention of the Company to the
effect that (i) any activity in operating the business of the Company as
presently conducted by the Company or as proposed to be conducted by the
Company may infringe any patent, trademark, service-mark, trade name,
copyright, permit, license, franchise or other right owned by any other
Person, (ii) there is pending or threatened any claim or litigation against
or affecting the Company contesting its right to carry on such activities
or (iii) there is, or there is pending or proposed, any statute, law, rule,
regulation, standard or code which would prevent or inhibit, or
substantially reduce the projected revenues of, or otherwise adversely
affect the business, condition (financial or otherwise) or operations of,
the Company.
9J. OFFERING OF SECURITIES. The Company, has not, directly or
indirectly, offered any of the Securities or any similar security of the
Company, including, without limitation, Common Stock, for sale to, or
solicited any offers to buy any of the Securities or any such security of
the Company from, or otherwise approached or negotiated with respect
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thereto with, any Person or Persons other than the Purchasers and such
number and type of other investors as is permitted under the Securities
Act. Neither the Company nor any agent acting on its behalf has taken or
will take any action which would subject the issuance or sale of any of the
Securities to the provisions of section 5 of the Securities Act or to the
provisions of any securities or Blue Sky law of any applicable
jurisdiction.
9K. BROKER'S OR FINDER'S COMMISSIONS. No broker's or finder's
fee or commission will be payable by the Company with respect to the
issuance and sale of the Securities or the transactions contemplated
hereby.
9L. COMPLIANCE WITH LAW. (a) The Company has not received
notice of, or citation or summons for, and no complaint has been filed, no
penalty has been assessed and no investigation or review is in process or,
to the best knowledge of the Company, threatened by any governmental
authority with respect to, any violation or alleged violation of any law,
regulation, order or other legal requirement, or failure by the Company to
have any permit, certificate, license, approval, registration or
authorization required in connection with the operation of its business,
other than where such violation or failure would not reasonably be expected
to have a material adverse effect on the business, condition (financial or
otherwise), assets, properties, operations or prospects of the Company.
The Company is not in default with respect to any order, writ, judgment,
award, injunction or decree of any federal, state or local court or
governmental or regulatory authority or arbitrator, domestic or foreign,
applicable to or in connection with its business or any of its assets,
properties or operations, other than defaults the consequences of which
would not reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), assets, properties,
operations or prospects of the Company.
(b) With respect to the operation of its business, the Company
possesses and is in compliance with all permits, certificates, licenses,
approvals, registrations and authorizations required under all applicable
laws, rules and regulations, all of which are in full force and effect, and
the business has been conducted and is now being conducted in compliance
with all applicable laws, rules, regulations, judgments and orders of the
United States and states, counties, municipalities and agencies thereof,
including, without limitation, laws, rules and regulations relating to
pollution and environmental control, equal employment opportunity, health
and safety and zoning, except with respect to Bulk Sales Laws, and except
for such noncompliance which, individually or in the aggregate, would not
reasonably be expected to have a material adverse effect on the business,
condition (financial or other), assets, properties, operations or prospects
of the Company.
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9M. INVESTMENT COMPANY ACT. The Company is not an "investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
9N. PUBLIC UTILITY HOLDING COMPANY ACT. The Company is not a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.
9O. GOVERNMENTAL CONSENTS, ETC. No consent, approval,
authorization, exemption or other action by, or notice to or filing with,
any court or administrative or governmental body which has not been
obtained, taken or made is required in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby or thereby or fulfillment of or compliance with the
terms and provisions hereof.
9P. COMPLIANCE WITH ERISA. (a) PROHIBITED TRANSACTIONS.
Neither the Company nor any ERISA Affiliate has engaged in a transaction in
connection with which the Company could be subject to a material liability
for either a civil penalty assessed pursuant to section 502 (i) or (1) of
ERISA or a tax imposed by section 4975 of the Code.
(b) PLAN TERMINATION; MATERIAL LIABILITIES. There has been no
termination or partial termination of a Plan or trust, insurance contract
or other funding arrangement maintained or created under any Plan that
would give rise to a material liability to the PBGC on the part of the
Company or an ERISA Affiliate. No material liability to the PBGC has been
or is expected to be incurred with respect to any Plan by the Company or an
ERISA Affiliate. The PBGC has not instituted proceedings to terminate any
Plan with respect to which the Company or an ERISA Affiliate has
liabilities. There exists no condition or set of circumstances which
presents a material risk of termination or partial termination of any Plan
by the PBGC. The Company and each ERISA Affiliate have paid all premiums
to the PBGC when due.
(c) ACCUMULATED FUNDING DEFICIENCY. Full payment has been made
of all amounts which are required under the terms of each Plan to have been
paid or accrued as contributions to such Plan as of the last day of the
most recent fiscal year of such Plan ended on or before the date of this
Agreement (except such contributions as have not been made but that can be
timely made at a later date without penalty in accordance with sections 412
and 4971 of the Code), and no accumulated funding deficiency (as defined in
section 302 of ERISA and section 412 of the Code), whether or not waived,
exists with respect to any Plan. Neither the Company nor an ERISA
Affiliate has failed to make a required installment under section 412(m) of
the Code.
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(d) RELATIONSHIP OF BENEFITS TO PENSION PLAN ASSETS. The
current value of the "benefit liabilities" (as defined in section
4001(a)(16) of ERISA) of each Plan subject to Title IV of ERISA and section
412 of the Code does not exceed the fair market value of the assets of such
Plan, except, in the case of Plans established after the date hereof, as
permitted by the applicable funding requirements of Section 412 of the
Code. Neither the Company nor any ERISA Affiliate is required to provide
security to any Plan. No Lien under section 412(n) of the Code or
sections 312(f) or 4068 of ERISA has been or is reasonably expected by the
Company to be imposed on the assets of the Company or any ERISA Affiliate.
(e) COMPLIANCE WITH ERISA. All Plans which are intended to be
"qualified" are "qualified" under section 401(a) of the Code. All Plans
and Welfare Plans contributed to or maintained by the Company or an ERISA
Affiliate have been administered substantially in compliance with ERISA and
the applicable provisions of the Code. There are no pending issues before
the Internal Revenue Service or any court of competent jurisdiction related
to the qualification, or payment of benefits under, any Plan or Welfare
Plan.
(f) EXECUTION OF AGREEMENTS; PURCHASE AND SALE OF SECURITIES,
ETC. The execution and delivery of this Agreement the issue and sale of
the Securities and the consummation of transactions contemplated by this
Agreement will not involve any transaction which is subject to the
prohibitions of section 406 of ERISA or in connection with which a tax
could be imposed pursuant to section 4975 of the Code. The representation
by the Company in the preceding sentence is made in reliance upon and
subject to the accuracy of the Purchaser's representations in paragraph 11
as to the source of funds used to pay the purchase price of the Securities.
9Q. MATERIAL AGREEMENTS. The agreements, contracts and other
documents listed in SCHEDULE 9O hereto (collectively, "CONTRACTS") comprise
all of the material agreements, contracts and other arrangements to which
the Company is a party (including, without limitation, contracts or other
agreements for the employment or compensation of any officer, director,
stockholder, consultant or key employee of the Company, joint venture
agreements, shareholder agreements or similar arrangements).
9R. ENVIRONMENTAL MATTERS. (a) To the best knowledge of the
senior executives of the Company, none of the real property owned or leased
by the Company (the "REAL PROPERTY") contains or, to the best knowledge of
the Company, has previously contained any hazardous or toxic wastes or
substances or underground storage tanks, where the consequences of the same
would reasonably be expected to have a material adverse effect on the
business, condition (financial or otherwise), assets, properties,
operations, or prospects of the Company.
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(b) To the best knowledge of the senior executives of the
Company, after having made due inquiry, the Real Property is in compliance
with all applicable federal, state and local environmental standards and
requirements affecting such Real Property except to the extent that
noncompliance would not reasonably be expected to have a material adverse
effect on the business, condition (financial or otherwise), assets,
properties, operations, or prospects of the Company and, to the best of
such senior executives' knowledge after having made due inquiry, there are
no environmental conditions which are reasonably likely to interfere with
the continued use of the Real Property.
(c) The Company has not received any notice of violation or
advisory action against the Company by any regulatory agency regarding
environmental laws or regulations or permit regulations.
(d) The Company has not transferred hazardous waste from any of
the Real Property to any other location which is not in compliance with all
applicable environmental laws and regulations and permit regulations.
(e) With respect to the Real Property, there are no proceedings,
governmental administrative actions or judicial proceedings pending or, to
the best knowledge of the Company, threatened under any federal, state, or
local law regulating the discharge of hazardous or toxic materials or
substances into the environment, to which the Company is named as a party.
9S. FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT. The Company is
not a "United States real property holding corporation," as defined in
section 897 of the Code and in applicable regulations thereunder.
9T. LEASES. SCHEDULE 9T sets forth a list of all real and
personal properties in which the Company has a leasehold interest and which
are used in connection with its business (each, a "LEASE," and
collectively, the "LEASES"), including, without limitation, all leases of
equipment, machinery, furniture, vehicles and tangible personal property
and all leases under which the Company is a lessee of private and public
warehouses. No party to any Lease has given the Company written notice of
or made a claim with respect to any breach or default under any such Lease
the consequences of which, individually or in the aggregate, would
reasonably be expected to have a material adverse effect on the business,
condition (financial or other), assets, properties, operations or prospects
of the Company. Except as described in paragraph 9H, each of the Leases is
valid, binding and enforceable against the Company, and, to the best of the
Company's knowledge, the other parties thereto, in accordance with its
terms and is in full force and effect. Except as described in paragraph
9H, the Company, and, to the best of the Company's knowledge, each of the
other parties thereto, has performed all material obligations required to
be performed by it to date under, and is not in default in respect of, any
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of the Leases and, to the best of the Company's knowledge, no event exists
which, with notice or lapse of time, or both, would constitute such a
default, other than where failure to perform such obligations or such
default would not reasonably be expected to have a material adverse effect
on the business, condition (financial or other), assets, properties,
operations or prospects of the Company.
9U. INVENTORY. The Inventory is merchantable and is saleable in
the ordinary course of business and is carried on the Company's books and
records at values, after giving effect to normal reserves consistent with
the Company's past practice, which conform to generally accepted accounting
principles. The Company has good title, free and clear of all Liens,
except for Liens permitted under paragraph 7D, to the Inventory owned by it
on the Closing Date.
9V. EMPLOYEE MATTERS. Except as set forth in SCHEDULE 9V, (a)
there are no open National Labor Relations Board claims, petitions,
proceedings, charges, complaints or notices with respect to the Company,
(b) the Company has no labor negotiations in process with any labor union
or other labor organization, (c) no labor disputes, including, but not
limited to, strikes, slowdowns, picketing or work stoppages or other labor
difficulty exist or to the best of the Company's knowledge are threatened,
with respect to any employees of the Company, (d) no grievance or
arbitration proceeding arising out of or under any collective bargaining
agreement relating to the employees of the Company is in process, and to
the best knowledge of the Company, no claim thereunder exists, (e) the
Company is not experiencing any labor disputes, including but not limited
to strikes, slowdowns, picketing or work stoppages with respect to the
employees of the Company and (f) no "plant closing" or "mass layoff" has
been effectuated by the Company (in each case as defined in the Worker
Adjustment and Retraining Notification Act (29 U.S.C. (Section) 2101, ET
SEQ.), as amended). To the best knowledge of the Company, there are no
efforts in process by unions to organize any employees of the Company who
are not now represented by recognized collective bargaining agents.
9W. PRODUCTS LIABILITY. Except for lawsuits, claims (asserted
or unasserted), damages and expenses adequately covered by the Company's
insurance, there are no (i) liabilities of the Company, fixed or
contingent, asserted or, to the best knowledge of the Company, unasserted,
with respect to any product liability or any similar claim that relates to
any product sold by the Company to others prior to the Closing Date, or
(ii) liabilities of the Company, fixed or contingent, asserted or, to the
best knowledge of the Company, unasserted, with respect to any claim for
the breach of any express or implied product warranty or any other similar
claim with respect to any product sold by the Company to others prior to
the Closing Date, other than standard warranty obligations (to replace,
repair or refund) made by the Company in the ordinary course of the conduct
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of its business to purchasers of its products, and except, in each case,
where such liabilities do not or would not reasonably be expected to have a
material adverse effect on the business, condition (financial or other),
assets, properties, operations or prospects of the Company.
10. REPRESENTATIONS OF THE PURCHASERS. Each of the Purchasers
represents, and in making this sale to the Purchasers it is specifically
understood and agreed, that (i) it is purchasing the Securities for its own
account, for investment purposes and not with a view to or for sale in
connection with any distribution thereof in violation of applicable federal
and state securities laws; and (ii) it has received, or has had access to,
all information which it considers necessary or advisable to enable it to
make a decision concerning its purchase of the Securities, and possesses
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of its investment hereunder.
Each of the Purchasers represents that it is an "Accredited Investor" as
such term is defined in Regulation D promulgated under the Securities Act.
Each of the Purchasers agrees that it will not, directly or indirectly,
offer, transfer, sell, assign, pledge, hypothecate or otherwise dispose of
any of the Securities (or solicit any offers to buy, purchase, or otherwise
acquire or take a pledge of any of the Securities), except in compliance
with the Securities Act and any applicable state securities or blue sky
laws.
11. DEFINITIONS. For purposes of this Agreement, the terms
defined in paragraphs 1, 2 and 3 shall have the respective meanings
specified therein, and the following terms shall have the meanings
specified below with respect thereto:
"ACQUISITION EFFECTIVENESS DATE" shall mean November 1, 1994.
"ADJUSTED CAPITAL EXPENDITURES" shall mean the sum of (x) capital
expenditures (by Capitalized Lease Obligations or otherwise) for
acquisitions, construction or improvement of fixed assets, and (y) the
aggregate acquisition price for Stores and Similar Stores purchased,
leased, opened or otherwise acquired; PROVIDED, that any amount not
considered an Adjusted Capital Expenditure pursuant to clause (iii) or (iv)
of paragraph 7G(b) shall not be considered an Adjusted Capital Expenditure
and amounts deemed to be Adjusted Capital Expenditures by clauses (i) and
(ii) of paragraph 7G(b) shall be considered Adjusted Capital Expenditures.
"ADVISORY AGREEMENT" shall have the meaning specified in
paragraph 4A(v).
"ADVISORY FEEL" shall have the meaning specified in paragraph 12.
"AFFILIATE" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by, or under direct
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or indirect common control with, such Person, but shall exclude the
Purchasers and any Transferee that might be deemed to be an Affiliate of
the Company solely by reason of its ownership of Securities purchased by
the Purchasers under this Agreement or securities issued in exchange for
any such Securities, or by reason of its benefitting from any agreements or
covenants of the Company contained in this Agreement. A Person shall be
deemed to control another Person if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management
and policies of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
"ANDERSEN AGREEMENT" shall mean the Base Software License
Agreement dated May 9, 1994 between Zondervan and Andersen Consulting, as
assumed by the Company pursuant to the Asset Purchase Agreement.
"ASSET PURCHASE AGREEMENT" shall have the meaning specified in
paragraph 1.
"ASSOCIATES" shall have the meaning in the first paragraph
hereof.
"BANKS" shall mean the Banks from time to time party to the Loan
Agreement.
"BANK DEBT" shall mean the Debt of the Company to the Banks (and
to the Agent for the Banks) outstanding from time to time under the Loan
Agreement.
"BANKRUPTCY LAW" shall have the meaning specified in clause (ix)
of paragraph 8A.
"BULK SALES LAWS" shall have the meaning specified in clause (x)
of paragraph 7D hereof.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday
or a day on which commercial banks in New York City are required or
authorized to be closed.
"BUY AND SELL AGREEMENT" shall have the meaning specified in
paragraph 4A(xix).
"CAPITALIZED LEASE" shall mean any lease if the obligation to
make rental payments thereunder constitutes a Capitalized Lease Obligation.
"CAPITALIZED LEASE OBLIGATIONS" shall mean any rental obligations
which, under GAAP, are or will be required to be capitalized on the books
of the Company or any Subsidiary, taken at the amount thereof accounted for
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as indebtedness (net of interest expense) in accordance with such
principles.
"CAPITAL STOCK" shall mean any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock.
"CASH INTEREST EXPENSE" shall mean, in respect of any Person for
any period, as of any date of calculation, the total interest expense of
such Person and its Subsidiaries for such period determined in accordance
with GAAP, LESS the amount of such interest expense paid or payable other
than in cash.
"CHANGE IN BUSINESS" with respect to the Company shall mean any
change in or addition to the primary business of the Company that has not
been approved by the Purchasers such that more than 10% of the Consolidated
Net Earnings of the Company are derived from a business other than the
retail and direct mail distribution and sale of bibles, books, gifts,
music, video, church materials and novelty items of a Christian nature.
"CHANGE IN CONTROL" with respect to the Company shall mean the
occurrence of any of the following events: (a) the sale, lease or other
disposition of all or substantially all of the assets of the Company and
its Subsidiaries or of a majority of the Common Stock (other than in an
Initial Public Offering) or a merger or consolidation of the Company with
or into another entity in a transaction in which the shareholders of the
Company on the Closing Date (together with the Purchasers and their
successors and assigns, and other present or future shareholders of the
categories described in paragraph 9C) own less than 50% of the voting
securities of the surviving or resulting corporation immediately after such
merger or consolidation; or (b) any liquidation, dissolution or winding up
of the Company.
"CLOSING" shall have the meaning specified in paragraph 3.
"CLOSING DATE" shall have the meaning specified in paragraph 3.
"CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"COMMISSION" shall mean the United States Securities and Exchange
Commission or any governmental body or agency succeeding to the functions
thereof.
"COMMON STOCK" shall have the meaning specified in paragraph
1(b).
"CONSENTS" shall have the meaning specified in paragraph 4F.
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"CONSOLIDATED GROUP" shall mean the Company and its consolidated
Subsidiaries (if any). If at the relevant date or for the relevant period
of computation the Company has no such Subsidiaries, the term "Consolidated
Group" shall refer solely to the Company.
"CONSOLIDATED NET EARNINGS" means consolidated gross revenues of
the Company and its Subsidiaries less all operating and nonoperating
expenses of the Company and its Subsidiaries, including all charges of a
proper character (including current and deferred taxes on income, provision
for taxes on income, provision for taxes on unremitted foreign earnings
which are included in gross revenues, and current additions to reserves),
all determined in accordance with GAAP applied on a basis consistent with
prior years, but not including in gross revenues any gains (net of expenses
and taxes applicable thereto) in excess of losses resulting from the sale,
conversion or other disposition of capital assets (i.e., assets other than
current assets), any gains resulting from the write-up of assets, any gains
resulting from an acquisition by the Company or any of its Subsidiaries at
a discount of any Debt of the Company or any of its Subsidiaries, any
equity of the Company or any of its Subsidiaries in the unremitted earnings
of any corporation which is not a Subsidiary of the Company, any earnings
of any Person acquired by the Company or any of its Subsidiaries through
purchase, merger or consolidation or otherwise for any time prior to the
date of acquisition, or any deferred credit representing the excess of
equity in any Subsidiary of the Company at the date of acquisition over the
cost of the investment in such Subsidiary.
"CONSULTING AGREEMENT" shall have the meaning specified in
paragraph 4P.
"CONTRACTS" shall have the meaning specified in paragraph 9Q.
"CURRENT LIABILITIES" shall mean, at any date of determination,
the total liabilities of the Company (including tax and other proper
accruals) which may properly be classified as current liabilities in
accordance with GAAP.
"DEBT" of any Person shall mean:
(1) all indebtedness of such Person for borrowed money,
including without limitation obligations evidenced by bonds,
debentures, notes, or other similar instruments;
(2) all indebtedness guaranteed in any manner by such Person, or
in effect guaranteed by such Person through an agreement to purchase,
contingent or otherwise;
(3) all accounts payable which, to the knowledge of such Person,
have remained unpaid for a period of 60 days after the same become due
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and payable in accordance with their respective terms taking into
account (i) any grace period relating to the due date expressly set
forth in the applicable invoice will respect to the payment of such
accounts payable or (ii) customary industry payment practices in
respect of due dates;
(4) all indebtedness secured by any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in property
owned by such Person, even though such Person has not assumed or
become liable for the payment of such indebtedness;
(5) all indebtedness created or arising under any conditional
sale agreement or lease in the nature thereof (including obligations
as lessee under leases which shall have been or should be, in
accordance with GAAP, recorded as Capitalized Leases) (but excluding
operating leases) or other title retention agreement with respect to
property acquired by such Person, even though the rights and remedies
of the seller or lender under such agreement in the event of default
are limited to repossession of such property;
(6) all bankers' acceptances and letters of credit; and
(7) liabilities in respect of unfunded vested benefits under
Plans covered by Title IV of ERISA.
"DEFAULT": see "Event of Default".
"EBIT" for any Person for any period shall mean the consolidated
Net Income of such Person for such period, before interest expense and
provision for taxes and without giving effect to any extraordinary gains or
losses (or gains or losses from sales of assets, other than sales of
inventory in the ordinary course of business), for such period (taken as
one accounting period).
"EBITDA" for any Person for any period shall mean the EBIT of
such Person for such period PLUS (to the extent deducted in computing EBIT
for such Person for such period) depreciation, amortization and other non-
cash items.
"EIT" shall have the meaning specified in the first paragraph
hereof.
"ELECTRA" shall have the meaning specified in paragraph 3 hereof.
"EMPLOYMENT AGREEMENT" shall have the meaning specified in
paragraph 4A(xi).
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"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA AFFILIATE" shall mean each trade or business (whether or
not incorporated) which together with the Company is treated as a "single
employer" under sections (b), (c), (m), (n) or (o) of section 414 of the
Code; PROVIDED that in no event shall the Purchasers or any of their
Affiliates be deemed to be an ERISA Affiliate for purposes of this
Agreement.
"EVENT OF DEFAULT" shall mean any of the events specified in
paragraph 8A, provided that there has been satisfied any requirement in
connection with such event for the giving of notice, or the lapse of time,
or the happening of any further condition, event or act, and "DEFAULT"
shall mean any of such-events, whether or not any such requirement has been
satisfied.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FBS" shall have the meaning specified in paragraph 1.
"FISCAL YEAR" shall mean each July 1-June 30 period. "Fiscal
Year" followed by a year means the Fiscal Year with its Fiscal Year-End in
such calendar year.
"FISCAL YEAR-END" shall mean, with respect to any Person, the
last day of such Person's Fiscal Year.
"FIXED CHARGE COVERAGE RATIO" shall mean, for the period in
question, in respect of any Person, the ratio for such Person and its
Subsidiaries, of (A) an amount equal to the sum (without duplication) of
(i) the consolidated Net Income of such Person and its
Subsidiaries for such period, exclusive of extraordinary gains and
losses for such period, PLUS
(ii) consolidated interest expense for such Person and its
Subsidiaries for such period, including the portion of any Capitalized
Lease Obligations allocable to such interest expense, PLUS
(iii) all taxes imposed by any government authority on the income
of such Person and its Subsidiaries that have accrued or are otherwise
due or payable in respect of such period, PLUS
(iv) all depreciation and amortization of such Person and its
Subsidiaries with respect to such period,
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to (b) their Fixed Charges for such period.
"FIXED CHARGES" shall mean, in respect of any Person for any
period, as of any date of calculation, an amount equal to the sum (without
duplication) of
(i) all Cash Interest Expenses for such Person and its
Subsidiaries during such period (less amounts received by such Person
and its Subsidiaries) as interest during such period, PLUS
(ii) the principal due on the Term Loan portion of the Bank Debt,
PLUS
(iii) the principal due on all other Indebtedness for Borrowed
Money of such Person and its Subsidiaries during such period, PLUS
(iv) all rents and other amounts allocable to principal that
accrue or have accrued during such period with respect to Capitalized
Lease Obligations of such Person and its Subsidiaries.
"FOUR-QUARTER PERIOD" shall mean a period of four consecutive
calendar quarters, commencing with the four consecutive calendar quarters
ending on December 31, 1995.
"FULLY DILUTED" shall mean, at any point in time, the number of
common shares outstanding, increased by all common equivalent shares (stock
options, warrants, convertible securities and any other security or
instrument having the right to require additional common shares to be
issued at any time in the future) at the time outstanding.
"GAAP" shall mean generally accepted accounting principles (as
promulgated by the Financial Accounting Standards Board or any successor
entity).
"GE" shall mean (x) with respect to the GE Credit Facility,
General Electric Capital Computer Leasing Group, and (y) with respect to
the GE Store Fixtures Lease, General Electric Capital Corporation.
"GE AGREEMENTS" shall mean, individually and collectively, the GE
Credit Facility and the GE Store Fixtures Lease.
"GE CREDIT FACILITY" shall mean that certain Base Software
License Agreement date May 9, 1994 between Zondervan and Andersen
Consulting, as assigned to GE.
"GE STORE FIXTURES LEASE" shall mean Equipment Schedule 5 to that
certain Equipment Lease Agreement dated as of June 3, 1991 between
Zondervan and GE.
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"GOODWILL" shall mean, with respect to the balance sheet of a
Person as at the date at which the amount thereof shall be determined, the
aggregate of all amounts appearing on the asset side of such balance sheet
for goodwill, patents, patent rights, trademarks, trade names, copyrights,
franchises, treasury stock, organizational expenses, and other similar
items, if any, all determined in accordance with GAAP.
"GUARANTEE" shall mean by any Person, any obligation, contingent
or otherwise, of such Person directly or indirectly guaranteeing any
Indebtedness for Borrowed Money or other obligation of any other Person
and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness for Borrowed Money or other obligation (whether arising by
virtue of partnership arrangements, by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness
for Borrowed Money or other obligation of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part),
provided that the term "Guarantee" shall not include endorsements for
collection or deposits in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
"HARPERCOLLINS" shall have the meaning specified in paragraph 1
hereof.
"HART-SCOTT ACT" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"IFA LEASE" shall mean that certain lease agreement between
Zondervan and IFA Incorporated dated June 20, 1994 (as supplemented by
supplements 1, 2 and 3 dated September 9, 1994, September 30, 1994 and
September 30, 1994, respectively), as assumed by the Company pursuant to
the Asset Purchase Agreement, as such lease agreement may from time to time
be amended, restated, supplemented or otherwise modified with the consent
of the Agent under (and as defined in) the Loan Agreement.
"INDEBTEDNESS FOR BORROWED MONEY" shall mean (without
duplication) (i) all indebtedness of (including, without limitation, all
indebtedness assumed by) a Person in respect of money borrowed (including,
without limitation, the unpaid amount of the purchase price of any
property, incurred for such purpose in lieu of borrowing money or using
available funds to pay said amount, and not constituting an account payable
or expense accrual incurred or assumed in the ordinary course of business),
or evidenced by a promissory note, bond, debenture or other like obligation
to pay money, and including indebtedness under banker's acceptances and
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with respect to letters of credit, and (ii) all obligations of (including,
without limitation, all obligations assumed by) a Person (x) constituting a
Capitalized Lease Obligation of such Person, or (y) constituting a
Guarantee by such Person. Notwithstanding the foregoing, the Zondervan
Indemnification shall not be considered Indebtedness for Borrowed Money
until such time as a claim is made for monies to be paid under it (and, in
such event, the amount of such indebtedness shall equal the aggregate
amount of all such claims).
"INITIAL PUBLIC OFFERING" shall mean the closing of an
underwritten public offering for the shares of Common Stock of the Company
pursuant to a registration statement under the Securities Act, with
proceeds to the Company of $25,000,000 or more, and valuing the total
common equity of the Company as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Prior to December 31, 1996: $50,000,000;
From December 31, 1996
to but not including
December 31, 1998: $70,000,000; and
From and including
December 31, 1998: $90,000,000.
</TABLE>
"INTANGIBLE RIGHTS" shall have the meaning specified in paragraph
9I.
"INTEREST COVERAGE RATIO" as to any Person for any period, shall
mean (A) the EBITDA of such Person for such period, divided by (B) the
amount by which (i) interest on Debt payable during such period, exceeds
(ii) amounts received by such Person as interest during such period.
"INVENTORY" shall mean goods, merchandise and other personal
property, now owned or hereafter acquired by the Company (including
returns), which are held for sale or resale to customers.
"INVESTORS" shall mean the Investors parties to the Shareholders'
Agreement.
"LEASE" shall have the meaning specified in paragraph 9T.
"LIEN" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give
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any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature thereof to the extent it constitutes a
Capitalized Lease Obligation, and the filing of or agreement to give any
financing statement under the Uniform Commercial Code of any jurisdiction).
"LOAN AGREEMENT" shall mean the Loan Agreement, dated as of
October 31, 1994, among the Company, the Banks parties thereto, and the
Bank of Scotland as Agent for the Banks, in the form attached hereto as
EXHIBIT 4A(IX), as amended from time to time, but excluding any such
amendment which is the substantial equivalent of a refinancing without the
consent of the Purchasers.
"LONG-TERM DEBT" shall mean all Indebtedness for Borrowed Money,
regardless of stated maturity.
"MULTIEMPLOYER PLAN" shall mean "multiemployer plan" (as such
term is defined in section 3(37) of ERISA and section 414(f) of the Code)
to which contributions are or have been made by the Company or any of its
Subsidiaries.
"NET INCOME" as to any Person for any period shall mean the
consolidated net income of such Person and its Subsidiaries for such period
determined in accordance with GAAP.
"NET PROCEEDS," as applied to the sale, transfer or disposition
of assets referred to in paragraph 7I, shall mean all proceeds received by
the Company or any Subsidiary in connection with such sale, transfer or
disposition after deduction of all fees and expenses paid, or to be paid
within the three months following such sale, transfer or disposition, in
connection with the transaction (other than to Affiliates).
"NOTES" shall have the meaning specified in paragraph 1(a).
"OFFICERS' CERTIFICATE" shall mean a certificate signed in the
name of the Company by (i) its Chief Executive Officer, President, one of
its Vice Presidents, or such other authorized agent of the Company as shall
be designated by the Company's Board of Directors and as shall be
reasonably acceptable to the Purchasers and (ii) by its Chief Financial
Officer, Treasurer, Controller, or such other authorized agent of the
Company as shall be designated by the Company's Board of Directors and as
shall be reasonably acceptable to the Purchasers (other than the person
signing under clause (i)).
"OPERATING LEASE OBLIGATIONS" shall mean and include all rental
obligations other than Capitalized Lease Obligations.
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"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
corporation or governmental body or agency succeeding to the functions
thereof.
"PENALTY WARRANTS" shall have the meaning specified in paragraph
13C.
"PERFORMANCE PLAN" shall mean such plan described on Schedule 9C
hereto, which plan (and any amendments thereto) shall be subject to the
approval of the Purchasers, which approval shall not be unreasonably
withheld.
"PERSON" shall mean and include an individual, a partnership, a
joint venture, a corporation, an estate, a trust, an unincorporated
organization and a government or any department or agency thereof.
"PLAN" shall mean an employee pension benefit plan within the
meaning of section 3(2) of ERISA, maintained or contributed to by the
Company or an ERISA Affiliate.
"PREPAYMENT NOTICE" shall have the meaning specified in paragraph
5C.
"PURCHASE PRICE" shall have the meaning specified in paragraph 5
hereof.
"PURCHASERS" shall have the meaning specified in the first
paragraph hereof.
"PUT" shall have the meaning specified in paragraph 13B hereof.
"REAL PROPERTY" shall have the meaning specified in paragraph 9R.
"REGISTRATION RIGHTS AGREEMENT" shall have the meaning specified
in paragraph 4A(iii).
"RESPONSIBLE OFFICER" shall mean, with respect to the Company,
its Chairman of the Board, Chief Executive Officer, President, Chief
Operating Officer, Chief Financial Officer, Treasurer, Secretary, and any
Executive Vice President.
"SECURITIES" shall have the meaning specified in paragraph 1.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SENIOR DEBT" shall mean the Bank Debt.
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"SHAREHOLDERS' AGREEMENT" shall have the meaning specified in
paragraph 4A(xii).
"SIMILAR STORE" shall have the meaning specified in clause (viii)
of paragraph 7B hereof.
"STORE LEASE" shall mean a lease by the Company or a Subsidiary
for occupancy of a Store.
"STORES" shall mean the approximately 148 retail stores owned by
FBS and being purchased by the Company pursuant to the Asset Purchase
Agreement, and any additional stores opened, purchased or otherwise
established from time to time by the Company and any of its Subsidiaries.
"SUBSIDIARY" shall mean, with respect to any Person, any
corporation or similar entity, a majority of the Capital Stock or other
equity of which, except directors' qualifying shares, shall, at the time as
of which any determination is being made, be owned by such Person either
directly or through Subsidiaries.
"SUBSTANTIAL PART" shall mean, as of any date, assets (i) having
a net book value equal to or in excess of 20% of the consolidated assets of
the Company and its Subsidiaries (determined in accordance with generally
accepted accounting principles) or (ii) which have provided 20% or more of
Consolidated Net Earnings in any of the three most recent fiscal years of
the Company
"SUBSTITUTE LEASE" shall mean any Store Lease with respect to a
Store which is a new location for a Store which has closed if (x) such new
location is in the same or an adjacent neighborhood as the closed Store,
(y) such new location caters to essentially the same people who patronized
the closed Store, and (z) the Store opened at such new location no later
than 30 days after the closed Store closed.
"TANGIBLE ASSETS" of a Person shall mean, as at any date at which
the amount thereof shall be determined, all the assets of such Person LESS
the amount of any write-up in the book value of any assets resulting from
the revaluation thereof after the Acquisition Effectiveness Date, or any
write-up in excess of the cost of assets acquired (other than a write-up
made on the date of such acquisition), LESS Goodwill.
"TANGIBLE NET WORTH" of a Person shall mean, as at any date at
which the amount thereof shall be determined, the amount by which the total
shareholders' or partners equity of such Person exceeds the sum of (x) the
amount of any write-up in the book value of any assets resulting from the
revaluation thereof after the Acquisition Effectiveness Date, or any write-
up in excess of the cost of assets acquired (other than a write-up made on
the date of such acquisition), and (y) Goodwill.
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"TRANSACTION FEE" shall have the meaning specified in paragraph
3.
"TRANSFEREE" shall mean any direct or indirect transferee of all
or any part of any Security purchased by the Purchasers under this
Agreement.
"TRIGGERING EVENT" shall mean the occurrence of the event
described in clause (i) below together with either of the events described
in clause (ii) (a) or (ii) (b) below: (i) the payment in full (including
payment of all principal and all accrued and unpaid interest) of all of the
Notes and (ii) either (a) an Initial Public Offering or (b) a sale of all
or substantially all of the Capital Stock or assets of the Company for cash
in an amount equivalent to a common equity valuation for the Company as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Prior to December 31, 1996: $50,000,000;
From December 31, 1996
to but not including
December 31, 1998: $70,000,000; and
From and including
December 31, 1998: $90,000,000.
</TABLE>
"UNUSED AMOUNT" shall have the meaning specified in paragraph
7G(b).
"WARRANTS" shall have the meaning specified in paragraph 1(b) .
"WELFARE PLAN" shall mean an employee welfare benefit plan within
the meaning of section 3 (1) of ERISA, maintained or contributed to by the
Company or an ERISA Affiliate.
"ZONDERVAN" shall have the meaning specified in paragraph 1.
"ZONDERVAN INDEMNIFICATION" shall mean the Company's obligations
(pursuant to Section 7.2 (c) of the Asset Purchase Agreement as in effect
on the Acquisition Effectiveness Date) to indemnify Zondervan and
HarperCollins for any payments made by Zondervan or HarperCollins under any
Assigned Contract (as defined in the Asset Purchase Agreement as in effect
on the Acquisition Effectiveness Date), including any Store Lease (or under
the Andersen Agreement or either GE Agreement) for any period after the
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Closing Date if, as a condition to the relevant lessor consenting to the
assignment of said lease to the Company (or, as to the GE Agreements, the
consent of GE) pursuant to the Asset Purchase Agreement, said lessor
required either or both of Zondervan and HarperCollins to remain obligated
with respect thereto.
12. ADVISORY FEE. Prior to a Triggering Event, and for so long
as the Purchasers hold any Note, any Warrant exchangeable into at least 5%
of the issued and outstanding Common Stock on a Fully Diluted basis, or at
least 5% of the issued and outstanding Common Stock on a Fully Diluted
basis, the Company will pay to Electra in cash an annual fee (the "ADVISORY
FEE") in the amount of $100,000, payable in advance in equal quarterly
installments, as more fully set forth in the Advisory Agreement. In
addition, at the Closing, the Company will pay to Electra a pro rated
amount of the Advisory Fee for the quarter ending December 31, 1994.
13. WARRANTS.
13A. SERIES OF WARRANTS AND TRIGGERING EVENT. The Warrants will
be issued in several series, which will be identical in all respects except
as to the date upon which the Warrants will be issued and the percentage of
shares of Common Stock for which such Warrants will be exercisable. At the
Closing, the Purchasers will receive Warrants, designated Series A (the
"SERIES A WARRANTS"), exercisable into an aggregate of 18% of the issued
and outstanding Common Stock on a Fully Diluted basis, excluding shares
issued or for which options are issued or to be issued under the
Performance Plan. The Series A Warrants will be immediately exercisable
and transferable, except as otherwise set forth herein or in the Warrants.
Additional Warrants, designated as the Series B, Series C and
Series D Warrants, and substantially in the form of the Series A Warrants,
will be issued promptly by the Company to the Purchasers if no Triggering
Event occurs prior to the following corresponding dates:
<TABLE>
<CAPTION>
PERCENTAGE OF
IF NO TRIGGERING SERIES OF WARRANTS SHARES FOR WHICH
EVENT OCCURS PRIOR TO: ISSUED EXERCISABLE
- --------------------- ------------------ ----------------
<S> <C> <C>
December 31, 1996 Series B 2%
December 31, 1998 Series C 4%
December 31, 1999 Series D 4%
</TABLE>
The percentage of shares described above for which the additional Warrants
shall be exercisable shall mean such percentage of shares on a Fully
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Diluted Basis, excluding shares issued or for which options are issued or
to be issued under the Performance Plan.
13B. PUT. (a) If no Triggering Event shall have occurred by
December 31, 1999, the Purchasers or other holder or holders of the
Warrants may, at any time thereafter, by giving 30 days written notice to
the Company (the "PUT NOTICE"), require the Company to repurchase (the
"PUT") all or any portion of the Warrants held by the Purchasers or other
holder of the Warrants for an amount (the "PUT AMOUNT") equal to the fair
saleable value of the shares of Common Stock into which such Warrants may
be exercised (determined without giving effect to a discount for (x) a
minority interest, or (y) any lack of liquidity of the Common Stock or to
the fact that the Company may have no class of equity registered under the
Exchange Act, including without limitation, any restriction with respect to
such shares of Common Stock under the Shareholders' Agreement or the Buy
and Sell Agreement), based upon the value of the Company as determined by
the Company and the Purchasers in reasonable good faith, and, if the
Company and Purchasers fail to so agree with 20 Business Days, as
determined by an independent appraiser satisfactory to both the Purchasers
or other holder of the Warrants and the Company, subject, in all cases to
restrictions under applicable corporate laws. The Company shall bear 80%,
and the Purchasers shall bear 20%, of the costs of such independent
appraiser. The Company shall pay to the Purchasers an amount in cash equal
to 60% of the Put Amount upon exercise of the Put and shall issue a note
evidencing its obligation to pay the remainder in cash within 366 days of
the date of the Put; any unpaid balance of the Put Amount shall bear
interest, which interest shall be paid together with any payment of the Put
Amount, at a rate of 14% per annum.
(b) Immediately upon receipt of (i) the Put Notice or (ii)
notice from any other holder of the Company's warrants containing put
rights (the Purchasers and all other such holders being referred to herein
as the "PUT HOLDERS") in connection with a put of warrants to the Company,
the Company shall, before repurchasing any such warrants specified in the
Put Notice or such other notice, give written notice thereof to each Put
Holder. For a period of ten (10) days following such notice, each Put
Holder shall be entitled, by written notice to the Company and each other
Put Holder, to elect to require the Company to repurchase its pro rata
share of the warrants containing put rights held by such Put Holder. If,
at the expiration of such ten day period any Put Holder has not elected to
have the Company repurchase such Put Holder's warrants, the Company shall
repurchase only those warrants for which notice has been received pursuant
to this paragraph 13B(b).
13C. PENALTY WARRANTS. For so long as the Purchasers hold any
Note as to which an event described in clause (i) of paragraph 8A hereof
has occurred, and, in the case of a default in the payment of any principal
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<PAGE>
or premium on any Note when due, such default has remained uncured for a
period of 5 days after such payment shall have become due, the Company will
promptly issue to the Purchasers, for no additional consideration,
additional Warrants in the form of the Series A Warrant (the "PENALTY
WARRANTS") representing the right to purchase that number of shares of
Common Stock equal to 0.5% of the then issued and outstanding Common Stock
on a Fully Diluted basis for every calendar quarter or a portion thereof
that such event is not cured. No more than one such Penalty Warrant for
0.5% shall be issued with respect to any one calendar quarter.
14. MISCELLANEOUS.
14A. PAYMENTS. The Company agrees that (i) so long as the
Purchasers shall hold any Notes or any other Security, it will make
payments of principal of, and premium, if any, and interest on, the Notes
and payments in respect of any such other Security, in compliance with the
terms of this Agreement, to the Purchasers and (ii) so long as the Advisory
Agreement remains in effect, it shall pay the Advisory Fee thereunder to
Electra, by wire transfer of immediately available funds for credit to the
Purchasers' or Electra's account or accounts, as the case may be, as
specified on SCHEDULE 14A hereto, or to such other account or accounts as
the Purchasers or Electra, as the case may be, may designate in writing,
notwithstanding any contrary provision herein or in any Note or any other
Security with respect to the place of payment. The Purchasers agree that,
before disposing of any Note, the Purchasers will make a notation thereon
(or on a schedule attached thereto) of all principal payments previously
made thereon and of the date to which interest thereon has been paid. The
Company agrees to afford the benefits of this paragraph 15A to any
Transferee which shall have made the same agreement as the Purchasers have
made in this paragraph 14A.
14B. EXPENSES. The Company agrees, whether or not the
transactions hereby contemplated shall be consummated, to pay, and save the
Purchasers harmless against liability for the payment of, (i) the
reasonable fees and expenses (including document production and duplication
charges) of any counsel engaged by the Purchasers in connection with this
Agreement, the Asset Purchase Agreement, the Notes and the other Securities
and the transactions hereby and thereby contemplated and the reasonable
fees and expenses of any counsel engaged by the Purchasers or any
Transferee in connection with any subsequent proposed modification of, or
proposed consent under, such agreements or instruments, whether or not such
proposed modification shall be effected or proposed consent granted, and
(ii) the costs and expenses, including attorney's fees, incurred by the
Purchasers or any Transferee in enforcing any rights under any such
agreement or instrument or in responding to any subpoena or other legal
process issued in connection with any such agreement or instrument or the
transactions contemplated hereby or thereby or by reason of the Purchasers,
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or any Transferee's having acquired any Security, including without
limitation costs and expenses incurred in any bankruptcy case; PROVIDED,
HOWEVER, that the Company shall not be obligated to pay any costs, fees and
expenses incurred by the Purchasers solely by reason of the Purchasers'
gross negligence or willful misconduct; PROVIDED, FURTHER, that if the
transactions contemplated hereby and thereby are not consummated for any
reason other than those listed as (a), (b) and (c) below, the fees and
expenses of counsel referenced in this paragraph payable by the Company
(and/or George Craig) shall be limited to a maximum of $75,000; AND,
PROVIDED FURTHER, that if such transaction fails to be consummated: (a) due
to the failure of the Purchasers to reach an agreement on subordination or
other related intercreditor matters with the Bank of Scotland, as agent for
the holders of the Senior Debt, (b) solely due to a breach of this
Agreement by the Purchasers, or (c) solely due to the decision by the
Purchasers to terminate the transactions contemplated hereby or thereby for
reasons unrelated to the business of FBS or the terms of such transactions,
then the Purchasers shall not be entitled to any reimbursement under clause
(i) of this paragraph 14B. The obligations of the Company under this
paragraph 14B shall survive the transfer of any of the Securities or
portion thereof or interest therein by the Purchasers or any Transferee and
the payment of any Note.
14C. CONSENT TO AMENDMENTS; WAIVERS. This Agreement may be
amended and the Company may take any action herein prohibited, or omit to
perform any act or covenant herein required to be performed by it, only if
the Company shall have obtained the written consent to such amendment,
action or omission to act, of the holders of a majority of the Notes at the
time outstanding, and the holders of the Notes at the time or thereafter
outstanding shall be bound by any consent authorized by this paragraph 14C,
whether or not such Security shall have been marked to indicate such
consent, but any Security issued thereafter may bear a notation referring
to any such consent; PROVIDED that without the written consent of a
majority of the holders of the Notes at the time outstanding, no amendment
to this Agreement shall change the maturity of any Note, or reduce the rate
or time of payment of interest payable with respect to any Note, or affect
the time, amount or allocation of any prepayments, or reduce the proportion
of the principal amount of the Notes required with respect to any consent.
No course of dealing between the Company and the Purchasers nor any delay
in exercising any rights hereunder or under any Security shall operate as a
waiver of the Purchasers thereunder. As used herein and in the Securities,
the term "this Agreement" and references thereto shall mean this Agreement
as it may from time to time be amended or supplemented.
14D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST
NOTES. The Notes are issuable as registered notes without coupons in
denominations of at least $500,000 except as may be necessary to reflect
any principal amount not evenly divisible by $500,000. The Company shall
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<PAGE>
keep at its principal office a register in which the Company shall provide
for the registration of Notes and of transfers of Notes. Upon surrender
for registration of transfer of any Note at the principal office of the
Company, the Company shall, at its expense, execute and deliver one or more
new Notes of like tenor and of a like aggregate principal amount,
registered in the name of such transferee or transferees. At the option of
the holder of any Note, such Note may be exchanged for other Notes of like
tenor and of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Note to be exchanged at the principal office
of the Company. Whenever any Notes are so surrendered for exchange, the
Company shall, at its expense, execute and deliver the Notes which the
holder making the exchange is entitled to receive. Every Note surrendered
for registration of transfer or exchange shall be duly endorsed, or be
accompanied by a written instrument of transfer duly executed, by the
holder of such Note or such holder's attorney duly authorized in writing.
Any Note or Notes issued in exchange for any Note or upon transfer thereof
shall carry the rights to unpaid interest and interest to accrue which were
carried by the Note so exchanged or transferred, so that neither gain nor
loss of interest shall result from any such transfer or exchange. Upon
receipt of written notice from the holder of any Note of the loss, theft,
destruction or mutilation of such Note and, in the case of any such loss,
theft or destruction, upon receipt of the Purchasers' unsecured indemnity
or any other holder's indemnity agreement in such form as the Company may
reasonably require, or in the case of any such mutilation upon surrender
and cancellation of such Note, the Company will make and deliver a new
Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Note.
14E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due
presentment for registration of transfer, the Company may treat the Person
in whose name any Note is registered as the owner and holder of such Note
for the purpose of receiving payment of principal of, and premium, if any,
and interest and on, such Note and for all other purposes whatsoever,
whether or not such Note shall be overdue, and the Company shall not be
affected by notice to the contrary. Subject to the preceding sentence, the
holder of any Note may from time to time grant participations in such Note
to any Person on such terms and conditions as may be determined by such
holder in its sole and absolute discretion, except that such participation
shall be subject to the approval described in paragraph 14G.
14F. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
ENTIRE AGREEMENT. All representations, warranties and covenants contained
herein or made in writing by or on behalf of the Company in connection
herewith shall survive the execution and delivery of this Agreement and the
Securities, the transfer by the Purchasers of any Security or portion
thereof or interest therein and the payment of any Security, and may be
relied upon by any Transferee regardless of any investigation made at any
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<PAGE>
time by or on behalf of the Purchasers or any Transferee. Subject to the
preceding sentence, this Agreement and the Securities embody the entire
agreement and understanding among the Purchasers and the Company and
supersede all prior agreements and understandings relating to the subject
matter hereof. Any and all obligations of all parties under the proposal
letter dated September 29, 1994, are hereby terminated upon execution of
this Agreement (except for the George Craig guarantee of expenses).
14G. TRANSFERS: SUCCESSORS AND ASSIGNS. The Purchasers may, from
time to time upon notice to the Company, sell, transfer or otherwise assign
any or all of their interest in the Notes in minimum amounts of $500,000,
to purchasers acceptable to the Company, which acceptance shall not be
unreasonably withheld. Purchasers may also, from time to time, upon notice
to the Company sell, transfer, or otherwise assign any or all of their
interest in the Warrants, to up to ten purchasers, acceptable to the
Company, which acceptance will not be unreasonably withheld. The
Purchasers have no present intention, but reserve the right, to sell any of
the Notes or Warrants. All covenants and other agreements in this
Agreement contained by or on behalf of either of the parties hereto shall
bind and inure to the benefit of the respective permitted successors and
assigns of the parties hereto (including, without limitation, any permitted
Transferee) whether so expressed or not.
14H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that
the holder of any Security may deliver copies of any financial statements
and other documents delivered to such holder, and disclose any other
information disclosed to such holder, by or on behalf of the Company in
connection with or pursuant to this Agreement to (i) such holder's
directors, officers, employees, agents and professional consultants, (ii)
any other holder of any Security, (iii) any Person to which such holder
offers to sell such Security or any part thereof; PROVIDED, HOWEVER, that
no financial statements, other documents or other information that is not
publicly available shall be disclosed to any Person that owns and operates
a business that is directly competitive with the business of the Company
without the consent of the Company, or (iv) any other Person to which such
delivery or disclosure may be necessary or appropriate (a) in compliance
with any law, rule, regulation or order applicable to such holder, (b) in
response to any subpoena or other legal process, (c) in connection with any
litigation to which such holder is a party or (d) in order to protect such
holder' s investment in such Security.
14I. NOTICES. All written communications provided for hereunder
shall be sent by first class mail or nationwide overnight delivery service
(with charges prepaid) and (i) if to the Purchasers, addressed to EIT at 65
Kingsway, London, England WC2B 6QT, Attention: Company Secretary, and
addressed to Associates at 65 Kingsway, London, England WC2B6QT, Attention:
Philip J. Dyke, with copies to Electra Inc., 70 East 55th Street, New York,
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<PAGE>
New York 10022, Attention: John L. Pouschine and Willkie Farr & Gallagher,
One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
Attention: Peter J. Hanlon, or to such other address or addresses as the
Purchasers shall have specified to the Company in writing, (ii) if to any
other holder of any Security addressed to such holder at such address as
such other holder shall have specified to the Company in writing or, if any
such other holder shall not have so specified an address to the Company,
then addressed to such other holder in care of the last holder of such
Security which shall have so specified an address of the Company, and (iii)
if to the Company addressed to it at 5300 Patterson, S.E., Grand Rapids,
Michigan 49530, with copies to Warner, Norcross & Judd, 900 Old Kent
Building, 111 Lyon Street, N.W., Grand Rapids, Michigan 49503-2489,
Attention: John G. Cameron, Jr., or to such other address or addresses as
the Company may have designated in writing to each holder of the Securities
at the time outstanding.
14J. INDEMNIFICATION. The Company shall indemnify and hold
harmless the Purchasers and each of their directors, officers, employees,
affiliates and agents (each an "INDEMNIFIED PERSON"), on demand, from and
against any and all losses, claims, damages, liabilities, or actions or
other proceedings commenced or threatened in respect thereof, and expenses
that arise out of, result from, or in any way relate to, (x) any breach by
the Company of the representations, warranties or covenants contained
herein, or (y) the involvement of related parties and affiliates in the
transactions contemplated hereby or by the Asset Purchase Agreement, or in
connection with the business of FBS, and to reimburse each Indemnified
Person, upon demand, for any legal or other expenses incurred in connection
with investigating, defending or participating in the defense of any such
loss, claim, damage, liability, action or other proceeding, whether or not
such Indemnified Person is a party to any action or proceeding out of which
any such expenses arise, other than any of the foregoing claimed by an
Indemnified Person to the extent incurred by reason of the gross negligence
or willful misconduct of such Indemnified Person. No Indemnified Person
shall be responsible or liable to any of the Company, FBS, Zondervan,
HarperCollins, the Investors or any other person for any consequential
damages which may be alleged as a result of or relating to the transactions
contemplated hereby or by the Asset Purchase Agreement.
14K. DESCRIPTIVE HEADINGS, ETC. The descriptive headings of the
several paragraphs of this Agreement are inserted for convenience only and
do not constitute a part of this Agreement. References herein to a
paragraph are, unless otherwise specified, to one of the paragraphs of this
Agreement and references to an "Exhibit" are, unless otherwise specified,
to one of the Exhibits to this Agreement.
14L. GOVERNING LAW. This Agreement and the Securities shall be
construed and enforced in accordance with, and the rights of the parties
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shall be governed by, the law of the State of New York without reference to
such State's conflicts of laws principles.
14M. COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, and
it shall not be necessary in making proof of this Agreement to produce or
account for more than one such counterpart.
IN WITNESS WHEREOF, the Company and the Purchasers have executed
this Agreement as of the date first above written.
FAMILY BOOKSTORES COMPANY, INC.
By:____________________________________
Name:
Title:
ELECTRA INVESTMENT TRUST P.L.C.
By:____________________________________
Name:
Title:
ELECTRA ASSOCIATES, INC.
By:____________________________________
Name:
Title:
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<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 2, 1998, except for Note M as to which the
date is September , 1998, in Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-60835) and related Prospectus of Family Christian Stores, Inc.
dated September 17, 1998.
ERNST & YOUNG LLP
Grand Rapids, Michigan
The foregoing consent is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note M to the financial
statements.
/s/ERNST & YOUNG LLP
Grand Rapids, Michigan
September 14, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 27, 1998 relating
to the financial statements of Joshua's Christian Stores ( a division of The
Development Association, Inc.), which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Fort Worth, Texas
September 17, 1998
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<S> <C>
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12,878
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