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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934
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HOUSE OF FABRICS, INC.
(Name of Subject Company)
HOUSE OF FABRICS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
441758109
(CUSIP Number of Class of Securities)
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MARVIN S. MALTZMAN, ESQ.
SENIOR VICE PRESIDENT, SECRETARY
AND GENERAL COUNSEL
HOUSE OF FABRICS, INC.
13400 RIVERSIDE DRIVE
SHERMAN OAKS, CALIFORNIA 91423
(Name, address and telephone number of person
authorized to receive notice and communications
on behalf of the person(s) filing statement)
With a copy to:
Richard A. Boehmer, Esq.
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071-2899
(213) 669-6000
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is House of Fabrics, Inc., a Delaware
corporation (the "Company"), and the address of the principal executive office
of the Company is 13400 Riverside Drive, Sherman Oaks, California 91423. The
title of the class of equity securities to which this statement relates is the
common stock, par value $.01 per share (the "Common Stock" or the "Shares"), of
the Company.
ITEM 2. TENDER OFFER OF PURCHASER.
This statement relates to the tender offer by FCA Acquisition Corporation,
a Delaware corporation ("Purchaser"), and a wholly owned subsidiary of
Fabri-Centers of America, Inc., an Ohio corporation ("Parent"), disclosed in a
Tender Offer Statement on Schedule 14D-1, dated February 6, 1998 (the "Schedule
14D-1"), to purchase all of the issued and outstanding Shares, at a price of
$4.25 per Share, net to the seller in cash (the "Offer Price"), upon the terms
and subject to the conditions set forth in the Offer to Purchase, dated February
6, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which,
together with the Offer to Purchase, constitute the "Offer").
The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of February 1, 1998 (the "Merger Agreement"), among Parent, Purchaser and the
Company. The Merger Agreement provides, among other things, that as soon as
practicable after the satisfaction or waiver of the conditions set forth in the
Merger Agreement, Purchaser will be merged with and into the Company (the
"Merger"), and the Company will continue as the surviving corporation (the
"Surviving Corporation"). In the Merger, among other things, each Share (other
than Shares held in the treasury of the Company or owned by Parent, Purchaser or
any subsidiary of Parent and other than Shares held by stockholders who shall
have fully complied with the statutory dissenters' procedures set forth in the
Delaware General Corporation Law (the "Delaware Law")) will be cancelled and
converted automatically into the right to receive $4.25 in cash or any higher
price that may be paid per Share in the Offer, without interest (the "Merger
Consideration"). The Merger Agreement is incorporated herein by reference.
As set forth in the Schedule 14D-1, the principal executive offices of
Purchaser are located at 5555 Darrow Road, Hudson, Ohio 44236.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and address of the Company, which is the person filing this
statement, are set forth in Item 1 above.
(b) To the knowledge of the Company, each material contract, agreement,
arrangement or understanding and actual or potential conflict of interest
between the Company or its affiliates and (i) the Company's executive officers,
directors or affiliates or (ii) Parent or Purchaser or their respective
executive officers, directors or affiliates, is described below or in an
information statement containing the information required by Section 14(f) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
14f-1 promulgated thereunder, which information statement is attached as Annex A
hereto (which information is incorporated herein by reference).
The stockholders of the Company should be aware that certain members of the
Company's management and certain members of the Board of Directors of the
Company have certain interests in the Merger that are in addition to the
interests of stockholders of the Company generally.
CHANGE-IN-CONTROL AGREEMENTS
The Company has entered into Change-In-Control Severance Agreements (the
"Change-In-Control Agreements") with certain executives pursuant to which the
Company has agreed to pay specified amounts to the executive if a
Change-in-Control (as defined, which would include the consummation of the
Offer) occurs and the executive's employment by the Company ceases in
anticipation of the Change-in-Control or on or after the Change-in-Control,
other than as a result of a termination for good cause (as defined), the death
or permanent disability of the executive or the resignation of the executive
without Good Reason (a "Covered Transaction"). A resignation by an executive
shall be for "Good Reason" if on or after a Change-in-Control (i) there has been
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reduction in the executive's title or any material reduction in the executive's
responsibilities from those that existed immediately prior to the
Change-in-Control, (ii) without the executive's prior written approval (A) the
Company's principal executive offices are relocated to a location outside Los
Angeles County, California, or (B) the Company requires the executive to be
based anywhere other than the Company's principal executive office, or his
current assignment location, except for required travel on the Company's
business to any extent substantially consistent with the executive's business
travel obligations immediately prior to any Change-in-Control, (iii) there is a
reduction in the executive's base salary or benefits from that in effect on the
date of the Change-in-Control Agreement, or as the same may be increased from
time to time, except that an across-the-board reduction in the salary level and
benefits of all of the Company's executive employees in the same percentage
amount as part of a general salary level of benefits reduction of all salaried
employees of the Company, shall not constitute "Good Reason," or (iv) a
successor to all or substantially all of the business and assets of the Company
fails to furnish the executive with an agreement assuming the Change-in-Control
Agreement.
If the Offer is consummated and a Covered Transaction occurs with respect
to the following executive officers, he or she will be entitled to the amounts
indicated (which include the costs of certain benefits): John E. Labbett,
Executive Vice President, Chief Financial Officer and Director of the Company
($223,295); William E. Rapp, Executive Vice President -- Merchandise and Buying
($197,475); Carolyn Tackett, Executive Vice President ($177,828); Gary E.
Veazie, Executive Vice President -- Store Operations ($177,828); James C. Webb,
Senior Vice President -- Real Estate ($110,197); Marvin S. Maltzman, Senior Vice
President -- Administration, Secretary and General Counsel ($126,323); Jay A.
Klein, Senior Vice President -- Crafts ($101,566); Doyle W. Parker, Senior Vice
President, Craft Buyer ($69,228); and Carlos Menendez, Vice
President -- Information Systems ($80,845). In addition, the Change-in-Control
Agreements provide that the executive will be entitled to participate in all
employee benefits, or the Company will arrange to provide benefits substantially
similar to those the executive was entitled to receive prior to the Covered
Transaction, for a specified period of time.
EMPLOYMENT AGREEMENT AND OTHER ARRANGEMENTS
Mr. Donald L. Richey, President, Chief Executive Officer and a director of
the Company, entered into an employment agreement with the Company in March 1997
(the "Richey Employment Agreement"). The Richey Employment Agreement provides,
among other things, that if a change in control (as defined, which would include
the consummation of the Offer) occurs, Mr. Richey may, within nine months after
first receiving notice of the change in control, elect to retire from full-time
service and shall be entitled, for a period of 18 months after such election, to
receive his base salary under the Richey Employment Agreement, a bonus
(calculated based upon the bonus Mr. Richey would have been entitled to receive
for the fiscal year in which he retires from full-time service) and any
additional benefits to which he is entitled under the Richey Employment
Agreement. If Mr. Richey were to elect to retire immediately after the
consummation of the Offer, he would be entitled to receive approximately
$459,450.
Pursuant to the Richey Employment Agreement, Mr. Richey was granted an
option to purchase 200,000 shares of the Common Stock of the Company at a price
of $3.6875 per share. In addition, pursuant to the terms of the Richey
Employment Agreement, on February 2, 1998, Mr. Richey was granted an option to
purchase 100,000 shares of the Common Stock of the Company at a price of
$4.09375 per share, the closing price of the Company's Common Stock on February
2, 1998. All these options accelerate and became immediately exercisable upon a
change in control (as defined, which would include the consummation of the
Offer). Based upon a Merger Consideration of $4.25 per share, Mr. Richey's
option will have an aggregate value of approximately $128,125.
Parent has indicated that it will pay Mr. Richey approximately $210,000 as
a "stay on" bonus for Mr. Richey to assist the Parent in assimilating the
Company into Parent's operations.
EMPLOYEE OPTIONS
Pursuant to the terms of the Company's 1996 Non-Qualified Stock Option Plan
(the "Employee Option Plan"), certain executive officers and other employees of
the Company have been granted options to purchase shares of the Company's Common
Stock. The Employee Option Plan provides, among other things, that upon a
Change-in-Control (as defined, which would include the consummation of the
Offer), all outstanding options
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which are not then vested will be fully vested and subject to exercise. The
following executive officers hold options with an exercise price of $4.00 per
share: John E. Labbett (37,492 shares), William E. Rapp (37,492 shares), Marvin
S. Maltzman (24,370 shares), James C. Webb (20,621 shares) and Carlos Menendez
(11,248 shares). In addition, the following executive officers hold options as
follows: Carolyn Tackett (30,000 shares at $3.625 per share), Gary E. Veazie
(30,000 shares at $2.00 per share), Doyle W. Parker (20,000 shares at $2.125 per
share), Jay A. Klein (20,000 shares at $1.75 per share) and Carlos Menendez
(5,000 shares at $1.875 per share).
DIRECTORS' OPTIONS
Pursuant to the terms of the Company's Non-Employee Directors' Stock Option
Plan (the "Directors Option Plan"), all non-employee directors of the Company
have been granted options. The Directors Option Plan provides, among other
things, that upon a Change-in-Control (as defined, which would include the
consummation of the Offer), all outstanding options which are not yet vested
shall be fully vested and subject to exercise. The following directors of the
Company hold options with an exercise price of $4.00 per share: Carl C. Gregory,
III (9,373 shares); Mitchell G. Lynn (18,746 shares); Alison L. May (9,373
shares); R.N. Hankin (18,746 shares); and H. Michael Hecht (18,746 shares).
THE MERGER AGREEMENT
The following is a summary of the Merger Agreement. Such summary is
qualified in its entirety by reference to the Merger Agreement which is
incororated by reference in this Schedule 14D-9..
The Tender Offer. Pursuant to the terms of the Merger Agreement, the
Purchaser has agreed to, and the Parent has agreed to cause the Purchaser to,
offer to purchase each outstanding Share of the Company tendered pursuant to the
Offer at a price of $4.25 per share, net to the seller in cash, and to cause the
Offer to remain open until the close of business on the 20th business day after
the commencement of the Offer. The obligations of the Purchaser and the Parent
to consummate the Offer and to accept for payment the Shares tendered in the
Offer is subject only to the Offer Conditions. At the Company's request, the
Purchaser will, and the Parent will cause the Purchaser to, extend the
expiration date of the Offer from time to time for up to an aggregate of ten
business days following the Expiration Date of the Offer if the Minimum
Condition (as defined below) is not fulfilled prior to 12:00 p.m. on the
Expiration Date. The Purchaser will not decrease the price payable in the Offer,
change the form of consideration payable in the Offer, reduce the number of
Shares subject to the Offer, change the Offer Conditions, impose additional
conditions to its obligation to consummate the Offer and to accept for payment
and purchase Shares tendered in the Offer, or change any other terms of the
Offer in a manner adverse to the stockholders of the Company, except that the
Purchaser may extend the Expiration Date to the extent required by applicable
law, if the Offer conditions are not satisfied, or if less than 90% of the
outstanding Shares have been validly tendered and not withdrawn.
Board Designees. The Merger Agreement provides that promptly following the
purchase by the Purchaser pursuant to the Offer of that number of Shares which,
when aggregated with the Shares then owned by the Parent and any of its
affiliates, represents at least a majority of the Shares then outstanding on a
fully diluted basis (the "Minimum Condition"), the Company will, if requested by
the Purchaser or the Parent, take all actions necessary to cause persons
designated by the Purchaser to become directors of the Company so that the total
number of directors so designated equals the product, rounded up to the next
whole number, of (i) the total number of directors of the Company multiplied by
(ii) the ratio of the number of Shares beneficially owned by the Purchaser or
its affiliates at the time of such purchase over the number of Shares then
outstanding. In furtherance thereof, the Company will take whatever action is
necessary, including, but not limited to, amending the Company's bylaws to
increase the size of its Board of Directors, or using reasonable efforts to
secure the resignation of directors, or both, as is necessary to permit that
number of the Purchaser's designees to be elected to the Company's Board of
Directors; provided that, prior to the Effective Time (as defined below), the
Company's Board of Directors will always have at least two members who are
currently directors of the Company, except to the extent that no such
individuals wish to be directors ("Continuing Directors"). Following the
election or appointment of the Purchaser's designees, any amendment to the
Merger Agreement, any termination of the Merger Agreement by the Company, any
extension by the Company of the time for the performance of any of the
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obligations of the Purchaser or the Parent under the Merger Agreement (except as
expressly permitted under the Merger Agreement), any recommendation to
stockholders or any modification or withdrawal of any such recommendation, the
retention of counsel and other advisors in connection with the transactions
contemplated by the Merger Agreement, or any waiver of any of the Company's
rights under the Merger Agreement, will require the concurrence of a majority of
the Continuing Directors, unless no individuals who are currently directors of
the Company wish to be directors.
The Merger. Pursuant to the terms of the Merger Agreement, the Purchaser
will be merged with and into the Company in accordance with the Delaware Law. As
a result, the separate existence of the Purchaser will cease and the Company
will be the surviving corporation (the "Surviving Corporation"). As soon as
practicable after satisfaction or waiver of all conditions to the Merger set
forth in the Merger Agreement, the parties will cause a certificate of merger to
be duly filed with the Delaware Secretary of State. The Merger will become
effective when the certificate of merger is so filed (the "Effective Time").
By virtue of the Merger, at the Effective Time: (i) each share of common
stock of the Purchaser then issued and outstanding will be converted into one
Share of the Surviving Corporation; and (ii) each Share then issued and
outstanding, except for Shares held by the Company as treasury shares or owned
by the Parent or any subsidiary of the Parent (which Shares will be immediately
canceled and no payment will be made with respect thereto), will be converted
into the right to receive, without interest, an amount in cash equal to the
price per Share paid in the Offer (the "Merger Consideration"). Subject to the
right of stockholder to dissent from the Merger and require appraisal of their
Shares pursuant to the Delaware Law, from and after the Effective Time all
Shares will be canceled and retired and cease to exist and each holder of a
certificate representing any Shares immediately prior to the Effective Time will
thereafter cease to have any rights with respect to such Shares, except the
right to receive the Merger Consideration therefor or payment from the Surviving
Corporation of the "fair value" of such Shares as determined under Section 2631
of the Delaware Law.
Until amended in accordance with applicable law, the certificate of
incorporation and bylaws of the Purchaser in effect immediately prior to the
Effective Term will be the certificate of incorporation and bylaws of the
Surviving Corporation after the consummation of the Merger. Until successors are
duly elected or appointed and qualified in accordance with applicable law, from
and after the Effective Time, the directors and officers of the Purchaser
immediately prior to the Effective Time will be the directors and officers of
the Surviving Corporation after the consummation of the Merger.
Stock Options: Series B and C Warrants. At the Effective Time, each
outstanding option (a "Company Option") to purchase Shares, whether or not
exercisable, will be canceled and converted into the right to receive, without
interest, an amount in cash (the "Cash Payment") equal to the product of (i) the
number of Shares subject to the Company Option and (ii) the excess of (a) the
Merger Consideration over (b) the exercise price per share of the Company
Option; provided that, with respect to any Person subject to Section 16 of the
Exchange Act, any such amount shall be paid, without interest, as soon as
practicable after the first date payment can be made without liability of such
Person under Section 16(b) of the Exchange Act.
At the Effective Time, the Parent will cause the Surviving Corporation to
expressly assume the due and punctual performance and observance of the
covenants and conditions of the Series B Warrant Agreement (the "Series B
Warrant Agreement") and the Series C Warrant Agreement (the "Series C Warrant
Agreement"), each executed by and between the Company and American Stock
Transfer & Trust Company, as the warrant agent (the "Warrant Agent"), and dated
as of July 31, 1996, that was to be performed by the Company under each
agreement, by supplemental agreement (the "Supplemental Warrant Agreement"). The
Supplemental Warrant Agreement will further provide that each holder of a Series
B Warrant will have the right after the Effective Time (a) upon exercise of each
Series B Warrant and payment of the Exercise Price (as defined in the Series B
Warrant Agreement) in effect immediately prior to the Effective Time, to receive
the Merger Consideration and one Series C Warrant and (b) upon exercise of each
Series C Warrant and payment of the Exercise Price (as defined in the Series C
Warrant Agreement) in effect immediately prior to the Effective Time, to receive
the Merger Consideration.
Representations and Warranties of the Company. In the Merger Agreement,
the Company has made customary representations and warranties to the Purchaser
and the Parent, including, but not limited to representations and warranties
relating to the following: the organization and qualification of the Company;
the
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authority of the Company to enter into and perform its obligations under the
Merger Agreement; required consents and approvals; the capitalization of the
Company; filings made by the Company with the Securities and Exchange Commission
(the "Commission"); the accuracy of the Company's financial statements;
inventory, contracts and commitment; the absence of certain changes or
developments since October 31, 1997; litigation; necessary permits; labor and
employee benefit matters; taxes; real estate; personal property; intellectual
property; environmental matters; insurance; indemnification; board approval and
recommendation; stockholder approval; opinion of a financial advisor; finders
and investment bankers; and state takeover statues.
Representations and Warranties of the Parent and the Purchaser. The Parent
and the Purchaser have also made customary representations and warranties in the
Merger Agreement, including, but not limited to, representations and warranties
relating to the following: the organization of the Parent and the Purchaser; the
authority of each of the Parent and the Purchaser to enter into and perform its
obligations under the Merger Agreement; required consents and approvals; filings
made by the Parent with the Commission; the accuracy of the Parent's
consolidated financial statements; litigation; shareholder approval;
availability of sufficient funds to consummate the Offer; the absence of
fraudulent conveyances; and finders and investment bankers.
Covenants of the Company. In the Merger Agreement, the Company has agreed
that, except as contemplated or permitted by the Merger Agreement or
specifically disclosed in the schedules thereto, or as otherwise approved in
writing by the Parent, from the date of the Merger Agreement until the time that
the designees of the Purchaser have been appointed to the Board of Directors of
the Company, the Company will conduct its business in the ordinary course
consistent with past practice. Throughout this same period of time (i) the
Company will not adopt or approve any change or amendment in its certificate of
incorporation or bylaws; (ii) the Company will not merge, consolidate, or enter
into a share exchange with any other individual, corporation, partnership,
association, trust or other entity or organization, including a government or
political subdivision or any agency or instrumentality thereof (a "Person"),
acquire a material amount of capital stock or assets of any other person, or
sell, lease, license, mortgage, pledge or otherwise dispose of any material
assets, except for the purchase or sale of inventory in the ordinary course
consistent with past practice; (iii) the Company will not declare, set aside, or
pay any dividends or make any distributions in respect of the Shares or redeem,
repurchase, or otherwise acquire any Shares; (iv) the Company will not (a)
issue, deliver or sell, or authorize the issuance, delivery or sale of, any
capital stock or other securities of the Company, other than upon the exercise
of outstanding Company Options or Series B Warrants granted prior to the date
hereof, (b) split, combine, or reclassify any Shares, or (c) amend the terms of
any outstanding voting securities; (v) the Company will not, without the prior
written consent of the Parent, which consent shall not be unreasonably withheld
or delayed, enter into any new store lease, extend the term of any existing
store lease, or enter into certain other contracts or commitments; (vi) except
to the extent required by law or by existing written agreements or plans
disclosed in Company reports to the Commission or the Company disclosure
schedule, the Company will not increase in any manner the compensation or fringe
benefits of any of its directors or officers (other than annual increases, in
the ordinary course of business, in the compensation or fringe benefits of
officers who are not executive officers), pay any pension or retirement
allowance to any such director or officer, become a party to, amend, or commit
itself to any pension, retirement, profit-sharing, welfare-benefit plan, or
employment agreement with or for the benefit of any such director or officer, or
grant any severance or termination pay or stay-in-place bonus to any such
director or officer, or increase the benefits payable under any existing
severance or termination pay or stay-in-place bonus policies; (vii) the Company
will not make any material tax election or settle or compromise any material
federal, state, local or foreign tax liability; (viii) the Company will not
change its accounting procedures and practices in any material respects,
including but not limited to those relating to inventory valuation and reserves,
except to the extent required by changes in generally accepted accounting
principles; and (ix) the Company will not agree to do any of the foregoing.
In the Merger Agreement, the Company has further agreed that, from the date
of the Merger Agreement until the Effective Time, it will not, and will direct
and use its reasonable efforts to cause its officers, directors, employees, and
agents not to, directly or indirectly, (i) take any action to solicit, to
initiate, or knowingly to encourage any good faith offer or proposal for (x) a
merger or other business combination involving the Company and any Person (other
than the Parent, the Purchaser, or any subsidiary of either the Parent or the
Purchaser), (y) an acquisition by any Person (other than the Parent, the
Purchaser, or any subsidiary of either the Parent or the
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Purchaser) of assets or earning power of the Company, in one or more
transactions, representing 15% or more of the assets or earning power of the
Company, or (z) an acquisition by any Person (other than the Parent, the
Purchaser, or any subsidiary of either the Parent or the Purchaser) of
securities representing 15% or more of the voting power of the Company (any of
the events in (x), (y) and (z) being a "Company Acquisition Proposal"), (ii)
engage or participate in discussions or negotiations, or enter into agreements,
with any Person with respect to a Company Acquisition Proposal, or (iii) in
connection with a Company Acquisition Proposal, disclose any nonpublic
information relating to the Company or any of its subsidiaries or afford access
to the properties, books, or records of the Company or any of its subsidiaries
to any Person, except that the Company may take action described in clause (ii)
or (iii) if (A) such action is taken in connection with an unsolicited Company
Acquisition Proposal, (B) in the good faith judgment of the Board of Directors,
after consultation with outside counsel, the failure to take such action would
not be consistent with the fiduciary duties of the Board of Directors under
applicable law, and (C) in the case of the disclosure of nonpublic information
relating to the Company in connection with a Company Acquisition Proposal, such
information is covered by a confidentiality agreement that provides
substantially the same protection to the Company as is afforded by the
confidentiality agreement, dated October 30, 1997, between the Parent and the
Company (the "Confidentiality Agreement"). The Company will promptly notify the
Parent orally and in writing of any Company Acquisition Proposal or any
inquiries with respect thereto.
Neither the Board of Directors of the Company nor any committee thereof
shall (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to the Parent or the Purchaser, the approval or recommendation by such
Board of Directors or such committee of the Offer, the Merger, or the Merger
Agreement, (ii) approve or recommend, or propose publicly to approve or
recommend, any Company Acquisition Proposal, or (iii) cause the Company to enter
into any letter of intent, agreement in principle, acquisition agreement or
other similar agreement (each, an "Acquisition Agreement") related to any
Company Acquisition Proposal, except that, in any case set forth in clause (i),
(ii), or (iii) above, prior to the acceptance for payment of Shares pursuant to
the Offer, the Board of Directors of the Company may, in response to an
unsolicited Company Acquisition Proposal, (A) withdraw or modify its approval or
recommendation of the Offer, the Merger, or the Merger Agreement or (B) approve
or recommend any such Company Acquisition Proposal if, in the case of any action
described in clause (A) or (B), in the good faith judgment of the Board of
Directors, after consultation with outside counsel, the failure to take such
action would not be consistent with the fiduciary duties of the Board of
Directors under applicable law and, in the case of the actions described in
clause (B), concurrently with such approval or recommendation the Company
terminates the Merger Agreement and promptly thereafter enters into an
Acquisition Agreement with respect to a Company Acquisition Proposal.
Merger Meeting; Proxy Statement. The Merger will be consummated as soon as
practicable (and in no event later than six months) after the purchase of Shares
pursuant to the Offer. If Purchaser is able to do so under the Delaware Law, it
will consummate the Merger pursuant to the "short form" merger provisions of the
Delaware Law. The Parent will vote, or cause to be voted, all Shares
beneficially owned by it in favor of the Merger. If required by the Delaware Law
in order to consummate the Merger, as soon as practicable following the purchase
of Shares pursuant to the Offer, the Company will take all action necessary in
accordance with the Delaware Law and with the Company's certificate of
incorporation and bylaws to convene a meeting of its stockholders to approve the
Merger and adopt the Merger Agreement (the "Merger Meeting"). The Company's
Board of Directors will recommend that the Company's stockholders approve the
Merger and adopt the Merger Agreement, and will cause the Company to use all
reasonable efforts to solicit from the stockholders proxies to vote therefor,
unless (i) in the good faith judgment of the Board of Directors, after the
consultation with outside counsel, such recommendation would not be consistent
with the fiduciary duties of the Board of Directors under applicable law or (ii)
the Merger Agreement is terminated in accordance with its terms. The Company
will, if required by law for the consummation of the Merger, prepare and file
with the Commission preliminary proxy materials relating to the approval of the
Merger and the adoption of the Merger Agreement by the Company's stockholders,
and will file with the Commission revised preliminary proxy materials, if
appropriate, and definitive proxy materials in a timely manner as required by
the rules and regulations of the Commission. Except as otherwise provided in
clauses (i) and (ii) of this paragraph, the proxy materials relating to the
Merger Meeting will include the recommendation of the Company's Board of
Directors.
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Covenants of the Parent and the Purchaser. The Merger Agreement provides
that, from and after the Effective Time, the Parent and the Surviving
Corporation will jointly and severally indemnify, defend, and hold harmless the
present and former directors and officers of the Company against all losses,
claims, damages, and liabilities and amounts paid in settlement in connection
with any claim, action, suit, proceeding, or investigation, whether civil,
criminal, administrative, or investigative, to which any of them was or is a
party or is threatened to be made a party by reason of the fact that he or she
was or is a director or officer of the Company in respect of acts or omissions
occurring at or prior to the Effective Time to the fullest extent that the
Company would have been permitted to indemnify such person under applicable law
and the certificate of incorporation and bylaws of the Company in effect on the
date of the Merger Agreement. The Parent will use all reasonable efforts to,
without any lapse in coverage, either (i) for at least six years after the
Effective Time, provide directors' and officers' liability insurance ("D&O
Insurance") in respect of acts or omissions occurring at or prior to the
Effective Time covering each such Person currently covered by the Company's D&O
Insurance policy on terms with respect to coverage and amount no less favorable
than those of such policy in effect on the date of the Merger Agreement;
provided that the Parent will not be required to pay per annum more than 150% of
the last premium (annualized) paid by the Company for such policy prior to the
date of the Merger Agreement, (ii) purchase tail insurance in respect of the
Company's existing D&O Insurance for six years for a premium not to exceed the
present value (discounted at the rate of 10% per annum) of the maximum annual
premiums payable under clause (i) above, or (iii) if such D&O Insurance or tail
insurance is only available at premiums in excess of the premiums set forth in
clauses (i) or (ii), as applicable, then purchase the highest level of D&O
Insurance or tail insurance available at such applicable premium.
Employee Benefits. The Parent expects that it will provide the employees
of the Company with benefits which, in the aggregate, are substantially
comparable to the benefits provided from time to time by the Parent to other
employees of the Parent or its subsidiaries in similar positions. The Parent
agrees in the Merger Agreement that, during the period commencing at the
Effective Time and ending on the second anniversary thereof, the employees of
the Company will be provided with benefits which are not less favorable, in the
aggregate, than the benefits provided by the Company on the date of the Merger
Agreement. The Parent will cause each employee benefit plan of the Parent in
which employees of the Company are eligible to participate to take into account
for purposes of eligibility and vesting thereunder the service of such employees
with the Company as if such service were with the Parent, to the same extent
that such service was credited under a comparable plan of the Company. The
Parent will, and will cause the Surviving Corporation to, honor in accordance
with their terms (i) all employee benefit obligations to current and former
employees of the Company accrued and vested as of the Effective Time and (ii) to
the extent set forth in the Company disclosure schedule, all employee severance
plans in existence on the date of the Merger Agreement and all employment or
severance agreements entered into prior to the date of the Merger Agreement.
Covenants of the Company, the Parent and the Purchaser. Subject to the
terms and conditions of the Merger Agreement, the Company, the Parent and the
Purchaser agree to use all reasonable efforts to take all actions and to do all
things necessary or advisable under applicable laws and regulations to
consummate the transactions contemplated by the Merger Agreement as promptly as
practicable. The Company and the Parent will each promptly file Notification and
Report Forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
("HSR Act") and respond as promptly as practicable to all requests for
additional information or documentation received from the Antitrust Division of
he United States Department of Justice (the "Antitrust Division") or the Federal
Trade Commission (the "FTC"). Notwithstanding the foregoing, nothing contained
in the Merger Agreement will require the Company, the Parent, or any of the
Parent's subsidiaries (i) to initiate or defend any material pending or
threatened litigation to which any governmental or regulatory authority
(including the Antitrust Division and the FTC) is a party, (ii) to agree or
otherwise become subject to any material limitations on (A) the right of the
Parent or the Company, as the Surviving Corporation, effectively to control or
operate the business, assets or operations of the Company following the Offer or
the Merger, (B) the right of the Parent or the Company as the Surviving
Corporation, to acquire or hold the business, assets or operations of the
Company as a result of the Merger, (C) the right of the Purchaser to exercise
its rights of ownership of the Shares purchased by it in the Offer, or the right
of the Parent to exercise its rights of ownership of the shares of Common Stock
of the Company, as the Surviving Corporation, after consummation of the Merger,
including but not limited to the right to vote such shares of Common Stock on
all matters properly presented to the Company's
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stockholders, or (iii) to agree or otherwise be required to sell or dispose of,
hold separate (through the establishment of a trust or otherwise), or divest
itself of 25 stores or more (whether stores of the Company, the Parent, or any
of the Parent's subsidiaries).
Conditions to the Merger. The obligations of the Company, the Parent and
the Purchaser to consummate the Merger are subject to the satisfaction of the
following conditions: (i) if required by applicable law, the Merger has been
approved, and the Merger Agreement has been adopted, by the requisite vote of
the Company's stockholders; (ii) the Purchaser has purchased all validly
tendered and not properly withdrawn Shares in accordance with the Offer; and
(iii) no provision of any applicable domestic law or regulation and no judgment,
injunction, order or decree of a court or governmental agency or authority of
competent jurisdiction is in effect that has the effect of making the Offer or
the Merger illegal or otherwise restrains or prohibits the purchase of Shares
pursuant to the Offer or the consummation of the Merger. The obligations of the
Parent and the Purchaser to consummate the Merger are subject to compliance by
the Company with its obligations to cause persons designated by the Parent to
become directors of the Company in accordance with the Merger Agreement.
Termination. The Merger Agreement may be terminated and the Offer and the
Merger may be abandoned at any time prior to the Effective Time, notwithstanding
any prior approval of the Merger and adoption of the Merger Agreement by the
Company's stockholders, (i) by the mutual written consent of the Company, the
Parent, and the Purchaser; (ii) by the Company if the Purchaser has not
purchased Shares pursuant to the Offer by May 31, 1998, or by either the Company
or the Parent if the Merger has not been consummated by October 31, 1998,
provided that such right of termination will not be available to any party that,
at the time of termination, is in material breach of any of its obligations
under the Merger Agreement; (iii) by either the Company or the Parent if any
applicable domestic law, rule, or regulation makes consummation of the Merger
illegal or if any judgment, injunction, order, or decree of a court or
governmental agency or authority of competent jurisdiction restrains or
prohibits the consummation of the Offer or Merger and such judgment, injunction,
order, or decree has become final and nonappealable; (iv) by either the Company
or the Parent if the requisite vote of the Company's stockholders approving the
Merger and adopting the Merger Agreement has not been obtained at the Merger
Meeting; provided that the right to so terminate the Merger Agreement will not
be available to the Parent if it has not voted, or caused to be voted, all
Shares beneficially owned by it in favor of the Merger; (v) by either the
Company or the Parent if the Offer terminates without the purchase of Shares
thereunder; provided that the right to so terminate the Merger Agreement shall
not be available to (a) the Parent, if the Purchaser has breached its
obligations to conduct the Offer in accordance with the terms of the Merger
Agreement, or (b) any party whose willful failure to perform any of its
obligations under the Merger Agreement results in the failure of any of the
Offer Conditions or if the failure of any such offer Conditions results from
facts or circumstances that constitute a material breach of the representations
or warranties of such party under the Merger Agreement; (vi) prior to the
purchase of Shares by the Purchaser pursuant to the Offer, by the Parent if (a)
the Company violates its obligations under the terms of the Merger Agreement
regarding Company Acquisition Proposals in any material respects and thereafter
any person publicly makes a Company Acquisition Proposal or (b) the Board of
Directors of the Company does not publicly recommend in the Schedule 14D-9 that
the Company's stockholders accept the Offer and tender their Shares pursuant to
the Offer and approve the merger and adopt the Merger Agreement, or if the Board
of Directors of the Company withdraws, modifies, or changes such recommendation
in any manner materially adverse to the Parent; or (vii) by the Company if the
Company receives an unsolicited Company Acquisition Proposal that the Board of
Directors determines in good faith, after consultation with its legal and
financial advisors, is likely to lead to a merger, acquisition, consolidation,
or similar transaction that is more favorable to the stockholders of the Company
than the transactions contemplated by the Merger Agreement; provided that the
Company has given the Parent at least five days notice of the material terms of
such Company Acquisition Proposal and such termination shall not be effective
until the Company has paid the Termination Fee (as defined below), if and to the
extent required under the terms of the Merger Agreement.
In the event of any such termination of the Merger Agreement and
abandonment of the Offer and the Merger, no party to the Merger Agreement (or
any of its directors, officers, employees, agents, or advisors) will have any
liability or further obligation to any other party to the Merger Agreement
except (i) for obligations of the Company to pay, under circumstances described
below, the Termination Fee and certain expenses of the Parent and the Purchaser,
(ii) for obligations arising out of the applicability of the Confidentiality
Agreement to
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information provided pursuant to the Merger Agreement, and (iii) for liability
for any breach of covenants or agreements of the Merger Agreement.
Fee and Expenses. The Merger Agreement provides that, except as set forth
below, all costs and expenses incurred in connection with the Merger Agreement
will be paid by the party incurring the costs and expenses.
Pursuant to the Merger Agreement, if (i) any Person publicly makes an
Acquisition Proposal and thereafter the Merger Agreement is terminated by the
Company or the Parent because the requisite vote of the Company's stockholders
approving the Merger and adopting the Merger Agreement has not been obtained at
the Merger Meeting, (ii) any person publicly makes an Acquisition Proposal and
thereafter the Merger Agreement is terminated by the Company or the Parent
because an insufficient number of Shares are tendered pursuant to the Offer,
(iii) prior to the Purchase of Shares by the Purchaser pursuant to the Offer,
the Merger Agreement is terminated by the Parent because (a) the Company has
violated its obligations under the terms of the Merger Agreement regarding
Company Acquisition Proposals in any material respects and thereafter any Person
publicly makes a Company Acquisition Proposal or (b) the Board of Directors of
the Company has not publicly recommended in the Schedule 14D-9 that the
Company's shareholders accept the Offer and tender their Shares pursuant to the
Offer and approve the Merger and adopt the Merger Agreement, or if the Board of
Directors of the Company has withdrawn, modified, or changed such recommendation
in any manner materially adverse to the Parent, or (iv) the Merger Agreement is
terminated by the Company because the Company receives an unsolicited Company
Acquisition Proposal that the Board of Directors of the Company determines in
good faith, after consultation with its legal and financial advisors, is likely
to lead to a merger, acquisition, consolidation, or similar transaction that is
more favorable to the shareholders of the Company than the Merger, then the
Company will reimburse the Parent and the Purchaser for all of the reasonable
documented out-of-pocket expenses and fees actually incurred by the Parent and
the Purchaser in connection with the transactions contemplated by the Merger
Agreement prior to the termination of the Merger Agreement, without limitation,
all reasonable fees and expenses of counsel, financial advisors, accountants,
and environmental and other experts and consultants to the Parent and the
Purchaser ("Transaction Costs"); except that the Company will not be required to
reimburse the Parent or the Purchaser for Transaction Costs in excess of
$750,000 in the aggregate.
Pursuant to the Merger Agreement, if (i) any Person publicly makes an
Acquisition Proposal, thereafter the Merger Agreement is terminated by the
Company or the Parent because the requisite vote of the Company's stockholders
approving the Merger and adopting the Merger Agreement has not been obtained at
the Merger Meeting, and within 12 months after termination the Company agrees to
or consummates a Company Acquisition Proposal, (ii) any Person publicly makes an
Acquisition Proposal, thereafter the Merger Agreement is terminated by the
Company or the Parent because an insufficient number of Shares are tendered
pursuant to the Offer, and within 12 months after termination the Company agrees
to or consummates a Company Acquisition Proposal, (iii) prior to the Purchase of
Shares by the Purchaser pursuant to the Offer, the Merger Agreement is
terminated by the Parent because (a) the Company has violated its obligations
under the terms of the Merger Agreement regarding Company Acquisition Proposals
in any material respects and thereafter any Person publicly makes a Company
Acquisition Proposal or (b) the Board of Directors of the Company has not
publicly recommended in the Schedule 14D-9 that the Company's stockholders
accept the Offer and tender their Shares pursuant to the Offer and approve the
Merger and adopt the Merger Agreement, or if the Board of Directors of the
Company has withdrawn, modified, or changed such recommendation in any manner
materially adverse to the parent, or (iv) the Merger Agreement is terminated by
the Company because the Company receives an unsolicited Company Acquisition
Proposal that the Board of Directors of the Company determines in good faith,
after consultation with its legal and financial advisors, is likely to lead to a
merger, acquisition, consolidation, or similar transaction that is more
favorable to the shareholders of the Company than the Merger, then, in addition
to reimbursing the Parent and the Purchase for their Transaction Costs, the
Company will pay to the Parent a fee of $750,000 (the "Termination Fee"). If the
parent is required to file suit to seek the Termination Fee, and it ultimately
succeeds on the merits, it will also be entitled to all expenses, including
reasonable attorneys' fees, that it has incurred in enforcing its right to
receive the Termination Fee.
Waiver and Amendment. Subject to applicable law and the terms of the
Merger Agreement, any provision of the Merger Agreement may be amended or waived
prior to the Effective Time if, and only if, such amendment
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<PAGE> 11
or waiver is in writing and duly executed and delivered, in the case of an
amendment, by each of the parties to the Merger Agreement or, in the case of a
waiver, by the party against whom the waiver is to be effective.
Required Vote. In general, under Delaware Law and the Company's
certificate of incorporation, the Merger requires the approval of the Company's
Board of Directors and the approval by the holders of a majority of all
outstanding Shares.
Accordingly, if the Purchaser acquires more than a majority of the
outstanding Shares pursuant to the Offer, the Purchaser would have the voting
power to approve the Merger without the vote of any other stockholders and could
effect the Merger by so voting and by action of the Board of Directors of the
Purchaser, the Company's Board of Directors having already approved the Merger
on February 1, 1998. This will be the case if the Minimum Condition is
satisfied. In the Merger Agreement, the Purchaser has agreed to vote in favor of
the Merger all of the Shares purchased pursuant to the Offer.
Further, Delaware Law provides that, if a parent corporation owns 90% or
more of each class of outstanding shares of a subsidiary, the parent corporation
may merge the subsidiary into itself, or merge itself into the subsidiary, by
action of the board of directors of the parent corporation and without action or
vote by the stockholders of either corporation. Accordingly, if the Purchaser
owns 90% or more of the outstanding Shares after consummation of the Offer, a
"short form" merger could be effected by action of the Purchaser's Board of
Directors and without the approval of the Company's stockholders.
Dividends and Distributions. The Company has agreed that, from the date of
the Merger Agreement until the time that the designees of the Purchaser have
been appointed to the Board of Directors of the Company, the Company will not
declare, set aside, or pay any dividends or make any distributions on the
Shares.
Appraisal Rights. Stockholders do not have appraisal rights as a result of
the Offer. However, if the Merger is consummated, stockholders of the Company at
the time of the Merger who comply with all statutory requirements and do not
vote in favor of the Merger will have the right under the Delaware Law to demand
an appraisal of, and receive payment in cash of the fair value of, their Shares
outstanding immediately prior to the Effective Time in accordance with Section
262 of the Delaware Law.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has unanimously approved the Merger
Agreement, the Offer, the Merger and the other transactions contemplated by the
Merger Agreement and has determined that the Offer and the Merger are fair to
the Company's stockholders, and unanimously recommends that the Company's
stockholders accept the Offer and tender their Shares in the Offer.
A letter to the Company's stockholders communicating the Board's
recommendation and a press release announcing the execution of the Merger
Agreement are filed herewith as Exhibits 9 and 8, respectively, and are
incorporated herein by reference.
(b) BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION
In the spring of 1994, the Parent and the Company had extensive discussions
about a possible merger of the Company with a wholly owned subsidiary of the
Parent. In the transaction discussed at that time, outstanding shares of Common
Stock of the Company would have been converted into the right to receive shares
of common stock of the Parent. Prior to the execution of a definitive merger
agreement, these discussions terminated.
In November 1994, the Company and four of its former subsidiaries filed
separate voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Proceedings") in the United States
Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). In the summer of 1995, the Parent expressed an interest in buying
assets of the Company as part of a plan of reorganization in the Bankruptcy
Proceedings and asked for information needed to evaluate the Company and its
business. In July 1995, the Parent and the Company entered into a
confidentiality agreement covering all such information
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furnished by the Company to the Parent and its advisors. At least two other
entities expressed an interest in the Company and executed confidentiality
agreements.
From December 1995 through March 1996, the Parent held discussions with the
Company and certain of its creditors regarding the possible terms of an
acquisition by the Parent. In March 1996, the Parent submitted a proposal to
purchase, as part of a plan of reorganization of the Company and its
subsidiaries in the Bankruptcy Proceedings, substantially all of the assets of
the Company and its subsidiaries, other than deferred taxes and tax refunds, the
Company's office building, and leasehold interests in the Company's warehouse
and processing facility in South Carolina, for $118.8 million in cash, subject
to significant adjustments for changes in the book value of the assets, but
without the assumption of any liabilities other than certain store leases. The
Company also received a proposal from another entity. The Company's Board of
Directors, after discussion with the representatives of its secured creditors,
the unsecured creditors committee and the equity holders committee, rejected
both proposals as inadequate.
On July 10, 1996, the Bankruptcy Court confirmed the Third Amended Joint
Plan for Reorganization of the Company and its subsidiaries (the "Plan"). On
July 31, 1996, all conditions required for the effectiveness of the Plan were
satisfied.
In January 1997, the Company was approached by another entity regarding a
possible acquisition of the Company. That entity executed a confidentiality
agreement and commenced due diligence. On January 24, 1997, the Company retained
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as its exclusive
financial advisor in connection with the Company's evaluation of strategic
alternatives, including a possible sale, merger or other business combination.
DLJ received a $100,000 retainer fee at the time of its engagement. In the
course of the engagement DLJ investigated a number of strategic alternatives
including the sale of the Company and the possibility of raising additional
equity capital with new investors. The entity that had expressed interest prior
to DLJ's engagement ultimately declined to make an offer for the Company after
completing its due diligence. That entity did express interest in purchasing
specific stores, however the Company determined that such a sale was not in the
best interests of the Company and discussions with that entity ceased in April
1997. Other parties contacted by DLJ did not return with proposals the Company
wished to pursue.
In May 1997, the Company was approached by Parent regarding the purchase by
Parent of certain of the Company's stores, however, the Company determined that
such a sale was not in the best interests of the Company.
In June 1997, the Company and DLJ mutually determined that DLJ would not
continue to be actively involved in the Company's efforts to procure the
additional capital it was seeking.
In August 1997, the Company retained F.M. Roberts & Company, Inc. ("F.M.
Roberts") to advise it on financing alternatives and enhancing shareholder
value. F.M. Roberts contacted approximately 10 entities, including the Parent,
who were potential sources of capital financing for the Company and/or entities
that might be interested in acquiring the Company.
On September 26, 1997, Mr. Fredric Roberts, President of F.M. Roberts,
telephoned Alan Rosskamm, Chairman of the Board, President and Chief Executive
Officer of the Parent, to determine whether the Parent was interested in
acquiring the Company.
On October 24, 1997, Mr. Roberts and Mr. Rosskamm spoke again by telephone.
At that time, Mr. Roberts advised Mr. Rosskamm that the Company was continuing
to explore the possibility of capital financing and that, if the Parent wished
to submit a proposal to acquire the Company, it should do so before the
financing was completed.
On October 27, 1997, Mr. Rosskamm telephoned Mr. Donald L. Richey,
President and Chief Executive Officer of the Company, and told him that the
Parent was considering an acquisition of the Company and was prepared to move
quickly.
On October 30, 1997, the Parent and the Company entered into a
confidentiality agreement covering information furnished by the Parent to the
Company and its advisors in connection with their evaluation of a possible
transaction with the Company.
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On November 26, 1997, Brian P. Carney, Executive Vice President and Chief
Financial Officer of the Parent, had a telephone conversation with John E.
Labbett, Executive Vice President -- Chief Financial Officer of the Company, to
request information about the Company and to express an interest in a
face-to-face meeting. Following the discussion, Mr. Labbett faxed to Mr. Carney
a copy of the Company's third quarter press release, which had been made public
that day.
On December 2, 1997, Mr. Carney sent to Mr. Labbett a letter requesting
additional information and materials relating to the Company.
On December 11, 1997, the Company entered into a Commitment Letter with
Chiplease, Inc. which provided that Chiplease, Inc. would make an investment of
$10 million in the Company through the purchase of common stock, preferred stock
and warrants. The Commitment Letter provided that the commitment to invest by
Chiplease, Inc. was subject to, among other things, the execution of a mutually
satisfactory definitive purchase agreement by January 15, 1998 and the
completion by Chiplease, Inc. of such due diligence as it deemed appropriate.
The Company and Chiplease, Inc. were unable to agree on the definitive terms of
the proposed investment by Chiplease, Inc. and on January 15, 1998, the
Commitment Letter terminated by its terms.
On December 16, 1997, Mr. Carney and other representatives of the Parent
and its financial advisor, McDonald & Company Securities, Inc., met in Los
Angeles with Mr. Richey, Mr. Labbett, Mr. R.N. Hankin, Chairman of the Board of
the Company, and representatives of F.M. Roberts to review the information and
materials requested by Mr. Carney in his December 2, 1997 letter to Mr. Labbett.
On January 9, 1998, Mr. Carney and Timothy Lemieux, Director of Systems
Development of the Parent, participated in a telephone call with Mr. Labbett and
representatives of the firm that the Company had retained in connection with the
installation of the Company's point-of-sale equipment. The purpose of the call
was to determine the compatibilities of the hardware and software platforms used
by the Company and the Parent at their respective stores.
On January 9, 1998, Mr. Roberts wrote a letter formally inviting interested
parties, including the Parent, to submit a non-binding indication of interest in
an acquisition of the Company and specifying the information to be contained in
the indication of interest.
On January 14, 1998, the Parent's Board of Directors met to discuss the
advisability of an acquisition of the Company by the Parent, as well as the
terms and conditions of such an acquisition. Mr. Dorsey participated in the
meeting by conference telephone. A preliminary draft of the Merger Agreement was
sent to each of the directors prior to the meeting. At the meeting, the Parent's
directors unanimously approved the acquisition on the terms discussed.
On January 16, 1998, the Parent submitted a non-binding proposal for the
acquisition of the Company. The principal terms of that proposal were: (1) a
price of $4.10 per share in cash, subject to reduction if the Company's secured
lender did not waive the termination fee payable under the Company's existing
financing arrangement or the Company's investment bankers did not agree to cap
their fees at $1,500,000 in the aggregate, (2) the acquisition to be structured
as a tender offer followed by a merger in which non-tendering stockholders of
the Company received the same cash price as was paid in the tender offer, (3)
prompt filing by the Parent and the Company of their Notification and Report
Forms under the HSR Act, and (4) an agreement by the Company not to solicit or
encourage acquisition proposals from other bidders or to furnish nonpublic
information to other bidders. The members of the Company's Board of Directors
were informed as to the content of Parent's non-binding proposal.
On January 19, 1998, the Parent submitted to the Company a draft of the
Merger Agreement and a Stock Option Agreement that provided for the grant by the
Company to the Parent of an option to purchase shares of Company Common Stock
comprising 19% of the outstanding shares of Company Common Stock prior to
exercise of the option (the "Lock-up Option").
On January 20, 1998, the Company's Board of Directors met and reviewed the
proposal from Parent. Mr. Roberts and Richard Boehmer of O'Melveny & Myers LLP,
counsel for the Company, discussed the
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proposal with the Board. The Board concluded that the Company's management, Mr.
Roberts and counsel should discuss the proposal further with the Parent and
report back to the Board regarding their discussions.
Following discussions between Mr. Roberts and Mr. Dorsey, on January 22,
1998, the Parent increased the price to $4.25 per share in cash, removed the
provision for a reduction of the price and clarified the extent of the due
diligence to be conducted by the Parent prior to the execution of a definitive
Merger Agreement. On January 22, 1998, Mr. Richey wrote Mr. Rosskamm and agreed
not to engage in discussions with third parties about a merger with the Company
until February 6, 1998 or the earlier termination of discussions between the
Parent and the Company.
On January 27 and 28, 1998, representatives of the Parent and its counsel
met with representatives of the Company, F.M. Roberts and counsel to the Company
to negotiate the terms of the Merger Agreement. During the course of those
discussions, a number of issues were addressed, including the amount of the
Termination Fee requested by the Parent, the proposed Offer Conditions and the
extent of the representations, warranties and covenants to be made by the
Company in the Merger Agreement. As a result of these discussions,
representatives of the Parent agreed to drop their request for the Lock-up
Option, to decrease the amount of the Termination Fee being requested, and to
eliminate or revise certain of the Company representations, warranties and
covenants.
On January 28, 1998, the Company's Board of Directors met. Mr. Roberts and
Mr. Boehmer summarized for the Board the negotiations to date with the Parent
and discussed the open issues, including the extent of the representations and
warranties requested by Parent, the Termination Fee demanded by Parent and its
amount, and the proposed Offer Conditions.
On January 29, 1998, the then current draft of the Merger Agreement was
provided to all the directors. Also, the Company requested that DLJ review the
proposed transaction and, when requested by the Company, deliver an opinion as
to the fairness from a financial point of view of the consideration to be
received by the Company's stockholders in the proposed transaction. The Company
and DLJ then signed a letter agreement confirming DLJ's fee for such an opinion
and waiving certain other fees which had been provided for in the agreement the
Company had signed with DLJ on January 24, 1997.
On January 30, 1998, counsel for the Parent and the Company exchanged
comments on a draft of the Merger Agreement and continued to discuss open
issues, including the amount of the Termination Fee and the wording of the Offer
Conditions.
On February 1, 1998, the Company's Board of Directors met to consider the
proposed transaction with Parent. Mr. Boehmer reviewed with the Board the
proposed terms of the Merger Agreement in detail. The Board continued to be
concerned regarding the amount of the proposed Transaction Fee and the wording
of the condition to the Offer regarding the possible divestiture of stores by
the Parent. The Board instructed Mr. Roberts to contact the Parent regarding
these matters. Mr. Roberts telephoned Mr. Carney and it was agreed that the
requested Termination Fee amount would be reduced and the parties agreed on the
Offer Conditions. A revised draft of the Merger Agreement was prepared
reflecting the changes.
The Company's Board of Directors reconvened later on February 1, 1998. At
that meeting, Mr. Boehmer described the terms of the proposed Merger Agreement.
Representatives of DLJ joined the meeting and made a presentation to the
Company's Board of Directors. After the presentation, DLJ delivered its written
opinion that the consideration to be received by the stockholders of the Company
pursuant to the Merger Agreement is fair to such stockholders from a financial
point of view. The Company's Board of Directors then unanimously determined that
the Merger Agreement and the transactions contemplated thereby, including the
Offer and the Merger, were fair to the stockholders of the Company, approved the
Merger Agreement and recommended that the Company's stockholders tender their
shares of Common Stock pursuant to the Offer and, if applicable, approve the
Merger Agreement and the transactions contemplated therein, including the
Merger.
The Merger Agreement was executed by all parties after the Company's Board
of Directors meeting.
In reaching the determination and recommendation described in paragraph (a)
above, the Board considered a number of factors, including the following:
(1) The financial condition and results of operations of the Company.
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(2) The projected financial results, prospects and strategic objectives of
the Company, as well as the risks involved in achieving those results, prospects
and objectives, including certain liquidity constraints which the Company may
face in the absence of any new financing.
(3) The fact that the $4.25 per Share to be received by the Company's
stockholders in both the Offer and Merger represents a substantial premium
(approximately 33%) over the closing market price of $3.19 per Share on January
30, 1998 (the last trading day prior to the Board's approval of the transaction
referred to in paragraph (a) of this Item 4); and the fact that the $4.25 per
Share to be received by the Company's stockholders in both the Offer and Merger
represents a substantial premium (110%) over the average market price per Share
during the 60-day period prior to the Board's approval of the transaction
referred to in paragraph (a) of this Item 4.
(4) The Board's view, after consultation with management and F.M. Roberts,
regarding the likelihood of the existence of other viable buyers on terms as
favorable as those in the Offer and the Merger.
(5) The presentation to the Company's Board of Directors by representatives
of DLJ and the opinion of DLJ that the $4.25 per Share in cash to be received by
the stockholders of the Company pursuant to the Merger Agreement is fair to such
stockholders from a financial point of view. The full text of the written
opinion of DLJ which sets forth assumptions made, procedures followed, matters
considered and limits on the review undertaken, is attached as Exhibit 15 to
this Schedule 14D-9 and is incorporated herein by reference. THE COMPANY'S
STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY.
The opinion of DLJ was presented for the information of the Company's Board
of Directors in connection with their consideration of the Merger Agreement and
is directed only to the fairness of the aggregate consideration to be received
by the stockholders of the Company pursuant to the Merger Agreement. The opinion
does not constitute a recommendation to any stockholder as to whether to tender
Shares in the Offer or how to vote with respect to the Merger.
(6) The availability of appraisal rights under Section 262 of Delaware Law
for dissenting Shares.
(7) The terms and conditions of the Merger Agreement and the course of the
negotiations resulting in the execution thereof.
(8) The possible alternatives to the Offer and the Merger, including the
prospects of the Company going forward as an independent entity, the range of
possible benefits to the Company's stockholders of such alternatives and the
timing and the likelihood of actually accomplishing any of such alternatives.
(9) The likelihood that the proposed acquisition would be consummated,
including the likelihood of obtaining the regulatory approvals required pursuant
to, and satisfying the other conditions to, the Offer and the Merger contained
in the Merger Agreement, the experience, reputation and financial condition of
the Parent and the risks to the Company if the acquisition were not consummated.
The members of the Board of Directors evaluated the factors listed above in
light of their knowledge of the business and operations of the Company and their
business judgment. In view of the wide variety of factors considered in
connection with its evaluation of the Offer and the Merger, the Board did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its
determination.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
F.M. Roberts is acting as a financial advisor to the Company and, pursuant
to an agreement between F.M. Roberts and the Company dated August 8, 1997, as
amended, F.M. Roberts has received to date $150,000, will receive an additional
$75,000 in February 1998 and, upon consummation of the Offer, F.M. Roberts will
receive an additional fee of approximately $840,000. In addition, as part of the
agreement with F.M. Roberts, F.M. Roberts received an option in August 1997 to
acquire 50,000 shares of the Company's Common Stock at an exercise price of
$2.34 per share. F.M. Roberts is also entitled to reimbursement of all costs and
expenses reasonably incurred by F.M. Roberts in connection with its duties under
its agreement with the Company.
14
<PAGE> 16
The Company and DLJ entered into an agreement dated January 24, 1997 (the
"Retention Letter") pursuant to which DLJ was retained as the Company's
exclusive financial advisor with respect to (i) the sale, merger, consolidation
or any other business combination, in one or a series of transactions, involving
all or a substantial amount of the business, securities or assets of the
Company; and (ii) certain other extraordinary corporate transactions. The
Company paid DLJ a $100,000 retainer fee at the time the Retention Letter was
executed. It also agreed to pay (i) a fee of $350,000 if DLJ delivered a
fairness opinion with respect to any transaction; and (ii) a "success fee" in
the event a transaction was consummated. In addition, the Company agreed to
reimburse DLJ's out-of-pocket expenses (in an amount not to exceed $75,000
without the Company's prior written consent) and to provide indemnification to
DLJ in connection with its services. On January 24, 1998, when DLJ was requested
to render its opinion with respect to the consideration to be received by the
Company's stockholders pursuant to the Merger Agreement, the Retention Letter
was amended (the "Amendment") to waive the "success fee" originally provided for
therein and to confirm that DLJ would receive $100,000 upon the execution of the
Amendment and an additional $250,000 at the time an opinion was delivered to the
Company in writing. On February 1, 1998, the Company paid DLJ $350,000 for
rendering its opinion regarding the consideration to be received by the
stockholders of the Company under the Merger Agreement.
Except as disclosed herein, neither the Company nor any person acting on
its behalf has employed, retained or compensated any person to make
solicitations or recommendations to the Company's stockholders with respect to
the Offer or the Merger.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) To the best of the Company's knowledge, no transactions in the Shares
have been effected during the past 60 days by the Company or by any executive
officer, director, affiliate or subsidiary of the Company.
(b) To the best of the Company's knowledge, all of its executive officers,
directors, affiliates and subsidiaries currently intend to tender pursuant to
the Offer all Shares held of record or beneficially owned by them other than
Shares issuable upon exercise of stock options and Shares, if any, which if
tendered could cause such persons to incur liability under the provisions of
Section 16(b) of the Exchange Act.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as set forth in this Schedule 14D-9, the Company is not engaged
in any negotiation in response to the Offer which relates to or would result in
(i) an extraordinary transaction, such as a merger or reorganization, involving
the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer
of a material amount of assets by the Company or any subsidiary of the Company;
(iii) a tender offer for or other acquisition of securities by or of the
Company; or (iv) any material change in the present capitalization or dividend
policy of the Company.
(b) Except as described in Item 3(b) and Item 4 above (the provisions of
which are hereby incorporated by reference), there are no transactions, board
resolutions, agreements in principle or signed contracts in response to the
Offer which relate to or would result in one or more of the matters referred to
in paragraph (a) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Not applicable.
15
<PAGE> 17
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<S> <C> <C>
Exhibit 1* -- Offer to Purchase (incorporated by reference to Exhibit (a)(2) to the Tender
Offer Statement on Schedule 14D-1 filed with the Securities and Exchange
Commission by Parent and Purchaser dated February 6, 1998 (the "Schedule
14D-1")).
Exhibit 2* -- Letter of Transmittal (incorporated by reference to Exhibit (a)(3) to the
Schedule 14D-1).
Exhibit 3* -- Notice of Guaranteed Delivery (incorporated by reference to Exhibit (a)(4) to
the Schedule 14D-1).
Exhibit 4* -- Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees (incorporated by reference to Exhibit (a)(5) to the Schedule 14D-1).
Exhibit 5* -- Letter to clients for use by Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees (incorporated by reference to Exhibit (a)(6) of
the Schedule 14D-1).
Exhibit 6* -- Guidelines for Certification of TIN on Substitute Form W-9 (incorporated by
reference to Exhibit (a)(7) to the Schedule 14D-1).
Exhibit 7* -- Summary Advertisement, dated February 6, 1998 (incorporated by reference to
Exhibit (a)(8) to the Schedule 14D-1).
Exhibit 8 -- Joint Press Release, dated February 2, 1998 (incorporated by reference to
Exhibit (a)(1) to the Schedule 14D-1).
Exhibit 9* -- Letter to Stockholders.+
Exhibit 10 -- Agreement and Plan of Merger, dated February 1, 1998, by and among
Fabri-Centers of America, Inc., FCA Acquisition Corporation and House of
Fabrics, Inc. (incorporated by reference to Exhibit (c) to the Schedule
14D-1).
Exhibit 11 -- Form of Change-in-Control Severance Agreement (incorporated by reference to
Exhibit 28.2 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1996).
Exhibit 12 -- Employment Agreement, dated March 26, 1997, between Donald L. Richey and the
Company.+
Exhibit 13 -- 1996 Non-Qualified Stock Option Plan.+
Exhibit 14 -- Non-Employee Directors Stock Option Plan.+
Exhibit 15* -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation dated February
1, 1998.+
</TABLE>
- ---------------
* Included in documents mailed to stockholders.
+ Filed herewith.
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: February 6, 1998.
HOUSE OF FABRICS, INC.
By: /s/ MARVIN S. MALTZMAN
-------------------------------------
Name:Marvin S. Maltzman
Title: Senior Vice President, Secretary
and General Counsel
16
<PAGE> 18
ANNEX A
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE
SECURITIES EXCHANGE ACT OF 1934 AND
RULE 14F-1 THEREUNDER
GENERAL
This Information Statement is being mailed on or about February 6, 1998 as
part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of House of Fabrics, Inc., a Delaware corporation (the
"Company"), to the holders of record of shares of common stock, par value $.01
per share, of the Company (the "Common Stock" or the "Shares"). You are
receiving this Information Statement in connection with the possible election of
persons designated by Purchaser (as defined below) to the Board of Directors of
the Company (the "Board").
On February 1, 1998, the Company, Fabri-Centers of America, Inc., an Ohio
corporation ("Parent"), and FCA Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of Parent ("Purchaser"), entered into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which (i) Purchaser will
commence a tender offer (the "Offer") for all of the outstanding Shares at a
price of $4.25 per Share, net to the seller in cash, without interest thereon,
and (ii) Purchaser will be merged with and into the Company (the "Merger"). As a
result of the Offer and the Merger, Parent will own all of the outstanding
capital stock of the Company.
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of Shares pursuant to the Offer, Purchaser shall be entitled to designate such
number of directors (the "Purchaser Designees") on the Board as will give
Purchaser representation proportionate to its ownership interest. The Merger
Agreement requires the Company to take action to cause the Purchaser Designees
to be elected to the Board under the circumstances described therein. This
Information Statement is required by Section 14(f) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and Rule 14f-1 promulgated
thereunder. See "Right to Designate Directors; The Purchaser Designees."
You are urged to read this Information Statement carefully. You are not,
however, required to take any action in connection with this Information
Statement. Capitalized terms used herein and not otherwise defined shall have
the meaning set forth in the Schedule 14D-9.
The information contained in this Information Statement concerning Parent
and Purchaser has been furnished to the Company by Parent. The Company assumes
no responsibility for the accuracy or completeness of such information.
The Shares are the only class of voting securities of the Company
outstanding. Each Share has one vote. As of February 2, 1998, there were
5,331,830 Shares outstanding. The Board currently consists of seven members with
no vacancies.
RIGHT TO DESIGNATE DIRECTORS; THE PURCHASER DESIGNEES
The Merger Agreement provides that, if requested by the Parent or
Purchaser, the Company will, promptly following the purchase by Purchaser
pursuant to the Offer of that number of Shares which, when aggregated with the
shares of Common Stock then owned by the Parent and any of its affiliates,
represents at least a majority of the shares of Common Stock then outstanding on
a fully diluted basis, take all actions necessary to cause persons designated by
Purchaser to become directors of the Company so that the total number of
directors so designated equals the product, rounded up to the next whole number,
of (i) the total number of directors of the Company multiplied by (ii) the ratio
of the number of shares of Common Stock beneficially owned by Purchaser or its
affiliates to the number of shares of Common Stock then outstanding. The Merger
Agreement also provides that the Company will take whatever action is necessary,
including but not limited to amending the Company's bylaws, to increase the size
of its Board of Directors, or use reasonable efforts to secure the resignation
of
A-1
<PAGE> 19
directors, or both, as is necessary to permit that number of Purchasers'
Designees to be elected to the Company's Board of Directors; provided that,
prior to the effective time of the Merger, the Company's Board of Directors will
always have at least two members who are currently directors of the Company,
except to the extent that no such individuals wish to be directors.
Parent has informed the Company that it currently intends to choose the
Purchaser Designees it has the right to designate to the Company's Board of
Directors pursuant to the Merger Agreement from the executive officers and
directors of Parent and Purchaser listed in Schedule I of the Offer to Purchase,
a copy of which is being mailed to stockholders. The information with respect to
such directors and executives officers in Schedule I is hereby incorporated
herein by reference in its entirety.
It is expected that the Purchaser Designees may assume office at any time
following the purchase by the Purchaser of a specified minimum number of Shares
pursuant to the Offer, which purchase cannot be earlier than March 6, 1998. This
step will be accomplished at a meeting or by written consent of the Board
providing that the size of the Board will be increased and/or sufficient numbers
of current directors resigning such that, immediately following such action, the
number of vacancies to be filled by the Purchaser Designees will be available.
It is currently not known which of the current directors of the Company will
resign. Parent has informed the Company that each of the directors and
executives officers listed in Schedule I of the Offer to Purchase has consented
to act as a director of the Company, if so designated.
None of the executive officers or directors of Parent or Purchaser
currently is a director of, or holds any position with, the Company. The Company
has been advised that, to the best knowledge of Parent or Purchaser, none of
Parent's or Purchaser's directors or executive officers beneficially owns any
equity securities, or rights to acquire any equity securities, of the Company,
other than Alan Rosskamm, Chairman of the Board, President and Chief Executive
Officer of the Parent, who owns 100 shares of the Company's Common Stock, and
none has been involved in any transactions with the Company or any of its
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the Securities and Exchange
Commission.
DIRECTORS OF THE COMPANY
The Company's Restated Certificate of Incorporation and By-Laws provide
that the authorized directors are divided into three classes. Set forth below is
certain information with respect to the current directors of the Company as of
January 31, 1998:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ----------------------- ---- --------------------------------------------------------------
<S> <C> <C>
Carl C. Gregory, III 52 Chairman and Chief Executive Officer of West Capital Financial
Services Corp., since 1997. From 1991 to 1996 he served as
Chairman and Chief Executive Officer of MIP Properties, Inc.
He also serves as a Director of Pacific Gulf Properties, Inc.
and Apex Mortgage Capital, Inc.
John E. Labbett 47 Executive Vice President and Chief Financial Officer since
October 1995 and a Director since August 1996. Prior to that
he was the Vice President/Chief Financial Officer for the
Petfood Giant, Inc. from 1994 to 1995. From 1987 to 1993 he
was Executive Vice President -- Chief Financial Officer for
Herman's Sporting Goods, Inc.
Mitchell G. Lynn 48 President and Managing Director of Combined Resources
International since 1994, and a director of the Company since
1995. From 1993 to 1994, he was Senior Executive Vice
President and Director of Price/Costco. From 1979 to 1993, he
was with Price Company in various executive positions, the
most recent of which was President and a Director.
Alison L. May 47 Chief Operating Officer and Chief Financial Officer of Esprit
de Corp. since January 1997 and a director of the Company
since August 1996. From 1991 to 1996 she served in various
executive positions at Patagonia, Inc., the most recent of
which was President.
</TABLE>
A-2
<PAGE> 20
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- ----------------------- ---- --------------------------------------------------------------
<S> <C> <C>
Donald L. Richey 54 President and Chief Executive Officer and a director of the
Company since April 1997. From 1994 to 1995 he was Executive
Vice President and Chief Operating officer of Fabri-Centers of
America, Inc., and from 1990 to 1994 he was President of Cloth
World, Inc., which was acquired by Fabri-Centers of America,
Inc.
R.N. Hankin 50 Founder and Chief Executive Officer of Hankin & Co. for more
than five years. He has been a director of the Company since
1995, and Chairman of the Board since August 1996. He also
serves on the Board of Directors of Alpha Microsystems, Quidel
Corporation, Semitech Corporation and Sparta, Inc. He also is
a member of the U.C.L.A. Foundation Board of Counselors.
H. Michael Hecht 57 President and Chief Executive Officer of Dickson Trading North
America since 1994, and a director of the Company since 1995.
From 1992 to 1994 he was President and Chief Executive Officer
of Builder's Emporium. Prior to that he served in a variety of
executive positions at Carter Hawley Hale Stores, Inc., the
most recent of which was as President and a Director. He also
is a director of Edison Brothers Stores.
</TABLE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
current executive officers of the Company as of January 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
- ----------------------- ---- --------------------------------------------------------------
<S> <C> <C>
Donald L. Richey 54 President and Chief Executive Officer since April 1997. Prior
to this he was the Executive Vice President and Chief
Operating Officer of Fabri-Centers of America, Inc. from 1994
to 1995. From 1990 to 1994, he was President of Cloth World,
Inc., which was acquired by Fabri-Centers of America, Inc. in
1994.
John E. Labbett 47 Executive Vice President and Chief Financial Officer since
October 1995. Prior to that he was the Vice President/Chief
Financial Officer for the Petfood Giant, Inc. from 1994 to
1995. From 1987 to 1993 he was Executive Vice
President -- Chief Financial Officer for Herman's Sporting
Goods, Inc.
William E. Rapp 57 Executive Vice President -- Merchandise and Buying since May
1995. General Merchandise Manager for Northwest Fabrics from
1988 to 1995.
Carolyn Tackett 44 Executive Vice President since May 1997. From 1994 to 1997,
she was Director of Operations and Visual Merchandising at
Fabri-Centers of America, Inc. From 1992 to 1994, she was
Director of Advertising and Senior Merchandiser at Clothworld,
Inc.
Gary E. Veazie 49 Executive Vice President -- Store Operations since December
16, 1997. From September 1997 through December 1997, Regional
Manager. Vice President -- Operations Old American Store, Inc.
from 1995 to 1996. A consultant with Customers, Inc. in 1994.
Executive Vice President -- Director of Stores with Northwest
Fabrics and Crafts, a Division of ConAgra Corp, from 1989 to
1993.
Marvin S. Maltzman 61 Sr. Vice President -- Administration, Secretary and General
Counsel since 1993; Vice President, Secretary and General
Counsel from 1980 to 1993, and a Director from 1991 to 1996.
James C. Webb 54 Sr. Vice President -- Real Estate since 1993. Prior to that he
was Vice President -- Real Estate.
</TABLE>
A-3
<PAGE> 21
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
- ----------------------- ---- --------------------------------------------------------------
<S> <C> <C>
Doyle W. Parker 50 Sr. Vice President, Craft Buyer since January 5, 1998. Prior
to that he was a Sr. Buyer -- Fabrics for Michael Arts and
Crafts from April, 1997 to November 1997. Executive Vice
President -- Buyer for Piece Goods Shops from 1995 to 1996.
Executive Vice President -- Buying for House of Fabrics, Inc.
from 1994 to 1995, and Vice President -- Crafts from 1993
through 1994.
Jay A. Klein 49 Sr. Vice President -- Crafts since November, 1997. From 1995
to 1997, he was a Senior Buyer at Michaels Arts and Crafts,
and from 1992 through 1995 a Crafts and Fabric Buyer at Ames
Department Stores.
Carlos Menendez 48 Vice President -- Information Systems since November, 1997.
Prior to that he was Chief Information Officer since August,
1995. Director of MIS for Aaron Brothers from 1988 to 1995.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors and persons who own more than ten
percent of the Company's common stock file initial reports of ownership of
common stock and reports of changes of ownership with the Securities and
Exchange Commission and the NASDAQ Stock Market.
Executive officers, directors and certain stockholders are required to
furnish the Company with copies of all Section 16(a) forms they file. Based on a
review of such copies and other records available to the Company, the Company
believes that all of its officers and directors have complied with all filing
requirements. The Company has not received copies of any Section 16(a) forms
filed by any person who owns more then ten percent of the Company's Common
Stock.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During the fiscal year ended January 31, 1998, the Board of Directors held
16 meetings and acted by written consent on three occasions. All of the
directors attended at least 75% of the aggregate number of Board and Board
Committee meetings on which they served.
The Company's Audit Committee is currently composed of R.N. Hankin (Chair),
Carl C. Gregory, III and Alison L. May. The primary function of the committee is
to recommend to the Board of Directors the firm of independent public
accountants to be selected as auditors for the year and to consult with the
accountants regarding the scope of their engagement, the audit report and
management letter issued upon the completion of their examination and the
adequacy of the Company's internal accounting controls. The committee also
provides an independent forum for open and candid discussions concerning the
Company's financial statements and related disclosures and the adoption and
review of accounting policies and procedures. While the committee is concerned
with the accuracy and completeness of the Company's financial statements and
matters relating thereto, the committee's role is not designed to provide
stockholders or others with any special assurances with regard thereto, nor
involve the review (in any sense of professional evaluation) of the quality of
the Company's independent audit. It is believed that the committee's activities
serve a useful function in providing ongoing oversight on behalf of the Board of
Directors, but they in no way alter the traditional roles and responsibilities
of the Company's management and independent public accountants with respect to
the accounting and control functions and the financial statements presentation.
The Audit Committee met one time in fiscal 1998.
The Company's Compensation Committee is currently composed of Mitchell G.
Lynn (Chair), R.N. Hankin and H. Michael Hecht. The committee is primarily
responsible for the review and recommendation of officers' salaries, bonuses and
other forms of compensation and for the periodic review and evaluation of new
and existing forms of employee benefit programs. The members also serve as the
Stock Option Committee of the Compensation Committee and are responsible for the
administration of the Stock Option Plan and to make
A-4
<PAGE> 22
recommendations to the Board of Directors regarding stock option awards. The
Compensation Committee and the Stock Option Committee met once in fiscal 1998.
The Company does not have a Nominating Committee.
Directors who are not employees of the Company are compensated for their
services. The Chairman of the Board receives an annual retainer fee of $30,000
and each director receives an annual retainer fee of $15,000, plus a meeting fee
of $1,000 per day for board or committee meetings attended. Directors who are
employees of the Company do not receive any additional compensation for their
services as a director. Non-employee directors were granted stock options on
August 20, 1996 at an exercise price of $4.00 per share for a term of 10 years.
The amount of the options granted are as follows: Messrs. Hankin, Hecht and
Lynn, 18,746; and Mr. Gregory and Ms. May, 9,373.
EXECUTIVE COMPENSATION
The information in the Summary Compensation Table sets forth the
compensation paid to the Chief Executive Officer and the four most highly
compensated executive officers at the end of the last completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ AWARDS
FISCAL OTHER -------------
YEAR ANNUAL SECURITIES
ENDED COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION JANUARY 31 SALARY BONUS(1) (2)(3) STOCK OPTIONS
- -------------------------------- ----------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Donald L. Richey 1998 $237,500 $100,000(5) $117,826(6) 200,000
President and
Chief Executive Officer(4)
Gary L. Larkins, 1998 $247,255 -- (8) --
Former Vice Chairman 1997 $224,254 $ 74,400(9) (8) 76,859
and Chief Executive Officer(7) 1996 $224,254 -- $ 28,234 --(10)
John E. Labbett, 1998 $175,000 $ 25,000(5) $139,674(6) --
Executive Vice President -- 1997 $175,000 $ 25,000(5) (8) 37,492
Chief Financial Officer(11) 1996 $ 43,749 -- $ 11,346 (10)
Michael E. Brown, 1998 $142,206 -- (8) --
Former Executive Vice President --
1997 $150,000 $108,400(2) (8) 37,492
Store Operations(12) 1996 $131,250 $ 10,000(9) $ 13,688 (10)
William E. Rapp, 1998 $150,000 -- (8)
Executive Vice President -- 1997 $150,000 $120,000(5) (8) 37,492
Buying(13) 1996 $ 97,210 $ 60,000(14) $ 32,111 (10)
</TABLE>
- ---------------
(1) There were no performance bonuses paid under the Company's incentive bonus
program for any of the years shown.
(2) The Company adopted a Qualified Profit Sharing Plan (the "Qualified Plan")
in 1970 which was amended to a 401(k) Plan in 1996. The 401(k) Plan is
designed to encourage long range savings, to meet financial emergencies and
retirement needs. The 401(k) Plan covers fulltime employees, twenty-one
years of age, who have been employed by the Company for at least twelve
months. An employee may contribute up to a maximum of 16% of monthly
earnings. The Company, subject to its profitability, may match 1% for each
year of employment up to a maximum of 6%. In 1990, the Company adopted a
Non-Qualified Profit Sharing Plan (the "Non Qualified Plan") for all highly
compensated officers and employees ("HCG") of the Company since the HCG
were no longer eligible to participate in the Qualified Plan. The
Non-Qualified Plan is limited to the HCG. The Non-Qualified Plan was
designed to offer the HCG the same benefits as afforded under the Qualified
Plan.
A-5
<PAGE> 23
(3) Profit sharing contributions are earned in the prior year but paid in the
following year. Because of the Company losses in the last three years,
there were no Company matching contributions earned for the fiscal years
ended January 31, 1998, 1997 and 1996.
(4) Mr. Richey became an employee of the Company in April 1997. See "--
Employment Agreement".
(5) Minimum bonus payments guaranteed.
(6) Includes reimbursement of moving and related expenses, term life insurance
premiums for coverage over $50,000 and car allowance.
(7) Mr. Larkins resigned as Vice Chairman and Chief Executive Officer effective
April 1, 1997.
(8) The aggregate value of the perquisites and other personal benefits received
by the named executive is not reflected because the amount was below the
reporting threshold.
(9) The Board of Directors adopted a Special Bonus Plan ("Plan") effective
during fiscal 1995. The Plan was designed to help retain executive officers
and key employees ("Employees") of the Company during the period of its
Chapter 11 bankruptcy reorganization. This Plan was designed to offer
Employees the incentive and reward required to maintain their support,
enthusiasm and loyalty through the restructuring process. The Plan provided
for the payment of the bonus in three stages. The first payment was made
upon adoption of the Plan with each participant receiving 20% of the total
amount designated. The second payment of 20% was made upon the Company's
having secured approval from the Bankruptcy Court to present a Plan of
Reorganization. The final payment of 60% was made on July 31, 1996 upon
confirmation of the Plan of Reorganization.
(10) All options issued prior to emergence from Chapter 11 proceeding on July
31, 1996 have been cancelled.
(11) John E. Labbett was elected as an officer on October 16, 1995.
(12) Michael E. Brown resigned as of December 12, 1997.
(13) William E. Rapp was elected as an officer on May 24, 1995.
(14) Hiring bonus agreed to be paid to William E. Rapp.
CHANGE IN CONTROL AND CONSULTING AGREEMENTS
In October 1995, the Board of Directors adopted a Change-in-Control
Severance Agreement ("Agreement") that covers certain key and executive officers
of the Company. The agreement provides for payment of 9 to 18 months of base
salary based on the executive officers' classification in the event of a change
in the control of the Company as defined in the Agreement. All of the executive
officers named in the Summary Compensation Table are covered by the Agreement.
On December 19, 1996, the Company entered into an agreement with Gary L.
Larkins whereby Mr. Larkins resigned as President of the Company. He continued
to serve the Company as Vice-Chairman and Chief Executive Officer until April 1,
1997 when a successor was appointed. Mr. Larkins serves as a consultant to the
Company for 19 months at a monthly rate of $17,842.11, effective April 1, 1997.
EMPLOYMENT AGREEMENT
On March 26, 1997, the Company entered into an employment agreement with
Donald L. Richey, President and Chief Executive Officer of the Company. The
employment agreement provides for a term ending on January 31, 2000, unless the
agreement is earlier terminated in accordance with its terms; provided,
however,that unless Mr. Richey or the Company gives written notice to the other
party to the contrary at least ninety days prior to the end of the initial or
extended term of the employment agreement, the term of the agreement will
automatically be extended for an additional one year. The employment agreement
provides that Mr. Richey will be paid a base salary of not less than $300,000
per year and a bonus based upon performance targets. However, Mr. Richey is
entitled to a minimum bonus for fiscal 1998 of $100,000. Pursuant to the terms
of the employment agreement, Mr. Richey received options in March 1997 to
acquire 200,000 shares of the Common Stock of the Company at an exercise price
of $3.6875 per share and options on February 2, 1998 to acquire an additional
100,000 shares at an exercise price of $4.09375 per share.
A-6
<PAGE> 24
If Mr. Richey's employment is terminated during the term of the employment
agreement as a result of his disability, Mr. Richey would be entitled to receive
his base salary and any Additional Benefits (as defined) for a period of 18
months. If Mr. Richey's employment is terminated "without cause" (as defined) he
would be entitled to receive his base salary, bonus and any Additional Benefits
for the lesser of 18 months or the remainder of the term of the employment
agreement. If a "change in control" of the Company should occur, Mr. Richey may,
within nine months after first receiving notice of the change in control, elect
to retire from full time service and shall be entitled, for a period of 18
months after such election, to receive his base salary, bonus and any Additional
Benefits to which he would have been entitled. For purposes of the employment
agreement, a "change in control" shall have occurred if, with or without the
consent of the Board of Directors of the Company, (i) any person, enterprise,
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) or other entities shall
become the beneficial owner (within the meaning of Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of at least 50% of the outstanding
stock of the Company entitled to vote generally for the election of directors
(other than in a transaction or a series of transactions approved by Mr. Richey
as a director of the Company or recommended to the Board by Mr. Richey), or (ii)
at any time fewer than 51% of the members of the Board of Directors of the
Company shall be persons who are either nominated for election by the Board, or
were elected by the Board; provided, however, that for purposes of determining
whether a majority of the Board has approved such nomination or election, there
shall be excluded any individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest or other action or
threatened solicitation of proxies or consents by or on behalf of a person other
than the Board, or (iii) there shall be a sale of all or substantially all of
the Company's assets or the Company shall merge or consolidate with another
corporation and the stockholders of the Company immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in such transaction (or of the parent
corporation of the purchasing or surviving corporation), possessing more than
50% of the voting power (for the election of directors generally) of the
outstanding stock of that corporation, which ownership shall be measured without
regard to any stock of the purchasing, surviving or parent corporation owned by
the stockholders of the Company before the transaction.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------------- VALUE AT ASSUMED
PERCENTAGE OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS GRANTED TO EXERCISE FOR OPTION TERM(1)
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
------------------ ------------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald L. Richey..... 200,000 63.5% $3.69 03/25/2007 1,200,495 1,911,588
Gary L. Larkins...... 0 -- -- -- -- --
John E. Labbett...... 0 -- -- -- -- --
Michael E. Brown..... 0 -- -- -- -- --
William E. Rapp...... 0 -- -- -- -- --
</TABLE>
- ---------------
(1) Potential realizable value is disclosed in response to SEC rules which
require such disclosure for illustration only. The values disclosed are not
intended to be, and should not be, interpreted by stockholders as
representations or projections of the future value of the Company's stock or
of the stock price.
A-7
<PAGE> 25
AGGREGATED OPTION EXERCISES DURING FISCAL 1998
AND OPTIONS VALUES AT FISCAL YEAR END
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
YEAR END(#) YEAR END($)(#)
------------------- ---------------
SHARE ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
--------------- ------------ ------------------- ---------------
<S> <C> <C> <C> <C>
Donald L. Richey...................... -- -- 66,666/133,334 0/0
Gary L. Larkins....................... -- -- 19,214/57,645 0/0
John E. Labbett....................... -- -- 9,373/28,119 0/0
Michael E. Brown...................... -- -- 0 0/0
William E. Rapp....................... -- -- 9,373/28,119 0/0
</TABLE>
- ---------------
* Based on the difference between the closing sale price of the Common Stock on
January 30, 1998 (the last trading day of fiscal 1998), and the exercise
price.
A-8
<PAGE> 26
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Company's Compensation Committee is currently composed of Mitchell G.
Lynn (Chair), R.N. Hankin and H. Michael Hecht. There are no Compensation
Committee interlocks or insider participation for any of the committee members.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee ("Committee") is appointed by the Board of
Directors and currently consists of three of the Company's outside directors,
Michael G. Lynn (Chair), R.N. Hankins and H. Michael Hecht.
The Committee reviews the compensation of all corporate officers, including
the Chief Executive Officer, and makes recommendations to the Board of Directors
based upon the criteria which follows:
The Company's overall compensation philosophy has the objective of (1)
competitiveness, (2) reasonableness, (3) performance, (4) consistency and (5)
equity. The Committee also believes the Company's bonus program should
incorporate a philosophy that a substantial portion of the total annual
compensation be "at risk" through short-term strategic goals for the Company,
and significant individual incentive during the fiscal year.
At the Company, for many years officers' compensation has been directly
linked to performance through a base salary and a performance bonus. No
performance bonuses have been paid in the past three years. However, as
described in the Summary Compensation Table, a Special Bonus and hiring bonuses
were paid.
During the fiscal year ended January 31, 1998, the base compensation for
four executive officers was increased. Six executive officers were hired to fill
vacancies. Each newly hired executive officer received, in addition to their
base pay, a Change-in-Control Severance Agreement and a Stock Option Grant.
On April 1, 1997, Donald L. Richey was hired as the Company's Chief
Executive Officer under a three year Employment Agreement ("Agreement"). The
Agreement provided for annual base compensation of $300,000, a minimum annual
bonus of $100,000 and a grant of stock options as described in the Stock Option
Table.
In 1993, Congress adopted legislation that prohibits publicly-held
companies from deducting certain compensation that exceeds $1,000,000 in any tax
year. In view of the Company's compensation levels, it has not modified its
incentive plans to comply with this legislation. Should circumstances change,
the Committee will consider a modification of Company plans to comply with the
legislation where practical.
Michael G. Lynn, Chair
R.N. Hankin
H. Michael Hecht
A-9
<PAGE> 27
COMPARISON OF 17 MONTH CUMULATIVE TOTAL RETURN*
AMONG HOUSE OF FABRICS, INC., THE RUSSELL 2000 INDEX
AND THE NASDAQ RETAIL INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD HOUSE OF FABRICS, NASDAQ RETAIL
(FISCAL YEAR COVERED) INC. RUSSELL 2000 TRADE
<S> <C> <C> <C>
8/01/96 100.00 100.00 100.00
1/31/97 97.62 117.96 107.88
12/31/97 39.29 141.59 124.50
</TABLE>
* $100 invested on 8/01/96 in stock or on 7/31/96 in index -- including
reinvestment of dividends.
On July 31, 1996, the Company's Plan of Reorganization became effective,
which provided for a restructuring and issuance of new Common Stock of the
Company. The performance graph reflects the newly issued Common Stock
performance since August 1, 1996.
A-10
<PAGE> 28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of common shares beneficially
owned on February 1, 1998 by (i) owners of more than five percent of outstanding
common stock, based solely on Schedules 13Ds filed by such beneficial owners
with the Securities and Exchange Commission; (ii) each director; (iii) each of
the executive officers named in the Summary Compensation Table; and (iv) all
directors and executive officers as a group. All individuals listed in the table
have sole voting and investment power over the shares reported as owned, except
as otherwise stated.
<TABLE>
<CAPTION>
OPTION SHARES
SHARES EXERCISABLE PERCENTAGE OF
BENEFICIALLY OWNED, WITHIN 60 OUTSTANDING
NAME EXCLUDING OPTIONS DAYS SHARES
- ------------------------------------------------- ------------------- ------------- -------------
<S> <C> <C> <C>
Rumpelstiltskin (USA)(1)......................... 873,390 0 16.4%
c/o Goldsher & Goldsher
640 N. LaSalle Street, Suite 300
Chicago, IL 60610
Gabriel Capital, L.P.(2)......................... 331,534 0 6.2%
450 Park Avenue, Suite 3201
New York, New York 10022
Gary L. Larkins.................................. 90 19,214 (3)
Michael E. Brown................................. 0 0
John E. Labbett.................................. 0 9,373 (3)
William E. Rapp.................................. 0 9,373 (3)
Donald L. Richey................................. 0 66,666 1.2%
Carl C. Gregory, III............................. 0 2,343 (3)
R.N. Hankin...................................... 0 4,686 (3)
H. Michael Hecht................................. 0 4,686 (3)
Mitchell G. Lynn................................. 0 4,686 (3)
Alison L. May.................................... 0 2,343 (3)
All directors and executive officers as a group
(15)........................................... 0 115,403 2.1%
</TABLE>
- ---------------
(1) Based upon Amendment No. 2 to Schedule 13D dated March 31, 1997.
(2) Based upon Schedule 13D dated December 19, 1997.
(3) Less than 1%.
A-11
<PAGE> 1
EXHIBIT 9
LOGO
February 6, 1998
Dear Stockholders:
By now you are probably aware that on February 1, 1998, House of Fabrics,
Inc. (the "Company") entered into an Agreement and Plan of Merger with
Fabri-Centers of America, Inc. and FCA Acquisition Corporation that provides for
the acquisition of the common stock of the Company at a price of $4.25 per
share. Under the terms of the proposed transaction, FCA Acquisition Corporation,
a wholly owned subsidiary of Fabri-Centers, has commenced a tender offer for all
outstanding shares of the Company's common stock at $4.25 per share.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE
OFFER BY FCA ACQUISITION CORPORATION AND THE SUBSEQUENT MERGER OF THE COMPANY
WITH FCA ACQUISITION CORPORATION AND HAS DETERMINED THAT THE TERMS OF THE OFFER
AND THE MERGER ARE FAIR TO THE COMPANY'S STOCKHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE
OFFER AND TENDER THEIR SHARES IN THE OFFER.
Following the successful completion of the tender offer, upon approval by
stockholders, if required, FCA Acquisition Corporation will be merged with the
Company, and all shares not purchased in the tender offer will be converted into
the right to receive $4.25 per share in cash in the merger without interest.
In arriving at its recommendations, the Board of Directors gave careful
consideration to a number of factors. These factors included the opinion of
Donaldson, Lufkin & Jenrette Securities Corporation that, as of February 1,
1998, the consideration to be received by the Company's stockholders in the
transaction is fair, from a financial point of view, to the Company's
stockholders.
Accompanying this letter is a copy of the Company's
Solicitation/Recommendation Statement on Schedule 14d-9. Also enclosed is the
offer to purchase and related materials, including a letter of transmittal, of
FCA Acquisition Corporation for use in tendering shares. I urge you to read the
enclosed materials carefully.
Very truly yours,
/s/ Donald L. Richey
Donald L. Richey
President and Chief Executive Officer
<PAGE> 1
Exhibit 12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of March 26, 1997
by and between House of Fabrics, Inc., a Delaware corporation ("Employer"), and
Donald L. Richey ("Employee").
WITNESSETH:
WHEREAS, Employer desires to obtain the services of
Employee, and Employee desires to render services to Employer;
WHEREAS, the Board of Directors of Employer (the "Board") has
determined that because of Employee's substantial experience and business
relationships in connection with the retail fabric business, it is in Employer's
best interest and that of its stockholders to secure services of Employee, to
secure certain additional commitments from Employee and to provide Employee
certain additional benefits; and
WHEREAS, Employer and Employee desire to set forth in this
Agreement the terms and conditions of Employee's employment with Employer.
NOW, THEREFORE, in consideration of the mutual promises and
covenants herein contained, the parties agree as follows:
1. TERM. Employer agrees to employ Employee and Employee
agrees to serve Employer, in accordance with the terms of this Agreement, for a
term commencing April 1, 1997 and ending January 31, 2000, unless this Agreement
is earlier terminated in accordance with the provisions which follow; provided,
however, that unless Employer or Employee gives written notice to the other
party to the contrary at least 90 days prior to the end of the initial term of
this Agreement or the term of this Agreement as extended, the term of this
Agreement shall automatically be extended for an additional one year. The term
of this Agreement shall include any automatic extensions pursuant to the
preceding sentence.
2. SERVICES AND EXCLUSIVITY OF SERVICES. So long as this
Agreement shall continue in effect, Employee shall devote substantially all of
his business time, energy and ability exclusively to the business, affairs and
interests of Employer and its subsidiaries and matters related thereto, shall
use Employee's best efforts and abilities to promote Employer's interests, and
shall perform the services contemplated by this Agreement in accordance with
policies established by and under the direction of the Board.
1
<PAGE> 2
Employee agrees to serve without additional remuneration in
such official capacities for one or more direct or indirect subsidiaries of
Employer as the Board may from time to time reasonably request, subject to
appropriate authorization by the subsidiary or subsidiaries involved and any
limitations under applicable law. Employee agrees to faithfully and diligently
promote the business, affairs and interests of Employer and its subsidiaries.
Without the prior express written authorization of the Board,
Employee shall not, directly or indirectly, during the term of this Agreement,
engage in any activity competitive with or adverse to Employer's business,
whether alone, as a partner, or as an officer, director, employee or significant
investor of or in any other entity. (An investment of less than 10% of the
outstanding capital or equity securities of an entity shall not be deemed
significant for these purposes.)
Employee represents to Employer that Employee has no other
outstanding commitments inconsistent with any of the terms of this Agreement or
the services to be rendered hereunder. Employee further represents that Employee
will not bring to Employer for use in the performance of Employee's duties
hereunder any confidential or proprietary information or property of any other
person without the express written consent of such other person.
3. SPECIFIC POSITION; DUTIES AND RESPONSIBILITIES. Employer
and Employee agree that, subject to the provisions of this Agreement, Employer
will employ Employee and Employee will serve Employer as President and Chief
Executive Officer or in an executive position or positions of equivalent or
greater responsibilities and duties. Employee agrees to observe and comply with
the reasonable rules and regulations of Employer as adopted by the Board
respecting the performance of Employee's duties and agrees to carry out and
perform orders, directions and policies of Employer and its Board as they may
be, from time to time, stated either orally or in writing. Employer agrees that
the duties which may be assigned to Employee shall be usual and customary duties
of the office(s) or position(s) to which he may from time to time be appointed
or elected and shall not be inconsistent with the provisions of this Agreement,
the charter documents of Employer or applicable law. Employee shall have such
corporate power and authority as shall reasonably be required to enable the
discharge of duties in any office that may be held.
4. COMPENSATION.
(a) BASE COMPENSATION.
During the term of this Agreement, Employer agrees to pay
Employee a base salary of not less than $300,000 per
year, payable in equal twice monthly installments ("Base Salary"). The
Board shall review Employee's Base Salary no less frequently than every
twelve months.
2
<PAGE> 3
(b) BONUS.
Employee shall be entitled to a bonus as follows:
(i) For the fiscal year ending January 31, 1998
("fiscal 1998"), if the Performance Target (to be agreed upon
by Employee and the Compensation Committee of the Board) is
achieved, Employee shall be entitled to receive a bonus of
$150,000. If the Performance Target is exceeded for fiscal
1998, Employee shall be entitled to receive a bonus in excess
of $150,000, but in no event greater than $300,000. The exact
amount of the bonus in excess of $150,000 shall be based upon
criteria to be agreed upon by Employee and the Compensation
Committee of the Board. Notwithstanding the foregoing,
Employee shall be entitled to a minimum bonus for fiscal 1998
of $100,000 whether or not the Performance Target is achieved.
(ii) For the fiscal years ending January 31, 1999 and
2000, Employee shall be entitled to participate in a bonus
plan for executives of Employer proposed by Employee and
approved by the Compensation Committee of the Board.
(iii) The bonus for any fiscal year shall be paid on or
before the date 90 days after the end of such fiscal year.
(c) OPTIONS.
(i) On the date of this Agreement, Employer shall
grant to Employee an option to acquire 200,000 shares of the
Common Stock of Employer (the "Option"). The Option shall
expire on March 25, 2007 and shall have an exercise price of
$3.6875 per share, subject to adjustment as provided below.
One-third of the Option shall vest and become exercisable on
February 1 of each of 1998, 1999 and 2000. Notwithstanding the
foregoing, if a Change in Control (as defined in Section 6)
occurs, the Option shall vest in full at such time and become
fully exercisable at such time.
(ii) In the event of a stock split, stock dividend,
reclassification, reorganization, recapitalization, merger,
consolidation, exchange of shares, or any other capital
adjustment of shares of Common Stock of Employer, the number
of shares subject to the Option shall be adjusted in the same
manner as shares of Employer's Common Stock. Any fractional
shares resulting from such adjustments shall be eliminated.
The Option shall not be transferable except by will or the
laws of descent and distribution. The Option may be exercised
during the life time of the Employee, only by Employee or by
his guardian or legal
3
<PAGE> 4
representative.
(iii) In the event Employee leaves the employ of Employer
by voluntary resignation or is terminated pursuant to Section
5(c), any unexpired portion of the Option shall expire and be
forfeited effective on the date of such resignation or
termination. In the event Employee's employment is terminated
pursuant to Section 5 (a), (b) or (d), or the term of this
Agreement ends and a new employment arrangement is not made
between Employee and Employer, the Option shall vest in full
at such time and become fully exercisable at such time and
shall be deemed to expire and be forfeited on the 120th day
following such death, disability, or termination of
employment.
(iv) Upon issuance of Common Stock of Employer pursuant
to the Option to Employee, his heirs or representatives, the
recipient of such stock may be required to represent that the
shares of stock are taken for investment and not resale and
make such other representations as may be necessary to qualify
the issuance of the shares as exempt from the Securities Act
of 1933 or to permit registration of the shares and shall
represent that he shall not dispose of such shares in
violation of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Employer reserves the right to place a
legend on any stock certificate issued pursuant to the Option
to assure compliance with this subclause. No shares of Common
Stock of Employer shall be required to be distributed until
Employer shall have taken such action, if any, as is then
required to comply with the provisions of the Securities Act
of 1933 or any other then applicable securities law or
regulation of any stock exchange.
(v) Employee shall be responsible for payment to
Employer of the amount of any tax required by any governmental
authority to be withheld and paid over by Employer to such
governmental authority for the account of the person entitled
to the Option.
(vi) On February 2, 1998, if Employee's employment
hereunder has not been terminated pursuant to the provisions
of this Agreement, Employer shall grant to Employee an option
substantially the same as the Option, except (A) the number of
shares of Common Stock of Employer to be acquired shall be
100,000, (B) such option shall expire on February 1, 2008, (C)
the exercise price for such option shall be the closing price
of the Common Stock of Employer as reported on NASDAQ National
Market for that date (or if the Common Stock of Employer is
not traded on that date, the immediately preceding date on
which the Common Stock of Employer was traded) or on any other
recognized quotation system on which the Common Stock of
Employer is then quoted (or the midpoint of the "bid" and
"asked" price if no closing price is quoted), subject to
adjustment as
4
<PAGE> 5
provided in clause (ii) above, and (D) one-third of such
option shall vest and become exercisable on February 2 of each
of 1999, 2000 and 2001.
(d) ADDITIONAL BENEFITS.
Employee shall also be entitled to all rights and benefits for
which Employee is otherwise eligible under any non-qualified
profit-sharing plan, Section 401(k) profit-sharing plan, life, medical,
dental, disability or basic or supplemental life insurance plan or
policy or other plan or benefit that Employer or its subsidiaries may
provide for Employee or for senior officers or for employees of
Employer generally, as from time to time in effect, during the term of
this Agreement (collectively, "Additional Benefits"). The Additional
Benefits shall be provided at the level commensurate with the office
held at the time. Any waiting periods for participation in any of the
plans constituting Additional Benefits and any limitations on
preexisting conditions in any medical policy or plan constituting
Additional Benefits shall be waived for Employee. If Employer
institutes a plan pursuant to which years of service with Employer is a
basis for determining the level of benefits under such plan, then after
three years of service by Employee with Employer, Employee shall be
credited with an additional five years of service for purposes of such
plan.
(e) PERQUISITES
Employee shall be entitled to paid vacation in accordance with
Employer's policies which are applicable to other executive employees
of Employer, but in no event shall Employee be entitled to less than
four weeks of paid vacation per year. Vacation may be taken in
accordance with Employer's written vacation policy for employees of
Employee's class at such time during each year as may be mutually
agreed upon by Employer and Employee.
During the term of this Agreement, Employer shall provide
Employee a vehicle allowance of $1,000 per month or,
pursuant to Employee's election, a vehicle pursuant to Employer's
automobile policy for senior executives.
(f) LIMITED BENEFIT SUCCESSION.
If Employee's full-time services are terminated hereunder
pursuant to Sections 5(a), 5(b) or 6 and Employee is no longer eligible
for Additional Benefits because of such termination, Employee (or in
event of death, such person or persons as Employee shall have directed
in writing or, in the absence of a designation, the estate of Employee
(the "Beneficiary")) shall be entitled to and Employer shall provide
benefits substantially equivalent to those benefits in the nature of
health and welfare type benefits to which Employee was entitled
immediately prior to such termination, but shall not be entitled to
5
<PAGE> 6
option, equity, appreciation, profit sharing, deferred compensation,
savings, bonus, participation, pension, extra compensation and other
incentive plan benefits except to the extent otherwise expressly
provided in any then outstanding awards to such Employee), but in each
case (1) only for the period (if any) during which Employee (or (if
expressly entitled thereto) Beneficiary, as the case may be) remains
entitled to receive Base Salary under such sections, (2) only to the
extent that Employee or such Beneficiary is not entitled to comparable
benefits from another employer or provider, and (3) subject to any
other express limitations elsewhere in this Agreement or any applicable
plan.
(g) OVERALL QUALIFICATION.
Employer reserves the right to modify, suspend or discontinue
any and all of the above referenced benefit plans, practices, policies
and programs at any time (whether before or after termination of
employment); provided, however, the Employee's benefits under such
benefit plans, practices, policies or programs shall not be reduced or
eliminated unless (i) Employer provides Employee with reasonably
comparable benefits or (ii) the modification, suspension or
discontinuance of such benefit plan, practice, policy or program was
approved by Employee as a director of Employer or recommended to the
Board by Employee.
(h) RELOCATION EXPENSES.
Employer shall pay Employee: (i) the commission paid by
Employee to a real estate agent in connection with the sale of
Employee's house in St. Louis, Missouri (the "St. Louis Home"); (ii)
the amount, but not in excess of $20,000, by which the gross sales
price of the St. Louis Home is less than $445,000; (iii) reasonable
out-of-pocket moving expenses incurred by Employee in moving his
belongings from St. Louis, Missouri to Southern California; and (iv)
reasonable out-of-pocket living expenses incurred by Employee in
Southern California for up to a 90-day period after April 1, 1997,
subject to extension of such 90-day period upon mutual agreement by
Employee and Employer.
5. TERMINATION. The compensation and other benefits provided
to Employee pursuant to this Agreement, and the employment of Employee by
Employer, shall be terminated prior to expiration of the term of this Agreement
only as provided in this Section 5 or Section 6:
(a) DISABILITY.
In the event that Employee shall fail, because of illness,
incapacity or injury which is determined to be total and permanent by a
physician selected by Employer or its insurers and acceptable to
Employee or Employee's legal representative (such agreement as to
acceptability not to be withheld unreasonably) to render for 90
consecutive days, the services contemplated by this Agreement,
Employee's employment hereunder may be
6
<PAGE> 7
terminated by written notice of termination from Employer to Employee.
Thereafter, Employer shall continue, until 18 months after the date of
such notice, to pay Base Salary to Employee at a rate and time and in
an amount and manner equal to (i) 100% of the Base Salary minus (ii)
the amount of any cash payments to Employee under the terms of
Employer's disability insurance, if any, or other disability benefits
or plans, if any. Thereafter, no further salary shall be paid. Employee
shall be entitled to all Additional Benefits for a period of 18 months
following such notice or for such shorter period as provided in the
applicable plan.
(b) DEATH.
In the event of Employee's death during the term, Employer
shall be entitled to receive any Base Salary earned but unpaid to the
date of Employee's death and any bonus Employee would have been
entitled to receive for the fiscal year in which he dies, prorated to
the date of Employee's death. Any other rights or benefits which do not
by their terms end at the death of Employee shall be paid to
Beneficiary for a period of six months only following the date of
Employee's death or such shorter period as provided in the applicable
plan. This Agreement in all other respects will terminate upon the
death of Employee except as otherwise expressly provided in Section
4(f).
(c) FOR CAUSE.
Employee's employment hereunder shall be terminated and all of
his rights to receive Base Salary (other than Base Salary earned but
unpaid to the date of termination), bonus and (subject to the terms of
any plans relating thereto) Additional Benefits hereunder in respect of
any period after such termination, shall terminate (i) upon a
determination by the Board, acting in good faith based upon actual
knowledge at such time and after notice to Employee and a reasonable
opportunity to cure, that Employee has willfully failed or refused,
without proper cause, to substantially perform his duties as an
employee of Employer, or (ii) has been convicted of any criminal act,
except a misdemeanor conviction that does not involve misappropriation
of funds or property, fraud or other similar activity which bears
directly upon Employee's ability to perform faithfully his duties as an
employee of Employer.
Notwithstanding the foregoing, Employee shall not be
terminated for cause pursuant to clause (i) of the first paragraph of
this Section 5(c) unless and until Employee has received notice of a
proposed termination for cause and Employee has had an opportunity to
be heard before at least a majority of the members of the Board.
Employee shall be deemed to have had such opportunity if given written
or telephonic notice by any director at least 72 hours in advance of a
meeting.
7
<PAGE> 8
(d) WITHOUT CAUSE.
Notwithstanding any other provision of this Section 5, the
Board shall have the right to terminate Employee's employment with
Employer at any time, but any such termination other than as expressly
provided in Section 5(a), (b) or (c) herein shall be without prejudice
to Employee's rights to receive Base Salary, a bonus (calculated based
upon the bonus Employee would have been entitled to receive for the
fiscal year in which his employment is terminated) and Additional
Benefits provided under this Agreement for the lesser of 18 months
thereafter or the remainder of the term of this Agreement.
(e) NO LIMITATION.
Employer's exercise of its right to terminate shall be without
prejudice to any other right or remedy to which it may be entitled at
law, in equity or under this Agreement.
(f) EXCLUSIVE REMEDY. Employee agrees that the payments
expressly provided and contemplated by this Agreement shall constitute
the sole and exclusive obligation of Employer in respect of Employee's
employment with and relationship to Employer, other than a claim by
Employee for defamation by Employer, and that the payment thereof shall
be the sole and exclusive remedy for any termination of Employee's
employment. Employee covenants not to assert or pursue any other
remedies, at law or in equity, with respect to any termination of
employment.
6. CHANGE IN CONTROL. If there should occur a "change in
control" of Employer (or any successor), as defined below, then Employee,
without limitation on any other rights hereunder, may, within nine months after
first receiving notice (which may be oral) of such event, elect to retire from
full-time service to Employer and shall be entitled, for a period of 18 months
after such election, to receive Base Salary, a bonus (calculated based upon the
bonus Employee would have been entitled to receive for the fiscal year in which
he retires from full-time service) and all Additional Benefits to which Employee
is entitled.
For purposes of the foregoing provisions, a "change of
control" shall have occurred if, with or without consent of the Board, (i) any
person, enterprise, group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or other
entity shall become the beneficial owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of at least 50% of
the outstanding stock of Employer entitled to vote generally for the election of
directors (other than in a transaction or series of transactions approved by
Employee as a director of Employer or recommended to the Board by Employee), or
(ii) at any time fewer than 51% of the members of the Board shall be persons who
were either nominated for election by the Board, or were elected by the Board;
provided, however, that for purposes of determining whether a majority of the
8
<PAGE> 9
Board has approved such nomination or election, there shall be excluded
any individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than the
Board, or (iii), there shall be a sale of all or substantially all of Employer's
assets or Employer shall merge or consolidate with another corporation and the
stockholders of Employer immediately prior to such transaction do not own,
immediately after such transaction, stock of the purchasing or surviving
corporation in such transaction (or of the parent corporation of the purchasing
or surviving corporation), possessing more than 50% of the voting power (for the
election of directors generally) of the outstanding stock of that corporation,
which ownership shall be measured without regard to any stock of the purchasing,
surviving or parent corporation owned by the stockholders of Employer before the
transaction.
7. BUSINESS EXPENSES. During the term of this Agreement, to
the extent that such expenditures satisfy the criteria under the Internal
Revenue Code for deductibility by Employer (whether or not fully deductible by
Employer) for federal income tax purposes as ordinary and necessary business
expenses, Employer shall reimburse Employee promptly for reasonable business
expenditures, including travel, entertainment, parking, business meetings, and
professional dues made and substantiated in accordance with policies, practices
and procedures established from time to time by the Board and incurred in
pursuit and furtherance of Employer's business and good will.
8. INDEMNITY. To the fullest extent permitted by applicable
law and the bylaws of Employer, as from time to time in effect, Employer shall
indemnify Employee and hold Employee harmless for any acts or decisions made in
good faith while performing services for Employer. To the same extent, Employer
will pay and, subject to any legal limitations, advance all expenses, including
reasonable attorneys' fees and costs of court approved settlements, actually and
necessarily incurred by Employee in connection with the defense of any action,
suit or proceeding and in connection with any appeal thereon, which has been
brought against Employee by reason of Employee's service as an officer or agent
of Employer or of a subsidiary of Employer.
9. MISCELLANEOUS.
(a) SUCCESSION; SURVIVAL.
This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns, but without the
prior written consent of Employee this Agreement may not be assigned
other than in connection with a merger or sale of substantially all the
assets of Employer or a similar transaction in which the successor or
assignee assumes (whether by operation of law or express assumption)
all obligations of Employer hereunder including without limitation
those in Section 6 hereof in respect of such successor or assignee. The
obligations and duties of Employee hereunder are
9
<PAGE> 10
personal and otherwise not assignable. Employee's obligations and
representations under this Agreement will survive the termination of
Employee's employment, regardless of the manner of such termination.
(b) NOTICES.
Any notice or other communication provided for in this
Agreement shall be in writing and sent if to Employer to its principal
office at:
13400 Riverside Drive
Sherman Oaks, California 94123
Attention: Chairman of the Board
or at such other address as Employer may from time to time in writing
designate, and if to Employee at such address as Employee may from time
to time in writing designate (or Employee's business address of record
in the absence of such designation). Each such notice or other
communication shall be effective (i) if given by telecommunication,
when transmitted to the applicable number so specified in (or pursuant
to) this Section 9(b) and an appropriate answerback is received, (ii)
if given by mail, three days after such communication is deposited in
the mails with first class postage prepaid, addressed as aforesaid or
(iii) if given by any other means, when actually delivered at such
address.
(c) ENTIRE AGREEMENT; AMENDMENTS.
This Agreement contains the entire agreement of the parties
relating to the subject matter hereof and it supersedes any prior
agreements, undertakings, commitments and practices relating to
Employee's employment by Employer. No amendment or modification of the
terms of this Agreement shall be valid unless made in writing and
signed by Employee and, on behalf of Employer, by an officer expressly
so authorized by the Board.
(d) WAIVER.
No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of
any other right, nor shall any single or partial exercise preclude any
further or other exercise of such right or any other right.
(e) CHOICE OF LAW.
This Agreement, the legal relations between the parties and
any action, whether contractual or non-contractual, instituted by any
party with respect to matters arising under or growing out of or in
connection with or in respect of this Agreement, the
10
<PAGE> 11
relationship of the parties or the subject matter hereof shall be
governed by and construed in accordance with the laws of the State of
California applicable to contracts made and performed in such State and
without regard to conflicts of law doctrines, to the extent permitted
by law.
(f) ARBITRATION.
Any dispute, controversy or claim arising out of or in respect
of this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the
request of either party be submitted to and settled by arbitration
conducted before a single, neutral arbitrator in Los Angeles,
California pursuant to Title 9, Section 1280, ET SEQ., of the
California Code of Civil Procedure. Judgement upon the award rendered
by the arbitrator may be entered by any court having jurisdiction
thereof.
(g) CONFIDENTIALITY; PROPRIETARY INFORMATION.
Employee agrees to not make use of, divulge or otherwise
disclose, directly or indirectly any trade secret or other confidential
or proprietary information concerning the business (including but not
limited to its products, employees, services, practices or policies) of
Employer or any of its affiliates of which Employee may learn or be
aware as a result of Employee's employment during the Term, except to
the extent such use or disclosure is (i) necessary to the performance
of this Agreement and in furtherance of Employer's best interests, (ii)
required by applicable law, (iii) lawfully obtainable from other
sources, or (iv) authorized in writing by Employer. The provisions of
this subsection (g) shall survive the expiration, suspension or
termination, for any reason, of this Agreement.
(h) TRADE SECRETS.
Employee, prior to and during the term of employment, has had
and will have access to and become acquainted with various trade
secrets, consisting of software, plans, formulas, patterns, devices,
secret inventions, processes, customer lists, contracts, and
compilations of information, records and specifications, which are
owned by Employer and regularly used in the operation of its business
and which may give Employer an opportunity to obtain an advantage over
competitors, who do not know or use such trade secrets. Employee agrees
and acknowledges that Employee has been granted access to these
valuable trade secrets only by virtue of the confidential relationship
created by Employee's employment. Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any
way, either during the term of this Agreement or at any time
thereafter, except as required in the course of employment by Employer
and for its benefit.
11
<PAGE> 12
All records, files, documents, drawings, specifications,
software, equipment, and similar items relating to the business of
Employer or its affiliates, including without limitation all records
relating to customers (the "Documents"), whether prepared by Employee
or otherwise coming into Employee's possession, shall remain the
exclusive property of Employer or such affiliates and shall not be
removed from the premises of Employer or its affiliates under any
circumstances whatsoever without the prior consent of the Board. Upon
termination of employment, Employee agrees to promptly deliver to
Employer all Documents in the possession or under the control of
Employee.
(i) PLACE OF EMPLOYMENT.
The principal place of employment and the location of
Employee's principal office shall be in 13400 Riverside Drive, Sherman
Oaks, California or such other place as shall be mutually agreed upon
by Employee and Employer; provided, however, that Employee will be
expected to engage in periodic travel within and outside the State of
California as Employer may reasonably request or as may be required for
the proper rendition of services hereunder.
(j) SEVERABILITY.
If this Agreement shall for any reason be or become
unenforceable in any material respect by any party, this Agreement
shall thereupon terminate and become unenforceable by the other party
as well. In all other respects, if any provision of this Agreement is
held invalid or unenforceable, the remainder of this Agreement shall
nevertheless remain in full force and effect, and if any provision is
held invalid or unenforceable with respect to particular circumstances,
it shall nevertheless remain in full force and effect in all other
circumstances, to the fullest extent permitted by law.
(k) WITHHOLDING; DEDUCTIONS.
All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other
required, normal or elected employee deductions.
(l) SECTION HEADINGS.
Section and other headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
12
<PAGE> 13
(m) UNIQUE SERVICES; SPECIFIC PERFORMANCE.
The parties hereto agree that the services to be rendered by
Employee pursuant to this Agreement, and the rights and privileges
granted to Employer pursuant to this Agreement, and the rights and
privileges granted to Employee by virtue of his position, are of a
special, unique, extraordinary and intellectual character, which gives
them a peculiar value, the loss of which cannot be reasonably or
adequately compensated in damages in any action at law, and that a
breach by Employee of any of the terms of this Agreement will cause
Employer great and irreparable injury and damage. Employee hereby
expressly agrees that Employer shall be entitled to the remedies of
injunction, specific performance and other equitable relief to prevent
a breach of this Agreement by Employee. This subsection (n) shall not
be construed as a waiver of any other rights or remedies which Employer
may have for damages or otherwise.
(n) NO-RAIDING OF EMPLOYEES.
Employee agrees that for a period of two years after the
termination of Employee's employment, except in the case of a
termination caused by Employer in violation of the terms hereof or a
termination pursuant to Section 5(d), Employee will not, directly or
indirectly, disrupt, damage, impair, or interfere with Employer's
business by soliciting, influencing, encouraging or recruiting any
employee of Employer to work for Employee or any other person or entity
by or with which Employee is employed, associated, affiliated or
otherwise related.
(o) COUNTERPARTS.
This Agreement and any amendment hereto may be executed in one
or more counterparts. All of such counterparts shall constitute one and
the same agreement and shall become effective when a copy signed by
each party has been delivered to the other party.
(p) BOARD OF DIRECTORS.
Employer shall use its best efforts to cause Employee to be
appointed to the Board as soon as practicable or to be nominated for
election to the Board at the next annual meeting of the stockholders of
Employer.
(q) REIMBURSEMENT OF LEGAL EXPENSES.
Employer shall reimburse Employee for the reasonable legal
fees and expenses incurred by Employee in connection with the
negotiation and execution of this Agreement, but in no event greater
than $2,000.
13
<PAGE> 14
(r) REPRESENTATION BY COUNSEL; INTERPRETATION.
Employer and Employee each acknowledge that each party to this
Agreement has been represented by counsel in connection with this
Agreement and the matters contemplated by this Agreement. Accordingly,
any rule of law, including but not limited to Section 1654 of the
California Civil Code, or any legal decision that would require
interpretation of any claimed ambiguities in this Agreement against the
party that drafted it has no application and is expressly waived. The
provisions of this Agreement shall be interpreted in a reasonable
manner to effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
"EMPLOYER"
HOUSE OF FABRICS, INC.
By /s/ ROCKELL N. HANKIN
----------------------------
Its Chairman
---------------------------
"EMPLOYEE"
/s/ DONALD L. RICHEY
-------------------------------
Donald L. Richey
-------------------------------
-------------------------------
-------------------------------
[address]
14
<PAGE> 1
Exhibit 13
HOUSE OF FABRICS
----------------
1996 NON-QUALIFIED STOCK OPTION PLAN
------------------------------------
1. PURPOSE OF THE PLAN.
- -----------------------------
The House of Fabrics Non-Qualified Stock Option Plan (hereafter the
"Plan") is to provide a means by which House of Fabrics, Inc. and its
subsidiaries (hereafter the "Company") shall be able to attract and retain
competent key employees (including officers and directors who are employees) and
provide such personnel with an opportunity to participate in the increased value
of the Company, which their efforts, initiative and skill have helped produce.
2. ADMINISTRATION.
- ------------------------
(a) The Board of Directors (the "Board") of the Company or a Committee
of the Board composed solely of two or more members of the Board who are
"Non-Employee Directors" (as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934) shall administer the Plan (the Board or said
Committee being referred to herein as the "Committee").
(b) A majority of the members of the Committee shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and signed by all of
the members of the Committee shall be fully effective as if it had been made by
a majority vote at a meeting duly called and held.
(c) Subject to the express provisions of the Plan, the Committee also
shall have complete authority to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to it, and to make all other
determinations necessary or advisable for the administration of the Plan.
(d) The Committee shall have the authority to determine the
participants ("Participants"), to grant and/or extend options, and determine the
terms thereof and the amount of options to be awarded to them.
(e) All determinations of the Committee on the matters referred to in
this paragraph 2 shall be final and conclusive.
3. TERM OF GRANTS
- -----------------------
The term of each stock option (hereafter "Option") granted shall not
exceed ten (10) years from date of grant, subject to earlier termination, as
provided in Paragraph 11.
1
<PAGE> 2
4. STOCK OPTION AWARDS.
- -----------------------------
The purchase price of the Common Stock covered by each option shall be
established by the Committee, but in no event shall it be less then 100% of the
fair market value of the Common Stock on the date the option is granted. For
purposes of this Plan, the "fair market value" of the Common Stock on any date
shall be the closing price of the Common Stock as reported on the NASDAQ
National Market Quotation System for that date, or on any other recognized
quotation system. If the closing price is reported as "bid" and "asked" the
"fair market value" shall be the mid point between the "bid" and "asked" price.
If there are no sales on such date, the next trading day on which there are
sales shall be used to establish the purchase price. Such price shall be subject
to adjustment as provided in paragraph 9 hereof. The date on which the Committee
adopts its resolution expressly granting an option shall be considered the date
on which such option is granted.
5. EXERCISE OF OPTIONS.
- -----------------------------
(a) Options under the Plan shall be exercisable as determined by the
Committee, but in no event shall any option be exercised within 12 months from
the date of the grant nor shall the term of the option extend beyond 10 years
from the date of such grant. However, in the event there is a
"Change-in-Control" of the Company, as defined in Appendix "A" attached hereto,
all outstanding options, which are not yet vested, shall be fully vested and
subject to exercise.
(b) An option shall be exercised only by written notice to the Company,
for any or all full shares as to which the option has become exercisable.
(c) The purchase price of the shares, as to which an option is
exercised, shall be paid for in cash at the time of exercise, or for such other
consideration, or upon such other terms and conditions as the Committee may
approve.
(d) Except as provided in paragraphs 10 and 11, no option may be
exercised unless the holder thereof is then an employee of the Company at the
time of such exercise.
6. EFFECTIVE DATE.
- ------------------------
The Plan shall become effective upon adoption by the Board and
confirmation of the Company's Plan of Reorganization by the Bankruptcy Court.
The Plan shall terminate and no new options shall be awarded under the Plan
after July 31, 2006.
2
<PAGE> 3
7. LIMITS ON AWARDS.
- --------------------------
The maximum number of options which may be granted under the Plan is
583,500 and the maximum number of shares of common stock of the Company which
may be issued under the Plan is 583,500. Any forfeited or canceled options,
shall be available for future grants.
8. DILUTION.
- ------------------
In the event of a stock split, stock dividend, reclassification,
reorganization, recapitalization, merger, consolidation, exchange of shares, or
any other capital adjustment of shares of common stock of the Company, the
number of options of a Participant and the maximum number of options and shares
of common stock provided in paragraph 7 shall be adjusted in the same manner as
shares of the Company's common stock. Any fractional shares resulting from such
adjustments shall be eliminated.
9. TRANSFERABILITY.
- -------------------------
Any option arising under the Plan shall not be transferable except by
will or the laws of descent and distribution. Options may be exercised during
the life time of the Participant, only by the Participant or by his guardian or
legal representative.
10. TERMINATION OF EMPLOYMENT.
- -----------------------------------
In the event a Participant leaves the employ of the Company by
voluntary resignation or is terminated for cause, all unexpired options granted
to that Participant under the Plan shall expire and be forfeited effective on
the date of such resignation or termination. In the event a Participant leaves
the employ of the Company due to any other involuntary termination of
employment, death or disability, the options for such Participant shall be
deemed to expire and be forfeited on the 120th day following such death,
disability, or involuntary termination of employment.
11. SECURITIES ACT OF 1933.
- --------------------------------
Upon issuance of common stock of the Company of the Participant, his
heirs or representative, the recipient of such stock may be required to
represent that the shares of stock are taken for investment and not resale and
make such other representations as may be necessary to qualify the issuance of
the shares as exempt from the Securities Act of 1933 or to permit registration
of the shares and shall represent that he or she shall not dispose of such
shares in violation of the Securities Act of 1933 and the Securities and
Exchange Act of 1934. The Company reserves the right to place a legend on any
stock certificate issued pursuant to the Plan to assure compliance with this
paragraph. No shares of
3
<PAGE> 4
commons stock of the Company shall be required to be distributed until the
Company shall have taken such action, if any, as is then required to comply with
the provisions of the Securities Act of 1933 or any other then applicable
securities law or regulation of any stock exchange.
12. WITHHOLDING OF TAX.
- ----------------------------
Participants under the Plan shall be responsible for payment to the
Company of the amount of any tax required by any governmental authority to be
withheld and paid over by the Company to such governmental authority for the
account of the person entitled to such option.
13. TERMINATION AND AMENDMENT OF PLAN.
- -------------------------------------------
The Committee may at any time suspend, terminate, modify or amend the
Plan. To the extent required by law, any modification, which shall materially
increase the benefits accruing to Participants, the number of options to
purchase shares which may be issued under the Plan or materially modify the
requirements as to eligibility for participation in the Plan shall become
effective only by affirmative vote of the holders of the majority of the
outstanding shares of the common stock of the Company. No termination or
amendment of the Plan may, without the consent of a Participant, adversely
affect the rights of such Participant.
DATED: JULY 25, 1996
HOUSE OF FABRICS, INC.
BY: /s/ Gary L. Larkins
-----------------------------
ITS PRESIDENT, GARY L. LARKINS
AND: /s/ Marvin W. Maltzman
-----------------------------
ITS SECRETARY, MARVIN S. MALTZMAN
4
<PAGE> 5
APPENDIX "A"
------------
A "Change in Control" shall have occurred if, with or without consent of the
Board of Directors, (i) any person, enterprise, group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) or other entity shall become the beneficial owner (within
the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of at least 33.3% of the outstanding stock of the Company entitled
to vote generally for the election of directors, or (ii), at any time fewer than
51% of the members of the Board of Directors of the Company shall be persons who
were either nominated for election by the Board of Directors, or were elected by
the Board of Directors; provided, however, that for purposes of determining
whether a majority of the Board of Directors of the Company has approved such
nomination or election, there shall be excluded any individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest or other actual or threatened solicitation of proxies or
consents by or on behalf of a person other than the Board of Directors of the
Company, or (iii), there shall be a sale of all or substantially all of the
Company's assets or the Company shall merge or consolidate with another
corporation and the stockholders of the Company immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in such transaction (or of the parent
corporation of the purchasing or surviving corporation), possessing more than
50% of the voting power (for the election of directors generally) of the
outstanding stock of that corporation, which ownership shall be measured without
regard to any stock of the purchasing, surviving or parent corporation owned by
the stockholders of the Company before the transaction.
5
<PAGE> 1
Exhibit 14
HOUSE OF FABRICS
----------------
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
-----------------------------------------
1. PURPOSE OF THE DIRECTORS PLAN.
- ---------------------------------------
The House of Fabrics Non-Employee Directors' Stock Option Plan
(hereafter the "Directors Plan") is to provide a means by which House of
Fabrics, Inc. and its subsidiaries (hereafter the "Company") shall be able to
attract and retain experienced and qualified non-employee directors and provide
such directors with an opportunity to participate in the increased value of the
Company, which their efforts, initiative and skill have helped produce.
2. ADMINISTRATION.
- ------------------------
Subject to the express provisions of the Directors Plan, the Board of
Directors of the Company (the "Board") also shall have complete authority to
interpret the Directors Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations necessary or
advisable for the administration of the Directors Plan. All determinations of
the Board on the matters referred to in this paragraph 2 shall be conclusive.
3. PARTICIPANTS
- ---------------------
Participation in the Directors Plan ("Participants") shall be limited
to the non-employee directors of the Company.
4. TERM OF GRANTS
- -----------------------
The term of each stock option (hereafter "Option") granted shall be ten
(10) years from date of grant, subject to earlier termination, as provided in
Paragraph 11.
5. STOCK OPTION AWARDS.
- -----------------------------
The purchase price of the Common Stock covered by each option shall be
100% of the fair market value of the Common Stock on the date the option is
granted. For purposes of this Directors Plan, the "fair market value" of the
Common Stock on any date shall be the closing price of the Common Stock as
1
<PAGE> 2
reported on the NASDAQ National Market Quotation System for that date, or on any
other recognized quotation system. If the closing price is reported as "bid" and
"asked" the "fair market value" shall be the mid point between the "bid" and
"asked" price. If there are no sales on such date, the next trading day on which
there are sales shall be used to establish the purchase price. Such price shall
be subject to adjustment as provided in paragraph 9 hereof.
6. EXERCISE OF OPTIONS.
- -----------------------------
(a) Options granted under the Directors Plan shall in no event be
exercised within 12 months from the date of the grant. However, in the event
there is a "Change-in-Control" of the Company, as defined in Appendix "A"
attached hereto, all outstanding options, which are not yet vested, shall be
fully vested and subject to exercise.
(b) An option shall be exercised only by written notice to the Company,
for any or all full shares as to which the option has become exercisable.
(c) The purchase price of the shares, as to which an option is
exercised, shall be paid for in cash at the time of exercise, or for such other
consideration, or upon such other terms and conditions as the Board may approve.
(d) Except as provided in paragraphs 10 and 11, no option may be
exercised unless the holder thereof is then a director of the Company at the
time of such exercise.
7. EFFECTIVE DATE.
- ------------------------
The Directors Plan shall become effective upon adoption by the Board
and confirmation of the Company's Plan of Reorganization by the Bankruptcy
Court. The Directors Plan shall terminate and no new options shall be granted
under the Directors Plan after July 31, 2006.
8. LIMITS ON AWARDS.
- --------------------------
The maximum number of options which may be granted under the Directors
Plan is 84,375 and the maximum number of shares of common stock of the Company
which may be issued under the Directors Plan is 84,375. Any forfeited or
canceled options, shall be available for future grants.
2
<PAGE> 3
9. DILUTION.
- ------------------
In the event of a stock split, stock dividend, reclassification,
reorganization, recapitalization, merger, consolidation, exchange of shares, or
any other capital adjustment of shares of common stock of the Company, the
number of options of a Participant and the maximum number of options and shares
of common stock provided in paragraph 8 shall be adjusted in the same manner as
shares of the Company's common stock. Any fractional shares resulting from such
adjustments shall be eliminated.
10. TRANSFERABILITY.
- -------------------------
Any option arising under the Directors Plan shall not be transferable
except by will or the laws of descent and distribution. Options may be exercised
during the life time of the Participant, only by the Participant or by his
guardian or legal representative.
11. TERMINATION.
- ---------------------
In the event a Participant is no longer a director of the Company,
except by death or disability, all unexercised options granted to a director
under the Directors Plan shall expire and be forfeited effective on the date
such directorship terminates. In the event a director dies or is disabled and
can no longer serve as a director, the options for such director shall be deemed
to expire and be forfeited on the 120th day following such death or disability.
12. SECURITIES ACT OF 1933.
- --------------------------------
Upon issuance of common stock of the Company of the Participant, his
heirs or representative, the recipient of such stock may be required to
represent that the shares of stock are taken for investment and not resale and
make such other representations as may be necessary to qualify the issuance of
the shares as exempt from the Securities Act of 1933 or to permit registration
of the shares and shall represent that he or she shall not dispose of such
shares in violation of the Securities Act of 1933 and the Securities and
Exchange Act of 1934. The Company reserves the right to place a legend on any
stock certificate issued pursuant to the Directors Plan to assure compliance
with this paragraph. No shares of common stock of the Company shall be required
to be distributed until the Company shall have taken such action, if any, as is
then required to comply with the provisions of the Securities Act of 1933 or any
other then applicable securities law or regulation of any stock exchange.
3
<PAGE> 4
13. WITHHOLDING OF TAX.
- ----------------------------
Participants under the Directors Plan shall be responsible for payment
to the Company of the amount of any tax required by any governmental authority
to be withheld and paid over by the Company to such governmental authority for
the account of the person entitled to such option.
14. AMENDMENT OF DIRECTORS PLAN.
- -------------------------------------
(a) The Board may at any time suspend, terminate, modify or amend the
Directors Plan. To the extent required by law, any modification, which shall
materially increase the benefits accruing to Participants, the number of options
to purchase shares which may be issued under the Directors Plan or materially
modify the requirements as to eligibility for participation in the Directors
Plan shall become effective only by affirmative vote of the holders of the
majority of the outstanding shares of the common stock of the Company. No
termination or amendment of the Directors Plan may, without the consent of a
Participant, adversely affect the rights of such Participant.
(b) Notwithstanding anything to the contrary in the Directors Plan,
after the Transition Period (as defined below) with respect to Rule 16b-3
promulgated under the Securities Exchange Act of 1934 ("Rule 16b-3"), the Board
may authorize discretionary grants of Options to Participants subject only to
the limitations under paragraphs 4, 8, 10, and 11 hereof. "Transition Period"
means the period ending on the day the Company elects or is required to become
subject to Rule 16b-3 as amended in 1996.
15. CURRENT STOCK OPTION GRANT.
- ------------------------------------
Upon the effective date of the Directors Plan, a grant of 18,750 stock
options to the following non-employee directors: R.N. Hankin, H. Michael Hecht,
Mitchell G. Lynn is hereby approved. Upon the appointment of two new
non-employee directors an initial grant of 9,375 stock options is hereby
approved. Said options are to vest as follows: after 18 months 25%; after 24
months 50%; and after 36 months 100%.
4
<PAGE> 5
16. FUTURE STOCK OPTION GRANTS.
- ------------------------------------
(a) APPOINTMENT. Except as determined by the Board as set forth in the
paragraph 14(b) hereof, upon the appointment of new or additional non-employee
directors a grant of 9,375 stock options for each new or additional non-employee
director is authorized at the "fair market value" of House of Fabrics stock on
the date of such appointment, which option shall be for a ten-year term and vest
equally over a three-year period.
(b) ELECTION. Except as determined by the Board as set forth in the
paragraph 14(b) hereof, upon election of an incumbent non-employee director a
grant of 1,875 stock options is authorized at the "fair market value" of House
of Fabrics stock on the date of such election, which option shall be for a
ten-year term and vest equally over a three-year period. The election of an
incumbent director shall occur on the day of the Annual Stockholders Meeting.
DATED: JULY 25, 1996
HOUSE OF FABRICS, INC.
BY: /s/ Gary L. Larkins
--------------------------
Its President, Gary L. Larkins
AND: /s/ Marvin S. Maltzman
--------------------------
Its Secretary, Marvin S. Maltzman
5
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APPENDIX "A"
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A "Change in Control" shall have occurred if, with or without consent of the
Board of Directors, (I) any person, enterprise, group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) or other entity shall become the beneficial owner (within
the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of at least 33.3% of the outstanding stock of the Company entitled
to vote generally for the election of directors, or (ii), at any time fewer than
51% of the members of the Board of Directors of the Company shall be persons who
were either nominated for election by the Board of Directors, or were elected by
the Board of Directors; provided, however, that for purposes of determining
whether a majority of the Board of Directors of the Company has approved such
nomination or election, there shall be excluded any individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest or other actual or threatened solicitation of proxies or
consents by or on behalf of a person other than the Board of Directors of the
Company, or (iii), there shall be a sale of all or substantially all of the
Company's assets or the Company shall merge or consolidate with another
corporation and the stockholders of the Company immediately prior to such
transaction do not own, immediately after such transaction, stock of the
purchasing or surviving corporation in such transaction (or of the parent
corporation of the purchasing or surviving corporation), possessing more than
50% of the voting power (for the election of directors generally) of the
outstanding stock of that corporation, which ownership shall be measured without
regard to any stock of the purchasing, surviving or parent corporation owned by
the stockholders of the Company before the transaction.
6
<PAGE> 1
EXHIBIT 15
LOGO DONALD, LUFKIN & JENRETTE
Donaldson, Lufkin & Jenrette Securities Corporation
2121 Avenue of the Stars, Los Angeles, CA 90067-5014
February 1, 1998
Board of Directors
House of Fabrics, Inc.
13400 Riverside Drive
Sherman Oaks, CA 91423
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of House of Fabrics, Inc. (the "Company") of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Merger, dated as of February 1, 1998 (the "Agreement"), by
and among Fabri-Centers of America, Inc. ("Fabri-Centers"), the Company and FCA
Acquisition Corporation ("Merger Sub"), a wholly owned subsidiary of
Fabri-Centers.
Pursuant to the Agreement, Merger Sub will commence a tender offer for any
and all outstanding shares of the Company's common stock at a price of $4.25 per
share. The tender offer is to be followed by a merger of Merger Sub with and
into the Company in which the shares of all stockholders who did not tender will
be converted into the right to receive an amount in cash equal to the price per
share paid in the tender offer.
In arriving at our opinion, we have reviewed the Agreement as well as
financial and other information that was publicly available or furnished to us
by the Company including information provided during discussions with
management. Included in the information provided during discussions with
management were certain financial projections of the Company for the period
beginning fiscal year 1998 and ending fiscal year 2003 provided by the
management of the Company and certain information concerning the Company's
near-term liquidity concerns. In addition, we have compared certain financial
and securities data of the Company with various other companies whose securities
are traded in public markets, reviewed the historical stock prices and trading
volumes of the common stock of the Company, reviewed prices and premiums paid in
certain other business combinations and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion. We were not requested to, nor did we, solicit the interest of any other
party in acquiring the Company or assist the Company in exploring alternative
strategies since earlier in 1997. We also did not participate in the
negotiations of the terms of the proposed transaction with Fabri-Centers.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. We have not assumed any
responsibility for making an independent evaluation of any assets or liabilities
or for making any independent verification of any of the information reviewed by
us. We have relied as to certain legal matters on advice of counsel to the
Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the proposed transaction and the other business strategies being
considered by the Company's Board of Directors, nor does it address the Board's
decision to proceed with the proposed transaction. Our opinion does not
constitute a recommendation to any stockholder as
<PAGE> 2
to whether such stockholder should tender in the tender offer or how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of business
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for the Company in the past and has been compensated
for such services.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the consideration to be received by the stockholders of the
Company pursuant to the Agreement is fair to such stockholders from a financial
point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JOHN B. MAIER, II
-------------------------------------
John B. Maier, II
Senior Vice President
