<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998 Commission File No. 1-6695
- ------------------------------------------ --------------------------
FABRI-CENTERS OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-0720629
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5555 Darrow Road
Hudson, Ohio 44236
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 656-2600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class on Which Registered
- ----------------------------------------- ------------------------------------
Class A Common Stock, Without Par Value New York Stock Exchange
Class B Common Stock, Without Par Value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ X ]
As of April 9, 1998, there were 9,498,488 shares of Class A Common Stock and
9,347,162 shares of Class B Common Stock outstanding and the aggregate market
value of these Common Shares (based upon the closing price on April 9, 1998 of
these shares on the New York Stock Exchange) of the Registrant held by persons
other than affiliates of the Registrant was approximately $422,557,000.
Documents incorporated by reference:
Portions of the following documents are or will be incorporated by
reference:
Proxy Statement for 1998 Annual Meeting of Shareholders--Items 10, 11 and 12 of
Part III.
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PART I
Except as otherwise stated, the information contained in this report is given as
of January 31, 1998, the end of the Registrant's latest fiscal year. The term
"Registrant" or "Company" as used herein refers to Fabri-Centers of America,
Inc. and its subsidiaries.
ITEM 1. BUSINESS
--------
The Registrant, an Ohio corporation with executive offices in Hudson, Ohio, is
the nation's largest retailer serving the fabric and craft industry. The
Registrant was incorporated in February 1951; however, the business conducted by
its predecessors began in 1943 when the first store was opened in Cleveland,
Ohio offering fabrics and notions for sale under the name "Cleveland Fabric
Shops." The Registrant's stores do business under the names of "Jo-Ann Fabrics
and Crafts," "Jo-Ann etc," "Cloth World" and "New York Fabrics."
At January 31, 1998, the Registrant operated 903 stores in 48 states offering a
wide variety of competitively priced items, including fashion, decorator,
quilting and craft fabrics, notions, patterns, craft components, seasonal
merchandise and silk and dried flowers. The Registrant had 832 stores in
operation for the full fiscal year, with average sales of $1,051,000 per store.
Sales are made for cash and through the use of various bank charge plans
including a private label charge card.
In fiscal 1996, the Registrant opened an expanded research and development store
in Hudson, Ohio under the name of Jo-Ann etc (experience the creativity). The
45,000 square foot store is about three times larger than the Registrant's
standard new store format. The Jo-Ann etc store offers a significantly more
extensive fabric and craft assortment, a wide array of services and numerous
merchandise demonstrations and classes. The Company opened six additional Jo-Ann
etc stores averaging 46,000 square feet in a variety of geographic markets
during fiscal 1998.
Subsequent to the end of fiscal 1998, the Company acquired, through a cash
tender offer, 77.2 percent of the outstanding common stock of House of Fabrics,
Inc. ("HOF"), for $4.25 per share. A special meeting of the shareholders of HOF
was held on April 21, 1998 at which time the merger of HOF with the Company was
approved. The shares of HOF common stock not already owned by the Company were
canceled and converted into the right to receive $4.25 in cash. The total value
of the transaction, including debt and other long-term liabilities, is
approximately $96,000,000. The funds used to acquire HOF were provided by
internally generated funds and borrowings under a revolving credit facility. The
acquisition will be recorded using the purchase method, and accordingly, the
results of operations of HOF will be included in the Company's consolidated
financial statements after March 9, 1998, the date the tender offer closed. HOF
operates 261 fabric and craft stores, concentrated in the western United States,
under the names of House of Fabrics, SoFro Fabrics, Fabricland and Fabric King.
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The following is a schedule of the number of stores operated by state at January
31, 1998:
<TABLE>
<S> <C> <C> <C>
Alabama.................. 6 Montana.................... 4
Alaska................... 4 Nebraska................... 1
Arizona.................. 14 Nevada..................... 3
Arkansas................. 3 New Hampshire.............. 8
California............... 64 New Jersey................. 14
Colorado................. 14 New Mexico................. 4
Connecticut.............. 14 New York................... 45
Delaware................. 3 North Carolina............. 7
Florida.................. 64 North Dakota............... 3
Georgia.................. 18 Ohio....................... 85
Idaho.................... 4 Oklahoma................... 8
Illinois................. 46 Oregon..................... 16
Indiana.................. 33 Pennsylvania............... 56
Iowa..................... 4 Rhode Island............... 2
Kansas................... 8 South Carolina............. 2
Kentucky................. 7 South Dakota............... 2
Louisiana................ 11 Tennessee.................. 9
Maine.................... 5 Texas...................... 74
Maryland................. 26 Utah....................... 5
Massachusetts............ 22 Vermont.................... 4
Michigan................. 61 Virginia................... 25
Minnesota................ 24 Washington................. 26
Mississippi.............. 1 West Virginia.............. 7
Missouri................. 14 Wisconsin.................. 23
</TABLE>
The following table sets forth the number of stores opened, expanded or
relocated, closed or acquired by the Registrant during each of the past five
fiscal years:
<TABLE>
<CAPTION>
Expanded Stores in
Fiscal Stores or Stores Stores Operation
Year Opened Relocated Closed Acquired at Year end
- ------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
1994 6 21 44 --- 655
1995 10 28 43 342(A) 964
1996 14 48 42 --- 936
1997 13 37 35 --- 914
1998 24 42 35 --- 903
<FN>
(A) In October 1994, the Registrant acquired Cloth World, a division of Brown
Group, Inc., a chain of fabric stores located primarily in the southern half of
the United States.
</TABLE>
The Registrant's stores are located primarily in high-traffic strip shopping
centers and average approximately 13,400 square feet. At the end of fiscal 1998,
92 percent of the Registrant's stores were
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over 9,000 square feet. In fiscal 1999, the Registrant expects to open
approximately 17 Jo-Ann etc megastores, open approximately 20 traditional
stores, relocate approximately another 25 traditional stores to larger locations
and close approximately 35 stores that are small or under-performing. In
addition, the Registrant will close approximately 90 overlap locations as a
result of the 261-store House of Fabrics acquisition. The Company expects to
have 1,070 to 1,080 store locations open at the end of fiscal 1999.
The Registrant owns substantially all of the fixtures in its stores. The
Registrant believes that it effectively utilizes its selling space and that its
equipment is maintained and suitable for its requirements. It is the Company's
practice to transfer fixtures and inventory from closed stores to new or
existing stores. During fiscal 1998, the average investment in each new
traditional store was approximately $135,000 for leasehold improvements and
additional fixtures. It is the Registrant's policy to charge operations for
pre-opening expenses as incurred, which is generally the same period as the
store is opened. Store pre-opening costs consist chiefly of the cost of training
sales associates, advertising, stocking and incidental supplies.
PRODUCT SELECTION
Each of the Registrant's stores offer a wide variety of merchandise for
customers to make their own clothing, or to complete home decorating and craft
projects. The stores also feature seasonal and holiday merchandise. The products
offered by major category are as follows:
Fabrics, including a wide assortment of apparel fabrics, quilting, crafting
fabrics, drapery and upholstery.
Notions, including cutting implements, trimmings, buttons, threads, ribbon,
zippers and sewing accessories such as needles, pins and elastic.
Craft supplies, including those used for stitchery, stenciling,
woodworking, doll making, fabric painting, jewelry making, and artificial floral
arranging.
Seasonal merchandise, including items for Easter, Halloween, Thanksgiving
and the Christmas holidays.
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The following table shows the Company's sales by principal product as a percent
of total sales:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------
January 31, February 1, January 27,
Principal Product 1998 1997 1996
- ----------------------- -------------------- ----------------- -------------
<S> <C> <C> <C>
Fabrics 47.8% 47.1% 48.3%
Notions 20.9% 21.4% 21.9%
Crafts and Floral 15.1% 16.8% 16.3%
Seasonal 12.3% 10.8% 9.4%
Other 3.9% 3.9% 4.1%
</TABLE>
ADVERTISING
The Company focuses its advertising on direct mail circulars and to a lesser
extent on newspaper advertising. The Company has found full-color circulars
mailed about 20 times a year to its most frequent customers to be an effective
advertising medium. Each circular features numerous products offered at
competitive prices to emphasize the wide selection of merchandise available in
the stores.
PURCHASING AND DISTRIBUTION
Substantially all of the merchandising functions, including purchasing,
allocation and distribution are centralized at the Registrant's corporate
offices. This centralized control system allows store managers and sales
associates the opportunity to devote maximum effort toward sales of merchandise
and customer service. The centralized merchandising departments negotiate with
vendors to take advantage of volume purchase discounts and to control product
mix and quality. The Company operates one distribution service center located at
its Hudson, Ohio facility. About 1,200,000 square feet of the facility is
utilized as a distribution center. Approximately 78 percent of the merchandise
sold in its stores is handled through this facility with the remainder shipped
directly to the stores from the vendors. Each store usually receives a weekly
shipment from the distribution center.
STORE OPERATIONS
Each of the Registrant's stores employs a store manager, merchandise manager, an
operations manager (in some locations), and full-time and part-time sales
associates. Each store is under the supervision of a district manager who
reports to a regional director. The Registrant's centralized human resource
department and field management organization are responsible for recruiting and
training new store managers. A prospective store manager is assigned to an
existing store as a manager-trainee for several weeks and receives in-depth
on-the-job training. In addition, periodic training seminars are conducted for
existing store managers. Sales associates are trained on the job.
INFORMATION TECHNOLOGY
The Registrant utilizes point of sale registers and scanning devices to record
the sale of merchandise at a stock keeping unit (SKU) level at the stores. The
Registrant also utilizes hand held radio frequency
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terminals for a variety of store tasks including price look-up, ordering and
fabric sales processing. Register transactions are polled nightly and interfaced
with the Company's sales and merchandising systems.
The "Year 2000 Issue" refers to the inability of computers and related software
to correctly interpret and process Year 2000 dated transactions. The software
problem results from a memory saving practice of using two digits instead of
four to denote years in a program. Computer systems that are not Year 2000
compliant may not be able to be relied upon to process data accurately for
transactions dated after the year 1999.
The Company has developed plans to address possible exposures related to the
impact on its computer systems of the Year 2000 Issue. Significant financial and
operational systems have been assessed and detailed plans have been developed to
modify or replace the affected systems. The replaced systems will be part of a
significantly larger project of implementing an enterprise-wide system over the
next several years at a total cost of approximately $30,000,000. The
enterprise-wide systems project will fully integrate financial and operational
systems, creating increased reliability and usefulness of Company data in
addition to resolving certain Year 2000 issues. Expenditures for modifying
existing software for Year 2000 issues were approximately $500,000 in fiscal
1998 and are estimated to total $2,500,000 over the next two years. Maintenance
and modification costs will be expensed as incurred, while the costs of new
information technology will be capitalized and amortized in accordance with
Company policy and generally accepted accounting principles. The Company expects
that it will be able to modify or replace the affected systems in time to avoid
any material disruption to its operations; however, unforeseen developments or
delays could cause this expectation to change. Also, in the event that any of
the Company's significant suppliers do not successfully achieve timely Year 2000
compliance, the Company's operations could be adversely affected.
STATUS OF PRODUCT OR LINE OF BUSINESS
During the last fiscal year, there has been no public announcement nor is there
a public announcement anticipated, about either a new product line or line of
business involving the investment of a material portion of the Registrant's
assets.
SOURCE AND AVAILABILITY OF RAW MATERIALS
There are various sources of supply available for each category of merchandise
sold by the Registrant. The Registrant has no significant long-term purchase
commitments with any of its suppliers. The Registrant imports approximately 14
percent of its purchases, which are bought in United States currency.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS
The Registrant does business under the names "Jo-Ann Fabrics and Crafts,"
"Jo-Ann etc," "Cloth World" and "New York Fabrics." Other than the names, the
Registrant does not own material patents, trademarks, licenses, franchises,
and/or concessions.
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SEASONAL BUSINESS
The Company's business exhibits seasonality which is typical for most retail
companies, with much stronger sales in the second half of the year than the
first half of the year. In general, net income is highest during the months of
September through December, when sales volumes provide significant operating
leverage. Conversely, net income is substantially lower during the relatively
low-volume sales months of January through August. Capital requirements needed
to finance the Company's operations fluctuate during the year and typically
reach their highest levels during the second and third fiscal quarters as the
Company increases its inventory in preparation for its peak selling season.
DEPENDENCE ON SINGLE OR FEW CUSTOMERS
The Registrant is engaged in the retail sale of merchandise to the general
public and; accordingly, no part of the business of the Registrant is dependent
upon a single customer or a few customers. During the fiscal year ended January
31, 1998, no one store accounted for more than 1 percent of total sales.
BACKLOG OF ORDERS
The Registrant is engaged in the retail sale of merchandise to the general
public on a cash and carry basis and, accordingly, has no significant backlog of
orders.
COMPETITIVE CONDITIONS
The retail fabric and craft industry is highly competitive. The Registrant's
stores compete with other specialty fabric and craft retailers, fabric
retailers, craft retailers and mass merchants that dedicate a portion of their
selling space to a limited selection of fabrics, craft supplies and seasonal and
holiday merchandise. Some of the competitors have stores nationwide, several
operate regional chains and numerous others are local merchants. The Company
competes on the basis of assortment, price and convenience. Some of the
Registrant's competitors, particularly mass merchants, have greater financial
and other resources than the Registrant. The retail fabric industry and retail
craft industry continue to contract and consolidate. With the acquisition of
Cloth World in fiscal 1995 and House of Fabrics, Inc. in fiscal 1999, the
Registrant has become the leading national fabric and craft retailer with
approximately twice as many stores as the next largest fabric and craft retail
competitor.
RESEARCH AND DEVELOPMENT
During the three fiscal years ended January 31, 1998, the Registrant has not
incurred any material expense on research activities relating to the development
of new products or services or the improvement of existing products or services
that were company-sponsored or customer-sponsored.
ENVIRONMENTAL DISCLOSURE
The Registrant is not engaged in manufacturing. Accordingly, the Registrant does
not believe that compliance with federal, state and local provisions regulating
the discharge of material into the environment or otherwise relating to the
protection of the environment will have any material effects upon the capital
expenditures, income or competitive position of the Registrant.
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NUMBER OF EMPLOYEES
The Registrant has approximately 16,400 permanent full-time and part-time
employees, 15,200 of whom work in the Registrant's retail stores. Additional
part-time employees are hired during peak selling periods. Approximately 360
employees in the Hudson distribution center are covered by a collective
bargaining agreement with the United Steelworkers of America, Upholstery and
Allied Industries Division. This agreement expires in May 1998. The Company
expects to reach an agreement with the union that is acceptable to both the
Company and its employees. The Registrant considers its relationships with its
employees to be good.
FOREIGN OPERATIONS AND EXPORT SALES
Although the Registrant imports a significant percentage of its merchandise
from foreign countries, the loss of any sources of supply from any foreign
country would not be material to the business of the Registrant. The Registrant
had no export sales.
ITEM 2. PROPERTIES
----------
The Registrant's corporate office and distribution center are located in an
approximately 1,400,000 square foot Registrant-owned facility on approximately
120 acres in Hudson, Ohio. The distribution operation occupies approximately
1,200,000 square feet and an additional 125,000 square feet are used as the
Registrant's corporate office and a "laboratory" store. The Registrant leases
the remainder of the facility to unrelated third parties. The Registrant
believes that the facility will meet substantially all of its requirements for
the foreseeable future, although some distribution operations may be conducted
out of rented warehouse space. Adjacent to the Hudson facility, the Registrant
owns approximately 100 acres of land.
The remaining properties occupied by the Registrant are leased retail store
facilities that are located primarily in high-traffic shopping centers. All
store leases are operating leases, generally for periods up to ten years with
renewal options for up to twenty years. Certain retail store leases contain
escalation clauses and in some cases provide for contingent rents based on a
percent of sales in excess of defined minimums. During the fiscal year ended
January 31, 1998, the Registrant incurred $73,168,000 of expenses for store
rentals.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On February 18, 1997, the Company settled enforcement proceedings by the
Securities and Exchange Commission (the "SEC") involving the Company's financial
statements for its fiscal year ended February 1, 1992 (fiscal 1992), the use of
those statements in connection with the Company's sale in March 1992 of its
6-1/4% Convertible Subordinated Debentures due 2002 (subsequently redeemed in
June 1997), the Company's financial statements for the first three quarters of
fiscal 1993, and the adequacy of certain disclosures relating to such periods.
The SEC's principal allegation was that the Company materially overstated
earnings for such periods because of the manner in which the Company calculated
one of its inventory-related reserves thereby allegedly violating certain
federal securities laws, including provisions regarding anti-fraud, reporting,
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internal controls and books and records. The accounting and disclosure issues
that were raised are not related to any current period, and no current
accounting policies or financial statements were in question. Concurrently with
the settlement, the SEC filed a civil action against the Company and its former
chief financial officer and former controller in the United States District
Court for the District of Columbia. Without admitting or denying the SEC's
allegations, the Company consented to the entry of an order enjoining it from
violations of the federal securities laws and agreed to pay $3,280,000 in
settlement of the action against the Company. The SEC's litigation is
proceeding against the former officers.
Concurrently with the Company's settlement, Alan Rosskamm, CEO of the Company,
consented to a separate SEC administrative cease and desist order settling
certain allegations by the SEC, without admitting or denying the allegations.
The SEC contended that Mr. Rosskamm violated certain federal securities laws as
a result of his not making adequate inquiry of his financial staff before
signing management representation letters given to the Company's auditors in
connection with the 1992 Debenture offering, and as a result of signing the
Company's Form 10-Q for the quarter ended May 2, 1992.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of stockholders during the Company's fourth
quarter.
Executive Officers of the Registrant
------------------------------------
The information below is included in this report pursuant to instruction 3 to
item 401 (b) of Regulation S-K.
The Executive Officers of the Registrant are as follows:
<TABLE>
<CAPTION>
Name Executive Officers Age
- ----------------- ------------------------------------------------------- --------------
<S> <C> <C>
Alan Rosskamm Mr. Rosskamm currently serves as Chairman of the 48
Board, President and Chief Executive Officer of the
Company. He has served as President since April 1993,
Chairman of the Board since July 1992, and Chief
Executive Officer for more than five years.
Mr. Rosskamm is also currently a member of the Board
of Directors of Charming Shoppes, Inc., a women's
apparel retailer. Mr. Rosskamm has been a Director of
the Company since 1985.
</TABLE>
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<TABLE>
<S> <C> <C>
Brian P. Carney Mr. Carney has served as Executive Vice President and 37
Chief Financial Officer of the Company since October
1997. Prior to joining the Company, he served as Senior
Vice President-Finance, from May 1996 to August 1997, and
Vice President and Controller, from June 1992 to May 1996,
of Revco D.S., Inc. (previously a public company).
David E. Bolen Mr. Bolen has served as Executive Vice 46
President-Business Development of the Company since August
1997. He served as Senior Vice President-General Manager
Jo-Ann etc of the Company from March 1997 to August 1997.
Prior to joining the Company, Mr. Bolen served as
Executive Vice President-Operations of Michaels Stores,
from July 1994 to August 1996, and as Executive Vice
President, Chief Operation Officer and Director of
Leewards Creative Crafts, from January 1986 to July 1994.
Jane Aggers Ms. Aggers has served as Executive Vice 49
President-Merchandising, Marketing, Logistics and
Inventory Management of the Company since April 1993.
Prior to April 1993, she served as Senior Vice
President-General Merchandise Manager of the Company from
May 1990 to April 1993.
John Hermsen Mr. Hermsen has served as Executive Vice President-Stores 51
of the Company since August 1995. Prior to joining the
Company, he served as Executive Vice President-Store
Operations and Distribution of Ames Department Stores,
Inc., from June 1993 to July 1995, and as Vice
President-Stores of Shopko Stores, Inc., from May 1986 to
June 1993.
</TABLE>
Executive officers are elected by and serve at the discretion of the Board of
Directors until their successors are duly elected and qualified. Betty Rosskamm,
a Senior Vice President, Secretary and Director of the Registrant, is the mother
of Alan Rosskamm.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS
-------
The Company's Class A and Class B shares of common stock are traded on the New
York Stock Exchange under the ticker symbols FCA.A and FCA.B, respectively. The
number of Class A and Class B Common shareholders of record as of April 9, 1998
were 807 and 763, respectively.
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The quarterly high and low closing stock prices for the fiscal years 1998 and
1997 are presented in the table below:
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
- ---------------------------------------------------------------------------------------------
FISCAL QUARTER ENDED HIGH LOW HIGH LOW
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 31, 1998 25 20 3/16 21 7/8 19 5/8
November 1, 1997 25 15/16 21 5/8 22 9/16 20 1/4
August 2, 1997 27 9/16 21 1/8 24 3/8 19 1/2
May 3, 1997 $ 23 $ 15 3/4 $ 21 $ 15
FISCAL QUARTER ENDED HIGH LOW HIGH LOW
- ---------------------------------------------------------------------------------------------
February 1, 1997 16 7/8 12 5/8 15 3/4 12 5/8
October 26, 1996 15 3/8 12 1/2 14 3/8 12 1/8
July 27, 1996 16 7/8 10 1/4 15 3/4 10
April 27, 1996 $ 14 1/4 $ 9 7/8 $ 12 3/4 $ 9 7/8
</TABLE>
The Registrant did not pay dividends on its common stock during fiscal 1998 and
fiscal 1997. The Registrant's dividend policy has been to retain earnings for
the operation and growth of its business. Payments of dividends, if any, in the
future will be determined by the Board of Directors in light of appropriate
business conditions.
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
FINANCIAL SUMMARY
Fabri-Centers of America, Inc.
(Thousands of dollars, except per share data)
<TABLE>
<CAPTION>
January February January January January
31, 1, 27, 28, 29,
Years ended 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Net sales $ 974,997 $ 928,951 $ 834,617 $ 677,279 $ 582,071
Cost of goods sold 533,169 516,857 456,615 378,593 329,950
Selling, general and administrative expenses 363,112 340,909 319,913 257,185 223,385
Depreciation and amortization 21,673 21,152 18,196 14,002 12,054
Operating profit 57,043 50,033 39,893 27,499 16,682
Interest expense, net 5,874 10,668 11,982 8,418 5,547
Income from continuing operations before
income taxes 51,169 39,365 27,911 19,081 11,135
Income taxes 19,191 14,762 10,453 7,347 4,176
Income from continuing operations 31,978 24,603 17,458 11,734 6,959
Loss from discontinued operation -- -- -- -- (5,201)
Extraordinary items (1,136) -- -- -- --
Cumulative effect of accounting change -- -- -- -- 399
Net income $ 30,842 $ 24,603 $ 17,458 $ 11,734 $ 2,157
- ----------------------------------------------------------------------------------------------------------------------------------
DATA PER COMMON SHARE (a)
Income from continuing operations
- Basic $ 1.74 $ 1.37 $ 0.95 $ 0.64 $ 0.38
- Diluted 1.60 1.26 0.90 0.63 0.37
Average shares and equivalents outstanding
- Basic 18,393,827 17,930,367 18,415,419 18,313,052 18,158,254
- Diluted 20,591,880 21,215,880 19,292,842 18,748,998 18,877,498
Book value 12.83 11.13 9.79 8.79 8.19
Shares outstanding, net of treasury shares 18,766,661 17,920,641 18,486,108 18,397,822 18,194,196
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Inventories $ 294,653 $ 296,104 $ 337,974 $ 290,560 $ 224,803
Property and equipment, net 110,004 94,618 102,034 84,122 75,633
Total assets 447,775 429,180 479,648 427,304 340,373
Long-term debt including debentures 24,700 72,083 155,483 126,983 102,483
Total liabilities 206,914 229,770 298,685 265,585 191,361
Shareholders' equity 240,861 199,410 180,963 161,719 149,012
Working capital 157,242 177,047 232,157 198,247 167,455
- ----------------------------------------------------------------------------------------------------------------------------------
GENERAL STATISTICS (FROM CONTINUING
OPERATIONS)
Sales increase 5.0% 11.3% 23.2% 16.4% 1.4%
Net income increase (decrease) 30.0% 40.9% 48.8% 68.6% 34.5%
Return on sales:
Before income taxes 5.2% 4.2% 3.3% 2.8% 1.9%
After income taxes 3.3% 2.6% 2.1% 1.7% 1.2%
Return on average shareholders' equity 14.5% 12.9% 10.2% 7.6% 4.7%
Return on average net assets (b) 11.2% 7.7% 5.4% 4.2% 2.7%
Current ratio 1.95 to 1 2.25 to 1 2.80 to 1 2.56 to 1 3.09 to 1
Capital expenditures $ 36,564 $ 13,191 $ 34,732 $ 11,740 $ 8,491
Long-term debt to total capitalization 9.3% 26.6% 46.2% 44.0% 40.7%
Times interest earned (c) 9.7x 4.7x 3.3x 3.3x 3.0x
Number of stores in operation 903 914 936 964 655
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The number of shares and per share data have been restated to give effect
to changes required by Statement of Financial Accounting Standards No.
128 "Earnings per Share", and to the Recapitalization Amendment,
effective August 2, 1995, which has been accounted for as if it were a
two-for-one stock split.
(b) Ratio of income from continuing operations to average total assets less
current liabilities.
(c) Ratio of operating profit to net interest expense.
(d) Not meaningful.
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
January February February January January
30, 1, 2, 27, 28,
1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$ 574,120 $ 441,978 $ 368,608 $ 323,352 $ 281,429
329,058 233,580 202,758 176,278 154,331
221,185 171,750 138,537 123,861 111,517
10,076 5,535 5,567 4,761 4,361
13,801 31,113 21,746 18,452 11,220
5,522 2,870 3,599 4,049 2,747
8,279 28,243 18,147 14,403 8,473
3,105 10,166 6,806 5,478 3,048
5,174 18,077 11,341 8,925 5,425
(2,994) (564) (117) (165) (332)
2,052 --- --- --- ---
--- --- --- --- ---
$ 4,232 $ 17,513 $ 11,224 $ 8,760 $ 5,093
- ----------------------------------------------------------------------------------------------
$ 0.28 $ 1.04 $ 0.75 $ 0.59 $ 0.36
0.27 0.98 0.72 0.58 0.36
18,656,450 17,456,150 15,215,008 15,155,344 15,069,456
19,263,074 18,397,584 15,782,426 15,493,210 15,097,270
8.00 7.67 5.16 4.50 3.92
18,554,512 18,584,058 14,915,306 15,150,423 15,192,798
- ----------------------------------------------------------------------------------------------
$ 223,648 $ 183,315 $ 135,242 $ 104,723 $ 95,502
77,914 54,640 33,928 25,131 21,629
351,619 284,060 204,593 157,790 134,513
104,083 40,100 52,100 28,600 23,043
203,145 141,537 127,610 89,564 74,961
148,474 142,523 76,983 68,226 59,552
161,627 121,953 87,452 67,161 58,280
- ----------------------------------------------------------------------------------------------
29.9 % 19.9% 14.0% 14.9% 9.7 %
(71.4)% 59.4% 27.1% 64.5% (d)
1.4 % 6.4% 4.9% 4.5% 3.0 %
0.9 % 4.1% 3.1% 2.8% 1.9 %
3.6 % 16.5% 15.6% 14.0% 9.5 %
2.3% 11.3% 9.8% 9.7% 6.2%
2.73 to 1 2.14 to 1 2.22 to 1 2.15 to 1 2.18 to 1
$ 32,295 $ 18,509 $ 14,654 $ 8,998 $ 4,130
41.2 % 22.0% 40.4% 29.5% 27.9 %
2.5x 10.8x 6.0x 4.6x 4.1x
693 664 617 615 627
- ----------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
The following table shows the percentage of net sales for the periods indicated
and the percentage change in dollar amounts of certain items included in the
Consolidated Statements of Income.
<TABLE>
<CAPTION>
Percentage Change
Percentage of Net Sales From Prior Year
------------------------------------------------------------------------
1998 1997 1996 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 5.0% 11.3%
Cost of goods sold 54.7 55.6 54.7 3.2 13.2
Selling, general and administrative
expenses 37.2 36.7 38.3 6.5 6.6
Depreciation and amortization 2.2 2.3 2.2 2.5 16.2
----------- ------------- -------------
Operating profit 5.9 5.4 4.8 14.0 25.4
Interest expense, net 0.6 1.2 1.4 (44.9) (11.0)
----------- ------------- -------------
Net income before taxes 5.3 4.2 3.4 30.0 41.0
Income taxes 2.0 1.6 1.3 30.0 41.2
----------- ------------- -------------
Net income before extraordinary item 3.3% 2.6% 2.1% 30.0% 40.9%
=========== ============= =============
</TABLE>
Net sales increased $46,046,000 to $974,997,000 in fiscal 1998, a 5 percent
increase over the 53-week fiscal 1997. The sales increase was $62,646,000 or
6.9% after adjusting fiscal year 1997 to 52 weeks. The sales growth was
distributed across all product lines with sales of home decorating fabrics and
craft-related merchandise showing considerable strength. Comparable store sales
for fiscal 1998 increased 3.8 percent over the prior year. In fiscal 1998, the
Company opened 24 stores, relocated or expanded 42 stores and closed 35 smaller
or under performing stores, ending the year with 903 stores in operation. The
openings included six Jo-Ann etc stores, a new 46,000 square foot megastore
format.
Net sales increased $94,334,000 to $928,951,000 in fiscal 1997, an 11 percent
increase over fiscal 1996. Fiscal year 1997 consisted of 53 weeks while fiscal
year 1996 consisted of 52 weeks. Approximately $16,600,000 of the increase in
net sales was attributable to the additional week. Sales of apparel fabrics,
notions and seasonal merchandise in the Jo-Ann Fabrics and Crafts stores out
paced the prior year and higher sales were recorded in the Cloth World stores
that were converted throughout fiscal 1996 to the Jo-Ann Fabrics and Crafts
format. Comparable store sales for fiscal 1997 increased 7.5 percent over the
prior year. In fiscal 1997, the Company opened 13 stores, relocated or expanded
37 stores and closed 35 stores, ending the year with 914 stores in operation.
Gross profit was 45.3 percent of net sales in fiscal 1998, 44.4 percent in
fiscal 1997 and 45.3 percent in fiscal 1996. The decrease in gross profit
percentage from fiscal 1996 to 1997 resulted from a program that
-14-
<PAGE> 15
reduced prices on seasonal merchandise, to stimulate sales and improve in season
sell-through. The improvement in gross profit percentage from fiscal 1997 to
fiscal 1998 resulted from reduced markdowns on seasonal merchandise and a
reduction in store inventory shrink due to a focus on inventory control
disciplines including enhanced shrinkage controls.
Selling, general and administrative expenses as a percentage of net sales were
37.2 percent in fiscal 1998, 36.7 percent in fiscal 1997 and 38.3 percent in
fiscal 1996. The increase, as a percent of sales, from fiscal 1997 to fiscal
1998 consisted primarily of advertising, distribution service center, and store
occupancy expenses. The improvement of 1.6 percentage points from fiscal 1996 to
fiscal 1997 resulted primarily from improved store payroll productivity and
reduced advertising expense.
Net interest expense decreased $4,794,000 in fiscal 1998 compared to fiscal 1997
and decreased $1,314,000 in fiscal 1997 compared to fiscal 1996. The decreases
were due to a cumulative decline in long-term debt of $130,783,000 over the
two-year period.
The Company's effective income tax rate was 37.5 percent in fiscal 1998, 1997
and 1996. See Note 2 of Notes to Consolidated Financial Statements for
additional information on income taxes.
During the second quarter of fiscal 1998, the Company incurred an extraordinary
loss of $1,136,000, or $0.06 per share, related to the early redemption of the 6
1/4% Convertible Subordinated Debentures due March 1, 2002. The redemption was
funded through the use of the Company's long-term credit facilities.
Management believes that inflation has not had a significant effect on the
growth of net sales or on income from continuing operations over the past three
years.
The Company's business exhibits seasonality that is typical for most retail
companies, with much stronger sales in the second half of the year than the
first half of the year. In general, net income is highest during the months of
September through December, when sales volumes provide significant operating
leverage. Conversely, net income is substantially lower during the relatively
low-volume sales months of January through August. Capital requirements needed
to finance the Company's operations fluctuate during the year and reach their
highest levels during the second and third fiscal quarters as the Company
increases its inventory in preparation for its peak selling season.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are cash generated from net income,
vendor financing of inventories through trade payment terms and borrowings under
the revolving credit facility. The Company's primary capital requirements are
for financing of inventories and for capital expenditures related to stores, the
distribution center and information systems. Cash generated from net income
before depreciation and amortization in fiscal 1998, combined with a $21,180,000
increase in accounts payable, contributed to the $77,897,000 of net cash
provided by operating activities. The fiscal 1998 increase in accounts payable
resulted from greater purchases of inventory in the fourth quarter of fiscal
1998 when compared to the prior year. Fiscal 1997 net cash provided by operating
activities was $103,888,000, which included a $41,870,000 decrease in
inventories. The fiscal 1997 decrease in inventories resulted
-15-
<PAGE> 16
from a program to improve the sell-through of seasonal merchandise and from
other company-wide efforts to increase inventory turnover.
Over the last two fiscal years, the Company has reduced the working capital
needed to conduct its operations by $74,915,000. The decrease resulted primarily
from a $43,321,000 decline in inventories and a $16,223,000 increase in accounts
payable. Debt to capitalization ratio improved to 9 percent at fiscal year end
1998 from 27 percent at the end of the prior year as long-term debt was reduced
by $47,383,000. Return on average equity (before extraordinary items) improved
to 14.5 percent in fiscal 1998, compared to 12.9 percent in fiscal 1997 and 10.2
percent in fiscal 1996.
Capital expenditures were $36,564,000 in fiscal 1998, $13,191,000 in fiscal 1997
and $34,732,000 in fiscal 1996. The level of capital expenditures relates
primarily to the number of stores opened each year. An additional factor in
fiscal 1998 was the opening of six Jo-Ann etc stores that require a
significantly greater capital investment per store than the Company's
traditional stores. Fiscal 1996 included expenditures to convert Cloth World
stores to the Jo-Ann Fabrics and Crafts format. For fiscal 1999, the Company
expects to open 35 to 40 new stores (including 17 Jo-Ann etc formats), relocate
25 stores and close approximately 35 smaller stores. Capital expenditures,
excluding any impact of the acquisition of House of Fabrics, Inc. as discussed
below, are expected to be approximately $65,000,000 (of which approximately
$46,000,000 has been committed) during fiscal 1999.
During fiscal 1997, the Company purchased 407,525 Class A and 450,506 Class B
Common Shares on the open market. The aggregate purchase price of these shares
was $9,009,000 which was funded through the revolving credit facility. The
remaining number of shares that can be acquired pursuant to prior authorization
by the Board of Directors is 597,025 Class A and 557,025 Class B Common Shares.
The Company has an unsecured $250,000,000 five-year revolving credit facility
with a group of banks that expires on January 31, 2003. The maximum allowable
combined outstanding debt for the revolving credit facility and additional bank
borrowings is $280,000,000. As of January 31, 1998, the Company had borrowings
of $24,700,000 under the revolving credit facility and other lines of credit.
The Company continues to maintain excellent vendor and banking relationships and
believes it has sufficient resources, including unused credit facilities, to
meet its operating needs.
Subsequent to the end of fiscal year 1998, the Company acquired, through a cash
tender offer, 77.2 percent of the outstanding common stock of House of Fabrics,
Inc. House of Fabrics operated 261 fabric and craft stores in 27 states. The
total value of the transaction, including debt and other long-term liabilities,
is approximately $96,000,000. See Note 9 of Notes to Consolidated Financial
Statements for additional information on the House of Fabrics acquisition.
The "Year 2000 Issue" refers to the inability of computers and related software
to correctly interpret and process Year 2000 dated transactions. The software
problem results from a memory saving practice of using two digits instead of
four to denote years in a program. Computer systems that are not Year 2000
compliant may not be able to be relied upon to process data accurately for
transactions dated after the year 1999.
The Company has developed plans to address possible exposures related to the
impact on its computer systems of the Year 2000 Issue. Significant financial
and operational systems have been assessed and detailed plans have been
-16-
<PAGE> 17
developed to modify or replace the affected systems. The replaced systems will
be part of a significantly larger project of implementing an enterprise-wide
system over the next several years at a total cost of approximately
$30,000,000. The enterprise-wide systems project will fully integrate financial
and operational systems, creating increased reliability and usefulness of
Company data in addition to solving certain Year 2000 issues. Expenditures for
modifying existing software to resolve Year 2000 issues were approximately
$500,000 in fiscal 1998 and are estimated to total $2,500,000 over the next two
years. Maintenance and modification costs will be expensed as incurred, while
the costs of new information technology will be capitalized and amortized in
accordance with company policy and generally accepted accounting principles.
The Company expects that it will be able to modify or replace the affected
systems in time to avoid any material disruption to its operations; however,
unforeseen developments or delays could cause this expectation to change. Also,
in the event that any of the Company's significant suppliers do not
successfully achieve timely Year 2000 compliance, the Company's operations
could be adversely affected.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. The Company's actual results,
performance or achievements may materially differ from those expressed or
implied in the forward-looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, changes in customer demand, changes in trends in the fabric and craft
industry, changes in the competitive pricing for products, the impact of
competitor store openings and closings, the availability of acceptable store
locations, the availability of merchandise, the Company's ability to
successfully integrate House of Fabrics' stores into its operations and general
economic conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company uses derivative financial instruments, particularly interest rate
swaps, to manage interest rate risk. The Company does not engage in trading or
other speculative activities in the derivatives markets.
The Company currently has an interest rate swap agreement with a bank, which is
used as a hedge against interest rate risk on its unsecured $250,000,000
revolving credit facility. See Note 3 of Notes to Consolidated Financial
Statements for the notional amount hedged and other terms of the interest rate
swap agreement.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
------------------------------------------
The following consolidated financial statements of the Registrant are included
in Part II, Item 8:
Consolidated Balance Sheets - January 31, 1998 and February 1, 1997
Consolidated Statements of Income for the three fiscal years ended January 31,
1998
Consolidated Statements of Cash Flows for the three fiscal years ended January
31, 1998
Consolidated Statements of Shareholders' Equity for the three fiscal years ended
January 31, 1998
Notes to Consolidated Financial Statements
Report of Management
Report of Independent Public Accountants
-17-
<PAGE> 18
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
FABRI-CENTERS OF AMERICA, INC.
(THOUSANDS OF DOLLARS)
JANUARY 31, FEBRUARY 1,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 14,774 $ 12,631
Inventories 294,653 296,104
Prepaid expenses and other current assets 12,604 9,532
---------------- ---------------
Total current assets 322,031 318,267
Property and equipment, at cost:
Land 1,677 1,709
Buildings 24,244 23,905
Furniture and fixtures 122,586 108,684
Leasehold improvements 47,125 42,118
----------------- ----------------
195,632 176,416
Less accumulated depreciation and amortization 85,628 81,798
----------------- ----------------
110,004 94,618
Other assets 15,740 16,295
----------------- ----------------
Total assets $ 447,775 $ 429,180
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 120,638 $ 99,458
Accrued expenses 32,456 28,898
Accrued income taxes 10,422 10,697
Deferred income taxes 1,273 2,167
----------------- ----------------
Total current liabilities 164,789 141,220
Long-term debt 24,700 15,100
Convertible subordinated debentures --- 56,983
Deferred income taxes 14,248 13,357
Other long-term liabilities 3,177 3,110
Shareholders' equity:
Common stock:
Class A 528 507
Class B 522 503
Additional paid-in capital 88,904 76,614
Unamortized restricted stock awards (3,194) (1,248)
Retained earnings 172,239 141,397
----------------- ----------------
258,999 217,773
Treasury stock, at cost (18,138) (18,363)
----------------- ----------------
Total shareholders' equity 240,861 199,410
----------------- ----------------
Total liabilities and shareholders' equity $ 447,775 $ 429,180
================= ================
</TABLE>
See notes to consolidated financial statements
-18-
<PAGE> 19
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FABRI-CENTERS OF AMERICA, INC.
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
JANUARY 31, FEBRUARY 1, JANUARY 27,
YEARS ENDED 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 974,997 $ 928,951 $ 834,617
Costs and expenses:
Cost of goods sold 533,169 516,857 456,615
Selling, general and administrative expenses 363,112 340,909 319,913
Depreciation and amortization 21,673 21,152 18,196
------------------ ------------------ -----------------
Operating profit 57,043 50,033 39,893
Interest expense, net 5,874 10,668 11,982
------------------ ------------------ -----------------
Income before taxes 51,169 39,365 27,911
Income taxes 19,191 14,762 10,453
------------------ ------------------ -----------------
Net income before extraordinary item 31,978 24,603 17,458
Extraordinary loss on debt prepayment, net of
tax benefit of $682 (1,136) --- ---
------------------ ------------------ -----------------
Net income $ 30,842 $ 24,603 $ 17,458
================== ================== =================
Earnings per common share - basic:
Income before extraordinary item $ 1.74 $ 1.37 $ 0.95
Extraordinary loss on debt prepayment (0.06) --- ---
------------------ ------------------ -----------------
Net income per common share $ 1.68 $ 1.37 $ 0.95
================== ================== =================
Earnings per common share - diluted:
Income before extraordinary item $ 1.60 $ 1.26 $ 0.90
Extraordinary loss on debt prepayment (0.06) --- ---
------------------ ------------------ -----------------
Net income per common share $ 1.54 $ 1.26 $ 0.90
================== ================== =================
See notes to consolidated financial statements
</TABLE>
-19-
<PAGE> 20
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FABRI-CENTERS OF AMERICA, INC.
(THOUSANDS OF DOLLARS)
JANUARY 31, FEBRUARY 1, JANUARY 27,
YEARS ENDED 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 30,842 $ 24,603 $ 17,458
Extraordinary loss on debt prepayment 1,136 --- ---
--------------- --------------- ----------------
Net income before extraordinary item 31,978 24,603 17,458
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 21,673 21,152 18,196
Loss on disposal of fixed assets 883 1,076 41
Deferred income taxes (3) (1,286) 8,288
Cancellation of restricted stock awards (158) (67) (55)
Changes in operating assets and liabilities:
(Increase) decrease in inventories 1,451 41,870 (47,414)
(Increase) decrease in prepaid expenses and
other current assets (3,072) 2,328 103
Increase (decrease) in accounts payable 21,180 (4,957) 11,387
Increase (decrease) in accrued expenses 3,558 8,842 (7,987)
Increase (decrease) in accrued income taxes 407 10,327 (2,308)
--------------- --------------- ----------------
Net cash provided by (used for) operating activities 77,897 103,888 (2,291)
Net cash flows from investing activities:
Capital expenditures (36,564) (13,191) (34,732)
Other, net (277) (966) (2,860)
--------------- --------------- ----------------
Net cash used for investing activities (36,841) (14,157) (37,592)
Net cash flows from financing activities:
Proceeds from long-term debt 87,300 13,100 75,200
Repayment of long-term debt (77,700) (96,500) (46,700)
Redemption of debentures (56,983) --- ---
Debenture prepayment premiums and issuance costs (1,818) --- ---
Other long-term liabilities 67 1,559 226
Issuance of common stock upon conversion of debentures 1,061 --- ---
Proceeds and tax benefit from exercise of stock options 8,356 2,198 1,205
Issuance of treasury shares 826 --- ---
Purchase of common stock (22) (9,009) (383)
--------------- --------------- ----------------
Net cash (used for) provided by financing activities (38,913) (88,652) 29,548
Net increase (decrease) in cash 2,143 1,079 (10,335)
Cash and temporary cash investments at beginning
of year 12,631 11,552 21,887
--------------- -------------- ----------------
Cash and temporary cash investments at end of year $ 14,774 $ 12,631 $ 11,552
============== ============== ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,476 $ 11,133 $ 11,737
Income taxes $ 15,575 $ 5,721 $ 4,723
See notes to consolidated financial statements
</TABLE>
-20-
<PAGE> 21
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FABRI-CENTERS OF AMERICA, INC.
(THOUSANDS OF DOLLARS)
JANUARY FEBRUARY JANUARY
31, 1, 27,
YEARS ENDED 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK AT STATED VALUE
<S> <C> <C> <C>
Balance at beginning of year $ 507 $ 499 $ 989
Recapitalization - effective August 2, 1995 --- --- (494)
Exercise of stock options 15 8 5
Issuance of common stock upon conversion of debentures 1 --- ---
Issuance of restricted stock awards 7 1 2
Cancellation of restricted stock awards (2) (1) (3)
-------------- --------------- ---------------
Balance at end of year 528 507 499
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B COMMON STOCK AT STATED VALUE
Balance at beginning of year 503 496 ---
Recapitalization - effective August 2, 1995 --- --- 494
Exercise of stock options 18 7 2
Issuance of common stock upon conversion of debentures 1 --- ---
Issuance of restricted stock awards --- 1 ---
Cancellation of restricted stock awards --- (1) ---
-------------- --------------- ---------------
Balance at end of year 522 503 496
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 76,614 74,216 72,921
Exercise of stock options 5,112 1,789 866
Issuance of common stock upon conversion of debentures 1,059 --- ---
Issuance of restricted stock awards 2,770 402 532
Issuance of treasury shares 579 --- ---
Cancellation of restricted stock awards (441) (187) (472)
Tax benefit on options exercised 3,211 394 332
Other --- --- 37
-------------- --------------- ---------------
Balance at end of year 88,904 76,614 74,216
- ------------------------------------------------------------------------------------------------------------------------------------
UNAMORTIZED RESTRICTED STOCK AWARDS
Balance at beginning of year (1,248) (1,688) (2,556)
Issuance of restricted stock awards (2,777) (404) (534)
Cancellation of restricted stock awards 285 122 420
Amortization of restricted stock awards 546 722 982
-------------- --------------- ---------------
Balance at end of year (3,194) (1,248) (1,688)
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 141,397 116,794 99,336
Net income 30,842 24,603 17,458
-------------- --------------- ---------------
Balance at end of year 172,239 141,397 116,794
- ------------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year (18,363) (9,354) (8,971)
Purchase of common stock (22) (9,009) (383)
Issuance of treasury shares 247 --- ---
-------------- --------------- ---------------
Balance at end of year (18,138) (18,363) (9,354)
- ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY $ 240,861 $ 199,410 $ 180,963
====================================================================================================================================
See notes to consolidated financial statements
</TABLE>
-21-
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FABRI-CENTERS OF AMERICA, INC.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Fabri-Centers of America, Inc. (the "Company"), an Ohio corporation, is a fabric
and craft retailer with 903 retail stores in 48 states at January 31, 1998. The
stores operate under the names Jo-Ann Fabrics and Crafts, Jo-Ann etc, Cloth
World, and New York Fabrics and feature a broad line of fashion, decorator,
quilting and craft fabrics, notions, patterns, craft components, seasonal
merchandise and silk and dried flowers.
The significant accounting policies applied in preparing the accompanying
consolidated financial statements of the Company are summarized below:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated. Certain amounts in the fiscal 1997 and fiscal 1996 financial
statements have been reclassified in order to conform with the current year
presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Since actual results may differ from those estimates, the
Company revises its estimates and assumptions as new information becomes
available.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31. The fiscal
year refers to the year in which the period ends (e.g., fiscal 1998 ended
January 31, 1998). Fiscal years generally consist of 52 weeks, with the
exception of fiscal year 1997 which contains 53 weeks.
CASH AND TEMPORARY CASH INVESTMENTS
Temporary cash investments are all highly liquid investments with original
maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Substantially all
inventories were valued using the last-in, first-out (LIFO) method. The value of
inventories stated on the LIFO method at January 31, 1998 and February 1, 1997
are not materially different from their current cost.
-22-
<PAGE> 23
Store physical inventories are taken on a cycle basis throughout the fiscal
year. Store inventories subsequent to a physical inventory are charged at cost
for shipments of merchandise to the stores and are relieved at cost for the sale
of merchandise.
PROPERTY AND EQUIPMENT
Depreciation is provided principally by the straight-line method. The major
classes of assets and ranges of estimated useful lives are: buildings from 10 to
40 years, furniture and fixtures from 2 to 10 years, and leasehold improvements
for 10 years or the remainder of the lease, whichever is shorter.
Depreciation expense amounted to $19,880,000, $18,921,000 and $15,675,000 in
fiscal 1998, 1997 and 1996, respectively. Maintenance and repair expenditures
are charged to expense as incurred and betterments and major renewals are
capitalized.
SOFTWARE DEVELOPMENT
The AICPA issued its Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" (SOP 98-1),
effective for fiscal years beginning after December 31, 1997. This statement
requires companies to capitalize payroll and other internal costs as well as any
external costs related to software development. The Company adopted SOP 98-1 in
fiscal 1998, and the impact of adoption was not material.
INTANGIBLE ASSETS
Other assets include, among other things, the value assigned for trade names,
favorable lease interest, and other intangible assets acquired in connection
with purchased businesses totaling $2,469,000 and $3,219,000 at January 31, 1998
and February 1, 1997, respectively, and are being amortized primarily on a
straight-line basis over 7 to 20 years. Amortization expense was $750,000 in
both fiscal 1998 and 1997, and $812,000 in fiscal 1996.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets when indicators of
impairment are present and the estimated undiscounted cash flows to be generated
by those assets are less than the assets' net book value. There were no
long-lived assets that required recognition of an impairment loss at January 31,
1998 or February 1, 1997.
FINANCIAL INSTRUMENTS
All financial instruments are considered to have a fair value which approximates
carrying value at January 31, 1998 and February 1, 1997, unless otherwise
specified. The Company has entered into interest rate swap and interest rate cap
agreements to hedge against interest rate risk. The interest differentials from
these swaps are recorded as interest expense as incurred.
-23-
<PAGE> 24
STOCK-BASED COMPENSATION PLANS
The Company has three stock-based compensation plans, which are described in
Note 6. The Company applies the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," and will continue to apply Accounting Principles Board (APB) No.
25 and related interpretations in accounting for its plans.
STORE OPENING EXPENSES
Store opening expenses are charged to operations as incurred, which is generally
the same period that the store is opened.
ADVERTISING COSTS
The Company expenses production costs of advertising the first time the
advertising takes place. Advertising expense was $24,418,000, $20,298,000 and
$23,053,000 for fiscal 1998, 1997 and 1996 respectively.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board issued SFAS 130
"Reporting on Comprehensive Income". SFAS 130 would become effective for the
Company in the first quarter of fiscal 1999. As the Company currently has no
items that qualify as comprehensive income under the definitions of SFAS 130,
the Statement will not effect the presentation of previously reported results,
and is not expected to impact future financial reporting.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. The statement must be adopted by the Company
in fiscal 1999. Under provisions of this statement, the Company will be required
to modify or expand the financial statement disclosures for its products and
services and geographic areas. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
-24-
<PAGE> 25
<TABLE>
<CAPTION>
NOTE 2 - INCOME TAXES
The significant components of income tax expense are as follows:
Fiscal Year 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Current:
Federal $ 16,864 $ 14,578 $ 1,712
State and local 2,330 1,470 453
--------------- -------------- -------------
19,194 16,048 2,165
Deferred (3) (1,286) 8,288
--------------- -------------- -------------
Total income tax expense $ 19,191 $ 14,762 $ 10,453
=============== ============== =============
The reconciliation of income tax at the statutory rate to income tax expense is
as follows:
<CAPTION>
Fiscal Year 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Federal income tax at the
statutory rate $ 17,909 $ 13,778 $ 9,769
Effect of:
State and local taxes 1,515 956 294
Other, net (233) 28 390
--------------- -------------- -------------
Provision for income taxes $ 19,191 $ 14,762 $ 10,453
=============== ============== =============
</TABLE>
-25-
<PAGE> 26
The significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
Asset/(Liability)
------------------------
Fiscal Year 1998 1997
- --------------------------------------------------------------------------------------------------
(Thousands of dollars)
Current
- -------
<S> <C> <C>
Deferred tax assets:
Inventory items $ 2,539 $ 2,085
Benefit programs 1,629 1,285
Lease obligations 1,185 882
Other 604 446
------------ ------------
5,957 4,698
Deferred tax liabilities:
Basis difference in net assets acquired (6,490) (6,301)
Real estate taxes (446) (258)
Personal property taxes (294) (306)
------------ ------------
(7,230) (6,865)
------------ ------------
Net current deferred taxes $ (1,273) $ (2,167)
============ ============
Non-current
- -----------
Deferred tax assets:
Unearned compensation $ 225 $ 696
Other 311 273
------------ ------------
536 969
Deferred tax liabilities:
Depreciation (14,056) (13,650)
Basis difference in net assets acquired (623) (626)
Other (105) (50)
------------ ------------
(14,784) (14,326)
------------ ------------
Net non-current deferred taxes $ (14,248) $ (13,357)
============ ============
</TABLE>
The Company did not record any valuation allowances against deferred tax assets
as of January 31, 1998 or February 1, 1997.
NOTE 3 - FINANCING
The Company has an unsecured $250,000,000 five-year revolving credit agreement
(the "Credit Facility") with a group of banks (the "Bank Group") that expires
January 31, 2003. The Credit Facility was amended
-26-
<PAGE> 27
on June 2, 1997 and on March 4, 1998, to improve pricing and modify or eliminate
certain covenants. The March 4, 1998 amendment increased the Credit Facility to
$250,000,000 from $200,000,000 and included a provision allowing the Company to
acquire House of Fabrics, Inc., as discussed in Note 9.
The Company's weighted average interest rate and weighted average borrowings
under the Credit Facility and other bank borrowings were 6.00 percent and
$49,008,000 during fiscal 1998, 6.33 percent and $83,100,000 during fiscal 1997
and 6.95 percent and $100,700,000 during fiscal 1996, respectively.
The weighted average interest rate under the Credit Facility and other bank
borrowings was 6.10 percent at January 31, 1998. Interest on borrowings under
the Credit Facility is calculated at an applicable margin over prime, federal
funds or LIBOR rates, based on the achievement of specified ranges of certain
financial covenants. The Company pays a facility fee on the revolving commitment
amount which ranges from 10 basis points to 30 basis points based on the
achievement of specified ranges of certain financial covenants.
The Credit Facility contains financial covenants which require the Company to,
among other things, maintain a minimum tangible net worth and fixed charge
coverage and current funded indebtedness ratios as well as a financial covenant
which limits the Company's defined leverage ratio. The Company is in compliance
with all financial covenants contained in the Credit Facility. The maximum
allowable combined outstanding debt for the Credit Facility and other bank
borrowings is $280,000,000.
On March 15, 1998, the Company entered into a five-year interest rate swap
agreement with one of the banks in the Bank Group under which it will pay
quarterly to the counter-party interest at a fixed rate of 5.98 percent and the
counter-party will pay quarterly to the Company interest at a variable rate
based on the three-month LIBOR rate. The notional amount of this interest rate
swap agreement is $75,000,000 reducing to $50,000,000 on March 15, 2001 for the
remainder of the term of the agreement.
On June 30, 1997, the Company redeemed all of its outstanding 6 1/4% Convertible
Subordinated Debentures due March 1, 2002 at a price of 101.785 percent of
principal. The debenture holders had the option to convert their debentures into
common shares at a conversion price of $24.375 per share, or to accept
redemption at the stated premium.
Of the $56,983,000 of debentures outstanding, $1,076,000 were converted,
resulting in the issuance of 22,062 Class A and 22,062 Class B Common Shares.
The remaining $55,907,000 of debentures were redeemed. The Company recorded an
extraordinary loss, net of taxes, of $1,136,000, or $0.06 per share, consisting
of the redemption premium, unamortized debenture issuance costs and other
related expenses.
-27-
<PAGE> 28
NOTE 4 - CAPITAL STOCK
The following table details the common stock ($0.05 stated value) activity for
fiscal 1998 and fiscal 1997:
<TABLE>
<CAPTION>
Common Shares Outstanding
Net of Treasury Shares
-------------------------------------- in
Class A Class B Treasury
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 27, 1996 9,268,950 9,217,158 1,421,130
Exercise of stock options 144,732 140,832 ---
Issuance of restricted stock 27,000 2,000 ---
Cancellation of restricted stock (12,000) (10,000) ---
Purchase of common stock (407,525) (450,506) 858,031
--------------- ---------------- ------------
Balance at February 1, 1997 9,021,157 8,899,484 2,279,161
Exercise of stock options 299,134 371,664 ---
Issuance of restricted stock 132,500 --- ---
Cancellation of restricted stock (30,000) (10,000) ---
Issuance of common stock upon conversion
of debentures 22,062 22,062 ---
Issuance of treasury shares 19,485 20,111 (39,596)
Purchase of common stock (423) (575) 998
--------------- ---------------- ------------
Balance at January 31, 1998 9,463,915 9,302,746 2,240,563
=============== ================ ============
</TABLE>
On August 2, 1995, the shareholders approved a recapitalization amendment to the
Articles of Incorporation ("Recapitalization Amendment"), which became effective
on that date, creating a new class of non-voting common shares designated as
Class B Common Shares and changing each outstanding common share into one Class
A and one Class B Common Share. Additionally, the number of authorized common
shares was increased from 75,000,000 to 150,000,000, consisting of 75,000,000
Class A Common Shares and 75,000,000 Class B Common Shares. Pursuant to this
amendment, the Common Shares, with a stated value of $0.10 per share, were
changed into one Class A Common Share and one Class B Common Share, with each
class having a stated value of $0.05 per share. As a result of the
recapitalization, 9,191,514 Class A Common Shares and 9,191,514 Class B Common
Shares were outstanding as of the effective date. All earnings per share amounts
have been restated to reflect the Recapitalization Amendment, which has been
accounted for as if it were a two-for-one stock split.
At January 31, 1998 and February 1, 1997, there were 5,000,000 shares of serial
preferred stock, without par value, authorized for issuance, none of which are
outstanding. At January 31, 1998 and February 1, 1997, there were 75,000,000
Class A Common Shares and 75,000,000 Class B Common Shares authorized for
issuance.
-28-
<PAGE> 29
SHAREHOLDERS' RIGHTS PLAN
Under the Company's Shareholders' Rights Plan, as amended, one right is issued
for each Class A Common Share outstanding. The rights are exercisable only if a
person or group buys or announces a tender offer for 20 percent or more of the
outstanding Class A Common Shares or the Board of Directors declares a person or
group to be an "adverse person," as defined in the Plan. When exercisable, each
right initially entitles a holder to purchase one Class A Common Share for
$105.75. If at any time after the rights become exercisable, the Company is
acquired in a merger or certain other business transactions occur, each right
would then enable the holder thereof to purchase one common share of the
acquiring company, or under certain circumstances, one Class A Common Share of
the Company for $0.50. The rights, which do not have voting privileges, expire
in 2000, but may be redeemed by the Board of Directors prior to that time, under
certain circumstances, for $0.005 per right. Until the rights become
exercisable, they have no effect on earnings per share.
NOTE 5 - EARNINGS PER SHARE
In the fourth quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 revised
the calculation methods and disclosures regarding earnings per common share.
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share include the effect of the assumed exercise of dilutive stock options
under the treasury stock method and the assumed conversion of all of the
Company's 6 1/4% Convertible Subordinated Debentures ("Debentures") on the first
day of each fiscal year. The assumed conversion of the Debentures is not
included in the diluted earnings per common share calculation for fiscal 1996
because it is anti-dilutive.
-29-
<PAGE> 30
The following table presents information necessary to calculate basic and
diluted earnings per common share for the fiscal years presented (in thousands
of dollars except for share and per share data):
<TABLE>
<CAPTION>
Fiscal Year 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE:
<S> <C> <C> <C>
Net income before extraordinary item $ 31,978 $ 24,603 $ 17,458
Extraordinary loss on debt prepayment (1,136) --- ---
--------------- --------------- -----------------
Net income $ 30,842 $ 24,603 $ 17,458
=============== =============== =================
Weighted average shares outstanding 18,393,827 17,930,367 18,415,419
Net income per common share before
extraordinary item $ 1.74 $ 1.37 $ 0.95
Extraordinary item (0.06) --- ---
--------------- --------------- -----------------
Net income per common share $ 1.68 $ 1.37 $ 0.95
=============== =============== =================
DILUTED EARNINGS PER COMMON SHARE:
Net income before extraordinary item $ 31,978 $ 24,603 $ 17,458
Debenture interest net of tax 893 2,226 ---
---------------- ---------------- ------------------
Net income before extraordinary item
and Debenture interest 32,871 26,829 17,458
Extraordinary loss on debt prepayment (1,136) --- ---
---------------- ---------------- ------------------
Net income before Debenture interest $ 31,735 $ 26,829 $ 17,458
================ ================ ==================
Weighted average shares outstanding 18,393,827 17,930,367 18,415,419
Incremental shares from assumed exercise
of stock options 1,223,985 947,749 877,423
Incremental shares from assumed
conversion of Debentures 974,068 2,337,764 ---
---------------- ---------------- ------------------
20,591,880 21,215,880 19,292,842
================ ================ ==================
Net income per common share before
extraordinary item $ 1.60 $ 1.26 $ 0.90
Extraordinary item (0.06) --- ---
---------------- ---------------- ------------------
Net income per common share $ 1.54 $ 1.26 $ 0.90
================ ================ ==================
</TABLE>
As a result of the adoption of SFAS 128, the Company's reported earnings per
common share were restated for fiscal 1997 and 1996. Previously reported primary
earnings per share and earnings per share assuming
-30-
<PAGE> 31
full dilution under APB 15 were $1.30 and $1.26 in fiscal 1997 and $0.91 and
$0.89 in fiscal 1996, respectively.
NOTE 6 - STOCK-BASED COMPENSATION PLANS
STOCK OPTION PLANS
Nonqualified stock options have been granted to certain officers and key
employees under the Company's 1990 Employee Stock Option and Stock Appreciation
Rights Plan (the "Employee Plan") at prices not less than fair market value of
the common stock at the date of grant. The Employee Plan also permits the
granting of stock appreciation rights (SAR's), with respect to all or part of
the common stock subject to any option granted under this plan. The options and
stock appreciation rights become exercisable to the extent of one-fourth of the
optioned shares for each full year of continuous employment following the date
of grant and generally expire ten years after the date of the grant. Future
options and stock appreciation rights granted can relate to Class A Common
Shares, Class B Common Shares, or a combination of both. There are 842,371 Class
A Shares authorized for future option and stock appreciation right grants under
the Employee Plan at January 31, 1998.
During fiscal 1997, the shareholders approved the 1996 Stock Option Plan for
Non-Employee Directors (the "Directors Plan") which succeeded the 1988 Stock
Option Plan for Non-Employee Directors. Under the Directors Plan, stock options
are automatically granted to each non-employee director upon their election to
the board and annually thereafter at prices not less than the fair market value
of the common stock at the date of the grant. The options become exercisable to
the extent of one-fourth of the optioned shares for each full year of continuous
service following the date of grant and generally expire ten years after the
date of the grant. There are 85,000 Class A Shares and 85,000 Class B Shares
authorized for future option grants under the Directors Plan at January 31,
1998.
The Company applies APB Opinion 25 and related Interpretations in accounting for
the Employee Plan and the Directors Plan (collectively the "Plans") and,
accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair value at the
grant dates for awards under these Plans consistent with SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts shown in the table below (in thousands of dollars except for earnings
per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------
As Pro As Pro As Pro
Reported forma Reported forma Reported forma
-------------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 30,842 $ 29,772 $ 24,603 $ 23,868 $ 17,458 $ 17,322
Earnings per common share:
Basic $ 1.68 $ 1.62 $ 1.37 $ 1.33 $ 0.95 $ 0.94
Diluted 1.54 1.46 1.26 1.24 0.90 0.90
</TABLE>
The pro forma disclosures presented are not representative of the future effects
on net income and net income per share because only awards granted after fiscal
1996 are permitted to be included, as the disclosure only requirements of SFAS
123 are phased in over a period of years starting in fiscal 1997.
-31-
<PAGE> 32
For purposes of computing the pro forma disclosures above, the fair values of
the options granted under the Plans during fiscal 1998, 1997 and 1996 were
determined at the date of grant separately for Class A and Class B option grants
using the Black-Scholes option pricing model. The significant assumptions used
to calculate the fair value of Class A and Class B option grants were: risk-free
interest rates ranging from 5.8 to 6.3 percent for Class A and 5.9 to 6.3
percent for Class B, expected volatility ranging from 34.5 to 37.4 percent for
Class A and 31.7 to 34.0 percent for Class B, expected lives ranging from 2.9 to
5.6 years for Class A and 3.3 to 6.5 years for Class B and no expected dividends
for either class of shares.
The following is a summary of the Company's stock option activity for the plans:
<TABLE>
<CAPTION>
Class A Options Class B Options
------------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Options Prices of Options Prices
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Outstanding at January 28, 1995 1,502,427 $ 8.79 1,502,427 $ 8.79
Granted 66,075 13.34 418,325 11.46
Exercised (71,618) 7.51 (60,132) 6.59
Canceled (148,429) 8.83 (148,429) 8.83
------------ ---------
Outstanding at January 27, 1996 1,348,455 9.10 1,712,191 9.50
Granted 81,500 14.62 345,100 14.73
Exercised (144,732) 4.34 (140,832) 4.90
Canceled (78,744) 10.87 (105,356) 10.92
------------ ---------
Outstanding at February 1, 1997 1,206,479 9.70 1,811,103 10.66
Granted 58,000 21.43 487,750 20.33
Exercised (299,134) 7.36 (371,664) 7.92
Canceled (86,325) 12.65 (181,677) 12.73
------------ ---------
Outstanding at January 31, 1998 879,020 $ 10.98 1,745,512 $ 13.73
============ =========
Exercisable at January 31, 1998 703,120 $ 10.02 892,862 $ 10.53
Weighted average fair value of options
granted during fiscal 1998 $ 8.22 $ 8.05
Exercisable at February 1, 1997 914,854 $ 9.40 1,011,400 $ 9.49
Weighted average fair value of options
granted during fiscal 1997 $ 5.45 $ 5.58
Exercisable at January 27, 1996 870,376 $ 9.27 881,862 $ 9.24
Weighted average fair value of options
granted during fiscal 1996 $ 4.94 $ 4.32
</TABLE>
-32-
<PAGE> 33
The following table summarizes the status of stock options outstanding and
exercisable at January 31, 1998:
<TABLE>
<CAPTION>
Class A Options Outstanding Class A Options Exercisable
- ---------------------------------------------------------------------------- -----------------------------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Number Exercise Exercise Contractual Number Exercise
Outstanding Prices Prices Life Exercisable Prices
- ---------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
653,970 $ 2.38 to $ 16.00 $ 7.99 5.3 years 534,070 $ 7.15
225,050 $ 16.01 to $ 23.69 $ 19.66 5.4 years 169,050 $ 19.07
- ----------- --------------
879,020 $ 2.38 to $ 23.69 $ 10.98 5.3 years 703,120 $ 10.02
=========== ==============
<CAPTION>
Class B Options Outstanding Class B Options Exercisable
- ---------------------------------------------------------------------------- -----------------------------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Number Exercise Exercise Contractual Number Exercise
Outstanding Prices Prices Life Exercisable Prices
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
854,987 $ 2.38 to $ 15.00 $ 8.57 5.9 years 667,337 $ 7.99
890,525 $ 15.01 to $ 23.13 $ 18.68 8.4 years 225,525 $ 18.04
- ----------- --------------
1,745,512 $ 2.38 to $ 23.13 $ 13.73 7.2 years 892,862 $ 10.53
=========== ==============
</TABLE>
RESTRICTED STOCK AWARDS
Restricted shares of the Company's common stock have been awarded to executive
officers and senior management under the 1994 Executive Incentive Plan. The
vesting periods for these restricted shares are generally five years with all
rights to such restricted stock terminating without any payment of consideration
by the Company unless the grantee remains in the continuous employment of the
Company throughout the vesting period. Unearned compensation resulting from the
issuance of shares under this plan is being amortized over the vesting periods,
and the unamortized portion has been reflected as a reduction of shareholders'
equity. 510,000 Class A and 510,000 Class B Common Shares have been reserved for
the plan. At January 31, 1998, 238,500 Class A and 61,000 Class B restricted
shares were outstanding under the plan and 271,500 Class A and 449,000 Class B
Common Shares are available for future awards. During fiscal 1998, 132,500 Class
A restricted shares were granted at a weighted average market value of $20.96;
during fiscal 1997, 27,000 Class A and 2,000 Class B restricted shares were
granted at weighted average market values of $14.09 and $11.75, respectively,
and during fiscal 1996, 42,000 Class A restricted shares were granted at a
weighted average market value of $12.31.
NOTE 7 - EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND POSTRETIREMENT BENEFITS
The Company sponsors a tax-deferred savings plan (the "Savings Plan") whereby
eligible employees may elect quarterly to contribute up to the lesser of 10
percent of annual compensation or the statutory maximum. The Company makes a 50
percent matching contribution in the form of the Company's
-33-
<PAGE> 34
common stock, up to a maximum employee contribution of 4 percent of the
employee's compensation. Employer contributions of the Company's common stock
have been made through the issuance of shares out of the treasury or by
purchasing shares on the open market. The amount of the Company's matching
contribution in fiscal 1998, 1997 and 1996 was $794,000, $894,000 and $759,000,
respectively. Plan assets included 441,273 shares of Class A Common Stock and
267,406 shares of Class B Common Stock at January 31, 1998. The Company does not
provide postretirement health care benefits for its employees.
NOTE 8 - LEASES
Principally all of the Company's retail stores operate out of leased facilities.
All store leases are operating leases, generally for periods up to 10 years with
renewal options for up to 20 years. Certain leases contain escalation clauses
and, in some cases, provide for contingent rents based on a percent of sales in
excess of defined minimums. In certain instances, the Company is required to pay
its pro rata share of real estate taxes and common area maintenance expenses.
The Company also leases certain store equipment, generally under five-year lease
terms.
The following is a schedule of future minimum rental payments under
non-cancelable operating leases:
<TABLE>
<CAPTION>
Minimum
Fiscal Year Rentals
- ----------------------------------------------------------------------------------
(Thousands of dollars)
<C> <C>
1999 $ 77,538
2000 75,161
2001 68,316
2002 59,950
2003 46,011
Thereafter 121,908
---------------
$ 448,884
===============
<CAPTION>
Rent expense was as follows:
Fiscal Year 1998 1997 1996
- -------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Minimum rentals $ 78,649 $ 73,728 $ 69,672
Contingent rentals 1,833 1,392 1,849
Sublease rentals (2,077) (1,897) (1,767)
-------------- --------------- ---------------
$ 78,405 $ 73,223 $ 69,754
============== =============== ===============
</TABLE>
-34-
<PAGE> 35
NOTE 9 - SUBSEQUENT EVENT - HOUSE OF FABRICS ACQUISITION
On March 9, 1998, the Company acquired, through a cash tender offer, 77.2
percent of the outstanding common stock of House of Fabrics, Inc. ("HOF"), for
$4.25 per share. A special meeting of the shareholders of HOF is expected to be
held in late April 1998 to approve the merger of HOF with a wholly-owned
acquisition subsidiary of the Company formed for the sole purpose of completing
the HOF acquisition. The shares of HOF common stock not already owned by the
Company will be canceled and converted into the right to receive $4.25 in cash.
The total value of the transaction, including debt and other long-term
liabilities, is approximately $96,000,000. The funds used to acquire HOF were
provided by internally generated funds and borrowings under the Credit Facility.
The acquisition will be recorded using the purchase method, and, accordingly,
the results of operations of HOF will be included in the Company's consolidated
financial statements after March 9, 1998. HOF operates 261 fabric and craft
stores, concentrated in the western United States, under the names of House of
Fabrics, SoFro Fabrics, Fabricland and Fabric King.
Summarized below are the unaudited pro forma combined results of operations for
fiscal 1998 of the Company and HOF as if the acquisition had occurred as of the
beginning of fiscal 1998:
<TABLE>
<CAPTION>
(Thousands of Dollars, Except Per Share Data)
Pro Forma
Combined
(Unaudited)
-------------------
<S> <C>
Net sales $ 1,209,197
Net income before extraordinary items $ 25,215
Net income $ 24,079
Earnings per common share before extraordinary item:
Basic $ 1.37
Diluted $ 1.27
Earnings per common share:
Basic $ 1.31
Diluted $ 1.21
</TABLE>
The pro forma combined results of operations presented assume the Company
acquires all of the common stock of HOF. The purchase price allocation used in
preparing this pro forma financial information is based on preliminary estimates
and resulting goodwill was amortized on a straight-line basis using a 40-year
life. The pro forma combined results of operations do not include any
non-recurring charges or credits directly attributable to the acquisition that
may be incurred by the Company following its completion. The non-recurring
charges or credits cannot currently be estimated but could be significant to the
Company's results of operations for the fifty-two weeks ended January 30, 1999.
The pro forma financial information presented is for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the HOF acquisition been consummated at the beginning of the period
presented. In addition, the information is not intended to be a projection of
future results and does not reflect synergies that may be achieved from combined
operations.
-35-
<PAGE> 36
NOTE 10 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly high and low closing stock prices for fiscal 1998 and 1997 are
presented in the table below:
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1998:
January 31, 1998 $ 25 $ 20 3/16 $ 21 7/8 $ 19 5/8
November 1, 1997 25 5/16 21 5/8 22 9/16 20 1/4
August 2, 1997 27 9/16 21 1/8 24 3/8 19 1/2
May 3, 1997 23 15 3/4 21 15
Fiscal 1997:
February 1, 1997 16 7/8 12 5/8 15 3/4 12 5/8
October 26, 1996 15 3/8 12 1/2 14 3/8 12 1/8
July 27, 1996 16 7/8 10 1/4 15 3/4 10
April 27, 1996 $ 14 1/4 $ 9 7/8 $ 12 3/4 $ 9 7/8
Summarized below are the unaudited results of operations by quarter for fiscal
1998 and 1997:
<CAPTION>
First Second Third Fourth
Fiscal 1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 218,826 $ 197,474 $ 247,180 $ 311,517
Gross profit 96,138 88,256 114,569 142,865
Net income (loss) before extraordinary item 2,608 (1,003) 9,300 21,073
Extraordinary loss on debt prepayment, net
of tax benefit of $682 --- (1,136) --- ---
------------- ------------- ----------- -----------
Net income (loss) $ 2,608 $ (2,139) $ 9,300 $ 21,073
============= ============= =========== ===========
Earnings (loss) per common share before extraordinary item (a):
Basic $ 0.14 $ (0.05) $ 0.50 $ 1.13
Diluted 0.14 (0.05) 0.47 1.07
Extraordinary loss on debt prepayment (a):
Basic $ --- $ (0.06) $ --- $ ---
Diluted --- (0.06) --- ---
Earnings (loss) per common share (a):
Basic $ 0.14 $ (0.12) $ 0.50 $ 1.13
Diluted 0.14 (0.12) 0.47 1.07
</TABLE>
-36-
<PAGE> 37
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal 1997 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 203,028 $ 188,865 $ 229,587 $ 307,471
Gross profit $ 88,387 $ 82,101 $ 104,070 $ 137,536
Net income (loss) $ 1,070 $ (2,416) $ 7,961 $ 17,988
Earnings (loss) per common share (a):
Basic $ 0.06 $ (0.14) $ 0.45 $ 1.01
Diluted $ 0.06 $ (0.14) $ 0.41 $ 0.87
<FN>
(a) Earnings per common share calculations for each quarter are
restated to reflect accounting changes required under Statement of
Accounting Standards No. 128, "Earnings per Share". See Note 5.
</TABLE>
-37-
<PAGE> 38
REPORT OF MANAGEMENT
TO THE SHAREHOLDERS OF FABRI-CENTERS OF AMERICA, INC.
We have prepared the accompanying consolidated financial statements and related
information included herein for the years ended January 31, 1998, February 1,
1997 and January 27, 1996. The opinion of Arthur Andersen LLP, the Company's
independent public accountants, on those financial statements is included. The
primary responsibility for the integrity of the financial information included
in this annual report rests with management. This information is prepared in
accordance with generally accepted accounting principles, based on our best
estimates and judgments and giving due consideration to materiality.
The Company maintains accounting and control systems which are designed to
provide reasonable assurance that assets are safeguarded from loss or
unauthorized use, and which produce records adequate for preparation of
financial information. There are limits inherent in all systems of internal
control based on the recognition that the cost of such systems should not exceed
the benefits to be derived. We believe our system provides this appropriate
balance.
The Board of Directors pursues its responsibility for these financial statements
through the Audit Committee, composed exclusively of outside directors. The
committee meets periodically with management, internal auditors and our
independent public accountants to discuss the adequacy of financial controls,
the quality of financial reporting, and the nature, extent and results of the
audit effort. Both the internal auditors and independent public accountants have
private and confidential access to the Audit Committee at all times.
Alan Rosskamm Brian P. Carney
Chairman of the Board, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
Robert R. Gerber
Senior Vice President, Controller
and Chief Accounting Officer
-38-
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF FABRI-CENTERS OF AMERICA, INC.
We have audited the accompanying consolidated balance sheets of Fabri-Centers of
America, Inc. (an Ohio corporation) and subsidiaries as of January 31, 1998 and
February 1, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fabri-Centers of America, Inc.
and subsidiaries as of January 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 31, 1998 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Cleveland, Ohio,
March 15, 1998.
-39-
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 as to the Directors of the Registrant is
incorporated herein by reference to the information set forth under the caption
"Nominees to the Board of Directors" in the Registrant's definitive proxy
statement for its 1998 Annual Meeting of Shareholders (the "Proxy Statement").
Information required by this Item 10 as to the Executive Officers of the
Registrant is included under Item 4 of Part I of this Form 10-K as permitted by
Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405
of Regulation S-K is incorporated herein by reference to the information set
forth in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to
the information set forth under the captions "Director's Compensation" and
"Executive Compensation" (except for the Compensation Committee Report on
Executive Compensation and the Performance Graph) in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by reference to
the information set forth under the captions, "Security Ownership of Management"
and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ira Gumberg, a Director of the Company, is President and Chief Executive
Officer, and a principal shareholder of J.J. Gumberg Co. J.J. Gumberg Co.
manages numerous shopping centers, 11 of which contain stores of the Company.
Three of the leases were entered into after Mr. Gumberg became a Director of the
Company, and the Company believes such leases are on terms, no less favorable to
the Company than could have been obtained from an unrelated third party. The
aggregate rent and related occupancy charges paid during fiscal 1998 on those 11
stores amounted to $1,159,000.
-40-
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Registrant are
included in Part II, Item 8:
Consolidated Balance Sheets - January 31, 1998 and February 1, 1997
Consolidated Statements of Income for the three fiscal years ended
January 31, 1998
Consolidated Statements of Cash Flows for the three fiscal years
ended January 31, 1998
Consolidated Statements of Shareholders' Equity for the three
fiscal years ended January 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
Selected Quarterly Financial Data for the Fiscal Years Ended
January 31, 1998 and February 1, 1997 are included in Part II,
Item 8
All other schedules have been omitted because the required
information is shown in the consolidated financial statements or
notes thereto, because the amounts involved are not significant or
because the required subject matter is not applicable to the
Registrant.
3. Exhibits
See the Exhibit Index at sequential page 42 of this report.
(b) Reports on Form 8-K.
The Company was not required to and did not file a report on Form 8-K
for the 13-week period ended January 31, 1998. Reports on Form 8-K
were filed on February 12, 1998 and March 24, 1998 regarding the
Registrant's acquisition of House of Fabrics, Inc. as further
discussed in Note 9 to Notes to Consolidated Financial Statements.
The report on Form 8-K filed on March 24, 1998 includes required
financial statements and pro forma information related to the
acquisition.
-41-
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FABRI-CENTERS OF AMERICA, INC.
By: /s/ Alan Rosskamm April 24, 1998
--------------------------------------
Alan Rosskamm
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------- -------------------------------------- -------------
<S> <C> <C>
/s/Alan Rosskamm Chairman of the Board and Director
- ----------------
Alan Rosskamm (Chief Executive Officer)
/s/Brian P. Carney* Executive Vice President and Chief
- -------------------
Brian P. Carney Financial Officer
/s/Robert R. Gerber* Senior Vice President and Controller
- --------------------
Robert R. Gerber (Chief Accounting Officer)
/s/Betty Rosskamm* Director
- ------------------
Betty Rosskamm
/s/Alma Zimmerman* Director
- ------------------
Alma Zimmerman
/s/Scott Cowen* Director
- ---------------
Scott Cowen
/s/Frank Newman* Director
- ----------------
Frank Newman
/s/Ira Gumberg* Director
- ---------------
Ira Gumberg
/s/Gregg Searle* Director
- ----------------
Gregg Searle
The undersigned, by signing his name hereto, does hereby sign this Form 10-K
Annual Report on behalf of the above-named officers and directors of
Fabri-Centers of America, Inc., pursuant to powers of attorney executed on
behalf of each of such officers and directors.
*By: /s/ Alan Rosskamm April 24, 1998
------------------------------
Alan Rosskamm, Attorney-in-Fact
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
FABRI-CENTERS OF AMERICA, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
EXHIBIT INDEX
Official
Exhibit No. Description
- ----------- ---------------------------------------------------------------------------------
<S> <C> <C>
2 Asset Purchase Agreement among Fabri-Centers of America, Inc., FCA of Ohio,
Inc., Brown Group, Inc. and Cloth World, Inc. dated August 24, 1994.
(Incorporated by reference to an Exhibit in the Registrant's Form 8-K filed with
the Commission on October 2, 1994.)
3 (a) Form of 1995 Amended Articles of Incorporation of Fabri-Centers of America,
Inc. (Incorporated by reference to an Exhibit in the Registrant's Form 10-Q for
the quarter ended July 29, 1995 filed with Commission on September 11, 1995.)
3 (b) Amended Regulations. (Incorporated by reference to an Exhibit in the Registrant's
Form 8-K filed with the Commission on December 1, 1993.)
4 (a) Form of Second Amendment of Rights Agreement, dated August 2, 1995,
between the Registrant and Society National Bank, as successor by merger to
Ameritrust Company National Association, as Rights Agent. (Incorporated by
reference to an Exhibit in the Registrant's Form 10-Q for the quarter ended July
29, 1995 filed with Commission on September 11, 1995.)
10 (a) Form of Split Dollar Life Insurance Agreement between the Registrant and
certain of its officers. (Management contact or compensatory plan or
arrangement. Incorporated by reference to an Exhibit in the Registrant's Form
8-K filed with the Commission on December 1, 1993.)
10 (b) Split Dollar Life Insurance Agreement and Assignment between the Registrant
and Alma Zimmerman dated September 22, 1984. (Management contact or
compensatory plan or arrangement. Incorporated by reference to an Exhibit in
the Registrant's Form 8-K filed with the Commission on December 1, 1993.)
10 (c) Fabri-Centers of America, Inc. 1979 Supplemental Retirement Benefit Plan as
amended. (Management contact or compensatory plan or arrangement.
Incorporated by reference to an Exhibit in the Registrant's Form 8-K filed with
the Commission on December 1, 1993.)
10 (d) Split Dollar Life Insurance Agreements and Assignments between the Registrant
and Betty Rosskamm dated October 19, 1984. (Management contact or
compensatory plan or arrangement. Incorporated by reference to an Exhibit in
the Registrant's Form 8-K filed with the Commission on December 1, 1993.)
10 (e) Fabri-Centers of America, Inc. Executive Incentive Plan dated March 19, 1980
as amended. (Management contact or compensatory plan or arrangement.
Incorporated by reference to an Exhibit in the Registrant's Form 8-K filed with
the Commission on December 1, 1993.)
10 (f) Form of Employment Agreement between the Registrant and certain Executive
Officers. (Management contact or compensatory plan or arrangement.
Incorporated by reference to an Exhibit in the Registrant's Form 8-K filed with
the Commission on December 1, 1993.)
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
Exhibit Index
-continued-
Official
Exhibit No. Description
- ---------- ---------------------------------------------------------------------------------
<S> <C> <C>
10 (g) Fabri-Centers of America, Inc. 1990 Employees Stock Option and Stock
Appreciation Rights Plan as amended. (Management contact or compensatory
plan or arrangement. Incorporated by reference to an Exhibit in the Registrant's
Form 8-K filed with the Commission on December 1, 1993.)
10 (h) Credit Agreement dated as of September 30, 1994 and amended through
March 4, 1998 among Fabri-Centers of America, Inc. as borrower, the Banks
which are Signatories thereto and Keybank National Association, as Agent
10 (i) Restated Employment Agreement between Robert L. Norton (former officer) and
Fabri-Centers of America, Inc., dated April 22, 1994. (Management contract or
compensatory plan or arrangement. Incorporated by reference to an Exhibit in
the Registrant's Form 8-K filed with the Commission on October 2, 1994.)
10 (j) Fabri-Centers of America, Inc. 1996 Stock Option Plan for Non-Employee
Directors. (Management contract or compensatory plan or arrangement.
Incorporated by reference to Exhibit A to the Registrant's Proxy Statement for
its Annual Meeting held on June 12, 1996.)
10 (k) House of Fabrics, Inc. Non-Standardized 401(k) Plan. (Management contract or
compensatory plan or arrangement. Incorporated by reference to Exhibit 10 in
House of Fabrics, Inc.'s (commission file number 1-7927) Form 10-K filed with
the Commission on May 1, 1997.)
21 List of Subsidiaries
23 Consent of Independent Public Accountants
24 Directors and Officers Power of Attorney
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10(h)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FABRI-CENTERS OF AMERICA, INC.
AS THE BORROWER
THE BANKS NAMED HEREIN
AS BANKS
AND
KEYBANK NATIONAL ASSOCIATION,
AS AGENT
----------------------------------
AMENDMENT NO. 2
DATED AS OF
MARCH 4, 1998
TO
CREDIT AGREEMENT
DATED AS OF
SEPTEMBER 30, 1994
----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
AMENDMENT NO. 2 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT, dated as of March 4, 1998
("THIS AMENDMENT"), among:
(i) FABRI-CENTERS OF AMERICA, INC., an Ohio corporation
(herein, together with its successors and assigns, the "BORROWER");
(ii) the Banks party hereto (the "BANKS"); and
(iii) KEYBANK NATIONAL ASSOCIATION, a national banking
association, as agent (the "AGENT") for the Banks under the Credit
Agreement (hereafter defined):
PRELIMINARY STATEMENTS:
(1) The Borrower, the Banks named therein, and the Agent entered into
the Credit Agreement, dated as of September 30, 1994, as amended by Amendment
No. 1 thereto, dated as of June 2, 1997 (as so amended, the "CREDIT AGREEMENT").
Capitalized terms used herein without definition shall have the respective
meanings ascribed thereto in the Credit Agreement.
(2) The Borrower, the Banks party hereto and the Agent desire to
amend certain of the terms and provisions of the Credit Agreement in order to,
among other things, (i) increase the Commitments from $200,000,000 to
$250,000,000, (ii) reflect the revised Commitments of the Banks, (iii) extend
the Commitment Period, (iv) permit the acquisition by the Borrower of House of
Fabrics, Inc., (v) change the interest rate and Facility Fee provisions, (vi)
modify certain financial covenants, and (vii) delete references to the
Convertible Subordinated Debentures, which are no longer outstanding, all as
more fully set forth below.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT.
1.1. REVISED COMMITMENTS, ETC. Effective on the Effective Date (as
hereinafter defined):
(a) Annex A to the Credit Agreement is amended to read in
its entirety as set forth on Annex A hereto;
(b) the phrase "Sixty Million Dollars ($60,000,000)" which
appears in Section 2.1 and again in Sections 4.1, 5.1(a) and 5.2(a)
of the Credit Agreement is changed in each such instance to "Eighty
Million Dollars ($80,000,000)";
(c) the phrase "Two Hundred Million Dollars
($200,000,000)" which appears in the definition of the term Total
Commitment Amount in Section 1.1 of the Credit Agreement and again in
Section 2.1 of the Credit Agreement is changed in each such instance
to "Two Hundred Fifty Million Dollars ($250,000,000)"; and
(d) the phrase "1995 Fiscal Year" which appears in Section
3.2(c) of the Credit Agreement [which Section is captioned Extension
of Commitment Period], is changed to "1999 Fiscal Year".
1.2. INITIAL PRICING, ETC. (a) Effective on the Effective Date and
continuing to the Interest Adjustment Date relating to the delivery of the
Borrower's financial statements for its Fiscal Quarter ended May 2, 1998, the
Applicable Fee Percentage shall be 20.00 basis points per annum and the
Applicable Loan Percentage shall be 75.00 basis points per annum. On and after
such Interest Adjustment Date the Applicable Fee Percentage and the Applicable
Loan Percentage shall be subject to determination and change as provided in the
Credit Agreement, as amended hereby.
<PAGE> 3
(b) Effective on the Effective Date, Section 3.4(f) of the Credit
Agreement is amended by adding the following at the end thereof:
Alternatively, the Agent may in its discretion permit the Borrower to
pay such commissions quarterly in arrears on the last day of each
fiscal quarter.
1.3. CHANGES IN DEFINITIONS. (a) CHANGES IN EXISTING DEFINITIONS.
Effective on the Effective Date, the following definitions contained in Section
1.1 of the Credit Agreement are amended to read in their entirety as follows:
"APPLICABLE FEE PERCENTAGE" shall mean, on each day of any
Fiscal Quarter, with respect to any Facility Fee (as set forth in
Section 3.4(a)), the annual percentage rate (expressed in basis
points) indicated in the following table corresponding to the
Borrower's Consolidated Leverage Ratio as measured for the Fiscal
Quarter immediately preceding and ending on the applicable Fee
Determination Date and the Borrower's Consolidated Fixed Charge
Coverage Ratio as measured for the Four Fiscal Quarter Period ending
as of such Fee Determination Date:
<TABLE>
<CAPTION>
FACILITY FEE PRICING GRID TABLE
(EXPRESSED IN BASIS POINTS)
CONSOLIDATED CONSOLIDATED FIXED CHARGE COVERAGE RATIO
LEVERAGE RATIO
Less Than Greater Than or Equal to Greater Than 2.00 to 1.00
1.75 to 1.00 1.75 to 1.00 but but Less than 2.25 to 1.00
Less Than 2.00 to 1.00
<S> <C> <C> <C>
Greater Than .35 to 1.00 30.00 20.00 20.00
Less than or equal to .35 to 1.00 but 30.00 20.00 20.00
Greater than .25 to 1.00
Less Than or equal to .25 to 1.00 but 30.00 20.00 15.00
Greater than .15 to 1.00
Less Than or equal to .15 to 1.00 20.00 15.00 15.00
<CAPTION>
CONSOLIDATED CONSOLIDATED FIXED CHARGE COVERAGE RATIO
LEVERAGE RATIO
Greater Than or Equal to
2.25 to 1.00
<S> <C>
Greater Than .35 to 1.00 20.00
Less Than or Equal to .35 to 1.00 but 15.00
Greater Than .25 to 1.00
Less Than or Equal to .25 to 1.00 but 15.00
Greater Than .15 to 1.00
Less Than or Equal to .15 to 1.00 10.00
</TABLE>
<PAGE> 4
"APPLICABLE LOAN PERCENTAGE" shall mean, on each day of
any Interest Period, with respect to any LIBOR Loans comprising a
Revolving Credit Borrowing or any Fed Funds Rate Loans comprising a
Revolving Credit Borrowing, as the case may be, the annual percentage
rate (expressed in basis points) indicated in the following table
corresponding to the Borrower's Consolidated Leverage Ratio as
measured for the Fiscal Quarter immediately preceding and ending on
the Determination Date applicable to such Interest Period and the
Borrower's Consolidated Fixed Charge Coverage Ratio as measured for
the Four Fiscal Quarter Period ending as of such Determination Date:
<TABLE>
<CAPTION>
INTEREST RATE PRICING GRID TABLE
(EXPRESSED IN BASIS POINTS)
CONSOLIDATED CONSOLIDATED FIXED CHARGE COVERAGE RATIO
LEVERAGE RATIO
Less Than Greater Than or Equal to Greater Than 2.00 to 1.00
1.75 to 1.00 1.75 to 1.00 but but Less Than 2.25 to 1.00
Less Than 2.00 to 1.00
<S> <C> <C> <C>
Greater Than .35 to 1.00 100.00 75.00 65.00
Less Than or Equal to .35 to 1.00 but
Greater Than .25 to 1.00 70.00 65.00 45.00
Less Than or Equal to .25 to 1.00 but
Greater Than .15 to 1.00 60.00 45.00 35.00
Less Than or Equal to .15 to 1.00 50.00 35.00 30.00
<CAPTION>
CONSOLIDATED CONSOLIDATED FIXED CHARGE COVERAGE RATIO
LEVERAGE RATIO
Greater Than or Equal to
2.25 to 1.00
<S> <C>
Greater Than .35 to 1.00 45.00
Less Than or Equal to .35 to 1.00 but
Greater Than .25 to 1.00 35.00
Less Than or Equal to .25 to 1.00 but
Greater Than .15 to 1.00 30.00
Less Than or Equal to .15 to 1.00 25.00
</TABLE>
"COMMITMENT PERIOD" shall mean the period from the date
hereof to January 31, 2003, as the same may be extended pursuant to
Section 3.2(c) or reduced pursuant to Section 3.2(a).
"MAXIMUM AVAILABILITY AMOUNT" shall mean the Total
Commitment Amount, giving effect to any reductions in the Total
Commitment Amount pursuant to Section 3.2(a).
(b) ADDITION OF DEFINITION OF CONSOLIDATED NET WORTH. Effective on
the Effective Date, the following definition is added to Section 1.1 of the
Credit Agreement in appropriate alphabetic order:
"CONSOLIDATED NET WORTH" shall mean, as of any date of
determination, the excess of (i) the net book value (after deducting
all applicable reserves and excluding any re-appraisal or write-up of
assets after the date of this Agreement except any re-appraisal or
write-up of assets at the time such assets are acquired in the
Acquisition or by means of corporate acquisitions subsequent to the
date of this Agreement) of all Consolidated Assets of the Borrower
and its Subsidiaries as of such date, OVER (ii) all Consolidated
Liabilities of the Borrower and its Subsidiaries as of such date, in
each case determined on a consolidated basis in accordance with
generally accepted accounting principles.
(c) DELETION OF THE DEFINITION OF, AND REFERENCES TO, CONVERTIBLE
SUBORDINATED DEBENTURES. Inasmuch as the Convertible Subordinated Debentures are
no longer outstanding, effective on the Effective Date, Section 1.1 of the
Credit Agreement is amended to delete the definition of the term "Convertible
Subordinated Debentures", and all references to such term elsewhere in the
Credit Agreement shall be of no further force or effect.
1.4. USE OF PROCEEDS. Effective on the Effective Date, Section 2.2 of
the Credit Agreement is amended by adding the following at the end thereof:
Notwithstanding the following, the Borrower may use the proceeds of
the Revolving Credit Loans hereunder to acquire House of Fabrics,
Inc. as contemplated by the Offer to Purchase dated February 6, 1998
made by FCA Acquisition Corporation, its Subsidiary, to retire
indebtedness
<PAGE> 5
of House of Fabrics, Inc which is outstanding at the date of the
acquisition, and to pay expenses and other amounts contemplated by
such Offer to Purchase.
1.5. ACQUISITIONS; BULK TRANSFERS. Effective on the Effective Date,
Section 8.9 of the Credit Agreement is amended to add the following at the end
thereof:
Notwithstanding the foregoing, the Borrower shall be permitted to
consummate the acquisition of House of Fabrics, Inc. as contemplated
by the Offer to Purchase dated February 6, 1998 made by FCA
Acquisition Corporation, its Subsidiary.
1.6. INDEBTEDNESS FOR BORROWED MONEY. Effective on the Effective
Date, Section 8.11 of the Credit Agreement is amended to, among other things,
delete references to the Convertible Subordinated Debentures and to change the
overall borrowing limitation which was contained in the proviso at the end
thereof, so that, as so amended, Section 8.11 of the Credit Agreement reads in
its entirety as follows:
SECTION 8.11 INDEBTEDNESS FOR BORROWED MONEY. The Borrower
shall not, and shall not permit any of its Subsidiaries to, create,
incur or suffer to exist any Indebtedness for Borrowed Money of any
kind; PROVIDED, HOWEVER, that this Section 8.11 shall not apply to:
(i) the Obligations of the Borrower under this
Agreement and any obligations of any Subsidiary under any
Guaranty of Payment and any obligation of any Subsidiary
under a Reimbursement Agreement in respect of any Letter
of Credit;
(ii) any purchase money indebtedness secured by
a purchase money mortgage or security interest permitted
by Section 8.10 hereof;
(iii) any Subordinated Indebtedness;
(iv) so long as the Borrower and its
Subsidiaries are satisfying the Qualifying Financial
Standards, loans may be obtained from financial
institutions not pursuant to this Agreement ("OUTSIDE
LOANS") in the aggregate principal amount of up to
$30,000,000 at any one time outstanding; PROVIDED,
HOWEVER, that any such Outside Loan obtained from any
financial institution other than a Bank may not remain
outstanding for more than 30 consecutive days and;
PROVIDED, FURTHER, that any such Outside Loans must be
repaid within one Banking Day following the date as of
which the Borrower and its Subsidiaries no longer satisfy
such Qualifying Financial Standards, except that, if such
repayment would cause the Borrower to incur compensation
obligations resulting from the prepayment of any such
Outside Loan with a fixed rate, the Borrower shall not be
required to repay such loan until the earlier of (x) the
expiration of the interest period or (y) the date upon
which repayment will not result in a compensation
obligation;
(v) certain unsecured senior Indebtedness or
Subordinated Indebtedness the terms of which are
acceptable to all of the Banks (it being understood that
any Bank will not find acceptable any such terms which
are, in any Bank's judgment, more restrictive,
individually or collectively, than the terms of this
Agreement unless the Banks are given the right, at their
option, to incorporate the same or similar terms into the
provisions of this Agreement by way of amendment thereto);
in any event such indebtedness will be automatically
applied in such a way as to reduce the outstanding amount
of the Revolving Credit Loans and will ratably reduce
Total Commitment Amount by like amount;
(vi) any permitted exception set forth in
Section 8.9 or 8.10 hereof;
(vii) the outstanding principal amount with
respect to the Swingline Facility; and
(viii) if at the time of incurrence thereof the
Borrower and its Subsidiaries have satisfied the
Qualifying Financial Standards, any Negotiated Bid Loans
obtained from any
<PAGE> 6
of the Banks aggregating not more than $75,000,000 in
principal amount at any one time outstanding; PROVIDED,
HOWEVER, that (A) no such Negotiated Bid Loan may remain
outstanding for more than 3 months and (B) no Bank may
have outstanding Negotiated Bid Loans in an aggregate
greater than two times the amount of such Bank's
Commitment; and, PROVIDED, FURTHER, that the Outside Loans
and the Negotiated Bid Loans shall not be made or
maintained in an aggregate principal amount outstanding at
any one time which, when combined with the then
outstanding aggregate principal amount of all Revolving
Credit Loans and the aggregate amount of all outstanding
Risk Participation Exposure at such time, would total more
than $280,000,000.
1.7. CAPITAL EXPENDITURES. Effective on the Effective Date, Section
8.17 of the Credit Agreement shall be of no further force or effect.
1.8. CONSOLIDATED NET WORTH. Effective on the Effective Date, Section
8.20 of the Credit Agreement is amended to read in its entirety as follows:
SECTION 8.20 CONSOLIDATED NET WORTH. The Borrower will not
suffer or permit its Consolidated Net Worth as of the end of any
Fiscal Quarter to be less than $205,000,000, EXCEPT that (i)
effective as of the end of the Borrower's Fiscal Quarter ended May 2,
1998, and as of the end of each Fiscal Quarter thereafter, the
foregoing amount (as it may from time to time be increased as herein
provided), shall be increased by 50% of the consolidated net income
of the Borrower and its Subsidiaries for the Fiscal Quarter ended on
such date, if any, as determined in conformity with generally
accepted accounting principles (there being no reduction in the case
of any such consolidated net income which reflects a deficit), (ii)
the foregoing amount (as it may from time to time be increased as
herein provided), shall be increased by an amount equal to 100% of
the net proceeds received by the Borrower at any time after January
31, 1998 from any stock or other equity offering (excluding stock
offerings under any employee benefit plan of the Borrower or its
Subsidiaries), and (iii) the foregoing amount (as it may from time to
time be increased as herein provided), shall be increased by an
amount equal to 100% of the aggregate principal amount of any
Indebtedness converted into equity of the Borrower after January 31,
1998.
1.9. CONSOLIDATED FIXED CHARGE COVERAGE. Effective on the Effective
Date, Section 8.21 of the Credit Agreement is amended to read in its entirety as
follows:
SECTION 8.21 CONSOLIDATED FIXED CHARGE COVERAGE. The
Borrower shall not suffer or permit, as at the end of any Four Fiscal
Quarter Period ending on or after the Fiscal Quarter ended on or
nearest to January 31, 1998, the ratio (the "CONSOLIDATED FIXED
CHARGE COVERAGE RATIO") of:
(a) Consolidated Net Pre-Tax Earnings of the
Borrower and its Subsidiaries attributable to such period,
PLUS the sum (without duplication) of the following, to
the extent deducted in determining such Consolidated
Pre-Tax Earnings, (i) Consolidated Net Fixed Lease Charges
attributable to such period, PLUS (ii) Consolidated Net
Interest Expense attributable to such period, PLUS (iii)
depreciation and amortization charges of the Borrower and
its Subsidiaries attributable to such period, PLUS (iv)
during any such period ending not later than one year
following the completion of the acquisition of House of
Fabrics, up to $35,000,000, on a pre-tax basis, of charges
taken during such period which are related to such
acquisition,
to
(b) the sum of (i) Consolidated Net Fixed Lease
Charges attributable to such period, PLUS (ii)
Consolidated Net Interest Expense attributable to such
period, PLUS (iii) scheduled principal payments in respect
of any Long-Term Indebtedness of the Borrower and its
Subsidiaries during said period,
to be as at such date less than 1.50 to 1.00.
<PAGE> 7
1.10. CONSOLIDATED CURRENT FUNDED INDEBTEDNESS. Effective on the
Effective Date, Section 8.22 of the Credit Agreement is amended to read in its
entirety as follows:
SECTION 8.22 CONSOLIDATED CURRENT FUNDED INDEBTEDNESS. The Borrower
shall not suffer or permit, as at the end of any Fiscal Quarter, the ratio of:
(x) Consolidated Current Assets at such date to (y) Consolidated Current
Liabilities at such date, PLUS Funded Senior Debt at such date, to be less than
the ratio shown below for such Fiscal Quarter:
<TABLE>
<CAPTION>
FQ1 of such FY FQ2 of such FY FQ3 of such FY FQ4 of such FY
<S> <C> <C> <C> <C>
Fiscal Year 0.95 to 1.00 0.95 to 1.00 0.95 to 1.00 1.10 to 1.00
ended on or
nearest to
January 31, 1999
Fiscal Year 1.00 to 1.00 1.00 to 1.00 1.00 to 1.00 1.15 to 1.00
ended on or
nearest to
January 31, 2000
Fiscal Year 1.05 to 1.00 1.05 to 1.00 1.05 to 1.00 1.20 to 1.00
ended on or
nearest to
January 31, 2001
Any Subsequent 1.10 to 1.00 1.10 to 1.00 1.10 to 1.00 1.25 to 1.00
Fiscal Year
</TABLE>
1.11. CONSOLIDATED LEVERAGE RATIO. Effective on the Effective Date,
Section 8.23 of the Credit Agreement is amended to read in its entirety as
follows:
SECTION 8.23 CONSOLIDATED LEVERAGE RATIO. The Borrower shall not
suffer or permit, as at the end of any Fiscal Quarter, the ratio (the
"CONSOLIDATED LEVERAGE RATIO") of: (x) Funded Senior Debt outstanding as at such
date, TO (y) the sum of Funded Senior Debt outstanding as at such date PLUS
Consolidated Net Worth at such date, to be greater than the ratio shown below
for such Fiscal Quarter:
<TABLE>
<CAPTION>
FQ1 of such FY FQ2 of such FY FQ3 of such FY FQ4 of such FY
<S> <C> <C> <C> <C>
Fiscal Year 0.50 to 1.00 0.55 to 1.00 0.55 to 1.00 0.45 to 1.00
ended on or
nearest to
January 31, 1999
Fiscal Year 0.50 to 1.00 0.55 to 1.00 0.55 to 1.00 0.45 to 1.00
ended on or
nearest to
January 31, 2000
Any Subsequent 0.45 to 1.00 0.50 to 1.00 0.50 to 1.00 0.40 to 1.00
Fiscal Year
</TABLE>
1.12. CONDITIONS TO ALL CREDIT EVENTS---NO MATERIAL ADVERSE CHANGE.
Effective on the Effective Date, Section 7.3 of the Credit Agreement is amended
to read in its entirety as follows:
SECTION 7.3 NO MATERIAL ADVERSE CHANGE. There has been no
event since the end of the Borrower's Fiscal Year ended on or nearest
to January 31, 1997 which would or might
<PAGE> 8
reasonably be expected to have a Material Adverse Effect; provided,
however, that the failure of this representation under this Section
7.3 shall not prevent the occurrence of a Rate Continuation or a Rate
Conversion subject to the provisions of Section 3.1(h).
1.13. FORM OF COMPLIANCE CERTIFICATE. Effective on the Effective
Date, Exhibits F and F-1 to the Credit Agreement are replaced by Exhibit F
attached hereto.
1.14. AMENDMENT TO FINANCIAL REPRESENTATIONS. Effective on the
Effective Date, Section 9.5 of the Credit Agreement is amended to read in its
entirety as follows:
SECTION 9.5 FINANCIAL CONDITION, ETC. (a) The Borrower has
furnished to the Banks and the Agent true, complete and correct
copies of (i) the audited consolidated balance sheets of the Borrower
and its consolidated subsidiaries as of the end of its Fiscal Year
ended on or nearest to January 31, 1997, and as of the end of the two
preceding Fiscal Years, and the related audited consolidated
statements of income, shareholders' equity, and cash flows for the
Fiscal Years then ended, accompanied by the unqualified report
thereon of the Borrower's independent accountants; and (ii) the
unaudited condensed consolidated balance sheets of the Borrower and
its consolidated subsidiaries as of the Fiscal Quarter ended on or
nearest to October 31, 1997, and the related unaudited condensed
consolidated statements of income and of cash flows of the Borrower
and its consolidated subsidiaries for the Fiscal Quarters then ended,
as contained in the Form 10-Q Quarterly Report of the Borrower filed
with the SEC. All such financial statements have been prepared in
accordance with generally accepted accounting principles,
consistently applied (except as stated therein), and fairly present
the financial position of the Borrower and its consolidated
subsidiaries as of the respective dates indicated and the
consolidated results of their operations and cash flows for the
respective periods indicated, subject in the case of any such
financial statements which are unaudited, to normal audit
adjustments, none of which will result in a Material Adverse Effect.
(b) Since the end of the Borrower's Fiscal Year ended on
or nearest to January 31, 1997, there has been no change in the
business, results of operations or financial condition of the
Borrower and its Subsidiaries, considered as an entirety, which has
had, or might reasonably be expected to have, a Material Adverse
Effect.
SECTION 2. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants as follows:
2.1. AUTHORIZATION, VALIDITY AND BINDING EFFECT. This Amendment has
been duly authorized by all necessary corporate action on the part of the
Borrower, has been duly executed and delivered by a duly authorized officer or
officers of the Borrower, and constitutes the valid and binding agreement of the
Borrower, enforceable against the Borrower in accordance with its terms.
2.2. REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The
representations and warranties of the Borrower contained in the Credit
Agreement, as amended hereby, are true and correct on and as of the date hereof
as though made on and as of the date hereof, except to the extent that such
representations and warranties expressly relate to a specified date, in which
case such representations and warranties are hereby reaffirmed as true and
correct when made.
2.3. NO EVENT OF DEFAULT, ETC. No condition or event has occurred or
exists which constitutes or which, after notice or lapse of time or both, would
constitute an Event of Default.
2.4. COMPLIANCE. The Borrower is in full compliance with all
covenants and agreements contained in the Credit Agreement, as amended hereby.
2.5. OFFER TO PURCHASE. The Borrower has delivered to the Banks and
the Agent a true and complete copy of the Offer to Purchase (the "OFFER TO
PURCHASE") dated February 6, 1998 made by FCA Acquisition Corporation, its
Subsidiary, relating to its offer to purchase any and all of the outstanding
shares of capital stock of House of Fabrics, Inc. ("HOUSE OF FABRICS").
<PAGE> 9
2.6. FINANCIAL PROJECTIONS. The Borrower has caused to be delivered
to the Banks a Confidential Information Memorandum dated February 10, 1998 which
includes financial projections prepared by management of the Borrower for the
Borrower and its Subsidiaries for the Fiscal Years 1999- 2003 which take into
account the acquisition contemplated by the Offer to Purchase (the "FINANCIAL
PROJECTIONS"). The Financial Projections were prepared on behalf of the Borrower
in good faith after taking into account the existing and historical levels of
business activity of the Borrower and its Subsidiaries, historical financial
information with respect to the properties and business of House of Fabrics to
be acquired pursuant to the Offer to Purchase, as supplied by management of
House of Fabrics, known trends, including general economic trends, and all other
information, assumptions and estimates considered by management of the Borrower
and its Subsidiaries to be pertinent thereto. The Financial Projections were
considered by management of the Borrower, as of such date of preparation, to be
realistically achievable; PROVIDED, that no representation or warranty is made
as to the impact of future general economic conditions or as to whether the
Borrower's projected consolidated results as set forth in the Financial
Projections will actually be realized. No facts are known to the Borrower at the
date hereof which, if reflected in the Financial Projections, would result in a
material adverse change in the assets, liabilities, results of operations or
cash flows reflected therein.
SECTION 3. RATIFICATIONS.
The terms and provisions set forth in this Amendment shall modify and
supersede all inconsistent terms and provisions set forth in the Credit
Agreement, and except as expressly modified and superseded by this Amendment,
the terms and provisions of the Credit Agreement are ratified and confirmed and
shall continue in full force and effect.
SECTION 4. EFFECTIVENESS OF AMENDMENTS.
The amendments to the Credit Agreement provided for in this Amendment
shall become effective if and when, on a date (the "EFFECTIVE DATE") on or prior
to March 31, 1998, the following conditions shall have been satisfied:
4.1. EXECUTION OF AMENDMENT; DELIVERY OF NOTES. This Amendment shall
have been executed by the Borrower and the Agent and counterparts hereof as so
executed shall have been delivered to the Agent; the Acknowledgment and Consent
appended hereto shall have been executed by the Guarantors named therein, and
counterparts thereof as so executed shall have been delivered to the Agent; and
the Agent shall have been notified by the Banks party hereto that such Banks
have executed this Amendment (which notification may be by facsimile or other
written confirmation of such execution). There shall have been delivered to the
Agent for the account of each Bank party hereto the appropriate Note or Notes
executed by the Borrower, in each case, in the amount, maturity and as otherwise
provided in the Credit Agreement as amended by this Amendment, in exchange for
the Notes previously outstanding under the Credit Agreement.
4.2. OFFER TO PURCHASE, ETC. (a) There shall have been no
modification to the Offer to Purchase subsequent to its date which is not
acceptable to all of the Banks.
(b) Shares representing not less than a majority of the fully diluted
outstanding equity securities of House of Fabrics shall have been duly tendered
pursuant to the Offer to Purchase, and FCA Acquisition Corporation shall have
accepted such shares for payment pursuant to the Offer to Purchase.
(c) Each of the conditions precedent to the obligations of FCA
Acquisition Corporation to purchase outstanding equity securities of House of
Fabrics which is contained in the Offer to Purchase or any other related
documents incident to the acquisition of House of Fabrics shall have been
fulfilled (without any waiver thereto not consented to by the Majority Banks) to
the satisfaction of the Majority Banks.
(d) Without limiting the generality of the foregoing, such purchase
of equity securities shall have been consummated in compliance with the terms of
the Offer to Purchase and all applicable laws, and all material governmental and
third party approvals in connection with such purchase shall have been
<PAGE> 10
obtained and remain in effect, and all applicable waiting periods provided in
any applicable laws shall have expired without any action being taken by any
competent authority (including any court having jurisdiction) which restrains or
prevents such transactions or imposes, in the judgment of the Majority Banks,
materially adverse conditions upon the consummation of such purchase or the
continued operation of the Borrower's businesses or the business to be acquired
by the Borrower pursuant to the Offer to Purchase.
(e) The Borrower shall have made arrangements, satisfactory to the
Agent, for (i) the prompt prepayment in full of all outstanding loans of House
of Fabrics out of the proceeds of Loans under the Credit Agreement as amended
hereby; (ii) the termination of the commitments of any lenders for any
additional loans to House of Fabrics; and (iii) the termination of any and all
liens and security interests securing any such loans made to House of Fabrics.
4.3. FEES. The Borrower shall have paid to the Agent for its own
account and for the account of the Banks all fees which the Borrower has agreed
to pay in connection with this Amendment.
4.4. REALLOCATION OF COMMITMENTS, ETC. On the Effective Date and
immediately prior to the time this Amendment becomes effective, (a) the Borrower
shall have paid all fees and interest accrued under the Credit Agreement to such
time, (b) the Borrower shall have paid in full all outstanding Negotiated Bid
Loans and Outside Loans, if any, owed to any Bank referred to in the Credit
Agreement which is not a Bank party to this Amendment, together with accrued
interest and any breakage commission thereon, (c) the outstanding Revolving
Credit Loans, Risk Participation Exposure and Commitments of the Banks under the
Credit Agreement shall have been assigned to KeyBank National Association, and
re-assigned by it to the Banks which are party to this Amendment, so that after
giving effect thereto the outstanding Revolving Credit Loans, Risk Participation
Exposure and Commitments are in the proportions specified in Annex A hereto.
4.5. CORPORATE RESOLUTIONS AND APPROVALS. The Agent shall have
received, in sufficient quantity for the Agent and the Banks, certified copies
of the resolutions of the Board of Directors of the Borrower and each Guarantor,
approving this Amendment and any other documents contemplated hereby to which
the Borrower or any such Guarantor, as the case may be, is or may become a
party, and of all documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to the execution, delivery and
performance by the Borrower or any such Guarantor of this Amendment and such
other documents to which it is or may become a party.
4.6. INCUMBENCY CERTIFICATES. The Agent shall have received, in
sufficient quantity for the Agent and the Banks, a certificate of the Secretary
or an Assistant Secretary of the Borrower and of each Guarantor, certifying the
names and true signatures of the officers of the Borrower or such Guarantor, as
the case may be, authorized to sign this Amendment and the other documents
contemplated hereby to which the Borrower or such Guarantor is a party and any
other documents to which the Borrower or any such other Credit Party is a party
which may be executed and delivered in connection herewith.
4.7. OPINION OF COUNSEL. On the Effective Date, the Agent shall have
received an opinion, addressed to the Administrative Agent and each of the Banks
and dated the Effective Date, from Thompson, Hine & Flory LLP, special counsel
to the Borrower, substantially in the form of Exhibit A hereto and covering such
other matters incident to the transactions contemplated hereby as the Agent may
reasonably request, such opinion to be in form and substance satisfactory to the
Agent.
SECTION 5. NOTICE OF EFFECTIVE DATE.
After this Amendment becomes effective as provided herein, the Agent
will promptly furnish a copy of this Amendment to each Bank and the Borrower and
confirm the specific Effective Date hereof.
SECTION 6. MISCELLANEOUS.
6.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Amendment shall survive the execution and delivery
of this Amendment, and no investigation by
<PAGE> 11
any Agent or any Bank or any subsequent Loan or other Credit Event shall affect
the representations and warranties or the right of the Agent or any Bank to rely
upon them.
6.2. REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any and
all other agreements, instruments or documentation now or hereafter executed and
delivered pursuant to the terms of the Credit Agreement as amended hereby, are
hereby amended so that any reference therein to the Credit Agreement shall mean
a reference to the Credit Agreement as amended hereby.
6.3. EXPENSES. As provided in the Credit Agreement, but without
limiting any terms or provisions thereof, the Borrower agrees to pay on demand
all costs and expenses incurred by the Agent in connection with the preparation,
negotiation, and execution of this Amendment, including without limitation the
costs and fees of the Agent's special legal counsel, regardless of whether the
amendments to the Credit Agreement contemplated by this Amendment become
effective in accordance with the terms hereof, and all costs and expenses
incurred by the Agent or any Bank in connection with the enforcement or
preservation of any rights under the Credit Agreement, as amended hereby.
6.4. SEVERABILITY. Any term or provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the term or provision so held to be invalid or unenforceable.
6.5. APPLICABLE LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Ohio.
6.6. HEADINGS. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.7. ENTIRE AGREEMENT. This Amendment is specifically limited to the
matters expressly set forth herein. This Amendment and all other instruments,
agreements and documentation executed and delivered in connection with this
Amendment embody the final, entire agreement among the parties hereto with
respect to the subject matter hereof and supersede any and all prior
commitments, agreements, representations and understandings, whether written or
oral, relating to the matters covered by this Amendment, and may not be
contradicted or varied by evidence of prior, contemporaneous or subsequent oral
agreements or discussions of the parties hereto. There are no oral agreements
among the parties hereto relating to the subject matter hereof or any other
subject matter relating to the Credit Agreement.
6.8. COUNTERPARTS. This Amendment may be executed by the parties
hereto separately in one or more counterparts, each of which when so executed
shall be deemed to be an original, but all of which when taken together shall
constitute one and the same agreement.
[The balance of this page is intentionally blank.]
<PAGE> 12
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered as of the date first above written.
FABRI-CENTERS OF AMERICA, INC. THE FIRST NATIONAL BANK OF CHICAGO
By:_______________________________ By:__________________________________
Executive Vice President Vice President
& Chief Financial Officer
KEYBANK NATIONAL ASSOCIATION, NATIONSBANK, N. A.
individually and as Agent
By:_______________________________ By:__________________________________
Vice President Senior Vice President
NATIONAL CITY BANK BANK ONE, NA
By:_______________________________ By:__________________________________
Vice President Vice President
COMERICA BANK
By:_______________________________
Vice President
<PAGE> 13
ACKNOWLEDGMENT AND CONSENT
For the avoidance of doubt, and without limitation of the intent and
effect of Sections 3 and 4 of the Guaranty of Payment executed and delivered by
each of the undersigned Guarantors (as each of such terms is defined in the
Credit Agreement referred to in the Amendment No. 2 to Credit Agreement (the
"AMENDMENT"), to which this Acknowledgment and Consent is appended), each of the
undersigned hereby unconditionally and irrevocably (i) acknowledges receipt of a
copy of the Credit Agreement and the Amendment, and (ii) consents to all of the
terms and provisions of the Credit Agreement as amended by the Amendment.
Capitalized terms which are used herein without definition shall have
the respective meanings ascribed thereto in the Credit Agreement referred to
herein. This Acknowledgment and Consent is for the benefit of the Banks and the
Agent, and their respective successors and assigns. No term or provision of this
Acknowledgment and Consent may be modified or otherwise changed without the
prior written consent of the Agent, given as provided in the Credit Agreement.
This Acknowledgment and Consent shall be binding upon the successors and assigns
of each of the undersigned. This Acknowledgment and Consent may be executed by
any of the undersigned in separate counterparts, each of which shall be an
original and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, each of the undersigned has duly executed and
delivered this Acknowledgment and Consent as of the date of the Amendment
referred to herein.
FCA FINANCIAL, INC. FABRI-CENTERS OF CALIFORNIA, INC.
By:__________________________ By:__________________________
Title: Title:
FABRI-CENTERS OF SOUTH DAKOTA, INC. FCA OF OHIO, INC.
By:__________________________ By:__________________________
Title: Title:
<PAGE> 14
ANNEX A
COMMITMENTS AND PERCENTAGES
<TABLE>
<CAPTION>
NAME OF BANK COMMITMENT RATABLE PORTION
=================================================================================
<S> <C> <C>
KeyBank National Association $105,000,000 42.00%
- ---------------------------------------------------------------------------------
National City Bank $35,000,000 14.00%
- ---------------------------------------------------------------------------------
The First National Bank of $35,000,000 14.00%
Chicago
- ---------------------------------------------------------------------------------
Comerica Bank $35,000,000 14.00%
- ---------------------------------------------------------------------------------
Bank One, NA $25,000,000 10.00%
- ---------------------------------------------------------------------------------
NationsBank, N. A. $15,000,000 06.00%
- ---------------------------------------------------------------------------------
TOTAL COMMITMENT $250,000,000 100%
AMOUNT
</TABLE>
<PAGE> 15
EXHIBIT A
FORM OF OPINION OF SPECIAL COUNSEL TO THE BORROWER
___________, 1998
To the Agent and Each of the Banks
Named in the Credit Agreement
Referred to Below
c/o KeyBank National Association,
as Agent
Key Center
127 Public Square
Cleveland, Ohio 44114
Attention: Large Corporate Group
Re: $250,000,000 Credit Agreement with Fabri-Centers of
America, Inc.
---------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Fabri-Centers of America, Inc.
(the "BORROWER"), an Ohio corporation, in connection with the Credit Agreement,
dated as of September 30, 1994, as amended by Amendment No. 1 to Credit
Agreement, dated as of June 2, 1997, and Amendment No. 2 to Credit Agreement
("AMENDMENT NO. 2 TO CREDIT AGREEMENT"), dated as of March 4, 1997, among the
Borrower, the Banks named therein, and KeyBank National Association (as
successor by merger and change of name to Society National Bank), as agent (the
"AGENT") for the Banks thereunder (as so amended, the "CREDIT AGREEMENT"). This
opinion letter is delivered to you on behalf of the Borrower pursuant to its
request and pursuant to the requirements of Section 4 of Amendment No. 2 to
Credit Agreement. Capitalized terms used herein without definition shall have
the respective meanings ascribed thereto in the Credit Agreement.
As such special counsel, we have examined (i) the Credit Agreement,
(ii) the Revolving Credit Notes issued today pursuant to Amendment No. 2 to
Credit Agreement (the "REVOLVING CREDIT NOTES"), (iii) the separate Guaranty of
Payment (each a "GUARANTY OF PAYMENT" and, collectively, the "GUARANTIES OF
PAYMENT"), dated as of September 30, 1994, executed and delivered by each of FCA
Financial, Inc., an Ohio corporation, Fabri-Centers of South Dakota, Inc., an
Ohio corporation, Fabri-Centers of California, Inc., an Ohio corporation, and
FCA of Ohio, Inc., an Ohio corporation (individually, a "SUBSIDIARY" and,
collectively, the "SUBSIDIARIES"), in favor of the Agent, for the ratable
benefit of the Agent and the Banks from time to time party to the Credit
Agreement, and (iv) the certificate (the "CERTIFICATE") of an officer of the
Borrower, dated the date hereof (a copy of which is appended hereto), certifying
that the documents listed therein are all of the indentures, loan or credit
agreements, mortgages, security agreements, bonds, notes, debentures and other
agreements or instruments, relating to any Funded Senior Debt of the Borrower or
any of the Subsidiaries, which restrict or purport to restrict the Borrower's or
any Subsidiary's right to borrow money or guarantee indebtedness, together with
such additional documents and such records and matters of law as we have
considered necessary as a basis for the opinions expressed herein. In connection
with our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity with
the originals of all documents submitted to us as copies or telecopied
facsimiles, and the authenticity of the originals of such latter documents.
Further, with your consent, we have assumed the legal power of the Banks and the
Agent to enter into and perform the Credit Agreement and the due authorization,
execution, and delivery of the Credit Agreement by the Banks and the Agent.
Based upon the foregoing and subject to the qualifications,
limitations and assumptions specified herein, we are of the opinion that:
<PAGE> 16
1. EXISTENCE, CORPORATE POWER AND AUTHORITY. Each of the
Borrower and the Subsidiaries is a corporation validly existing and
in good standing under the laws of the State of Ohio, with corporate
power and authority to execute and deliver and perform its
obligations under the Credit Agreement and the Revolving Credit
Notes, in the case of the Borrower, and the Guaranty of Payment to
which it is a party, in the case of any Subsidiary.
2. AUTHORIZATION, EXECUTION AND DELIVERY. The Credit Agreement
and the Revolving Credit Notes have each been duly authorized by all
necessary corporate action on the part of the Borrower and duly
executed and delivered on behalf of the Borrower by an officer or
officers of the Borrower thereunto duly authorized. Each Guaranty of
Payment has been duly authorized by all necessary corporate action
on the part of the Subsidiary which is a party thereto and duly
executed and delivered on behalf of such Subsidiary by an officer or
officers of such Subsidiary thereunto duly authorized.
3. NO GOVERNMENTAL CONSENT, ETC. No consent or approval or
other action by, and no notice to or filing with, any governmental
body, agency or authority, is required under any United States
federal or State of Ohio law, regulation or rule as a condition to
the valid execution, delivery or performance by the Borrower or any
Subsidiary of the Credit Agreement, the Revolving Credit Notes or
the Guaranty of Payment to which any such Subsidiary is a party, as
the case may be.
4. NO CONFLICTS, ETC. The execution, delivery and performance
of the Credit Agreement, the Revolving Credit Notes and the
Guaranties of Payment on the part of the Borrower and the
Subsidiaries, as the case may be, do not contravene, or constitute a
default under, or violate, any term or provision of (i) the articles
of incorporation or code of regulations of the Borrower or any
Subsidiary, (ii) any United States federal or State of Ohio law,
regulation or rule applicable to the Borrower or any Subsidiary, as
the case may be, or (iii) any indenture, loan or credit agreement,
mortgage, security agreement, bond, note, debenture or other
agreement or instrument binding on or affecting the Borrower or any
Subsidiary which is listed in the Certificate, and do not result in
the creation or imposition of any Lien on any material asset of the
Borrower or any of the Subsidiaries pursuant to any such term or
provision.
5. VALIDITY AND BINDING EFFECT, ETC. The Credit Agreement, the
Revolving Credit Notes and the Guaranties of Payment each
constitutes a valid and binding agreement or obligation of the
Borrower or any Subsidiary, as the case may be, which is a party
thereto, enforceable against the Borrower or any such Subsidiary, as
the case may be, in accordance with its respective terms, except to
the extent enforceability may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws affecting the enforcement of the
rights of creditors generally, and (ii) the effect of general
principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
6. MARGIN REGULATIONS. Based in part upon the accuracy of
representations and warranties of the Borrower contained in the
Credit Agreement to the effect that neither the Borrower nor any of
its Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of
purchasing or carrying "margin stock" (as defined in Regulation U of
the Board of Governors of the Federal Reserve System), and that at
no time would more than 25% of the value of the assets of the
Borrower or the Borrower and its Consolidated Subsidiaries that are
subject to any "arrangement" (as such term is used in section
221.2(g) of Regulation U) under the Credit Agreement be represented
by margin stock, Borrowings under the Credit Agreement will not
result in any violation of Regulation G, Regulation T, Regulation U
or Regulation X of the Board of Governors of the Federal Reserve
System.
7. INVESTMENT COMPANY. The Borrower is not an "investment
company" within the meaning of the Investment Company Act of 1940,
as amended.
Please be advised that the foregoing opinions are subject to the
following qualifications and assumptions:
<PAGE> 17
A. Our opinions in paragraphs 3 and 4 above insofar as
such paragraphs relate to requirements of any United States federal
or State of Ohio laws, regulations or rules is based upon a review of
those laws, regulations and rules that, in our experience, are
normally applicable to transactions of the type contemplated by the
Credit Agreement, the Revolving Credit Notes and the Guaranties of
Payment. We express no opinion as to any violation of any law,
regulation or rule or absence of any consent, approval, action or
filing (i) that does not in any practical manner adversely affect the
rights of the Agent or any Bank under the Credit Agreement or any of
the other documents referred to herein and does not deprive the Agent
or any Bank of any material benefit thereunder, or (ii) which can be
readily remedied without significant delay, expense or loss to the
Agent or any Bank.
B. With reference to our opinion in paragraph 4 above, we
note that the Ohio criminal usury statute, section 2905.21 of the
Ohio Revised Code, defines "Criminal usury" in section 2905.21(H) as
"illegally charging, taking or receiving any money or other property
as interest on an extension of credit at a rate exceeding twenty-five
percent per annum ... unless... the rate of interest is otherwise
authorized by law...". Whether the exemption of the Loans made
pursuant to the Credit Agreement from the Ohio civil usury statute
because the Loans constitute "business loans", as defined in section
1343.01 of the Ohio Revised Code, the provisions of section 1701.68
of the Ohio Revised Code (which generally prohibit any domestic or
foreign corporation from interposing the defense of usury in any
proceeding upon or with reference to any obligation of such
corporation), or any other similar exemptive provision of law, makes
the rate "otherwise authorized by law" within the contemplation of
section 2905.21(H), is unclear. We are unaware of any Ohio authority
on the application of section 2905.21(H) to an arms-length commercial
loan transaction.
C. We express no opinion as to the enforceability of any
term or provision of the Credit Agreement, the Revolving Credit Notes
or the Guaranties of Payment that purports to (i) restrict access by
the Borrower or any Subsidiary to legal or equitable remedies; (ii)
waive or affect any right to notices; (iii) provide for nonjudicial
remedies; (iv) waive the consequences of any delay or omission in the
enforcement of remedies; (v) provide for the payment or reimbursement
by the Borrower or any Subsidiary of any attorneys' fees in
connection with the enforcement of obligations of the Borrower or any
Subsidiary, to the extent that the recovery of any such attorneys'
fees under such circumstances would be contrary to the public policy
of the State of Ohio; or (vi) waive the right to trial by jury.
D. We express no opinion as to compliance or noncompliance
of the Agent or any Bank with any state or federal laws or
regulations applicable to the Agent or any Bank by reason of the
legal or regulatory status or the nature of the business of the Agent
or any Bank, except as specified in paragraph 6 above.
This opinion letter is rendered solely for your information in
connection with the transactions contemplated in the Credit Agreement and is not
to be quoted in whole or in part or otherwise referred to in any of your
financial statements or other public releases, nor is it to be filed with or
delivered to any governmental agency or other person (other than independent
accountants and counsel who receive this letter in the course of representation
of the Agent, any Bank, or any prospective or actual assignee or participant)
without the prior written consent of the undersigned, except as required by law.
This opinion letter may not be relied upon for any other purpose whatsoever or
by any person other than the Agent, the Banks and their respective loan
participants and assignees.
Very truly yours,
<PAGE> 18
FABRI-CENTERS OF AMERICA, INC.
OFFICER'S CERTIFICATE
The undersigned hereby certifies that he is an officer of
FABRI-CENTERS OF AMERICA, INC., an Ohio corporation (the "BORROWER"), holding
the office or offices in the Borrower indicated below his signature hereto and
that, as such officer he is authorized to execute and deliver this Certificate
on behalf of the Borrower, and with reference to the Credit Agreement, dated as
of September 30, 1994, as amended by Amendment Nos. 1 and 2 thereto, dated as of
June 2, 1997 and March 4, 1998, among the Borrower, the Banks named therein and
KeyBank National Association (as successor by merger and change of name to
Society National Bank), as Agent (as so amended, the "CREDIT AGREEMENT";
capitalized terms used herein without definition shall have the respective
meanings ascribed thereto in the Credit Agreement), further certifies as
follows:
(a) BACKGROUND. I am fully familiar with the financial
affairs of the Borrower and its Subsidiaries and have made such
investigation as I considered necessary as a basis for the statements
in this Certificate.
(b) RESTRICTIVE DOCUMENTS. The documents listed below are
all of the indentures, loan or credit agreements, mortgages, security
agreements, bonds, notes, debentures and other agreements or
instruments, relating to any Funded Senior Debt of the Borrower or
any of the Subsidiaries, which restrict or purport to restrict the
Borrower's or any Subsidiary's right to borrow money or guarantee
indebtedness:
(1) Credit Agreement.
(2) Other notes, applications for credit, etc.
which incorporate covenants, etc. from the Existing Credit
Agreement or the Credit Agreement. Any such documents
which incorporate covenants from the Credit Agreement are
being or will be modified to incorporate covenants from
the Credit Agreement.
(c) NO RESTRICTIVE ORDERS, JUDGMENTS, ETC. There are no
orders, writs, judgments, awards, injunctions or decrees which
restrict or purport to restrict the Borrower's or any Subsidiary's
right to borrow money or guarantee indebtedness.
WITNESS the due execution and delivery of this Certificate by the
undersigned this ___th day of March, 1998.
------------------------------------
Brian P. Carney
Executive Vice President
& Chief Financial Officer
<PAGE> 19
EXHIBIT F
FABRI-CENTERS OF AMERICA, INC.
QUARTER-ANNUAL COMPLIANCE CERTIFICATE
Certified on this __ day of ________, 19__ ("THIS DATE") as of
______, 19__ (the "REPORT DATE") pursuant to Section 8.1(c)(ii) of the Credit
Agreement (as hereinafter defined).
Reference is hereby made to that certain Credit Agreement, dated as
of September 30, 1994 (as amended from time to time, the "CREDIT AGREEMENT"),
among Fabri-Centers of America, Inc. (the "BORROWER"), certain banks which are
signatories thereto (the "BANKS"), and KeyBank National Association, as agent
for the Banks (the "AGENT"). Unless otherwise defined herein, all capitalized
terms used herein shall have the meanings ascribed to such terms in the Credit
Agreement.
Pursuant to Section 8.1(c)(ii) of the Credit Agreement, I certify to
the Banks that I am the __________________[responsible financial officer] of the
Borrower and further certify to the Banks, on behalf of the Borrower, to the
best of my knowledge and belief, as follows:
1. The conclusions set forth on the attached pages,
together with the accompanying calculations, indicate the Borrower's
compliance or non-compliance with certain sections of the Credit
Agreement:
2. Enclosed herewith are Borrower's [unaudited
quarterly/audited annual] financial statements as required by Section
8.1 of the Credit Agreement.
3. No Possible Default or Event of Default existed as at
the Report Date, nor does any exist at this date.(1)
IN WITNESS WHEREOF, the undersigned has duly executed and delivered
this Certificate as of the date set forth below.
FABRI-CENTERS OF AMERICA, INC.
on behalf of itself and its Subsidiaries
By:_______________________________
Title:
Date:_______________
_______________________
(1) If this certification cannot be given, substitute a brief
description of the Possible Default(s) or Event of Default(s) and Borrower's
intentions in respect thereof.
<PAGE> 20
SECTION 8.20 CONSOLIDATED NET WORTH.
Required Beginning Amount of
Consolidated Net Worth $205,000,000
Plus:
50% of positive Consolidated Net
Income for each FQ (no deduction for deficits)
FQ1 of 1999 FY $___________
FQ2 of 1999 FY $___________
FQ1 of 1999 FY $___________
FQ4 of 1999 FY $___________
FQ1 of 2000 FY $___________
FQ2 of 2000 FY $___________
FQ1 of 2000 FY $___________
FQ4 of 2000 FY $___________
etc.
Plus:
100% of equity sales (other than to
employee benefit plans
[date] $__________
[date] $__________
[date] $__________
Plus:
100% of principal amount of Indebtedness
converted into equity
[date] $__________
[date] $__________
[date] $__________
TOTAL REQUIRED CONSOLIDATED NET WORTH $___________
ACTUAL CONSOLIDATED NET WORTH
AS OF REPORT DATE $___________
In Compliance? |_| Yes |_| No
<PAGE> 21
SECTION 8.21 CONSOLIDATED FIXED CHARGE COVERAGE.
As of the Report Date, and as determined for each period set forth below:
(A) Consolidated Net Pre-Tax Earnings for
each Fiscal Quarter in the Four Fiscal
Quarter Period Ending with the Report Date $________
By Fiscal Quarter
-------------------------------------------------
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
(B) Consolidated Net Fixed Lease Charges for
each Fiscal Quarter in the Four Fiscal
Quarter Period Ending with the Report Date $________
By Fiscal Quarter
-------------------------------------------------
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
(C) Consolidated Net Interest Expense for
each Fiscal Quarter in the Four Fiscal
Quarter Period Ending with the Report Date $________
By Fiscal Quarter
-------------------------------------------------
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
(D) Consolidated Depreciation and Amortization
Expense for each Fiscal Quarter in the Four Fiscal
Quarter Period Ending with the Report Date $________
By Fiscal Quarter
-------------------------------------------------
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
<PAGE> 22
SECTION 8.21 CONSOLIDATED FIXED CHARGE COVERAGE---CONTINUED.
(E) Other Charges incident to the acquisition of House of Fabrics
taken during such Four Fiscal Quarter Period and within one
year of acquisition, and not otherwise taken into account as
provided above (subject to
$35 million limitation) $________
(F) TOTAL OF (A), (B), (C), (D) and (E) $________
(G) Scheduled Principal Payments in respect of
Long-Term Indebtedness during the Four Fiscal
Quarter Period Ending with the Report Date $________
By Fiscal Quarter
---------------------------------------------
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
FQE [date] $_______
(H) TOTAL OF (B), (C) AND (G) $________
(H) ACTUAL RATIO OF (F) to (H) _____ to 1.00
REQUIRED CONSOLIDATED FIXED CHARGE
RATIO 1.50 to 1.00
In Compliance? |_| Yes |_| No
<PAGE> 23
SECTION 8.22 CONSOLIDATED CURRENT FUNDED INDEBTEDNESS.
As of the Report Date:
(A) Consolidated Current Assets: $__________
(B) Consolidated Current Liabilities: $__________(2)
(C) Funded Senior Debt $__________
ACTUAL RATIO OF (A) TO THE SUM OF (B) AND (C) ______ to 1.00
MINIMUM REQUIRED CONSOLIDATED
CURRENT FUNDED INDEBTEDNESS RATIO
FOR THE FISCAL QUARTER ENDED WITH
THE REPORT DATE, PER SECTION 8.22 OF THE
CREDIT AGREEMENT: ______ to 1.00
In Compliance? |_| Yes |_| No
SECTION 8.23 CONSOLIDATED LEVERAGE RATIO.
As of the Report Date:
(A) Outstanding Funded Senior Debt: $__________
(B) Consolidated Net Worth: $__________
ACTUAL RATIO OF (A) TO THE SUM OF (A) AND (B): ______ to 1.00
MAXIMUM CONSOLIDATED LEVERAGE RATIO
FOR THE FISCAL QUARTER ENDED WITH THE
REPORT DATE, PER SECTION 8.23
OF THE CREDIT AGREEMENT: ______ to 1.00
In Compliance? |_| Yes |_| No
_____________
(2) Exclusive of the sum of (a) the aggregate outstanding balance of
Revolving Credit Loans plus (b) the aggregate outstanding Negotiated Bid Loans
not in excess of the Total Commitment Amount.
<PAGE> 1
EXHIBIT 21
FABRI-CENTERS OF AMERICA, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State of Percent owned
Name Incorporation by Registrant
--------------------------------------- ------------------- ----------------
<S> <C> <C>
FCA Financial, Inc. Ohio 100%
Fabri-Centers of South Dakota, Inc. Ohio 100%
Fabri-Centers of California, Inc. Ohio 100%
FCA of Ohio, Inc. Ohio 100%
House of Fabrics, Inc. Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into the Company's
previously filed Registration Statements (Form S-8) pertaining to the
Fabri-Centers of America, Inc.'s Executive Incentive Plan (Nos. 2-73332 and
33-49688), 1994 Executive Incentive Plan (No. 333-10093), the Employee Savings
and Profit Sharing Plan (No. 33-32809), the 1988 Stock Option Plan for
Non-Employee Directors (Nos. 33-38681 and 333-10089), the 1990 Employees Stock
Option and Stock Appreciation Rights Plan (Nos. 33-37355, 33-49690 and
333-10087) and the 1996 Stock Option Plan for Non-Employee Directors (No.
333-10091).
Arthur Andersen LLP
Cleveland, Ohio
April 24, 1998.
<PAGE> 1
EXHIBIT 24
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Fabri-Centers of America, Inc. Commission File
No. 1-6695 1934 Act Filings on Form 10-K For
Fiscal Year Ended January 31, 1998
Gentlemen:
The above Company is the issuer of securities registered under Section 12 of the
Securities Exchange Act of 1934 (the "Act"). Each of the persons signing his or
her name below confirms, as of the date appearing opposite his or her signature,
that Alan Rosskamm, Brian P. Carney, and each of them, are authorized on his or
her behalf to sign and to submit to the Securities and Exchange Commission such
filings on Form 10-K as are required by the Act. Each person so signing also
confirms the authority of Alan Rosskamm, Brian P. Carney, and each of them, to
do and perform on his or her behalf, any and all acts and things requisite or
necessary to assure compliance by the signing person with the Form 10-K filing
requirements. The authority confirmed herein shall remain in effect as to each
person signing his or her name below until such time as the Commission shall
receive from such person a written communication terminating or modifying the
authority.
Date Date
/s/Alan Rosskamm /s/Scott Cowen
- ---------------- ----------- -------------- ----------
Alan Rosskamm Scott Cowen
/s/Brian P. Carney /s/Frank Newman
- ------------------ ----------- --------------- ----------
Brian P. Carney Frank Newman
/s/Robert R. Gerber /s/Ira Gumberg
- ------------------- ----------- -------------- ----------
Robert R. Gerber Ira Gumberg
/s/Betty Rosskamm /s/Gregg Searle
- ----------------- ----------- --------------- ----------
Betty Rosskamm Gregg Searle
/s/Alma Zimmerman
- ----------------- -----------
Alma Zimmerman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF FABRI-CENTERS OF AMERICA, INC. AS OF JANUARY 31,
1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE FIFTY-TWO WEEKS THEN
ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 14,774
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 294,653
<CURRENT-ASSETS> 322,031
<PP&E> 195,632
<DEPRECIATION> 85,628
<TOTAL-ASSETS> 447,775
<CURRENT-LIABILITIES> 164,789
<BONDS> 24,700
0
0
<COMMON> 1,050
<OTHER-SE> 239,811
<TOTAL-LIABILITY-AND-EQUITY> 447,775
<SALES> 974,997
<TOTAL-REVENUES> 974,997
<CGS> 533,169
<TOTAL-COSTS> 917,954
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,874
<INCOME-PRETAX> 51,169
<INCOME-TAX> 19,191
<INCOME-CONTINUING> 31,978
<DISCONTINUED> 0
<EXTRAORDINARY> (1,136)
<CHANGES> 0
<NET-INCOME> 30,842
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.54
</TABLE>
