<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
REGISTRATION NO. 333-80763
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JO-ANN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
OHIO 5949 34-0720629
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
------------------------
5555 DARROW ROAD
HUDSON, OHIO 44236
(330) 656-2600
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
------------------------
CT CORPORATION
1300 EAST 9TH STREET
SUITE 1010
CLEVELAND, OHIO 44114
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
------------------------
COPIES TO:
PAUL N. HARRIS, ESQ.
Thompson Hine & Flory LLP
3900 Key Center
127 Public Square
Cleveland, Ohio 44114-1216
(216) 566-5500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
TABLE OF CO-REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION
OF PRIMARY STANDARD
INCORPORATION INDUSTRIAL IRS EMPLOYER
OR CLASSIFICATION IDENTIFICATION
NAME ORGANIZATION CODE NUMBER NUMBER
- --------------------------------------------------------------- -------------- ------------------- -------------
<S> <C> <C> <C>
FCA of Ohio, Inc............................................... Ohio 5949 34-1780524
FCA Financial, Inc............................................. Ohio 5949 34-0819987
Fabri-Centers of California, Inc............................... Ohio 5949 34-1694372
Fabri-Centers of South Dakota, Inc............................. Ohio 5949 34-1451235
House of Fabrics, Inc.......................................... Delaware 5949 95-3426136
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
EXCHANGE OFFER FOR
$150,000,000
10 3/8% SENIOR SUBORDINATED NOTES DUE 2007
We are offering to exchange 10 3/8% senior subordinated notes due 2007 for
our currently outstanding 10 3/8% senior subordinated notes due 2007. The
exchange notes are identical to the outstanding notes, except that the exchange
notes have been registered under the federal securities laws and will not bear
any legend restricting their transfer. The exchange notes will represent the
same debt as the outstanding notes, and we will issue the exchange notes under
the same indenture. The principal features of the exchange offer are as follows:
- Expires 12:00 a.m. Midnight EDT, on August 19, 1999, unless extended.
- We will exchange all outstanding notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
- You may withdraw tendered outstanding notes at any time before the
expiration of the exchange offer.
- We will not receive any proceeds from the exchange offer.
- The exchange of outstanding notes in the exchange offer will be a tax-free
event for United States federal tax purposes.
- We do not intend to apply for the listing of the exchange notes on any
securities exchange or automated quotation system.
Broker-dealers receiving exchange notes in exchange for outstanding notes
acquired for their own account through market-making or other trading activities
must deliver a prospectus in any resale of the exchange notes.
------------------------
AN INVESTMENT IN THE EXCHANGE NOTES INVOLVES A HIGH DEGREE OF RISK. RISK
FACTORS BEGIN ON PAGE 10.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this prospectus is July 20, 1999
<PAGE>
TABLE OF CONTENTS
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PAGE
-----
<S> <C>
Summary.................................................................................................... 1
Risk Factors............................................................................................... 10
Use of Proceeds............................................................................................ 17
Capitalization............................................................................................. 17
Selected Historical Consolidated Financial Data............................................................ 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20
Business................................................................................................... 28
Management................................................................................................. 38
Principal Shareholders..................................................................................... 40
Certain Transactions....................................................................................... 43
Description of Certain Indebtedness........................................................................ 44
The Exchange Offer......................................................................................... 46
Description of the Notes................................................................................... 54
Federal Tax Consequences................................................................................... 95
Plan of Distribution....................................................................................... 101
Legal Matters.............................................................................................. 102
Independent Public Accountants............................................................................. 102
Where You Can Find More Information About Jo-Ann Stores.................................................... 102
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>
------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. When used in this
prospectus, words such as "anticipates," "plans," "estimates," "expects,"
"believes," and similar expressions used in connection with Jo-Ann Stores, Inc.
or our management, are intended to identify forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. However, our actual results, performance, or
achievements may materially differ from those expressed in the forward-looking
statements. Risks, uncertainties, and assumptions that could cause or contribute
to material differences include, among other things:
- general economic conditions;
- changes in customer demand;
- changes in trends in the fabric and craft industry;
- seasonality;
- our failure to manage our growth;
- loss of key management;
- the availability of merchandise;
- changes in the competitive pricing for products;
i
<PAGE>
- the impact of competitor store openings and closings; and
- the ability to address internal and external Year 2000 issues.
We undertake no obligation publicly to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Due to these risks, uncertainties and assumptions, the forward-looking events
discussed in this prospectus might not occur.
------------------
INCORPORATION OF DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows us to incorporate by reference
the information we file with the Commission. This means that we can disclose
important information to you by referring you to those documents. Any
information we incorporate by reference is considered part of this prospectus,
except for any information updated and superseded by information contained
directly in this prospectus. This prospectus incorporates by reference the
documents listed below that we have previously filed with the Commission. These
documents contain important business and financial information about Jo-Ann
Stores that is not included in or delivered with this prospectus.
We incorporate by reference into this prospectus:
(a) Our annual report on Form 10-K for the fiscal year ended January 30,
1999;
(b) Our proxy statement for the 1999 annual meeting of shareholders
including the information under the caption "Executive Compensation;" and
(c) Our quarterly report on Form 10-Q for the quarter ended May 1, 1999.
We also incorporate by reference all documents subsequently filed by us
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of
the outstanding notes are exchanged for exchange notes. Any new information we
file with the Commission after the date of this prospectus and until this
exchange offer is completed will update and supersede the information contained
in this prospectus.
We will provide, upon written or oral request, without charge, to each
person to whom a prospectus is delivered, a copy of any or all of the
information that has been incorporated by reference in this prospectus but not
delivered with this prospectus. If you would like to obtain this information
from us, please direct your request, either in writing or by telephone, to
Jo-Ann Stores, Inc., 5555 Darrow Road, Hudson, Ohio 44236, Attention: Chief
Financial Officer, (330) 656-2600. TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST
THE INFORMATION NO LATER THAN AUGUST 12, 1999 WHICH IS FIVE BUSINESS DAYS BEFORE
THE DATE BY WHICH YOU MUST MAKE YOUR INVESTMENT DECISION.
------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to exchange the outstanding notes for the exchange notes in any jurisdiction
except where the exchange is permitted. You should assume that the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
This prospectus is based on information provided by us and by other sources
that we believe are reliable. We cannot assure you that this information is
accurate or complete. This prospectus summarizes documents and other information
and we refer you to them for a more complete understanding of what we discuss in
this prospectus. In making an investment decision, you must rely on your own
examination of our company and the terms of the offering and the exchange notes,
including the merits and risks involved.
------------------
ii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS.
FOR A MORE COMPLETE UNDERSTANDING OF THIS EXCHANGE OFFER, WE ENCOURAGE YOU TO
READ THIS ENTIRE PROSPECTUS. WE BASED MARKET SHARE AND OTHER INDUSTRY DATA
INCLUDED IN THIS PROSPECTUS ON STUDIES BY THE HOBBY INDUSTRY ASSOCIATION AND
INTERNALLY GENERATED REPORTS. WE HAVE NOT VERIFIED THE INDUSTRY REPORTS AND URGE
INVESTORS IN THE EXCHANGE NOTES NOT TO PLACE UNDUE RELIANCE ON THIS DATA. IN
THIS PROSPECTUS, THE WORDS "JO-ANN STORES, INC.," "JO-ANN STORES," "JO-ANN
FABRICS AND CRAFTS," "JO-ANN ETC," "JO-ANN," "WE," "OUR," AND "US" REFER TO
JO-ANN STORES, INC. AND, UNLESS THE CONTEXT REQUIRES OTHERWISE, TO OUR
SUBSIDIARIES. OUR FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO JANUARY 31 AND
REFERS TO THE YEAR IN WHICH THE PERIOD ENDS (E.G., FISCAL 1999 ENDED JANUARY 30,
1999).
THE COMPANY
We are the largest national category-dominant retailer serving the retail
fabric and craft industry, which generated estimated combined revenues of $10.0
billion in 1998. We have an approximately 20% market share in the consolidated
fabric and sewing-related products segment and an approximately four percent
market share in the highly fragmented craft products segment. We were founded as
a single retail store in 1943. As of January 30, 1999, we operated 1,034 Jo-Ann
Fabrics and Crafts traditional stores in 49 states and 24 Jo-Ann etc superstores
in 12 states. We serve the approximately 70% of U.S. households that engaged in
crafts and hobbies during the past year by offering a large variety of
competitively priced, high quality apparel, quilting and craft fabrics and
sewing-related products, home decorating fabrics, floral, craft and seasonal
products, and by offering educational classes and custom services.
We have increased our net sales and EBITDA over the past five years from
$677.3 million and $41.5 million, respectively, in fiscal 1995 to $1,242.9
million and $87.7 million, respectively, in fiscal 1999. These increases
represent compound annual growth rates of approximately 16% and 21%,
respectively. In addition, we have achieved 18 consecutive quarters of positive
comparable store sales growth.
Our traditional stores primarily serve small and middle markets. Our
recently developed superstores serve selected markets where traditional store
performance and area demographics are favorable. We believe that many of our
traditional stores are located in markets that are currently underserved. Over
the past five years we have strategically relocated some of our traditional
stores, increasing average square footage per store by 20% and sales per square
foot by 11%. As a result, net sales per traditional store have increased 33% to
$1.2 million over this period. In November 1995 we opened our first large format
"category killer" superstore. Our superstores offer a more comprehensive product
assortment and higher-margin custom services including framing, home decoration,
and furniture and floral design. In fiscal 1999 these superstores generated
approximately five times more revenue and 40% higher sales per square foot than
our traditional stores. Our superstores accounted for approximately seven
percent of fiscal 1999 net sales. We believe our superstores will be our future
growth vehicle.
Our principal executive offices are located at 5555 Darrow Road, Hudson,
Ohio 44236, and our telephone number is (330) 656-2600. For more information
regarding the company, see "Business."
1
<PAGE>
THE EXCHANGE OFFER
On May 5, 1999, we privately placed $150.0 million of 10 3/8% senior
subordinated notes due 2007. All of our wholly-owned operating subsidiaries
guarantee these outstanding notes.
Simultaneously with the private placement, we entered into a registration
rights agreement with the initial purchasers of the outstanding notes. Under the
terms of that agreement we agreed to file a registration statement for the
exchange offer and the exchange notes by June 19, 1999, cause the registration
statement to be declared effective by the Commission by September 2, 1999, and
complete this exchange offer by October 2, 1999. If we do not meet one of these
requirements, we must pay additional interest on the outstanding notes until we
meet the requirement. In this exchange offer, you may exchange your outstanding
notes for the exchange notes. The exchange notes have the same terms as the
outstanding notes except that the exchange notes will be registered under the
Securities Act and will not have registration rights. You should read the
discussions under the heading "The Exchange Offer" and "Description of the
Notes" for more information regarding the notes to be issued in the exchange
offer.
SUMMARY OF TERMS OF EXCHANGE OFFER
The following is a brief summary of terms of the exchange offer. For a more
complete description of the exchange offer, see "The Exchange Offer" in this
prospectus.
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<S> <C>
Registration Rights Agreement................ We sold the outstanding notes on May 5, 1999
to the initial purchasers under a purchase
agreement dated May 5, 1999. Pursuant to the
purchase agreement, our company, our
subsidiaries who guaranteed our obligations
under the outstanding notes and the initial
purchasers entered into a registration rights
agreement which granted the holders of the
outstanding notes exchange and registration
rights. This exchange offer is intended to
satisfy our obligations under the
registration rights agreement.
The Exchange Offer........................... We are offering to exchange up to $150.0
million aggregate principal of the exchange
notes for up to $150.0 million aggregate
principal of the outstanding notes.
Outstanding notes may be exchanged only in
$1,000 increments.
The terms of the exchange notes are identical
in all material respects to the outstanding
notes except for transfer restrictions and
registration rights relating to the
outstanding notes.
Transferability of Exchange Notes............ We believe that you will be able to freely
transfer the exchange notes without
registration or any prospectus delivery
requirement. However, broker-dealers who
acquire the exchange notes and our affiliates
may be required to deliver copies of this
prospectus if they resell any exchange notes.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Effect of Not Tendering...................... Any outstanding notes that are not tendered
or that are tendered but not accepted will
continue to be subject to the existing
restrictions upon transfer. Since the
outstanding notes have not been registered
under the federal securities laws, they bear
a legend restricting their transfer absent
registration or the availability of a
specific exemption from registration. Upon
the completion of the exchange offer, we will
have no further obligations to provide for
registration of the outstanding notes under
the federal securities laws.
Expiration Date.............................. 12:00 a.m. Midnight EDT, on August 19, 1999,
unless the exchange offer is extended.
Procedures For Tendering Outstanding Notes... If you wish to accept the exchange offer, you
must complete the letter of transmittal
accompanying this prospectus in accordance
with the instructions. You should then mail
or deliver the letter of transmittal, along
with the outstanding notes and any other
required documentation, to Harris Trust and
Savings Bank, the exchange agent, at the
address provided in this prospectus.
By executing the letter of transmittal, you
will represent to us that:
- you are acquiring the exchange notes in
the ordinary course of your business;
- you are not participating in and do not
intend to participate in any
distribution of the exchange notes;
- you have no arrangement with any person
to participate in the distribution of
the exchange notes;
- you are not our affiliate; and
- you are not acting on behalf of any
person or entity who could not truthfully
make the foregoing representations.
Withdrawal Rights............................ You may withdraw outstanding notes you tender
in the exchange offer by furnishing a written
notice of withdrawal to the exchange agent
containing the information described in "The
Exchange Offer--Withdrawal Rights."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Interest on The Exchange Notes And The
Outstanding Notes.......................... Interest on the exchange notes will accrue
from the date of the last periodic payment of
interest on the outstanding notes. We will
not pay any additional interest on any of the
outstanding notes tendered and accepted for
exchange.
Conditions to the Exchange Offer............. We will not be required to complete the
exchange offer and we may terminate or amend
it if, at any time before we accept any
tendered notes for exchange, we determine
that the exchange offer violates any law,
interpretation of the Commission or order of
any governmental agency or court.
Acceptance of Outstanding Notes And Delivery
of Exchange Notes.......................... If you meet the conditions described in this
prospectus, we will accept for exchange any
and all outstanding notes that you properly
tender in the exchange offer prior to August
19, 1999, the expiration date. We will
deliver to you the exchange notes issued in
the exchange offer promptly following the
expiration date.
Federal Tax Consequences..................... There will be no federal income tax
consequences to you if you exchange your
outstanding notes for exchange notes in the
exchange offer.
Exchange Agent............................... Harris Trust and Savings Bank, the trustee
under the indenture, is serving as exchange
agent in connection with the exchange offer.
The exchange agent's mailing address is 311
West Monroe Street, 12(th) Floor, Chicago,
Illinois 60606. You can request additional
copies of this prospectus, the letter of
transmittal or the notice of guaranteed
delivery, by calling the exchange agent at
(312) 416-7380 or by faxing your request to
the exchange agent at (312) 765-8012.
See "The Exchange Offer" for more detailed
information concerning the terms of the
exchange offer.
</TABLE>
4
<PAGE>
SUMMARY OF TERMS OF THE OFFERED NOTES
The following is a brief summary of terms of the exchange notes. For a more
complete description of the terms of the exchange notes, see "Description of the
Notes" in this prospectus.
<TABLE>
<S> <C>
Issuer............................ Jo-Ann Stores, Inc.
Notes Offered..................... $150,000,000 principal amount of 10 3/8% senior
subordinated notes due 2007.
Maturity.......................... May 1, 2007.
Interest Payment Dates............ May 1 and November 1, beginning November 1, 1999.
Guarantees........................ Each of our restricted subsidiaries will fully and
unconditionally guarantee the exchange notes on a senior
subordinated basis. Future restricted subsidiaries will
also be required to guarantee the exchange notes if
those subsidiaries guarantee any of our debt. See
"Description of the Notes-- Guarantees."
Ranking........................... The exchange notes will be unsecured senior subordinated
obligations and will be junior to all of our existing
and future senior debt. The subsidiary guarantees will
be unsecured senior subordinated obligations and will be
junior to all existing and future senior debt of those
subsidiaries. The exchange notes effectively will be
junior to all existing and future debt and other
liabilities of our subsidiaries that are not guarantors.
Because the exchange notes are junior in right of
payment to senior debt, in the event of bankruptcy,
liquidation or dissolution, holders of the exchange
notes will not receive any payment until holders of our
senior debt and the senior debt of our restricted
subsidiaries have been paid in full.
Assuming we had completed the offering of the
outstanding notes on January 30, 1999, and applied the
net proceeds as intended, the notes and the guarantees
would have been junior to $39.5 million of our and our
restricted subsidiaries' senior debt.
Optional Redemption............... We may redeem some or all of the exchange notes at any
time on or after May 1, 2003, at the redemption prices
described in this prospectus.
Public Equity Offering
Optional Redemption............. Before May 1, 2002, we may redeem up to 35% of the
exchange notes with the net proceeds of a public equity
offering at the redemption price described in this
prospectus, if at least 65% of the exchange notes
originally issued remain outstanding after such
redemption. See "Description of the Notes--Optional
Redemption."
Change of Control................. Upon change of control events described in this
prospectus, each holder of exchange notes may require us
to repurchase some or all of its exchange notes at a
purchase price equal to 101% of their principal amount,
plus accrued interest. See
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
"Description of the Notes--Purchase of Notes Upon a
Change of Control."
Restrictive Covenants............. The indenture governing the exchange notes will contain
covenants that, among other things, will limit our
ability and the ability of our restricted subsidiaries
to:
- borrow money;
- pay dividends on, redeem or repurchase our or our
restricted subsidiaries' capital stock;
- make restricted payments and investments;
- issue or sell capital stock of our restricted
subsidiaries;
- use assets as security in other transactions;
- in the case of our restricted subsidiaries, create
any restrictions on the payment of dividends or other
payments to us;
- guarantee debt;
- engage in transactions with affiliates;
- create unrestricted subsidiaries; and
- sell assets in excess of specified amounts or merge
with or into other companies.
There are important exceptions and qualifications to
these covenants, which are described under the heading
"Description of the Notes" in this prospectus.
Use of Proceeds................... We will not receive any proceeds from the exchange
offer. See "Use of Proceeds."
</TABLE>
RISK FACTORS
See "Risk Factors" and the other information in this prospectus for a
discussion of some factors you should carefully consider before deciding to
tender your outstanding notes.
6
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents our summary historical consolidated financial
data for each of the five fiscal years ending January 30, 1999. We derived the
summary historical consolidated financial data from audited financial
statements. You should read these financial statements in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and related notes appearing
elsewhere in this prospectus and other financial data that we have filed with
the Securities and Exchange Commission.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------------------------
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT FOR SALES PER SQUARE FOOT)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales(1)................................. $677.3 $834.6 $929.0 $975.0 $1,242.9
Cost of sales................................ 378.6 456.6 516.9 533.2 678.5
------ ------ ------ ------ -------------
Gross profit................................. 298.7 378.0 412.1 441.8 564.4
Selling, general and administrative
expenses................................... 257.2 319.9 340.9 363.1 476.7
Depreciation and amortization................ 14.0 18.2 21.2 21.7 27.7
Non-recurring charge(2)...................... -- -- -- -- 25.1
------ ------ ------ ------ -------------
Operating profit............................. 27.5 39.9 50.0 57.0 34.9
Interest expense............................. 8.4 12.0 10.7 5.9 12.5
------ ------ ------ ------ -------------
Income before income taxes................... 19.1 27.9 39.3 51.1 22.4
Income taxes................................. 7.3 10.5 14.8 19.2 8.8
Extraordinary item(3)........................ -- -- -- (1.1 ) --
------ ------ ------ ------ -------------
Net income................................... $ 11.8 $ 17.4 $ 24.5 $ 30.8 $ 13.6
------ ------ ------ ------ -------------
------ ------ ------ ------ -------------
OTHER DATA:
EBITDAR(4)................................... $108.7 $138.9 $155.4 $170.2 $ 206.2
Rental expense(5)............................ 67.2 80.8 84.2 91.5 118.5
EBITDA(6).................................... 41.5 58.1 71.2 78.7 87.7
Capital expenditures......................... $ 11.7 $ 34.7 $ 13.2 $ 36.6 $ 75.1
Percentage increase in comparable store
sales(7)................................... 1.0% 3.0% 7.5% 3.8% 3.5%
Store square footage (000's), at end of
period(8).................................. 11,423 11,522 11,613 12,119 15,270
Sales per square foot(9)..................... $ 77 $ 74 $ 81 $ 82 $ 86
Number of stores, end of period:
Traditional stores(10)..................... 964 935 913 896 1,034
Superstores................................ -- 1 1 7 24
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30, 1999
----------------------------
AS
ACTUAL ADJUSTED(11)
------------- -------------
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and temporary cash investments................................................. $ 20.4 $ 20.4
Total assets........................................................................ 701.4 706.2
Long-term debt...................................................................... 182.5 187.3
Shareholders' equity................................................................ 259.0 259.0
</TABLE>
FOOTNOTES ON FOLLOWING PAGE
7
<PAGE>
- ------------------------
(1) The following represents a break-out of our net sales between our
traditional stores and our superstores (unaudited):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales:
Traditional stores....................... $ 677.3 $ 833.2 $ 923.2 $ 953.5 $ 1,154.6
Superstores.............................. -- 1.4 5.8 21.5 88.3
------ ------ ------ ------ -----------
Total net sales............................ $ 677.3 $ 834.6 $ 929.0 $ 975.0 $ 1,242.9
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
</TABLE>
(2) We recorded a non-recurring charge of $25.1 million ($15.3 million on an
after-tax basis) related to the House of Fabrics acquisition in fiscal
1999. This charge consisted of write-downs of previously owned assets
affected by the House of Fabrics acquisition to estimated net realizable
value, the cost of operating duplicate corporate facilities during the
six-month transition period following the House of Fabrics acquisition, and
costs associated with the re-merchandising of the acquired stores. The
total cash costs included in the non-recurring charge were approximately
$15.9 million. We completed the planned integration events associated with
the acquisition by the end of the third quarter of fiscal 1999.
(3) We recorded an extraordinary item in fiscal 1998 for the early redemption
of convertible subordinated debentures outstanding. The extraordinary item,
net of taxes, consisted of the redemption premium, unamortized debenture
issuance costs and other related expenses.
(4) EBITDAR represents net income before taking into consideration interest
expense, income tax expense, depreciation and amortization expense,
non-recurring charges and rental expense. EBITDAR is not a measurement of
financial performance under generally accepted accounting principles.
Accordingly, you should not regard this figure as an alternative to net
income or as an indicator of our operating performance. We believe that
EBITDAR is widely used by analysts, investors and other interested parties
in our industry but is not necessarily comparable with similarly titled
measures for other companies.
(5) Rental expense includes base rent, percentage rent, common area
maintenance, real estate taxes, merchant association dues, landlord
property insurance and sublease rental income.
(6) EBITDA represents net income before taking into consideration interest
expense, income tax expense, depreciation and amortization expense, and
non-recurring charges. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and does not represent cash
flow from operations. Accordingly, you should not regard this figure as an
alternative to net income or as an indicator of our operating performance
or as an alternative to cash flows as a measure of liquidity. We believe
that EBITDA is widely used by analysts, investors and other interested
parties in our industry but is not necessarily comparable with similarly
titled measures for other companies.
(7) New stores are included in the calculation of comparable store sales on the
one-year anniversary of the store opening.
(8) Total store square footage includes selling floor space and inventory
storage areas.
(9) For fiscal 1999, average sales per square foot were $84 and $120, for
traditional stores and superstores, respectively. We based sales per square
foot on the total store square footage, which includes selling floor space
and inventory storage areas. To accommodate openings and closings of store
locations throughout the year, we calculated sales per square foot using an
average square foot amount for the year, rather than the fiscal year end
square foot amount.
FOOTNOTES CONTINUED ON FOLLOWING PAGE
8
<PAGE>
(10) In April 1998, we completed the acquisition of House of Fabrics which had
annual net sales of approximately $240.0 million and operated 261 fabric
and craft stores in 27 states. Following the acquisition, we closed 60
House of Fabric stores and 30 Jo-Ann Fabrics and Crafts stores in
overlapping geographic locations.
(11) The as adjusted data gives effect to the offering of the outstanding
notes, application of the proceeds and borrowings under the new senior
credit facility. See "Use of Proceeds."
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this prospectus, you
should consider carefully the following factors before deciding to tender your
outstanding notes.
OUR SUBSTANTIAL INDEBTEDNESS COULD RESTRICT OUR OPERATIONS, MAKE US MORE
VULNERABLE TO ADVERSE ECONOMIC CONDITIONS AND MAKE IT MORE DIFFICULT FOR US TO
MAKE PAYMENTS ON THE EXCHANGE NOTES
We have had and will continue to have a significant amount of indebtedness.
The following chart presents important credit statistics regarding our company
after giving effect to the offering of the outstanding notes, the application of
the net proceeds from that offering and borrowings under the new senior credit
facility.
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 30, 1999
-------------------
(DOLLARS IN
MILLIONS)
<S> <C>
Long-term debt............................................................ $ 187.3
Debt to capitalization percentage......................................... 42%
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations relating to the
exchange notes;
- reduce the availability of our cash flow from operations to fund working
capital, capital expenditures, acquisitions and other general corporate
requirements because we will have to dedicate a substantial portion of our
cash flow from operations to payments on our indebtedness;
- limit our ability to borrow funds to pay for future working capital,
capital expenditures, acquisitions and other general corporate
requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a disadvantage compared to our competitors who have less debt;
and
- make us more vulnerable to negative changes in economic and industry
conditions.
Our ability to make payments on our indebtedness, including the exchange
notes, depends upon our ability to generate cash flow in the future. Our ability
to generate that cash flow depends upon, among other things, our future
operating performance and our ability to refinance indebtedness when necessary.
To a large extent, each of these factors depends upon economic, financial,
competitive and other factors beyond our control. If we cannot generate enough
cash from operations to make payments on our indebtedness, we will need to
refinance our indebtedness, obtain additional financing, or sell assets. We
cannot assure you that our business will generate cash flow or that we will be
able to obtain acceptable financing to satisfy our debt obligations, including
our payments on the exchange notes.
The indenture and the new senior credit facility will permit us and the
guarantors to incur substantial additional indebtedness. As of January 30, 1999,
after giving pro forma effect to the offering of the outstanding notes, the
application of the net proceeds of that offering, and borrowings under the new
senior credit facility, we would have had $219.9 million of availability under
our new senior credit facility. All of those borrowings would be senior to the
exchange notes and the guarantees. If we incur new indebtedness, the related
risks that we face could intensify. See "Description of the Notes."
10
<PAGE>
WE MAY NOT BE ABLE TO FINANCE FUTURE NEEDS OR ADAPT OUR BUSINESS PLAN TO CHANGES
BECAUSE OF RESTRICTIONS PLACED ON US BY OUR SENIOR CREDIT FACILITY AND THE
INDENTURE
The indenture governing the exchange notes, and the instruments governing
our other indebtedness, including the new senior credit facility, will contain
restrictive and financial covenants, which will limit our ability to borrow
money, make investments, redeem or make payments on our capital stock, incur
liens and take other actions. For a description of the restrictive covenants in
the indenture, see "The Exchange Notes." For a description of the covenants in
the senior credit facility, see "Description of Certain Indebtedness."
Our ability to remain in compliance with these covenants and satisfy the
financial ratios and tests may be affected by events beyond our control. If we
fail to meet these tests or breach any of the covenants, the lenders under the
senior credit facility or the holders of the exchange notes could declare all
amounts outstanding under their indebtedness, including accrued interest, to be
immediately due and payable. A declaration of acceleration under the senior
credit facility would constitute a default under the indenture, and a default
under the indenture would constitute a default under the senior credit facility.
The operating and financial restrictions may adversely affect and may limit or
prohibit our ability to finance future acquisitions, our operations and our
capital needs.
HOLDERS OF SENIOR INDEBTEDNESS WILL BE PAID BEFORE HOLDERS OF THE EXCHANGE NOTES
ARE PAID
The exchange notes will be subordinated to our senior indebtedness. The
guarantees will be subordinated to all guarantor senior indebtedness. As of
January 30, 1999, after giving pro forma effect to the offering of the
outstanding notes, the application of the net proceeds of that offering and
borrowings under the new senior credit facility, we would have had $39.5 million
of senior indebtedness and the subsidiary guarantors would have had no guarantor
senior indebtedness (other than their guarantees under the new senior credit
facility and the exchange notes). If we become bankrupt, liquidate, or dissolve,
our assets would be available to pay obligations on the exchange notes only
after our senior indebtedness has been paid. Similarly, if one of our
subsidiaries becomes bankrupt, liquidates or dissolves, that subsidiary's assets
would be available to pay obligations on the guarantee only after payments have
been made on its guarantor senior indebtedness. We cannot assure you that there
will be sufficient assets to pay amounts due on the exchange notes. See
"Description of the Notes."
If a payment default occurs with respect to our designated senior
indebtedness, we may make payments on the exchange notes only if we cure the
default or the holder of the senior indebtedness waives the default. Moreover,
if any non-payment default exists under our designated senior indebtedness, we
may not make any cash payments on the exchange notes for a period of up to 179
days in any 365 day period, unless we cure the default, the holder of the senior
indebtedness waives the default or rescinds acceleration of the indebtedness, or
we repay the indebtedness in full. See "Description of the Notes."
OUR FAILURE TO MANAGE OUR GROWTH WOULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS
During the past five years, we have experienced rapid growth in sales,
expansion of our product offerings, and acquisitions. In April 1998, we merged
with House of Fabrics, a chain of 261 fabric and craft stores. In October 1994,
we acquired Cloth World, a chain of 342 fabric stores. A significant part of our
strategy is to expand our retailing concepts and to continue our retail
expansion plans. We intend to accomplish this expansion by opening new stores
and possibly by buying other businesses. The opening of additional stores in new
geographic markets could present competitive and merchandising challenges
different from those we face in our existing markets. In addition, we may incur
high costs related to advertising, administration, and distribution as we enter
new markets. Moreover, as we move stores or renew leases in existing markets we
may incur higher lease expenses. Also, integrating newly
11
<PAGE>
acquired stores can involve diversion of management's attention, strains on our
logistics and other systems, difficult personnel issues and other risks.
The number of new stores we open and the sales and profitability of those
stores depends on various factors. These factors include:
- the availability of working capital;
- our ability to obtain financing;
- our ability to penetrate new markets;
- the availability of desirable locations and the negotiation of acceptable
leases for these sites;
- the availability of management resources;
- the effectiveness of our national advertising campaign;
- the hiring and training of skilled personnel; and
- the maintenance or upgrade of our information processing systems and the
integration of those systems at the new stores.
Our failure to respond effectively to these difficulties related to rapid
expansion could prevent us from growing or could have a significant negative
impact on our business and prospects.
Our growth strategy contemplates the development of additional superstores
and an increasing percentage of our revenues coming from our superstores. Our
superstores combine under one roof a large selection of sewing and fabrics,
crafts and home decorative items. It is possible that the superstore concept
will not gain market acceptance among our customers and that customers will
prefer to purchase goods at stores which specialize in a particular category
rather than shop at superstores. Any failure of the superstore concept to gain
market acceptance could have a material adverse effect on our business and
prospects.
In addition, an important part of our strategy includes improving our
logistics systems in order to enable us to fully integrate acquired and new
stores. During the second half of fiscal 1999 and the beginning of fiscal 2000,
we have experienced higher costs than in prior periods due principally to higher
freight and logistics costs. We are working with a leading consulting firm to
design and implement a national logistics network in order to reduce these
expenses and provide for a more efficient logistics network. We believe that
this network will result in the addition of at least one new distribution center
at an estimated cost for construction and equipment of $30.0 million. During the
next 18 to 24 months, we expect to operate within our existing distribution
center in Hudson, Ohio together with a contract facility in California to handle
seasonal product demand. Until we complete the implementation of our new
logistics network, we may continue to experience higher costs as a result of
these factors. Any failure to fully implement new logistics systems could have a
material adverse effect on our business and prospects.
LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGEMENT COULD LIMIT
OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS
Our future success depends in large part on our ability to retain our senior
management team. We do not have employment agreements with our senior officers
other than in the event of a change in control. We do not maintain key person
life insurance with respect to any executive. The loss of the services of one or
more of these persons could materially adversely affect our operations and
financial condition. In addition, our continued success depends upon our ability
to attract and retain qualified management, administrative and sales personnel
to support our future growth. Our inability to do so may have a material adverse
effect on our business and prospects. See "Management."
12
<PAGE>
IF CUSTOMER INTEREST IN THE FABRIC AND CRAFT INDUSTRY DECLINES, OUR REVENUES MAY
DECLINE
The success of our operations depends on our customers' purchasing our
fabric and craft products. Craft products in particular are not necessities.
These products compete with numerous other leisure activities and other forms of
entertainment. If our customers' interest in the fabric and craft industry
declines, that decline would likely result in the reduction of our revenues and
have a negative impact on our business and prospects. In addition, changes in
demographic and societal trends, including decreases in the number of people
interested in sewing, could have a material adverse effect on our business and
prospects.
WEAK SALES DURING THE SECOND HALF OF THE YEAR WILL NEGATIVELY IMPACT OUR
OPERATING RESULTS
Our quarterly results of operations may fluctuate significantly as the
result of:
- retail consumers' purchasing patterns;
- the timing of the opening of, and the amount of net sales contributed by,
new stores;
- the timing of costs associated with the selection, leasing, construction
and opening of new stores;
- the impact of extreme hot or cold weather conditions; and
- seasonal factors, product introductions and changes in product mix.
Our business is seasonal. Sales and earnings are relatively lower during the
first and second fiscal quarters than in the third and fourth fiscal quarters.
Our best quarter in terms of sales and profitability historically has been the
fourth quarter. In fiscal 1999, the fourth quarter, which includes the Christmas
selling season, accounted for approximately 34% of our sales and approximately
65% of our operating income, excluding the non-recurring charge. In addition,
excluding the effects of new store openings, our inventories and related
short-term financing needs have been seasonal. The greatest requirements occur
during our second and third fiscal quarters as we increase our inventory in
preparation for our peak selling season. Weak sales during the second half of
the year will negatively impact our operating results by reducing our cash flow,
leaving us with excess inventory. In addition, weak sales may make it more
difficult for us to finance our capital requirements. See Note 10 to our
consolidated financial statements included elsewhere in this prospectus.
OUR DEPENDENCE ON FOREIGN SUPPLIERS MAKES US VULNERABLE TO POSSIBLE DELAYS IN
RECEIPT OF MERCHANDISE AND TO THE RISKS INVOLVED IN FOREIGN OPERATIONS
In fiscal 1999, we purchased approximately 15% of our products directly from
manufacturers located in foreign countries. We currently use suppliers located
in Hong Kong, China and Taiwan. In addition, many of our domestic suppliers
purchase a portion of their products from foreign suppliers. Because a large
percentage of our products are manufactured or sourced abroad, we are required
to order these products further in advance than would be the case if products
were manufactured domestically. If we underestimate consumer demand, we may not
be able to fill orders on a timely basis. If we overestimate consumer demand, we
may be required to hold goods in inventory for a long period of time. We do not
have long-term contracts with any manufacturers, and none of our suppliers
manufacture products for us exclusively.
Foreign manufacturing also makes us vulnerable to a number of other risks,
including work stoppages, transportation delays and interruptions, political
instability, economic disruptions, the imposition of tariffs and import and
export controls, changes in governmental policies and other events. If any of
these events occur, it could result in a material adverse effect on our
business, financial condition, results of operations and prospects. In addition,
reductions in the value of the U.S. dollar could ultimately increase the prices
that we pay for our products. During fiscal 1999, we experienced an
13
<PAGE>
increase in the cost of containers as a result of economic difficulties in Asia.
Future increases in container costs could have a material adverse effect on our
results of operations.
BECAUSE OF OUR DEPENDENCE ON FOREIGN SUPPLIERS, INCREASED RESTRICTIONS ON
IMPORTS MAY NEGATIVELY IMPACT OUR OPERATIONS
Due to our dependence on foreign suppliers, we are susceptible to risks
associated with importing products into the United States. Substantially all of
our import operations are subject to the terms of bilateral textile agreements
between the United States and a number of foreign countries. These agreements
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. These agreements also allow the United
States to impose at any time restrictions on the importation of categories of
merchandise that, under the terms of the agreements, are not subject to
specified limits.
Our imported products are also subject to United States customs duties.
These duties are a significant portion of our cost of sales. The United States
and countries in which our products are manufactured may at times impose new
quotas, duties, tariffs or other restrictions or negatively adjust presently
prevailing quotas, duties or tariffs. Any new or increased quotas, duties,
tariffs, or other similar restrictions could have a significant negative effect
on our business, financial condition, results of operations, and prospects.
COMPETITION COULD NEGATIVELY IMPACT OUR OPERATIONS DUE TO PRICE REDUCTIONS AND
LOSS OF MARKET SHARE
Competition is intense in the retail fabric and craft industry. This
competition could result in the reduction of our prices and our loss of market
share. We must remain competitive in the areas of quality, price, selection, and
convenience. The location and atmosphere of retail stores are an additional
competitive factor in our retail business.
Our primary competition is comprised of specialty fabric and craft
retailers, fabric retailers and craft retailers. Our competitors include
Michaels Stores, Inc., a chain which operates approximately 585 retail craft and
framing stores in 47 states, Hancock Fabrics, Inc., a chain which operates
approximately 462 retail fabric stores in 39 states, and A.C. Moore, a chain
which operates approximately 37 retail craft stores in the Philadelphia and New
York markets. We also compete with 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 our competitors have stores
nationwide. Several operate regional chains. Numerous others are local
merchants. Some of our competitors, particularly the mass merchants, are larger
and have greater financial resources than we do. Our sales are also impacted by
store liquidations of our competitors. In addition, we ultimately compete with
alternate sources of entertainment and leisure for our customers. Alternate
methods of selling fabrics and crafts on the Internet could become competitors
in the future. See "Business--Competition."
THE FAILURE OF PARTIES WITH WHOM WE DO BUSINESS TO ADDRESS THEIR YEAR 2000
ISSUES COULD PREVENT US FROM ADEQUATELY STOCKING OUR STORES
The Year 2000 issue refers to computer programs being written using two
digits rather than four to define an applicable year. A company's hardware,
information technology systems or computer programs that have a two digit field
to define the year may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure,
disruption of operations, or inaccurate information or calculations.
Possible consequences to us of Year 2000 issues include, but are not limited
to, temporary disruption of our normal business operations, loss of
communications links with store locations, loss of electric power, inability to
process transactions, problems with ordering and receiving merchandise and
problems with banks and other financial institutions. We believe that our worst
case scenario involves
14
<PAGE>
the inability of electric utility companies to service our various stores due to
Year 2000 problems. If the electric utility companies cannot provide power to a
significant number of our stores, our business and operations could be
materially disrupted. For a more detailed discussion of this risk and the status
of our Year 2000 program, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
FEDERAL AND STATE STATUTES ALLOW COURTS TO FURTHER SUBORDINATE OR VOID THE
GUARANTEES
Fraudulent conveyance laws have been enacted for the protection of
creditors. Under these fraudulent conveyance laws, a court could further
subordinate the subsidiary guarantees to our present and future indebtedness or
take other detrimental actions, including voiding the subsidiary guarantees. The
court could take that action if it found that at the time any subsidiary issued
its guarantee, (a) it issued the guarantee with the intent of hindering,
delaying or defrauding any current or future creditor or contemplated insolvency
with a design to favor one or more creditors to the total or partial exclusion
of other creditors, or (b) it received less than reasonably equivalent value or
fair consideration for issuing its guarantee and:
- was insolvent or made insolvent because of the related transaction;
- was engaged in a business or transaction for which its assets constituted
unreasonably small capital;
- intended to incur, or believed that we would incur, debts beyond its
ability to pay as they matured; or
- was a defendant in an action for money damages or had a judgment for money
damages docketed against it, which was unsatisfied.
The court could subordinate or invalidate the guarantee relating to the
exchange notes if it found that the above conditions applied to the guarantor.
Any payment by the guarantor under the guarantee could be voided and required to
be repaid to the guarantor or to a fund for the benefit of the creditors of the
guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
vary depending on the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a party would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
Among other things, a legal challenge of a subsidiary's guarantee of the
exchange notes on fraudulent conveyance grounds may focus on the benefits, if
any, realized by that subsidiary as a result of our issuance of the exchange
notes. To the extent a subsidiary's guarantee of the exchange notes is voided as
a result of being deemed a fraudulent conveyance or held unenforceable for any
other reason, the exchange note holders would cease to have any claim in respect
of that guarantee. The exchange note holders would be creditors solely of the
company and any guarantor whose guarantee was not voided.
On the basis of historical financial information, recent operating history
and other factors, we believe that, after giving effect to the debt incurred by
the company and the guarantors in connection with the exchange notes, the
company and the guarantors will not be insolvent, will have sufficient
15
<PAGE>
capital to meet their obligations as they mature and to operate their business
effectively, and will not have incurred debts beyond their ability to pay as
they mature. We cannot assure you, however, that a court would apply the same or
similar standards in making a determination or that a court would agree with our
conclusions in this regard.
YOU MAY BE UNABLE TO SELL YOUR EXCHANGE NOTES IF A TRADING MARKET FOR THE
EXCHANGE NOTES DOES NOT DEVELOP
The exchange notes will be new securities for which there is currently no
established trading market, and none may develop. The initial purchasers have
indicated to us that they intend to make a market in the exchange notes, as
permitted by applicable laws and regulations. However, they are under no
obligation to do so. At their discretion, the initial purchasers could
discontinue their market-making efforts at any time without notice. Accordingly,
we can give you no assurance that an active trading market for the exchange
notes will develop or, if a market develops, as to the liquidity of the market.
We intend to have the exchange notes designated as eligible for trading in
the PORTAL market. However, we do not intend to apply for listing of the
exchange notes on any securities exchange or for quotation on any automated
dealer quotation system.
The liquidity of any market for the exchange notes will depend on the number
of holders of the exchange notes, the interest of securities dealers in making a
market in the exchange notes and other factors. Accordingly, we can give you no
assurance as to the development or liquidity of any market for the exchange
notes. If an active trading market for the exchange notes does not develop, the
market price and liquidity of the exchange notes may be adversely affected.
16
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the exchange notes in
the exchange offer. We will retire or cancel all of the outstanding notes
tendered in the exchange offer.
CAPITALIZATION
The following table sets forth our capitalization as of January 30, 1999 and
as adjusted to reflect the completion of the offering of the outstanding notes
and the new senior credit facility. See "Use of Proceeds." You should read this
table in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements and
notes appearing elsewhere in this prospectus and other financial data we have
filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
JANUARY 30, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN MILLIONS)
<S> <C> <C>
Cash and temporary cash investments...................................... $ 20.4 $ 20.4
--------- -----------
--------- -----------
Long-term debt:
Existing senior credit facility........................................ $ 182.5 $ --
New senior credit facility(1).......................................... -- 39.5
Notes offered hereby, net of discount of 2.2........................... -- 147.8
--------- -----------
Total long-term debt(2).............................................. $ 182.5 $ 187.3
--------- -----------
--------- -----------
Shareholders' equity:
Common stock........................................................... $ 1.0 $ 1.0
Additional paid-in-capital............................................. 94.4 94.4
Retained earnings...................................................... 185.8 185.8
Treasury stock and other............................................... (22.2) (22.2)
--------- -----------
Total shareholders' equity........................................... 259.0 259.0
--------- -----------
Total capitalization............................................... $ 441.5 $ 446.3
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) As adjusted, we would have had available under the new senior credit
facility approximately $219.9 million of additional borrowing capability
(which reflects $40.6 million letters of credit outstanding) as of January
30, 1999. See "Description of Certain Indebtedness."
(2) As of January 30, 1999, we had $581.9 million of obligations under operating
leases which are not included in the amount shown in the table above. See
Note 9 of the consolidated financial statements included elsewhere in this
prospectus.
17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical consolidated financial
data for each of the five fiscal years ending January 30, 1999. We derived the
selected historical consolidated financial data from audited financial
statements. You should read this financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and related notes appearing
elsewhere in this prospectus and other financial data that we have filed with
the Securities and Exchange Commission.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------------------
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -----------
(DOLLARS IN MILLIONS, EXCEPT FOR SALES PER SQUARE FOOT)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales(1).................................. $677.3 $834.6 $929.0 $975.0 $1,242.9
Cost of sales................................. 378.6 456.6 516.9 533.2 678.5
------ ------ ------ ------ -----------
Gross profit.................................. 298.7 378.0 412.1 441.8 564.4
Selling, general and administrative
expenses.................................... 257.2 319.9 340.9 363.1 476.7
Depreciation and amortization................. 14.0 18.2 21.2 21.7 27.7
Non-recurring charge(2)....................... -- -- -- -- 25.1
------ ------ ------ ------ -----------
Operating profit.............................. 27.5 39.9 50.0 57.0 34.9
Interest expense.............................. 8.4 12.0 10.7 5.9 12.5
------ ------ ------ ------ -----------
Income before income taxes.................... 19.1 27.9 39.3 51.1 22.4
Income taxes.................................. 7.3 10.5 14.8 19.2 8.8
Extraordinary item(3)......................... -- -- -- (1.1 ) --
------ ------ ------ ------ -----------
Net income.................................... $ 11.8 $ 17.4 $ 24.5 $ 30.8 $ 13.6
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
DATA PER COMMON SHARE:
Net income, before extraordinary item
Basic....................................... $ 0.64 $ 0.95 $ 1.37 $ 1.74 $ 0.72
Diluted..................................... 0.63 0.90 1.26 1.60 0.69
OTHER DATA:
EBITDAR(4).................................... $108.7 $138.9 $155.4 $170.2 $ 206.2
Rental expense(5)............................. 67.2 80.8 84.2 91.5 118.5
EBITDA(6)..................................... 41.5 58.1 71.2 78.7 87.7
Capital expenditures.......................... $ 11.7 $ 34.7 $ 13.2 $ 36.6 $ 75.1
Ratio of earnings to fixed charges(7)......... 1.7 x 1.8 x 2.2 x 2.7 x 1.5 x
Percentage increase in comparable store
sales(8).................................... 1.0% 3.0% 7.5% 3.8% 3.5%
Store square footage (000's), at end of
period(9)................................... 11,423 11,522 11,613 12,119 15,270
Sales per square foot(10)..................... $ 77 $ 74 $ 81 $ 82 $ 86
Number of stores, end of period:
Traditional stores(11)...................... 964 935 913 896 1,034
Superstores................................. -- 1 1 7 24
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and temporary cash
investments................................. $ 21.9 $ 11.6 $ 12.6 $ 14.8 $ 20.4
Total assets.................................. 427.3 479.6 429.2 447.8 701.4
Long-term debt................................ 127.0 155.5 72.1 24.7 182.5
Shareholders' equity.......................... $161.7 $181.0 $199.4 $240.9 $ 259.0
</TABLE>
FOOTNOTES CONTINUED ON FOLLOWING PAGE
18
<PAGE>
- ------------------------------
(1) The following represents a break-out of our net sales between our
traditional stores and our superstores (unaudited):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 27, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales:
Traditional stores.......... $ 677.3 $ 833.2 $ 923.2 $ 953.5 $ 1,154.6
Superstores................. -- 1.4 5.8 21.5 88.3
------ ------ ------ ------ -----------
Total net sales............... $ 677.3 $ 834.6 $ 929.0 $ 975.0 $ 1,242.9
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
</TABLE>
(2) We recorded a non-recurring charge of $25.1 million ($15.3 million on an
after-tax basis) related to the House of Fabrics acquisition in fiscal
1999. This charge consisted of write-downs of previously owned assets
affected by the House of Fabrics acquisition to estimated net realizable
value, the cost of operating duplicate corporate facilities during the
six-month transition period following the House of Fabrics acquisition, and
costs associated with the remerchandising of the acquired stores. The total
cash costs included in the non-recurring charge were approximately $15.9
million. We completed the planned integration events associated with the
acquisition by the end of the third quarter of fiscal 1999.
(3) We recorded an extraordinary item in fiscal 1998 for the early redemption
of convertible subordinated debentures outstanding. The extraordinary item,
net of taxes, consisted of the redemption premium, unamortized debenture
issuance costs and other related expenses.
(4) EBITDAR represents net income before taking into consideration interest
expense, income tax expense, depreciation and amortization expense,
non-recurring charges and rental expense. EBITDAR is not a measurement of
financial performance under generally accepted accounting principles.
Accordingly, you should not regard this figure as an alternative to net
income or as an indicator of our operating performance. We believe that
EBITDAR is widely used by analysts, investors and other interested parties
in our industry but is not necessarily comparable with similarly titled
measures for other companies.
(5) Rental expense includes base rent, percentage rent, common area
maintenance, real estate taxes, merchant association dues, landlord
property insurance and sublease rental income.
(6) EBITDA represents net income before taking into consideration interest
expense, income tax expense, depreciation and amortization expense, and
non-recurring charges. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and does not represent cash
flow from operations. Accordingly, you should not regard this figure as an
alternative to net income or as an indicator of our operating performance
or as an alternative to cash flows as a measure of liquidity. We believe
that EBITDA is widely used by analysts, investors and other interested
parties in our industry but is not necessarily comparable with similarly
titled measures for other companies.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes and fixed charges. Fixed charges
consist of interest expense, amortization of deferred debt issuance costs
and the portion of occupancy expense deemed representative of interest.
(8) New stores are included in the calculation of comparable store sales on the
one-year anniversary of the store opening.
(9) Total store square footage includes selling floor space and inventory
storage areas.
(10) For fiscal 1999, average sales per square foot were $84 and $120, for
traditional stores and superstores, respectively. We based sales per
square foot on the total store square footage, which includes selling
floor space and inventory storage areas. To accommodate openings and
closings of store locations throughout the year, we calculated sales per
square foot using an average square foot amount for the year, rather than
the fiscal year end square foot amount.
(11) In April 1998, we completed the acquisition of House of Fabrics which had
annual net sales of approximately $240.0 million and operated 261 fabric
and craft stores in 27 states. Following the acquisition, we closed 60
House of Fabric stores and 30 Jo-Ann Fabrics and Crafts stores in
overlapping geographic locations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INCLUDES A DISCUSSION OF OUR MOST RECENTLY COMPLETED FISCAL
YEARS. WE URGE YOU TO REVIEW OUR QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MAY 1, 1999 FOR MORE CURRENT INFORMATION ON JO-ANN STORES. SEE
"INCORPORATION OF DOCUMENTS BY REFERENCE" FOR INSTRUCTIONS ON HOW YOU MAY
RECEIVE OUR QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 1, 1999, AND
OTHER FILINGS INCORPORATED INTO THIS PROSPECTUS BY REFERENCE, WITHOUT CHARGE.
We are the largest national category-dominant retailer, based on number of
stores, serving the retail fabric and craft industry. The retail fabric and
craft industry generated estimated combined revenues of $10.0 billion in 1998.
We operate 1,034 Jo-Ann Fabrics and Crafts traditional stores in 49 states and
24 Jo-Ann etc superstores in 12 states as of January 30, 1999. We serve the
approximately 70% of U.S. households that engaged in crafts and hobbies during
the past year by offering a large variety of competitively priced, high quality
apparel, quilting and craft fabrics and sewing-related products, home decorating
fabrics, floral, craft and seasonal products, educational classes and custom
services.
We have an approximately 20% market share in the consolidated fabric and
sewing-related products segment of the industry and an approximately four
percent market share in the highly fragmented craft products segment of the
industry.
Our traditional stores average 13,700 square feet, and we believe many are
located in markets that are currently underserved. Over the past five years we
have strategically relocated certain traditional stores, increasing average
square footage per store by 20% and sales per square foot by 11%. As a result,
net sales per traditional store have increased 33% to $1.2 million over this
period. In November 1995 we opened our first large format "category killer"
superstore which offers a more comprehensive product assortment and
higher-margin custom services including framing, home decoration, and furniture
and floral design. These superstores average 46,900 square feet and in fiscal
1999 generated approximately five times more revenue and 40% higher sales per
square foot than our traditional stores. We believe our superstores, which
accounted for approximately seven percent of fiscal 1999 net sales, will be our
future growth vehicle.
On March 9, 1998, we acquired, through a cash tender offer, 77.2% of the
outstanding common stock of House of Fabrics, Inc., a retail chain operating 261
fabric and craft stores predominantly on the West Coast. On April 21, 1998, the
merger of House of Fabrics with one of our wholly owned subsidiaries was
approved at a special meeting of the shareholders of House of Fabrics. Operating
results of the House of Fabrics stores continuing in operation have been
included in our results of operations since the date of the House of Fabrics
acquisition.
During fiscal 2000, we plan to proceed with the next phase of a three-year
project of implementing an enterprise-wide information technology system which
began in fiscal 1999. The project is expected to fully integrate financial and
operations systems at a cost of approximately $30.0 million, of which $8.8
million has been spent to date.
During the second half of fiscal 1999 and the beginning of fiscal 2000, we
have experienced higher costs than in prior periods due principally to higher
freight and logistics costs. We are working with a leading consulting firm to
design and implement a national logistics network in order to reduce these
expenses and provide for a more efficient logistics network. We believe that
this network will result in the addition of at least one new distribution center
at an estimated cost for construction and equipment of $30.0 million. During the
next 18 to 24 months, we expect to operate within our existing distribution
center in Hudson, Ohio together with a contract facility in California to handle
seasonal product demand. Until we complete the implementation of our new
logistics network, we may continue to experience higher costs as a result of
these factors.
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RESULTS OF OPERATIONS
The following table sets forth certain financial information from our
audited consolidated financial statements of income expressed as a percentage of
net sales and should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------
FISCAL YEARS ENDED
-------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales.................................................................. 100.0% 100.0% 100.0%
Cost of sales.............................................................. 54.6 54.7 55.6
----- ----- -----
Gross profit............................................................... 45.4 45.3 44.4
Selling, general and administrative expenses............................... 38.4 37.2 36.7
Depreciation and amortization.............................................. 2.2 2.2 2.3
----- ----- -----
Operating profit before non-recurring charge............................... 4.8 5.9 5.4
Non-recurring charge....................................................... 2.0 -- --
----- ----- -----
Operating profit........................................................... 2.8 5.9 5.4
Interest expense........................................................... 1.0 0.6 1.1
----- ----- -----
Income before income taxes and extraordinary item.......................... 1.8 5.3 4.3
Income taxes............................................................... 0.7 2.0 1.7
----- ----- -----
Net income before extraordinary item....................................... 1.1 3.3 2.6
Extraordinary item......................................................... -- (0.1) --
----- ----- -----
Net income................................................................. 1.1% 3.2% 2.6%
----- ----- -----
----- ----- -----
</TABLE>
COMPARISON OF THE 52 WEEKS ENDED JANUARY 30, 1999 AND JANUARY 31, 1998
NET SALES. Net sales for fiscal 1999 were $1,242.9 million compared to
$975.0 million in fiscal 1998, an increase of $267.9 million, or 27.5%, compared
to fiscal 1998. Of this increase, $188.8 million was attributable to the
acquired House of Fabrics stores. Excluding the impact of the House of Fabrics
stores, sales increased 8.1%, or $79.1 million, compared to fiscal 1998. The
majority of this sales growth (excluding House of Fabrics) was generated by the
increase in the number of superstores, our 46,000 square foot format.
Twenty-four superstores were in operation at January 30, 1999 compared to seven
superstores at January 31, 1998. Comparable store sales increased 3.5% for
fiscal 1999 over fiscal 1998 and comparable store sales increased 3.8% for
fiscal 1998 over fiscal 1997.
GROSS PROFIT. Gross profit for fiscal 1999 was $564.4 million compared to
$441.8 million in fiscal 1998, an increase of $122.6 million, or 27.8%, compared
to fiscal 1998. As a percentage of net sales, fiscal 1999 gross profit was
45.4%, an increase of 0.1 percentage points from fiscal 1998. The gross profit
percentage improvement resulted from a continued improvement in shrink as
pricing to consumers and product costs were relatively constant between years.
In addition, higher freight costs, due to the increased level of inventory
handled during the year and a higher proportion of stores operating on the West
Coast, were partially offset by increased vendor support in the form of quantity
discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-recurring charges, were $476.7 million in
fiscal 1999 compared to $363.1 million in fiscal 1998, an increase of $113.6
million, or 31.3%, over fiscal 1998. Selling, general and administrative
expenses as a percentage of net sales were 38.4% in fiscal 1999 compared to
37.2% in fiscal 1998, an increase of 1.2 percentage points from fiscal 1998. The
increase, as a percentage of sales, consisted primarily of
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increases in distribution expenses due to the higher level of inventory handled,
store opening expenses and Year 2000 compliance expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
fiscal 1999 was $27.7 million compared to $21.7 million in fiscal 1998, an
increase of $6.0 million, or 27.6%, compared to fiscal 1998. Of this increase,
$4.2 million was due to the House of Fabrics acquisition and the balance was
attributable to higher capital expenditure levels in the most recent and prior
year.
NON-RECURRING CHARGE. During fiscal 1999, we incurred a non-recurring
charge of $25.1 million pretax ($15.3 million on an after-tax basis) related to
the House of Fabrics acquisition. This charge consisted of write-downs of
previously owned assets affected by the House of Fabrics acquisition to
estimated net realizable value, the cost of operating duplicate corporate
facilities during the six-month transition period following the House of Fabrics
acquisition, and costs associated with the remerchandising of the acquired
stores. The total cash costs included in the non-recurring charge were
approximately $15.9 million. The planned integration events associated with the
acquisition were completed by the end of the third quarter of fiscal 1999.
OPERATING PROFIT. Operating profit for fiscal 1999 was $34.9 million,
compared to $57.0 million in fiscal 1998, a decrease of $22.1 million, or 38.8%,
compared to fiscal 1998. Excluding the non-recurring charge incurred in fiscal
1999, operating profit would have been $60.0 million in fiscal 1999, an increase
of $3.0 million over fiscal 1998.
INTEREST EXPENSE. Interest expense for fiscal 1999 was $12.5 million
compared to $5.9 million in fiscal 1998, an increase of $6.6 million compared to
fiscal 1998. The increase was due to higher debt levels resulting from the House
of Fabrics acquisition and increased inventory levels.
INCOME TAXES. Income taxes during fiscal 1999 were $8.8 million compared to
$19.2 million in fiscal 1998, a decrease of $10.4 million compared to fiscal
1998. The effective income tax rate was 39.0% for fiscal 1999 compared to 37.5%
for fiscal 1998. The effective tax rate increased due to higher state income tax
expense as a result of fully utilizing state tax net operating loss carry
forwards during fiscal 1999 and the impact of nondeductible amortization of
goodwill from the House of Fabrics acquisition.
NET INCOME. Net income during fiscal 1999 was $13.6 million compared to
$30.8 million in fiscal 1998, a decrease of $17.2 million, or 55.8%, compared to
fiscal 1998. Excluding the non-recurring charge in fiscal 1999, net income would
have been $28.9 million in fiscal 1999, a decrease of $1.9 million or 6.2%
compared to fiscal 1998.
COMPARISON OF THE 52 WEEKS ENDED JANUARY 31, 1998 AND THE 53 WEEKS ENDED
FEBRUARY 1, 1997
NET SALES. Net sales for fiscal 1998 were $975.0 million compared to $929.0
million in fiscal 1997, an increase of $46.0 million, or 5.0%, compared to
fiscal 1997. The sales increase was $62.6 million, or 6.9%, after adjusting
fiscal 1997 to 52 weeks. Comparable store sales increased 3.8% in fiscal 1998
over fiscal 1997, and comparable store sales increased by 7.5% in fiscal 1997
compared to fiscal 1996.
GROSS PROFIT. Gross profit for fiscal 1998 was $441.8 million compared to
$412.1 million in fiscal 1997, an increase of $29.7 million, or 7.2%, compared
to fiscal 1997. As a percent of net sales, gross profit for fiscal 1998 was
45.3%, an increase of 0.9 percentage points from fiscal 1997. The gross profit
margin percent improvement resulted primarily from reduced markdowns on seasonal
merchandise and improvements in store inventory shrink due to a focus on
inventory control disciplines, including enhanced shrinkage controls.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $363.1 million in fiscal 1998 compared to $340.9
million in fiscal 1997, an increase of $22.2 million, or
22
<PAGE>
6.5%, compared to fiscal 1997. Selling, general and administrative expenses were
37.2% of net sales for fiscal 1998, an increase of 0.5 percentage points from
fiscal 1997. The increase, as a percentage of sales, consisted primarily of
increases in advertising, distribution and store occupancy expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $21.7
million in fiscal 1998 compared to $21.2 million in fiscal 1997, an increase of
$0.5 million.
OPERATING PROFIT. Operating profit was $57.0 million in fiscal 1998
compared to $50.0 million in fiscal 1997, an increase of $7.0 million, or 14.0%,
compared to fiscal 1997.
INTEREST EXPENSE. Interest expense was $5.9 million in fiscal 1998 compared
to $10.6 million in fiscal 1997, a decrease of $4.7 million, or 44.3%. Interest
expense for fiscal 1998 decreased due to a $47.4 million reduction in debt
levels from the beginning of the year, coupled with an $83.4 million reduction
in debt in the year earlier period. These debt reductions were achieved
primarily through cash flows from operations and reductions in working capital.
INCOME TAXES. Income taxes were $19.2 million in fiscal 1998 compared to
$14.8 million in fiscal 1997, an increase of $4.4 million compared to fiscal
1997. The effective income tax rate was 37.5% for fiscal 1998 and fiscal 1997.
EXTRAORDINARY ITEM. During the second quarter of fiscal 1998, we incurred
an extraordinary loss of $1.1 million, or $0.06 per share, related to the early
redemption of our 6 1/4% Convertible Subordinated Debentures due 2002. The
redemption was funded through the use of our senior credit facility.
NET INCOME. Net income was $30.8 million in fiscal 1998 compared to $24.6
million in fiscal 1997, an increase of $6.2 million, or 25.2%, compared to
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1999 CASH FLOWS
Cash, including temporary cash investments, increased $5.6 million during
fiscal 1999 to $20.4 million as of January 30, 1999.
Net cash used for operating activities was $15.3 million in fiscal 1999,
compared to net cash provided by operating activities of $78.1 million in fiscal
1998. Cash generated by operations in fiscal 1999, before working capital items,
totaled $61.2 million, an improvement of $6.7 million compared to the $54.5
million generated during fiscal 1998. Working capital consumed $76.5 million of
cash. Inventories, net of payables support, increased $81.4 million due to the
opening of 17 additional superstores, the remerchandising of the acquired House
of Fabrics stores with a denser mix of inventory per square foot, and higher
levels of inventory in the distribution service center.
Net cash used for investing activities for fiscal 1999 totaled $94.3 million
compared to $37.1 million in fiscal 1998. The primary investment activities in
fiscal 1999 were the acquisition of House of Fabrics and capital expenditures.
We completed our acquisition of the outstanding stock of House of Fabrics during
the first quarter of fiscal 1999 for a total purchase price of $23.5 million. In
addition to the cost of the outstanding stock, we assumed approximately $73.6
million in debt and other long-term liabilities, including a $22.5 million
income tax contingency discussed in Note 2 to the consolidated financial
statements appearing elsewhere in this prospectus. We made a payment to the
Internal Revenue Service of $16.1 million in February 1999, representing $12.3
million of the $22.5 million income tax liability and $3.8 million of accrued
interest, in connection with this income tax contingency. We are currently in
discussions with the Internal Revenue Service regarding this contingency.
Capital expenditures were $75.1 million during fiscal 1999 and are discussed
further under the caption "--Capital Expenditures."
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Net cash provided by financing activities during fiscal 1999 was $115.2
million, of which $111.3 million represented an increase in borrowings under our
senior credit facility and $4.4 million represented the proceeds and tax benefit
from the exercise of stock options.
In December 1998, our board of directors authorized the repurchase of up to
an additional 2.0 million shares of our common stock. This authorization, when
coupled with prior authorizations by the board of directors, allows for the
repurchase of up to approximately 3.1 million shares at January 30, 1999. During
fiscal years 1999 and 1998, we purchased a total of 83,499 shares at an
aggregate price of $1.5 million under these authorizations. We have purchased an
additional 647,860 shares in fiscal 2000 at an aggregate price of $8.6 million
through April 9, 1999.
FISCAL 1998 CASH FLOWS
Cash, including temporary cash investments, increased $2.2 million during
fiscal 1998 to $14.8 million as of January 31, 1998.
Net cash provided by operating activities was $78.1 million in fiscal 1998
compared to $103.9 million in fiscal 1997. Cash generated by operations, before
working capital items, totaled $54.5 million, an improvement of $8.9 million
from the $45.6 million generated during fiscal 1997. Working capital generated
$23.6 million of cash, due to inventory levels being held constant with an
improvement in trade payables support.
Net cash used for investing activities in fiscal 1998 totaled $37.1 million,
substantially all of which related to capital expenditures, as discussed further
under the caption "--Capital Expenditures."
Net cash used for financing activities was $38.8 million. Borrowings of
$87.3 million during fiscal 1998 were offset by repayments of $77.7 million of
long-term debt and the redemption for $57.0 million of our convertible
debentures. We also received $8.4 million from the exercise and tax benefit of
stock options.
CAPITAL EXPENDITURES
During fiscal 1999, we reinvested $75.1 million into our business, of which
$52.6 million represented investment in new stores and upgrades through
relocation or remodel of our existing store base, including $16.0 million to
remodel the acquired House of Fabrics stores. During fiscal 1999, we opened 31
stores, including 17 superstores, and relocated 19 traditional stores.
We spent $4.9 million in fiscal 1999 on capital projects for our
distribution service center to, among other initiatives, install a fabric
selection module and a split case selection module to improve picking
efficiency. A second fabric selection module is scheduled to be installed in the
52 weeks ended January 29, 2000.
We spent $15.3 million in fiscal 1999 on capitalizable systems technology,
of which $8.8 million related to the first year of a three-year project to
replace substantially all of our existing legacy systems with a fully integrated
enterprise-wide system, utilizing software supplied by SAP AG. The total cost of
this project is estimated to be $30.0 million and will replace all of our
financial, merchandising and human resource systems. The financial systems were
installed and became operational in the fourth quarter of fiscal 1999.
During fiscal 1998, we reinvested $36.6 million into our business, of which
$24.0 million represented our investment in new and relocated stores. During
fiscal 1998, we opened 24 stores, including six superstores, and relocated or
expanded 42 traditional stores. We spent $4.5 million in fiscal 1998 on our
distribution service center to install conveyor equipment and construct
additional shipping docks. The balance of our capital expenditures in fiscal
1998 were primarily for capitalizable systems technology enhancements.
24
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During fiscal 2000, we intend to open up to 30 new stores, including 18
superstores, relocate 25 traditional stores, and remodel an additional 15
traditional stores. We also intend to continue our enterprise-wide system
implementation program. Our total capital expenditures are expected to
approximate $70.0 million in fiscal 2000. We also plan to spend approximately
$30.0 million in future fiscal years for construction and equipment in
connection with the addition of at least one new distribution center ($5.0
million of which will be spent in fiscal 2000). We have no material commitments
in connection with these planned capital expenditures. Funds for these
expenditures are expected to be provided from borrowings under our senior credit
facility and cash generated internally.
SOURCES OF LIQUIDITY
We have three principal sources of liquidity:
- cash from operations;
- cash and temporary cash investments; and
- our senior credit facility.
Our existing senior credit facility is an unsecured revolving facility
maturing on January 31, 2003 and provides for total credit commitments,
including letters of credit and related acceptances, of $250.0 million, plus an
additional $30.0 million of outside bank lines. As of January 30, 1999, we had
cash borrowings of $182.5 million under the senior credit facility and outside
bank lines. In addition, we had $40.6 million in letters of credit and related
acceptances outstanding under the senior credit facility at January 30, 1999. As
of April 29, 1999, we had $233.9 million of debt outstanding under the senior
credit facility (not including $45.0 million of letters of credit). The senior
credit facility includes a number of financial, operating and restrictive
covenants. We are currently in compliance with all such covenants.
We are currently in the process of negotiating a new five-year senior
unsecured revolving credit facility that will increase the total credit
commitment, including letters of credit and related acceptances, to $300.0
million, plus an additional $30.0 million of outside bank lines. The new senior
credit facility will provide us with greater financial flexibility because it
will permit this offering and, subject to the satisfaction of some of its
financial covenants, also will permit us to incur additional senior and
subordinated debt. We believe that our new senior credit facility, coupled with
cash on hand and from operations and the net proceeds of this offering, will be
sufficient to cover our working capital, capital expenditure and debt service
requirement needs for the foreseeable future. The closing of the sale of the
notes is conditioned upon our closing the new senior credit facility in the
aggregate amount of at least $250.0 million. See "Description of Certain
Indebtedness."
SEASONALITY AND INFLATION
Our 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. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
Capital requirements needed to finance our operations fluctuate during the year
and reach their highest levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling season.
We believe that inflation has not had a significant effect on the growth of
net sales or on net income over the past three years.
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YEAR 2000
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.
We have developed and are executing plans to address possible exposures
related to the impact on our computer systems of the Year 2000 issue. Our
planned modification of our existing systems was complete as of January 30,
1999, and testing and certification of these completed modifications is in
process and is expected to be completed by August 31, 1999. Expenditures for
modifying existing software to address Year 2000 issues are estimated to total
$2.5 to $3.0 million, of which $2.1 million has been spent to date, $1.6 million
in fiscal 1999 and $0.5 million in fiscal 1998. All expenditures are being
expensed as incurred. We expect that we will be able to test and certify the
affected systems that we have modified in time to avoid any material disruption
to operations; however, unforeseen developments or delays could cause this
expectation to change.
We are also engaged in a significantly larger project of implementing an
enterprise-wide system which began in fiscal 1999 and will continue over the
next several years at a total cost of approximately $30.0 million. The project
is expected to fully integrate financial and operations systems, creating
increased reliability and usefulness of our data. Our financial systems became
operational under this enterprise-wide system implementation in the fourth
quarter of fiscal 1999 and are Year 2000 compliant. The merchandise and human
resource operating systems are expected to become operational in fiscal 2000 and
2001. However, as discussed above, we are not relying on this implementation to
address Year 2000 issues related to our existing operational systems.
We are also in the process of developing contingency plans that focus on
reducing any disruption that might be created by product suppliers with whom we
do business being Year 2000 noncompliant. We have communicated with our key
suppliers to identify the nature and potential impact of issues presented by the
Year 2000 on the businesses of such suppliers. We are not presently aware of any
product supplier-related issue presented by the Year 2000 that is likely to have
a material impact on us. None of our suppliers in fiscal 1999 provided more than
2% of our products. In the first half of fiscal 2000, we will evaluate any
supplier-related issues and other external risks and we will develop contingency
plans as necessary. There can be no assurances that the systems or products of
third parties on which we rely will be converted on a timely basis or that a
failure by a third party, or a conversion that is incompatible with our systems,
would not have a material adverse effect on our results of operations, financial
condition or business.
We anticipate minimal business disruption will occur as a result of Year
2000 issues. However, possible consequences include, but are not limited to,
temporary disruption of our normal business operations, loss of communications
links with store locations, loss of electric power, inability to process
transactions, problems with ordering and receiving merchandise and problems with
banks and other financial institutions. We believe that our worst case scenario
involves the inability of electric utility companies to service our various
stores due to Year 2000 problems. If the electric utility companies cannot
provide power to a significant number of our stores, our business and operations
could be materially disrupted.
DERIVATIVE FINANCIAL INSTRUMENTS AND MARKET RISK
We are exposed to the impact of:
- interest rate changes on our outstanding borrowings under the senior
credit facility; and
- foreign currency fluctuations on merchandise that is sourced
internationally.
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In the normal course of business, we employ established policies and
procedures to manage our exposure to changes in interest rates. Our objective in
managing the exposure to interest rate changes is to limit the impact of
interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve our objective, we utilize interest rate swaps to
manage net exposure to interest rate changes related to our debt structure. On
March 15, 1998, we entered into a five-year interest rate swap agreement to
hedge our interest rate exposure. The notional amount of this interest rate swap
is $75.0 million, with a fixed London Interbank Offered Rate of 5.98%, reducing
to $50.0 million on March 15, 2001 for the remaining term of the agreement.
Foreign currency exchange rate fluctuations, we believe, do not contain
significant market risk due to the nature of our relationships with our
international vendors. All merchandise contracts are denominated in U.S. dollars
and are subject to negotiation prior to our commitment for purchases.
Approximately 15% of our purchases are sourced internationally and no single
vendor makes up more than 10% of this total. As a result, there is not a direct
correlation of merchandise prices relative to fluctuations in the exchange rate.
RECENT ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting on
Comprehensive Income." This statement became effective in our first quarter of
fiscal 1999. This statement establishes standards for reporting and display of
comprehensive income and its components. We currently have no items that qualify
as comprehensive income under the definitions of this statement and the
presentation of previously reported results is not affected.
SEGMENT REPORTING. In June 1997, Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information," was issued. Based on the information utilized by our operating
decision makers to manage the business, we currently have no segments which
require disclosure under the quantitative thresholds defined by the statement.
DERIVATIVES. In June 1998, Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," was issued.
We must adopt the statement in fiscal 2000. Under provisions of this statement,
we will be required to record all derivatives on the balance sheet at fair value
and establish special accounting rules for the different types of hedges.
Implementation of this standard is not expected to have a material impact on our
financial position or results of operations.
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BUSINESS
We are the largest national category-dominant retailer serving the retail
fabric and craft industry, which generated estimated combined revenues of $10.0
billion in 1998. We were founded as a single retail store in 1943. As of January
30, 1999, we operated 1,034 Jo-Ann Fabrics and Crafts traditional stores in 49
states and 24 Jo-Ann etc superstores in 12 states. We serve the approximately
70% of U.S. households that engaged in crafts and hobbies during the past year
by offering a large variety of competitively priced, high quality apparel,
quilting and craft fabrics and sewing-related products, home decorating fabrics,
floral, craft and seasonal products, educational classes and custom services. We
have increased our net sales and EBITDA over the past five years from $677.3
million and $41.5 million, respectively, in fiscal 1995 to $1,242.9 million and
$87.7 million, respectively, in fiscal 1999. These increases represent compound
annual growth rates of approximately 16% and 21%, respectively. In addition, we
have achieved 18 consecutive quarters of positive comparable store sales growth.
We have an approximately 20% market share in the consolidated fabric and
sewing-related products segment and an approximately four percent market share
in the highly fragmented craft products segment. Our preferred mailing list
includes more than four million customers, and we believe that we have many
loyal customers who visit our stores at least every two weeks. In addition, our
website (www.joann.com) is accessed approximately 100,000 times per month. We
believe that our customers visit our website to obtain information on our
products, classes and services and to communicate with other sewing and craft
enthusiasts.
Our traditional stores primarily serve small and middle markets, and our
recently developed superstores serve selected markets where traditional store
performance and area demographics are favorable. Our traditional stores average
13,700 square feet, and we believe many are located in markets that are
currently underserved. Over the past five years we have strategically relocated
certain traditional stores, increasing average square footage per store by 20%
and sales per square foot by 11%. As a result, net sales per traditional store
have increased 33% to $1.2 million over this period. In November 1995 we opened
our first large format "category killer" superstore which offers a more
comprehensive product assortment and higher-margin custom services including
framing, home decoration, and furniture and floral design. These superstores
average 46,900 square feet and in fiscal 1999 generated approximately five times
more revenue and 40% higher sales per square foot than our traditional stores.
We believe our superstores, which accounted for approximately seven percent of
fiscal 1999 net sales, will be our future growth vehicle.
Historically, we have grown and increased market share principally through
existing store growth, new store openings and strategic acquisitions. In April
1998, we acquired House of Fabrics, a chain of 261 fabric and craft stores
located primarily on the West Coast. By September 1998, we successfully
integrated, remerchandised and rebranded the former House of Fabrics stores.
These stores had been significantly under-inventoried as a result of the
previous owner's financial constraints. In addition to eliminating duplicate
overhead, we expect to re-establish these stores' former sales base by
increasing product selection and availability.
COMPETITIVE STRENGTHS
We believe that we have the following competitive advantages in our
industry:
- LEADING MARKET SHARE. We are the largest national category-dominant
retailer in the estimated $10.0 billion fabric and craft industry based on
number of stores and have a well-established national brand name. We
estimate that we enjoy an approximately 20% market share in the
approximately $4.0 billion consolidated fabric and sewing-related products
segment and an approximately four percent market share in the
approximately $6.0 billion highly fragmented craft products segment. We
have only one national competitor in each of these segments, and the
balance of our competitors are regional and local operators.
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<PAGE>
- ABILITY TO BENEFIT FROM SOCIETAL TRENDS. We believe that societal trends
toward lifestyle improvement, family-oriented activities and the recent
proliferation of home decorating, gardening and crafting programming on
television have served to promote interest in the retail fabric and craft
industry. As the largest national category-dominant retailer serving this
industry, we believe that we are well positioned to serve the
approximately 70% of all U.S. households that completed at least one craft
or hobby project during the past year. We believe influential figures
including Martha Stewart and Rosie O'Donnell increase consumer awareness
of sewing and crafting through their highly rated television programs. We
are a sponsor of THE CAROL DUVALL SHOW on The Home and Garden Television
network, INTERIOR MOTIVES on the Discovery Channel and AMERICA SEWS on
PBS.
- LOYAL CUSTOMER BASE SUPPORTED BY EXCEPTIONAL CUSTOMER SERVICE. Our mission
is to serve and inspire creativity. We provide a solution-oriented
shopping experience with employees who are trained to assist customers in
creating and completing creative projects. Many of our store level
employees are sewing and/or craft enthusiasts, which enables them to
provide exceptional customer service. We believe our focus on service
contributes to a high proportion of repeat business from our customers,
and that we have many loyal customers who visit our stores at least every
two weeks. More than 50% of our advertising budget is allocated to our
direct mail program targeting three to four million of our preferred
customers.
- DIVERSE SELECTION OF HIGH QUALITY PRODUCTS. We believe our superstores are
uniquely designed to create a destination location for our customers and
offer a complete selection of fabric, craft and home decorating supplies
and services. Our traditional stores offer a comprehensive and fashionable
selection of fabric and a competitive, convenient assortment of crafts.
During fiscal 1999, sewing, craft and seasonal, and home decorating and
floral products represented 58%, 26%, and 16% of our net sales,
respectively. We believe our merchandise is of superior quality,
represents good value to our customers, and provides us with a diverse
revenue base.
- FAVORABLE REAL ESTATE SELECTION AND MANAGEMENT. We believe that our store
locations are integral to our success. We have built a five-member real
estate management team that collectively has more than 160 years of
experience in real estate site selection and lease negotiation. As a
result of our 56-year operating history and more than 15 million square
feet of stores under lease, we have developed long-term relationships with
real estate developers nationwide and are generally able to negotiate
advantageous lease terms. Additionally, we often obtain favorable store
sites because developers recognize that our stores draw customers to
shopping centers and there is less competition for real estate within our
retailing segment. As a result, our traditional store leases typically
provide for five-year terms, renewable at our option, rather than the
ten-year industry standard, and often allow us to cancel them before the
end of their initial terms. For example, in the recently completed House
of Fabrics acquisition, we have already negotiated rent settlements for 70
of the 90 overlap locations that we closed.
- EXPERIENCED MANAGEMENT TEAM. Our eight-member senior management team
collectively has more than 160 years of retail industry experience and
more than 70 years of fabric and craft industry experience. In addition,
our three general merchandise managers collectively have more than 50
years of fabric and craft industry buying experience.
BUSINESS STRATEGY
Our business strategy is to emphasize and build on our significant
competitive strengths to increase net sales and EBITDA. The key components of
this strategy include:
- MAINTAIN HIGHLY ATTRACTIVE STORE ECONOMICS. Our return on new store
investment has been rapid, with both new traditional stores and
superstores generating breakeven cash flows after approximately 2.5 years
(3.5 years including inventory investment). We conduct an internal rate
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<PAGE>
of return analysis on all new and relocation store projects based on their
projected ten-year after-tax cash flow, including distribution and
corporate overhead costs. We generally approve new and relocation store
projects that provide a minimum 15% internal rate of return.
- CONTINUE SUPERSTORE OPENINGS. We believe our superstores are the best
vehicle to bring our product to market in major metropolitan areas. Our
superstores are staffed with expert personnel and carry comprehensive
product selections that create a destination-oriented shopping experience
and draw customers from a broader geographic area than our traditional
stores. We expect to add superstores in selected markets where current
traditional store performance and area demographics are favorable. On
average, we plan to close one to two traditional stores for each
superstore we open in an existing market. We expect this to increase our
total store square footage but not necessarily our total store count. At
the end of fiscal 1999, we operated 24 superstores and during fiscal 2000
we plan to open 18 new superstores.
- REPOSITION AND ADD TRADITIONAL STORES. Our traditional stores will
continue to be our vehicle for bringing creativity to small and middle
markets, many of which we believe are currently underserved. We will
continue to actively manage this portion of our store base, relocating and
opening new traditional stores as market conditions and leasing
opportunities dictate. Over the past five years, this repositioning has
increased average square footage by more than 20% and sales per square
foot by 11%. As a result, sales per traditional store have increased 33%
to $1.2 million.
- INCREASE SALES PER SQUARE FOOT IN TRADITIONAL STORES. We believe that by
increasing the breadth of our merchandise assortments, we can increase
sales per square foot in our traditional stores. In fiscal 1999, we
completely remerchandised the 201 retained House of Fabrics stores,
developing product assortments based on their assessed potential. The
result was an increase in average net sales per House of Fabrics store
from 85% of our average net sales per traditional store at the time of
acquisition to more than 100% in the 28 weeks after the grand reopening of
these stores under the Jo-Ann name. We plan to selectively remodel 15
traditional stores during fiscal 2000 to increase inventory density,
expand product assortment and improve sales productivity.
- IMPLEMENT INTEGRATED MANAGEMENT INFORMATION SYSTEMS. We are currently
implementing a fully integrated management information system designed by
SAP AG at a cost of approximately $30.0 million, of which $8.8 million has
been spent to date. We are implementing the system software in three major
phases, with financial systems already installed and operational, retail
systems scheduled for installation during fiscal 2000 and human resource
systems scheduled for installation during fiscal 2001. This project is
designed to improve inventory management and gross margins by providing
automatic merchandise replenishment to each store based on historical
demand. This project is also designed to merge all of our financial and
operational systems and link our business processes on a single software
platform.
- IMPROVE MARGINS THROUGH ENHANCED LOGISTICS NETWORK. We are working with a
leading consulting firm to design and implement a national logistics
network. This network, when completed, is expected to include at least one
additional permanent distribution center, at an estimated cost for
construction and equipment of $30.0 million, and create a more efficient
operating cost structure. During the next 18 to 24 months, we expect to
utilize our existing distribution center in Hudson, Ohio, along with a
contract facility in California to handle seasonal product demand.
PRODUCT SELECTION
Each of our stores offers a broad selection of traditional sewing, craft and
seasonal, and home decorating and floral merchandise.
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<PAGE>
The following table shows our sales by principal product lines as a
percentage of total net sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Principal product line:
Traditional sewing................................... 58% 62% 65%
Craft and seasonal................................... 26 24 22
Home decorating and floral........................... 16 14 13
--- --- ---
Total............................................ 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
Our traditional stores have historically carried a full selection of sewing
merchandise and a convenient assortment of craft, seasonal, home decorating and
floral products. Our superstores offer a competitive assortment of merchandise
in all of our principal product lines and have a more diversified sales mix.
During fiscal 1999, 36% of superstore net sales were derived from traditional
sewing, 33% from crafts and seasonal and 31% from home decorating and floral.
TRADITIONAL SEWING
We believe that we provide the most extensive offering of apparel, quilting
and craft fabrics and sewing-related products available to our customers. We
offer the following traditional sewing selection:
- apparel fabrics, used primarily in the construction of garments, including
a wide variety of solid and printed cottons, linens, wools, fleece and
outerwear;
- an upscale selection of fabrics, including satins, metallics, evening
wear, bridal and special occasion;
- craft fabrics, used primarily in the construction of quilts, craft and
holiday projects, including calico, quilting, solids, holiday fabric and
juvenile designs;
- printed fabrics, including juvenile prints, seasonal designs for spring,
summer, fall and winter, and logo-related prints such as team emblems of
the National Football League;
- proprietary print designs which are unique to our stores; and
- notions, which represent all items incidental to sewing-related projects
other than fabric, including cutting implements, threads, zippers, trims,
tapes, pins, elastics, buttons and ribbons.
We also sell patterns and a limited number of sewing machines. Our high
volume stores offer a wider selection of sewing machines through leased
departments with third parties from whom we receive sublease income.
CRAFTS AND SEASONAL
Our superstores offer a full line of craft products, while our traditional
stores offer a convenient assortment. We carry both perennial and seasonal
products in a wide variety of categories. We offer the following craft
selection:
- general craft materials, including items used for stenciling, doll making,
jewelry making, woodworking, wall decor, rubber stamps, memory books and
plaster;
- brand name fine art materials, including items such as pastels, water
colors, oil paints, acrylics, easels, brushes, paper and canvas;
- hobby items, including wooden and plastic model kits and related supplies,
and paint-by-number kits;
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<PAGE>
- home accessories, including baskets, candles and potpourri; and
- needlecraft items, including hand-knitting yarns, needles, canvas,
needlepoint, embroidery and cross-stitching, knitting, crochet and other
stitchery supplies.
In addition to the basic categories described above, our stores regularly
feature seasonal products, which complement our core merchandising strategy. Our
seasonal offering spans all product lines and includes decorations, gifts and
supplies that focus on holidays including Easter, Halloween and Christmas, as
well as seasonal categories such as patio/garden. We own several private label
seasonal brands including the "Cottontale Collection," "Spooky Hollow" and
"Santa's Workbench."
During the Christmas selling season, a significant portion of floor and
shelf space is devoted to seasonal crafts, decorating and gift-making
merchandise. Due to the project-oriented nature of these items, our peak selling
season extends longer than that of other retailers and generally runs from
October through December. Accordingly, a fully developed seasonal merchandising
program, including inventory, merchandise layout and instructional ideas, is
implemented in every store during our third quarter of each fiscal year. This
program includes increasing inventory levels so that each store is fully stocked
during our peak selling season.
HOME DECORATING AND FLORAL
We offer an extensive selection of fabrics used in home decorating projects
such as window treatments and furniture and bed coverings. In addition, our
superstores offer custom window treatments and a full service framing department
stocked with picture framing materials, including ready-made and custom frames,
mat boards, glass, backing materials and related supplies, framed art and photo
albums.
Our floral products line includes silk flowers, dried flowers, artificial
plants sold separately or in ready-made and custom floral arrangements. We also
carry a broad selection of accessories required for floral arranging and wreath
making.
CUSTOMER SERVICE
We believe that customer service is an important aspect of our merchandising
strategy. Each store is staffed with knowledgeable employees and uses displays
in an effort to stimulate and promote new project ideas.
We believe that our extensive instructional programs conducted in our
superstores are the best in the industry, and serve to add new customers and
build customer loyalty. We view these programs as educational tools for our
customers and investments in our employees. Each of our superstores offers more
than 1,500 classes per year to approximately 4,000 customers. In addition, our
website (www.joann.com), which is accessed approximately 100,000 times per
month, offers information on our products, classes and services and provides a
forum for craft enthusiasts to interact.
MARKETING
We have recently rebranded all of our stores under the Jo-Ann name and have
begun a national advertising campaign. Our proprietary mailing list of more than
four million preferred customers allows us to efficiently reach our target
market. Through our national advertising campaign and proprietary mailing list,
we believe that we are able to create high impact, low cost marketing campaigns.
We focus our advertising on direct mail circulars and to a lesser extent on
newspaper advertising. We have found that mailing full-color circulars to
frequent customers is our most effective advertising program. Each circular
features numerous products offered at competitive prices and emphasizes the wide
selection of merchandise available in the stores.
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<PAGE>
PURCHASING
We have numerous competitive domestic and international sources of supply
available for each category of merchandise that we sell. During fiscal 1999,
approximately 85% of our purchases were sourced domestically and 15% were
sourced internationally. Although we have no long-term purchase commitments with
any of our suppliers, we strive to maintain continuity with them. All purchases
are centralized through our corporate office, allowing store managers and sales
associates to focus on customer sales and service and enabling us to negotiate
volume discounts, control product mix and ensure quality. Currently, none of our
suppliers represents more than two percent of our purchasing volume and the top
ten suppliers represent less than 17% of our total purchasing volume. We
currently utilize more than 1,200 suppliers, with the top 200 representing more
than 80% of our purchasing volume.
LOGISTICS
We operate one owned distribution center in Hudson, Ohio, which ships
products to all of our stores on a weekly basis. Approximately 80% of the
merchandise sold in a traditional store and 65% of the merchandise sold in a
superstore is handled through this facility with the remainder shipped directly
from our vendors. We also utilize a contract warehouse in California to
distribute peak seasonal product. As part of our strategic logistics network
design project, we expect to build a new permanent distribution center at an
estimated cost for construction and equipment of $30.0 million.
We transport merchandise from our distribution center to our stores
utilizing contract carriers. Some merchandise is transported to 28 regional
"hubs" and repacked for local delivery. We do not own either the regional hubs
or local delivery vehicles.
STORES
LOCATION. The following table shows our stores by type and state at January
30, 1999:
<TABLE>
<CAPTION>
TRADITIONAL SUPERSTORE TOTAL
----------- ---------- -----
<S> <C> <C> <C>
Alabama.................. 4 -- 4
Alaska................... 5 -- 5
Arizona.................. 17 2 19
Arkansas................. 3 -- 3
California............... 129 -- 129
Colorado................. 17 -- 17
Connecticut.............. 19 1 20
Delaware................. 3 -- 3
Florida.................. 57 4 61
Georgia.................. 16 -- 16
Idaho.................... 10 -- 10
Illinois................. 49 -- 49
Indiana.................. 33 1 34
Iowa..................... 12 -- 12
Kansas................... 10 1 11
Kentucky................. 7 -- 7
Louisiana................ 9 -- 9
Maine.................... 5 -- 5
Maryland................. 21 2 23
Massachusetts............ 26 -- 26
Michigan................. 63 1 64
Minnesota................ 24 1 25
Mississippi.............. 1 -- 1
Missouri................. 14 -- 14
Montana.................. 7 -- 7
<CAPTION>
TRADITIONAL SUPERSTORE TOTAL
----------- ---------- -----
<S> <C> <C> <C>
Nebraska................. 6 -- 6
Nevada................... 6 1 7
New Hampshire............ 10 -- 10
New Jersey............... 16 -- 16
New Mexico............... 6 -- 6
New York................. 49 2 51
North Carolina........... 7 -- 7
North Dakota............. 4 -- 4
Ohio..................... 78 5 83
Oklahoma................. 7 -- 7
Oregon................... 26 -- 26
Pennsylvania............. 61 -- 61
Rhode Island............. 3 -- 3
South Carolina........... 2 -- 2
South Dakota............. 2 -- 2
Tennessee................ 4 3 7
Texas.................... 73 -- 73
Utah..................... 15 -- 15
Vermont.................. 4 -- 4
Virginia................. 24 -- 24
Washington............... 38 -- 38
West Virginia............ 7 -- 7
Wisconsin................ 23 -- 23
Wyoming.................. 2 -- 2
----- --- -----
Total................ 1,034 24 1,058
----- --- -----
----- --- -----
</TABLE>
33
<PAGE>
The following table reflects the number of stores opened, expanded or
relocated, closed and acquired during each of the past five fiscal years:
<TABLE>
<CAPTION>
STORES IN
STORES EXPANDED OR STORES STORES OPERATION AT
FISCAL YEAR OPENED RELOCATED CLOSED ACQUIRED YEAR-END
- ----------- ------------- ----------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1995...... 10 28 43 342(1) 964
1996...... 14 48 42 -- 936
1997...... 13 37 35 -- 914
1998...... 24 42 35 -- 903
1999...... 31 26 47 171(2) 1,058
</TABLE>
- ------------------------
(1) In October 1994, we acquired Cloth World, a division of Brown Group, Inc., a
chain of 342 fabric stores located primarily in the southern half of the
United States.
(2) In April 1998, we completed a merger with House of Fabrics, Inc., a chain of
261 fabric and craft stores located primarily on the West Coast. Of the 261
stores acquired, 90 stores were consolidated with existing traditional
stores. As a result, 171 net new units were added to the store base.
During fiscal 2000, we expect to open up to 30 new stores, including 18
superstores, relocate 25 traditional stores, and remodel an additional 15
traditional stores. We have committed to 15 locations for these new stores.
SITE SELECTION. We believe that our store locations are integral to our
success. Sites are selected through a coordinated effort of our real estate and
operations management teams. In evaluating the desirability of a potential store
site, we consider both market demographics and site-specific criteria. Market
demographic criteria that we consider important include total population, number
of households, median household income, percentage of home ownership versus
rental, and historical and projected population growth over a ten-year period.
Site-specific criteria that we consider important include rental terms, our
position within the shopping strip location, size of the location, age of the
shopping strip location, co-tenants, proximity to highway access, traffic
patterns and ease of entry from the major roadways framing the strip location.
Our expansion strategy is to give priority to adding stores in existing
markets in order to create economies of scale associated with advertising,
distribution, field supervision, and other regional expenses. We believe that
there are attractive opportunities in most of our existing markets and numerous
new markets. We also intend to continue to selectively review acquisition
opportunities in existing and new markets.
COSTS OF OPENING STORES. We employ standard operating procedures that allow
us to efficiently open new stores and integrate them into our information and
distribution systems. We develop a standardized floor plan, inventory layout,
and marketing program for each new store we open. We typically open new stores
during the period from February through October to maximize sales during our
peak Christmas selling season.
Our new store opening costs depend on the building type, store size and
general cost levels in the area. During fiscal 1999, we opened 14 new
traditional stores, with an average square footage per store of 15,500 square
feet. Our average net opening cost of these traditional stores was approximately
$0.3 million per store, which included leasehold improvements, furniture,
fixtures and equipment, and pre-opening expenses. The initial inventory
investment, net of payables support, associated with each new traditional store
during fiscal 1999 was approximately $0.3 million. Also during fiscal 1999, we
opened 17 superstores, with an average square footage per store of approximately
46,900 square feet. Our average net opening cost of these superstores was
approximately $1.3 million per store, which included leasehold improvements,
furniture, fixtures and equipment, and pre-opening expenses. The
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<PAGE>
initial inventory investment, net of payables support, associated with each new
superstore in fiscal 1999 was approximately $0.9 million.
STORE MANAGEMENT. Traditional stores have approximately five full-time
employees and ten part-time employees, while superstores typically have
approximately 20 full-time employees and 40 part-time employees. Store managers
are compensated with a base salary plus a bonus which is tied to quarterly store
sales. The average tenure of our store managers is approximately six years.
Store managers are typically promoted from a group of top performing sales
associates, some of whom started as our customers. This continuity serves to
solidify long-standing relationships between our stores and our customers. When
a traditional store is closed due to the opening of a superstore, we generally
retain its employees to staff the new superstore.
Each store is under the supervision of a district manager who reports to a
regional vice president. Our centralized human resource department and field
management organization are responsible for recruiting and training new store
managers. Our prospective store managers are assigned to one of our existing
stores as manager-trainees for several weeks where they receive in-depth
on-the-job training. In addition, quarterly training seminars are conducted for
existing store managers and two-week orientation and training programs are
conducted for new sales associates.
INFORMATION TECHNOLOGY
We believe we have employed industry leading information technology in our
stores. We have had point of sale systems operational in all of our stores and
interfaced into our financial and merchandising systems since fiscal 1994. We
utilize point of sale registers and scanning devices to record the sale of
merchandise at a stock keeping unit (SKU) level at the stores. We also utilize
hand-held radio frequency terminals for a variety of store tasks including price
look-up, ordering and fabric sales processing. Point of sale register
transactions are polled nightly and interfaced with our sales and merchandising
systems.
Information obtained from item-level scanning through our point of sale
system enables us to identify important trends to assist in managing inventory
by facilitating the elimination of less profitable SKUs, increasing the in-stock
level of more popular SKUs, analyzing product margins, and generating data for
advertising cost/benefit evaluations. We also believe that our point of sale
systems allow us to provide better customer service by increasing the speed and
accuracy of register check out, enabling us to more rapidly restock merchandise
and efficiently re-price sale items.
We are currently implementing a fully integrated management information
system designed by SAP AG at a cost of approximately $30.0 million, of which
$8.8 million has been spent to date. We are implementing the system software in
three major phases, with financial systems already installed and operational,
retail systems scheduled for installation during fiscal 2000 and human resource
systems scheduled for installation during fiscal 2001. This project is designed
to improve inventory management and gross margins by providing automatic
merchandise replenishment to each store based on historical demand. This project
is also designed to merge all of our financial and operational systems and link
our business processes on a single software platform.
TRADEMARKS
We do business under the federally registered trademarks "Jo-Ann Fabrics and
Crafts" and "Jo-Ann etc." We believe that these names are significant to our
business.
COMPETITION
We are the largest national category-dominant retailer serving the retail
fabric and craft industry. Our stores compete with other specialty fabric and
craft retailers and selected mass merchants that
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<PAGE>
dedicate a portion of their selling space to a limited selection of fabrics and
craft supply items. We compete on the basis of product assortment, price,
convenience and customer service. We believe the combination of our product
assortment, customer service emphasis, systems technology and frequent
advertising provides us with a competitive advantage.
The domestic retail fabric and craft industry generated estimated combined
revenues of $10.0 billion in 1998. We have an approximately 20% market share in
the consolidated fabric and sewing-related products segment and an approximately
four percent market share in the highly fragmented craft products segment. We
have only one national competitor in each of the fabric segment and craft
segment of the industry, with the balance of the competitors being regional and
local operators. We believe that there are only a few competitors with fabric or
crafts sales exceeding $200.0 million annually, and that we are, based on store
count, approximately twice the size of our nearest competitor. We believe that
we have several advantages over most of our competitors, including:
- purchasing power;
- ability to support an efficient nationwide distribution; and
- the financial resources to support ongoing capital investments in our
infrastructure and new store development annual advertising expenditures.
See "Risk Factors--Competition could negatively impact our operations due to
price reductions and loss of market share."
PROPERTIES
Our corporate office and distribution center are located in an approximately
1.4 million square foot facility, that we own, on approximately 120 acres in
Hudson, Ohio. The distribution center occupies approximately 1.1 million square
feet and the remainder is used as our corporate office and a superstore. We own
approximately 100 acres of land adjacent to our Hudson facility.
The remaining properties that we occupy are leased retail store facilities
that are located primarily in high-traffic shopping centers. All store leases
are operating leases, generally for periods of five to ten years with renewal
options for up to 20 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 30,
1999, we incurred $118.5 million of rental expense for store locations.
As of January 30, 1999, the current terms of our store leases, assuming we
exercise all lease renewal options, were as follows:
<TABLE>
<CAPTION>
NUMBER OF
YEARS LEASE TERMS EXPIRE STORE LEASES
- ------------------------------------------------------------ -------------
<S> <C>
Month-to-month.............................................. 34
2000........................................................ 48
2001........................................................ 38
2002........................................................ 30
2003........................................................ 45
2004........................................................ 38
Thereafter.................................................. 822
-----
Total..................................................... 1,055
-----
-----
</TABLE>
36
<PAGE>
EMPLOYEES
As of January 30, 1999, we had approximately 22,000 full and part-time
employees, of which 20,700 worked in our stores, 750 were employed in our
distribution service center, and the balance held corporate and administrative
positions. The number of part-time employees is substantially increased during
the Christmas selling season. We believe our employee turnover is below average
for retailers primarily because our stores are staffed with sewing and crafting
enthusiasts. In addition, we provide an attractive work environment, employee
discounts, flexible hours and competitive compensation packages within the local
labor markets. Our ability to offer flexible scheduling is important in
attracting and retaining these employees since approximately 75% of our
employees work part-time.
The United Steelworkers of America, Upholstery and Allied Industries
Division currently represent employees who work in our distribution service
center. We recently negotiated a three-year contract, which expires May 2001. We
believe that our relations with our employees and the union are good.
LEGAL PROCEEDINGS
We are involved in various litigation matters in the ordinary course of our
business. We are not currently involved in any litigation which we expect,
either individually or in the aggregate, will have a material adverse effect on
our financial condition or results of operations.
On February 18, 1997, we settled enforcement proceedings brought by the
Securities and Exchange Commission involving our financial statements for the
fiscal year ended February 1, 1992, the use of those statements in connection
with the sale in March 1992 of our 6 1/4% convertible subordinated debentures
due 2002 (subsequently redeemed in June 1997), our financial statements for the
first three quarters of fiscal 1993, and the adequacy of certain disclosures
relating to such periods. The principal allegation was that we materially
overstated earnings for such periods because of the manner in which we
calculated one of our inventory-related reserves, thereby allegedly violating
certain federal securities laws, including provisions regarding anti-fraud,
reporting, 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. At the
same time as the settlement, the Securities and Exchange Commission filed a
civil action against us and our former chief financial officer and former
controller in the United States District Court for the District of Columbia.
Without admitting or denying the allegations, we consented to the entry of an
order enjoining us from violations of the federal securities laws and agreed to
pay $3.3 million in settlement of the action against us. The litigation is
proceeding against the former officers.
Alan Rosskamm, our Chief Executive Officer, consented to a separate
Securities and Exchange Commission administrative cease and desist order
settling certain allegations, without admitting or denying the allegations. The
Commission contended that Mr. Rosskamm violated certain federal securities laws
as a result of not making adequate inquiry of the financial staff before signing
management representation letters given to our auditors in connection with the
1992 debenture offering, and as a result of signing our Form 10-Q for the
quarter ended May 2, 1992.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Alan Rosskamm(1)........................ 49 Chairman of the Board, President and Chief
Executive Officer
Jane Aggers............................. 51 Executive Vice President, Merchandising, Marketing
and Inventory Management
Dave Bolen.............................. 47 Executive Vice President, Stores and Business
Development
Brian Carney............................ 38 Executive Vice President and Chief Financial
Officer
Les Duncan.............................. 51 Senior Vice President and Chief Information
Officer
Betty Rosskamm.......................... 71 Senior Vice President, Secretary and Director
Alma Zimmerman.......................... 86 Senior Vice President and Director
Scott Cowen(1)(2)(3).................... 52 Director
Ira Gumberg(1)(2)....................... 45 Director
Frank Newman(1)(2)(3)................... 50 Director
Gregg Searle(1)(2)(3)................... 50 Director
Debra Walker(1)(2)(3)................... 43 Director
</TABLE>
- ------------------------
(1) Member of the Corporate Governance Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
ALAN ROSSKAMM has been Chairman of the Board, President and Chief Executive
Officer of our company for more than five years and a Director of our company
since 1985. He is a member of one of the two founding families of our company
and has been employed by us since 1978. Mr. Rosskamm is also a Director of
Charming Shoppes Inc., a women's apparel retailer.
JANE AGGERS has been Executive Vice President, Merchandising, Marketing and
Inventory Management of our company for more than five years. She was previously
Senior Vice President, General Merchandise Manager of our company. Ms. Aggers
has been employed by us since 1977 in positions of increasing responsibility.
DAVE BOLEN has been Executive Vice President, Stores and Business
Development of our company since December 1998. He was Executive Vice President,
Business Development since August 1997 and Senior Vice President, General
Manager Jo-Ann etc from March 1997 to August 1997. Prior to joining our company,
he was Executive Vice President--Operations of Michaels Stores from July 1994 to
August 1996, and Executive Vice President, Chief Operating Officer and a
Director of Leewards Creative Crafts, from January 1986 to July 1994.
BRIAN CARNEY has been Executive Vice President and Chief Financial Officer
of our company since October 1997. Prior to joining our company, he was 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).
38
<PAGE>
LES DUNCAN has been Senior Vice President and Chief Information Officer of
our company since October 1997. Prior to joining our company, he was Vice
President and Chief Information Officer of Express, the largest division of The
Limited, Inc., from September 1993 to October 1997.
BETTY ROSSKAMM has been Senior Vice President and Secretary of our company
for more than five years and a Director of our company since 1967. Betty
Rosskamm is the mother of Alan Rosskamm.
ALMA ZIMMERMAN has been Senior Vice President of our company for more than
five years and a Director since 1967.
SCOTT COWEN has been President of Tulane University since July 1998.
Previously, he was Dean of the Weatherhead School of Management and A.J.
Weatherhead III Professor of Management, Case Western Reserve University, for
more than five years. Mr. Cowen has been a Director of our company since 1987
and is also a Director of American Greetings Corporation, Forest City
Enterprises, Inc. and Newell Rubbermaid Inc.
IRA GUMBERG has been Chief Executive Officer and President of J.J. Gumberg
Co., a real estate management and development company, for more than five years.
He has been a Director of our company since 1992 and is also a Director of
Mellon Bank, N.A.
FRANK NEWMAN has been Chairman of the Board since February 1997 and
President and Chief Executive Officer since February 1996 of Eckerd Corporation,
a pharmacy retailer. He has been President of Eckerd Corporation since July 1993
and was Chief Operating Officer from July 1993 to February 1996 and a Director
of Eckerd Corporation since July 1993. He has been a Director of our company
since 1991.
GREGG SEARLE was President and Chief Operating Officer from November 1996 to
September 1998 and Executive Vice President from August 1993 to February 1996 of
Diebold, Incorporated. He has been a private investor since September 1998. He
has been a Director of our company since 1996.
DEBRA WALKER has been Vice President and Chief Information Officer of The
Goodyear Tire and Rubber Company since March 1997. She was previously Vice
President--Retail for The Goodyear Tire and Rubber Company and was responsible
for the operation of all of its retail stores from February 1995 to March 1997
and Manager of Dealer Sales from January 1994 to February 1997. She has been a
Director of our company since August 1998.
39
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 7, 1999, the amount of our common
stock beneficially owned by (1) each person or group known to us to be
beneficial owners of more than 5% of our Class A or Class B common shares, (2)
each of our directors and nominees for directors, (3) our chief executive
officer and the four other most highly compensated executive officers, and (4)
all of our executive officers and directors as a group. We have obtained the
information provided in connection with this table from our records and a review
of statements filed with the Securities and Exchange Commission. Unless
otherwise indicated, each of the persons listed in the following table has sole
voting and investment power with respect to the common shares set forth opposite
his or her name. As of June 7, 1999, 9,123,202 Class A common shares were
outstanding and 9,192,794 Class B common shares were outstanding. Class A common
shares each have one vote per share and Class B common shares do not have voting
rights.
<TABLE>
<CAPTION>
CLASS A COMMON SHARES CLASS B COMMON SHARES
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
NUMBER OF NUMBER OF
COMMON SHARES COMMON SHARES
NAME OF BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS OWNED CLASS
- ----------------------------------------------------- --------------- ----------- --------------- -----------
5% SHAREHOLDERS:
Alan Rosskamm(1)(2).................................. 1,412,923 15.27% 844,741 9.00%
Betty Rosskamm(1)(3)................................. 878,335 9.63% 633,039 6.89%
First Pacific Advisors, Inc.(4)...................... 710,300 7.79% n/a n/a
FMR Corp(4)(5)....................................... 688,250 7.54% n/a n/a
Mr. Justin and Mrs. Alma Zimmerman(1)(6)............. 680,707 7.46% 571,646 6.22%
The State Teachers Retirement Board of Ohio
(STRS)(4).......................................... 580,700 6.37% n/a n/a
The Capital Group Companies, Inc.(4)(7).............. 525,000 5.76% n/a n/a
OTHER DIRECTORS AND EXECUTIVE OFFICERS:
Jane Aggers(1)(8).................................... 144,656 1.57% 200,567 2.15%
Brian Carney(1)(9)................................... 35,000 * 12,500 *
Dave Bolen(1)(10).................................... 32,127 * 49,769 *
Scott Cowen(11)...................................... 26,425 * 13,425 *
Frank Newman(12)..................................... 22,125 * 16,125 *
Ira Gumberg(13)...................................... 13,125 * 1,125 *
Gregg Searle(14)..................................... 9,750 * 6,750 *
Les Duncan(15)....................................... 5,000 * 8,000 *
Debra Walker(16)..................................... -- -- -- --
John Hermsen (1)(17)................................. -- -- -- --
All Executive Officers and Directors
as a group (13 persons)(1)(18)..................... 2,509,928 26.70% 2,048,105 21.30%
</TABLE>
- ------------------------
* Less than 1%.
FOOTNOTES ON FOLLOWING PAGE
40
<PAGE>
(1) With respect to common shares beneficially owned by such persons under our
Employees' Savings and Profit Sharing Plan, the common shares included are
as of December 31, 1998, the latest date for which statements are
available.
(2) Mr. Rosskamm's beneficial ownership includes 132,500 Class A common shares
and 196,250 Class B common shares subject to stock options granted that are
exercisable on or prior to August 6, 1999, 32,500 Class A common shares and
12,500 Class B common shares held as restricted stock under our Executive
Incentive Plan, and an aggregate of 182,188 Class A common shares and
211,066 Class B common shares held by his children, spouse, or by Mr.
Rosskamm as trustee for the benefit of family members and charities. His
beneficial ownership also includes 750,245 Class A common shares and
105,500 Class B common shares held by Rosskamm Family Partners, L.P., and
204,082 Class B common shares held by Rosskamm Family Partners, L.P. II. He
has shared voting and dispositive power with regard to Rosskamm Family
Partners, L.P. and Rosskamm Family Partners, L.P. II.
(3) Mrs. Rosskamm's beneficial ownership includes 22,803 Class A common shares
and 28,241 Class B common shares held as custodian for the benefit of her
grandchildren. Her beneficial ownership also includes 25,000 Class A common
shares and 25,000 Class B common shares held by The Rosskamm Family
Partnership, with regard to which she has sole voting and dispositive
power, 750,245 Class A common shares and 105,500 Class B common shares held
by Rosskamm Family Partners, L.P., with regard to which she has shared
voting and dispositive power and 204,082 Class B common shares held by
Rosskamm Family Partners, L.P. II, with regard to which she also has shared
voting and dispositive power. Betty Rosskamm, Justin and Alma Zimmerman,
and Jo-Ann Stores have entered into an agreement pursuant to which Ms.
Rosskamm has granted a right of first refusal with respect to her shares to
Mr. and Mrs. Zimmerman and Jo-Ann Stores, and Mr. and Mrs. Zimmerman have
granted a right of first refusal with respect to their shares to Ms.
Rosskamm and Jo-Ann Stores.
(4) The Class A common shares listed are reported on a Schedule 13G filed with
the Securities and Exchange Commission with respect to holdings as of
December 31, 1998.
(5) Fidelity Management & Research Company, a wholly owned subsidiary of FMR
Corp., reported beneficial ownership of 545,150 Class A common shares as a
result of acting as investment advisor to several investment funds that
hold such Class A common shares (the "Funds"). The voting of these 545,150
Class A common shares is directed by each of the Funds' Boards of Trustees.
In addition, Fidelity Management Trust Company, a wholly owned subsidiary
of FMR Corp., reported beneficial ownership of 143,100 Class A common
shares. FMR Corp. has sole voting and dispositive power with regard to
these 143,100 shares.
(6) Of the 680,707 Class A common shares beneficially owned by the Zimmermans,
Mr. Zimmerman disclaims beneficial ownership of 339,513 Class A common
shares beneficially owned by his wife and Mrs. Zimmerman disclaims
beneficial ownership of 341,194 Class A common shares beneficially owned by
her husband. Of the 571,646 Class B common shares beneficially owned by the
Zimmermans, Mr. Zimmerman disclaims beneficial ownership of 287,417 Class B
common shares beneficially owned by his wife and Mrs. Zimmerman disclaims
beneficial ownership of 284,229 Class B common shares beneficially owned by
her husband. See footnote (3) above.
(7) Capital Research and Management Company, a registered investment adviser
and an operating subsidiary of The Capital Group Companies, Inc., exercised
as of December 31, 1998 investment discretion with respect to 525,000 Class
A common shares or 5.76% of outstanding shares of the class, which were
owned by various institutional investors. Such subsidiary has no power to
direct the vote of the above shares.
FOOTNOTES CONTINUED ON FOLLOWING PAGE
41
<PAGE>
(8) Ms. Aggers beneficial ownership includes 81,000 Class A common shares and
129,750 Class B common shares subject to stock options granted that are
exercisable on or prior to August 6, 1999 and 35,000 Class A common shares
and 15,000 Class B common shares held as restricted stock under our
Executive Incentive Plan.
(9) Mr. Carney's beneficial ownership includes 12,500 Class A common shares and
12,500 Class B common shares subject to stock options granted that are
exercisable on or prior to August 6, 1999 and 20,000 Class A common shares
held as restricted stock under our Executive Incentive Plan.
(10) Mr. Bolen's beneficial ownership includes 43,125 Class B common shares
subject to stock options granted that are exercisable on or prior to
August 6, 1999 and 26,000 Class A common shares held as restricted stock
under our Executive Incentive Plan.
(11) Mr. Cowen's beneficial ownership includes 14,125 Class A common shares and
11,125 Class B common shares subject to stock options granted under the
Stock Option Plan for Non-Employee Directors that are exercisable on or
prior to August 6, 1999.
(12) Mr. Newman's beneficial ownership includes 22,125 Class A common shares
and 16,125 Class B common shares subject to stock options granted under
the Stock Option Plan for Non-Employee Directors that are exercisable on
or prior to August 6, 1999.
(13) Mr. Gumberg's beneficial ownership includes 7,125 Class A common shares
and 1,125 Class B common shares subject to stock options granted under the
Stock Option Plan for Non-Employee Directors that are exercisable on or
prior to August 6, 1999.
(14) Mr. Searle's beneficial ownership includes 6,750 Class A common shares and
6,750 Class B common shares subject to stock options granted under the
Stock Option Plan for Non-Employee Directors that are exercisable on or
prior to August 6, 1999.
(15) Mr. Duncan's beneficial ownership includes 5,000 Class B common shares
subject to stock options granted that are exercisable on or prior to
August 6, 1999 and 5,000 Class A common shares and 3,000 Class B common
shares held as restricted stock under our Executive Incentive Plan and
1998 Incentive Compensation Plan.
(16) Ms. Walker was elected to the Board of Directors on August 28, 1998.
(17) Mr. Hermsen resigned his position as Executive Vice President--Stores
effective January 1, 1999.
(18) Beneficial ownership for all executive officers and directors as a group
includes 276,125 Class A common shares and 421,750 Class B common shares
subject to stock options granted under our Stock Option Plans that are
exercisable on or prior to August 6, 1999 and 118,500 Class A common
shares and 30,500 Class B common shares of restricted stock awarded under
our Executive Incentive Plan and 1998 Incentive Compensation Plan. Total
excludes 750,245 Class A common shares and 309,582 Class B common shares
with shared voting and dispositive powers between Mr. Rosskamm and Mrs.
Rosskamm held in certain family partnerships.
42
<PAGE>
CERTAIN TRANSACTIONS
Ira Gumberg, one of our Directors, is President and Chief Executive Officer
and a principal shareholder of J.J. Gumberg Co. which manages numerous shopping
centers. Eleven of these shopping centers contain stores of our company. We
entered into three of the leases after Mr. Gumberg became a Director of our
company. We believe these leases are on terms no less favorable to us than could
have been obtained from an unrelated party. The aggregate rent and related
occupancy charges paid during fiscal 1999, fiscal 1998 and fiscal 1997 on these
stores amounted to $1.2 million, $1.2 million and $0.9 million, respectively.
Betty Rosskamm, Alma and Justin Zimmerman and Jo-Ann Stores have entered
into an agreement, dated September 26, 1997, relating to their shares of Jo-Ann
Stores Class A and Class B common stock. Under this agreement, Betty Rosskamm
and her lineal descendants and permitted holders, and Alma and Justin Zimmerman
and their lineal descendants and permitted holders, may each sell up to 200,000
shares of their Class A common stock in any calendar year. They may not sell
more than 100,000 of those shares in any 180-day period. Mrs. Rosskamm, and Mr.
and Mrs. Zimmerman collectively, may each sell up to 100,000 of their shares of
Jo-Ann's Class B common stock in any 60-day period. If either Mrs. Rosskamm or
Mr. and Mrs. Zimmerman sell a number of shares of their Class A common stock in
excess of the number permitted under the agreement, they must first offer to
sell those shares to the other family party to the agreement, and then with the
other family's permission, to Jo-Ann Stores. If either Mrs. Rosskamm or Mr. and
Mrs. Zimmerman sell a number of shares of their Class B common stock in excess
of the number permitted under the agreement, each family must first offer to
sell those shares to Jo-Ann Stores.
43
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW SENIOR CREDIT FACILITY
THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS AND PROVISIONS OF OUR NEW
SENIOR CREDIT FACILITY. THIS SUMMARY IS NOT COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE AGREEMENT DESCRIBED, INCLUDING THE DEFINITIONS OF
THE CAPITALIZED TERMS USED IN THIS PROSPECTUS. COPIES OF THE AGREEMENT DESCRIBED
ARE AVAILABLE UPON REQUEST. SEE "WHERE YOU CAN FIND MORE INFORMATION ABOUT
JO-ANN STORES."
Upon the closing of the offering of the outstanding notes, we entered into a
senior credit facility with a group of institutions named therein, as lenders.
The senior credit facility provides for unsecured revolving credit loans in an
aggregate amount of up to $300.0 million, including a $100.0 million sublimit
for Letters of Credit, and replaces our existing $250.0 million senior credit
facility. The new senior credit facility contains a negative pledge on
substantially all of our assets and the capital stock of our restricted
subsidiaries and is guaranteed by all of our restricted subsidiaries.
The revolving credit loans will bear interest at floating rates of (a) the
Prime Rate, or, at our option (b) a rate equal to the Applicable Eurodollar
Margin plus the Adjusted LIBO Rate. The Applicable Eurodollar Margin will begin
at 110 basis points per annum, and can increase or decrease based on our future
financial performance in relation to certain measurements provided for in the
senior credit facility. We will also pay a quarterly facility fee in arrears at
a rate determined in accordance with our performance levels and a quarterly
letter of credit fee at a rate per annum equal to the Applicable Eurodollar
Margin on the Letters of Credit outstanding on the date of payment. We will also
pay a fronting fee upon issuance of each Letter of Credit to the individual
issuing lender at a rate agreed upon with such lender.
We may repay the loans at any time without penalty prior to the Maturity
Date (except for prepayments of Eurodollar Loans at times other than the end of
their respective interest periods, as to which breakage costs may be payable).
The senior credit facility has an initial Maturity Date of April 30, 2004, which
may be extended for one year periods at our request with the consent of each of
the lenders.
The senior credit facility contains restrictive covenants applicable to us
and our subsidiaries, subject to certain exceptions, regarding, among other
things, the following matters:
- changes in business operations;
- the incurrence of indebtedness;
- engaging in certain transactions with affiliates;
- liens;
- investments;
- distributions and dispositions of assets;
- advances or guarantees;
- maintenance of Minimum Consolidated Net Worth measured quarterly;
- maintenance of a Senior Leverage Ratio not to exceed specified quarterly
levels;
- maintenance of a Total Leverage Ratio not to exceed specified quarterly
levels;
- maintenance of a minimum Fixed Charge Coverage Ratio;
- maintenance of a ratio of Consolidated Current Assets to Consolidated
Current Liabilities plus Consolidated Total Senior Balance Sheet Debt not
exceeding specified quarterly levels; and
44
<PAGE>
- the reduction of our consolidated total balance sheet senior debt to no
more than $85.0 million for at least one 30-day period during every
12-month period (which amount will be increased by $15.0 million at the
end of each fiscal year beginning in fiscal 2001).
The senior credit facility also includes certain events of default,
including, but not limited to: failure to pay principal or interest; inaccuracy
of representations; covenant defaults (some of which become Events of Default
only if 30 days pass without resolution after notice of the default); final
judgments against us in the aggregate amount of $1.0 million which remain
undischarged, unsatisfied and unstayed for more than 30 days; certain bankruptcy
and similar events involving us or certain of our subsidiaries; cancellation,
revocation, termination or recission of any of the documents evidencing the
terms of the senior credit facility; and the occurrence of certain events with
respect to any pension plans.
OTHER LINES OF CREDIT
We have entered into a $10.0 million short-term facility and a $7.5 million
short-term facility, both of which may be used for general corporate purposes.
45
<PAGE>
THE EXCHANGE OFFER
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of the outstanding notes, the company
entered into a registration rights agreement with the initial purchasers of the
outstanding notes. The registration rights agreement requires the company to
register the exchange notes under the federal securities laws and offer to
exchange such notes with the holders of the outstanding notes. The exchange
notes will be issued without a restrictive legend and generally may be resold
without registration under the federal securities laws. The company is effecting
the exchange offer to comply with the registration rights agreement.
The registration rights agreement requires the company to:
- file a registration statement for the exchange offer and the exchange
notes on or before June 19, 1999;
- cause the registration statement filed for the exchange offer and the
exchange notes to be declared effective by the Commission on or before
September 2, 1999; and
- complete the exchange offer on or before October 2, 1999.
These requirements under the registration rights agreement will be satisfied
when the company completes the exchange offer. However, if the company fails to
meet any of these requirements, it must pay additional interest on the
outstanding notes until the applicable requirement has been met. The company
will be required to pay additional interest at the rate of 0.25% per year for
each requirement that it fails to meet. The company must pay an additional 0.25%
per year for each 90 days that a requirement has not been met. However, the
company will not be required to pay more than 1.0% per year in additional
interest on the outstanding notes. Immediately following the completion of a
requirement, any additional interest with respect to that particular requirement
will cease to accrue.
Under the registration rights agreement, the company's obligations to
register the outstanding notes and the exchange notes will terminate upon the
completion of the exchange offer. However, the company will be required to file
a "shelf" registration statement for a continuous offering by the holders of the
outstanding notes if:
- because of any change in law or position of the Commission, the company
cannot effect the exchange offer;
- the registration statement filed for the exchange offer and the exchange
notes is not declared effective by the Commission on or before September
2, 1999;
- the exchange offer is not completed on or before October 2, 1999;
- any of the initial purchasers of the outstanding notes so requests; or
- any holder of outstanding notes that is not permitted to participate in
the exchange offer or does not receive fully tradeable notes in the
exchange offer so requests.
If the company is required to file a "shelf" registration statement, it will
be required to use its best efforts to keep such registration statement
effective for the shorter of two years or the period ending when all of the
notes covered by the "shelf" registration statement have been sold. Other than
as described above, no holder will have the right to require the company to file
a "shelf" registration statement or otherwise register such holder's notes under
the federal securities laws.
This summary includes only the material terms of the registration rights
agreement. For a full description, you should refer to the complete copy of the
registration rights agreement, which has been filed as an exhibit to the
registration statement for the exchange offer and the exchange notes.
46
<PAGE>
TRANSFERABILITY OF THE EXCHANGE NOTES
Based on the position of the Commission stated in a series of no-action
letters, the company believes that the exchange notes may be resold by you, or
any other person receiving such notes, without compliance with the registration
and prospectus delivery requirements of the federal securities laws, if:
- you, or the person or entity receiving such notes, are acquiring the
exchange notes in the ordinary course of business;
- neither you nor any such person or entity is engaging in or intends to
engage in a distribution of the exchange notes;
- neither you nor any such person or entity has an arrangement or
understanding with any person or entity to participate in any distribution
of the exchange notes;
- neither you nor any such person or entity is an "affiliate" of the
company, within the meaning of the federal securities laws; and
- you are not acting on behalf of any person or entity who could not
truthfully make these statements.
To participate in the exchange offer, you must represent as the holder of
outstanding notes that each of these statements is true. Any noteholder who
tenders in the exchange offer to participate in a distribution of the exchange
notes cannot rely on this interpretation by the Commission. Such persons must
comply with the registration and prospectus delivery requirements of the federal
securities laws to resell any of the exchange notes.
Any holder of the outstanding notes who is our affiliate and who intends to
participate in the exchange offer for the purpose of distributing the exchange
notes:
- will not be able to rely on the interpretation of the Commission set forth
in the no-action letters described above;
- will not be able to tender notes in the exchange offer; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the
outstanding notes unless the sale or transfer is made pursuant to an
exemption from those requirements.
Broker-dealers receiving exchange notes in exchange for outstanding notes
acquired for their own account through market-making or other trading activities
may not rely on this interpretation by the Commission. Such broker-dealers may
be deemed to be "underwriters" within the meaning of the Securities Act and must
therefore deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of the exchange notes. Such broker-dealers must
acknowledge, by signing the letter of transmittal, that they will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
such resale. The letter of transmittal states that by acknowledging that it will
deliver, and by delivering, a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act. See
"Plan of Distribution."
Any broker-dealer that holds any outstanding notes that it acquired directly
from the company in the initial offering and not as a result of market-making or
other trading activities cannot rely on this interpretation by the Commission
and, in the absence of an exemption, must comply with the registration and
prospectus delivery requirements of the Securities Act. However, since the
initial purchasers that purchased all of the outstanding notes directly from the
company immediately resold all of the outstanding notes purchased by them, no
such broker-dealer exists.
47
<PAGE>
EFFECT OF NOT TENDERING
After the completion of the exchange offer, the outstanding notes will
remain subject to restrictions on transfer. Since the outstanding notes have not
been registered under the federal securities laws, they bear a legend
restricting their transfer absent registration or the availability of a specific
exemption from registration. The holders of outstanding notes not tendered into
the exchange offer will have no further registration rights, except for the
limited registration rights described above under the heading "--Registration
Rights Agreement." Accordingly, upon the completion of the exchange offer, the
liquidity of the market for the outstanding notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER; ACCEPTANCE OF TENDERED NOTES
The company will accept any of its outstanding notes validly tendered and
not validly withdrawn before 12:00 a.m. Midnight EDT, on August 19, 1999,
subject to the conditions of the exchange offer. The company will issue $1,000
principal amount of the exchange notes in exchange for each $1,000 principal
amount of outstanding notes accepted in the exchange offer. Noteholders may
tender some or all of their notes pursuant to the exchange offer. However,
noteholders may only tender outstanding notes in $1,000 increments.
The terms of the exchange notes are substantially identical to the terms of
the outstanding notes, except that the exchange notes have been registered under
the federal securities laws and will not bear any legend restricting their
transfer. The exchange notes will represent the same debt as the outstanding
notes and will be issued under the same indenture.
As of the date of this prospectus, outstanding notes representing $150.0
million in aggregate principal amount were outstanding and there was one
registered holder, a nominee of the Depository Trust Company. This prospectus
and the letter of transmittal are being sent to DTC and to others believed to
have beneficial interests in the outstanding notes. The company intends to
conduct the exchange offer in accordance with the applicable requirements of the
federal securities laws.
The company will be deemed to have accepted validly tendered notes when it
notifies the exchange agent of its acceptance. The exchange agent will act as
agent for the tendering holders for the purpose of receiving the exchange notes
from the company. If any tendered notes are not accepted for exchange because of
an invalid tender or otherwise, the exchange agent will return the applicable
certificates without expense to the tendering noteholder promptly after the
expiration of the exchange offer.
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees as part of the exchange offer.
Tendering noteholders will also not be required to pay transfer taxes in the
exchange offer. The company will pay all charges and expenses in connection with
the exchange offer. However, the company will not pay any taxes incurred in
connection with a noteholder's request to have exchange notes or nonexchanged
notes issued in the name of a person other than the registered holder. See
"--Transfer Taxes" in this section below.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The exchange offer will expire at 12:00 a.m. Midnight EDT, on August 19,
1999, unless the company extends the exchange offer. To extend the exchange
offer, the company will notify the exchange agent and each registered holder of
any extension before 9:00 a.m., eastern daylight saving time, on the next
business day after the previously scheduled expiration date. The company
reserves the right to extend the exchange offer. The company also reserves the
right to delay accepting any tendered notes or, if any of the conditions
described below under the heading "--Conditions to the Exchange Offer" have not
been satisfied, to terminate the exchange offer. The company will give oral or
written notice of such delay, extension or termination to the exchange agent.
The company also reserves the right to amend the terms of the exchange offer in
any manner.
48
<PAGE>
PROCEDURES FOR TENDERING
Only holders of outstanding notes may tender such notes into the exchange
offer. To tender notes into the exchange offer, you must use one of the
following methods.
- Complete the letter of transmittal provided with this prospectus, obtain
all required signature guarantees, and deliver the letter of transmittal
to the exchange agent before the expiration of the exchange offer.
- IF YOU HOLD YOUR NOTES THROUGH DTC, YOU MAY ACCEPT THE EXCHANGE OFFER
THROUGH DTC'S AUTOMATED TENDER OFFER PROGRAM, AS DESCRIBED BELOW UNDER THE
HEADING "--BOOK-ENTRY TRANSFER."
- Follow the book-entry transfer procedures described below under the
heading "--Book-Entry Transfer."
- Follow the guaranteed delivery procedures described below under the
heading "--Guaranteed Delivery Procedures."
All tenders not withdrawn before the expiration of the exchange offer will
constitute an agreement between the noteholder and the company in accordance
with the terms described in this prospectus and the letter of transmittal.
The method of delivery of outstanding notes and the letter of transmittal
and all other required documents to the exchange agent is at the election and
risk of the noteholder. Instead of delivery by mail, you should use an overnight
or hand delivery service. In all cases, you should allow for sufficient time to
ensure delivery to the exchange agent before the expiration of the exchange
offer. You may request your broker, dealer, commercial bank, trust company or
nominee to effect these transactions for you. YOU SHOULD NOT SEND ANY NOTE,
LETTER OF TRANSMITTAL OR OTHER REQUIRED DOCUMENT TO THE COMPANY.
If your notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you desire to tender, you should:
- contact the registered holder promptly and instruct the registered holder
to tender on your behalf; or
- if you wish to tender on your own behalf, before completing and executing
the letter of transmittal and delivering your notes, either make
appropriate arrangements to register ownership of the outstanding notes in
your name or obtain a properly completed bond power from the registered
holder.
Please note, however, that the transfer of registered ownership may take
considerable time.
The exchange of notes will be made only after timely receipt by the exchange
agent of certificates for outstanding notes, a letter of transmittal and all
other required documents, or timely completion of a book-entry transfer. If any
tendered notes are not accepted for any reason or if outstanding notes are
submitted for a greater principal amount than the holder desires to exchange,
the exchange agent will return such unaccepted or nonexchanged notes to the
tendering noteholder promptly after the expiration or termination of the
exchange offer. In the case of outstanding notes tendered by book-entry
transfer, the exchange agent will credit the nonexchanged notes to an account
maintained with DTC.
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GUARANTEE OF SIGNATURES
Noteholders must obtain a guarantee of all signatures on a letter of
transmittal or a notice of withdrawal unless the outstanding notes are tendered:
- by a registered holder who has not completed the box entitled "Special
Delivery Instructions" on the letter of transmittal; or
- for the account of an "eligible guarantor institution."
Signature guarantees must be made by an "eligible guarantor institution," which
generally includes: banks; brokers and dealers; credit unions; national
securities exchanges; registered securities associations; learning agencies; and
savings associations.
SIGNATURE ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS
If the letter of transmittal is signed by a person other than the registered
holder of the outstanding notes, the registered holder must endorse the
outstanding notes or provide a properly completed bond power. Any such
endorsement or bond power must be signed by the registered holder as that
registered holder's name appears on the outstanding notes. Signatures on such
outstanding notes and bond powers must be guaranteed by an "eligible guarantor
institution."
If you sign the letter of transmittal or any outstanding notes or bond power
as a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation, fiduciary or in any other representative capacity, you must so
indicate when signing. You must submit satisfactory evidence to the exchange
agent of your authority to act in such capacity.
DETERMINATION OF VALID TENDERS; THE COMPANY'S RIGHTS UNDER THE EXCHANGE OFFER
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of tendered notes will be determined by the company,
which determination will be final and binding on all parties. The company
reserves the right to reject any outstanding notes not properly tendered or any
outstanding notes the acceptance of which would, in the opinion of counsel for
the company, be unlawful. The company also reserves the right to waive any
defects, irregularities or conditions of tender for any tendered note. The
company's interpretation of the terms of the exchange offer will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured by the tendering
noteholder within such time as the company determines.
Although the company intends to notify noteholders of defects or
irregularities in tenders of outstanding notes, the company will not be liable
for any failure to give such notification. Noteholders will be deemed to have
tendered outstanding notes only when such defects or irregularities have been
cured or waived. The exchange agent will return to the tendering noteholder,
after the expiration of the exchange offer, any outstanding notes that are not
properly tendered and as to which the defects have not been cured or waived.
In addition, the company reserves the right to terminate the exchange offer
or purchase any outstanding notes that are not tendered into the exchange offer.
The company's termination rights are described below under the heading
"--Conditions to the Exchange Offer." The company may, to the extent permitted
by law, purchase some or all of the outstanding notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such offers or
purchases could differ from the terms of the exchange offer.
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BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account for the
outstanding notes at DTC within two business days after the date of this
prospectus. Any financial institution that is a participant in DTC's systems may
make book-entry delivery of tendered notes by causing DTC to transfer such notes
into the exchange agent's account in accordance with DTC's book-entry transfer
procedures. However, even if delivery of outstanding notes is effected through
book-entry transfer at DTC, noteholders must compete a letter of transmittal and
transmit it to the exchange agent before the expiration of the exchange offer,
unless:
- the exchange offer is accepted through DTC's Automated Tender Offer
Program described in the next paragraph; or
- the guaranteed delivery procedures described in the next section are
complied with.
To accept the exchange offer through DTC's Automated Tender Offer Program,
participants in DTC must send electronic instruction to DTC through DTC's
communication system in lieu of sending a signed letter of transmittal. DTC is
obligated to communicate those electronic instructions to the exchange agent. To
tender outstanding notes through the Automated Tender Offer Program, the
electronic instructions sent to DTC and transmitted by DTC to the exchange agent
must contain the character by which the participant acknowledges to be bound by
the letter of transmittal.
GUARANTEED DELIVERY PROCEDURES
If your notes are currently unavailable or insufficient time exists for you
to tender your notes or complete the procedure for book-entry transfer, you may
tender your notes by taking each of the following steps.
- You must effect your tender through an "eligible guarantor institution,"
which is defined above under the heading "--Procedures for Tendering."
- The exchange agent must receive from the "eligible guarantor institution,"
before the expiration of the exchange offer, a properly completed letter
of transmittal and notice of guaranteed delivery by telegram, telex,
facsimile transmission, mail or hand delivery.
- The notice of guaranteed delivery, which has been provided with this
prospectus, must:
- include the name and address of the holder of the outstanding notes and
the amount of notes tendered;
- state that the tender is being made by the notice of guaranteed delivery;
and
- guarantee that within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery, the
certificates for all tendered notes or a book-entry confirmation, and any
other documents required by the letter of transmittal, will be sent by
the "eligible guarantor institution" to the exchange agent.
- Certificates for all tendered notes or a book-entry confirmation, and any
other documents required by the letter of transmittal, must be received by
the exchange agent within three New York Stock Exchange trading days after
the date of execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
Noteholders may withdraw tendered notes at any time before 12:00 a.m.
Midnight EDT, on August 19, 1999. For a withdrawal to be effective, a written
notice of withdrawal must be received by the exchange agent before the
expiration of the exchange offer. For DTC participants, a written notice
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of withdrawal may be made by electronic transmission through DTC's Automated
Tender Offer Program. Any notice of withdrawal must:
- specify the name of the person having tendered the notes to be withdrawn;
- identify the notes to be withdrawn, including the certificate number(s)
and principal amount of such notes;
- be signed by the noteholder in the same manner as the original signature
on the letter of transmittal by which such notes were tendered, with any
required signature guarantees, or be accompanied by documents of transfer
sufficient to transfer such notes into the name of the person withdrawing
the tender; and
- specify the name in which any such notes are to be registered, if
different from that of the registered holder.
All questions as to the validity, form, eligibility and time of receipt of
such notices will be determined by the company, whose determination will be
final and binding on all parties. Any withdrawn notes will be deemed not to have
been validly tendered for purposes of the exchange offer. The exchange agent
will return any withdrawn notes without cost to the noteholder promptly after
withdrawal of the notes. Noteholders may retender properly withdrawn notes at
any time before the expiration of the exchange offer by following one of the
procedures described above under the heading "--Procedures for Tendering."
CONDITIONS TO THE EXCHANGE OFFER
The company will not be required to complete the exchange offer and may
terminate or amend it if, at any time before the acceptance or exchange of
notes:
- the company determines that the exchange offer violates any applicable law
or interpretation of the Commission; or
- any action has been commenced or threatened in any court or before any
governmental agency with respect to the exchange offer which, in the
company's judgment, would reasonably be expected to impair the company's
ability to consummate the exchange offer.
These conditions are for the sole benefit of the company and may be asserted or
waived by the company at any time in its sole discretion. The company's failure
to exercise any of these rights at any time will not be deemed a waiver of such
rights. These rights will be ongoing and may be asserted by the company at any
time.
In addition, the company will not complete the exchange offer if any stop
order is threatened or issued with respect to the registration statement for the
exchange offer and the exchange notes. In any such event, the company must make
every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible moment.
TRANSFER TAXES
Noteholders who tender outstanding notes will be obligated to pay any
transfer taxes in connection with their tender. However, holders who instruct
the company to (a) register exchange notes in the name of a person other than
the registered holder or (b) request that outstanding notes not tendered or
accepted for exchange be returned to a person other than the registered holder
will be responsible for the payment of any transfer tax arising from such
transfer.
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THE EXCHANGE AGENT
Harris Trust and Savings Bank is serving as the exchange agent for the
exchange offer. ALL EXECUTED LETTERS OF TRANSMITTAL SHOULD BE SENT TO THE
EXCHANGE AGENT AT THE ADDRESS LISTED BELOW. Questions, requests for assistance
and requests for additional copies of this prospectus or the letter of
transmittal should be directed to the exchange agent at the address or telephone
number listed below.
Harris Trust and Savings Bank
311 West Monroe Street
12(th) Floor
Chicago, Illinois 60606
By Facsimile: (312) 416-7380
Confirm by Telephone: (312) 765-8012
Originals of all documents sent by facsimile should be promptly sent to the
exchange agent by registered or certified mail, by hand, or by overnight
delivery service.
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DESCRIPTION OF THE NOTES
The exchange notes will be issued under the Indenture. The Company entered
into the Indenture on May 5, 1999 with the Guarantors and Harris Trust and
Savings Bank, as Trustee. The terms of the exchange notes include those stated
in the Indenture and those made a part of the Indenture by reference to the
Trust Indenture Act of 1939.
The company will issue the exchange notes in fully registered form only,
without coupons, in $1,000 increments. The trustee under the indenture will act
as the paying agent and registrar for the exchange notes. Noteholders may
present notes for registration of transfer at the offices of the registrar,
which initially will be the trustee's corporate trust office. No service charge
will be made for any registration of transfer of the exchange notes. However,
the company may require payment of a sum sufficient to cover any transfer tax or
other similar charge payable in connection with any such transfer.
The exchange notes and any of the outstanding notes that are not tendered
into the exchange offer will be treated as a single class of securities under
the indenture. Accordingly, references in this section of the prospectus to
"Notes" include the exchange notes and any of the outstanding notes that are not
tendered into the exchange offer, unless otherwise indicated. The following
description is a summary of the material provisions of the Indenture. It does
not restate the indenture in its entirety. Section references in parentheticals
refer to specific sections of the indenture. We will make available a copy of
the form of indenture to holders of the outstanding or exchange notes upon
request to the Company. For definitions of capitalized terms used in the
following summary, see "--Certain Definitions."
MATURITY, PRINCIPAL AND INTEREST
The Notes will mature on May 1, 2007, will be limited to $150,000,000
aggregate principal amount, and will be unsecured senior subordinated
obligations of the Company. Each Note will bear interest at the rate described
on the cover page from May 5, 1999 or from the most recent interest payment date
on which interest has been paid, payable semiannually in arrears on May 1 and
November 1 in each year, commencing November 1, 1999.
The Company will pay interest to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the April 15 or
October 15 immediately preceding the relevant interest payment date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. (Sections 202, 301 and 309)
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company in The City of New York maintained for such purposes (which
initially will be the corporate trust office of the Trustee). Payment of
interest also may be made at the option of the Company by check mailed to the
Person entitled thereto as shown on the security register. (Sections 301, 305
and 1002)
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith. (Sections 302 and 305)
Settlement for the Notes will be made in same day funds. All payments of
principal and interest will be made by the Company in same day funds. The Notes
will trade in the Same-Day Funds Settlement System of The Depository Trust
Company (the "Depositary" or "DTC") until maturity, and secondary market trading
activity for the Notes will therefore settle in same day funds.
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GUARANTEES
Payment of the Notes is guaranteed by the Guarantors jointly and severally,
fully and unconditionally, on a senior subordinated basis. The Guarantors are
comprised of all of the direct and indirect Wholly Owned Restricted Subsidiaries
of the Company. In addition, if any Restricted Subsidiary of the Company becomes
a guarantor or obligor in respect of any other Indebtedness of the Company or
any of the Restricted Subsidiaries, the Company shall cause such Restricted
Subsidiary to enter into a supplemental indenture pursuant to which such
Restricted Subsidiary shall agree to guarantee the Company's obligations under
the Notes.
If the Company defaults in payment of the principal of, premium, if any, or
interest on the Notes, each of the Guarantors will be unconditionally, jointly
and severally obligated to duly and punctually pay the principal of, premium, if
any, and interest on the Notes.
The obligations of each Guarantor under its Guarantee are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor, and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under Federal or state law. Each Guarantor that makes a
payment or distribution under its Guarantee shall be entitled to a contribution
from any other Guarantor in a pro rata amount based on the net assets of each
Guarantor determined in accordance with GAAP.
Notwithstanding the foregoing, in certain circumstances a Guarantee of a
Guarantor may be released pursuant to the provisions of subsection (c) under
"--Certain Covenants--LIMITATION ON ISSUANCES OF GUARANTEES OF AND PLEDGES FOR
INDEBTEDNESS." The Company also may, at any time, cause a Restricted Subsidiary
to become a Guarantor by executing and delivering a supplemental indenture
providing for the guarantee of payment of the Notes by such Restricted
Subsidiary on the basis provided in the Indenture.
OPTIONAL REDEMPTION
After May 1, 2003, the Company may redeem all or a portion of the Notes, on
not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an
integral multiple thereof at the following redemption prices (expressed as
percentages of the principal amount), if redeemed during the 12-month period
beginning May 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -----------
<S> <C>
2003................................................................... 105.188%
2004................................................................... 102.594%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date).
In addition, at any time prior to May 1, 2002, the Company, at its option,
may use the net proceeds of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the aggregate principal amount of Notes originally issued
under the Indenture at a redemption price equal to 110.375% of the aggregate
principal amount of the Notes redeemed, plus accrued and unpaid interest
thereon, if any, to the redemption date (subject to the rights of holders of
record on relevant record dates to receive interest due on an interest payment
date). At least 65% of the initial aggregate principal amount of Notes must
remain outstanding immediately after the occurrence of such redemption. In order
to effect this redemption, the Company must mail a notice of redemption no later
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than 30 days after the closing of the related Public Equity Offering and must
complete such redemption within 60 days of the closing of the Public Equity
Offering.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes to be redeemed in compliance with the requirements of the principal
national security exchange, if any, on which the Notes are listed, or if the
Notes are not so listed, on a pro rata basis, by lot or by any other method the
Trustee shall deem fair and reasonable. Notes redeemed in part must be redeemed
only in integral multiples of $1,000. Redemption pursuant to the provisions
relating to a Public Equity Offering must be made on a pro rata basis or on as
nearly a pro rata basis as practicable (subject to the procedures of DTC or any
other depositary). (Sections 203, 1101, 1105 and 1107)
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a Change of Control occurs, each holder of Notes will have the right to
require that the Company purchase all or any part (in integral multiples of
$1,000) of such holder's Notes pursuant to a Change of Control Offer. In the
Change of Control Offer, the Company will offer to purchase all of the Notes, at
a purchase price (the "Change of Control Purchase Price") in cash in an amount
equal to 101% of the principal amount of such Notes, plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Purchase
Date") (subject to the rights of holders of record on relevant record dates to
receive interest due on an interest payment date).
Within 30 days of any Change of Control or, at the Company's option, prior
to such Change of Control but after it is publicly announced, the Company must
notify the Trustee and give written notice of the Change of Control to each
holder of Notes, by first-class mail, postage prepaid, at his address appearing
in the security register. The notice must state, among other things:
- that a Change of Control has occurred and the date of such event;
- the circumstances and relevant facts regarding such Change of Control,
including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control;
- the purchase price and the purchase date which shall be fixed by the
Company on a business day no earlier than 30 days nor later than 60 days
from the date the notice is mailed, or such later date as is necessary to
comply with requirements under the Exchange Act;
- that any Note not tendered will continue to accrue interest; that, unless
the Company defaults in the payment of the Change of Control Purchase
Price, any Notes accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Purchase
Date; and
- other procedures that a holder of Notes must follow to accept a Change of
Control Offer or to withdraw acceptance of the Change of Control Offer.
(Section 1015)
If a Change of Control Offer is made, the Company may not have available
funds sufficient to pay the Change of Control Purchase Price for all of the
Notes that might be delivered by holders of the Notes seeking to accept the
Change of Control Offer. The failure of the Company to make or consummate the
Change of Control Offer or pay the Change of Control Purchase Price when due
will give the Trustee and the holders of the Notes the rights described under
"--Events of Default."
Under the Credit Facility, if a change of control occurs all Indebtedness
under the Credit Facility will be subject to mandatory prepayment in full. A
"change of control" under the Credit Facility will occur if, among other things,
any Person or group, other than current officers and directors of the
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<PAGE>
Company, acquires more than 33% on a fully diluted basis of the economic or
voting interest in the Company's Capital Stock.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. The term "all or substantially all" as used in the
definition of "Change of Control" has not been interpreted under New York law
(which is the governing law of the Indenture) to represent a specific
quantitative test. Therefore, if holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election, it
is not clear how a court interpreting New York law would interpret the phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The provisions of the Indenture will not afford holders of the Notes the
right to require the Company to repurchase the Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its Affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition of the Company
by management or its affiliates) involving the Company that may adversely affect
holders of the Notes, if such transaction is not a transaction defined as a
Change of Control. A transaction involving the Company's management or its
Affiliates, or a transaction involving a recapitalization of the Company, will
result in a Change of Control if it is the type of transaction specified by such
definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements described
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
RANKING
The payment of the principal of, premium, if any, and interest on, the Notes
will rank junior to and be subordinated, as described in the Indenture, in right
of payment, to the prior payment in full of all Senior Indebtedness. The Notes
will be senior subordinated indebtedness of the Company ranking equal to all
other existing and future senior subordinated indebtedness of the Company and
senior to all existing and future Subordinated Indebtedness of the Company.
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness beyond any applicable grace period and after the receipt by the
Trustee from a representative of holders of any Designated Senior Indebtedness
(collectively, a "Senior Representative") of written notice of such default, no
payment (other than payments previously made pursuant to the provisions
described under "--Defeasance or Covenant Defeasance of Indenture") or
distribution of any assets of the Company of any kind or character (excluding
certain permitted equity interests or subordinated securities) may be made on
account of the principal of, premium, if any, or interest on, the Notes or on
account of the purchase, redemption, defeasance or other acquisition of or in
respect of, the Notes unless and until such default shall have been cured or
waived or shall have ceased to exist or such Designated Senior Indebtedness
shall have been discharged or paid in full after which the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may be accelerated
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immediately (a "Non-payment Default") and after the receipt by the Trustee and
the Company from a Senior Representative of written notice of such Non-Payment
Default, no payment (other than payments previously made pursuant to the
provisions described under "--Defeasance or Covenant Defeasance of Indenture")
or distribution of any assets of the Company of any kind or character (excluding
certain permitted equity interests or subordinated securities) may be made by
the Company on account of the principal of, premium, if any, or interest on, the
Notes or on account of the purchase, redemption, defeasance or other acquisition
of, or in respect of, the Notes for the period specified below (the "Payment
Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee and the Company from a Senior Representative
and shall end on the earliest of
(1) the 179th day after such commencement,
(2) the date on which such Non-payment Default (and all other Non-payment
Defaults as to which notice is given after such Payment Blockage Period
is initiated) is cured, waived or ceases to exist or on which such
Designated Senior Indebtedness is discharged or paid in full or
(3) the date on which such Payment Blockage Period (and all Non-payment
Defaults as to which notice is given after such Payment Blockage Period
is initiated) shall have been terminated by written notice to the Company
or the Trustee from the Senior Representative initiating such Payment
Blockage Period.
When the Payment Blockage Period ends, the Company will promptly resume
making any and all required payments in respect of the Notes, including any
missed payments. In no event will a Payment Blockage Period extend beyond 179
days from the date of the receipt by the Company or the Trustee of the notice
initiating such Payment Blockage Period (such 179-day period referred to as the
"Initial Period"). Any number of notices of Non-payment Defaults may be given
during the Initial Period. However, during any period of 365 consecutive days
only one Payment Blockage Period, during which payment of principal of, or
interest on, the Notes may not be made, may commence and the duration of such
period may not exceed 179 days and there must be a 186 consecutive day period in
any 365 day period during which no Payment Blockage Period is in effect. No
Non-payment Default with respect to Designated Senior Indebtedness that existed
or was continuing on the date of the commencement of any Payment Blockage Period
will be, or can be, made the basis for the commencement of a second Payment
Blockage Period, whether or not within a period of 365 consecutive days, unless
such default has been cured or waived for a period of not less than 90
consecutive days subsequent to the commencement of such initial Payment Blockage
Period. (Section 1303)
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "--Events of Default."
The Indenture will provide that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding, relative to the Company or its assets, or any
liquidation, dissolution or other winding up of the Company, whether voluntary
or involuntary, or any assignment for the benefit of creditors or other
marshalling of assets or liabilities of the Company (except in connection with
the consolidation or merger of the Company or its liquidation or dissolution
following the conveyance, transfer or lease of its properties and assets
substantially as an entirety upon the terms and conditions described under
"Consolidation, Merger, Sale of Assets"), all Senior Indebtedness must be paid
in full before any payment or distribution (excluding distributions of certain
permitted equity interests or subordinated securities) is made on account of the
principal of, premium, if any, or interest on the Notes or on account of the
purchase, redemption, defeasance or other acquisition of or in respect of the
Notes (other than payments
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previously made pursuant to the provisions described under "--Defeasance or
Covenant Defeasance of Indenture"). (Section 1302)
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds which would be otherwise
payable to the holders of the Notes will be paid to the holders of the Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full and
the Company may be unable to meet its obligations fully with respect to the
Notes.
The Indenture will limit, but not prohibit, the incurrence by the Company
and its Subsidiaries of additional Indebtedness, and the Indenture will prohibit
the incurrence by the Company of Indebtedness that is subordinated in right of
payment to any Senior Indebtedness of the Company and senior in right of payment
to the Notes.
Each Guarantee of a Guarantor will be an unsecured senior subordinated
obligation of such Guarantor, ranking senior in right of payment to, all other
existing and future Indebtedness of such Guarantor that is expressly
subordinated to Senior Guarantor Indebtedness. The Indebtedness evidenced by the
Guarantees will be subordinated to Senior Guarantor Indebtedness to
substantially the same extent as the Notes are subordinated to Senior
Indebtedness. During any period when payment on the Notes is blocked by
Designated Senior Indebtedness, payment on the Guarantees will be similarly
blocked.
As of January 30, 1999, on a PRO FORMA basis after giving effect to the sale
of the Notes and the application of the estimated net proceeds of the offering
of the Notes, the aggregate amount of Senior Indebtedness outstanding would have
been approximately $39.5 million, the Guarantors would have had no Senior
Guarantor Indebtedness outstanding (other than their Guarantees under the Credit
Facility and the Notes) and no Subordinated Indebtedness or Pari Passu
Indebtedness would have been outstanding. See "Risk Factors--Our substantial
indebtedness could restrict our operations, make us more vulnerable to adverse
economic conditions and make it more difficult for us to make payments on the
exchange notes" and "Capitalization."
"SENIOR INDEBTEDNESS" means the principal of, premium, if any, and interest
(including interest, to the extent allowable, accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy law) on any Indebtedness of the Company (other than as otherwise
provided in this definition), whether outstanding on the date of the Indenture
or thereafter created, incurred or assumed, and whether at any time owing,
actually or contingent, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Notes.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include
(1) Indebtedness evidenced by the Notes,
(2) Indebtedness that is subordinate or junior in right of payment to any
Indebtedness of the Company,
(3) Indebtedness which when incurred and without respect to any election
under Section 1111(b) of Title 11 United States Code, is without recourse
to the Company,
(4) Indebtedness which is represented by Redeemable Capital Stock,
(5) any liability for foreign, federal, state, local or other taxes owed or
owing by the Company to the extent such liability constitutes
Indebtedness,
(6) Indebtedness of the Company to a Subsidiary or any other Affiliate of
the Company or any of such Affiliate's Subsidiaries,
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(7) to the extent it might constitute Indebtedness, amounts owing for goods,
materials or services purchased in the ordinary course of business or
consisting of trade accounts payable owed or owing by the Company, and
amounts owed by the Company for compensation to employees or services
rendered to the Company,
(8) that portion of any Indebtedness which at the time of issuance is issued
in violation of the Indenture and
(9) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness
or Pari Passu Indebtedness.
"DESIGNATED SENIOR INDEBTEDNESS" means (1) all Senior Indebtedness under the
Credit Facility and (2) any other Senior Indebtedness which at the time of
determination has an aggregate principal amount outstanding of at least $25
million and which is specifically designated in the instrument evidencing such
Senior Indebtedness or the agreement under which such Senior Indebtedness arises
as "Designated Senior Indebtedness" by the Company.
"SENIOR GUARANTOR INDEBTEDNESS" means the principal of, premium, if any, and
interest (including interest, to the extent allowable, accruing after the filing
of a petition initiating any proceeding under any state, federal or foreign
bankruptcy law) on any Indebtedness of any Guarantor (other than as otherwise
provided in this definition), whether outstanding on the date of the Indenture
or thereafter created, incurred or assumed, and whether at any time owing,
actually or contingent, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to any Guarantee.
Notwithstanding the foregoing, "Senior Guarantor Indebtedness" shall not
include
(1) Indebtedness evidenced by the Guarantees,
(2) Indebtedness that is subordinated or junior in right of payment to any
Indebtedness of any Guarantor,
(3) Indebtedness which when incurred and without respect to any election
under Section 1111(b) of Title 11 United States Code, is without
recourse to any Guarantor,
(4) Indebtedness which is represented by Redeemable Capital Stock,
(5) any liability for foreign, federal, state, local or other taxes owed or
owing by any Guarantor to the extent such liability constitutes
Indebtedness,
(6) Indebtedness of any Guarantor to a Subsidiary or any other Affiliate of
the Company or any of such Affiliate's Subsidiaries,
(7) to the extent it might constitute Indebtedness, amounts owing for goods,
materials or services purchased in the ordinary course of business or
consisting of trade accounts payable owed or owing by such Guarantor,
and amounts owed by such Guarantor for compensation to employees or
services rendered to such Guarantor,
(8) that portion of any Indebtedness which at the time of issuance is issued
in violation of the Indenture and
(9) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness
or Pari Passu Indebtedness.
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CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, create, issue, incur, assume,
guarantee or otherwise in any manner become directly or indirectly liable for
the payment of or otherwise incur, contingently or otherwise (collectively,
"incur"), any Indebtedness (including any Acquired Indebtedness), unless such
Indebtedness is incurred by the Company or any Guarantor or constitutes Acquired
Indebtedness of a Restricted Subsidiary and, in each case, the Company's
Consolidated Fixed Charge Coverage Ratio for the most recent four full fiscal
quarters for which financial statements are available immediately preceding the
incurrence of such Indebtedness taken as one period is at least equal to or
greater than 2.0:1.
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Restricted Subsidiaries may incur each and all of the
following (collectively, the "Permitted Indebtedness"):
(1) Indebtedness of the Company (and guarantees thereof by Restricted
Subsidiaries) under the Credit Facility in an aggregate principal
amount at any one time outstanding not to exceed $300 million
(including up to $30 million of other credit lines) under any revolving
credit facility thereunder or in respect of letters of credit
thereunder minus the amount by which any commitments thereunder are
permanently reduced and minus the aggregate amount of Net Cash Proceeds
of Asset Sales applied to permanently reduce the commitments with
respect to such Indebtedness pursuant to the "RESTRICTION ON ASSET
SALES" covenant;
(2) Indebtedness of the Company pursuant to the Notes and Indebtedness of
any Guarantor pursuant to a Guarantee of the Notes;
(3) Indebtedness of the Company or any Restricted Subsidiary outstanding on
the date of the Indenture, listed on a schedule thereto and not
otherwise referred to in this definition of "Permitted Indebtedness;"
(4) Indebtedness of the Company owing to a Restricted Subsidiary;
- PROVIDED that any Indebtedness of the Company owing to a Restricted
Subsidiary that is not a Guarantor is made pursuant to an intercompany
note in the form attached to the Indenture and is unsecured and is
subordinated in right of payment from and after such time as the Notes
shall become due and payable (whether at Stated Maturity, acceleration
or otherwise) to the payment and performance of the Company's
obligations under the Notes;
- PROVIDED, FURTHER, that any disposition, pledge or transfer of any
such Indebtedness to a Person (other than a disposition, pledge or
transfer to a Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by the Company or other obligor not
permitted by this clause (4);
(5) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the
Company or another Wholly Owned Restricted Subsidiary;
- PROVIDED that any such Indebtedness is made pursuant to an
intercompany note in the form attached to the Indenture;
- PROVIDED, FURTHER, that (a) any disposition, pledge or transfer of any
such Indebtedness to a Person (other than a disposition, pledge or
transfer to the Company or a Wholly Owned Restricted Subsidiary) shall
be deemed to be an incurrence of such Indebtedness by the obligor not
permitted by this clause (5), and (b) any transaction pursuant to
which any Wholly Owned Restricted Subsidiary, which has Indebtedness
owing to the Company or
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any other Wholly Owned Restricted Subsidiary, ceases to be a Wholly
Owned Restricted Subsidiary shall be deemed to be the incurrence of
Indebtedness by such Wholly Owned Restricted Subsidiary that is not
permitted by this clause (5);
(6) guarantees of any Restricted Subsidiary made in accordance with the
provisions of "--LIMITATION ON ISSUANCES OF GUARANTEES OF AND PLEDGES
FOR INDEBTEDNESS;"
(7) obligations of the Company or any Guarantor entered into in the
ordinary course of business
(a) pursuant to Interest Rate Agreements designed to protect the Company
or any Restricted Subsidiary against fluctuations in interest rates
in respect of Indebtedness of the Company or any Restricted
Subsidiary as long as such obligations do not exceed the aggregate
principal amount of such Indebtedness then outstanding,
(b) under any Currency Hedging Agreements, relating to (1) Indebtedness
of the Company or any Restricted Subsidiary and/or (2) obligations to
purchase or sell assets or properties, in each case, incurred in the
ordinary course of business of the Company or any Restricted
Subsidiary; provided, however, that such Currency Hedging Agreements
do not increase the Indebtedness or other obligations of the Company
or any Restricted Subsidiary outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder or
(c) under any Commodity Price Protection Agreements which do not increase
the amount of Indebtedness or other obligations of the Company or any
Restricted Subsidiary outstanding other than as a result of
fluctuations in commodity prices or by reason of fees, indemnities
and compensation payable thereunder;
(8) Indebtedness of the Company or any Guarantor represented by Capital
Lease Obligations or Purchase Money Obligations or other Indebtedness
incurred or assumed in connection with the acquisition or development
of real or personal, movable or immovable, property in each case
incurred for the purpose of financing or refinancing all or any part of
the purchase price or cost of construction or improvement of property
used in the business of the Company, in an aggregate principal amount
pursuant to this clause (8) not to exceed 10% of Consolidated Net
Tangible Assets of the Company outstanding at any time; PROVIDED that
the principal amount of any Indebtedness permitted under this clause
(8) did not in each case at the time of incurrence exceed the Fair
Market Value, as determined by the Company in good faith, of the
acquired or constructed asset or improvement so financed;
(9) any renewals, extensions, substitutions, refundings, refinancings or
replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (2) and (3) of this definition of "Permitted
Indebtedness," including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company,
the same as the borrower of the Indebtedness being refinanced and the
aggregate principal amount of Indebtedness represented thereby (or if
such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of the
maturity thereof, the original issue price of such Indebtedness plus
any accreted value attributable thereto since the original issuance of
such Indebtedness) is not increased by such refinancing plus the lesser
of (a) the stated amount of any premium or other payment required to be
paid in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (b) the amount of premium or other
payment actually paid at such time to refinance the Indebtedness, plus,
in either case, the amount of expenses of the Company incurred in
connection with such refinancing and (1) in the case of any refinancing
of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Notes at least to the same
extent as the Indebtedness being refinanced and (2) in the case of Pari
Passu Indebtedness or Subordinated Indebtedness, as the case may be,
such refinancing does not reduce the Average Life to Stated Maturity or
the Stated Maturity of such Indebtedness; and
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(10) Indebtedness of the Company or any Guarantor in addition to that
described in clauses (1) through (9) above, and any renewals,
extensions, substitutions, refinancings or replacements of such
Indebtedness, so long as the aggregate principal amount of all such
Indebtedness shall not exceed $10 million outstanding at any one time
in the aggregate.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness permitted by this
covenant, the Company in its sole discretion shall classify such item of
Indebtedness and only be required to include the amount of such Indebtedness as
one of such types. (Section 1008)
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly:
(1) declare or pay any dividend on, or make any distribution to holders of,
any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or
in options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(2) purchase, redeem, defease or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital Stock
of any Affiliate of the Company (other than Capital Stock of any Wholly
Owned Restricted Subsidiary of the Company) or options, warrants or other
rights to acquire such Capital Stock;
(3) make any principal payment on, or repurchase, redeem, defease, retire or
otherwise acquire for value, prior to any scheduled principal payment,
sinking fund payment or maturity, any Subordinated Indebtedness;
(4) declare or pay any dividend or distribution on any Capital Stock of any
Restricted Subsidiary to any Person (other than (a) to the Company or any
of its Wholly Owned Restricted Subsidiaries or (b) dividends or
distributions made by a Restricted Subsidiary on a pro rata basis to all
stockholders of such Restricted Subsidiary); or
(5) make any Investment in any Person (other than any Permitted Investments)
(any of the foregoing actions described in clauses (1) through (5) above, other
than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such Restricted Payment,
if other than cash, shall be the Fair Market Value of the assets proposed to be
transferred, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless:
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a PRO FORMA basis, no Default or Event of Default
shall have occurred and be continuing and such Restricted Payment shall
not be an event which is, or after notice or lapse of time or both, would
be, an "event of default" under the terms of any Indebtedness of the
Company or its Restricted Subsidiaries;
(2) immediately before and immediately after giving effect to such
Restricted Payment on a PRO FORMA basis, the Company could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the
provisions described under "--LIMITATION ON INDEBTEDNESS;" and
(3) after giving effect to the proposed Restricted Payment, the aggregate
amount of all such Restricted Payments declared or made after the date of
the Indenture and all Designation Amounts does not exceed the sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company accrued
on a cumulative basis during the period beginning on May 2, 1999 and
ending on the last day of the Company's last fiscal quarter ending
prior to the date of the Restricted Payment (or, for
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each fiscal quarter of the Company beginning with the third quarter
of the Company's fiscal year ending January 29, 2000, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus
100% of such loss);
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company either (1) as capital contributions in the
form of common equity to the Company or (2) from the issuance or sale
(other than to any of its Subsidiaries) of Qualified Capital Stock of
the Company or any options, warrants or rights to purchase such
Qualified Capital Stock of the Company (except, in each case, to the
extent such proceeds are used to purchase, redeem or otherwise retire
Capital Stock or Subordinated Indebtedness as set forth below in
clause (2) or (3) of paragraph (b) below) (and excluding the Net Cash
Proceeds from the issuance of Qualified Capital Stock financed,
directly or indirectly, using funds borrowed from the Company or any
Subsidiary until and to the extent such borrowing is repaid);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries)
upon the exercise of any options, warrants or rights to purchase
Qualified Capital Stock of the Company (and excluding the Net Cash
Proceeds from the exercise of any options, warrants or rights to
purchase Qualified Capital Stock financed, directly or indirectly,
using funds borrowed from the Company or any Subsidiary until and to
the extent such borrowing is repaid);
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of
debt securities or Redeemable Capital Stock of the Company or its
Restricted Subsidiaries into or for Qualified Capital Stock of the
Company plus, to the extent such debt securities or Redeemable
Capital Stock were issued after the date of the Indenture, the
aggregate of Net Cash Proceeds from their original issuance (and
excluding the Net Cash Proceeds from the conversion or exchange of
debt securities or Redeemable Capital Stock financed, directly or
indirectly, using funds borrowed from the Company or any Subsidiary
until and to the extent such borrowing is repaid);
(E) (a) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the date of the
Indenture, an amount (to the extent not included in Consolidated
Net Income) equal to the lesser of the return of capital with
respect to such Investment and the initial amount of such
Investment, in either case, less the cost of the disposition of
such Investment and net of taxes, and
(b) in the case of the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary (as long as the designation of such
Subsidiary as an Unrestricted Subsidiary was deemed a Restricted
Payment), the Fair Market Value of the Company's interest in such
Subsidiary provided that such amount shall not in any case exceed
the amount of the Restricted Payment deemed made at the time the
Subsidiary was designated as an Unrestricted Subsidiary; and
(F) $10 million.
(b) Notwithstanding the foregoing, and in the case of clauses (2) through
(5) below, so long as no Default or Event of Default is continuing or would
arise therefrom, the foregoing provisions shall not prohibit the following
actions (each of clauses (1) through (4) being referred to as a "Permitted
Payment"):
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such payment was permitted by the
provisions of paragraph (a) of this section and such payment shall have
been deemed to have been paid on such date of
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declaration and shall not have been deemed a "Permitted Payment" for
purposes of the calculation required by paragraph (a) of this section;
(2) the repurchase, redemption, or other acquisition or retirement for value
of any shares of any class of Capital Stock of the Company in exchange
for (including any such exchange pursuant to the exercise of a conversion
right or privilege in connection with which cash is paid in lieu of the
issuance of fractional shares or scrip), or out of the Net Cash Proceeds
of a substantially concurrent issuance and sale for cash (other than to a
Subsidiary) of, other shares of Qualified Capital Stock of the Company;
PROVIDED that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a)
of this section;
(3) the repurchase, redemption, defeasance, retirement or acquisition for
value or payment of principal of any Subordinated Indebtedness in
exchange for, or in an amount not in excess of the Net Cash Proceeds of,
a substantially concurrent issuance and sale for cash (other than to any
Subsidiary of the Company) of any Qualified Capital Stock of the Company,
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a)
of this section; and
(4) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness
(a) shall be in a principal amount that does not exceed the principal
amount so refinanced (or, if such Subordinated Indebtedness provides
for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser
amount as of the date of determination), plus the lesser of (1) the
stated amount of any premium or other payment required to be paid in
connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (2) the amount of premium or other
payment actually paid at such time to refinance the Indebtedness,
plus, in either case, the amount of expenses of the Company incurred
in connection with such refinancing;
(b) has an Average Life to Stated Maturity greater than the remaining
Average Life to Stated Maturity of the Notes;
(c) has a Stated Maturity for its final scheduled principal payment later
than the Stated Maturity for the final scheduled principal payment of
the Notes; and
(d) is expressly subordinated in right of payment to the Notes at least
to the same extent as the Subordinated Indebtedness to be refinanced.
(Section 1009)
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of assets,
property or services) with or for the benefit of any Affiliate of the Company
(other than the Company or a Wholly Owned Restricted Subsidiary) unless such
transaction or series of related transactions is entered into in good faith and
in writing and
(1) such transaction or series of related transactions is on terms that are
not substantially less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that would be available in a
comparable transaction in arm's-length dealings with an unrelated third
party,
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(2) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5 million, such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the board of directors of the Company, or in
the event there is only one Disinterested Director, by such Disinterested
Director, and
(3) with respect to any transaction or series of related transactions
involving aggregate value in excess of $10 million, the Company delivers
to the Trustee a written opinion of an investment banking firm of
national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series
of related transactions for which an opinion is required stating that the
transaction or series of related transactions is fair to the Company or
such Restricted Subsidiary from a financial point of view;
PROVIDED, HOWEVER, that this provision shall not apply to (1) employment
agreements and employee benefit arrangements with any officer or director of the
Company, including under any stock option or stock incentive plans, entered into
in the ordinary course of business and consistent with the past practices of the
Company or such Restricted Subsidiary and (2) transactions pursuant to
agreements in effect on the date of the Indenture, including amendments thereto
entered into after that date, provided that the terms of any such amendment are
not less favorable to the Company or such Restricted Subsidiary than the terms
of such agreement prior to such amendment. (Section 1010)
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
Restricted Subsidiary to, directly or indirectly, create, incur or affirm any
Lien of any kind securing any Pari Passu Indebtedness or Subordinated
Indebtedness (including any assumption, guarantee or other liability with
respect thereto by any Restricted Subsidiary) upon any property or assets
(including any intercompany notes) of the Company or any Restricted Subsidiary
owned on the date of the Indenture or acquired after the date of the Indenture,
or assign or convey any right to receive any income or profits therefrom, unless
the Notes (or a Guarantee in the case of Liens of a Guarantor) are directly
secured equally and ratably with (or, in the case of Subordinated Indebtedness,
prior or senior thereto, with the same relative priority as the Notes shall have
with respect to such Subordinated Indebtedness) the obligation or liability
secured by such Lien except for Liens
(A) securing any Indebtedness which became Indebtedness pursuant to a
transaction permitted under "--Consolidation, Merger, Sale of Assets" or
securing Acquired Indebtedness which in each case was created prior to
(and not created in connection with, or in contemplation of) the
incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness
(including any assumption, guarantee or other liability with respect
thereto by any Restricted Subsidiary) and which Indebtedness is permitted
under the provisions of "--LIMITATION ON INDEBTEDNESS" or
(B) securing any Indebtedness incurred in connection with any refinancing,
renewal, substitutions or replacements of any such Indebtedness described
in clause (A), so long as the aggregate principal amount of Indebtedness
represented thereby (or if such Indebtedness provides for an amount less
than the principal amount thereof to be due and payable upon a
declaration of acceleration of the maturity thereof, the original issue
price of such Indebtedness plus any accreted value attributable thereto
since the original issuance of such Indebtedness) is not increased by
such refinancing by an amount greater than the lesser of (1) the stated
amount of any premium or other payment required to be paid in connection
with such a refinancing pursuant to the terms of the Indebtedness being
refinanced or (2) the amount of premium or other payment actually paid at
such time to refinance the Indebtedness, plus, in either case, the amount
of expenses of the Company incurred in connection with such refinancing,
PROVIDED, HOWEVER, that in the case of clauses (A) and (B), any such Lien only
extends to the assets that were subject to such Lien securing such Indebtedness
prior to the related acquisition by the Company or its Restricted Subsidiaries.
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Notwithstanding the foregoing, any Lien securing the Notes granted pursuant
to this covenant shall be automatically and unconditionally released and
discharged upon the release by the holders of the Pari Passu Indebtedness or
Subordinated Indebtedness described above of their Lien on the property or
assets of the Company or any Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness), at such time
as the holders of all such Pari Passu Indebtedness or Subordinated Indebtedness
also release their Lien on the property or assets of the Company or such
Restricted Subsidiary, or upon any sale, exchange or transfer to any Person not
an Affiliate of the Company of the property or assets secured by such Lien, or
of all of the Capital Stock held by the Company or any Restricted Subsidiary in,
or all or substantially all the assets of, any Restricted Subsidiary creating
such Lien. (Section 1011)
LIMITATION ON SALE OF ASSETS. (a) The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly,
consummate an Asset Sale unless (1) at least 75% of the consideration from such
Asset Sale is received in cash and (2) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the shares or assets subject to such Asset Sale (as determined
by the board of directors of the Company and evidenced in a board resolution).
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness or Senior
Guarantor Indebtedness then outstanding as required by the terms thereof, or the
Company determines not to apply such Net Cash Proceeds to the permanent
prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness, or if
no such Senior Indebtedness or Senior Guarantor Indebtedness is then
outstanding, then the Company or a Restricted Subsidiary may within 360 days of
the Asset Sale invest the Net Cash Proceeds in properties and other assets that
(as determined by the board of directors of the Company) replace the properties
and assets that were the subject of the Asset Sale or in properties and assets
that will be used in the businesses of the Company or its Restricted
Subsidiaries existing on the date of the Indenture or in businesses reasonably
related thereto. The amount of such Net Cash Proceeds not used or invested
within 360 days of the Asset Sale as set forth in this paragraph constitutes
"Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million or
more, the Company will apply the Excess Proceeds to the repayment of the Notes
and any other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Indebtedness with the
proceeds from any Asset Sale as follows:
(A) the Company will make an offer to purchase (an "Offer") from all holders
of the Notes in accordance with the procedures set forth in the Indenture
in the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased out of an amount (the "Note Amount") equal to
the product of such Excess Proceeds multiplied by a fraction, the
numerator of which is the outstanding principal amount of the Notes, and
the denominator of which is the sum of the outstanding principal amount
(or accreted value in the case of Indebtedness issued with original issue
discount) of the Notes and such Pari Passu Indebtedness (subject to
proration in the event such amount is less than the aggregate Offered
Price (as defined herein) of all Notes tendered) and
(B) to the extent required by such Pari Passu Indebtedness to permanently
reduce the principal amount of such Pari Passu Indebtedness (or accreted
value in the case of Indebtedness issued with original issue discount),
the Company will make an offer to purchase or otherwise repurchase or
redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the
"Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over
the Note Amount; PROVIDED that in no event will the Company be required
to make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the
principal amount (or accreted value) of such Pari Passu
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Indebtedness plus the amount of any premium required to be paid to
repurchase such Pari Passu Indebtedness.
The offer price for the Notes will be payable in cash in an amount equal to 100%
of the principal amount of the Notes plus accrued and unpaid interest, if any,
to the date (the "Offer Date") such Offer is consummated (the "Offered Price"),
in accordance with the procedures set forth in the Indenture. To the extent that
the aggregate Offered Price of the Notes tendered pursuant to the Offer is less
than the Note Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu
Debt Amount, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes and Pari Passu
Indebtedness surrendered by holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon the completion of the purchase of all the Notes tendered pursuant to
an Offer and the completion of a Pari Passu Offer, the amount of Excess
Proceeds, if any, shall be reset at zero.
(d) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Notes and the Pari Passu Indebtedness shall be purchased by the
Company, at the option of the holders thereof, in whole or in part in integral
multiples of $1,000, on a date that is not earlier than 30 days and not later
than 60 days from the date the notice of the Offer is given to holders, or such
later date as may be necessary for the Company to comply with the requirements
under the Exchange Act.
(e) In the event that the Company is required to make an Offer but is
restricted from making an Offer pursuant to clause (c) above under the terms of
any of its outstanding Senior Indebtedness, then the Company need not make such
an Offer pursuant to clause (c) above and shall not be deemed to be in default
in the performance of such covenant by virtue of not making such an Offer,
provided that in any such event (1) the Company shall use all or a portion of
the Net Cash Proceeds of any Asset Sale to repay permanently any Senior
Indebtedness or Senior Guarantor Indebtedness then outstanding as required by
the terms thereof or (2) the Company or a Restricted Subsidiary shall within 360
days of the Asset Sale invest the Net Cash Proceeds in properties and other
assets that (as determined by the board of directors of the Company) replace the
properties and assets that were the subject of the Asset Sale or in properties
and assets that will be used in the businesses of the Company or its Restricted
Subsidiaries existing on the date of the Indenture or in businesses reasonably
related thereto.
(f) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with an Offer.
(Section 1012)
LIMITATION ON ISSUANCES OF GUARANTEES OF AND PLEDGES FOR INDEBTEDNESS. (a)
The Company will not cause or permit any Restricted Subsidiary, other than a
Guarantor, directly or indirectly, to secure the payment of any Senior
Indebtedness of the Company and the Company will not, and will not permit any
Restricted Subsidiary to, pledge any intercompany notes representing obligations
of any Restricted Subsidiary (other than a Guarantor) to secure the payment of
any Senior Indebtedness unless in each case such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of payment of the Notes by such Restricted Subsidiary,
which guarantee shall be on the same terms as the guarantee of the Senior
Indebtedness (if a guarantee of Senior Indebtedness is granted by any such
Restricted Subsidiary) except that the guarantee of the Notes need not be
secured and shall be subordinated to the claims against such Restricted
Subsidiary in respect of Senior Indebtedness to the same extent as the Notes are
subordinated to Senior Indebtedness of the Company under the Indenture.
(b) The Company will not cause or permit any Restricted Subsidiary (which is
not a Guarantor), directly or indirectly, to guarantee, assume or in any other
manner become liable with respect to any Indebtedness of the Company or any
Restricted Subsidiary unless such Restricted Subsidiary
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simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee of the Notes on the same terms as the guarantee of
such Indebtedness except that
(A) such guarantee need not be secured unless required pursuant to
"--LIMITATION ON LIENS,"
(B) if such Indebtedness is by its terms Senior Indebtedness, any such
assumption, guarantee or other liability of such Restricted Subsidiary
with respect to such Indebtedness shall be senior to such Restricted
Subsidiary's Guarantee of the Notes to the same extent as such Senior
Indebtedness is senior to the Notes and
(C) if such Indebtedness is by its terms expressly subordinated to the
Notes, any such assumption, guarantee or other liability of such
Restricted Subsidiary with respect to such Indebtedness shall be
subordinated to such Restricted Subsidiary's Guarantee of the Notes at
least to the same extent as such Indebtedness is subordinated to the
Notes.
(c) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it (and all Liens securing the
same) shall be automatically and unconditionally released and discharged upon
(1) any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which
transaction is in compliance with the terms of the Indenture and such
Restricted Subsidiary is released from all guarantees, if any, by it of
other Indebtedness of the Company or any Restricted Subsidiaries and
(2) with respect to any Guarantees created after the date of the Indenture,
the release by the holders of the Indebtedness of the Company described
in clauses (a) and (b) above of their security interest or their
guarantee by such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness), at such
time as (A) no other Indebtedness of the Company has been secured or
guaranteed by such Restricted Subsidiary, as the case may be, or (B) the
holders of all such other Indebtedness which is secured or guaranteed by
such Restricted Subsidiary also release their security interest in or
guarantee by such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness).
(Section 1013)
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. The Company will not, and
will not permit or cause any Guarantor to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise in any manner become directly or
indirectly liable for or with respect to or otherwise permit to exist any
Indebtedness that is subordinate in right of payment to any Indebtedness of the
Company or such Guarantor, as the case may be, unless such Indebtedness is also
PARI PASSU with the Notes or the Guarantee of such Guarantor or subordinated in
right of payment to the Notes or such Guarantee at least to the same extent as
the Notes or such Guarantee are subordinated in right of payment to Senior
Indebtedness or Senior Indebtedness of such Guarantor, as the case may be, as
set forth in the Indenture. (Section 1014)
LIMITATION ON SUBSIDIARY CAPITAL STOCK. (a) The Company will not permit any
Restricted Subsidiary of the Company to issue, sell or transfer any Capital
Stock, except for (1) Capital Stock issued or sold to, held by or transferred to
the Company or a Wholly Owned Restricted Subsidiary, and (2) Capital Stock
issued by a Person prior to the time (A) such Person becomes a Restricted
Subsidiary, (B) such Person merges with or into a Restricted Subsidiary or (C) a
Restricted Subsidiary merges with or into such Person; PROVIDED that such
Capital Stock was not issued or incurred by such Person in anticipation of the
type of transaction contemplated by subclause (A), (B) or (C). This clause (a)
shall not apply upon the acquisition of all the outstanding Capital Stock of
such Restricted Subsidiary in accordance with the terms of the Indenture.
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(b) The Company will not permit any Person (other than the Company or a
Wholly Owned Restricted Subsidiary) to acquire Capital Stock of any Restricted
Subsidiary from the Company or any Restricted Subsidiary, except upon the
acquisition of all the outstanding Capital Stock of such Restricted Subsidiary
in accordance with the terms of the Indenture. (Section 1016)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to
(1) pay dividends or make any other distribution on its Capital Stock or any
other interest or participation in or measured by its profits,
(2) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary,
(3) make any Investment in the Company or any other Restricted Subsidiary or
(4) transfer any of its properties or assets to the Company or any other
Restricted Subsidiary.
However, this covenant will not prohibit any encumbrance or restriction (1)
pursuant to an agreement in effect on the date of the Indenture and listed on a
schedule to the Indenture; (2) with respect to a Restricted Subsidiary that is
not a Restricted Subsidiary of the Company on the date of the Indenture, in
existence at the time such Person becomes a Restricted Subsidiary of the Company
and not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary, provided that such encumbrances and
restrictions are not applicable to the Company or any Restricted Subsidiary or
the properties or assets of the Company or any Restricted Subsidiary other than
such Subsidiary which is becoming a Restricted Subsidiary; and (3) under any
agreement that extends, renews, refinances or replaces the agreements containing
the encumbrances or restrictions in the foregoing clauses (1) and (2), or in
this clause (3), PROVIDED that the terms and conditions of any such encumbrances
or restrictions are no more restrictive in any material respect than those under
or pursuant to the agreement evidencing the Indebtedness so extended, renewed,
refinanced or replaced. (Section 1017)
LIMITATION ON UNRESTRICTED SUBSIDIARIES. The Company may designate after
the Issue Date any Subsidiary (other than a Guarantor) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or after
giving effect to such Designation;
(b) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"--LIMITATION ON RESTRICTED PAYMENTS" above in an amount (the
"Designation Amount") equal to the greater of (1) the net book value of
the Company's interest in such Subsidiary calculated in accordance with
GAAP or (2) the Fair Market Value of the Company's interest in such
Subsidiary as determined in good faith by the Company's board of
directors;
(c) the Company would be permitted under the Indenture to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "--LIMITATION ON INDEBTEDNESS" at the time
of such Designation (assuming the effectiveness of such Designation);
(d) such Unrestricted Subsidiary does not own any Capital Stock in any
Restricted Subsidiary of the Company which is not simultaneously being
designated an Unrestricted Subsidiary;
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(e) such Unrestricted Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness, provided that an Unrestricted Subsidiary may provide a
Guarantee for the Notes; and
(f) such Unrestricted Subsidiary is not a party to any agreement, contract,
arrangement or understanding at such time with the Company or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company or, in the event such
condition is not satisfied, the value of such agreement, contract,
arrangement or understanding to such Unrestricted Subsidiary shall be
deemed a Restricted Payment.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--LIMITATION ON RESTRICTED PAYMENTS" for all purposes of the Indenture equal to
the Designation Amount.
The Indenture will also provide that the Company shall not and shall not
cause or permit any Restricted Subsidiary to at any time
(a) provide credit support for, guarantee or subject any of its property or
assets (other than the Capital Stock of any Unrestricted Subsidiary) to
the satisfaction of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness) (other than Permitted Investments in Unrestricted
Subsidiaries) or
(b) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary. For purposes of the foregoing, the Designation
of a Subsidiary of the Company as an Unrestricted Subsidiary shall be
deemed to be the Designation of all of the Subsidiaries of such
Subsidiary as Unrestricted Subsidiaries.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation;
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the Indenture; and
(c) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding (other than Indebtedness that would be Permitted
Indebtedness), immediately after giving effect to such proposed
Revocation, and after giving pro forma effect to the incurrence of any
such Indebtedness of such redesignated Subsidiary as if such Indebtedness
was incurred on the date of the Revocation, the Company could incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant
to the covenant described under "--Limitation on Indebtedness."
All Designations and Revocations must be evidenced by a resolution of the
board of directors of the Company delivered to the Trustee certifying compliance
with the foregoing provisions. (Section 1018)
PROVISION OF FINANCIAL STATEMENTS. Whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, the Company and any Guarantor will,
to the extent permitted under the Exchange Act, file with the Commission the
annual reports, quarterly reports and other documents which the Company and such
Guarantor would have been required to file with the Commission pursuant to
Sections 13(a) or 15(d) if the Company or such Guarantor were so subject, such
documents
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to be filed with the Commission on or prior to the date (the "Required Filing
Date") by which the Company and such Guarantor would have been required so to
file such documents if the Company and such Guarantor were so subject.
The Company and any Guarantor will also in any event (a) within 15 days of
each Required Filing Date (1) transmit by mail to all holders, as their names
and addresses appear in the security register, without cost to such holders and
(2) file with the Trustee copies of the annual reports, quarterly reports and
other documents which the Company and such Guarantor would have been required to
file with the Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act
if the Company and such Guarantor were subject to either of such Sections and
(b) if filing such documents by the Company and such Guarantor with the
Commission is not permitted under the Exchange Act, promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective holder at the Company's cost.
If any Guarantor's financial statements would be required to be included in
the financial statements filed or delivered pursuant to the Indenture if the
Company were subject to Section 13(a) or 15(d) of the Exchange Act, the Company
shall include such Guarantor's financial statements in any filing or delivery
pursuant to the Indenture.
In addition, so long as any of the Notes remain outstanding, the Company
will make available to any prospective purchaser of Notes or beneficial owner of
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act, until such time as the Company has either
exchanged the Notes for securities identical in all material respects which have
been registered under the Securities Act or until such time as the holders
thereof have disposed of such Notes pursuant to an effective registration
statement under the Securities Act. (Section 1019)
ADDITIONAL COVENANTS. The Indenture also contains covenants with respect to
the following matters: (1) payment of principal, premium and interest; (2)
maintenance of an office or agency in The City of New York; (3) arrangements
regarding the handling of money held in trust; (4) maintenance of corporate
existence; (5) payment of taxes and other claims; (6) maintenance of properties;
and (7) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any Person or group of Persons, or permit any of
its Restricted Subsidiaries to enter into any such transaction or series of
transactions, if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or disposition
of all or substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis to any other Person or group of
Persons, unless at the time and after giving effect thereto
(1) either (a) the Company will be the continuing corporation or (b) the
Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by sale,
assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity")
will be a corporation duly organized and validly existing under the laws
of the United States of America, any state thereof or the District of
Columbia and such Person expressly assumes, by a supplemental indenture,
in a form reasonably satisfactory to the Trustee, all the obligations of
the Company under the Notes and the Indenture and the Registration Rights
Agreement, as the case may be, and the Notes and the Indenture and the
Registration Rights Agreement will remain in full force and effect as so
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supplemented (and any Guarantees will be confirmed as applying to such
Surviving Entity's obligations);
(2) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis (and treating any Indebtedness not
previously an obligation of the Company or any of its Restricted
Subsidiaries which becomes the obligation of the Company or any of its
Restricted Subsidiaries as a result of such transaction as having been
incurred at the time of such transaction), no Default or Event of Default
will have occurred and be continuing;
(3) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis (on the assumption that the transaction
occurred on the first day of the four-quarter period for which financial
statements are available ending immediately prior to the consummation of
such transaction with the appropriate adjustments with respect to the
transaction being included in such PRO FORMA calculation), the Company
(or the Surviving Entity if the Company is not the continuing obligor
under the Indenture) could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the provisions of "--Certain
Covenants--LIMITATION ON INDEBTEDNESS;"
(4) at the time of the transaction each Guarantor, if any, unless it is the
other party to the transactions described above, will have by
supplemental indenture confirmed that its Guarantee shall apply to such
Person's obligations under the Indenture and the Notes;
(5) at the time of the transaction if any of the property or assets of the
Company or any of its Restricted Subsidiaries would thereupon become
subject to any Lien, the provisions of "--Certain Covenants--LIMITATION
ON LIENS" are complied with; and
(6) at the time of the transaction the Company or the Surviving Entity will
have delivered, or caused to be delivered, to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance, transfer,
lease or other transaction and the supplemental indenture in respect
thereof comply with the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied
with. (Section 801)
Each Guarantor will not, and the Company will not permit a Guarantor to, in
a single transaction or through a series of related transactions, consolidate
with or merge with or into any other Person (other than the Company or any
Guarantor) or sell, assign, convey, transfer, lease or otherwise dispose of all
or substantially all of its properties and assets to any Person or group of
Persons (other than the Company or any Guarantor) or permit any of its
Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or disposition
of all or substantially all of the properties and assets of the Guarantor and
its Restricted Subsidiaries on a Consolidated basis to any other Person or group
of Persons (other than the Company or any Guarantor), unless at the time and
after giving effect thereto
(1) either (a) the Guarantor will be the continuing corporation or a limited
liability company in the case of a consolidation or merger involving the
Guarantor or (b) the Person (if other than the Guarantor) formed by such
consolidation or into which such Guarantor is merged or the Person which
acquires by sale, assignment, conveyance, transfer, lease or disposition
all or substantially all of the properties and assets of the Guarantor
and its Restricted Subsidiaries on a Consolidated basis (the "Surviving
Guarantor Entity") will be a corporation or a limited liability company
duly organized and validly existing under the laws of the United States
of America, any state thereof or the District of Columbia and such Person
expressly assumes, by a supplemental indenture, in a form reasonably
satisfactory to the Trustee, all the obligations
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of such Guarantor under its Guarantee of the Notes and the Indenture and
the Registration Rights Agreement and such Guarantee, Indenture and
Registration Rights Agreement will remain in full force and effect;
(2) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis, no Default or Event of Default will
have occurred and be continuing; and
(3) at the time of the transaction such Guarantor or the Surviving Guarantor
Entity will have delivered, or caused to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance, lease or
other transaction and the supplemental indenture in respect thereof
comply with the Indenture and that all conditions precedent therein
provided for relating to such transaction have been complied with;
PROVIDED, HOWEVER, that this paragraph shall not apply to any Guarantor
whose Guarantee of the Notes is unconditionally released and discharged
in accordance with paragraph (c) under the provisions of "Certain
Covenants--LIMITATION ON ISSUANCES OF GUARANTEES OF AND PLEDGES FOR
INDEBTEDNESS." (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the two immediately preceding paragraphs
in which the Company or any Guarantor, as the case may be, is not the Successor
Person, the Successor Person formed or remaining or to which such transfer is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company or such Guarantor, as the case may be, and the Company or
any Guarantor, as the case may be, would be discharged (other than in a
transaction that results in the transfer of assets constituting or accounting
for less than 95% of the Consolidated assets (as of the last balance sheet date
available to the Company) of the Company or the Consolidated revenue of the
Company (as of the last 12-month period for which financial statements are
available)) from all obligations and covenants under the Indenture and the Notes
or its Guarantee, as the case may be, and the Registration Rights Agreement.
(Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(1) there shall be a default in the payment of any interest on any Note when
it becomes due and payable, and such default shall continue for a period
of 30 days (whether or not prohibited by the subordination provisions of
the Indenture);
(2) there shall be a default in the payment of the principal of (or premium,
if any, on) any Note at its Maturity (upon acceleration, optional or
mandatory redemption, if any, required repurchase or otherwise) (whether
or not prohibited by the subordination provisions of the Indenture);
(3) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture
or any Guarantee (other than a default in the performance, or breach, of
a covenant or agreement which is specifically dealt with in clause (1),
(2) or in clause (b), (c) or (d) of this clause (3)) and such default or
breach shall continue for a period of 30 days after written notice has
been given, by certified mail, (1) to the Company by the Trustee or (2)
to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Notes; (b) there shall be a
default in the performance or breach of the provisions described in
"--Consolidation, Merger, Sale of Assets;" (c) the Company shall have
failed to make or consummate an Offer in accordance with the provisions
of "--Certain Covenants--LIMITATION ON SALE OF ASSETS;" or (d) the
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Company shall have failed to make or consummate a Change of Control Offer
in accordance with the provisions of "--Purchase of Notes Upon a Change
of Control;"
(4) one or more defaults shall have occurred under any of the agreements,
indentures or instruments under which the Company, any Guarantor or any
Restricted Subsidiary then has outstanding Indebtedness in excess of $10
million, individually or in the aggregate, and either (a) such default
results from the failure to pay such Indebtedness at its stated final
maturity or (b) such default or defaults have resulted in the
acceleration of the maturity of such Indebtedness.
(5) any Guarantee shall for any reason cease to be, or shall for any reason
be asserted in writing by any Guarantor or the Company not to be, in full
force and effect and enforceable in accordance with its terms, except to
the extent contemplated by the Indenture and any such Guarantee;
(6) one or more judgments, orders or decrees of any court or regulatory or
administrative agency for the payment of money in excess of $10 million,
either individually or in the aggregate, shall be rendered against the
Company, any Guarantor or any Restricted Subsidiary or any of their
respective properties and shall not be discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such
judgment, order or decree or (b) there shall have been a period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of an appeal or otherwise, shall not be in effect;
(7) any holder or holders of at least $10 million in aggregate principal
amount of Indebtedness of the Company, any Guarantor or any Restricted
Subsidiary after a default under such Indebtedness shall notify the
Trustee of the intended sale or disposition of any assets of the Company,
any Guarantor or any Restricted Subsidiary that have been pledged to or
for the benefit of such holder or holders to secure such Indebtedness or
shall commence proceedings, or take any action (including by way of
set-off), to retain in satisfaction of such Indebtedness or to collect
on, seize, dispose of or apply in satisfaction of Indebtedness, assets of
the Company, any Guarantor or any Restricted Subsidiary (including funds
on deposit or held pursuant to lock-box and other similar arrangements);
(8) there shall have been the entry by a court of competent jurisdiction of
(a) a decree or order for relief in respect of the Company, any Guarantor
or any Restricted Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or (b) a decree or order adjudging the
Company, any Guarantor or any Restricted Subsidiary bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company, any Guarantor or any
Restricted Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company, any Guarantor or
any Restricted Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their affairs,
and any such decree or order for relief shall continue to be in effect,
or any such other decree or order shall be unstayed and in effect, for a
period of 60 consecutive days; or
(9) (a) the Company, any Guarantor or any Restricted Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or
any other case or proceeding to be adjudicated bankrupt or
insolvent,
(b) the Company, any Guarantor or any Restricted Subsidiary consents to
the entry of a decree or order for relief in respect of the Company,
such Guarantor or such Restricted Subsidiary in an involuntary case
or proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or proceeding
against it,
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(c) the Company, any Guarantor or any Restricted Subsidiary files a
petition or answer or consent seeking reorganization or relief under
any applicable federal or state law,
(d) the Company, any Guarantor or any Restricted Subsidiary (1) consents
to the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company, any Guarantor or
such Restricted Subsidiary or of any substantial part of their
respective properties, (2) makes an assignment for the benefit of
creditors or (3) admits in writing its inability to pay its debts
generally as they become due or
(e) the Company, any Guarantor or any Restricted Subsidiary takes any
corporate action in furtherance of any such actions in this paragraph
(9). (Section 501)
If an Event of Default (other than as specified in clauses (8) and (9) of
the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such holders shall, declare all unpaid principal of, premium, if any,
and accrued interest on all Notes to be due and payable immediately, by a notice
in writing to the Company (and to the Trustee if given by the holders of the
Notes) and upon any such declaration, such principal, premium, if any, and
interest shall become due and payable immediately. If an Event of Default
specified in clause (8) or (9) of the prior paragraph occurs and is continuing,
then all the Notes shall IPSO FACTO become and be due and payable immediately in
an amount equal to the principal amount of the Notes, together with accrued and
unpaid interest, if any, to the date the Notes become due and payable, without
any declaration or other act on the part of the Trustee or any holder.
Thereupon, the Trustee may, at its discretion, proceed to protect and enforce
the rights of the holders of Notes by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if
(a) the Company has paid or deposited with the Trustee a sum sufficient to
pay (1) all sums paid or advanced by the Trustee under the Indenture and
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, (2) all overdue interest on all Notes
then outstanding, (3) the principal of, and premium, if any, on any Notes
then outstanding which have become due otherwise than by such declaration
of acceleration and interest thereon at the rate borne by the Notes and
(4) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes;
(b) the rescission would not conflict with any judgment or decree of a court
of competent jurisdiction; and
(c) all Events of Default, other than the non-payment of principal of,
premium, if any, and interest on the Notes which have become due solely
by such declaration of acceleration, have been cured or waived as
provided in the Indenture.
No such rescission shall affect any subsequent default or impair any right
consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all outstanding Notes waive
any past default under the Indenture and its consequences, except a default (1)
in the payment of the principal of, premium, if any, or interest on any Note
(which may only be waived with the consent of each holder of Notes effected) or
(2) in respect of a covenant or provision which under the Indenture cannot be
modified or amended without
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the consent of the holders of 66 2/3% in aggregate principal amount of the Notes
outstanding or the consent of the holder of each Note affected by such
modification or amendment. (Section 513)
No holder of any of the Notes has any right to institute any proceedings
with respect to the Indenture or any remedy thereunder, unless such holder has
previously given written notice to the Trustee of a Continuing Event of Default
and the holders of at least 25% in aggregate principal amount of the outstanding
Notes have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding as Trustee under the Notes and the
Indenture, the Trustee has failed to institute such proceeding within 15 days
after receipt of such notice and the Trustee, within such 15-day period, has not
received directions inconsistent with such written request by holders of a
majority in aggregate principal amount of the outstanding Notes. Such
limitations do not, however, apply to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note. (Sections 507, 508)
The Company is required to notify the Trustee within five business days of
the occurrence of any Default. The Company is required to deliver to the
Trustee, on or before a date not more than 60 days after the end of each fiscal
quarter and not more than 120 days after the end of each fiscal year, a written
statement as to compliance with the Indenture, including whether or not any
Default has occurred. (Section 1020) The Trustee is under no obligation to
exercise any of the rights or powers vested in it by the Indenture at the
request or direction of any of the holders of the Notes unless such holders
offer to the Trustee security or indemnity satisfactory to the Trustee against
the costs, expenses and liabilities which might be incurred thereby. (Section
603)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, but if it acquires any conflicting
interest it must eliminate such conflict upon the occurrence of an Event of
Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such defeasance
means that the Company, any such Guarantor and any other obligor under the
Indenture shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes, except for
(1) the rights of holders of such outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes
when such payments are due,
(2) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of an office or agency for payment and
money for security payments held in trust,
(3) the rights, powers, trusts, duties and immunities of the Trustee and
(4) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and any Guarantor released with respect to
certain covenants that are described in the Indenture ("covenant defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or an Event of Default with respect to the Notes. In the event
covenant defeasance occurs, certain events (not including non-payment,
bankruptcy and insolvency events)
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described under "--Events of Default" will no longer constitute an Event of
Default with respect to the Notes. (Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance,
(a) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Notes cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, to pay and discharge the
principal of, premium, if any, and interest on the outstanding Notes on
the Stated Maturity (or on any date after May 1, 2003 (such date being
referred to as the "Defeasance Redemption Date"), if at or prior to
electing either defeasance or covenant defeasance, the Company has
delivered to the Trustee an irrevocable notice to redeem all of the
outstanding Notes on the Defeasance Redemption Date);
(b) in the case of defeasance, the Company shall have delivered to the
Trustee an opinion of independent counsel in the United States stating
that (A) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
independent counsel in the United States shall confirm that, the holders
of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(c) in the case of covenant defeasance, the Company shall have delivered to
the Trustee an opinion of independent counsel in the United States to the
effect that the holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such covenant defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or insofar as clauses (8) or (9) under the first
paragraph under "--Events of Default" are concerned, at any time during
the period ending on the 91st day after the date of deposit;
(e) such defeasance or covenant defeasance shall not cause the Trustee for
the Notes to have a conflicting interest as defined in the Indenture and
for purposes of the Trust Indenture Act with respect to any securities of
the Company or any Guarantor;
(f) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the Indenture or any other
material agreement or instrument to which the Company, any Guarantor or
any Restricted Subsidiary is a party or by which it is bound;
(g) such defeasance or covenant defeasance shall not result in the trust
arising from such deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, as amended, unless such
trust shall be registered under such Act or exempt from registration
thereunder;
(h) the Company will have delivered to the Trustee an opinion of independent
counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect
of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally;
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(i) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of the Notes or any Guarantee over the other
creditors of the Company or any Guarantor with the intent of defeating,
hindering, delaying or defrauding creditors of the Company, any Guarantor
or others;
(j) no event or condition shall exist that would prevent the Company from
making payments of the principal of, premium, if any, and interest on the
Notes on the date of such deposit or at any time ending on the 91st day
after the date of such deposit; and
(k) the Company will have delivered to the Trustee an officers' certificate
and an opinion of independent counsel, each stating that all conditions
precedent provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with. (Section 404)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when
(a) either
(1) all such Notes theretofore authenticated and delivered (except lost,
stolen or destroyed Notes which have been replaced or paid or Notes
whose payment has been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust as provided for in the Indenture) have
been delivered to the Trustee for cancellation or
(2) all Notes not theretofore delivered to the Trustee for cancellation
(a) have become due and payable, (b) will become due and payable at
their Stated Maturity within one year, or (c) are to be called for
redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Company;
(b) the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount in United
States dollars sufficient to pay and discharge the entire indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation,
including principal of, premium, if any, and accrued interest at such
Maturity, Stated Maturity or redemption date;
(c) the Company or any Guarantor has paid or caused to be paid all other
sums payable under the Indenture by the Company and any Guarantor; and
(d) the Company has delivered to the Trustee an officers' certificate and an
opinion of independent counsel each stating that (1) all conditions
precedent under the Indenture relating to the satisfaction and discharge
of such Indenture have been complied with and (2) such satisfaction and
discharge will not result in a breach or violation of, or constitute a
default under, the Indenture or any other material agreement or
instrument to which the Company, any Guarantor or any Subsidiary is a
party or by which the Company, any Guarantor or any Subsidiary is bound.
(Section 1201)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority in aggregate principal
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amount of the Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for Notes); PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, or change to an earlier date any redemption date of, or
waive a default in the payment of the principal of, premium, if any, or
interest on, any such Note or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon the redemption
thereof, or change the coin or currency in which the principal of any
such Note or any premium or the interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after
the redemption date);
(2) amend, change or modify the obligation of the Company to make and
consummate an Offer with respect to any Asset Sale or Asset Sales in
accordance with "--Certain Covenants-- Limitation on Sale of Assets" or
the obligation of the Company to make and consummate a Change of Control
Offer in the event of a Change of Control in accordance with "--Purchase
of Notes Upon a Change of Control," including, in each case, amending,
changing or modifying any definitions related thereto;
(3) reduce the percentage in principal amount of such outstanding Notes, the
consent of whose holders is required for any such supplemental indenture,
or the consent of whose holders is required for any waiver or compliance
with certain provisions of the Indenture;
(4) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to
increase the percentage of such outstanding Notes required for such
actions or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the holder of each
such Note affected thereby;
(5) except as otherwise permitted under "--Consolidation, Merger, Sale of
Assets," consent to the assignment or transfer by the Company or any
Guarantor of any of its rights and obligations under the Indenture; or
(6) amend or modify any of the provisions of the Indenture relating to the
subordination of the Notes or any Guarantee in any manner adverse to the
holders of the Notes or any Guarantee. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company, any Guarantor, any other obligor under the Notes and the
Trustee may modify or amend the Indenture:
(1) to evidence the succession of another Person to the Company or a
Guarantor, and the assumption by any such successor of the covenants of
the Company or such Guarantor in the Indenture and in the Notes and in
any Guarantee in accordance with "--Consolidation, Merger, Sale of
Assets;"
(2) to add to the covenants of the Company, any Guarantor or any other
obligor upon the Notes for the benefit of the holders of the Notes or to
surrender any right or power conferred upon the Company or any Guarantor
or any other obligor upon the Notes, as applicable, in the Indenture, in
the Notes or in any Guarantee;
(3) to cure any ambiguity, or to correct or supplement any provision in the
Indenture, the Notes or any Guarantee which may be defective or
inconsistent with any other provision in the Indenture, the Notes or any
Guarantee or make any other provisions with respect to matters or
questions arising under the Indenture, the Notes or any Guarantee;
PROVIDED that, in each case, such provisions shall not adversely affect
the interest of the holders of the Notes;
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(4) to comply with the requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture
Act;
(5) to add a Guarantor under the Indenture;
(6) to evidence and provide the acceptance of the appointment of a successor
Trustee under the Indenture; or
(7) to mortgage, pledge, hypothecate or grant a security interest in favor
of the Trustee for the benefit of the holders of the Notes as additional
security for the payment and performance of the Company's and any
Guarantor's obligations under the Indenture, in any property, or assets,
including any of which are required to be mortgaged, pledged or
hypothecated, or in which a security interest is required to be granted
to the Trustee pursuant to the Indenture or otherwise. (Section 901)
Notwithstanding the foregoing, no modification or amendment may, without the
consent of the holders of 66 2/3% in aggregate principal amount of the then
outstanding Notes, release the obligations of a Guarantor under its Guarantee of
the Notes. (Section 902)
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1021)
GOVERNING LAW
The Indenture, the Notes and any Guarantee will be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
as Trustee with such conflict or resign as Trustee. (Sections 608 and 613)
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any holder of Notes unless such holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense. (Section 512, 601, 603)
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (1) existing at the
time such Person becomes a Restricted Subsidiary or (2) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be.
Acquired Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary, as the case may be.
"AFFILIATE" means, with respect to any specified Person: (1) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person;
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(2) any other Person that owns, directly or indirectly, 5% or more of any class
or series of such specified Person's (or any of such Person's direct or indirect
parent's) Capital Stock or any officer or director of any such specified Person
or other Person or, with respect to any natural Person, any person having a
relationship with such Person by blood, marriage or adoption not more remote
than first cousin; or (3) any other Person 5% or more of the Voting Stock of
which is beneficially owned or held directly or indirectly by such specified
Person. For the purposes of this definition, "control" when used with respect to
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of:
(1) any Capital Stock of any Restricted Subsidiary;
(2) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary; or
(3) any other properties or assets of the Company or any Restricted
Subsidiary other than in the ordinary course of business.
For the purposes of this definition, the term "Asset Sale" shall not include
any transfer of properties and assets
(A) that is governed by the provisions described under "--Consolidation,
Merger, Sale of Assets,"
(B) that is by the Company to any Wholly Owned Restricted Subsidiary, or by
any Restricted Subsidiary to the Company or any Wholly Owned Restricted
Subsidiary in accordance with the terms of the Indenture,
(C) that is of obsolete equipment in the ordinary course of business, or
(D) the Fair Market Value of which in the aggregate does not exceed
$5,000,000 in any transaction or series of related transactions.
"AVERAGE LIFE TO STATED MATURITY" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (1) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (2)
the sum of all such principal payments.
"BANKRUPTCY LAW" means Title 11, United States Bankruptcy Code of 1978, or
any similar United States federal or state law or foreign law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"CAPITAL LEASE OBLIGATION" of any Person means any obligation of such Person
and its Restricted Subsidiaries on a Consolidated basis under any capital lease
of (or other agreement conveying the right to use) real or personal property
which, in accordance with GAAP, is required to be recorded as a capitalized
lease obligation.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations, rights in or other equivalents (however designated) of such
Person's capital stock, other equity interests whether now outstanding or issued
after the date of the Indenture, partnership interests (whether general or
limited), limited liability company interests, any other interest or
participation that confers on a Person that right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person,
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including any Preferred Stock, and any rights (other than debt securities
convertible into Capital Stock), warrants or options exchangeable for or
convertible into such Capital Stock.
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(1) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
Person shall be deemed to have beneficial ownership of all shares that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 35% of the total outstanding Voting Stock of the Company;
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors of the
Company (together with any new directors whose election to such board or
whose nomination for election by the stockholders of the Company was
approved by a vote of 66 2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election
or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in
office;
(3) the Company consolidates with or merges with or into any Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any Person, or any Person
consolidates with or merges into or with the Company, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the
Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where
(A) the outstanding Voting Stock of the Company is changed into or
exchanged for (1) Voting Stock of the surviving corporation which is
not Redeemable Capital Stock or (2) cash, securities and other
property (other than Capital Stock of the surviving corporation) in
an amount which could be paid by the Company as a Restricted Payment
as described under "--Certain Covenants--LIMITATION ON RESTRICTED
PAYMENTS" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indenture described under "--Certain
Covenants--LIMITATION ON RESTRICTED PAYMENTS") and
(B) immediately after such transaction, no "person" or "group," is the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have beneficial
ownership of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 35% of the
total outstanding Voting Stock of the surviving corporation; or
(4) the Company is liquidated or dissolved or adopts a plan of liquidation
or dissolution other than in a transaction which complies with the
provisions described under "--Consolidation, Merger, Sale of Assets."
For purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring voting stock of the Company will be
deemed to be a transfer of such portion of such voting stock as corresponds to
the portion of the equity of such entity that has been so transferred.
"COMMISSION" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Securities Act, Exchange Act and Trust
Indenture Act then the body performing such duties at such time.
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"COMMODITY PRICE PROTECTION AGREEMENT" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value of which is dependent upon, fluctuations in commodity
prices.
"COMPANY" means Jo-Ann Stores, Inc., a corporation incorporated under the
laws of Ohio, until a successor Person shall have become such pursuant to the
applicable provisions of the Indenture, and thereafter "Company" shall mean such
successor Person.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" of any Person means, for any
period, the ratio of
(a) the sum of Consolidated Net Income (Loss), and in each case to the
extent deducted in computing Consolidated Net Income (Loss) for such
period, Consolidated Interest Expense, Consolidated Income Tax Expense,
Consolidated Non-cash Charges and one third of Consolidated Rental
Payments for such period, of such Person and its Restricted Subsidiaries
on a Consolidated basis, all determined in accordance with GAAP, less all
noncash items increasing Consolidated Net Income for such period and less
all cash payments during such period relating to noncash charges that
were added back to Consolidated Net Income in determining the
Consolidated Fixed Charge Coverage Ratio in any prior period to
(b) the sum of Consolidated Interest Expense for such period, plus one third
of Consolidated Rental Payments during such period, plus cash and noncash
dividends paid on any Redeemable Capital Stock or Preferred Stock of such
Person and its Restricted Subsidiaries during such period,
in each case after giving PRO FORMA effect (as calculated in accordance with
Article 11 of Regulation S-X under the Securities Act of 1933 or any successor
provision) to
(1) the incurrence of the Indebtedness giving rise to the need to make such
calculation and (if applicable) the application of the net proceeds
therefrom, including to refinance other Indebtedness, as if such
Indebtedness was incurred, and the application of such proceeds occurred,
on the first day of such period;
(2) the incurrence, repayment or retirement of any other Indebtedness by the
Company and its Restricted Subsidiaries since the first day of such
period as if such Indebtedness was incurred, repaid or retired at the
beginning of such period (except that, in making such computation, the
amount of Indebtedness under any revolving credit facility shall be
computed based upon the average daily balance of such Indebtedness during
such period);
(3) in the case of Acquired Indebtedness or any acquisition occurring at the
time of the incurrence of such Indebtedness, the related acquisition,
assuming such acquisition had been consummated on the first day of such
period; and
(4) any acquisition or disposition by the Company and its Restricted
Subsidiaries of any company or any business or any assets out of the
ordinary course of business, whether by merger, stock purchase or sale or
asset purchase or sale, or any related repayment of Indebtedness, in each
case since the first day of such period, assuming such acquisition or
disposition had been consummated on the first day of such period;
PROVIDED that
(1) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a PRO FORMA
basis and (A) bearing a floating interest rate shall be computed as if
the rate in effect on the date of computation had been the applicable
rate for the entire period and (B) which was not outstanding during the
period for which the computation is being made but which bears, at the
option of such Person, a fixed or floating
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rate of interest, shall be computed by applying at the option of such
Person either the fixed or floating rate and
(2) in making such computation, the Consolidated Interest Expense of such
Person attributable to interest on any Indebtedness under a revolving
credit facility computed on a PRO FORMA basis shall be computed based
upon the average daily balance of such Indebtedness during the applicable
period.
"CONSOLIDATED INCOME TAX EXPENSE" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated Restricted Subsidiaries for such period as determined in
accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" of any Person means, without duplication,
for any period, the sum of
(a) the interest expense of such Person and its Restricted Subsidiaries for
such period, on a Consolidated basis, including, without limitation,
(1) amortization of debt discount,
(2) the net costs associated with Interest Rate Agreements, Currency
Hedging Agreements and Commodity Price Protection Agreements
(including amortization of discounts),
(3) the interest portion of any deferred payment obligation,
(4) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers acceptance financing and
(5) accrued interest, plus
(b) (1) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period and
(2) all capitalized interest of such Person and its Restricted
Subsidiaries plus
(c) the interest expense under any Guaranteed Debt of such Person and any
Restricted Subsidiary to the extent not included under clause (a)(4)
above, whether or not paid by such Person or its Restricted Subsidiaries.
"CONSOLIDATED NET INCOME (LOSS)" of any Person means, for any period, the
Consolidated net income (or loss) of such Person and its Restricted Subsidiaries
for such period on a Consolidated basis as determined in accordance with GAAP,
adjusted, to the extent included in calculating such net income (or loss), by
excluding, without duplication,
(1) all extraordinary gains or losses net of taxes (less all fees and
expenses relating thereto),
(2) the portion of net income (or loss) of such Person and its Restricted
Subsidiaries on a Consolidated basis allocable to minority interests in
unconsolidated Persons or Unrestricted Subsidiaries to the extent that
cash dividends or distributions have not actually been received by such
Person or one of its Consolidated Restricted Subsidiaries,
(3) net income (or loss) of any Person combined with such Person or any of
its Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination,
(4) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan,
(5) gains or losses, net of taxes (less all fees and expenses relating
thereto), in respect of dispositions of assets other than in the ordinary
course of business,
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(6) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders,
(7) any restoration to net income of any contingency reserve, except to the
extent provision for such reserve was made out of income accrued at any
time following the date of the Indenture, or
(8) any net gain arising from the acquisition of any securities or
extinguishment, under GAAP, of any Indebtedness of such Person.
"CONSOLIDATED NET TANGIBLE ASSETS" of any Person means, as of any date of
determination, the total assets, less goodwill and other intangibles and less
deferred tax assets, in each case as shown on the balance sheet of the Company
and its Restricted Subsidiaries for the most recently ended fiscal quarter for
which financial statements are available, determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED NON-CASH CHARGES" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its Restricted Subsidiaries on a Consolidated basis for such period, as
determined in accordance with GAAP (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period).
"CONSOLIDATED RENTAL PAYMENTS" of any Person means, for any period, the
aggregate rental obligations of such Person and its Restricted Subsidiaries on a
Consolidated basis, as determined in accordance with GAAP, payable in respect of
such period under leases of real or personal property, not including taxes,
insurance, maintenance and similar expenses that the lessee is obligated to pay
under the terms of the relevant leases (net of income from subleases thereof,
not including taxes, insurance, maintenance and similar expenses that the
sublessee is obligated to pay under the terms of such sublease), whether or not
such obligations are reflected as liabilities or commitments on a consolidated
balance sheet of such Person and its Restricted Subsidiaries or in the notes
thereto, excluding, however, in any such calculation, (a) that portion of
Consolidated Interest Expense of such Person representing payments by such
Person or any of its consolidated Restricted Subsidiaries in respect of Capital
Lease Obligations (net of payments to such Person or any of its consolidated
Subsidiaries under subleases qualifying as capitalized lease subleases to the
extent that such payments would be deducted in determining Consolidated Interest
Expense) and (b) the aggregate amount of amortization of obligations of such
Person and its consolidated Restricted Subsidiaries in respect of such Capital
Lease Obligations for such period (net of payments to such Person or any of its
consolidated Restricted Subsidiaries under subleases qualifying as capitalized
lease subleases to the extent that such payments would be deducted in
determining such amortization amount).
"CONSOLIDATION" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its Subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"CREDIT FACILITY" means the Credit Agreement, dated as of the closing date,
among the Company, the lending institutions named therein and the Issuing Bank
and Administrative Agent, as such agreement, in whole or in part, may be
amended, renewed, extended, substituted, refinanced, restructured, replaced,
supplemented or otherwise modified from time to time (including, without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements, supplementations or other modifications of the
foregoing) (including the addition of one or more lenders to an existing
facility or the replacement of one or more lenders in a new facility).
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"CURRENCY HEDGING AGREEMENTS" means one or more of the following agreements
which shall be entered into by one or more financial institutions: foreign
exchange contracts, currency swap agreements or other similar agreements or
arrangements designed to protect against the fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DISINTERESTED DIRECTOR" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who does
not have any material direct or indirect financial interest in or with respect
to such transaction or series of related transactions.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, or any successor
statute, and the rules and regulations promulgated by the Commission thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length free market transaction between
an informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Fair Market Value shall be determined
by the board of directors of the Company acting in good faith and shall be
evidenced by a resolution of the board of directors.
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"GUARANTEE" means the guarantee by any Guarantor of the Company's Indenture
Obligations.
"GUARANTEED DEBT" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness below
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement
(1) to pay or purchase such Indebtedness or to advance or supply funds for
the payment or purchase of such Indebtedness,
(2) to purchase, sell or lease (as lessee or lessor) property, or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of such Indebtedness or to assure the holder of
such Indebtedness against loss,
(3) to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without
requiring that such property be received or such services be rendered),
(4) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial
condition of the debtor or to cause such debtor to achieve certain levels
of financial performance or
(5) otherwise to assure a creditor against loss;
PROVIDED that the term "guarantee" shall not include endorsements for collection
or deposit, in either case in the ordinary course of business.
"GUARANTOR" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the Notes pursuant to the "Limitation on Liens" covenant or the
"Limitation on Issuance of Guarantees of and Pledges for Indebtedness" covenant
until a successor replaces such party pursuant to the applicable provisions of
the Indenture and, thereafter, shall mean such successor.
"INDEBTEDNESS" means, with respect to any Person, without duplication,
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(1) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and
other accrued current liabilities arising in the ordinary course of
business, but including, without limitation, all obligations, contingent
or otherwise, of such Person in connection with any letters of credit
issued under letter of credit facilities, acceptance facilities or other
similar facilities,
(2) all obligations of such Person evidenced by bonds, notes, debentures or
other similar instruments,
(3) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such
Person (even if the rights and remedies of the seller or lender under
such agreement in the event of default are limited to repossession or
sale of such property), but excluding trade payables arising in the
ordinary course of business,
(4) all obligations under Interest Rate Agreements, Currency Hedging
Agreements or Commodity Price Protection Agreements of such Person,
(5) all Capital Lease Obligations of such Person,
(6) all Indebtedness referred to in clauses (1) through (5) above of other
Persons and all dividends of other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien, upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness,
(7) all Guaranteed Debt of such Person,
(8) all Redeemable Capital Stock issued by such Person valued at the greater
of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends,
(9) Preferred Stock of any Restricted Subsidiary of the Company or any
Guarantor and
(10) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing of any liability of the types referred to in
clauses (1) through (9) above.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value to be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"INDENTURE OBLIGATIONS" means the obligations of the Company and any other
obligor under the Indenture or under the Notes, including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all other
amounts due or to become due under or in connection with the Indenture, the
Notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the Notes, according to the respective terms
thereof.
"INTEREST RATE AGREEMENTS" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
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"INVESTMENT" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP. Investments shall exclude extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices.
"ISSUE DATE" means the original issue date of the Notes under the Indenture.
"LIEN" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind (including any conditional sale,
capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired. A Person will be deemed
to own subject to a Lien any property which it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sale agreement, Capital
Lease Obligation or other title retention agreement.
"MATURITY" means, when used with respect to the Notes, the date on which the
principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control, call
for redemption or otherwise.
"NET CASH PROCEEDS" means
(a) with respect to any Asset Sale by any Person, the proceeds thereof
(without duplication in respect of all Asset Sales) in the form of cash
or Temporary Cash Investments including payments in respect of deferred
payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Temporary Cash Investments (except
to the extent that such obligations are financed or sold with recourse to
the Company or any Restricted Subsidiary) net of
(1) brokerage commissions and other reasonable fees and expenses
(including fees and expenses of counsel and investment bankers)
related to such Asset Sale,
(2) provisions for all taxes payable as a result of such Asset Sale,
(3) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of
such Asset Sale,
(4) amounts required to be paid to any Person (other than the Company or
any Restricted Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and
(5) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may
be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an
officers' certificate delivered to the Trustee and
(b) with respect to any issuance or sale of Capital Stock or options,
warrants or rights to purchase Capital Stock, or debt securities or
Capital Stock that have been converted into or exchanged for Capital
Stock as referred to under "--Certain Covenants--LIMITATION ON RESTRICTED
PAYMENTS," the proceeds of such issuance or sale in the form of cash or
Temporary Cash
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Investments including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed of
for, cash or Temporary Cash Investments (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses
actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"PARI PASSU INDEBTEDNESS" means (a) any Indebtedness of the Company that is
equal in right of payment to the Notes and (b) with respect to any Guarantee,
Indebtedness which ranks equal in right of payment to such Guarantee.
"PERMITTED INVESTMENT" means
(1) Investments in any Wholly Owned Restricted Subsidiary or any Person
which, as a result of such Investment, (a) becomes a Wholly Owned
Restricted Subsidiary or (b) is merged or consolidated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or any Wholly Owned Restricted Subsidiary;
(2) Indebtedness of the Company or a Restricted Subsidiary described under
clauses (4), (5) and (6) of the definition of "Permitted Indebtedness;"
(3) Investments in any of the Notes;
(4) Temporary Cash Investments;
(5) Investments acquired by the Company or any Restricted Subsidiary in
connection with an Asset Sale permitted under "--Certain
Covenants--LIMITATION ON SALE OF ASSETS" to the extent such Investments
are non-cash proceeds as permitted under such covenant;
(6) Investments in existence on the date of the Indenture; and
(7) other Investments which in the aggregate outstanding at any one time do
not total more than $20 million.
In connection with any assets or property contributed or transferred to any
Person as an Investment, such property and assets shall be equal to the Fair
Market Value (as determined by the Company's Board of Directors) at the time of
Investment.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PREFERRED STOCK" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of common
stock (other than Redeemable Capital Stock) of the Company with gross proceeds
to the Company of at least $35 million pursuant to a registration statement that
has been declared effective by the Commission pursuant to the Securities Act
(other than a registration statement on Form S-4 (or any successor form covering
substantially the same transactions), Form S-8 (or any successor form covering
substantially the same transactions) or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
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"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased by the Company at any time after the Notes are
issued; PROVIDED that
(1) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered
into within 90 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely to
the assets so purchased or acquired, any additions and accessions thereto
and any proceeds therefrom,
(2) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with the
purchase of additions and accessions thereto and except in respect of
fees and other obligations in respect of such Indebtedness and
(3) (A) the aggregate outstanding principal amount of Indebtedness secured
thereby (determined on a per asset basis in the case of any additions and
accessions) shall not at the time such Purchase Money Security Agreement
is entered into exceed 100% of the purchase price to the Company of the
assets subject thereto or (B) the Indebtedness secured thereby shall be
with recourse solely to the assets so purchased or acquired, any
additions and accessions thereto and any proceeds therefrom.
"QUALIFIED CAPITAL STOCK" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"REDEEMABLE CAPITAL STOCK" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to the final Stated Maturity of the principal of
the Notes or is redeemable at the option of the holder thereof at any time prior
to such final Stated Maturity (other than upon a change of control of or sale of
assets by the Company in circumstances where the holders of the Notes would have
similar rights), or is convertible into or exchangeable for debt securities at
any time prior to such final Stated Maturity at the option of the holder
thereof.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the board of directors of the Company by a board resolution
delivered to the Trustee as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants-- LIMITATION
ON UNRESTRICTED SUBSIDIARIES."
"SECURITIES ACT" means the Securities Act of 1933, or any successor statute,
and the rules and regulations promulgated by the Commission thereunder.
"STATED MATURITY" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as the
fixed date on which the principal of such Indebtedness or such installment of
interest, as the case may be, is due and payable.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes or a Guarantee, as the case may
be.
"SUBSIDIARY" of a Person means
(1) any corporation more than 50% of the outstanding voting power of the
Voting Stock of which is owned or controlled, directly or indirectly, by
such Person or by one or more other Subsidiaries of such Person, or by
such Person and one or more other Subsidiaries thereof, or
(2) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or
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(3) any other Person in which such Person, or one or more other Subsidiaries
of such Person, or such Person and one or more other Subsidiaries,
directly or indirectly, has more than 50% of the outstanding partnership
or similar interests or has the power, by contract or otherwise, to
direct or cause the direction of the policies, management and affairs
thereof.
"TEMPORARY CASH INVESTMENTS" means
(1) any evidence of Indebtedness, maturing not more than one year after the
date of acquisition, issued by the United States of America, or an
instrumentality or agency thereof, and guaranteed fully as to principal,
premium, if any, and interest by the full faith and credit of the United
States of America,
(2) any certificate of deposit, maturing not more than one year after the
date of acquisition, issued by, or time deposit of, a commercial banking
institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than $500
million, whose debt has a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's Investors
Service, Inc. ("Moody's") or any successor rating agency or "A-1" (or
higher) according to Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("S&P") or any successor rating agency,
(3) commercial paper, maturing not more than one year after the date of
acquisition, issued by a corporation (other than an Affiliate or
Subsidiary of the Company) organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia
with a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's or "A-1" (or higher) according to
S&P and
(4) any money market deposit accounts issued or offered by a domestic
commercial bank having capital and surplus in excess of $500 million;
PROVIDED that the short term debt of such commercial bank has a rating,
at the time of investment, of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, or any
successor statute.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company (other than a
Guarantor) designated as such pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Unrestricted Subsidiaries."
"UNRESTRICTED SUBSIDIARY INDEBTEDNESS" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary
(1) as to which neither the Company nor any Restricted Subsidiary is
directly or indirectly liable (by virtue of the Company or any such
Restricted Subsidiary being the primary obligor on, guarantor of, or
otherwise liable in any respect to, such Indebtedness), except Guaranteed
Debt of the Company or any Restricted Subsidiary to any Affiliate, in
which case (unless the incurrence of such Guaranteed Debt resulted in a
Restricted Payment at the time of incurrence) the Company shall be deemed
to have made a Restricted Payment equal to the principal amount of any
such Indebtedness to the extent guaranteed at the time such Affiliate is
designated an Unrestricted Subsidiary and
(2) which, upon the occurrence of a default with respect thereto, does not
result in, or permit any holder of any Indebtedness of the Company or any
Subsidiary to declare, a default on such Indebtedness of the Company or
any Subsidiary or cause the payment thereof to be accelerated or payable
prior to its Stated Maturity; provided that notwithstanding the foregoing
any Unrestricted Subsidiary may guarantee the Notes.
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"VOTING STOCK" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Restricted Subsidiary all the
Capital Stock of which is owned by the Company or another Wholly Owned
Restricted Subsidiary.
BOOK-ENTRY DELIVERY AND FORM
DEPOSIT OF THE NOTES WITH DTC. The company will issue the exchange notes in
the form of one or more registered notes in global form without coupons. The
company will deposit each global note with, or on behalf of, the Depository
Trust Company, and the global notes will be registered in the name of a nominee
of DTC.
DTC has advised the company that it is a:
- limited purpose trust company organized under New York law;
- member of the Federal Reserve System;
- "clearing corporation" under the Uniform Commercial Code; and
- "clearing agency" registered under Section 17A of the Securities Exchange
Act of 1934.
DTC holds securities for its participants and facilitates the clearance and
settlement of securities transactions between participants through electronic
book entry changes to the accounts of its participants. DTC's system therefore
eliminates the need for physical movement of certificates. DTC's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations. Other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant have indirect access to DTC's system.
Upon deposit of the global notes, DTC will credit on its internal system the
principal amount of the exchange notes to the accounts of participants with an
interest in the global notes. Records maintained by DTC, participants and
indirect participants will show the ownership of the exchange notes. Transfers
of the exchange notes will be affected only through those records. Some state
laws require some persons to take physical delivery in definitive form of
securities that they own. In addition, some states provide that security
interests in negotiable instruments can only be perfected by delivery of the
certificates representing the instruments. As a result, the ability of persons
in such states to transfer the exchange notes or to pledge the exchange notes as
collateral will be limited to this extent.
DTC AS REGISTERED OWNER OF THE NOTES; EXERCISE OF RIGHTS BY THE
NOTEHOLDERS. So long as DTC or its nominee is the registered owner of the
global notes, DTC or such nominee will be considered the sole owner of the notes
represented by such global notes. Except as provided below or in the next
section, owners of beneficial interests in a global note will not be:
- entitled to have notes represented by such global note registered in their
names;
- entitled to receive physical delivery of certificated securities; or
- considered the owners of the offered notes under the indenture for any
purpose, including with respect to the giving of any direction,
instruction or approval to the trustee.
As a result, the ability of a person having a beneficial interest in any of the
notes to pledge such interest to persons or entities that do not participate in
DTC's system or to otherwise take action with respect to such interest may be
affected by the lack of a physical certificate evidencing such interest.
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To exercise any right of a noteholder under the indenture, each holder of a
beneficial interest in a global note must rely on the procedures of DTC. If such
noteholder is not a participant or an indirect participant of DTC, the
noteholder must rely on the procedures of the participant through which the
noteholder owns its interest. The company understands that under existing
industry practice:
- if the company requests any action of the noteholders, DTC and DTC's
participants would act upon the instructions of the noteholders; and
- if a noteholder desires to take any action that DTC is entitled to take,
as the holder of the global note, DTC would authorize DTC's participants
to take such action and the participants would authorize the noteholders
owning through such participants to take such action.
Neither the company nor the trustee under the indenture will have any
responsibility or liability for any aspect of the records relating to, or
payments made on, the exchange notes by DTC.
PAYMENTS MADE THROUGH DTC. The trustee under the indenture will make all
payments on any exchange notes represented by a global note to DTC or its
nominee, as the holder of the global notes. Under the indenture, the company and
the trustee may treat the holder of the global notes as the owner of such notes
for the purpose of receiving payment on the notes. As a result, neither the
company nor the trustee will have any responsibility to make payments to the
beneficial owners of the exchange notes, or to credit the accounts of DTC
participants with such payments. Payments by DTC's participants and indirect
participants to the beneficial owners of the exchange notes will be governed by
customary practice and will be the responsibility of the participants and
indirect participants.
CERTIFICATED SECURITIES
Securities in registered definitive form, without coupons, will be issued to
each beneficial owner of notes represented by the global notes if:
- DTC is no longer willing or able to act as the depository for the notes
and the company is unable to locate a qualified successor within 90 days;
or
- the company elects to cause the issuance of notes in definitive form under
the indenture.
In addition, any person having a beneficial interest in a global note may, upon
request to the trustee, exchange such beneficial interest for securities in
registered definitive form. In such case, the trustee is required to register
such notes in the name of the requesting person or his/her nominee and deliver
the notes to such persons.
Neither the company nor the trustee will be liable for any delay by DTC or
any of DTC's participants or indirect participants in identifying the beneficial
owners of the exchange notes. The company and the trustee will be protected in
relying upon instructions from DTC for all purposes, including with respect to
the registration and delivery of notes to be issued and the principal amounts of
any such notes.
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FEDERAL TAX CONSEQUENCES
The following is a summary of all material federal income tax consequences
of the exchange of the outstanding notes for the exchange notes and the federal
income tax consequences (and, in the case of non-U.S. holders, certain federal
estate tax consequences) of the acquisition, ownership and disposition of the
exchange notes. This summary is based upon the provisions of the Internal
Revenue Code of 1986, as amended, the Treasury Regulations, and administrative
and judicial interpretations of the Internal Revenue Code, all as now in effect
and all of which are subject to change or possible differing interpretations.
Consequently, the Internal Revenue Service may disagree with certain aspects of
the discussion below. The statutory provisions, Treasury Regulations, and
interpretations on which this discussion is based are subject to change, and
such a change could apply retroactively. No ruling on any of the issues
discussed below will be sought from the Internal Revenue Service.
THIS SUMMARY DOES NOT DISCUSS ALL OF THE ASPECTS OF FEDERAL INCOME AND
ESTATE TAXATION WHICH MAY BE RELEVANT TO INVESTORS IN LIGHT OF THEIR PARTICULAR
INVESTMENT OR OTHER CIRCUMSTANCES. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS
ANY STATE OR LOCAL INCOME OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES. THE
DISCUSSION BELOW DEALS ONLY WITH INVESTORS WHO WILL HOLD EXCHANGE NOTES AS
CAPITAL ASSETS (GENERALLY, PROPERTY HELD FOR INVESTMENT) AND DOES NOT ADDRESS
SUBSEQUENT PURCHASERS OF THE EXCHANGE NOTES OR HOLDERS OF EXCHANGE NOTES THAT
MAY BE SUBJECT TO SPECIAL RULES (INCLUDING, WITHOUT LIMITATION, CERTAIN U.S.
EXPATRIATES, FINANCIAL INSTITUTIONS, INSURANCE COMPANIES, TAX-EXEMPT ENTITIES,
DEALERS IN SECURITIES OR CURRENCIES, TRADERS IN SECURITIES, PERSONS THAT ACQUIRE
THE NOTES FOR A PRICE OTHER THAN THEIR ISSUE PRICE, AND PERSONS THAT HOLD THE
NOTES AS PART OF A STRADDLE, HEDGE, CONVERSION OR OTHER INTEGRATED TRANSACTION).
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
PARTICULAR U.S. FEDERAL, STATE AND LOCAL AND FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE EXCHANGE NOTES THAT MAY
BE APPLICABLE TO THEM.
EXCHANGE OFFER
The exchange of an outstanding note for an exchange note pursuant to the
exchange offer will not constitute a "significant modification" of the
outstanding note for federal income tax purposes. Accordingly, the exchange will
be disregarded and the exchange note received will be treated as a continuation
of the outstanding note in the hands of each holder of an exchange note. As a
result, there will be no federal income tax consequences to a holder who
exchanges an outstanding note for an exchange note pursuant to the exchange
offer. Each such holder will have the same adjusted tax basis and holding period
in the exchange note as such holder had in the outstanding note immediately
before the exchange.
FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
For purposes of the following discussion, a U.S. holder is a beneficial
owner of a note that is, for U.S. federal income tax purposes,
(1) an individual citizen or resident of the United States;
(2) a corporation or partnership (unless the Internal Revenue Service
provides otherwise by Treasury Regulation) created or organized in or under
the laws of the United States or any of its political subdivisions;
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
(4) a trust if, in general, the trust is subject to the supervision of a
court within the United States and the control of one or more United States
persons as described in Section 7701(a)(30) of the Internal Revenue Code.
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INTEREST. In general, interest on a note will be included in the gross
income of a U.S. holder as ordinary interest income at the time it is received
or accrued in accordance with the U.S. holder's regular method of accounting for
U.S. federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
OVERVIEW OF ORIGINAL ISSUE DISCOUNT. Notes issued at a price less than
their stated principal amount, i.e., discount notes, will be issued with
"original issue discount" within the meaning of Section 1273(a) of the Internal
Revenue Code. Such original issue discount will equal the difference between the
"stated redemption price at maturity" (generally, its principal amount) and its
issue price. The issue price of discount notes that are issued for cash will be
the first price at which a substantial amount of the discount notes in such
issue are sold to the public (ignoring sales to bond houses, brokers, or similar
persons or organizations acting in the capacity of underwriters, placement
agents, or wholesalers). Original issue discount is treated as ordinary interest
income, and holders of notes with original issue discount must include the
amount of original issue discount in income on an accrual basis in advance of
the receipt of the cash to which it relates. Any amounts included in income as
original issue discount with respect to a discount note will increase a holder's
adjusted tax basis in the discount note.
COMPUTATION OF ORIGINAL ISSUE DISCOUNT. The amount of original issue
discount on a note equals the excess, if any, of the note's stated redemption
price at maturity over its issue price. Under the Treasury Regulations for
original issue discount, a debt instrument's stated redemption price at maturity
is the sum of all payments provided by the instrument other than "qualified
stated interest", i.e., deemed principal payments. Qualified stated interest, in
general, is stated interest that is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually at (1) a single
fixed rate or (2) a variable rate that meets certain requirements in the
Treasury Regulations for original issue discount. Thus, in the case of any note
providing for such stated interest, the stated redemption price at maturity
generally will equal the total amount of all deemed principal payments due on
that note.
DE MINIMIS RULE. Under a de minimis rule, a note will be considered to have
no original issue discount if the amount of the original issue discount is less
than 0.25% of the note's stated redemption price at maturity multiplied by the
number of complete years to maturity. A holder will include de minimis original
issue discount in income on a pro rata basis as stated principal payments on the
note are received or, if earlier, upon disposition of the note, unless the
holder makes the election described below in "--ALL ORIGINAL ISSUE DISCOUNT
ELECTION." Any amount of de minimis original issue discount that has not been
included in income prior to sale, exchange or retirement of a note generally
will be treated as capital gain.
EXAMPLE. The outstanding notes were issued in the May 1999 private
placement with a de minimis amount of original issue discount. An outstanding
note with a stated redemption price at maturity of $100,000 was issued for
$98,500 in the private placement. Unless the U.S. holder makes the election
described below in "--ALL ORIGINAL ISSUE DISCOUNT ELECTION," the U.S. holder
will include a portion of the de minimis original discount amount of $1,500
($100,000--$98,500) in income on a pro rata basis as each stated principal
payment on the exchange note is received or, if earlier, upon disposition of the
exchange note. If, for example, the U.S. holder were to receive a stated
principal
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<PAGE>
payment of $10,000 during a taxable year as the result of an optional
redemption, the U.S. holder would include $150 in income for that taxable year
as shown by the following computation:
<TABLE>
<S> <C> <C> <C> <C>
Stated Principal Amount Received $ 10,000
= = 10%
- ------------------------------------------- -------
Total Stated Principal Amount of Exchange
Note $ 100,000
De Minimis Original Discount Amount $ 1,500
X 10%
---------
Portion of De Minimis Original
Issue Discount Amount Included in Income $ 150
---------
---------
</TABLE>
COMPUTATIONS OF DAILY PORTIONS OF ORIGINAL ISSUE DISCOUNT. The amount of
original issue discount includible in income by a holder of a discount note is
the sum of the daily portions of original issue discount with respect to such
discount note for each day during the taxable year or portion of taxable year in
which the holder holds such discount note. The daily portion is determined by
allocating to each day in any accrual period a pro rata portion of the original
issue discount allocable to that accrual period. Accrual periods with respect to
a note may be any length selected by the holder and may vary in length over the
term of the note as long as no accrual period is longer than one year and each
scheduled payment of interest or principal on the note occurs either on the
final or first day of an accrual period.
The amount of original issue discount allocable to an accrual period equals
the excess of
(1) the product of the discount note's adjusted issue price at the beginning
of the accrual period and such note's yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period) over
(2) the sum of the payments of qualified stated interest on the note
allocable to the accrual period.
The "adjusted issue price" of a discount note at the beginning of any
accrual period is (a) the sum of the issue price of such note and the accrued
original issue discount for each prior accrual period less (b) any prior
payments on the note that were not qualified stated interest payments.
OPTIONAL REDEMPTION. The exchange notes are subject to optional redemption
by the issuer before maturity. Under the Treasury Regulations for original issue
discount, an issuer will be presumed to exercise its option to redeem for
purposes of computing the accrual of original issued discount if, and only if,
by using the optional redemption date as the maturity date and the optional
redemption price as the stated redemption price at maturity, the yield to
maturity of the notes is lower than it would be if the notes were not redeemed
early. If an issuer is presumed to exercise its option to redeem the notes,
original issue discount on such notes will be calculated as if the redemption
date were the maturity date and the optional redemption price were the stated
redemption price at maturity. In cases (such as with the outstanding notes) in
which all of the notes are issued at par or at a discount, an issuer will not be
presumed to exercise its option to redeem the notes because a redemption by the
issuer would not lower the yield to maturity of the notes. If, however, notes
were issued at a premium, an issuer may be able to lower the yield to maturity
of the notes by exercising its redemption option.
ALL ORIGINAL ISSUE DISCOUNT ELECTION. The Treasury Regulations for original
issue discount provide that a holder may make an election to include in gross
income all stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount
that accrues on the note, and unstated interest under the constant yield method
used to account for
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<PAGE>
original issue discount. To make such an election, the holder of the note must
attach a statement to its timely filed federal income tax return for the taxable
year in which the holder acquired the note. The statement must identify the
instrument to which the election applies. An election is irrevocable unless the
holder obtains the consent of the Internal Revenue Service.
IN VIEW OF THE COMPLEXITIES AS TO THE MANNER OF INCLUSION IN INCOME OF
ORIGINAL ISSUE DISCOUNT ON THE NOTES, IT IS SUGGESTED THAT POTENTIAL INVESTORS
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE APPROPRIATE AMOUNT AND METHOD OF
INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT ON THE NOTES FOR FEDERAL INCOME
TAX PURPOSES.
DISPOSITIONS. Upon the sale, exchange, retirement, redemption or other
taxable disposition of an exchange note, a U.S. holder generally will recognize
taxable gain or loss in an amount equal to the difference, if any, between the
amount realized on the disposition (excluding any amount received that is
attributable to accrued but unpaid interest) and the U.S. holder's adjusted tax
basis in the exchange note. A U.S. holder's adjusted tax basis in an exchange
note generally will equal the U.S. holder's cost of the exchange note. Gain or
loss recognized by a U.S. holder on the taxable disposition of an exchange note
generally will be capital gain or loss. The capital gain or loss will be
long-term capital gain or loss if the exchange note has been held for more than
one year at the time of the disposition. Long-term capital gain recognized by a
non-corporate U.S. holder generally will be subject to a maximum tax rate of
20%. Subject to certain limited exceptions, capital losses cannot be used to
offset ordinary income.
BACKUP WITHHOLDING. In general, "backup withholding" at a rate of 31% may
apply to payments of principal and interest made on an exchange note, and to
payment of the proceeds of a sale or exchange of an exchange note before
maturity, that are made to a non-corporate U.S. holder if the holder fails to
provide a correct taxpayer identification number or otherwise comply with
applicable requirements of the backup withholding rules. The backup withholding
tax is not an additional tax and may be credited against a U.S. holder's federal
income tax liability, provided that correct information is provided to the
Internal Revenue Service.
FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS
For purposes of the following discussion, a non-U.S. holder is a beneficial
owner of an exchange note that is not, for federal income tax purposes, a U.S.
holder. An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States on at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to federal tax as if they were citizens.
Under present federal income and estate tax law and subject to the
discussion of backup withholding below:
(a) payments of principal, premium (if any) and interest on an exchange note
by us or any of our agents to any non-U.S. holder will not be subject to
withholding of federal income tax, provided that in the case of interest
(1) the non-U.S. holder does not directly or indirectly, actually or
constructively, own ten percent or more of the total combined voting power
of all classes of our stock entitled to vote,
(2) the non-U.S. holder is not (x) a controlled foreign corporation that
is related to us through sufficient stock ownership, or (y) a bank receiving
interest described in Section 881(c)(3)(A) of the Internal Revenue Code, and
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(3) either (A) the beneficial owner of the note certifies to us or our
agent, under penalties of perjury, that it is not a "United States person"
under the meaning of the Internal Revenue Code and provides its name and
address, or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business and holds the note on behalf of the beneficial owner
certifies to us or our agent under penalties of perjury that it, or the
financial institution between it and the beneficial owner, has received from
the beneficial owner a statement, under penalties of perjury, that it is not
a "United States person" and provides the payor with a copy of this
statement;
(b) a non-U.S. holder will not be subject to federal income tax on any gain
or income realized on the sale, exchange, redemption, retirement at maturity or
other disposition of an exchange note (provided that, in the case of proceeds
representing accrued interest, the conditions described in paragraph (a) above
are met) unless
(1) the non-U.S. holder is an individual who is present in the United
States for 183 days or more during the taxable year and some other
conditions are met, or
(2) the gain is effectively connected with the conduct of a U.S. trade
or business by the non-U.S. holder, or if an income tax treaty applies, is
generally attributable to a U.S. "permanent establishment" maintained by the
non-U.S. holder; and
(c) a note held by an individual who at the time of death is not a citizen
or resident of the United States will not be subject to U.S. federal estate tax
as a result of the individual's death if, at the time of the individual's death,
(1) the individual did not directly or indirectly, actually or
constructively, own ten percent or more of the total combined voting power
of all classes of our stock entitled to vote, and
(2) the income on the note would not have been effectively connected
with the conduct of a trade or business by the individual in the United
States.
EFFECTIVELY CONNECTED INTEREST INCOME. If a non-U.S. holder is engaged in a
trade or business in the United States and interest on the note is effectively
connected with the conduct of this trade or business (or, if an income tax
treaty applies, and the non-U.S. holder maintains a U.S. "permanent
establishment" to which the interest is generally attributable), the non-U.S.
holder, although exempt from the withholding tax discussed in the preceding
paragraph (a) (provided that the holder furnishes a properly executed Internal
Revenue Service Form W-8ECI or successor form on or before any payment date to
claim the exemption), may be subject to federal income tax on such interest on a
net basis in the same manner as if it were a U.S. holder.
BRANCH PROFITS TAX. In addition, a foreign corporation that is a non-U.S.
holder of a note may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, subject to some
adjustments, unless it qualifies for a lower rate under an applicable income tax
treaty. For this purpose, interest on a note or gain recognized on the
disposition of a note will be included in earnings and profits if the interest
or gain is effectively connected with the conduct by the foreign corporation of
a trade or business in the United States.
NEW WITHHOLDING TAX REGULATIONS. In 1997, Treasury Regulations were issued
generally effective for payments made after December 31, 2000 that provide
alternative methods for satisfying the certification requirement described in
paragraph (a)(3) above and will require
- a non-U.S. holder that provides an Internal Revenue Service Form W-8ECI or
successor form (as discussed above) also to provide its U.S. taxpayer
identification number and
- a non-U.S. holder claiming the benefit of an income tax treaty also to
provide its U.S. taxpayer identification number.
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These Treasury Regulations generally also will require, in the case of a note
held by a foreign partnership, that (x) the certification described in paragraph
(a)(3) above be provided by the partners and (y) the partnership provide certain
information, including a U.S. taxpayer identification number. A look-through
rule will apply in the case of tiered partnerships.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under current Treasury
Regulations, backup withholding and information reporting will not apply to
payments made by us or any of our agents (in their capacities as agents) to a
non-U.S. holder of an exchange note if the holder has provided the required
certification that it is not a United States person as set forth in paragraph
(a) above, provided that neither we nor our agent has actual knowledge that the
exchange holder is a United States person. We or our agent may, however, report
payments of interest on the exchange notes.
Payments of the proceeds from a disposition by a non-U.S. holder of an
exchange note made to or through a foreign office of a broker will not be
subject to information reporting or backup withholding, except that information
reporting may apply to those payments if the broker is
(1) a United States person,
(2) a controlled foreign corporation for federal income tax purposes,
(3) a foreign person 50% or more of whose gross income is effectively
connected with a U.S. trade or business for a specified three-year
period, or
(4) with respect to payments made after December 31, 2000, a foreign
partnership, if at any time during its tax year, one or more of its
partners are U.S. persons (as defined in Treasury Regulations) who in the
aggregate hold more than 50% of the income or capital interest in the
partnership or if, at any time during its tax year, the foreign
partnership is engaged in a U.S. trade or business.
Payments of the proceeds from a disposition by a non-U.S. holder of a note made
to or through the U.S. office of a broker is subject to information reporting
and backup withholding unless the holder or beneficial owner certifies as to its
U.S. taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder would be allowed as a refund or a credit against the holder's
federal income tax liability, provided the required information is furnished to
the Internal Revenue Service.
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<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes acquired by the broker-dealer as a result of
market-making or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of the exchange notes. This
prospectus, as it may be amended, may be used by a broker-dealer in connection
with such resales.
The company will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
in the exchange offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the writing
of options on the exchange notes or a combination of such methods of resale.
Such resales may be made at market prices prevailing at the time of resale, at
prices related to prevailing market prices or negotiated prices. Such resales
may also be made directly to purchasers or to or through brokers or dealers who
may receive compensation in the form of commissions or concessions from any such
broker-dealer on the purchases of any such exchange notes.
Any broker-dealer that resells the exchange notes that were received by it
for its own account in the exchange offer and any broker-dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and must therefore
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of the exchange notes. Any profit on any such resale
of exchange notes and any commissions or concessions received by any such
broker-dealer may be deemed to be underwriting compensation under the Securities
Act. Such broker-dealers must acknowledge, by signing the letter of transmittal,
that they will deliver a letter of transmittal stating that by acknowledging
that it will deliver, and by delivering, a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Any broker-dealer that holds any outstanding notes that it acquired directly
from the company in the initial offering and not as a result of market-making or
other trading activities cannot rely on this interpretation by the Commission
and, in the absence of an exemption, must comply with the registration and
prospectus delivery requirements of the Securities Act. However, since the
initial purchasers that purchased all of the outstanding notes directly from the
company immediately resold all of the outstanding notes purchased by them, no
such broker-dealer exists.
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LEGAL MATTERS
The validity of the exchange notes will be passed upon for us by Thompson
Hine & Flory LLP, Cleveland, Ohio. Certain partners of Thompson Hine & Flory LLP
own a total of 2,850 shares of class A common stock of Jo-Ann Stores, Inc. and
2,850 shares of class B common stock of Jo-Ann Stores, Inc.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of Jo-Ann Stores, Inc. as of January
30, 1999, and for the three fiscal years then ended, appearing in this
prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report appearing herein.
WHERE YOU CAN FIND MORE INFORMATION ABOUT JO-ANN STORES
We are subject to the periodic reporting requirements of the Securities and
Exchange Commission and file periodic reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected at the public reference facilities of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The phone number of the Commission's public reference facilities is
1-800-SEC-0330. Such information may also be obtained on the Internet at the
Commission's web site located at http://www.sec.gov. In addition, our common
stock is traded on the New York Stock Exchange and as a result periodic reports
and proxy statements can be inspected at the offices of the New York Stock
Exchange at 20 Broad Street, New York, New York 10005.
Pursuant to the indenture, we have agreed that, whether or not we are
required to do so by the rules and regulations of the Commission, for so long as
any of the notes remain outstanding, we will furnish to the holders of the notes
and file with the Commission (1) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if our company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by our company's certified independent accountants, (2) all reports that would
be required to be filed with the Commission on Form 8-K if we were required to
file such reports and (3) any other information, documents and other reports
which we would be required to file with the Commission if we were subject to
Section 13 or 15(d) of the Exchange Act. In addition, whether or not required by
the rules and regulations of the Commission, we will also agree to file a copy
of all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JO-ANN STORES, INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.................................... F-3
Consolidated Statements of Income for each of the three fiscal years in the period ended January 30,
1999....................................................................................................... F-4
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 30,
1999....................................................................................................... F-5
Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended
January 30, 1999........................................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Jo-Ann Stores, Inc.
We have audited the accompanying consolidated balance sheets of Jo-Ann
Stores, Inc. (an Ohio corporation) and subsidiaries as of January 30, 1999 and
January 31, 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended January 30, 1999. 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 Jo-Ann Stores, Inc. and
subsidiaries as of January 30, 1999 and January 31, 1998 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 30, 1999 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Cleveland, Ohio,
April 14, 1999.
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
JO-ANN STORES, INC.
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
------------- -------------
(MILLIONS OF DOLLARS,
EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................................................................. $ 20.4 $ 14.8
Inventories......................................................................................... 420.2 294.7
Deferred income taxes............................................................................... 24.8 --
Prepaid expenses and other current assets........................................................... 24.7 12.6
------ ------
Total current assets.................................................................................. 490.1 322.1
Property and equipment, at cost:
Land................................................................................................ 2.2 1.7
Buildings........................................................................................... 24.7 22.8
Furniture, fixtures and equipment................................................................... 172.7 121.7
Leasehold improvements.............................................................................. 57.3 46.8
Construction in progress............................................................................ 13.2 2.6
------ ------
270.1 195.6
Less accumulated depreciation and amortization...................................................... 106.1 85.6
------ ------
164.0 110.0
Goodwill, net......................................................................................... 37.2 --
Other assets.......................................................................................... 10.1 15.7
------ ------
Total assets.......................................................................................... $ 701.4 $ 447.8
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................... $ 150.4 $ 120.6
Accrued expenses.................................................................................... 58.4 32.5
Accrued income taxes................................................................................ 0.4 10.4
Deferred income taxes............................................................................... -- 1.3
------ ------
Total current liabilities............................................................................. 209.2 164.8
Long-term debt........................................................................................ 182.5 24.7
Deferred income taxes................................................................................. 25.2 14.2
Other long-term liabilities........................................................................... 25.5 3.2
Shareholders' equity:
Common stock:
Class A, par value $0.05 per share; issued and outstanding 9,530,330 and 9,463,915,
respectively.................................................................................... 0.5 0.5
Class B, par value $0.05 per share; issued and outstanding 9,481,244 and 9,302,746,
respectively.................................................................................... 0.5 0.5
Additional paid-in capital.......................................................................... 94.4 88.9
Unamortized restricted stock awards................................................................. (2.9) (3.1)
Retained earnings................................................................................... 185.8 172.2
------ ------
278.3 259.0
Treasury stock, at cost............................................................................. (19.3) (18.1)
------ ------
Total shareholders' equity............................................................................ 259.0 240.9
------ ------
Total liabilities and shareholders' equity............................................................ $ 701.4 $ 447.8
------ ------
------ ------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
JO-ANN STORES, INC.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
(MILLIONS OF DOLLARS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net sales................................................................ $ 1,242.9 $ 975.0 $ 929.0
Cost of sales............................................................ 678.5 533.2 516.9
Selling, general and administrative expenses............................. 476.7 363.1 340.9
Depreciation and amortization............................................ 27.7 21.7 21.2
Non-recurring charge..................................................... 25.1 -- --
----------- ----------- -----------
Operating profit......................................................... 34.9 57.0 50.0
Interest expense......................................................... 12.5 5.9 10.6
----------- ----------- -----------
Income before income taxes and extraordinary item........................ 22.4 51.1 39.4
Income tax provision..................................................... 8.8 19.2 14.8
----------- ----------- -----------
Net income before extraordinary item..................................... 13.6 31.9 24.6
Extraordinary item, loss related to early retirement of debt,
net of tax benefit of $0.7 million....................................... -- (1.1) --
----------- ----------- -----------
Net income............................................................... $ 13.6 $ 30.8 $ 24.6
----------- ----------- -----------
----------- ----------- -----------
Net income per common share--basic:
Net income before extraordinary item................................... $ 0.72 $ 1.74 $ 1.37
Extraordinary item..................................................... -- (0.06) --
----------- ----------- -----------
Net income per common share.............................................. $ 0.72 $ 1.68 $ 1.37
----------- ----------- -----------
----------- ----------- -----------
Net income per common share--diluted:
Net income before extraordinary item................................... $ 0.69 $ 1.60 $ 1.26
Extraordinary item..................................................... -- (0.06) --
----------- ----------- -----------
Net income per common share.............................................. $ 0.69 $ 1.54 $ 1.26
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
JO-ANN STORES, INC.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income................................................ $ 13.6 $ 30.8 $ 24.6
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Depreciation and amortization........................... 27.7 21.7 21.2
Non-cash portion of non-recurring charge................ 9.2 -- --
Deferred income taxes................................... 8.5 -- (1.3)
Loss on disposal of fixed assets........................ 2.2 0.9 1.1
Extraordinary loss on debt prepayment................... -- 1.1 --
Changes in operating assets and liabilities:
(Increase) decrease in inventories...................... (96.0) 1.4 41.9
(Increase) decrease in prepaid expenses and other
current assets........................................ 19.2 (3.0) 2.3
Increase (decrease) in accounts payable................. 14.6 21.2 (5.0)
Increase (decrease) in accrued expenses................. (4.3) 3.6 8.8
Increase (decrease) in accrued income taxes............. (10.0) 0.4 10.3
----------- ----- -----------
Net cash (used for) provided by operating activities........ (15.3) 78.1 103.9
Net cash flows from investing activities:
Capital expenditures...................................... (75.1) (36.6) (13.2)
House of Fabrics acquisition, net of cash acquired........ (23.5) -- --
Other, net................................................ 4.3 (0.5) (1.1)
----------- ----- -----------
Net cash used for investing activities...................... (94.3) (37.1) (14.3)
Net cash flows from financing activities:
Proceeds from long-term debt.............................. 159.8 87.3 13.1
Repayment of long-term debt............................... (48.5) (77.7) (96.5)
Redemption of debentures.................................. -- (57.0) --
Proceeds and tax benefit from exercise of stock options... 4.4 8.4 2.2
Issuance of treasury shares............................... 1.0 0.8 --
Purchase of common stock.................................. (1.5) -- (9.0)
Other, net................................................ -- (0.6) 1.6
----------- ----- -----------
Net cash provided by (used for) financing activities........ 115.2 (38.8) (88.6)
Net increase in cash........................................ 5.6 2.2 1.0
Cash and temporary cash investments at beginning of year.... 14.8 12.6 11.6
----------- ----- -----------
Cash and temporary cash investments at end of year........ $ 20.4 $ 14.8 $ 12.6
----------- ----- -----------
----------- ----- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 12.5 $ 7.5 $ 11.1
Income taxes............................................ $ 14.6 $ 15.6 $ 5.7
Acquisition of House of Fabrics, Inc.:
Fair value of assets acquired, net of cash.............. $ (138.1)
Fair value of liabilities assumed....................... 116.8
-----------
Net cash payment to date.................................. (21.3)
Amount payable for shares not yet tendered................ (2.2)
-----------
Total..................................................... $ (23.5)
-----------
-----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
JO-ANN STORES, INC.
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL UNAMORTIZED TOTAL
COMMON COMMON PAID-IN RESTRICTED RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL STOCK AWARDS EARNINGS STOCK EQUITY
----------- ----------- ----------- ------------- ----------- ----------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 27, 1996....... $ 0.5 $ 0.5 $ 74.2 $ (1.7) $ 116.8 $ (9.4) $ 180.9
Net income.................... -- -- -- -- 24.6 -- 24.6
Exercise of stock options..... -- -- 1.8 -- -- -- 1.8
Tax benefit on options
exercised................... -- -- 0.4 -- -- -- 0.4
Issuance of restricted stock
awards...................... -- -- 0.4 (0.4) -- -- --
Cancellation of restricted
stock awards................ -- -- (0.2) 0.1 -- -- (0.1)
Amortization of restricted
stock awards................ -- -- -- 0.8 -- -- 0.8
Purchase of common stock...... -- -- -- -- -- (9.0) (9.0)
--- --- ----- ----- ----------- ----------- ------
Balance, February 1, 1997....... 0.5 0.5 76.6 (1.2) 141.4 (18.4) 199.4
Net income.................... -- -- -- -- 30.8 -- 30.8
Exercise of stock options..... -- -- 5.2 -- -- -- 5.2
Tax benefit on options
exercised................... -- -- 3.2 -- -- -- 3.2
Issuance of restricted stock
awards...................... -- -- 2.8 (2.8) -- -- --
Cancellation of restricted
stock awards................ -- -- (0.4) 0.3 -- -- (0.1)
Amortization of restricted
stock awards................ -- -- -- 0.6 -- -- 0.6
Issuance of treasury shares... -- -- 0.5 -- -- 0.3 0.8
Issuance of common stock upon
conversion of debentures.... -- -- 1.0 -- -- -- 1.0
--- --- ----- ----- ----------- ----------- ------
Balance, January 31, 1998....... 0.5 0.5 88.9 (3.1) 172.2 (18.1) 240.9
Net income.................... -- -- -- -- 13.6 -- 13.6
Exercise of stock options..... -- -- 2.7 -- -- -- 2.7
Tax benefit on options
exercised................... -- -- 1.7 -- -- -- 1.7
Issuance of restricted stock
awards...................... -- -- 1.3 (1.3) -- -- --
Cancellation of restricted
stock awards................ -- -- (0.9) 0.4 -- -- (0.5)
Amortization of restricted
stock awards................ -- -- -- 1.1 -- -- 1.1
Purchase of common stock...... -- -- -- -- -- (1.5) (1.5)
Issuance of treasury shares... -- -- 0.7 -- -- 0.3 1.0
--- --- ----- ----- ----------- ----------- ------
Balance, January 30, 1999..... $ 0.5 $ 0.5 $ 94.4 $ (2.9) $ 185.8 $ (19.3) $ 259.0
--- --- ----- ----- ----------- ----------- ------
--- --- ----- ----- ----------- ----------- ------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JO-ANN STORES, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric and
craft retailer with 1,058 retail stores in 49 states at January 30, 1999. The
1,034 traditional and 24 superstores feature a broad line of apparel, quilting
and craft fabrics and sewing-related products, home decorating fabrics, floral,
craft and seasonal products. Effective September 1, 1998, the Company changed
its name to Jo-Ann Stores, Inc. from Fabri-Centers of America, Inc.
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 1998 and fiscal 1997
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 1999 ended
January 30, 1999). Fiscal years generally consist of 52 weeks, with the
exception of fiscal 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 30, 1999 and January 31,
1998 are not materially different from their current cost.
PROPERTY AND EQUIPMENT
Depreciation and amortization 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, fixtures and equipment from 2 to 10
years; and leasehold improvements for 10 years or the remainder of the lease,
whichever is shorter.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization expense amounted to $25.4 million, $19.9
million and $18.9 million in fiscal 1999, 1998 and 1997, respectively.
Maintenance and repair expenditures are charged to expense as incurred and
improvements 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 No.
98-1") which requires companies to capitalize payroll and other internal costs
as well as any external costs related to software development. The Company
adopted SOP No. 98-1 in fiscal 1998, and the impact of adoption was not
material. The Company capitalized $12.3 million and $2.8 million in fiscal 1999
and fiscal 1998, respectively, for internal use software. The capitalized
amounts are included in property and equipment and are being amortized on a
straight-line basis over periods ranging from 2 to 5 years at the time the
software becomes operational.
GOODWILL
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible assets acquired from House of Fabrics, Inc.
Goodwill is amortized on a straight-line basis over 40 years. This amortization
is a non-deductible expense for tax purposes. The Company periodically reviews
the recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill from expected
future operating cash flows on an undiscounted basis. In management's opinion,
no material impairment exists on January 30, 1999. Amortization expense was $0.9
million for fiscal 1999.
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
30, 1999 or January 31, 1998.
FINANCIAL INSTRUMENTS
All financial instruments are considered to have a fair value which
approximates carrying value at January 30, 1999 and January 31, 1998, unless
otherwise specified. The Company has entered into interest rate swap agreements
to hedge against interest rate risk. The interest differentials from these swaps
are recorded as interest expense as incurred.
STORE OPENING EXPENSES
Store opening expenses are charged to operations as incurred.
ADVERTISING COSTS
The Company expenses production costs of advertising the first time the
advertising takes place. Advertising expense was $32.5 million, $24.4 million
and $20.3 million for fiscal 1999, 1998 and 1997, respectively.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting on Comprehensive Income."
This statement became effective for the Company in the first quarter of fiscal
1999. This statement establishes standards for reporting and display of
comprehensive income and its components. The Company currently has no items that
qualify as comprehensive income under the definitions of this statement, and the
presentation of previously reported results is not affected.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," was
issued. Based on the information utilized by the Company's operating decision
makers to manage the business, the Company currently has no segments which
require disclosure under the quantitative thresholds defined by the statement.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. The
statement must be adopted by the Company in fiscal 2000. Under provisions of
this statement, the Company will be required to record all derivatives on the
balance sheet at fair value and establish special accounting rules for the
different types of hedges. Implementation of this standard is not expected to
have a material impact on the Company's financial position or results of
operations.
NOTE 2--ACQUISITION OF HOUSE OF FABRICS, INC.
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 (the "Acquisition"). On April 21, 1998, the merger of HOF with a
wholly owned subsidiary of the Company was approved at a special meeting of the
shareholders of HOF. As a result, HOF became a wholly owned subsidiary of the
Company, and all 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 was approximately $97.1 million, including the
assumption of debt and other long-term liabilities aggregating $73.6 million.
The funds used to acquire HOF were provided by borrowings under the Credit
Facility.
HOF had annual revenues of approximately $240.0 million and operated 261
fabric and craft stores in 27 states at the time of the Acquisition. Of the 261
stores acquired, management identified 60 HOF stores and 30 Jo-Ann Fabrics and
Crafts stores for closing, due to the geographic overlap that existed between
the two companies. Certain HOF stores, identified for closing, were liquidated
with the assistance of an outside firm, and the Company actively settled leases
with landlords. The operations of the liquidated HOF stores have been excluded
from the Company's reported results of operations since the date of the
Acquisition. Operating results of the continuing HOF stores have been included
in our results of operations since the date of the Acquisition.
The Acquisition was recorded as a purchase business combination using
Accounting Principles Board Opinion No. 16, "Business Combinations."
Accordingly, the carrying values of HOF's net assets, including the
establishment of reserves for severance and costs associated with the HOF store
closings, have been adjusted to their estimated fair values. The excess of the
purchase price paid over the net
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 2--ACQUISITION OF HOUSE OF FABRICS, INC. (CONTINUED)
identifiable assets and liabilities totaled $38.1 million and is reported as
goodwill, which is being amortized on a straight-line basis over a 40-year life.
In accordance with Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)," the Company
recorded a non-recurring charge of $25.1 million during the first three quarters
of 1999 for direct and other merger-related costs pertaining to the Acquisition.
Following is a summary of the significant components of the non-recurring
charge (millions of dollars):
<TABLE>
<CAPTION>
CASH NON-CASH TOTAL
--------- ------------- ---------
<S> <C> <C> <C>
Write-downs of previously owned assets............................ $ -- $ 9.2 $ 9.2
Costs of operating duplicate corporate facilities................. 5.4 -- 5.4
Store remerchandising costs....................................... 5.1 -- 5.1
Rental costs on closed stores and other costs..................... 5.4 -- 5.4
--------- --- ---------
$ 15.9 $ 9.2 $ 25.1
--------- --- ---------
--------- --- ---------
</TABLE>
The integration events were completed by the end of the third quarter of
fiscal 1999. At the end of fiscal 1999, the Company had a remaining accrual of
$1.3 million for future rental obligations on the closed stores.
Other long-term liabilities include a $22.5 million income tax contingency
assumed in the Acquisition. Prior to the Acquisition, HOF received refunds
totaling $22.5 million pursuant to carrybacks of certain net operating losses on
claims filed for refund with the Internal Revenue Service ("IRS") on Forms 1139.
The claims for refund have been examined by the IRS, and a deficiency notice has
been issued. HOF had appealed the deficiency assessment. To the extent that the
Company prevails, in whole or in part, with respect to the appeal, goodwill and
cash payments to the IRS will be reduced.
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>
PRO FORMA
COMBINED
(UNAUDITED)
-----------
(MILLIONS
OF DOLLARS,
EXCEPT PER
SHARE DATA)
<S> <C>
Net sales........................................................ $ 1,209.2
Net income before extraordinary item............................. 25.2
Net income....................................................... 24.1
Net income per common share before extraordinary item:
Basic.......................................................... $ 1.37
Diluted........................................................ 1.27
Net income per common share:
Basic.......................................................... $ 1.31
Diluted........................................................ 1.21
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 2--ACQUISITION OF HOUSE OF FABRICS, INC. (CONTINUED)
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 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. The pro forma results presented do not include any impact on net
income of the non-recurring charge to integrate HOF.
NOTE 3--INCOME TAXES
The significant components of the income tax provision are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 1999 1998 1997
- ------------------------------------------------------- --------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ (1.2) $ 16.9 $ 14.6
State and local...................................... 1.4 2.3 1.5
--------- --------- ---------
0.2 19.2 16.1
Deferred............................................... 8.6 -- (1.3)
--------- --------- ---------
Income tax provision................................... $ 8.8 $ 19.2 $ 14.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of income tax at the statutory rate to the income tax
provision is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 1999 1998 1997
- ------------------------------------------------------- --------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Federal income tax at the statutory rate............... $ 7.8 $ 17.9 $ 13.8
Effect of:
State and local taxes................................ 0.9 1.5 1.0
Goodwill and other, net.............................. 0.1 (0.2) --
--------- --------- ---------
Income tax provision................................... $ 8.8 $ 19.2 $ 14.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 3--INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
ASSET/(LIABILITY)
--------------------
FISCAL YEAR 1999 1998
- ---------------------------------------------------------------------------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Current
Deferred tax assets:
Acquired tax assets....................................................... $ 11.5 $ --
Inventory items........................................................... 8.7 2.5
Employee benefits......................................................... 2.3 1.6
Lease obligations......................................................... 2.7 1.2
Other..................................................................... 3.4 0.6
--------- ---------
28.6 5.9
Deferred tax liabilities:
Basis difference in net assets acquired................................... (3.1) (6.5)
Non-income taxes.......................................................... (0.7) (0.7)
--------- ---------
(3.8) (7.2)
--------- ---------
Net current deferred tax asset (liability).................................. $ 24.8 $ (1.3)
--------- ---------
--------- ---------
Non-current
Deferred tax assets:
Unearned compensation..................................................... $ 0.2 $ 0.2
Other..................................................................... 0.8 0.3
--------- ---------
1.0 0.5
Deferred tax liabilities:
Depreciation.............................................................. (21.1) (14.0)
Basis difference in net assets acquired................................... (5.0) (0.6)
Other..................................................................... (0.1) (0.1)
--------- ---------
(26.2) (14.7)
--------- ---------
Net non-current deferred tax liability...................................... $ (25.2) $ (14.2)
--------- ---------
--------- ---------
</TABLE>
In connection with the purchase of HOF, the Company recorded certain tax
assets, of which approximately $11.5 million is still available as of January
30, 1999 to offset future years' tax payments. The Company did not record any
valuation allowances against deferred tax assets as of January 30, 1999 or
January 31, 1998.
NOTE 4--FINANCING
The Company has an unsecured $250.0 million five-year revolving credit
agreement (the "Credit Facility") that expires January 31, 2003. The Company may
borrow up to a maximum of $280.0 million by utilizing funds available under the
Credit Facility and other lines of credit. An amendment on March 4, 1998
increased the Credit Facility to $250.0 million from $200.0 million and included
a provision allowing the Company to acquire HOF as discussed in Note 2. The
Credit Facility was
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 3--INCOME TAXES (CONTINUED)
amended for the period of September 4, 1998 through November 30, 1998 to allow
the Company to increase its borrowing capacity up to a maximum of $315.0
million.
The Company's weighted average interest rate and weighted average borrowings
under the Credit Facility and other bank borrowings were 6.23 percent and $157.1
million during fiscal 1999, 6.00 percent and $49.0 million during fiscal 1998
and 6.33 percent and $83.1 million during fiscal 1997, respectively.
The weighted average interest rate under the Credit Facility and other bank
borrowings was 5.82 percent at January 30, 1999. 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.
On March 15, 1998, the Company entered into a five-year interest rate swap
agreement to hedge its interest rate exposure for a portion of the Credit
Facility. The notional amount of this interest rate swap agreement is $75.0
million, with a fixed LIBOR rate of 5.98 percent, reducing to $50.0 million on
March 15, 2001 for the remaining term of the agreement.
On June 30, 1997, the Company redeemed all of its outstanding 6 1/4%
Convertible Subordinated Debentures ("Debentures") due March 1, 2002 at a price
of 101.785 percent of principal. The holders of the Debentures 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 $57.0 million of
Debentures outstanding, $1.1 million were converted. The remaining $55.9 million
of Debentures were redeemed. The Company recorded an extraordinary loss, net of
taxes, of $1.1 million, or $0.06 per share, consisting of the redemption
premium, unamortized debenture issuance costs and other related expenses.
The Company is currently in the process of negotiating a new five-year
senior credit facility that will increase the total credit commitment, including
letters of credit and related acceptances, to $300.0 million, plus an additional
$30.0 million of outside bank lines. This will replace the existing Credit
Facility.
In addition, the Company expects to issue $150.0 million aggregate principal
amount of senior subordinated notes which will mature in 2009. It is anticipated
that these notes will be fully and unconditionally guaranteed by each of the
Company's restricted subsidiaries.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 3--INCOME TAXES (CONTINUED)
Summarized consolidating financial information of the Company (excluding its
subsidiaries) and the guarantor subsidiaries as of and for the year ended
January 30, 1999 is as follows:
<TABLE>
<CAPTION>
GUARANTOR
PARENT SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net sales................................................ $ 703.1 $ 539.8 $ 1,242.9
Gross profit............................................. 338.9 225.5 564.4
Operating profit......................................... 42.7 (7.8) 34.9
Net income............................................... 7.8 5.8 13.6
Current assets........................................... 223.5 266.6 490.1
Non-current assets....................................... 94.6 116.7 211.3
Intercompany receivable (payable)........................ 303.7 (303.7) --
Current liabilities...................................... 188.1 21.1 209.2
Non-current liabilities.................................. 197.5 35.7 233.2
</TABLE>
NOTE 5--CAPITAL STOCK
The following table details the common stock ($0.05 stated value) activity
for fiscal 1999 and fiscal 1998:
<TABLE>
<CAPTION>
COMMON SHARES
OUTSTANDING
NET OF TREASURY SHARES
---------------------- IN
CLASS A CLASS B TOTAL TREASURY
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Balance at February 1, 1997........................ 9,021,157 8,899,484 17,920,641 2,279,161
Exercise of stock options........................ 299,134 371,664 670,798 --
Issuance of restricted stock awards.............. 132,500 -- 132,500 --
Cancellation of restricted stock awards.......... (30,000) (10,000) (40,000) --
Purchase of common stock......................... (423) (575) (998) 998
Issuance of treasury shares...................... 19,485 20,111 39,596 (39,596)
Issuance of common stock upon conversion of
debentures..................................... 22,062 22,062 44,124 --
---------- ---------- ---------------- ----------
Balance at January 31, 1998........................ 9,463,915 9,302,746 18,766,661 2,240,563
Exercise of stock options........................ 131,541 149,864 281,405 --
Issuance of restricted stock awards.............. 11,500 47,500 59,000 --
Cancellation of restricted stock awards.......... (60,000) (3,500) (63,500) --
Purchase of common stock......................... (40,233) (42,268) (82,501) 82,501
Issuance of treasury shares...................... 23,607 26,902 50,509 (50,509)
---------- ---------- ---------------- ----------
Balance at January 30, 1999........................ 9,530,330 9,481,244 19,011,574 2,272,555
---------- ---------- ---------------- ----------
---------- ---------- ---------------- ----------
</TABLE>
The Company's Class A Common Shares have voting rights while Class B Common
Shares have no voting rights. At January 30, 1999 and January 31, 1998, there
were 75,000,000 Class A Common Shares and 75,000,000 Class B Common Shares
authorized for issuance. At January 30, 1999 and January 31, 1998, there were
5,000,000 shares of serial preferred stock, without par value, authorized for
issuance, none of which are outstanding.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JO-ANN STORES, INC.
NOTE 5--CAPITAL STOCK (CONTINUED)
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 November 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.
RIGHT TO ACQUIRE SHARES
The Company is a party to an agreement with certain members of the two
founding families of the Company, whereby the Company has a right of first
refusal to acquire, at market prices, common shares disposed of by either of the
families. The total number of both Class A and Class B Common Shares owned by
the families, subject to this agreement, was approximately 2.8 million as of
January 30, 1999.
NOTE 6--EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per 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
Debentures on the first day of fiscal 1998 and 1997.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 6--EARNINGS PER SHARE (CONTINUED)
The following table presents information necessary to calculate basic and
diluted earnings per common share for the fiscal years presented:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 1999 1998 1997
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Basic earnings per common share:
Net income before extraordinary item.................................... $ 13.6 $ 31.9 $ 24.6
Extraordinary item...................................................... -- (1.1) --
------------ ------------ ------------
Net income.............................................................. $ 13.6 $ 30.8 $ 24.6
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding..................................... 18,964,082 18,393,827 17,930,367
------------ ------------ ------------
------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE:
Net income before extraordinary item.................................... $ 13.6 $ 31.9 $ 24.6
Debenture interest, net of tax.......................................... -- 0.9 2.2
------------ ------------ ------------
Net income before extraordinary item and debenture interest............. 13.6 32.8 26.8
Extraordinary item...................................................... -- (1.1) --
------------ ------------ ------------
Net income before debenture interest.................................... $ 13.6 $ 31.7 $ 26.8
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding..................................... 18,964,082 18,393,827 17,930,367
Incremental shares from assumed exercise of stock options............... 939,517 1,223,985 947,749
Incremental shares from assumed conversion of debentures................ -- 974,068 2,337,764
------------ ------------ ------------
19,903,599 20,591,880 21,215,880
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 7--STOCK-BASED COMPENSATION PLANS
1998 INCENTIVE COMPENSATION PLAN
During fiscal 1999, the shareholders approved the 1998 Incentive
Compensation Plan (the "1998 Plan"). The 1998 Plan includes a stock options
program, a restricted stock program and an employee stock purchase program. The
employee stock purchase program meets the requirements of Section 423 of the
Internal Revenue Code of 1986. Shares subject to awards under the 1998 Plan may
be Class A or Class B shares. The total number of shares subject to awards,
other than those granted under the employee stock purchase program, are limited
in any fiscal year to (1) four percent of the number of shares outstanding at
the beginning of the fiscal year, plus (2) for each of the two prior fiscal
years, the excess of four percent of the number of shares outstanding at the
beginning of each such fiscal year over the number of shares subject to awards
actually granted in each such fiscal year.
The stock options granted under the 1998 Plan 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. During fiscal 1999, 750,666 shares were available to be
issued as awards under the stock option and restricted stock programs. 431,600
non-qualified stock options and 57,500 restricted shares, net of cancellations,
were issued during fiscal 1999, with 261,566 shares available to be carried over
to fiscal 2000.
The vesting periods for the restricted shares granted under the 1998 Plan
are up to five years with all rights to such restricted stock terminating
without any payment of consideration by the Company
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 7--STOCK-BASED COMPENSATION PLANS (CONTINUED)
unless the grantee remains in the continuous employment of the Company
throughout the vesting period. Unearned compensation resulting from the issuance
of restricted shares is being amortized over the vesting periods, and the
unamortized portion has been reflected as a reduction of shareholders' equity.
During fiscal 1999, under the 1998 Plan, 11,500 Class A and 47,500 Class B
restricted shares were granted at weighted average market values of $21.92 and
$22.82, respectively.
With respect to the employee stock purchase program, the total number of
shares subject to stock purchase rights granted in any fiscal year may not
exceed 1,000,000 shares. No stock purchase rights were granted during fiscal
1999.
DIRECTORS PLAN
Under the 1996 Stock Option Plan for Non-Employee Directors (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 71,500 Class A Shares and
71,500 Class B Shares authorized for future option grants under the Directors
Plan at January 30, 1999.
OTHER PLANS
Nonqualified stock options have been granted to certain officers and key
employees under the 1998 Plan and the 1990 Employee Stock Option and Stock
Appreciation Rights Plan (the "1990 Plan") at prices not less than fair market
value of the common stock at the date of grant. The 1990 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. Vesting and
expiration periods are identical to options issued under the 1998 Plan. There
are 852,771 Class A Shares authorized for future option and stock appreciation
right grants under the 1990 Plan at January 30, 1999.
Restricted shares of the Company's common stock have been awarded to
executive officers, senior management and other key employees under the 1998
Plan and the 1994 Executive Incentive Plan (the "Executive Plan"). At January
30, 1999, 168,500 Class A and 49,000 Class B restricted shares were outstanding
under the Executive Plan and 331,500 Class A and 451,000 Class B Common Shares
are available for future awards. During fiscal 1998, under the Executive Plan,
132,500 Class A restricted shares were granted at a weighted average market
value of $20.96 and 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.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options granted under the 1998 Plan, the 1990 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 Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation,"
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 7--STOCK-BASED COMPENSATION PLANS (CONTINUED)
the Company's net income and earnings per share would have been reduced to the
pro forma amounts shown in the table below (millions of dollars, except per
share data):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 1999 1998 1997
- --------------------------------------------- ------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income................................... $ 13.6 $ 12.0 $ 30.8 $ 29.8 $ 24.6 $ 23.9
Net income per common share:
Basic...................................... $ 0.72 $ 0.63 $ 1.68 $ 1.62 $ 1.37 $ 1.33
Diluted.................................... 0.69 0.61 1.54 1.46 1.26 1.24
</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.
For purposes of computing the pro forma disclosures above, the fair values
of the options granted under the Plans 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
5.3 to 6.3 percent for Class A and 4.6 to 6.3 percent for Class B, expected
volatility ranging from 34.5 to 38.9 percent for Class A and 31.7 to 34.6
percent for Class B, expected lives ranging from 2.9 to 5.8 years for Class A
and 3.3 to 6.5 years for Class B and no expected dividends for either class of
shares.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 7--STOCK-BASED COMPENSATION PLANS (CONTINUED)
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 CLASS A
NUMBER OF EXERCISE NUMBER OF EXERCISE AND CLASS
OPTIONS PRICES OPTIONS PRICES B OPTIONS
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at January 27, 1996.......... 1,348,455 $ 9.10 1,712,191 $ 9.50 3,060,646
Granted................................ 81,500 14.62 345,100 14.73 426,600
Exercised.............................. (144,732) 4.34 (140,832) 4.90 (285,564)
Canceled............................... (78,744) 10.87 (105,356) 10.92 (184,100)
--------- --------- ---------
Outstanding at February 1, 1997.......... 1,206,479 9.70 1,811,103 10.66 3,017,582
Granted................................ 58,000 21.43 487,750 20.33 545,750
Exercised.............................. (299,134) 7.36 (371,664) 7.92 (670,798)
Canceled............................... (86,325) 12.65 (181,677) 12.73 (268,002)
--------- --------- ---------
Outstanding at January 31, 1998.......... 879,020 10.98 1,745,512 13.73 2,624,532
Granted................................ 13,650 25.82 459,500 15.94 473,150
Exercised.............................. (131,541) 9.28 (149,864) 9.74 (281,405)
Canceled............................... (10,550) 9.52 (65,551) 15.18 (76,101)
--------- --------- ---------
Outstanding at January 30, 1999.......... 750,579 $ 11.57 1,989,597 $ 14.49 2,740,176
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
Exercisable at:
January 30, 1999....................... 652,554 $ 10.52 1,010,720 $ 11.90 1,663,274
January 31, 1998....................... 703,120 10.02 892,862 10.53 1,595,982
February 1, 1997....................... 914,854 9.40 1,011,400 9.49 1,926,254
Weighted average fair value of options
granted during fiscal:
1999................................... $ 10.38 $ 6.20
1998................................... 8.22 8.05
1997................................... 5.45 5.58
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 7--STOCK-BASED COMPENSATION PLANS (CONTINUED)
The following table summarizes the status of stock options outstanding and
exercisable at January 30, 1999:
<TABLE>
<CAPTION>
CLASS A OPTIONS
CLASS A OPTIONS OUTSTANDING
- ------------------------------------------------------------ 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>
372,854 $ 2.38 to $ 8.56 $ 6.86 3.1 years 372,754 $ 6.86
357,225 $ 8.57 to $21.94 $ 15.70 1.9 years 277,300 $ 15.33
20,500 $21.95 to $29.06 $ 25.21 6.3 years 2,500 $ 23.44
- ----------- ----------
750,579 $2.38 to $29.06 $ 11.57 2.6 years 652,554 $ 10.52
- ----------- ----------
- ----------- ----------
<CAPTION>
CLASS B OPTIONS
CLASS B OPTIONS OUTSTANDING
- ------------------------------------------------------------ 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>
201,744 $ 2.38 to $ 7.58 $ 6.08 1.9 years 201,744 $ 6.08
1,117,803 $ 7.59 to $17.68 $ 12.37 7.1 years 566,143 $ 10.58
670,050 $17.69 to $26.66 $ 20.57 4.2 years 242,833 $ 19.82
- ----------- ----------
1,989,597 $ 2.38 to $26.66 $ 14.49 5.6 years 1,010,720 $ 11.90
- ----------- ----------
- ----------- ----------
</TABLE>
NOTE 8--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 common stock, up
to a maximum employee contribution of 4 percent of the employee's annual
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
1999, 1998 and 1997 was $1.0 million, $0.8 million and $0.9 million,
respectively. Plan assets included 429,108 shares of Class A Common Stock and
252,945 shares of Class B Common Stock at January 31, 1999. The Company does not
provide postretirement health care benefits for its employees.
NOTE 9--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.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 9--LEASES (CONTINUED)
The following is a schedule of future minimum rental payments under
non-cancelable operating leases:
<TABLE>
<CAPTION>
MINIMUM
FISCAL YEARS ENDED RENTALS
- ------------------------------------------------------------------------------------------------------- -----------
<S> <C>
(MILLIONS OF DOLLARS)
2000................................................................................................... $ 101.4
2001................................................................................................... 95.2
2002................................................................................................... 85.6
2003................................................................................................... 67.5
2004................................................................................................... 48.3
Thereafter............................................................................................. 183.9
-----------
$ 581.9
-----------
-----------
</TABLE>
Rent expense was as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 1999 1998 1997
- --------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
(MILLIONS OF DOLLARS)
Minimum rentals........................................................................ $ 103.4 $ 78.6 $ 73.7
Contingent rentals..................................................................... 1.8 1.8 1.4
Sublease rentals....................................................................... (2.8) (2.0) (1.9)
--------- --------- ---------
$ 102.4 $ 78.4 $ 73.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JO-ANN STORES, INC.
NOTE 10--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized below are the unaudited results of operations by quarter for
fiscal 1999 and 1998:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1999 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
Net sales.................................................................. $ 252.9 $ 251.6 $ 319.7 $ 418.7
Gross profit............................................................... 116.1 114.3 152.2 181.8
Net income (loss).......................................................... (4.4) (6.5) 3.4 21.1
Net income (loss) per common share:
Basic.................................................................... $ (0.23) $ (0.34) $ 0.18 $ 1.11
Diluted.................................................................. (0.23) (0.34) 0.17 1.08
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1998 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
Net sales.................................................................. $ 218.8 $ 197.5 $ 247.2 $ 311.5
Gross profit............................................................... 96.1 88.3 114.6 142.8
Net income (loss) before extraordinary item................................ 2.6 (1.0) 9.3 21.0
Extraordinary item, loss related to early retirement of debt, net of tax
benefit of $0.7 million.................................................. -- (1.1) -- --
----------- ----------- ----------- -----------
Net income (loss).......................................................... $ 2.6 $ (2.1) $ 9.3 $ 21.0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per common share before extraordinary item:
Basic.................................................................... $ 0.14 $ (0.05) $ 0.50 $ 1.13
Diluted.................................................................. 0.14 (0.05) 0.47 1.07
Extraordinary item:
Basic.................................................................... $ -- $ (0.06) $ -- $ --
Diluted.................................................................. -- (0.06) -- --
Net income (loss) per common share:
Basic.................................................................... $ 0.14 $ (0.12) $ 0.50 $ 1.13
Diluted.................................................................. 0.14 (0.12) 0.47 1.07
</TABLE>
F-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Ohio law, Ohio corporations are authorized to indemnify directors,
officers, employees, and agents within prescribed limits and must indemnify them
under certain circumstances. Ohio law does not provide statutory authorization
for a corporation to indemnify directors, officers, employees, and agents for
settlements, fines, or judgments in the context of derivative suits. However, it
provides that directors (but not officers, employees, and agents) are entitled
to mandatory advancement of expenses, including attorneys' fees, incurred in
defending any action, including derivative actions, brought against the
director, provided the director agrees to cooperate with the corporation
concerning the matter and to repay the amount advanced if it is proved by clear
and convincing evidence that his act or failure to act was done with deliberate
intent to cause injury to the corporation or with reckless disregard for the
corporation's best interests.
Ohio law does not authorize payment of judgments to a director, officer,
employee, or agent after a finding of negligence or misconduct in a derivative
suit absent a court order. Indemnification is required, however, to the extent
such person succeeds on the merits. In all other cases, if a director, officer,
employee, or agent acting in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation,
indemnification is discretionary except as otherwise provided by a corporation's
articles, code of regulations, or by contract except with respect to the
advancement of expenses of directors.
Under Ohio law, a director is not liable for monetary damages unless it is
proved by clear and convincing evidence that his action or failure to act was
undertaken with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation. There is, however,
no comparable provision limiting the liability of officers, employees, or agents
of a corporation. The statutory right to indemnification is not exclusive in
Ohio, and Ohio corporations may, among other things, procure insurance for such
persons.
Jo-Ann's Code of Regulations, as amended, provides that Jo-Ann shall
indemnify, subject to certain limitations, any person (and the heirs, executors
and administrators of each such person) made or threatened to be made a party to
any action, suit, proceeding or claim by reason of the fact that he is or was a
director or officer of Jo-Ann or of another corporation for which he was serving
as a director or officer at the request of Jo-Ann for all expenses and
liabilities incurred by him in connection with the defense of any such action,
suit or proceeding or claim.
Under a directors' and officers' liability insurance policy, directors and
officers of Jo-Ann are insured against certain liabilities, including certain
liabilities under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1(a) Amended Articles of Incorporation of Fabri-Centers of America, Inc. (filed as an Exhibit to the
Registrant's Form 10-Q filed with the Commission on September 11, 1995 and incorporated herein by
reference)
3.1(b) Certificate of Amendment to the Amended Articles of Incorporation of Fabri-Centers of America, Inc.
(filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on April 16, 1999 and
incorporated herein by reference)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.2 Regulations of Jo-Ann Stores, Inc., as amended (filed as an Exhibit to the Registrant's Form 8-K filed
with the Commission on December 1, 1993 and incorporated herein by reference)
4.1 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
(filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on September 11, 1995 and
incorporated herein by reference)
4.2 Indenture between the Registrant and FCA Financial, Inc., Fabri-Centers of South Dakota, Inc.,
Fabri-Centers of California, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., as guarantors, and
Harris Trust and Savings Bank, as trustee relating to the 10 3/8% Senior Subordinated Notes due 2007**
4.3 Form of Certificate of the 10 3/8% Senior Subordinated Notes due 2007
4.4 Registration Rights Agreement among the Registrant, FCA Financial, Inc., Fabri-Centers of South Dakota,
Inc., Fabri-Centers of California, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., and Banc One Capital Markets, Inc.
relating to the 10 3/8% Senior Subordinated Notes due 2007**
5.1 Opinion and consent of Thompson Hine & Flory LLP as to legality of the 10 3/8% Senior Subordinated
Notes due 2007**
10.1 Form of Split Dollar Life Insurance Agreement between the Registrant and certain of its officers (filed
as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and
incorporated herein by reference)*
10.2 Split Dollar Life Insurance Agreement and Assignment between the Registrant and Alma Zimmerman dated
September 22, 1984 (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on
December 1, 1993 and incorporated herein by reference)*
10.3 Split Dollar Life Insurance Agreements and Assignments between the Registrant and Betty Rosskamm dated
October 19, 1984 (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on
December 1, 1993 and incorporated herein by reference)*
10.4 Fabri-Centers of America, Inc. 1979 Supplemental Retirement Benefit Plan as amended (filed as an
Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated
herein by reference)*
10.5 Fabri-Centers of America, Inc. Executive Incentive Plan dated March 19, 1980, as amended (filed as an
Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated
herein by reference)*
10.6 Form of Employment Agreement between the Registrant and certain Executive Officers (filed as an Exhibit
to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by
reference)*
10.7 Fabri-Centers of America, Inc. 1990 Employees Stock Option and Stock Appreciation Rights Plan, as
amended (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993
and incorporated herein by reference)*
10.8 Fabri-Centers of America, Inc. 1996 Stock Option Plan for Non-Employee Directors (filed as Exhibit A to
the Registrant's Definitive Proxy Statement filed with the Commission on Schedule 14A on May 11, 1996
and incorporated herein by reference)*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.9 House of Fabrics, Inc. Non-Standardized 401(k) Plan (filed as Exhibit 10 to House of Fabrics, Inc.'s
(commission file number 1-7927) Form 10-K filed with the Commission on May 1, 1997 and incorporated
herein by reference)*
10.10 Fabri-Centers of America, Inc. 1998 Incentive Compensation Plan (filed as Exhibit A to the Registrant's
Definitive Proxy Statement filed with the Commission on Schedule 14A on May 8, 1998 and incorporated
herein by reference)*
10.11 Amended and Restated Agreement dated September 26, 1997 among Fabri-Centers of America, Inc., Betty
Rosskamm and Justin Zimmerman and Alma Zimmerman (filed as an Exhibit to the Registrant's Form 10-K
filed with the Commission on April 16, 1999 and incorporated herein by reference)
10.12 Credit Agreement dated as of May 5, 1999 among the Registrant, as borrower, the Lending Institutions
named therein, as Lenders, The First National Bank of Chicago, as Documentation Agent, Comerica Bank
and National City Bank, as Co-Agents, and KeyBank National Association, as a Lender, the Swing Line
Lender, the Issuing Bank and as Administrative Agent**
12 Computation of ratio of earnings to fixed charges**
21 Subsidiaries of Jo-Ann Stores, Inc. (filed as an Exhibit to the Registrant's Form 10-K filed with the
Commission on April 16, 1999 and incorporated herein by reference)
23.1 Consent of Thompson Hine & Flory LLP (included in Exhibit 5.1)
23.2 Consent of Independent Public Accountants
24 Power of Attorney**
25 Form T-1 Statement of Eligibility of Harris Trust and Savings Bank to act as trustee under the
Indenture**
</TABLE>
- ------------------------
* Indicates that the exhibit is a management contract or compensatory plan or
arrangement.
** Previously filed.
(b) Financial Statement Schedules
Schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(c) Not applicable.
ITEM 22. UNDERTAKINGS
(a) (1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(2) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where
II-3
<PAGE>
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a trustee, director, officer or
controlling person of the Registrants in the successful defense of any action,
suit or proceeding) is asserted by such trustee, director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment no. 1 to registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Hudson, State of
Ohio, on the 20th day of July, 1999.
JO-ANN STORES, INC.
By: /s/ ALAN ROSSKAMM
-----------------------------------------
Alan Rosskamm
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
--------------------------------------- -------------------------------------------------- ---------------
<S> <C> <C> <C>
By: /s/ ALAN ROSSKAMM
------------------------------- Chairman of the Board, Chief Executive Officer and July 20, 1999
Alan Rosskamm Director (Principal Executive Officer)
By: /s/ BRIAN P. CARNEY* Executive Vice President and Chief Financial
------------------------------- Officer (Principal Financial and Accounting July 20, 1999
Brian P. Carney Officer
By: /s/ BETTY ROSSKAMM*
------------------------------- Director July 20, 1999
Betty Rosskamm
By: /s/ ALMA ZIMMERMAN*
------------------------------- Director July 20, 1999
Alma Zimmerman
By: /s/ SCOTT COWEN*
------------------------------- Director July 20, 1999
Scott Cowen
By: /s/ FRANK NEWMAN*
------------------------------- Director July 20, 1999
Frank Newman
By: /s/ IRA GUMBERG*
------------------------------- Director July 20, 1999
Ira Gumberg
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
--------------------------------------- -------------------------------------------------- ---------------
<S> <C> <C> <C>
By: /s/ GREGG SEARLE*
------------------------------- Director July 20, 1999
Gregg Searle
By: /s/ DEBRA WALKER*
------------------------------- Director July 20, 1999
Debra Walker
</TABLE>
The undersigned, by signing his name hereto, does hereby sign this amendment no.
1 to registration statement on behalf of the above-named officers and directors
of Jo-Ann Stores, Inc., pursuant to powers of attorney executed on behalf of
each of such officers and directors.
<TABLE>
<S> <C> <C> <C>
*By: /s/ ALAN ROSSKAMM
-------------------------
Alan Rosskamm
ATTORNEY-IN-FACT FOR THE July 20, 1999
OFFICERS AND DIRECTORS
SIGNING IN THE CAPACITIES
INDICATED
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1(a) Amended Articles of Incorporation of Fabri-Centers of America, Inc. (filed as an Exhibit to the
Registrant's Form 10-Q filed with the Commission on September 11, 1995 and incorporated herein by
reference)
3.1(b) Certificate of Amendment to the Amended Articles of Incorporation of Fabri-Centers of America, Inc.
(filed as an Exhibit to the Registrant's Form 10-K filed with the Commission on April 16, 1999 and
incorporated herein by reference)
3.2 Regulations of Jo-Ann Stores, Inc., as amended (filed as an Exhibit to the Registrant's Form 8-K filed
with the Commission on December 1, 1993 and incorporated herein by reference)
4.1 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
(filed as an Exhibit to the Registrant's Form 10-Q filed with the Commission on September 11, 1995 and
incorporated herein by reference)
4.2 Indenture between the Registrant and FCA Financial, Inc., Fabri-Centers of South Dakota, Inc.,
Fabri-Centers of California, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., as guarantors, and
Harris Trust and Savings Bank, as trustee relating to the 10 3/8% Senior Subordinated Notes due 2007*
4.3 Form of Certificate of the 10 3/8% Senior Subordinated Notes due 2007
4.4 Registration Rights Agreement among the Registrant, FCA Financial, Inc., Fabri-Centers of South Dakota,
Inc., Fabri-Centers of California, Inc., FCA of Ohio, Inc., and House of Fabrics, Inc., and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., and Banc One Capital Markets, Inc.
relating to the 10 3/8% Senior Subordinated Notes due 2007*
5.1 Opinion and consent of Thompson Hine & Flory LLP as to legality of the 10 3/8% Senior Subordinated
Notes due 2007*
10.1 Form of Split Dollar Life Insurance Agreement between the Registrant and certain of its officers (filed
as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and
incorporated herein by reference)
10.2 Split Dollar Life Insurance Agreement and Assignment between the Registrant and Alma Zimmerman dated
September 22, 1984 (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on
December 1, 1993 and incorporated herein by reference)
10.3 Split Dollar Life Insurance Agreements and Assignments between the Registrant and Betty Rosskamm dated
October 19, 1984 (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on
December 1, 1993 and incorporated herein by reference)
10.4 Fabri-Centers of America, Inc. 1979 Supplemental Retirement Benefit Plan as amended (filed as an
Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated
herein by reference)
10.5 Fabri-Centers of America, Inc. Executive Incentive Plan dated March 19, 1980, as amended (filed as an
Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated
herein by reference)
10.6 Form of Employment Agreement between the Registrant and certain Executive Officers (filed as an Exhibit
to the Registrant's Form 8-K filed with the Commission on December 1, 1993 and incorporated herein by
reference)
10.7 Fabri-Centers of America, Inc. 1990 Employees Stock Option and Stock Appreciation Rights Plan, as
amended (filed as an Exhibit to the Registrant's Form 8-K filed with the Commission on December 1, 1993
and incorporated herein by reference)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.8 Fabri-Centers of America, Inc. 1996 Stock Option Plan for Non-Employee Directors (filed as Exhibit A to
the Registrant's Definitive Proxy Statement filed with the Commission on Schedule 14A on May 11, 1996
and incorporated herein by reference)
10.9 House of Fabrics, Inc. Non-Standardized 401(k) Plan (filed as Exhibit 10 to House of Fabrics, Inc.'s
(commission file number 1-7927) Form 10-K filed with the Commission on May 1, 1997 and incorporated
herein by reference)
10.10 Fabri-Centers of America, Inc. 1998 Incentive Compensation Plan (filed as Exhibit A to the Registrant's
Definitive Proxy Statement filed with the Commission on Schedule 14A on May 8, 1998 and incorporated
herein by reference)
10.11 Amended and Restated Agreement dated September 26, 1997 among Fabri-Centers of America, Inc., Betty
Rosskamm and Justin Zimmerman and Alma Zimmerman (filed as an Exhibit to the Registrant's Form 10-K
filed with the Commission on April 16, 1999 and incorporated herein by reference)
10.12 Credit Agreement dated as of May 5, 1999 among the Registrant, as borrower, the Lending Institutions
named therein, as Lenders, The First National Bank of Chicago, as Documentation Agent, Comerica Bank
and National City Bank, as Co-Agents, and KeyBank National Association, as a Lender, the Swing Line
Lender, the Issuing Bank and as Administrative Agent*
12 Computation of ratio of earnings to fixed charges*
21 Subsidiaries of Jo-Ann Stores, Inc. (filed as an Exhibit to the Registrant's Form 10-K filed with the
Commission on April 16, 1999 and incorporated herein by reference)
23.1 Consent of Thompson Hine & Flory LLP (included in Exhibit 5.1)
23.2 Consent of Independent Public Accountants
24 Power of Attorney*
25 Form T-1 Statement of Eligibility of Harris Trust and Savings Bank to act as trustee under the
Indenture*
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR
DEPOSITARY. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED
TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO.
OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND
TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE
& CO., HAS AN INTEREST HEREIN.
<PAGE>
JO-ANN STORES, INC.
------------------
10 3/8 % SENIOR SUBORDINATED NOTE DUE 2007, SERIES B
CUSIP NO. 47758PAB5
No. 1 $149,500,000
------
Jo-Ann Stores, Inc., an Ohio corporation (herein called the "Company,"
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to Cede & Co. or
registered assigns, the principal sum of $149,500,000 United States dollars on
May 1, 2007, at the office or agency of the Company referred to below, and to
pay interest thereon from May 5, 1999, or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, semiannually on May 1
and November 1 in each year, commencing November 1, 1999 at the rate of 10 3/8 %
per annum, subject to adjustments as described in the second following
paragraph, in United States dollars, until the principal hereof is paid or duly
provided for. Interest shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Payment of the principal of, premium, if any, and interest on, this
Security, and exchange or transfer of the Security, will be made at the office
or agency of the Company in The City of New York maintained for that purpose
(which initially will be a corporate trust office of an affiliate of the
Trustee, Harris Trust Company of New York, located at 88 Pine Street, New York,
New York 10005), or at such other office or agency as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; PROVIDED,
HOWEVER, that payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as such address shall
appear on the Security Register.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
2
<PAGE>
This Security is entitled to the benefits of the Guarantees by the
Guarantors of the punctual payment when due and performance of the Indenture
Obligations made in favor of the Trustee for the benefit of the Holders.
Reference is made to Article Fourteen of the Indenture for a statement of the
respective rights, limitations of rights, duties and obligations under the
Guarantees of the Guarantors.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Security shall not be entitled to any benefit under the Indenture,
or be valid or obligatory for any purpose.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers.
JO-ANN STORES, INC.
By:
------------------------------------
Name: Alan Rosskamm
Title: Chairman of the Board, President
and Chief Executive Officer
Attest:
- ------------------------------------
Name: Brian P. Carney
Title: Executive Vice President and
Chief Financial Officer
4
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 10 3/8 % Senior Subordinated Notes due 2007, Series B
referred to in the within-mentioned Indenture.
HARRIS TRUST AND SAVINGS BANK, as Trustee
By:
------------------------------------
Name:
Title:
Dated:
5
<PAGE>
JO-ANN STORES, INC.
10 3/8 % Senior Subordinated Note due 2007, Series B
This Security is one of a duly authorized issue of Securities of the
Company designated as its 10 3/8 % Senior Subordinated Notes due 2007, Series B
(herein called the "Securities"), limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $150,000,000,
issued under and subject to the terms of an indenture (herein called the
"Indenture") dated as of May 5, 1999, among the Company, the Guarantors and
Harris Trust and Savings Bank, as trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Guarantors, the Trustee and the Holders of the
Securities, and of the terms upon which the Securities are, and are to be,
authenticated and delivered.
The Securities are subject to redemption at any time on or after
May 1, 2003, at the option of the Company, in whole or in part, on not less than
30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral
multiple thereof, at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning May 1
of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -----------
<S> <C>
2003 . . . . . . . . 105.188%
2004 . . . . . . . . 102.594%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
6
<PAGE>
In addition, at any time on or prior to May 1, 2002, the Company, at
its option, may use the net proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 35% of the aggregate principal amount of Securities
originally issued under the Indenture at a redemption price equal to 110.375% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the Redemption Date; provided that at least 65% of the
initial aggregate principal amount of Securities remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 30 days
after the closing of the related Public Equity Offering and must consummate such
redemption within 60 days of the closing of the Public Equity Offering.
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities or portions thereof to be redeemed in compliance
with the requirements of the principal national securities exchange, if any, on
which the Securities are listed, or if the Securities are not so listed, pro
rata, by lot or by any other method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, each Holder may require
the Company to purchase such Holder's Securities in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, pursuant to a Change of Control Offer in accordance with the
procedures set forth in the Indenture.
Under certain circumstances, if all or a portion of the Net Cash
Proceeds received by the Company from any Asset Sale are not required to be
applied to repay permanently any Senior Indebtedness or any Senior Guarantor
Indebtedness, or if the Company determines not to apply such Net Cash Proceeds
to the permanent prepayment of such Senior Indebtedness or Senior Guarantor
Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness
is then outstanding, and if the Company has not invested such Net Cash Proceeds
in properties and assets that replace the properties and assets that were the
subject of the Asset Sale or in properties and assets which will be used in the
businesses of the Company or its Restricted Subsidiaries existing on the date of
the Indenture or in businesses reasonably related thereto and such Net Cash
Proceeds not used or invested exceeds a specified amount, the Company will be
required to apply such proceeds to the repayment of the Securities and certain
Indebtedness ranking PARI PASSU in right of payment to the Securities.
7
<PAGE>
In the case of any redemption or repurchase of Securities in
accordance with the Indenture, interest installments whose Stated Maturity is on
or prior to the Redemption Date will be payable to the Holders of such
Securities of record as of the close of business on the relevant Regular Record
Date or Special Record Date referred to on the face hereof. Securities (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
In the event of redemption or repurchase of this Security in
accordance with the Indenture in part only, a new Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal
amount of all the Securities may be declared due and payable in the manner and
with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time of
(a) the entire Indebtedness on the Securities and (b) certain restrictive
covenants and related Defaults and Events of Default, in each case upon
compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders, certain amendments
which require the consent of Holders of 66 2/3% of the outstanding principal
amount of the Securities and certain amendments which require the consent of
all the Holders) as therein provided, the amendment thereof and the
modification of the rights and obligations of the Company and the Guarantors
and the rights of the Holders under the Indenture and the Securities and the
Guarantees at any time by the Company and the Trustee with the consent of the
Holders of at least a majority in aggregate principal amount of the
Securities at the time Outstanding. The Indenture also contains provisions
permitting the Holders of at least a majority in aggregate principal amount
of the Securities (Holders of 66 2/3% in aggregate principal amount of the
Securities or 100% of the Holders in certain circumstances) at the time
Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company and the Guarantors with certain provisions of the
Indenture and the Securities and the Guarantees and certain past Defaults
under the Indenture and the Securities and the Guarantees and their
consequences. Any such consent or waiver by or on behalf of the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the
registration of transfer
8
<PAGE>
hereof or in exchange herefor or in lieu hereof whether or not notation of
such consent or waiver is made upon this Security.
The Securities are, to the extent and manner provided in Article
Thirteen of the Indenture, subordinated and subject in right of payment to the
prior payment in full of all Senior Indebtedness.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Securities (in the event such Guarantor or
such other obligor is obligated to make payments in respect of the Securities),
which is absolute and unconditional, to pay the principal of, premium, if any,
and interest on, this Security at the times, place, and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Security Registrar duly executed by,
the Holder hereof or its attorney duly authorized in writing, and thereupon one
or more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
Certificated securities shall be transferred to all beneficial holders
in exchange for their beneficial interests in the Global Securities if (i) such
Depositary (A) has notified the Company that it is unwilling or unable to
continue as Depositary for such Global Security or (B) has ceased to be a
clearing agency registered as such under the Exchange Act, and in either case
the Company fails to appoint a successor Depositary within 90 days, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Securities in certificated form or (iii) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default with respect to such
Global Security. Upon any such issuance, the Trustee is required to register
such certificated Series B Securities in the name of, and cause the same to be
delivered to, such Person or Persons (or the nominee of any thereof).
9
<PAGE>
Series B Securities in certificated form are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series B Securities are exchangeable for a
like aggregate principal amount of Securities of a differing authorized
denomination, as requested by the Holder surrendering the same.
At any time when the Company is not subject to Sections 13 or 15(d) of
the Exchange Act, upon the written request of a Holder of a Series B Security,
the Company will promptly furnish or cause to be furnished such information as
is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any
successor provision thereto) to such Holder or to a prospective purchaser of
such Series B Security who such Holder informs the Company is reasonably
believed to be a "Qualified Institutional Buyer" within the meaning of Rule 144A
under the Securities Act, as the case may be, in order to permit compliance by
such Holder with Rule 144A under the Securities Act.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, any Guarantor, the Trustee and any agent of the Company,
any Guarantor or the Trustee may treat the Person in whose name this Security is
registered as the owner hereof for all purposes, whether or not this Security is
overdue, and neither the Company, any Guarantor, the Trustee nor any such agent
shall be affected by notice to the contrary.
THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES THEREOF.
All terms used in this Security which are defined in the Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Indenture.
10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1012 or Section 1015, as applicable, of the Indenture, check the Box:
[ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 1012 or Section 1015 as applicable, of the
Indenture, state the amount (in original principal amount):
$ .
-------------------
Date: Your Signature:
--------------------------- -------------------
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:
------------------------------------------
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
11
<PAGE>
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- -----------------------------------
- -------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)
- -------------------------------------------------------------------------------
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing
- -------------------------------------------------------------------------------
attorney to transfer such Security on the books of the Company with full power
of substitution in the premises.
Date:
-------------- -----------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
Signature Guarantee:
------------------------------------------
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
12
<PAGE>
GUARANTEE
For value received, each of the undersigned hereby absolutely, fully and
unconditionally and irrevocably guarantees, jointly and severally with each
other Guarantor, to the holder of this Security the payment of principal of,
premium, if any, and interest on this Security upon which these Guarantees are
endorsed in the amounts and at the time when due and payable whether by
declaration thereof, or otherwise, and interest on the overdue principal and
interest, if any, of this Security, if lawful, and the payment or performance of
all other obligations of the Company under the Indenture or the Securities, to
the holder of this Security and the Trustee, all in accordance with and subject
to the terms and limitations of this Security and Article Fourteen of the
Indenture. This Guarantee will not become effective until the Trustee duly
executes the certificate of authentication on this Security. These Guarantees
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to conflict of law principles thereof. The
Indebtedness evidenced by these Guarantees is, to the extent and in the manner
provided in the Indenture, subordinate and subject in right of payment to the
prior payment in full of all Senior Guarantor Indebtedness, whether outstanding
on the date of the Indenture or thereafter, and the Guarantees are issued
subject to such provisions.
Dated: July 20, 1999
FCA FINANCIAL, INC.
FABRI-CENTERS OF SOUTH DAKOTA, INC.
FABRI-CENTERS OF CALIFORNIA, INC.
FCA OF OHIO, INC.
HOUSE OF FABRICS, INC.
By
--------------------------------------------
Name: Alan Rosskamm
Title: Chairman, President and
Chief Executive Officer
Attest:
--------------------------
Name: Brian Carney
Title: Vice President
13
<PAGE>
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR
DEPOSITARY. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED
TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO.
OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND
TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE
& CO., HAS AN INTEREST HEREIN.
<PAGE>
JO-ANN STORES, INC.
----------------
10 3/8 % SENIOR SUBORDINATED NOTE DUE 2007, SERIES B
CUSIP NO. U14565AA0
No. 2 $500,000
------
Jo-Ann Stores, Inc., an Ohio corporation (herein called the
"Company," which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to Cede
& Co. or registered assigns, the principal sum of $500,000 United States
dollars on May 1, 2007, at the office or agency of the Company referred to
below, and to pay interest thereon from May 5, 1999, or from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
semiannually on May 1 and November 1 in each year, commencing November 1,
1999 at the rate of 10 3/8 % per annum, subject to adjustments as described
in the second following paragraph, in United States dollars, until the
principal hereof is paid or duly provided for. Interest shall be computed on
the basis of a 360-day year comprised of twelve 30-day months.
Payment of the principal of, premium, if any, and interest on, this
Security, and exchange or transfer of the Security, will be made at the
office or agency of the Company in The City of New York maintained for that
purpose (which initially will be a corporate trust office of an affiliate of
the Trustee, Harris Trust Company of New York, located at 88 Pine Street, New
York, New York 10005), or at such other office or agency as may be maintained
for such purpose, in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private
debts; PROVIDED, HOWEVER, that payment of interest may be made at the option
of the Company by check mailed to the address of the Person entitled thereto
as such address shall appear on the Security Register.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
2
<PAGE>
This Security is entitled to the benefits of the Guarantees by the
Guarantors of the punctual payment when due and performance of the Indenture
Obligations made in favor of the Trustee for the benefit of the Holders.
Reference is made to Article Fourteen of the Indenture for a statement of the
respective rights, limitations of rights, duties and obligations under the
Guarantees of the Guarantors.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof or by the authenticating agent
appointed as provided in the Indenture by manual signature of an authorized
signer, this Security shall not be entitled to any benefit under the Indenture,
or be valid or obligatory for any purpose.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by the manual or facsimile signature of its authorized officers.
JO-ANN STORES, INC.
By:
----------------------------------------
Name: Alan Rosskamm
Title: Chairman of the Board, President
and Chief Executive Officer
Attest:
- --------------------------------------
Name: Brian P. Carney
Title: Executive Vice President
and Chief Financial Officer
4
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 10 3/8 % Senior Subordinated Notes due 2007, Series B
referred to in the within-mentioned Indenture.
HARRIS TRUST AND SAVINGS BANK, as Trustee
By:
---------------------------------
Name:
Title:
Dated:
5
<PAGE>
JO-ANN STORES, INC.
10 3/8 % Senior Subordinated Note due 2007, Series B
This Security is one of a duly authorized issue of Securities of the
Company designated as its 10 3/8 % Senior Subordinated Notes due 2007, Series B
(herein called the "Securities"), limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $150,000,000,
issued under and subject to the terms of an indenture (herein called the
"Indenture") dated as of May 5, 1999, among the Company, the Guarantors and
Harris Trust and Savings Bank, as trustee (herein called the "Trustee," which
term includes any successor trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Guarantors, the Trustee and the Holders of the
Securities, and of the terms upon which the Securities are, and are to be,
authenticated and delivered.
The Securities are subject to redemption at any time on or after May
1, 2003, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice, in amounts of $1,000 or an integral
multiple thereof, at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning May 1
of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -----------
<S> <C>
2003 . . . . . . . . 105.188%
2004 . . . . . . . . 102.594%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the Redemption Date (subject to the
rights of Holders of record on relevant record dates to receive interest due on
an Interest Payment Date).
6
<PAGE>
In addition, at any time on or prior to May 1, 2002, the Company, at
its option, may use the net proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 35% of the aggregate principal amount of Securities
originally issued under the Indenture at a redemption price equal to 110.375% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the Redemption Date; provided that at least 65% of the
initial aggregate principal amount of Securities remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 30 days
after the closing of the related Public Equity Offering and must consummate such
redemption within 60 days of the closing of the Public Equity Offering.
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities or portions thereof to be redeemed in compliance
with the requirements of the principal national securities exchange, if any, on
which the Securities are listed, or if the Securities are not so listed, pro
rata, by lot or by any other method the Trustee shall deem fair and reasonable.
Upon the occurrence of a Change of Control, each Holder may require
the Company to purchase such Holder's Securities in whole or in part in integral
multiples of $1,000, at a purchase price in cash in an amount equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase, pursuant to a Change of Control Offer in accordance with the
procedures set forth in the Indenture.
Under certain circumstances, if all or a portion of the Net Cash
Proceeds received by the Company from any Asset Sale are not required to be
applied to repay permanently any Senior Indebtedness or any Senior Guarantor
Indebtedness, or if the Company determines not to apply such Net Cash Proceeds
to the permanent prepayment of such Senior Indebtedness or Senior Guarantor
Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness
is then outstanding, and if the Company has not invested such Net Cash Proceeds
in properties and assets that replace the properties and assets that were the
subject of the Asset Sale or in properties and assets which will be used in the
businesses of the Company or its Restricted Subsidiaries existing on the date of
the Indenture or in businesses reasonably related thereto and such Net Cash
Proceeds not used or invested exceeds a specified amount, the Company will be
required to apply such proceeds to the repayment of the Securities and certain
Indebtedness ranking PARI PASSU in right of payment to the Securities.
7
<PAGE>
In the case of any redemption or repurchase of Securities in
accordance with the Indenture, interest installments whose Stated Maturity is on
or prior to the Redemption Date will be payable to the Holders of such
Securities of record as of the close of business on the relevant Regular Record
Date or Special Record Date referred to on the face hereof. Securities (or
portions thereof) for whose redemption and payment provision is made in
accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
In the event of redemption or repurchase of this Security in
accordance with the Indenture in part only, a new Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal
amount of all the Securities may be declared due and payable in the manner and
with the effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time of
(a) the entire Indebtedness on the Securities and (b) certain restrictive
covenants and related Defaults and Events of Default, in each case upon
compliance with certain conditions set forth therein.
The Indenture permits, with certain exceptions (including certain
amendments permitted without the consent of any Holders, certain amendments
which require the consent of Holders of 66 2/3% of the outstanding principal
amount of the Securities and certain amendments which require the consent of
all the Holders) as therein provided, the amendment thereof and the
modification of the rights and obligations of the Company and the Guarantors
and the rights of the Holders under the Indenture and the Securities and the
Guarantees at any time by the Company and the Trustee with the consent of the
Holders of at least a majority in aggregate principal amount of the
Securities at the time Outstanding. The Indenture also contains provisions
permitting the Holders of at least a majority in aggregate principal amount
of the Securities (Holders of 66 2/3% in aggregate principal amount of the
Securities or 100% of the Holders in certain circumstances) at the time
Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company and the Guarantors with certain provisions of the
Indenture and the Securities and the Guarantees and certain past Defaults
under the Indenture and the Securities and the Guarantees and their
consequences. Any such consent or waiver by or on behalf of the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the
registration of transfer
8
<PAGE>
hereof or in exchange herefor or in lieu hereof whether or not notation of
such consent or waiver is made upon this Security.
The Securities are, to the extent and manner provided in Article
Thirteen of the Indenture, subordinated and subject in right of payment to the
prior payment in full of all Senior Indebtedness.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Securities (in the event such Guarantor or
such other obligor is obligated to make payments in respect of the Securities),
which is absolute and unconditional, to pay the principal of, premium, if any,
and interest on, this Security at the times, place, and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Security Registrar duly executed by,
the Holder hereof or its attorney duly authorized in writing, and thereupon one
or more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
Certificated securities shall be transferred to all beneficial holders
in exchange for their beneficial interests in the Global Securities if (i) such
Depositary (A) has notified the Company that it is unwilling or unable to
continue as Depositary for such Global Security or (B) has ceased to be a
clearing agency registered as such under the Exchange Act, and in either case
the Company fails to appoint a successor Depositary within 90 days, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Securities in certificated form or (iii) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default with respect to such
Global Security. Upon any such issuance, the Trustee is required to register
such certificated Series B Securities in the name of, and cause the same to be
delivered to, such Person or Persons (or the nominee of any thereof).
9
<PAGE>
Series B Securities in certificated form are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Series B Securities are exchangeable for a
like aggregate principal amount of Securities of a differing authorized
denomination, as requested by the Holder surrendering the same.
At any time when the Company is not subject to Sections 13 or 15(d) of
the Exchange Act, upon the written request of a Holder of a Series B Security,
the Company will promptly furnish or cause to be furnished such information as
is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any
successor provision thereto) to such Holder or to a prospective purchaser of
such Series B Security who such Holder informs the Company is reasonably
believed to be a "Qualified Institutional Buyer" within the meaning of Rule 144A
under the Securities Act, as the case may be, in order to permit compliance by
such Holder with Rule 144A under the Securities Act.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, any Guarantor, the Trustee and any agent of the Company,
any Guarantor or the Trustee may treat the Person in whose name this Security is
registered as the owner hereof for all purposes, whether or not this Security is
overdue, and neither the Company, any Guarantor, the Trustee nor any such agent
shall be affected by notice to the contrary.
THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS
PRINCIPLES THEREOF.
All terms used in this Security which are defined in the Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Indenture.
10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant
to Section 1012 or Section 1015, as applicable, of the Indenture, check the
Box: [ ].
If you wish to have a portion of this Security purchased by the
Company pursuant to Se ction 1012 or Section 1015 as applicable, of the
Indenture, state the amount (in original principal amount):
$ .
-----------------
Date: Your Signature:
--------------------------- ------------------
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:
-----------------------------------------
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
11
<PAGE>
TRANSFER NOTICE
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- -----------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)
- --------------------------------------------------------------------------------
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing
- --------------------------------------------------------------------------------
attorney to transfer such Security on the books of the Company with full power
of substitution in the premises.
Date:
----------------- ------------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
Signature Guarantee:
-----------------------------------------
[Signature must be guaranteed by an eligible Guarantor Institution (banks, stock
brokers, savings and loan associations and credit unions) with membership in an
approved guarantee medallion program pursuant to Securities and Exchange
Commission Rule 17Ad-15]
12
<PAGE>
GUARANTEE
For value received, each of the undersigned hereby absolutely, fully and
unconditionally and irrevocably guarantees, jointly and severally with each
other Guarantor, to the holder of this Security the payment of principal of,
premium, if any, and interest on this Security upon which these Guarantees are
endorsed in the amounts and at the time when due and payable whether by
declaration thereof, or otherwise, and interest on the overdue principal and
interest, if any, of this Security, if lawful, and the payment or performance of
all other obligations of the Company under the Indenture or the Securities, to
the holder of this Security and the Trustee, all in accordance with and subject
to the terms and limitations of this Security and Article Fourteen of the
Indenture. This Guarantee will not become effective until the Trustee duly
executes the certificate of authentication on this Security. These Guarantees
shall be governed by and construed in accordance with the laws of the State of
New York, without regard to conflict of law principles thereof. The
Indebtedness evidenced by these Guarantees is, to the extent and in the manner
provided in the Indenture, subordinate and subject in right of payment to the
prior payment in full of all Senior Guarantor Indebtedness, whether outstanding
on the date of the Indenture or thereafter, and the Guarantees are issued
subject to such provisions.
Dated: July 20, 1999
FCA FINANCIAL, INC.
FABRI-CENTERS OF SOUTH DAKOTA, INC.
FABRI-CENTERS OF CALIFORNIA, INC.
FCA OF OHIO, INC.
HOUSE OF FABRICS, INC.
By
-----------------------------------
Name: Alan Rosskamm
Title: Chairman, President and
Chief Executive Officer
Attest:
-----------------------------
Name: Brian Carney
Title: Vice President
13
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 14, 1999 included herein and to all references to our Firm
included in this Amendment No. 1 to registration statement.
/s/ Arthur Andersen LLP
July 20, 1999
