<PAGE>
As filed with the Securities and Exchange Commission on February 10, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________________
TUESDAY MORNING CORPORATION
(Exact name of registrant as specified in its charter)
_______________________
<TABLE>
<S> <C> <C>
DELAWARE 6749 75-2398532
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
_______________________
14621 INWOOD ROAD
DALLAS, TX 75244
TELEPHONE: (972) 387-3562
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
<TABLE>
<S> <C>
Copy to:
MARK E. JARVIS JAMES S. ROWE
TUESDAY MORNING CORPORATION KIRKLAND & ELLIS
14621 INWOOD ROAD 200 EAST RANDOLPH DRIVE
DALLAS, TX 75244 CHICAGO, ILLINOIS 60601
TELEPHONE: (972) 387-3562 (312) 861-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
</TABLE>
_______________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box.[_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Title of Each Class of Amount to be Registered Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Price Per Unit (1) Aggregate Offering Price (1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13 1/4% Series B Senior $25,000,000 100% $25,000,000 $7,375
Exchangeable Preferred
Stock due 2009............
- ------------------------------------------------------------------------------------------------------------------------------------
13 1/4% Exchange Debentures -- -- -- --
due 2009 (2)..............
====================================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) The Registration Statement covers the Company's 13 1/4% Exchange Debentures
due 2009 (the "Exchange Debentures") to be issued and delivered to the
holders of Series B Senior Exchangeable Preferred Stock when and if the
Company exchanges the Exchange Debentures for the Series B Senior
Exchangeable Preferred Stock and such indeterminable number of Exchange
Debentures as may be paid in lieu of cash interest on the Exchange
Debentures. Pursuant to Rule 457(i), no registration fee is required with
respect to the Exchange
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF PART I OF FORM S-4
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
----------------------- ---------------------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back Cover
Cover Pages of Prospectus..... Page
3. Risk Factors, Ratio of
Earnings to Fixed Charges and Prospectus Summary; Unaudited Pro Forma
Other Information............. Financial Statements; Selected Consolidated
Financial Data
4. Terms of the Transaction...... Outside Front Cover Page; Prospectus
Summary; Description of the Units; The
Preferred Stock Exchange Offer; Certain
Federal Income Tax Consequences
5. Pro Forma Financial
Information................... Unaudited Pro Forma Financial Statements
6. Material Contracts with the
Company Being Acquired........ Certain Transactions
7. Additional Information
Required...................... Inapplicable
8. Interests of Named Experts and
Counsel....................... Legal Matters; Experts
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Inapplicable
10. Information with Respect to S-
3 Registrants................. Inapplicable
11. Incorporation of Certain
Information by Reference...... Inapplicable
12. Information with Respect to S-
3 or S-2 Registrants.......... Inapplicable
13. Incorporation of Certain
Information by Reference...... Inapplicable
14. Information with Respect to
Registrants other than S-3 or Outside Front Cover Page; Prospectus
S-2 Registrants............... Summary; Risk Factors; Use of Proceeds;
Capitalization; Unaudited Pro Forma
Financial Statements; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Certain Transactions; Principal
Shareholders; Description of the Senior
Credit Facility
15. Information with Respect to S-
3 Companies................... Inapplicable
16. Information with Respect to S-
3 or S-2 Companies............ Inapplicable
</TABLE>
<PAGE>
<TABLE>
<S> <C>
17. Information with Respect to
Companies Other than S-3 or S-2
Companies...................... Inapplicable
18. Information if Proxies,
Consents or Authorizations are
to be Solicited................ Inapplicable
19. Information if Proxies,
Consents or Authorizations are
not to be Solicited or in an Management; Principal Shareholders; Certain
Exchange Offer................. Transactions
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement becomes+
+effective. This prospectus shall not constitute an offer to sell or the +
+solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to the registration or qualification under the securities laws +
+of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
, 1998
TUESDAY MORNING CORPORATION
OFFER TO EXCHANGE ITS 13 1/4% SERIES B SENIOR EXCHANGEABLE
PREFERRED STOCK DUE 2009 FOR ANY AND ALL OF ITS OUTSTANDING 13 1/4% SERIES A
SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
THE SENIOR PREFERRED STOCK EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1998, UNLESS EXTENDED.
Tuesday Morning Corporation, a Delaware corporation (the "Company"), hereby
offers (the "Preferred Stock Exchange Offer"), upon the terms and conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $100 liquidation
preference of its Series B 13 1/4% Senior Exchangeable Preferred Stock due 2009
(the "New Senior Exchangeable Preferred Stock"), registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus is a part, for each $100 liquidation
preference of its outstanding 13 1/4% Senior Exchangeable Preferred Stock due
2009 (the "Old Senior Exchangeable Preferred Stock"), of which $25,000,000
liquidation preference is outstanding. The form and terms of the New Senior
Exchangeable Preferred Stock are the same as the form and term of the Old Senior
Exchangeable Preferred Stock (which they replace), except that the New Senior
Exchangeable Preferred Stock will bear a Series B designation and will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and will not contain certain provisions relating to
liquidated damages which were included in the terms of the Old Senior
Exchangeable Preferred Stock in certain circumstances relating to the timing of
the Preferred Stock Exchange Offer. The New Senior Exchangeable Preferred Stock
will evidence the same equity as the Old Senior Exchangeable Preferred Stock
(which they replace) and will be issued under and be entitled to the benefits of
a Certificate of Designation (the "Certificate of Designation"). The Old Senior
Exchangeable Preferred Stock and the New Senior Exchangeable Preferred Stock are
sometimes referred to herein collectively as the "Senior Exchangeable Preferred
Stock." See "The Preferred Stock Exchange Offer" and "Description of
Securities--Senior Exchangeable Preferred Stock."
Each share of New Senior Exchangeable Preferred Stock will have, as the Old
Senior Exchangeable Preferred Stock (which they replace) has, a liquidation
preference of $100 per share. Dividends on the Senior Exchangeable Preferred
Stock will accrue in each period ending on March 15, June 15, September 15 and
December 15 of each year at a rate of 13.25% per annum of the liquidation
preference. On or prior to December 15, 2002, the Company may, at its option,
pay dividends either in cash or in additional fully paid and non-assessable
shares of Senior Exchangeable Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends. After December 15, 2002,
dividends may be paid in cash only.
On any scheduled dividend payment date, the Company may, at its option, but
subject to certain conditions, exchange all but not less than all of the shares
of Senior Exchangeable Preferred Stock then outstanding for the Company's
13 1/4% Subordinated Exchange Debentures due 2009 (the "Exchange Debentures").
See "Description of the Units--New Senior Exchangeable Preferred Stock--
Exchange." The Exchange Debentures will bear interest at a rate of 13.25% per
annum, payable quarterly in arrears on each March 15, June 15, September 15 and
December 15, commencing with the first such date to occur after the date of
exchange. On or before December 15, 2002, the Company may, at its option, pay
interest in cash or in additional Exchange Debentures having an aggregate
principal amount equal to the amount of such interest. After December 15, 2002,
interest may be paid in cash only.
The Senior Exchangeable Preferred Stock and the Exchange Debentures will be
redeemable at the option of the Company, in whole or in part, at any time or
from time to time, on or after December 15, 2002, at the redemption prices set
forth herein, plus, in the case of the Senior Exchangeable Preferred Stock,
accumulated and unpaid dividends thereon to the date of redemption, or in the
case of the Exchange Debentures, accrued and unpaid interest, if any, to the
date of redemption. In addition, at any time on or prior to December 15, 2001,
the Company may redeem for cash all, but not less than all, of the outstanding
Senior Exchangeable Preferred Stock or the Exchange Debentures within 20 days of
a Public Equity Offering (as defined) with the net proceeds of the offering at a
redemption price equal to, in the case of the Senior Exchangeable Preferred
Stock, 113.25% of the aggregate liquidation preference thereon, plus accumulated
and unpaid dividends thereon to the date of redemption, or in the case of the
Exchange Debentures, 113.25% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption.
(Cover continued on following page)
_______________________
SEE "RISK FACTORS," BEGINNING ON PAGE 16, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD SENIOR EXCHANGEABLE
PREFERRED STOCK IN THE PREFERRED STOCK EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
(Cover page continued)
Upon the occurrence of a Change in Control, each holder of Senior Exchangeable
Preferred Stock and the Exchange Debentures may require the Company to purchase
all or any part of such holder's Senior Exchangeable Preferred Stock or Exchange
Debentures at a purchase price in cash equal to 101% of the original liquidation
preference or aggregate principal amount (as the case may be) thereof, plus, in
the case of the Senior Exchangeable Preferred Stock, accumulated and unpaid
dividends per share to the date of purchase, or in the case of the Exchange
Debentures, accrued and unpaid interest, if any, to the date of purchase. In
the event of a Change in Control, there can be no assurance that the Company
will have, or will have access to, sufficient funds to repurchase the Senior
Exchangeable Preferred Stock or the Exchange Debentures or to pay the holders of
the Senior Exchangeable Preferred Stock or the Exchange Debentures. See "Risk
Factors--Subordination of the New Senior Exchangeable Preferred Stock and
Exchange Debentures," "Risk Factors--Change in Control," "Description of the
Units--New Senior Exchangeable Preferred Stock--Certain Provisions" and
"Description of the Units--The Exchange Debentures--Certain Covenants."
The Company will accept for exchange any and all Old Senior Exchangeable
Preferred Stock validly tendered and not withdrawn prior to 5:00 p.m., New York
City time on 1998, unless extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Old Senior Exchangeable Preferred
Stock may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
The Preferred Stock Exchange Offer is subject to certain customary conditions.
The Old Senior Exchangeable Preferred Stock were sold by the Company on December
29, 1997 to the Initial Purchaser (as defined herein) in a transaction not
registered under the Securities Act in reliance upon an exemption under the
Securities Act (the "Initial Unit Offering"). The Initial Purchaser subsequently
placed the Old Senior Exchangeable Preferred Stock with qualified institutional
buyers in reliance upon Rule 144A under the Securities Act. Accordingly, the Old
Senior Exchangeable Preferred Stock may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Senior Exchangeable Preferred Stock are
being offered hereunder in order to satisfy the obligations of the Company under
the Preferred Stock Registration Rights Agreement (as defined herein) entered
into by the Company and the Initial Purchaser in connection with the Initial
Unit Offering. See "The Preferred Stock Exchange Offer."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, the Company believes that the
New Senior Exchangeable Preferred Stock issued pursuant to the Preferred Stock
Exchange Offer may be offered for resale, resold and otherwise transferred by
any holder thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Senior Exchangeable Preferred Stock are
acquired in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Senior Exchangeable Preferred Stock. See "The Preferred Stock
Exchange Offer--Resale of the New Senior Exchangeable Preferred Stock." Each
broker-dealer (a "Participating Broker-Dealer") that receives New Senior
Exchangeable Preferred Stock for its own account pursuant to the Preferred Stock
Exchange Offer must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Senior Exchangeable Preferred Stock. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Senior Exchangeable Preferred
Stock received in exchange for Old Senior Exchangeable Preferred Stock where
such Old Senior Exchangeable Preferred Stock were acquired by such Participating
Broker-Dealer as a result of marketmaking activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Old Senior Exchangeable Preferred Stock not tendered and accepted
in the Preferred Stock Exchange Offer will continue to hold such Old Senior
Exchangeable Preferred Stock and will be entitled to all the rights and benefits
and will be subject to the limitations applicable thereto under the Certificate
of Designation and with respect to transfer under the Securities Act. The
Company will pay all the expenses incurred by it incident to the Preferred Stock
Exchange Offer. See "The Preferred Stock Exchange Offer."
There has not previously been any public market for the Old Senior
Exchangeable Preferred Stock or the New Senior Exchangeable Preferred Stock.
The Company does not intend to list the New Senior Exchangeable Preferred Stock
on any securities exchange or to seek approval for quotation through any
automated quotation system. The Old Senior Exchangeable Preferred Stock are
currently eligible for trading in the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") market. However, there can be no
assurance that an active market for the New Senior Exchangeable Preferred Stock
will develop. See "Risk Factors--Absence of a Public Market Could Adversely
Affect the Value of Senior Exchangeable Preferred Stock." Moreover, to the
extent that Old Senior Exchangeable Preferred Stock are tendered and accepted in
the Preferred Stock Exchange Offer, the trading market for untendered and
tendered but unaccepted Old Senior Exchangeable Preferred Stock could be
adversely affected.
Concurrent with the Initial Unit Offering, the Company sold $100,000,000
aggregate principal amount of its 11% Senior Subordinated Notes due 2007 (the
"Old Notes") (the "Initial Offering" and, together with the Initial Unit
Offering, the "Initial Offerings").
ii
<PAGE>
(Cover page continued)
Concurrent with the Preferred Stock Exchange Offer, the Company is offering
(the "Exchange Offer") to exchange $100 principal amount of its Series B 11%
Senior Subordinated Notes (the "Exchange Notes") for each $100 principal amount
of its outstanding Old Notes. The Exchange Notes and the Old Notes are sometimes
referred to herein collectively as the "Notes." The Exchange Offer and the
Preferred Stock Exchange Offer are sometimes referred to herein collectively as
the "Exchange Offers." See "Summary--Concurrent Exchange Offer." The Old Notes,
the Exchange Notes, the New Senior Exchangeable Preferred Stock, the Old Senior
Exchangeable Preferred Stock and the Exchange Debentures are sometimes referred
to herein collectively as the "Securities."
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN THIS PROSPECTUS MAY CONSTITUTE FORWARD-
LOOKING STATEMENTS FOR PURPOSES OF THE SECURITIES ACT AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SUCH FORWARD-LOOKING
STATEMENTS MAY INVOLVE UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS AND PERFORMANCE OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE
RESULTS OR PERFORMANCE EXPRESSED OR IMPLIED BY SUCH STATEMENTS. CAUTIONARY
STATEMENTS REGARDING THE RISKS ASSOCIATED WITH SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, WITHOUT LIMITATION, THOSE STATEMENTS INCLUDED UNDER "RISK FACTORS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." CERTAIN OF SUCH RISKS AND UNCERTAINTIES RELATE TO THE HIGHLY
LEVERAGED NATURE OF THE COMPANY, THE RESTRICTIONS IMPOSED ON THE COMPANY BY
CERTAIN INDEBTEDNESS, THE SENSITIVITY OF THE COMPANY TO ADVERSE TRENDS IN THE
GENERAL ECONOMY, THE HIGH DEGREE OF COMPETITION IN THE COMPANY'S INDUSTRY, THE
VARIABILITY OF THE COMPANY'S QUARTERLY RESULTS AND THE COMPANY'S SEASONALITY,
THE ABILITY OF THE COMPANY TO IDENTIFY, LOCATE AND PROCURE MERCHANDISE AT
SUITABLE PRICES, THE ABILITY OF THE COMPANY TO CONTINUE ITS EXPANSION, THE
CONTROL OF THE COMPANY BY MADISON DEARBORN CAPITAL PARTNERS II, L.P. AND THE
DEPENDENCE OF THE COMPANY ON KEY PERSONNEL, AMONG OTHERS.
ALL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY ARE
EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-4
(the "The Preferred Stock Exchange Offer Registration Statement," which term
shall encompass all amendments, exhibits, annexes and schedules thereto)
pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the New Senior Exchangeable Preferred Stock being offered
hereby. This Prospectus does not contain all the information set forth in the
Preferred Stock Exchange Offer Registration Statement. For further information
with respect to the Company and the Preferred Stock Exchange Offer, reference is
made to the Preferred Stock Exchange Offer Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Preferred Stock
Exchange Offer Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. In
addition, the Company files periodic reporting and other information
requirements of the Exchange Act. The Preferred Stock Exchange Offer
Registration Statement, including the exhibits thereto, and periodic reports and
other information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such materials can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such site is
http://www.sec.gov.
In addition, the Company has agreed that, whether or not it is required to do
so by the rules and regulations of the Commission, for so long as any of the
Senior Exchangeable Preferred Stock remain outstanding, it will furnish to the
holders of the Senior Exchangeable Preferred Stock and, to the extent permitted
by applicable law or regulation, file with the Commission (i) 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 the Company was required to file
such Forms, including for each a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
information only, a report thereof by the Company's independent certified public
accountants and (ii) all reports that would be required to be filed on Form 8-K
if it were required to file such reports. In addition, for so long as any of
the Senior Exchangeable Preferred Stock remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Senior Exchangeable
Preferred Stock or beneficial owner of the Senior Exchangeable Preferred Stock,
in connection with any sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act.
iii
<PAGE>
________________________________________________________________________________
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. The following summary information is qualified in its entirety
by reference to, and should be read in conjunction with, the more detailed
information and Consolidated Financial Statements (including the notes thereto)
included elsewhere in this Prospectus. Unless otherwise indicated, references to
the "Company" or "Tuesday Morning" are to Tuesday Morning Corporation and its
subsidiaries. The pro forma consolidated statement of operations for the periods
presented gives effect to the Transactions as if they were consummated on
January 1, 1996. The pro forma consolidated balance sheet gives effect to the
Transactions as if they had occurred on September 30, 1997. See "--The
Transactions."
THE COMPANY
Tuesday Morning is the largest closeout retailer of upscale gift and home
furnishings merchandise in the United States, with 315 stores in 33 states. The
Company operates its stores during seven annual "sales events" that last from
four to seven weeks, while closing them for the remaining weeks of the year.
Tuesday Morning does not sell seconds, irregulars or factory rejects, but rather
specializes in first quality, brand name merchandise such as Ralph Lauren bed
linens, Waterman pens, Limoges hand-decorated boxes, Mikasa dishes, Farberware
cookware, Daum French crystal, Martex bath towels, Fisher-Price toys, Samsonite
luggage and Spode china. The Company purchases its merchandise at closeout and
sells it at prices that are 50% to 80% below those generally charged by
department and specialty stores. The Company believes that its event-based
selling strategy, combined with high quality, reasonably priced merchandise,
attracts upscale "bargain hunters" with strong loyalty to the Company.
The Company was formed and opened its first store in 1974. Since its
initial public offering in 1986, the Company has increased its number of stores
from 63 to 315, and has achieved compound annual growth rates for sales and
EBITDA of 16.1% and 16.6%, respectively. During the twelve months ended
September 30, 1997, the Company generated comparable store sales growth of 18%
and net sales and EBITDA of $297.3 million and $34.1 million, respectively. This
represents an increase of 27.8% and 72.5%, respectively, over sales and EBITDA
for the twelve months ended September 30, 1996.
BUSINESS STRENGTHS
The Company's success has been largely based on the following strengths:
Unique Event-Based Format. The Company distinguishes itself from other
retailers with a unique "event-based" selling strategy, creating the equivalent
of seven "grand openings" each year. The Company believes that the closing and
reopening of its stores heightens customers' expectations of finding new,
undiscovered merchandise and intensifies their sense of urgency to buy the
Company's products, which are available only in limited quantities. Consistent
with this approach, the Company typically realizes approximately 40% of an
event's total sales in the first four or five days of the event (Wednesday or
Thursday to Sunday).
Strong Merchandising Capabilities. The Company employs a talented and
experienced buying team, which has grown from 10 buyers in 1993 to 22 buyers in
1997, with an average of nearly 20 years of retail experience. The Company's
buyers and its reputation as a preferred, reliable purchaser have enabled it to
establish excellent, long-term relationships with a diverse group of top-of-the-
line vendors. The Company obtains its merchandise primarily by purchasing from
manufacturers their end-of-line products which did not meet their sales
expectations, or merchandise left over from cancellations of orders placed by
other retailers. Merchandise is also obtained by contracting for production from
manufacturers during periods of lower production. Through its approximately
1,000 vendor relationships, the Company has become one of the largest retailers
for certain categories of luxury brand merchandise, such as European handmade
crystal and fine quality Oriental rugs from China and India. The Company
believes that certain top-of-the-line vendors such as Rosenthal and Samsonite
prefer to liquidate a majority of their excess inventory
________________________________________________________________________________
1
<PAGE>
________________________________________________________________________________
through the Company because of its access to an upscale customer base and its
ability to dispose of high-end, closeout merchandise quickly and without
disruption to their normal retail channels.
Dedicated, Upscale Customer Base. Tuesday Morning has an upscale, loyal
customer following. The Company has developed and maintains a proprietary
preferred customer mailing list of over 4,000,000 customers who have visited its
stores and requested to receive mailings in advance of the Company's sales
events. Customer loyalty is evidenced by the fact that the Company derives
approximately 31% of its sales during the first two or three days of each sales
event, which is advertised only by a mailing to those individuals on the list.
The Company believes, based on its internal research, that its customers are
primarily female from households headed by professionals, typically ranging in
age from 25 to 54 and having a median family income of approximately $55,000. In
addition, the Company believes its customers are knowledgeable shoppers who
frequent five or more national department stores and are able to recognize the
Company's favorable pricing on first quality, name brand merchandise.
Strong Financial Characteristics. Tuesday Morning has demonstrated an
ability to consistently grow sales while generating strong cash flow. For the
twelve months ended September 30, 1997, Tuesday Morning generated EBITDA of
$34.1 million, a 72.5% increase over the comparable period in 1996. During this
same period, capital expenditures were $6.1 million. The Company has
consistently grown its EBITDA since 1993 due to the improved profitability of
its existing store base, while requiring only modest capital expenditures to
fund growth.
Flexible, Low Cost Real Estate Approach. The Company's stores are
destination-oriented, and can therefore be located in secondary locations of
major suburban markets, such as strip malls and warehouse zones, in close
proximity to their target customers. As a result, the Company's real estate
costs are significantly lower than those of many other retailers, averaging
approximately $8 per square foot. In addition, virtually all new leases contain
a "kick" clause that gives the Company the ability to terminate the lease
without penalty for up to 18 months after lease inception. These kick clauses
provide the Company with significant downside protection in opening new stores
by allowing it to vacate a site that initially proves unprofitable. The Company
is able to obtain kick clauses because it seldom requires significant build out
of a lease site and because it is able to make productive use of challenging
space.
Integrated Management Information Systems and Inventory Controls. The
Company believes its management information systems are among the most advanced
in the retailing industry. These systems enable the Company to manage its flow
of almost 80,000 SKUs from approximately 1,000 vendors on a real-time basis in
order to make timely and accurate purchasing, distribution and merchandising
decisions. The Company's proprietary merchandising and inventory control
systems, point of sale system and state-of-the-art distribution management
system are integrated with its financial reporting systems, providing the
Company's buyers with a significant degree of control over inventory
acquisition, distribution and sales performance. The Company's buyers can
review, at the SKU level and on a real-time basis, the status of every open
purchase order, inbound shipment, warehouse receipt, process shipment and item
of store inventory. These systems further allow management to target merchandise
for markdowns in an effective and systematic manner. At September 30, 1997, less
than 5% of the Company's inventory was more than one year old.
BUSINESS STRATEGY
The Company's objective is to sustain its current growth and to enhance its
productivity and operating performance by continuing to build on its existing,
proven strengths. The Company intends to achieve this objective by pursuing the
following existing strategies:
Continue New Store Openings. The Company opened 31 new stores in 1997 and
plans to increase its store base, in new and existing markets, by approximately
32 to 35 stores per year for the foreseeable future. The Company's "no-frills"
approach enables it to open this number of stores for an aggregate cost of only
$2 million per year, or approximately $60,000 per store excluding inventory. The
Company intends to profitably increase its penetration of existing markets,
capitalize on the success it has enjoyed in smaller single-store markets, where
there are often no other
________________________________________________________________________________
2
<PAGE>
________________________________________________________________________________
retailers offering the Company's first quality products, and prudently expand
into new major metropolitan markets that will provide the basis for long-term
expansion.
Enhance Sales Productivity. The Company has achieved average comparable
store sales growth of approximately 6% per year since its initial public
offering in 1986 and 19% for the first nine months of 1997. The growth has
resulted from increases in (i) the number of customer transactions, (ii) the
average number of items purchased per customer visit and (iii) the average price
of such items. The average number of customer transactions has increased as a
result of the increased frequency of stocking its stores during a sales event.
The average number of items purchased by customers has increased as a result of
the introduction of additional impulse-oriented merchandise, and the average
price of items purchased has increased due to a greater mix of higher priced
items. The Company intends to continue implementing these merchandising
strategies to further enhance sales productivity.
Capitalize on Favorable Industry Dynamics and Competitive Positioning. The
Company is benefiting from several trends in the retailing industry. The
increase in the application of just-in-time inventory management techniques and
the increase in retailer consolidations have both resulted in a shift of
inventory risk from retailers to manufacturers. In addition, in order to
maintain market share in an increasingly competitive environment, manufacturers
are introducing new products and new packaging more frequently. All of these
factors have contributed to a broad and consistent supply of closeout
merchandise for the Company.
The Company believes it is the only retailer in the closeout industry that
focuses on first quality gift and home furnishings merchandise, in contrast with
most closeout retailers, which are general merchandisers or which focus on
apparel. In addition, the Company caters to upscale customers, while the rest of
the industry generally focuses on lower to middle income consumers. Finally,
unlike other closeout retailers which operate on a year-round basis, Tuesday
Morning operates on an event sale basis. The Company believes that its periodic
schedule of openings causes its customers to plan their visits to the Company's
stores to a greater extent than customers of conventional retailers whose
product offerings are more predictable and store hours more extensive.
Leverage Workforce and Technology. The Company believes that its
investments in information systems and inventory control technology and in
doubling its staff of experienced, specialized buyers over the last four years
will bolster future growth in the breadth of its product offerings and will
provide the support necessary for new store openings for the foreseeable future.
The Company's existing systems technology is scalable, enabling the Company to
expand or to upgrade its systems without significant additional expenditures in
the near term. The Company's corporate infrastructure will also allow for future
growth of the Company without significant expenditures beyond the marginal cost
of hiring additional buyers.
THE TRANSACTIONS
On December 29, 1997, Madison Dearborn Capital Partners II, L.P. ("Madison
Dearborn"), certain members of management and investors in the Units acquired
(the "Acquisition") all of the outstanding capital stock of the Company for an
equity investment of $117.9 million (the "Equity Investment"). The Equity
Investment consisted of (i) an $85.4 million investment by Madison Dearborn
(comprised of $4.6 million of Common Stock and $80.8 million of junior preferred
stock of the Company), (ii) a $7.5 million of investment by certain members of
management of the Company (comprised of $0.4 million in Common Stock and $7.1
million in junior preferred stock) and (iii) the proceeds from the Initial Unit
Offering. The Company used the proceeds from the Equity Investment and
approximately $223.4 million of aggregate proceeds from the financings described
below (the "Financings") (i) to pay $323.0 million as Acquisition consideration,
and (ii) to pay $18.3 million in transaction fees and expenses. See "Description
of the Units" and "Description of the Capital Stock."
The Financings consisted of (i) a $200.0 million credit facility (the
"Senior Credit Facility"), comprised of a $110.0 million term loan facility,
consisting of $40.0 million in Term Loan A loans and $70.0 million in Term Loan
B
________________________________________________________________________________
3
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________________________________________________________________________________
loans (collectively, the "Term Loans"), and a $90.0 million revolving credit
facility which, subject to certain conditions, can be increased up to $115.0
million (the "Revolving Credit Facility"), of which approximately $13.4 million
was drawn in January 1998 in connection with the Transaction and (ii) the
proceeds of the Old Notes offered in the Initial Offering. See "Description of
the Senior Credit Facility" and "Description of the Exchange Notes."
The closing of the Initial Unit Offering (the "Closing") was conditioned
upon the simultaneous consummation of the Acquisition, the Financings, the other
components of the Equity Investment and the repayment of the Old Credit
Facility. The Initial Offering, the Acquisition, the other Financings, the
Equity Investment and the repayment of the Old Credit Facility are collectively
referred to herein as the "Transactions."
The sources and uses of funds related to the Transactions, if they had
occurred on November 30, 1997, are set forth in the following table:
<TABLE>
<CAPTION>
AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Senior Credit Facility ($13,388 drawn in January 1998).. $ 123,388
Old Notes............................................... 100,000
Old Senior Exchangeable Preferred Stock................. 25,000
Junior Redeemable Preferred Stock (a)................... 86,010
Junior Perpetual Preferred Stock........................ 1,918
Common Stock (b)........................................ 5,000
----------
Total.............................................. $ 341,316
==========
USES OF FUNDS:
Acquisition consideration............................... $ 323,016
Fees and expenses....................................... 18,300
----------
Total.............................................. $ 341,316
==========
</TABLE>
____________
(a) Consists of approximately $80.8 million from Madison Dearborn and
approximately $5.2 million from management. See "Description of the Capital
Stock--Junior Redeemable Preferred Stock."
(b) Consists of approximately $4.6 million from Madison Dearborn and
approximately $0.4 million from management.
________________________________________________________________________________
4
<PAGE>
________________________________________________________________________________
THE INVESTORS
Madison Dearborn is a $925 million investment fund managed by Madison
Dearborn Partners, Inc. ("MDP"), a private equity investment firm. Since 1980,
the principals of MDP have directed equity investments of over $1.2 billion in
more than 100 transactions where MDP or its predecessor, First Chicago Venture
Capital, acted as a leading investor. Currently, MDP has approximately $2.2
billion of funds under management. MDP is comprised of five investment teams,
each focused on a particular sector: consumer (including retailing), industrial,
communications, natural resources, and healthcare services. Since 1984, MDP's
consumer team has made lead investments in over 10 portfolio companies,
including The Sports Authority, Inc., Consolidated Stores Corporation, Sterling
Merchandise Company, Beverages & More, Inc., The Cornerstone Investment Group,
Inc., Carrols Corporation, Peter Piper, Inc. and Bizmart, Inc.
RECENT DEVELOPMENTS - UNAUDITED
The Transaction was consummated December 29, 1997. Net sales for the year
ended December 31, 1997 increased $70.5 million, or 27.5%, to $327.3 million
from $256.8 million for the comparable period in 1996. Average store sales for
1997 were approximately $1,066,000, as compared to $925,000 for 1996. During the
year ended December 31, 1997, the Company generated comparable store sales
growth of 18% and EBITDA before Transaction expenses of $41.6 million as
compared to EBITDA of $25.9 million for the comparable period in 1996. Operating
income decreased $18.5 million from $20.4 million in 1996 to $1.9 million in
1997. Compensation paid in lieu of options of $25 million and non-debt fees and
expenses of $9.4 million are included in operating income for the year ended
December 31, 1997. In addition, net current assets at December 31, 1997
decreased by $39.8 million from September 30, 1997, due to the sell down of
inventory during the holiday season. All amounts are unaudited. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
_________________
The Company was incorporated in Delaware in 1974. The Company's principal
executive offices are located at 14621 Inwood Road, Dallas, Texas 75244 and its
telephone number is (972) 387-3562.
________________________________________________________________________________
5
<PAGE>
________________________________________________________________________________
THE INITIAL UNIT OFFERING
Old Senior Exchangeable Preferred The Old Senior Exchangeable Preferred
Stock................................ Stock was sold by the Company on
December 29, 1997 to Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch,"
the "Initial Purchaser") pursuant to
a Purchase Agreement, dated December
15, 1997 (the "Units Purchase
Agreement"). The Initial Purchaser
subsequently resold the Old Senior
Exchangeable Preferred Stock to
qualified institutional buyers
pursuant to Rule 144A under the
Securities Act.
Concurrent Initial Offering.......... Concurrent with the Initial Unit
Offering, the Company sold
$100,000,000 aggregate principal
amount of its 11% Senior Subordinated
Notes due 2007, on December 29, 1997
to Merrill Lynch and Goldman, Sachs &
Co., pursuant to a Purchase
Agreement, dated December 15, 1997.
Preferred Stock Registration Rights Pursuant to the Units Purchase
Agreement............................ Agreement, the Company and the
Initial Purchaser entered into a
Registration Rights Agreement, dated
as of December 29, 1997 (the
"Preferred Stock Registration Rights
Agreement"), which grants the holders
of the Old Senior Exchangeable
Preferred Stock certain exchange and
registration rights. The Preferred
Stock Exchange Offer is intended to
satisfy such exchange rights which
terminate upon the consummation of
the Preferred Stock Exchange Offer.
THE PREFERRED STOCK EXCHANGE OFFER
Securities Offered................... $25,000,000 aggregate liquidation
preference of 13 1/4% Series B Senior
Exchangeable Preferred Stock due 2009
of the Company (the "New Senior
Exchangeable Preferred Stock").
The Exchange Offer................... $100 liquidation preference of New
Senior Exchangeable Preferred Stock
in exchange for each $100
liquidation preference of Old Senior
Exchangeable Preferred Stock. As of
the date hereof, $25,000,000
aggregate liquidation preference of
Old Senior Exchangeable Preferred
Stock is outstanding. The Company
will issue the New Senior
Exchangeable Preferred Stock to
holders on or promptly after the
Expiration Date.
________________________________________________________________________________
6
<PAGE>
________________________________________________________________________________
Based on an interpretation by the
staff of the Commission set forth in
no-action letters issued to third
parties, the Company believes that
New Senior Exchangeable Preferred
Stock issued pursuant to the
Preferred Stock Exchange Offer in
exchange for Old Senior Exchangeable
Preferred Stock may be offered for
resale, resold and otherwise
transferred by any holder thereof
(other than any such holder which is
an "affiliate" of the Company within
the meaning of Rule 405 under the
Securities Act) without compliance
with the registration and prospectus
delivery provisions of the Securities
Act, provided that such New Senior
Exchangeable Preferred Stock is
acquired in the ordinary course of
such holder's business and that such
holder does not intend to participate
and has no arrangement or
understanding with any person to
participate in the distribution of
such New Senior Exchangeable
Preferred Stock. Each holder
accepting the Preferred Stock
Exchange Offer is required to
represent to the Company in the
Letter of Transmittal that, among
other things, the New Senior
Exchangeable Preferred Stock will be
acquired by the holder in the
ordinary course of business and the
holder does not intend to participate
and has no arrangement or
understanding with any person to
participate in the distribution of
such New Senior Exchangeable
Preferred Stock.
Any Participating Broker-Dealer that
acquired Old Senior Exchangeable
Preferred Stock for its own account
as a result of market-making
activities or other trading
activities may be a statutory
underwriter. Each Participating
Broker-Dealer that receives New
Senior Exchangeable Preferred Stock
for its own account pursuant to the
Preferred Stock Exchange Offer must
acknowledge that it will deliver a
Prospectus in connection with any
resale of such New Senior
Exchangeable Preferred Stock. The
Letter of Transmittal states that by
so acknowledging and by delivering a
Prospectus, a Participating
Broker-Dealer will not be deemed to
admit that it is an "underwriter"
within the meaning of the Securities
Act. This Prospectus, as it may be
amended or supplemented from time to
time, may be used by a Participating
Broker-Dealer in connection with
resale of New Senior Exchangeable
Preferred Stock received in exchange
for Old Senior Exchangeable Preferred
Stock where such Old Senior
Exchangeable Preferred Stock was
acquired by such Participating
Broker-Dealer as a result of
market-making activities or other
trading activities. The Company has
agreed that, for a period of 180 days
after the Expiration Date, it will
make this Prospectus available to any
Participating Broker-Dealer for use
in connection with any such resale.
See "Plan of Distribution."
Any holder who tenders in the
Preferred Stock Exchange Offer with
the intention to participate, or for
the purpose of participating, in a
distribution of the New Senior
Exchangeable Preferred Stock could
not rely on the position of the staff
of the Commission enunciated in
no-action letters and, in the absence
of an exemption therefrom, must
comply with the registration and
prospectus delivery requirements of
the Securities Act in connection with
any resale transaction. Failure to
comply with such requirements in such
instance may result in such holder
incurring liability under the
Securities Act for which the holder
is not indemnified by the Company.
________________________________________________________________________________
7
<PAGE>
________________________________________________________________________________
Expiration Date...................... 5:00 p.m., New York City time, on
, 1998 unless the Preferred Stock
Exchange Offer is extended, in which
case the term "Expiration Date" means
the latest date and time to which the
Preferred Stock Exchange Offer is
extended.
Accrued Dividends on the New Senior
Exchangeable Preferred Stock and the
Old Senior Exchangeable Preferred Each Share of New Senior Exchangeable
Stock................................ Preferred Stock will accrue dividends
from its issuance date. Holders of
Old Senior Exchangeable Preferred
Stock that are accepted for exchange
will receive accrued dividends
thereon to, but not including, the
issuance date of the New Senior
Exchangeable Preferred Stock.
Dividends on the Old Senior
Exchangeable Preferred Stock accepted
for exchange will cease to accrue
upon issuance of the New Senior
Exchangeable Preferred Stock.
Conditions to the Exchange
Offer................................ The Preferred Stock Exchange Offer is
subject to certain customary
conditions, which may be waived by
the Company. See "The Preferred
Stock Exchange Offer--Conditions."
Procedures for Tendering Old Senior
Exchangeable Preferred Stock......... Each holder of Old Senior
Exchangeable Preferred Stock wishing
to accept the Preferred Stock
Exchange Offer must complete, sign
and date the accompanying Letter of
Transmittal, or a facsimile thereof
in accordance with the instructions
contained herein and therein, and
mail or otherwise deliver such Letter
of Transmittal or such facsimile,
together with the Old Senior
Exchangeable Preferred Stock and any
other required documentation to the
Exchange Agent (as defined herein) at
the address set forth herein. By
executing the Letter of Transmittal,
each holder will represent to the
Company that, among other things, the
New Senior Exchangeable Preferred
Stock acquired pursuant to the
Preferred Stock Exchange Offer is
being obtained in the ordinary course
of business of the person receiving
such New Senior Exchangeable
Preferred Stock, whether or not such
person is the holder, that neither
the holder nor any such other person
(i) has any arrangement or
understanding with any person to
participate in the distribution of
such New Senior Exchangeable
Preferred Stock, (ii) is engaging or
intends to engage in the distribution
of such New Preferred Stock, or (iii)
is an "affiliate," as defined under
Rule 405 of the Securities Act, of
the Company. See "The Preferred
Stock Exchange Offer--Purpose and
Effect of the Preferred Stock
Exchange Offer" and "The Preferred
Stock Exchange Offer--Procedures for
Tendering."
Untendered Old Senior Exchangeable
Preferred Stock...................... Following the consummation of the
Preferred Stock Exchange Offer,
holders of Old Senior Exchangeable
Preferred Stock eligible to
participate but who do not tender
their Old Senior Exchangeable
Preferred Stock will not have any
further exchange rights and such Old
Senior Exchangeable Preferred Stock
will continue to be subject to
certain restrictions on transfer.
Accordingly, the liquidity of the
market for such Old Senior
Exchangeable Preferred Stock could be
adversely affected.
________________________________________________________________________________
8
<PAGE>
________________________________________________________________________________
Consequences of Failure to
Exchange............................. The Old Senior Exchangeable Preferred
Stock that is not exchanged pursuant
to the Preferred Stock Exchange Offer
will remain restricted securities.
Accordingly, such Old Senior
Exchangeable Preferred Stock may be
resold only (i) to the Company, (ii)
pursuant to Rule 144A or Rule 144
under the Securities Act or pursuant
to some other exemption under the
Securities Act, (iii) outside the
United States to a foreign person
pursuant to the requirements of Rule
904 under the Securities Act, or (iv)
pursuant to an effective registration
statement under the Securities Act.
See "The Preferred Stock Exchange
Offer--Consequences of Failure to
Exchange."
Shelf Registration Statement......... If any holder of the Old Senior
Exchangeable Preferred Stock (other
than any such holder which is an
"affiliate" of the Company within the
meaning of Rule 405 under the
Securities Act) is not eligible under
applicable securities laws to
participate in the Preferred Stock
Exchange Offer, and such holder has
provided information regarding such
holder and the distribution of such
holder's Old Senior Exchangeable
Preferred Stock to the Company for
use therein, the Company has agreed
to register the Old Senior
Exchangeable Preferred Stock on a
shelf registration statement (the
"Shelf Registration Statement") and
use its best efforts to cause it to
be declared effective by the
Commission as promptly as practical
on or after the consummation of the
Preferred Stock Exchange Offer. The
Company has agreed to maintain the
effectiveness of the Shelf
Registration Statement for, under
certain circumstances, a maximum of
two years, to cover resales of the
Old Senior Exchangeable Preferred
Stock held by any such holders.
Special Procedures for Beneficial
Owners............................... Any beneficial owner whose Old Senior
Exchangeable Preferred Stock is
registered in the name of a broker,
dealer, commercial bank, trust
company or other nominee and who
wishes to tender should contact such
registered holder promptly and
instruct such registered holder to
tender on such beneficial owner's
behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter
of Transmittal and delivering its Old
Senior Exchangeable Preferred Stock,
either make appropriate arrangements
to register ownership of the Old
Senior Exchangeable Preferred Stock
in such owner's name or obtain a
properly completed stock power from
the registered holder. The transfer
of registered ownership may take
considerable time. The Company will
keep the Preferred Stock Exchange
Offer open for not less than 30 days
in order to provide for the transfer
of registered ownership.
________________________________________________________________________________
9
<PAGE>
________________________________________________________________________________
Guaranteed Delivery
Procedures............................ Holders of Old Senior Exchangeable
Preferred Stock who wish to tender
their Old Senior Exchangeable
Preferred Stock and whose Old Senior
Exchangeable Preferred Stock is not
immediately available or who cannot
deliver their Old Senior Exchangeable
Preferred Stock, the Letter of
Transmittal or any other documents
required by the Letter of Transmittal
to the Exchange Agent (or comply with
the procedures for book-entry
transfer) prior to the Expiration
Date must tender their Old Senior
Exchangeable Preferred Stock
according to the guaranteed delivery
procedures set forth in "The
Preferred Stock Exchange
Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights..................... Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City
time, on the Expiration Date.
Acceptance of Old Senior Exchangeable
Preferred Stock and Delivery of New The Company will accept for exchange
Preferred Stock....................... any and all Old Senior Exchangeable
Preferred Stock which is properly
tendered in the Preferred Stock
Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration
Date. The New Senior Exchangeable
Preferred Stock issued pursuant to
the Preferred Stock Exchange Offer
will be delivered promptly following
the Expiration Date. See "The
Preferred Stock Exchange Offer--Terms
of the Preferred Stock Exchange
Offer."
Use of Proceeds....................... There will be no cash proceeds to the
Company from the exchange pursuant to
the Preferred Stock Exchange Offer.
Exchange Agent........................ United States Trust Company of New
York.
THE NEW SENIOR EXCHANGEABLE PREFERRED STOCK
General............................... The form and terms of the New Senior
Exchangeable Preferred Stock are the
same as the form and terms of the Old
Senior Exchangeable Preferred Stock
(which they replace) except that (i) the
New Senior Exchangeable Preferred Stock
bears a Series B designation, (ii) the
New Senior Exchangeable Preferred Stock
has been registered under the Securities
Act and, therefore, will not bear
legends restricting the transfer
thereof, and (iii) the holders of New
Senior Exchangeable Preferred Stock will
not be entitled to certain rights under
the Preferred Stock Registration Rights
Agreement, including the provisions
providing for an increase in the
dividend rate on the Old Senior
Exchangeable Preferred Stock in certain
circumstances relating to the timing of
the Preferred Stock Exchange Offer,
which rights will terminate when the
Preferred Stock Exchange Offer is
consummated. See "The Preferred Stock
Exchange Offer--Purpose and Effect of
the Preferred Stock Exchange Offer." The
New Senior Exchangeable Preferred Stock
will evidence the same equity as the Old
Senior Exchangeable Preferred Stock and
will be entitled to the benefits of the
Certificate of Designation. See
"Description of the Units--New Senior
Exchangeable Preferred Stock."
Liquidation Preference................ $100.00 per share, plus accumulated and
unpaid dividends.
________________________________________________________________________________
10
<PAGE>
________________________________________________________________________________
Optional Redemption.................. The New Senior Exchangeable Preferred
Stock will be redeemable at the option
of the Company, in whole or in part, at
any time or from time to time, on or
after December 15, 2002, at the
redemption prices set forth herein, plus
accumulated and unpaid dividends thereon
to the date of redemption. In addition,
at any time on or prior to December 15,
2001, the Company may redeem for cash
all, but not less than all, of the
outstanding New Senior Exchangeable
Preferred Stock within 20 days of a
Public Equity Offering with the net
proceeds of the offering at a redemption
price equal to 113.25% of the aggregate
liquidation preference thereon, plus
accumulated and unpaid dividends thereon
to the date of redemption. See
"Description of the Units--New Senior
Exchangeable Preferred Stock--Optional
Redemption."
Mandatory Redemption................. The Company is required to redeem all of
the New Senior Exchangeable Preferred
Stock outstanding on December 15, 2009
(subject to legal availability of funds
therefor) at a redemption price equal to
the liquidation preference thereof, plus
accumulated and unpaid dividends thereon
to the date of redemption. See
"Description of the Units--New Senior
Exchangeable Preferred Stock--Mandatory
Redemption."
Dividends............................ Dividends on the New Senior Exchangeable
Preferred Stock will be payable at a
rate equal to 13.25% per annum of the
liquidation preference per share.
Dividends will be cumulative and, when
declared, payable quarterly beginning
March 15, 1998 and accumulating from the
date of issuance (the "Issuance Date").
On any dividend payment date occurring
on or before December 15, 2002, the
Company, at its option, may pay
dividends either in cash or in
additional fully paid and nonassessable
shares of New Senior Exchangeable
Preferred Stock with an aggregate
liquidation preference equal to the
amount of such dividends. After December
15, 2002, dividends may only be paid in
cash. See "Description of the Units--New
Senior Exchangeable Preferred Stock--
Dividends."
Dividend Payment Dates............... March 15, June 15, September 15 and
December 15 of each year, commencing
March 15, 1998.
Voting............................... The New Senior Exchangeable Preferred
Stock will be non-voting, except as
otherwise required by law and except in
certain circumstances described herein,
including amending certain rights of the
holders of the New Senior Exchangeable
Preferred Stock. In addition, if the
Company (i) fails to pay dividends (and
if after December 15, 2002, such
dividends are not paid in cash) in
respect of six quarterly periods
(whether or not consecutive), (ii) fails
to make a mandatory redemption or
otherwise discharge any redemption
obligations, (iii) fails to make a
Change in Control Offer (as defined) or
(iv) fails to comply with certain
provisions or make certain payments on
its Indebtedness, or a Restricted
Subsidiary fails to make certain
payments on its Indebtedness, holders of
a majority of the outstanding shares of
New Senior Exchangeable Preferred Stock,
voting as a class, will be entitled to
elect the lesser of two directors or at
least 25% of the Board of Directors. See
"Description of the Units--New Senior
Exchangeable Preferred Stock--Voting
Rights."
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11
<PAGE>
________________________________________________________________________________
Ranking.............................. The New Senior Exchangeable Preferred
Stock will rank, with respect to
dividend rights and distributions upon
liquidation, winding-up and dissolution
of the Company, senior to all other
classes of equity securities of the
Company outstanding upon consummation of
the Preferred Stock Exchange Offer. See
"Description of the Units--New Senior
Exchangeable Preferred Stock--Ranking."
Change in Control.................... Upon the occurrence of a Change in
Control, each holder of the New Senior
Exchangeable Preferred Stock may require
the Company to purchase all or any
portion of such holder's New Senior
Exchangeable Preferred Stock at a
purchase price equal to 101% of the
original liquidation preference thereof,
plus accumulated and unpaid dividends
per share to the date of purchase. See
"Description of the Units--New Senior
Exchangeable Preferred Stock--Change in
Control."
Certain Provisions................... The Certificate of Designation relating
to the New Senior Exchangeable Preferred
Stock contains certain restrictive
provisions, including, but not limited
to, provisions with respect to the
following matters: (i) limitation on
additional indebtedness, (ii) limitation
on restricted payments, (iii) limitation
on issuances and sales of capital stock
of Restricted Subsidiaries, and (iv)
limitation on merger, consolidation and
sale of substantially all assets. See
"Description of the Units--New Senior
Exchangeable Preferred Stock--Certain
Provisions."
THE EXCHANGE DEBENTURES
Issue................................ 13 1/4% Subordinated Exchange Debentures
due 2009 issuable in exchange for the
Senior Exchangeable Preferred Stock in
an aggregate principal amount equal to
the aggregate liquidation preference of
the Senior Exchangeable Preferred Stock,
plus accumulated and unpaid dividends to
the date fixed for the exchange thereof
(the "Exchange Date"), plus any
additional Exchange Debentures issued in
lieu of cash interest.
Maturity............................. December 15, 2009.
Interest Payment Dates............... Interest on the Exchange Debentures will
be payable quarterly in cash (or, at the
option of the Company, on or prior to
December 15, 2002, in additional
Exchange Debentures) in arrears on each
March 15, June 15, September 15 and
December 15, commencing with the first
such date after the Exchange Date.
Optional Redemption.................. The Exchange Debentures will be
redeemable at the option of the Company,
in whole or in part, at any time or from
time to time, on or after December 15,
2002, at the redemption prices set forth
herein, plus accrued and unpaid
interest, if any, to the date of
redemption. In addition, at any time on
or prior to December 15, 2001, the
Company may redeem all, but not less
than all, of the outstanding Exchange
Debentures within 20 days of a Public
Equity Offering with the net proceeds of
the offering, at a redemption price
equal to 113.25% of the aggregate
principal amount thereof, plus accrued
and unpaid interest, if any, to the date
of redemption. See "Description of the
Units--Exchange Debentures--Optional
Redemption."
________________________________________________________________________________
12
<PAGE>
________________________________________________________________________________
Change in Control.................... Upon the occurrence of a Change in
Control, each holder of the Exchange
Debentures may require the Company to
purchase all or any portion of such
holder's Exchange Debentures at a
purchase price equal to 101% of the
principal amount thereof, together with
accrued and unpaid interest, if any, to
the date of purchase. See "Description
of the Units--Exchange Debentures--
Change in Control."
Ranking.............................. The Exchange Debentures will be
unsecured junior subordinated
obligations of the Company and, as such,
will be subordinated to all existing and
future Senior Indebtedness (as defined)
and Senior Subordinated Indebtedness (as
defined) of the Company, including
indebtedness under the Senior Credit
Facility and the Notes, with respect to
principal, premium, if any, and
interest. By reason of such
subordination, holders of Senior
Indebtedness and Senior Subordinated
Indebtedness must be paid in full before
holders of the Exchange Debentures may
be paid in the event of a liquidation,
dissolution or other winding up of the
Company, whether voluntary or
involuntary and whether or not involving
insolvency or bankruptcy. At September
30, 1997, on a pro forma basis after
giving effect to the Transactions and
the application of the net proceeds
therefrom, the Company would have had
approximately $176.5 million of Senior
Indebtedness (all of which would
represent Indebtedness under the Senior
Credit Facility) and $100.0 million of
Senior Subordinated Indebtedness (all of
which would represent Indebtedness under
the Notes) outstanding and the Company
would have had additional availability
of $16.1 million for borrowings under
the Senior Credit Facility, all of which
would be Senior Indebtedness, if
borrowed. See "Unaudited Pro Forma
Financial Statements." Additional Senior
Indebtedness and Senior Subordinated
Indebtedness may be incurred by the
Company from time to time, subject to
certain restrictions. See "Description
of the Units--Exchange Debentures--
Subordination."
The Exchange Debentures will be
guaranteed by all domestic subsidiaries
of the Company. Each Debenture Guarantee
(as defined) will be subordinated in
right of payment to the prior payment in
full of all Debenture Guarantor Senior
Indebtedness (as defined) and Debenture
Guarantor Senior Subordinated
Indebtedness (as defined) of the
Debenture Guarantor. See "Description of
the Units--Exchange Debentures--
Subordination."
Certain Covenants.................... The indenture under which the Exchange
Debentures will be offered (the
"Exchange Indenture") contains
covenants, including, but not limited
to, covenants with respect to the
following matters: (i) limitation on
additional indebtedness; (ii) limitation
on restricted payments; (iii) limitation
on issuances and sales of capital stock
of Restricted Subsidiaries; (iv)
limitation on transaction with
affiliates; (v) limitation on liens;
(vi) limitation on sale of assets; (vii)
limitation on merger, consolidation and
sale of substantially all assets; (viii)
limitations on guarantees of
indebtedness by Restricted Subsidiaries;
(ix) limitation on dividend and other
payment restrictions affecting
Restricted Subsidiaries; (x) limitation
on investment in Unrestricted
Subsidiaries; (xi) limitation on sale
and leaseback transactions; (xii)
limitations on other Subordinated
Indebtedness. See "Description of the
Units--Exchange Debentures--Certain
Covenants."
________________________________________________________________________________
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<PAGE>
________________________________________________________________________________
Exchange Offer; Exchange
Debenture Registration
Rights............................... In the event the Exchange Date occurs
prior to the issuance of the New
Exchangeable Preferred Stock, the
provisions of the Preferred Stock
Registration Rights Agreement will apply
to the registration of the Exchange
Debentures, provided that changes in
dividend rate shall result in
corresponding changes in the interest
rate applicable to the Exchange
Debentures. See "The Preferred Stock
Exchange Offer."
THE COMMON STOCK
Terms................................ 250,000 shares of Common Stock of the
Company, representing 6.0% of the
Company's Common Stock as of the Closing
on a fully diluted basis was offered
pursuant to the Initial Unit Offering.
Registration Rights.................. Under the terms of the Common Stock
Registration Rights Agreement (as
defined), (i) the holders of the Common
Stock offered pursuant to the Initial
Unit Offering are entitled, subject to
certain limitations, to include their
shares of Common Stock in any
registration of shares of Common Stock
initiated by the Company under the
Securities Act in which the proceeds to
the Company are at least $30 million and
in any other registration of Common
Stock initiated by the Company
thereafter, and (ii) after the first
registered secondary offering of shares
of Common Stock by Madison Dearborn or
its affiliates, the holders of 25% or
more of the Common Stock offered
pursuant to the Initial Unit Offering
will have the right, subject to certain
limitations, to require the Company to
effect a Demand Registration (as
defined) of all or any part of such
holders' shares of Common Stock under
the Securities Act. See "Description of
the Capital Stock--Common Stock
Registration Rights Agreement."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before tendering the Old Senior Exchangeable Preferred Stock in
exchange for the New Senior Exchangeable Preferred Stock in the Preferred Stock
Exchange Offer. These risk factors are generally applicable to the Old Senior
Exchangeable Preferred Stock as well as to the New Senior Exchangeable Preferred
Stock.
________________________________________________________________________________
14
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The summary historical financial data presented below for, and as of
the end of, each of the fiscal years in the three-year period ended December 31,
1996 is derived from the audited consolidated financial statements of the
Company. In the opinion of the Company, the unaudited financial information
presented for the nine months ended September 30, 1996 and September 30, 1997
contains all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial information included therein. Results
for interim periods are not necessarily indicative of results for the full year.
The summary unaudited pro forma statement of operations and other financial data
for the year ended December 31, 1996 and the nine months ended September 30,
1997 gives effect to the Transactions as if they had occurred on January 1,
1996. The summary unaudited pro forma balance sheet data at September 30, 1997
gives effect to the Transactions as if they had occurred on such date. The pro
forma data is not necessarily indicative of the results that actually would have
been achieved had the Transactions occurred on such date or that may be achieved
in the future. This summary information should be read in conjunction with the
consolidated financial statements and unaudited pro forma financial statements
of the Company and the notes thereto and "Capitalization," "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Twelve Months Nine Months
Nine Months Ended Ended Ended
Year Ended December 31, September 30, December 31, September 30,
---------------------------------- -----------------------
1994 1995 1996 1996 1997 1996 1997
--------- --------- ---------- --------- ---------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $190,081 $210,265 $256,756 $138,563 $179,058 $ 256,756 $ 179,058
Cost of sales........................ 126,931 137,427 165,189 88,199 112,620 165,189 112,620
-------- -------- -------- -------- -------- --------- ---------
Gross profit......................... 63,150 72,838 91,567 50,364 66,438 91,567 66,438
Selling, general and administrative
expenses............................ 57,523 63,040 71,167 48,134 56,193 71,517 56,456
-------- -------- -------- -------- -------- --------- ---------
Operating Income..................... 5,627 9,798 20,400 2,230 10,245 20,050 9,982
Net interest income (expenses) and
other income........................ (1,611) (2,534) (1,892) (1,518) (1,660) (24,225) (18,261)
-------- -------- -------- -------- -------- --------- ---------
Earnings before income
taxes............................... 4,016 7,264 18,508 712 8,585 (4,175) (8,279)
Net earnings......................... $ 2,651 $ 4,773 $ 11,516 $ 456 $ 5,366 $ (2,661) $ (5,174)
BALANCE SHEET DATA (END OF PERIOD):
Working capital...................... $ 32,593 $ 39,115 $ 49,568 $ 80,367 $109,205 $ 46,863 $ 63,921
Total assets......................... 89,403 94,243 121,757 151,668 199,215 127,387 209,719
Total debt........................... 10,127 8,398 6,622 48,851 61,409 218,631 281,768
Senior Exchangeable
Preferred Stock..................... -- -- -- -- -- 24,643 24,643
Junior Redeemable
Preferred Stock..................... -- -- -- -- -- 86,010 86,010
Total shareholders' equity
(deficit)........................... 58,630 63,648 75,528 64,103 81,213 (241,746) (234,113)
OTHER FINANCIAL DATA:
EBITDAR (a).......................... $ 21,920 $ 27,550 $ 39,874 $ 16,499 $ 26,322 $ 39,524 $ 26,059
Rental expense....................... 11,782 12,577 13,967 10,253 11,953 13,967 11,953
-------- -------- -------- -------- -------- --------- --------
EBITDA (a)........................... $ 10,138 $ 14,973 $ 25,907 $ 6,246 $ 14,369 $ 25,557 $ 14,106
======== ======== ======== ======== ======== ========= ========
Cash Flows provided by (used in):
Operating activities............ $ 12,056 $ 6,329 $ 10,592 $(42,789) $(57,703) $ (10,409) $(73,305)
Investing activities............ (7,992) (3,104) (4,701) (3,341) (5,129) (4,701) (5,129)
Financing activities............ (1,257) (1,484) (1,413) 40,453 55,110 207,298 52,350
Capital expenditures................. 5,693 2,692 4,233 2,935 4,756 4,233 4,756
Gross margin......................... 33.2% 34.6% 35.7% 36.4% 37.1% 35.7% 37.1%
S,G&A as a % of net sales............ 30.3% 30.0% 27.7% 34.7% 31.4% 27.9% 31.5%
EBITDA margin........................ 5.3% 7.1% 10.1% 4.5% 8.0% 10.0% 7.9%
Ratio of EBITDA to net
interest expense.................... -- -- -- -- -- 1.1x .8x
Ratio of long-term debt to
EBITDA (b).......................... -- -- -- -- -- 8.5x 16.1x
Ratio of earnings to fixed
charges (c)......................... 1.6x 2.0x 3.5x 1.1x 2.4x -- --
Deficiency of earnings to
cover fixed charges................. -- -- -- -- -- 4,175 8,279
Ratio of earnings to combined fixed
charges and preferred stock
dividends........................... 1.6x 2.0x 3.5x 1.1x 2.4x -- --
Deficiency of earnings to cover
combined fixed charges and
preferred stock dividends........... -- -- -- -- -- 15,208 16,554
STORE DATA:
Comparable store sales
increases........................... 4.2% 6.4% 14.0% 11.7% 18.6% 14.0% 18.6%
Average sales per store.............. $ 792 $ 829 $ 925 $ 512 $ 600 $ 925 $ 600
STORES:
Beginning of period.................. 235 246 260 260 286 260 286
Opened............................... 22 32 33 23 20 33 20
Closed............................... (11) (18) (7) (7) (2) (7) (2)
-------- -------- -------- -------- -------- ------- -------
End of period........................ 246 260 286 276 304 286 304
======== ======== ======== ======== ======== ======= =======
</TABLE>
_____________
(a) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDAR represents EBITDA plus rental expense. While EBITDA
and EBITDAR should not be construed as substitutes for operating income or
as better measures of liquidity than cash flows from operating activities,
which are determined in accordance with generally accepted accounting
principles, they are included to provide additional information with
respect to the ability of the Company to meet future debt service, capital
expenditure and working capital requirements.
(b) Total long-term debt excludes the outstanding balance under the Revolving
Credit Facility.
(c) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income before provision for income taxes and
cumulative effect of accounting changes plus fixed charges. "Fixed charges"
consist of interest expense, amortization of deferred financing costs and
the portion of rental expense assumed to represent interest.
15
<PAGE>
RISKS FACTORS
Prospective investors should carefully consider the factors set forth
below, as well as the other information contained in this Prospectus, before
tendering the Old Senior Exchangeable Preferred Stock in the Preferred Stock
Exchange Offer. The risk factors set forth below are generally applicable to the
Old Senior Exchangeable Preferred Stock as well as the New Senior Exchangeable
Preferred Stock.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE; RESTRICTIONS ON INDEBTEDNESS
As a result of the Transactions, the Company became highly leveraged, and
the Company's aggregate indebtedness for borrowed money and interest expense
increased and its shareholders' equity decreased. On a pro forma basis after
giving effect to the Transactions, the Company would have had total indebtedness
of $281.8 million and shareholders' deficit of approximately $234.1 million as
of September 30, 1997. In addition, subject to the restrictions contained in the
instruments governing its indebtedness, the Company may incur additional debt
from time to time to finance working capital, capital expenditures, acquisitions
or for other purposes. After December 15, 2002, the Company will be required to
pay dividends on the New Senior Exchangeable Preferred Stock in cash.
Furthermore, subject to certain conditions, the Company's New Senior
Exchangeable Preferred Stock will be exchangeable, at the Company's option, for
Exchange Debentures.
The Company's debt service and dividend obligations could have important
consequences to the holders of the New Senior Exchangeable Preferred Stock and
Exchange Debentures, including the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or other purposes may be limited or impaired; (ii) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of principal and interest on its indebtedness and dividends on
the New Senior Exchangeable Preferred Stock, thereby reducing the funds
available to the Company; (iii) the Company's operating flexibility with respect
to certain matters will be limited by covenants contained in the Certificate of
Designation, the Exchange Indenture, the Indenture (as defined) and the Senior
Credit Facility which will limit the ability of the Company and certain of its
subsidiaries to incur additional indebtedness, grant or create liens upon
assets, pay dividends, redeem capital stock or prepay certain subordinated
indebtedness and enter into sale and leaseback transactions or other loans,
investments or guarantees; (iv) the Company's degree of leverage may make it
more vulnerable to economic downturns, may reduce its flexibility in responding
to changing business and economic conditions and may limit its ability to pursue
other business opportunities, to finance its future operations or capital needs,
and to implement its business strategy; and (v) all of the indebtedness incurred
under the Senior Credit Facility and with respect to the Notes will become due
prior to the mandatory redemption date of the New Senior Exchangeable Preferred
Stock or the time the principal payments on the Exchange Debentures will become
due. See "Business--Strategy."
Required payments of principal and interest on the Company's indebtedness
and scheduled dividend payments on the New Senior Exchangeable Preferred Stock
are expected to be financed from its cash flow from operations. The Company's
ability to make scheduled dividend payments on the New Senior Exchangeable
Preferred Stock, to redeem the New Senior Exchangeable Preferred Stock and to
make scheduled payments of the principal of, or to pay interest on, or to
refinance its indebtedness (including the Notes and the Exchange Debentures, if
any) depends on the future performance of the Company's businesses, which will
in turn be subject to financial, business, economic and other factors affecting
the business and operations of the Company, including factors beyond its
control, such as prevailing economic conditions. There can be no assurance that
cash flow from operations will be sufficient to enable the Company to service
its debt and preferred stock obligations and meet its other obligations. If
such cash flow is insufficient, the Company may be required to refinance all or
a portion of its existing debt and all or a portion of the New Senior
Exchangeable Preferred Stock, to sell assets or to obtain additional financing.
There can be no assurance that any such refinancing would be possible or that
any such sales of assets or additional financing could be achieved.
The Certificate of Designation, the Exchange Indenture, the Indenture and
the Senior Credit Facility contain numerous financial and operating covenants
that limit the discretion of the Company's management with respect to certain
business matters. These covenants place significant restrictions on, among
other things, the ability of the Company and its
16
<PAGE>
subsidiaries to incur additional indebtedness, grant or create liens upon
assets, pay dividends, redeem capital stock or prepay certain subordinated
indebtedness or enter into sale leaseback transactions or other loans,
investments or guarantees. See "Description of the Units--New Senior
Exchangeable Preferred Stock," "Description of the Units--Exchange Debentures,"
"Description of the Exchange Notes" and "Description of the Senior Credit
Facility." The Senior Credit Facility also requires the Company to meet certain
financial ratios and tests. A failure to comply with the obligations contained
in the Senior Credit Facility, the Indenture or the Exchange Indenture could
result in an event of default under either the Senior Credit Facility, the
Indenture or the Exchange Indenture, which could result in acceleration of the
related debt and the acceleration of debt under other instruments evidencing
indebtedness that may contain cross-acceleration or cross-default provisions.
Since the New Senior Exchangeable Preferred Stock will be junior in right of
payment to all liabilities and obligations of the Company, in such an event,
payment of dividends or the redemption price with respect to the New Senior
Exchangeable Preferred Stock would be subordinated to the prior payment of such
indebtedness. If, as a result thereof, a default occurs with respect to Senior
Indebtedness, the subordination provisions in the Exchange Indenture would
likely restrict payments to the holders of the Exchange Debentures, if issued.
The Senior Credit Facility limits the Company's ability to pay dividends on
the New Senior Exchangeable Preferred Stock in cash and the Senior Credit
Facility and the Indenture also limit the Company's ability to exchange the New
Senior Exchangeable Preferred Stock into Exchange Debentures. See "Description
of the Exchange Notes" and "Description of Senior Credit Facility." The
Company's ability to pay cash dividends on the New Senior Exchangeable Preferred
Stock and the exchange of the New Senior Exchangeable Preferred Stock may also
be restricted by future indebtedness or agreements.
SUBORDINATION OF THE NEW SENIOR EXCHANGEABLE PREFERRED STOCK AND EXCHANGE
DEBENTURES
The New Senior Exchangeable Preferred Stock is junior in right of payment
to all existing and future liabilities and obligations (whether or not for
borrowed money) of the Company (other than Common Stock and any preferred stock
which by its terms is on parity with or junior to the New Senior Exchangeable
Preferred Stock). Accordingly, in the event of a liquidation, dissolution or
winding up of the Company, lenders to and other creditors of the Company would
be entitled to payment in full before the holders of New Senior Exchangeable
Preferred Stock. The Company's obligations under the Exchange Debentures are
subordinate and junior in right of payment to all existing and future Senior
Indebtedness and Senior Subordinated Indebtedness of the Company. As of
September 30, 1997, on a pro forma basis after giving effect to the
Transactions, the Company would have had approximately $176.5 million of Senior
Indebtedness (excluding unused commitments of approximately $16.1 million under
the Senior Credit Facility), all of it representing Indebtedness under the
Senior Credit Facility, and $100.0 million of Senior Subordinated Indebtedness,
all of it representing Indebtedness under the Notes, and the Subsidiary
Debenture Guarantors would have had approximately $181.8 of Debenture Guarantor
Senior Indebtedness, $176.5 million of which would have represented guarantees
of Indebtedness under the Senior Credit Facility, and $100.0 million of
Debenture Guarantor Senior Subordinated Indebtedness. Additional Senior
Indebtedness and Senior Subordinated Indebtedness and Debenture Guarantor Senior
Indebtedness may be incurred by the Company and the Subsidiary Debenture
Guarantors from time to time subject to certain restrictions contained in the
Certificate of Designation, the Exchange Indenture, the Senior Credit Facility
and the Indenture. In the event of bankruptcy, liquidation or reorganization of
the Company or the Subsidiary Debenture Guarantors, the assets of the Company or
the Subsidiary Debenture Guarantors will be available to pay obligations on the
Exchange Debentures only after all Senior Indebtedness or Debenture Guarantor
Senior Indebtedness, as the case may be, has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Exchange Debentures then outstanding. In addition, under certain circumstances,
no payments may be made with respect to the Exchange Debentures if a default
exists with respect to certain Senior Indebtedness or Senior Subordinated
Indebtedness. Indebtedness outstanding under the Senior Credit Facility is also
secured by substantially all of the assets of the Company and its subsidiaries.
See "Encumbrances on Assets to Secure Senior Credit Facility." Claims in respect
of the Exchange Debentures are effectively subordinated to all liabilities
(including trade payables) of any subsidiary of the Company that is not a
Subsidiary Debenture Guarantor. See "Description of the Units--Exchange
Debentures--Subordination," "Description of the Senior Credit Facility" and
"Description of the Exchange Notes."
17
<PAGE>
ENCUMBRANCES ON ASSETS TO SECURE SENIOR CREDIT FACILITY
In addition to being subordinated to all existing and future Senior
Indebtedness and Senior Subordinated Indebtedness of the Company (and with
respect to the New Senior Exchangeable Preferred Stock, all other liabilities of
the Company), the New Senior Exchangeable Preferred Stock and the Exchange
Debentures will not be secured by any of the Company's assets. The Company's
obligations under the Senior Credit Facility are secured by the Company's
inventory, tangible personal property and intangibles and a second mortgage on
owned real estate. If the Company becomes insolvent or is liquidated, or if
payment under the Senior Credit Facility is accelerated, the lenders under the
Senior Credit Facility are entitled to exercise the remedies available to a
secured lender under applicable law pursuant to the Senior Credit Facility.
Accordingly, such lenders will have a prior claim with respect to such assets
and there may not be sufficient assets remaining to pay amounts due on the New
Senior Exchangeable Preferred Stock and the Exchange Debentures then
outstanding. See "Description of the Senior Credit Facility."
IMPACT OF GENERAL ECONOMIC CONDITIONS
The retailing industry is sensitive to adverse trends in the general
economy. The success of the Company's operations depends to a significant extent
upon a number of factors relating to discretionary consumer spending, including
economic conditions (and perceptions of such conditions by consumers) affecting
disposable consumer income such as employment, wages and salaries, business
conditions, interest rates, availability of credit and taxation, for the economy
as a whole and in regional and local markets where the Company operates.
COMPETITION
The retailing business is highly competitive. The Company competes in the
sale of merchandise with a variety of other retail merchandisers, including
department, discount and specialty stores, many of which have locations
nationwide, are larger and have greater financial resources than the Company. In
addition, at various times throughout the year, department, discount and
specialty stores also offer merchandise at reduced prices similar to that sold
by the Company.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company's business is highly seasonal, with a significant portion of
its net sales and most or all of its EBITDA generated during the fourth quarter,
which includes the Christmas season. Net sales in the fourth quarter accounted
for over 40% of net sales for each of the last three fiscal years, and EBITDA
for the fourth quarters of 1996 and 1995 accounted for approximately 76% and
90%, respectively, of EBITDA for such years. Because a significant percentage of
the Company's net sales and EBITDA for a year results from operations in the
fourth quarter, the Company has limited ability to compensate for shortfalls in
fourth quarter sales or earnings by changes in its operations or strategies in
other quarters. A significant shortfall in results for the fourth quarter of any
year can thus be expected to have a material adverse effect on the Company's
annual results of operations. The Company's quarterly results of operations also
may fluctuate significantly as a result of a variety of factors, including the
timing of new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, timing of certain holidays, changes in the
Company's merchandise, general economic, industry and weather conditions that
affect consumer spending and actions of competitors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality."
MERCHANDISE SUPPLY AND INVENTORY
The success of the Company's closeout business depends upon its ability to
identify, locate, select and purchase quality merchandise at attractive prices
in order to maintain a balance of product in certain core merchandising
categories along with a changing mix of merchandise. The Company has no
continuing contracts for the purchase of closeout merchandise and relies on
buying opportunities from both existing and new sources, for which it competes
with other closeout merchandisers and wholesalers. Although the Company believes
that its management has longstanding relationships
18
<PAGE>
with its suppliers and is competitively positioned to continue to seek new
sources, there can be no assurance that the Company will be successful in
maintaining an adequate continuing supply of quality merchandise at attractive
prices.
EXPANSION PROGRAM
The growth of the Company's net sales and net earnings will depend, to a
significant extent, on the Company's ability to expand its operations through
the opening of new stores in existing and new markets and to operate those
stores profitably. The Company operates 315 stores in 33 states and plans to
open approximately 32 new stores during 1998. Achieving the Company's expansion
goals will depend on a number of factors, including the Company's ability to
identify and secure suitable locations on acceptable terms, open new stores in a
timely manner, hire and train additional store and supervisory personnel,
integrate new stores into its operations on a profitable basis and extend its
information systems. There can be no assurance that the Company will be able to
achieve its expansion goals on a timely or profitable basis. See "Business--
Business Strategy."
Management believes that cash flow from operating activities and borrowings
under the Senior Credit Facility will provide adequate funds to finance the
Company's expansion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." However,
if these sources of funds are inadequate to finance the Company's expansion, it
may require capital from additional sources. There can be no assurance as to the
future availability of additional financing or the terms thereof, and failure to
obtain such financing on acceptable terms could require the Company to alter its
expansion plans or otherwise adversely affect the Company.
CONTROL BY MADISON DEARBORN
Upon consummation of the Transactions, the Company became controlled by
Madison Dearborn, which owned approximately 85.8% of the Company's Common Stock
outstanding immediately after the Acquisition (approximately 77.2% on a fully
diluted basis). Madison Dearborn has the power to elect all of the Company's
board of directors, appoint new management and approve any action requiring the
approval of the Company's shareholders, including adopting amendments to the
Company's Certificate of Incorporation and approving acquisitions or sales of
substantially all of the Company's assets. The directors elected by Madison
Dearborn have the authority to make decisions affecting the capital structure of
the Company, including the issuance of additional indebtedness and the
declaration of dividends. There can be no assurance that the interests of
Madison Dearborn will not conflict with the interests of holders of the New
Senior Exchangeable Preferred Stock, the Exchange Debentures and the Common
Stock. See "Management," "Principal Shareholders" and "Certain Transactions."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance will depend, in part, upon the efforts and
abilities of the Company's senior management and other key employees, including
its buyers. The loss of service of certain of these persons could have a
material adverse effect on the Company's business and development. Upon
consummation of the Transactions, Lloyd L. Ross, the Company's founder, reduced
the amount of time he spends on the Company's affairs. While he continues to
serve as Chairman of the Company's Board of Directors, he resigned from his
position as Chief Executive Officer and entered into a two-year consulting
agreement with the Company. Pursuant to a three-year employment agreement dated
December 29, 1997, Jerry M. Smith continues as President and a director and
succeeded Mr. Ross as Chief Executive Officer of the Company. Mr. Smith has,
however, announced his intention to retire after the expiration of his
employment agreement. See "Management--Consulting and Employment Agreements."
CHANGE IN CONTROL
A Change in Control (as defined) could require the Company to refinance
substantial amounts of indebtedness, including indebtedness under the Notes, the
Senior Credit Facility and the Exchange Debentures, if issued. Upon the
occurrence of a Change in Control, each holder of the New Senior Exchangeable
Preferred Stock and the Exchange
19
<PAGE>
Debentures would be entitled to require the Company to repurchase the New Senior
Exchangeable Preferred Stock or the Exchange Debentures, as the case may be, in
whole or in part, at a purchase price equal to, in the case of New Senior
Exchangeable Preferred Stock, 101% of the liquidation preference, together with
accumulated and unpaid dividends, and in the case of the Exchange Debentures,
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest, in each case to the date of purchase. However, there can be no
assurance that sufficient funds will be available at the time of any Change in
Control to make any required purchases of the New Senior Exchangeable Preferred
Stock or the Exchange Debentures, as the case may be, tendered. In addition, the
Senior Credit Facility will prohibit the repayment of indebtedness on the Notes,
repurchase of the New Senior Exchangeable Preferred Stock or the repayment of
indebtedness on the Exchange Debentures by the Company upon a Change in Control,
unless and until such time as the indebtedness under the Senior Credit Facility
is repaid in full or the lenders under the Senior Credit Facility consent to
such repayment or repurchase, as the case may be. The Company's failure to make
such repayments or repurchases, as the case may be, in such instances would
result in a default under the Certificate of Designation, the Exchange
Indenture, the Indenture and the Senior Credit Facility. Future indebtedness of
the Company may also contain restrictions or repayment requirements with respect
to certain events or transactions that would constitute a Change in Control. The
source of funds for any such repayment of the New Senior Exchangeable Preferred
Stock, the Exchange Debentures, the Notes or the Senior Credit Facility would be
the Company's available cash or cash generated from operating or other sources,
including borrowings, sales of equity or funds provided by a new controlling
person. In the event of a Change in Control, there can be no assurance that the
Company would have sufficient cash to satisfy all of its obligations under the
New Senior Exchangeable Preferred Stock, the Exchange Debentures, the Notes and
the Senior Credit Facility. The effect of such requirements may make it more
difficult or delay attempts by others to obtain control of the Company. See
"Description of the Units--New Senior Exchangeable Preferred Stock--Change in
Control" and "--The Exchange Debentures--Purchase of Exchange Debentures upon a
Change in Control," "Description of the Exchange Notes--Change in Control" and
"Description of the Senior Credit Facility."
FRAUDULENT CONVEYANCE AND PREFERENCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Subsidiary Debenture Guarantors, at the time it incurred
the indebtedness evidenced by the Exchange Debentures or its Subsidiary
Debenture Guarantee, as the case may be, (i)(a) was or is insolvent or rendered
insolvent by reason of such occurrence or (b) was or is engaged in a business
transaction of which the assets remaining with the Company or such Subsidiary
Debenture Guarantor were unreasonably small or constitute unreasonably small
capital or (c) intended or intends to incur, or believed, believes or should
have believed that it would incur, debts beyond its ability to repay such debts
as they mature and (ii) the Company or such Debenture Subsidiary Guarantor
received or receives less than the reasonably equivalent value or fair
consideration for the incurrence of such indebtedness, the Exchange Debentures
and the Subsidiary Debenture Guarantees could be invalidated or subordinated to
all other debts of the Company or such Subsidiary Debenture Guarantors, as the
case may be. The Exchange Debentures or Subsidiary Debenture Guarantees could
also be invalidated or subordinated if it were found that the Company or the
Subsidiary Debenture Guarantor party thereto, as the case may be, incurred
indebtedness in connection with the Exchange Debentures or its Subsidiary
Debenture Guarantees with the intent of hindering, delaying or defrauding
current or future creditors of the Company or such Subsidiary Debenture
Guarantor, as the case may be. In addition, the payment of interest and
principal by the Company pursuant to the Exchange Debentures or the payment of
amounts by a Subsidiary Debenture Guarantor pursuant to a Subsidiary Debenture
Guarantee could be voided and required to be returned to the person making such
payment, or to a fund for the benefit of the creditors of the Company or such
Subsidiary Debenture Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Debenture Guarantor
would be considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the sum of all of its assets at a fair valuation
or if 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 (ii) it
could not pay its debts as they become due.
20
<PAGE>
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Subsidiary Debenture Guarantor within 90 days after any payment
by the Company or such Subsidiary Debenture Guarantor with respect to the
Exchange Debentures or a Subsidiary Debenture Guarantee, respectively, or after
the issuance of a Subsidiary Debenture Guarantee, or if the Company or such
Subsidiary Debenture Guarantor anticipated becoming insolvent at the time of
such payment or issuance, all or a portion of such payment of such Subsidiary
Debenture Guarantee could be avoided as a preferential transfer, and the
recipient of any such payment could be required to return such payment.
To the extent any Subsidiary Debenture Guarantees were voided as a
fraudulent conveyance or held unenforceable for any other reason, holders of
Exchange Debentures would cease to have any claim in respect of such Subsidiary
Debenture Guarantor and would be creditors solely of the Company and any
Subsidiary Debenture Guarantor, whose Subsidiary Debenture Guarantee was not
avoided or held unenforceable. In such event, the claims of holders of Exchange
Debentures against the issuer of an invalid Guarantee would be subject to the
prior payment of all liabilities and preferred stock claims of such Subsidiary
Debenture Guarantor. There can be no assurance that, after providing for all
prior claims and preferred stock interests, if any, there would be sufficient
assets to satisfy the claims of holders of Exchange Debentures relating to any
voided portions of any Subsidiary Debenture Guarantees.
On the basis of its historical financial information, recent operating
history and projected financial data, as discussed in "Prospectus Summary,"
"Unaudited Pro Forma Financial Statements," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company believes
that, after giving effect to the indebtedness incurred in connection with the
Transactions, it will not be insolvent, will not have unreasonably small assets
or capital for the business in which it is engaged and will not incur debts
beyond its ability to pay such debts as they mature. There can be no assurance,
however, as to what standard a court would apply in making such determinations.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF THE SENIOR
EXCHANGEABLE PREFERRED STOCK
The Old Senior Exchangeable Preferred Stock was issued to, and the Company
believes is currently owned by, a relatively small number of beneficial owners.
Prior to the Preferred Stock Exchange Offer, there has not been any public
market for the Old Senior Exchangeable Preferred Stock. The Old Senior
Exchangeable Preferred Stock has not been registered under the Securities Act
and will be subject to restrictions on transferability to the extent that it is
not exchanged for New Senior Exchangeable Preferred Stock by holders who are
entitled to participate in this Preferred Stock Exchange Offer. The holders of
Old Senior Exchangeable Preferred Stock (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who are not eligible to participate in the Preferred Stock Exchange Offer
are entitled to certain registration rights, and the Company is required to file
a Shelf Registration Statement with respect to such Old Senior Exchangeable
Preferred Stock. The New Senior Exchangeable Preferred Stock will constitute a
new issue of securities with no established trading market. The Company does not
intend to list the New Senior Exchangeable Preferred Stock on any national
securities exchange or seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchaser has advised the Company that it currently intends to make a market in
the New Senior Exchangeable Preferred Stock, but they are not obligated to do so
and may discontinue such market making at any time. In addition, such market
making activity will be subject to the limits imposed by the Securities Act and
the Exchange Act and may be limited during the Preferred Stock Exchange Offer
and the pendency of the Shelf Registration Statement. Accordingly, no assurance
can be given that an active public or other market will develop for the New
Senior Exchangeable Preferred Stock or as to the liquidity of the trading market
for the New Senior Exchangeable Preferred Stock. If a trading market does not
develop or is not maintained, holders of the New Senior Exchangeable Preferred
Stock may experience difficulty in reselling the New Senior Exchangeable
Preferred Stock or may be unable to sell them at all. If a market for the New
Senior Exchangeable Preferred Stock develops, any such market may be
discontinued at any time.
If a public trading market develops for the New Senior Exchangeable
Preferred Stock, future trading prices of such securities will depend on many
factors including, among other things, prevailing interest rates, the Company's
results of operations and the market for similar securities. Depending on
prevailing interest rates, the market for similar securities and
21
<PAGE>
other factors, including the financial condition of the Company, the New Senior
Exchangeable Preferred Stock may trade at a discount from their principal
amount.
FAILURE TO FOLLOW PREFERRED STOCK EXCHANGE OFFER PROCEDURES COULD ADVERSELY
AFFECT HOLDERS
Issuance of the New Senior Exchangeable Preferred Stock in exchange for the
Old Senior Exchangeable Preferred Stock pursuant to the Preferred Stock Exchange
Offer will be made only after a timely receipt by the Company of such Old Senior
Exchangeable Preferred Stock, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Old
Senior Exchangeable Preferred Stock desiring to tender such Old Senior
Exchangeable Preferred Stock in exchange for New Senior Exchangeable Preferred
Stock should allow sufficient time to ensure timely delivery. The Company is
under no duty to give notification of defects or irregularities with respect to
the tenders of Old Senior Exchangeable Preferred Stock for exchange. Old Senior
Exchangeable Preferred Stock that is not tendered or is tendered but not
accepted will, following the consummation of the Preferred Stock Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof, and,
upon consummation of the Preferred Stock Exchange Offer, certain registration
rights under the Preferred Stock Registration Rights Agreement will terminate.
In addition, any holder of Old Senior Exchangeable Preferred Stock who tenders
in the Preferred Stock Exchange Offer for the purpose of participating in a
distribution of the New Senior Exchangeable Preferred Stock may be deemed to
have received restricted securities, and if so, will be required to comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Senior Exchangeable Preferred Stock for its own account in exchange for Old
Senior Exchangeable Preferred Stock, where such Old Senior Exchangeable
Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Senior Exchangeable
Preferred Stock. See "Plan of Distribution." To the extent that Old Senior
Exchangeable Preferred Stock is tendered and accepted in the Preferred Stock
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Senior Exchangeable Preferred Stock could be adversely affected. See "The
Preferred Stock Exchange Offer."
TAX CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE NEW SENIOR EXCHANGEABLE
PREFERRED STOCK AND EXCHANGE DEBENTURES; POTENTIAL FOR UNPLANNED DEEMED
DIVIDEND INCOME
If the redemption price of the New Senior Exchangeable Preferred Stock
exceeds its issue price by more than a de minimis amount, such excess may be
treated as a constructive distribution with respect to the New Senior
Exchangeable Preferred Stock of additional stock over the term of the New Senior
Exchangeable Preferred Stock using a constant interest rate method similar to
that used for accruing original issue discount. As a result of the allocation of
a portion of the purchase price of the Units to the Common Stock, the New Senior
Exchangeable Preferred Stock initially purchased by holders may have a
redemption price that exceeds its issue price by more than a de minimis amount,
resulting in such constructive distributions. In addition, because the issue
price of the New Senior Exchangeable Preferred Stock distributed in lieu of
payments of cash dividends will be equal to the fair market value of the New
Senior Exchangeable Preferred Stock at the time of distribution, it is possible,
depending on the fair market value at that time, that such New Senior
Exchangeable Preferred Stock will be issued with a redemption premium large
enough to be considered a dividend as described above. In such event, holders
would be required to include such premium in income as a distribution over some
period in advance of receiving the cash attributable to such income, and such
additional New Senior Exchangeable Preferred Stock might trade separately from
other New Senior Exchangeable Preferred Stock, which might adversely affect the
liquidity of the New Senior Exchangeable Preferred Stock.
The Company may, at its option and under certain circumstances, issue
Exchange Debentures in exchange for the New Senior Exchangeable Preferred Stock.
Any such exchange will be a taxable event to holders of the New Senior
Exchangeable Preferred Stock. Furthermore, the Exchange Debentures may in
certain circumstances be treated as having been issued with original issue
discount ("OID") for federal income tax purposes. In such event, holders of
Exchange Debentures will be required to include such OID (as ordinary income) in
income over the life of the Exchange Debentures, in advance of the receipt of
the cash attributable to such income.
22
<PAGE>
An Exchange Debenture may be subject to the rules for "applicable high
yield discount obligations" ("AHYDOS"), in which case the Company's deduction
for OID on such Exchange Debenture will be substantially deferred and a portion
of such deduction may be disallowed.
For a description of certain tax consequences to purchasers of the New
Senior Exchangeable Preferred Stock offered hereby, see "Certain Federal Income
Tax Considerations."
USE OF PROCEEDS
The Preferred Stock Exchange Offer is intended to satisfy certain of the
Company's obligations under the Preferred Stock Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the New
Senior Exchangeable Preferred Stock offered hereby. In consideration for
issuing the New Senior Exchangeable Preferred Stock contemplated in this
Prospectus, the Company will receive Old Senior Exchangeable Preferred Stock in
like liquidation preference, the form and terms of which are the same as the
form and terms of the New Senior Exchangeable Preferred Stock (which replace the
Old Senior Exchangeable Preferred Stock), except as described herein. The Old
Senior Exchangeable Preferred Stock surrendered in exchange for the New Senior
Exchangeable Preferred Stock will be retired and canceled and cannot be
reissued. Likewise, the Old Notes surrendered in exchange for the Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly, neither
the issuance of the New Senior Exchangeable Preferred Stock nor the Exchange
Notes will result in any increase or decrease in the indebtedness of the
Company. As such, no effect has been given to the Preferred Stock Exchange
Offer or the exchange offer of the Exchange Notes for the Old Notes in the pro
forma financial data included herein.
The proceeds to the Company from the sale of the Units in the Initial Unit
Offering were used, together with borrowings under the Financings and the other
components of the Equity Investment, to consummate the Acquisition, to repay
indebtedness of the Company under the Old Credit Facility and to pay related
fees and expenses. See "Prospectus Summary--The Transactions," "Description of
the Senior Credit Facility" and "Description of the Exchange Notes."
23
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of the Company as of September 30, 1997, and as adjusted on a pro
forma basis to give effect to the Transactions as if they had occurred on such
date. See "Use of Proceeds." This table should be read in conjunction with the
"Selected Consolidated Financial Data" and the related notes thereto, and the
Company's consolidated financial statements, including the related notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1997
------------------------------
Actual Pro Forma
------------ -------------
(in thousands)
<S> <C> <C>
Debt:
Old Credit Facility................... $ 56,127 $ --
Revolving Credit Facility (a)......... -- 66,486
Term Loans............................ -- 110,000
Old Notes............................. -- 100,000
Mortgages and capitalized leases...... 5,282 5,282
------------ ------------
Total debt........................... 61,409 281,768
Redeemable preferred stock:
Old Senior Exchangeable Preferred Stock.. -- 24,643
Junior Redeemable Preferred Stock........ -- 86,010
------------ ------------
Total redeemable preferred stock.... -- 110,653
Junior Perpetual Preferred Stock......... -- 1,918
Common Stock............................. 17,017 5,357
Retained earnings (deficit).............. 64,196 (241,388)
------------ ------------
Total shareholders' equity (deficit). 81,213 (234,113)
------------ ------------
Total capitalization........... $142,622 $ 158,308
============ ============
</TABLE>
___________________
(a) The Revolving Credit Facility provides for revolving loans to the Company
up to $90.0 million, subject to certain borrowing base limitations. Under
certain circumstances, the Revolving Credit Facility may be increased to
$115.0 million. See "Description of the Senior Credit Facility." Had the
Transactions occurred on September 30, 1997, the Company would have had
approximately $16.1 million in remaining availability under the Revolving
Credit Facility.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") have been derived by the application of pro
forma adjustments to the Company's historical financial statements included
elsewhere in this Prospectus. The pro forma consolidated statement of operations
for the periods presented gives effect to the Transactions as if they were
consummated on January 1, 1996. The pro forma consolidated balance sheet gives
effect to the Transactions as if they had occurred on September 30, 1997. The
adjustments, which include adjustments relating to the Transactions, are
described in the accompanying notes. The Pro Forma Financial Statements should
not be considered indicative of actual results that would have been achieved had
the Transactions been consummated on the date or for the periods indicated and
do not purport to indicate balance sheet data or results of operations as of any
future date or for any future period. The Pro Forma Financial Statements should
be read in conjunction with the Company's historical financial statements and
the notes thereto included elsewhere in this Prospectus.
The Acquisition has been accounted for as a recapitalization and, as such,
has no impact on the historical basis of assets and liabilities.
24
<PAGE>
TUESDAY MORNING CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
ASSETS Actual Adjustments Pro Forma
---------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents........................ $ 3,029 $ (3,029) (a) $ --
Inventories...................................... 159,687 -- 159,687
Income tax receivable............................ -- 7,143 (b) 7,143
Other current assets............................. 1,516 (63) (c) 1,453
--------- ---------- ----------
Total current assets........................... 164,232 4,051 168,283
Net property, plant and equipment................ 31,439 -- 31,439
Other assets..................................... 3,544 (47) (c) 3,497
Debt issuance costs.............................. -- 9,381 (d) 9,381
--------- ---------- ----------
Total assets................................... $199,215 $ 13,385 $ 212,600
========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages on land, buildings and equipment....... $ 1,021 $ -- $ 1,021
Revolving Credit Facility........................ -- 51,486 (e) 51,486
Term Loans....................................... -- 1,350 (f) 1,350
Capital lease obligation......................... 213 -- 213
Accounts payable................................. 45,181 -- 45,181
Accrued expenses................................. 6,311 -- 6,311
Income taxes payable............................. 2,301 (2,301) (b) --
--------- ---------- ----------
Total current liabilities...................... 55,027 50,535 105,562
Mortgages on land, buildings and equipment....... 3,828 -- 3,828
Revolving Credit Facility........................ 56,127 (41,127) (e) 15,000
Term Loans....................................... -- 108,650 (f) 108,650
Old Notes........................................ -- 100,000 (f) 100,000
Capital lease obligation......................... 220 -- 220
Deferred income taxes............................ 2,800 -- 2,800
Redeemable preferred stock:
Old Senior Exchangeable Preferred Stock........ -- 24,643 24,643
Junior Redeemable Preferred Stock.............. -- 86,010 86,010
Junior Perpetual Preferred Stock................. -- 1,918 1,918
Common Stock..................................... 17,017 (11,660) 5,357
Retained earnings................................ 64,196 (305,584) (241,388)
--------- ---------- ----------
Total shareholders' equity (deficit)........ 81,213 (315,326) (g) (234,113)
--------- ---------- ----------
Total liabilities and shareholders' equity.. $199,215 $ 13,385 $ 212,600
========= ========== ==========
</TABLE>
See accompanying notes.
25
<PAGE>
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) The net effect of $(3,029) represents the adjustments to the Company's cash
and debt balances to account for the effects of the Acquisition and the
Financings.
<TABLE>
<S> <C>
Total Sources:
Term Loans....................... $ 110,000
Revolving Credit Facility........ 66,486
Old Notes........................ 100,000
Units............................ 25,000
Junior preferred stock issuance.. 87,928
Common Stock issuance............ 5,000
-----------
$ 394,414
-----------
Total Uses:
Acquisition consideration........ $ 323,016
Old Credit Facility.............. 56,127
Fees and expenses................ 18,300
-----------
$ 397,443
-----------
Net.............................. $ (3,029)
===========
</TABLE>
(b) The total of the income tax payable and income tax receivable adjustments
$(9,444) is primarily the tax benefit from recognizing the compensation
expense created by payments to management for their stock options.
(c) These adjustments write off the remaining balance of financing fees related
to the Old Credit Facility.
(d) The pro forma adjustment to debt issuance costs is to reflect fees and
expenses related to the Senior Credit Facility and the Initial Offering.
(e) Up to $90,000 is available under the Revolving Credit Facility for working
capital and general corporate purposes, subject to certain borrowing base
limitations. Had the Acquisition occurred on September 30, 1997, $66,486
would have been drawn in connection with the Acquisition, which would be
$10,359 more than amounts drawn on the Old Credit Facility. The Revolving
Credit Facility contains a $15,000 "cleandown" provision for 30 consecutive
days. The amount in excess of the $15,000 is considered to be a current
liability.
(f) Reflects the following:
<TABLE>
<CAPTION>
Expected Term Current Long Term Totals
------------- -------- ----------- --------
<S> <C> <C> <C> <C>
Senior Credit Facility:
Term Loan A.................................. 5 years $ 1,000 $ 39,000 $ 40,000
Term Loan B.................................. 7 years 350 69,650 70,000
Notes............................................ 10 years -- 100,000 100,000
--------- --------- ---------
Total................................ $ 1,350 $ 208,650 $ 210,000
========= ========= =========
</TABLE>
26
<PAGE>
(g) The following represents the net change in shareholders' equity as a result
of the Transactions.
<TABLE>
<S> <C>
Stock:
------
Issuance of Junior Perpetual Preferred
Stock.......................................................... $ 1,918
---------
Issuance of Common Stock............................................ $ 5,357
Redemption of existing common stock(1).............................. (17,017)
---------
$ (11,660)
---------
Retained Earnings:
------------------
Payments to previous shareholders at $25 per share
in excess of common stock redemption(1)........................... $(280,925)
Acquisition fees (non-debt) and expenses............................ (8,919)
Compensation expense from payments to
management for stock options (after-tax)(2)....................... (15,671)
Financing fees from Old Credit Facility
(after-tax)....................................................... (69)
---------
$(305,584)
---------
Net.......................................................... $(315,326)
=========
</TABLE>
_________________________________
(1) The total purchase price to existing shareholders is $297,942 (11,917,681
shares at $25.00 per share). This is accounted for as a reduction to common
stock of $17,017 and retained earnings of $280,925.
(2) Represents redemption of options to purchase 1,184,863 shares of common
stock at $25.00 per share, net of applicable exercise price and tax
benefit.
27
<PAGE>
TUESDAY MORNING CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
----------------------------------------------
Pro Forma
Actual Adjustments Pro Forma
----------- -------------- -------------
<S> <C> <C> <C>
Net sales............................................ $179,058 $ -- $179,058
Cost of sales........................................ 112,620 -- 112,620
--------- -------- --------
Gross profit...................................... 66,438 -- 66,438
Selling, general and administrative expenses......... 56,193 263 (a) 56,456
--------- -------- --------
Operating income.................................. 10,245 (263) 9,982
Other income (expense):
Interest income. ................................. 250 -- 250
Interest expense.................................. (2,330) (16,601) (b) (18,931)
Other income...................................... 420 -- 420
--------- -------- --------
(1,660) (16,601) (18,261)
--------- -------- --------
Income (loss) before income taxes............... 8,585 (16,864) (8,279)
Income tax (benefit)................................. 3,219 (6,324) (c) (3,105)
--------- -------- --------
Net income (loss)............................... 5,366 (10,540) (5,174)
Dividends and accretion of discount on
preferred stock..................................... -- (5,296) (d) (5,296)
--------- -------- --------
Earnings (loss) applicable to
common shareholders............................ $ 5,366 $(15,836) $(10,470)
========= ======== ========
Net income (loss) per common share................... $ 0.43 $ -- $ (2.79)
Weighted average common share and share equivalents.. 12,556 -- 3,750 (e)
</TABLE>
See accompanying notes.
28
<PAGE>
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(a) Represents prorated portion of annual fees for management and advisory
services rendered by Madison Dearborn.
(b) Pro forma interest expense reflects the 11% interest rate on the Notes, the
interest rates applicable to the Senior Credit Facility and amortization
expense from capitalized financing fees of $999.
(c) The adjustment reflects the tax effect of the deductible adjustments at the
Company's effective tax rate of 37.5%.
(d) The adjustment reflects the effect of preferred stock dividends on net
earnings applicable to holders of Common Stock. The Company is restricted
from paying cash dividends on junior preferred stock under the terms of the
Indenture, the Senior Credit Facility, the Certificate of Designation and,
if applicable, the Exchange Indenture.
(e) Represents the number of shares of Common Stock outstanding immediately
after the recapitalization.
29
<PAGE>
TUESDAY MORNING CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1996
-------------------------------------------------
Pro Forma
Actual Adjustments (a) Pro Forma
-------------- ----------------- ------------
<S> <C> <C> <C>
Net sales............................................ $ 256,756 $ -- $ 256,756
Cost of sales........................................ 165,189 -- 165,189
-------------- ---------------- ------------
Gross profit...................................... 91,567 -- 91,567
Selling, general and administrative expenses......... 71,167 350 (b) 71,517
-------------- ---------------- ------------
Operating income.................................. 20,400 (350) 20,050
Other income (expense):
Interest income................................... 275 -- 275
Interest expense.................................. (2,767) (22,333) (c) (25,100)
Other income...................................... 600 -- 600
-------------- ---------------- ------------
(1,892) (22,333) (24,225)
-------------- ---------------- ------------
Income (loss) before income taxes............... 18,508 (22,683) (4,175)
Income tax (benefit)................................. 6,992 (8,506) (d) (1,514)
-------------- ---------------- ------------
Net income (loss)................................. 11,516 (14,177) (2,661)
Dividends and accretion of discount on
preferred stock.................................... -- (7,061) (e) (7,061)
-------------- ---------------- ------------
Earnings (loss) applicable to
common shareholders................................ $ 11,516 $ (21,238) $ (9,722)
============== ================ ============
Net income (loss) per share.......................... $ 0.93 $ -- $ (2.59)
Weighted average common share and share equivalents.. 12,323 -- 3,750 (f)
</TABLE>
See accompanying notes.
30
<PAGE>
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) Does not give effect to non-recurring charges of $25,074 for compensation
expense from the payment to management for their stock options, $9,400 for
non-debt issuance costs and $280 for writing off the financing fees related
to the Old Credit Facility.
(b) Represents annual fees for management and advisory services rendered by
Madison Dearborn.
(c) Pro forma interest expense reflects the 11% interest rate on the Notes, the
interest rates applicable to the Senior Credit Facility and amortization
expense from capitalized financing fees of $1,332.
(d) The adjustment reflects the tax effect of the deductible adjustments at the
Company's effective tax rate of 37.5%.
(e) The adjustment reflects the effect of preferred stock dividends on net
earnings applicable to holders of Common Stock. The Company is restricted
from paying cash dividends on junior preferred stock under the terms of the
Indenture, the Senior Credit Facility, the Certificate of Designation and,
if applicable, the Exchange Indenture.
(f) Represents the number of shares of Common Stock outstanding immediately
after the recapitalization.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and operating data presented below for,
and as of the end of, each of the fiscal years in the five-year period ended
December 31, 1996 is derived from the audited consolidated financial statements
of the Company. In the opinion of the Company, the unaudited financial
information presented for the nine months ended September 30, 1996 and September
30, 1997 contains all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial information included
therein. Results for interim periods are not necessarily indicative of results
for the full year. The selected unaudited pro forma statement of operations data
for the twelve months ended December 31, 1996 and the nine months ended
September 30, 1997 gives effect to the Transactions as if they had occurred on
January 1, 1996. The selected unaudited pro forma balance sheet data as of
September 30, 1997 gives effect to the Transactions as if they had occurred on
such date. The pro forma data is not necessarily indicative of the results that
actually would have been achieved had the Transactions occurred on such date or
that may be achieved in the future. This selected information should be read in
conjunction with the Consolidated Financial Statements and the unaudited pro
forma financial statements of the Company and the notes thereto and
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------------ ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $160,075 $175,790 $190,081 $210,265 $256,756 $138,563 $ 179,058
Cost of sales...................... 104,581 123,148 126,931 137,427 165,189 88,199 112,620
-------- -------- -------- -------- -------- -------- ---------
Gross profit....................... 55,494 52,642 63,150 72,838 91,567 50,364 66,438
Selling, general and
administrative expenses.......... 45,315 54,895 57,523 63,040 71,167 48,134 56,193
-------- -------- -------- -------- -------- -------- ---------
Operating Income................... 10,179 (2,253) 5,627 9,798 20,400 2,230 10,245
Net interest income
(expense) and other income....... 36 (319) (1,611) (2,534) (1,892) (1,518) (1,660)
-------- -------- -------- -------- -------- -------- ---------
Earnings (loss) before income
taxes and cumulative effect
of accounting changes............ 10,215 (2,572) 4,016 7,264 18,508 712 8,585
Cumulative effect of accounting
changes (a)...................... 1,599 564 --- --- --- --- ---
Net earnings (loss)................ $ 8,171 $ (1,052) $ 2,651 $ 4,773 $ 11,516 $ 456 $ 5,366
BALANCE SHEET DATA (END OF
PERIOD):
Working capital.................... $ 48,053 $ 36,765 $ 32,593 $ 39,115 $ 49,568 $ 80,367 $ 109,205
Total assets....................... 97,175 88,967 89,403 94,243 121,757 151,668 199,215
Total debt......................... 13,697 8,997 10,127 8,398 6,622 48,851 61,409
Senior Exchangeable
Preferred Stock.................. -- -- -- -- -- -- --
Junior Redeemable Preferred
Stock............................ -- -- -- -- -- -- --
Total shareholders' equity
(deficit)........................ 64,564 55,724 58,630 63,648 75,528 64,103 81,213
OTHER FINANCIAL DATA:
EBITDAR (b)........................ $ 21 $ 12,303 $ 21,920 $ 27,550 $ 39,874 $ 16,499 $ 26,322
Rental expense..................... 8,409 10,692 11,782 12,577 13,967 10,253 11,953
-------- -------- -------- -------- -------- -------- ---------
EBITDA (b)......................... $ 12,611 $ 1,611 $ 10,138 $ 14,973 $ 25,907 $ 6,246 $ 14,369
======== ======== ======== ======== ======== ======== =========
Cash flows provided by (used in):
Operating activities............. $(18,407) $ 14,630 $ 12,056 $ 6,329 $ 10,592 $(42,789) $ (57,703)
Investing activities............. (5,166) (6,497) (7,992) (3,104) (4,701) (3,341) (5,129)
Financing activities............. 3,395 (7,932) (1,257) (1,484) (1,413) 40,453 55,110
Capital expenditures............... 5,087 4,850 5,693 2,692 4,233 2,935 4,756
Gross margin....................... 34.7% 30.0% 33.2% 34.6% 35.7% 36.4% 37.1%
S,G&A as a % of net sales.......... 28.3% 31.2% 30.3% 30.0% 27.7% 34.7% 31.4%
EBITDA margin...................... 7.9% 0.9% 5.3% 7.1% 10.1% 4.5% 8.0%
Ratio of EBITDA to net
interest expense................. -- -- -- -- -- -- --
Ratio of long-term debt to
EBITDA (c)....................... -- -- -- -- -- -- --
Ratio of earnings to fixed
charges (d)...................... 3.9x -- 1.6x 2.0x 3.5x 1.1x 2.4x
Deficiency of earnings to
cover fixed changes.............. -- 2,572 -- -- -- -- --
Ratio of earnings to
combined fixed changes and
preferred stock dividends........ 3.9x -- 1.6x 2.0x 3.5x 1.1x 2.4x
Deficiency of earnings to cover
combined fixed charges and
preferred stock dividends........ -- 2,572 -- -- -- -- --
SELECTED STORE DATA:
Comparable store sales
increases (decreases)............ 8.2% (3.0)% 4.2% 6.4% 14.0% 11.7% 18.6%
Average sales per store............ $ 873 $ 796 $ 792 $ 829 $ 925 $ 512 $ 600
STORES:
Beginning of period................ 150 190 235 246 260 260 286
Opened........................... 44 48 22 32 33 23 20
Closed........................... (4) (3) (11) (18) (7) (7) (2)
-------- -------- -------- -------- -------- -------- ---------
End of period...................... 190 235 246 260 286 276 304
======== ======== ======== ======== ======== ======== =========
<CAPTION>
Pro Forma
Twelve Pro Forma
Months Nine Months
Ended Ended
December September
31, 30,
1996 1997
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 256,756 $ 179,058
Cost of sales...................... 165,189 112,620
--------- ---------
Gross profit....................... 91,567 66,438
Selling, general and
administrative expenses.......... 71,517 56,456
--------- ---------
Operating Income................... 20,050 9,982
Net interest income
(expense) and other income....... (24,225) (18,261)
--------- ---------
Earnings (loss) before income
taxes and cumulative effect
of accounting changes............ (4,175) (8,279)
Cumulative effect of accounting
changes (a)...................... -- --
Net earnings (loss)................ $ (2,661) $ (5,174)
BALANCE SHEET DATA (END OF
PERIOD):
Working capital.................... $ 46,863 $ 63,921
Total assets....................... 127,387 209,719
Total debt......................... 218,631 281,768
Senior Exchangeable
Preferred Stock.................. 24,643 24,643
Junior Redeemable Preferred
Stock............................ 86,010 86,010
Total shareholders' equity
(deficit)........................ (241,746) (234,113)
OTHER FINANCIAL DATA:
EBITDAR (b)........................ $ 39,524 $ 26,059
Rental expense..................... 13,967 11,953
--------- ---------
EBITDA (b)......................... $ 25,557 $ 14,106
========= =========
Cash flows provided by (used in):
Operating activities............. $ (10,409) $ (73,305)
Investing activities............. (4,701) (5,129)
Financing activities............. 207,298 52,350
Capital expenditures............... 4,233 4,756
Gross margin....................... 35.7% 37.1%
S,G&A as a % of net sales.......... 27.9% 31.5%
EBITDA margin...................... 10.0% 7.9%
Ratio of EBITDA to net
interest expense................. 1.1x .8x
Ratio of long-term debt to
EBITDA (c)....................... 8.5x 16.1x
Ratio of earnings to fixed
charges (d)...................... -- --
Deficiency of earnings to
cover fixed changes.............. 4,175 8,279
Deficiency of earnings to cover
combined fixed charges and
preferred stock dividends........ 15,208 16,554
SELECTED STORE DATA:
Comparable store sales
increases (decreases)............ 14.0% 18.6%
Average sales per store............ 9.25 $ 600
STORES:
Beginning of period................ 260 286
Opened........................... 33 2
Closed........................... (7) (2)
--------- ---------
End of period...................... 286 304
========= =========
</TABLE>
(a) Cumulative effect of accounting changes represents changes in the method of
accounting for inventories in 1992 and for income taxes in 1993.
(b) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDAR represents EBITDA plus rental expense. While EBITDA
and EBITDAR should not be construed as substitutes for operating income or
as better measures of liquidity than cash flows from operating activities,
which are determined in accordance with generally accepted accounting
principles, they are included to provide additional information with
respect to the ability of the Company to meet future debt service, capital
expenditure and working capital requirements.
(c) Total long-term debt excludes the outstanding balance under the Revolving
Credit Facility.
(d) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income before provision for income taxes and
cumulative effect of accounting changes plus fixed charges. "Fixed charges"
consist of interest expense, amortization of deferred financing costs and
the portion of rental expense assumed to represent interest.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
consolidated historical and unaudited pro forma financial statements of the
Company and the related notes thereto appearing elsewhere in this Prospectus.
RECENT DEVELOPMENTS - UNAUDITED
The Transaction was consummated on December 29, 1997. Net sales for the year
December 31, 1997 increased $70.5 million, or 27.5%, to $327.3 million from
$256.8 million for the comparable period in 1996. Average store sales for 1997
were approximately $1,066,000, as compared to $925,000 for 1996. During the year
ended December 31, 1997, the Company generated comparable store sales growth of
18% and EBITDA before Transaction expenses of $41.6 million as compared to
EBITDA of $25.9 million for the comparable period in 1996. Operating income
decreased $18.5 million from $20.4 million in 1996 to $1.9 million in 1997.
Compensation paid in lieu of options of $25 million and non-debt fees and
expenses of $9.4 million are included in operating income for the year ended
December 31, 1997. In addition, net current assets at December 31, 1997
decreased by $39.8 million from September 30, 1997, due to the sell down of
inventory during the holiday season. All amounts are unaudited. See "--
Seasonality."
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's consolidated statements of operations expressed as a percentage of net
sales. There can be no assurance that the trends in sales growth or operating
results will continue in the future.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 66.8 65.4 64.3 63.7 63.0
------ ------ ----- ------ ------
Gross profit.................................. 33.2 34.6 35.7 36.4 37.1
Selling, general and administrative expenses.. 30.3 30.0 27.7 34.7 31.4
------ ------ ----- ------ ------
Operating income.............................. 3.0 4.7 7.9 1.6 5.7
Net interest income and other income.......... 0.9 1.2 0.7 1.1 0.9
------ ------ ----- ------ ------
Earnings before income taxes.................. 2.1 3.5 7.2 0.5 4.8
Net earnings.................................. 1.4% 2.3% 4.5% 0.3% 3.0%
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Net sales for the nine months ended September 30, 1997 increased $40.5
million, or 29.2%, to $179.1 million from $138.6 million for the comparable
period in 1996. The increase in net sales for the period was the result of $13.9
million in sales from new stores open during the period and from a 19% increase
in comparable store sales. The increase in comparable store sales was the result
of improvements in product selection, increase in the average price of items
sold and the continuing beneficial effects of the changes implemented in 1993
and 1994 with respect to the size and training of the Company's buying staff and
the Company's buying and merchandising policies. The Company also benefited from
increases in the frequency of shipments of merchandise to its stores and average
store level inventory, which resulted in an increase in customer visits and a
higher number of transactions.
33
<PAGE>
Gross profit increased $16.1 million, or 31.9%, to $66.4 million from $50.4
million for the comparable period in 1996. Gross profit as a percentage of net
sales increased from 36.4% to 37.1%. This increase was primarily attributable to
the leveraging of the Company's distribution costs, which remain relatively
fixed in relation to the increase in net sales.
Selling, general and administrative expenses increased $8.1 million, or 16.8%,
to $56.2 million from $48.1 million for the comparable period in 1996. However,
these expenses as a percentage of net sales declined to 31.4% from 34.7% for the
comparable period in 1996. These expenses are primarily incurred at the store
level and are relatively fixed, and therefore have also benefited from the
increase in comparable store sales.
Operating income increased $8.1 million, or 368.2%, to $10.2 million from $2.2
million for the comparable period in 1996. Operating income as a percentage of
net sales increased from 1.6% to 5.7%. These increases were the result of the
factors described above.
Income tax expense increased from 36.0% of net income to 37.5% of net income
due to reduced tax planning opportunities, and an increase in the Company's
federal tax bracket.
Other income and expense remained relatively constant. Other income
represented interest income, primarily in the form of sales tax discounts which
increased as a result of the Company's increase in net sales, and rental income
derived from a strip-center shopping area adjacent to the Company's
headquarters. Other expense represented interest expense and remained relatively
constant due to similar borrowing levels and interest rates.
For the reasons set forth above, net income for the nine months ended
September 30, 1997 increased $4.9 million, to $5.4 million from $0.5 million for
the comparable period in 1996.
1996 Compared to 1995
Net sales for the year ended December 31, 1996 increased $46.5 million, or
22.1%, to $256.8 million from $210.3 million for the year ended December 31,
1995. The increase in net sales was the result of $22.9 million in sales from
new stores open during the period and from a 14% increase in comparable store
sales. The increase in comparable store sales was comprised of a 9.3% increase
in the number of transactions and a 4.1% increase in the average transaction
amount. The increase was primarily the result of continued improvement in
merchandise selection, pricing and mix. In 1996, the Company began to realize
the full benefits of its initiative begun in 1993 to increase the staffing and
training of its buying team. By year end 1996, the size of the Company's buying
team had more than doubled from its size in 1993, which allowed the Company to
continue to develop its strategy of increasing the number of individual products
that it carries and to focus its buying activities on areas of individual buyer
expertise.
Gross profit increased $18.7 million, or 25.7%, to $91.6 million from $72.8
million for the year ended December 31, 1995. Gross profit as a percentage of
net sales increased to 35.7% from 34.6% in 1995. These increases were primarily
achieved through the leveraging of distribution, freight and buying costs, which
increased at a rate less than the increase in sales. The remainder of this
improvement was due to a reduction in markdowns, offset by a slight increase in
product cost.
Selling, general and administrative expenses increased $8.1 million, or 12.9%,
to $71.2 million from $63.0 million in 1995. However, these expenses declined as
a percentage of net sales to 27.7% from 30.0% in 1995. These expenses were
primarily related to store operations. The decrease in these expenses as a
percentage of net sales was the result of the leverage obtained from the
significant increases in sales.
Operating income increased $10.6 million, or 108.2%, to $20.4 million from
$9.8 million for 1995. Operating income as a percentage of net sales increased
from 4.7% to 7.9% in 1996. These increases were due to the improvements in gross
profit and selling, general and administrative expenses discussed above.
34
<PAGE>
The Company's income tax rate increased both at the Federal and state levels.
Federal tax rate increased from 34.0% to 35.0% due to the increase in the
Company's earnings and an increase in the Company's tax bracket. The Company's
state tax rate increased from 0.3% in 1995 to 2.8% in 1996, because loss carry-
forwards utilized in 1995 were no longer available in 1996, because of tax rate
increases and because of reduced tax planning opportunities.
Interest expense declined by approximately $0.6 million in 1996 due to reduced
average borrowings during the year, which was the result of cash flow from 1995
operations and reduced interest rates negotiated during 1996.
For the reasons set forth above, net income for the year ended December 31,
1996 increased $6.7 million, or 139.6%, to $11.5 million from $4.8 million for
the year ended December 31, 1995.
1995 Compared to 1994
Net sales for the year ended December 31, 1995 increased $20.2 million, or
10.6%, to $210.3 million from $190.1 million for the year ended December 31,
1994. The increase in net sales was the result of $17.7 million in sales from
new stores open during the period and from a 6.4% increase in comparable store
sales. The increase in comparable store sales was comprised of a 5.4% increase
in the number of transactions and a 1.1% increase in the average transaction
amount. These improvements came in several areas. Product selection, pricing and
mix continued to improve due to the increased number and expertise of new buyers
which were added in 1994 and 1995. The buyers increased their travel throughout
the world to obtain better values and to eliminate middlemen. Buyers were able
to focus on areas where they have significant expertise and were better able to
find the bargains that allow the Company to provide value to its customers and
improve product selection. As examples, the Company added buyers with expertise
in rugs, sporting goods, toys, seasonal items, housewares, and lawn and garden
which allowed for expansion of these categories. The point of sale system, which
was installed in 1994, provided the Company with more timely information
regarding the rate of sale of its products and allowed management to monitor and
more accurately plan markdowns.
Gross profit increased $9.7 million, or 15.3%, to $72.8 million from $63.2
million in 1994. Gross profit as a percentage of net sales increased 1.4
percentage points in 1995, from 33.2% to 34.6%. These increases were primarily
due to improvements in product cost attributable to the expertise of the buyers
hired in 1994 and 1995 and to the leveraging of distribution, freight and buying
costs, which increased less than the increase in sales. Gross profit in 1995
also increased due to reductions in shrink. Shrink improved in 1994 and 1995 as
a result of the enhancements made in the Company's loss prevention program and
the installation of electronic article surveillance equipment in the Company's
stores.
Selling, general and administrative expenses increased $5.5 million, or 9.6%,
to $63.0 million from $57.5 million in 1995, which was slightly less than the
increase in net sales. These expenses were primarily store level expenses and
were relatively fixed on a per store basis. The leverage obtained reduced these
expenses as a percentage of sales from 30.3% to 30.0%.
Income tax expense increased from 34.0% to 34.3% due to an increase in state
income taxes which were lower in 1994 due to loss carry forwards, some of which
were fully utilized in 1994.
Interest expense increased $0.9 million, or 35%, due to increased borrowing
levels and increased interest rates on the Company's revolving credit facility.
For the reasons set forth above, net income for the year ended December 31,
1995 increased $2.1 million, or 77.8%, to $4.8 million from $2.7 million for the
year ended December 31, 1994.
35
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with funds generated from
operating activities and borrowings under the Old Credit Facility.
Net cash provided (used) by operating activities for the fiscal years ended
December 31, 1994, 1995, and 1996 and the nine months ended September 30, 1996
and 1997 was $12.1 million, $6.3 million, $10.6 million, $(42.8) million and
$(57.7) million, respectively. Increases in net cash provided by operating
activities for the above periods were attributable to increases in operating
income, and for 1994, reduction in inventory levels. Uses of net cash by
operating activities was the result of seasonal increases in inventory levels.
Cash and cash equivalents as of December 31, 1994, 1995, 1996 and September 30,
1996 and 1997 were $4.5 million, $6.3 million, $10.8 million, $0.6 million and
$3.0 million, respectively.
Capital expenditures, principally associated with new store openings,
warehouse and system enhancements and maintenance capital expenditures, were
$5.7 million, $2.7 million and $4.2 million for 1994, 1995 and 1996,
respectively, and are expected to be approximately $5.1 million for 1997 and
approximately $4.7 million for 1998.
As part of the Acquisition, the Company entered into the Senior Credit
Facility, which is comprised of the $110.0 million Term Loans and the $90.0
million Revolving Credit Facility. Subject to compliance with the terms of the
Senior Credit Facility and the Indenture, borrowings under the Revolving Credit
Facility may be increased by $25.0 million to accommodate future growth and for
certain other purposes. At September 30, 1997, on a pro forma basis after giving
effect to the Transactions, the Company would have had outstanding $110.0
million under the Term Loans and $66.5 million under the Revolving Credit
Facility and would have had remaining availability thereunder of $16.1 million.
At November 30, 1997, on a pro forma basis after giving effect to the
Transactions (including the payment of $18.3 million in transaction fees), the
Company would have had approximately $18.4 million in remaining availability
under the Revolving Credit Facility. At Closing, the Company had significantly
greater availability under the Revolving Credit Facility as a result of cash
generated during the fourth quarter. The Term Loan A loans and the Revolving
Credit Facility loans mature on the fifth anniversary of the Closing, and the
Term Loan B loans mature on the seventh anniversary of the Closing. For a
consecutive 30-day period, measured from April 1 through March 31, beginning in
April 1998, the aggregate principal amount of loans outstanding under the
Revolving Credit Facility is not to exceed $15.0 million. See "Description of
the Senior Credit Facility."
Upon consummation of the Transactions, the Company's total debt and interest
charges increased significantly. Interest payments on the Notes, under the
Senior Credit Facility and on the Exchange Debentures, if issued, represent
significant liquidity requirements for the Company. The Notes require semi-
annual interest payments, and interest on the loans under the Senior Credit
Facility are due quarterly. After December 15, 2002, the Company will be
required to pay dividends on the Senior Exchangeable Preferred Stock in cash.
The Company anticipates that its cash flow generated from operations and
borrowings under the Senior Credit Facility will be sufficient to fund the
Company's working capital needs, planned capital expenditures, scheduled
interest payments (including interest payments on the Notes and amounts
outstanding under the Senior Credit Facility) and scheduled dividend payments on
the Senior Exchangeable Preferred Stock for the foreseeable future. See,
however, "Risk Factors--Substantial Leverage and Debt Service; Restrictions on
Indebtedness." The Company has from time to time received expressions of
interest with respect to the property on which its headquarters is located in
Dallas, Texas and in the future may consider selling such property as a means of
raising additional cash.
The instruments governing the Company's indebtedness, including the
Certificate of Designation, the Exchange Indenture, the Senior Credit Facility
and the Indenture, contain financial and other covenants that restrict, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of substantially all
of the assets
36
<PAGE>
of the Company. Such limitations, together with the highly leveraged nature of
the Company, could limit corporate and operating activities, including the
Company's ability to invest in opening new stores. See "Risk Factors--
Substantial Leverage and Debt Service; Restrictions on Indebtedness."
SEASONALITY
The Company has historically experienced, and the Company expects to continue
to experience, seasonal fluctuations in its business, with a significant
percentage of its net sales and most or all of its EBITDA being realized in the
fourth fiscal quarter, which includes the Christmas selling season. Net sales in
the fourth quarter accounted for over 40% of annual net sales for each of the
last three fiscal years, and EBITDA for the fourth quarters of 1996 and 1995
accounted for approximately 76% and 90%, respectively, of annual EBITDA for such
years. Because a significant percentage of the Company's net sales and EBITDA
for a year results from operations in the fourth quarter, the Company has
limited ability to compensate for shortfalls in fourth quarter sales or earnings
by changes in its operations or strategies in other quarters. A significant
shortfall in results for the fourth quarter of any year can thus be expected to
have a material adverse effect on the Company's annual results of operations.
See "Risk Factors--Variability of Quarterly Results and Seasonality."
The following table illustrates the seasonality of the Company's net sales,
EBITDA and net earnings (loss) by quarter for 1995 and 1996.
TUESDAY MORNING SEASONALITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Net Sales EBITDA Net Earnings (Loss)
----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
1996
First Quarter $ 35,740 13.9% $ 532 2.0% $ (676) (5.9)%
Second Quarter 54,286 21.2 2,484 9.6 434 3.8
Third Quarter 48,537 18.9 3,230 12.5 698 6.1
Fourth Quarter 118,193 46.0 19,661 75.9 11,060 96.0
-------- ------ ------- ------ ------- ------
Total $256,756 100.0% $25,907 100.0% $11,516 100.0%
======== ====== ======= ====== ======= ======
1995
First Quarter $ 29,958 14.2% $(1,564) (10.4)% $(2,046) (42.9)%
Second Quarter 47,977 22.8 1,702 11.4 (155) (3.2)
Third Quarter 38,240 18.2 1,412 9.4 (336) (7.0)
Fourth Quarter 94,090 44.8 13,423 89.6 7,310 153.1
-------- ------ ------- ------ ------- ------
Total $210,265 100.0% $14,973 100.0% $ 4,773 100.0%
======== ====== ======= ====== ======= ======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 "Earnings per Share" which is effective for both
interim and annual periods ending after December 15, 1997. Statement 128
requires the disclosure of basic and diluted earnings per share, which differ
from the previously reported primary and fully diluted earnings per share. The
Company has not yet determined the effect of this Statement on previously
reported earnings per share.
37
<PAGE>
INFLATION
In management's opinion, changes in net sales and net earnings that have
resulted from inflation and changing prices have not been material during the
periods presented. There is no assurance, however, that inflation will not
materially affect the Company in the future.
38
<PAGE>
BUSINESS
GENERAL
Tuesday Morning is the largest closeout retailer of upscale gift and home
furnishings merchandise in the United States, with 315 stores in 33 states. The
Company operates its stores during seven annual "sales events" that last from
four to seven weeks, while closing them for the remaining weeks of the year.
Tuesday Morning does not sell seconds, irregulars or factory rejects, but rather
specializes in first quality, brand name merchandise such as Ralph Lauren bed
linens, Waterman pens, Limoges hand-decorated boxes, Mikasa dishes, Farberware
cookware, Daum French crystal, Martex bath towels, Fisher-Price toys, Samsonite
luggage and Spode china. The Company purchases its merchandise at closeout and
sells it at prices that are 50% to 80% below those generally charged by
department and specialty stores. The Company believes that its event-based
selling strategy, combined with high quality, reasonably priced merchandise,
attracts upscale "bargain hunters" with strong loyalty to the Company.
The Company was formed and opened its first store in 1974. Since its initial
public offering in 1986, the Company has increased its number of stores from 63
to 315, and has achieved compound annual growth rates for sales and EBITDA of
16.1% and 16.6%, respectively. During the twelve months ended September 30,
1997, the Company generated comparable store sales growth of 18% and net sales
and EBITDA of $297.3 million and $34.1 million, respectively. This represents an
increase of 27.8% and 72.5%, respectively, over sales and EBITDA for the twelve
months ended September 30, 1996.
BUSINESS STRENGTHS
The Company's success has been largely based on the following strengths:
Unique Event-Based Format. The Company distinguishes itself from other
retailers with a unique event-based selling strategy, creating the equivalent of
seven "grand openings" each year. The Company believes that the closing and
reopening of its stores heightens customers' expectations of finding new,
undiscovered merchandise and intensifies their sense of urgency to buy the
Company's products, which are available only in limited quantities. Consistent
with this approach, the Company typically realizes approximately 40% of an
event's total sales in the first four or five days of the event (Wednesday or
Thursday to Sunday).
Strong Merchandising Capabilities. The Company employs a talented and
experienced buying team, which has grown from 10 buyers in 1993 to 22 buyers in
1997, with an average of nearly 20 years of retail experience. The Company's
buyers and its reputation as a preferred, reliable purchaser have enabled it to
establish excellent, long-term relationships with a diverse group of top-of-the-
line vendors. The Company obtains its merchandise primarily by purchasing from
manufacturers their end-of-line merchandise, products which did not meet their
sales expectations, or merchandise left over from cancellations of orders placed
by other retailers. Merchandise is also obtained by contracting for production
from manufacturers during periods of lower production. Through its approximately
1,000 vendor relationships, the Company has become one of the largest retailers
for certain categories of luxury brand merchandise, such as European handmade
crystal and fine quality Oriental rugs from China and India. The Company
believes that certain top-of-the-line vendors such as Rosenthal and Samsonite
prefer to liquidate a majority of their excess inventory through the Company
because of its access to an upscale customer base and its ability to dispose of
high-end, closeout merchandise quickly and without disruption to their normal
retail channels.
Dedicated, Upscale Customer Base. Tuesday Morning has an upscale, loyal
customer following. The Company has developed and maintains a proprietary
preferred customer mailing list of over 4,000,000 customers who have visited its
stores and requested to receive mailings in advance of the Company's sales
events. Customer loyalty is evidenced by the fact that the Company derives
approximately 31% of its sales during the first two or three days of each sales
event, which is advertised only by a mailing to those individuals on the list.
The Company believes, based on its internal research, that its customers are
primarily female from households headed by professionals, typically ranging in
age from 25 to 54 and
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<PAGE>
having a median family income of approximately $55,000. In addition, the Company
believes its customers are knowledgeable shoppers who frequent five or more
national department stores and are able to recognize the Company's favorable
pricing on first quality, name brand merchandise.
Strong Financial Characteristics. Tuesday Morning has demonstrated an ability
to consistently grow sales while generating strong cash flow. For the twelve
months ended September 30, 1997, Tuesday Morning generated EBITDA of $34.1
million, a 72.5% increase over the comparable period in 1996. During this same
period, capital expenditures were $6.1 million. The Company has consistently
grown its EBITDA since 1993 due to the improved profitability of its existing
store base, while requiring only modest capital expenditures to fund growth.
Flexible, Low Cost Real Estate Approach. The Company's stores are destination-
oriented, and can therefore be located in secondary locations of major suburban
markets, such as strip malls and warehouse zones, in close proximity to their
target customers. As a result, the Company's real estate costs are significantly
lower than those of many other retailers, averaging approximately $8 per square
foot. In addition, virtually all new leases contain a "kick" clause that gives
the Company the ability to terminate the lease without penalty for up to 18
months after lease inception. These kick clauses provide the Company with
significant downside protection in opening new stores by allowing it to vacate a
site that initially proves unprofitable. The Company is able to obtain kick
clauses because it seldom requires significant build out of a lease site and
because it is able to make productive use of challenging space.
Integrated Management Information Systems and Inventory Controls. The Company
believes its management information systems are among the most advanced in the
retailing industry. These systems enable the Company to manage its flow of
almost 80,000 SKUs from approximately 1,000 vendors on a real-time basis in
order to make timely and accurate purchasing, distribution and merchandising
decisions. The Company's proprietary merchandising and inventory control
systems, point of sale system and state-of-the-art distribution management
system are integrated with its financial reporting systems, providing the
Company's buyers with a significant degree of control over inventory
acquisition, distribution and sales performance. The Company's buyers can
review, at the SKU level and on a real-time basis, the status of every open
purchase order, inbound shipment, warehouse receipt, process shipment and item
of store inventory. These systems further allow management to target merchandise
for markdowns in an effective and systematic manner. At September 30, 1997, less
than 5% of the Company's inventory was more than one year old.
BUSINESS STRATEGY
The Company's objective is to sustain its current growth and to enhance its
productivity and operating performance by continuing to build on its existing,
proven strengths. The Company intends to achieve this objective by pursuing the
following existing strategies:
Continue New Store Openings. The Company opened 31 new stores in 1997 and
plans to increase its store base, in new and existing markets, by approximately
32 to 35 stores per year for the foreseeable future. The Company's "no-frills"
approach enables it to open this number of stores for an aggregate cost of only
$2 million per year, or approximately $60,000 per store excluding inventory. The
Company intends to profitably increase its penetration of existing markets,
capitalize on the success it has enjoyed in smaller single-store markets, where
there are often no other retailers offering the Company's first quality
products, and prudently expand into new major metropolitan markets that will
provide the basis for long-term expansion.
Enhance Sales Productivity. The Company has achieved average comparable store
sales growth of approximately 6% per year since its initial public offering in
1986 and 19% for the first nine months of 1997. The growth has resulted from
increases in (i) the number of customer transactions, (ii) the average number of
items purchased per customer visit and (iii) the average price of such items.
The average number of customer transactions has increased as a result of the
increased frequency of stocking its stores during a sales event. The average
number of items purchased by customers has increased as a result of the
introduction of additional impulse-oriented merchandise, and the average price
of items purchased has
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increased due to a greater mix of higher priced items. The Company intends to
continue implementing these merchandising strategies to further enhance sales
productivity.
Capitalize on Favorable Industry Dynamics and Competitive Positioning. The
Company is benefiting from several trends in the retailing industry. The
increase in the application of just-in-time inventory management techniques and
the increase in retailer consolidations have both resulted in a shift of
inventory risk from retailers to manufacturers. In addition, in order to
maintain market share in an increasingly competitive environment, manufacturers
are introducing new products and new packaging more frequently. All of these
factors have contributed to a broad and consistent supply of closeout
merchandise for the Company.
The Company believes it is the only retailer in the closeout industry that
focuses on first quality gift and home furnishings merchandise, in contrast with
most closeout retailers, which are general merchandisers or which focus on
apparel. In addition, the Company caters to upscale customers, while the rest of
the industry generally focuses on lower to middle income consumers. Finally,
unlike other closeout retailers which operate on a year-round basis, Tuesday
Morning operates on an event sale basis. The Company believes that its periodic
schedule of openings causes its customers to plan their visits to the Company's
stores to a greater extent than customers of conventional retailers whose
product offerings are more predictable and store hours more extensive.
Leverage Workforce and Technology. The Company believes that its investments
in information systems and inventory control technology and in doubling its
staff of experienced, specialized buyers over the last four years will bolster
future growth in the breadth of its product offerings and will provide the
support necessary for new store openings for the foreseeable future. The
Company's existing systems technology is scalable, enabling the Company to
expand or to upgrade its systems without significant additional expenditures in
the near term. The Company's corporate infrastructure will also allow for future
growth of the Company without significant expenditures beyond the marginal cost
of hiring additional buyers.
CLOSEOUT RETAILING INDUSTRY
The closeout retailing industry is distinguished from other retail formats by
the manner in which the closeout retailer purchases its goods. Purchasing on a
closeout basis enables the closeout retailer to sell goods at exceptionally low
prices, often well below even the very best discount operators. In addition, the
opportunistic nature of a closeout retailer's buying strategy often results in a
lack of continuity of specific products. The combination of these factors
creates a "treasure hunt" atmosphere for the closeout retailer's customers.
The closeout retailing industry is benefiting from several trends in the
retailing industry. The increase in the application of just-in-time inventory
management techniques and the increase in retailer consolidations have both
resulted in a shift of inventory risk from retailers to manufacturers.
Furthermore, in order to maintain market share in an increasingly competitive
environment, manufacturers are introducing new products and new packaging more
frequently. The Company believes that these trends have helped make the closeout
retailer an integral part of manufacturers' overall distribution strategies. As
a result, manufacturers are increasingly looking for larger, more sophisticated
closeout retailers, such as the Company, that can purchase large and varied
quantities of merchandise and control the distribution and advertising of
specific products to minimize disruption to the manufacturers' traditional
distribution channels.
Closeout merchandise is available to closeout retailers at low prices for a
variety of reasons, including: the inability of a manufacturer or importer to
dispose of merchandise through regular channels; the discontinuance of
merchandise due to a change in style, color, shape or packaging; insufficient
sales to justify continued production of an item; the fact that merchandise is
out of season; the cancellation of orders placed by other retailers; or the
termination of business by a manufacturer or wholesaler. Occasionally, the
closeout retailer may be able to purchase closeout merchandise at low prices
because a manufacturer may have an excess of raw material or production
capacity. Most manufacturers of retail goods anticipate that they will sell a
percentage of their products at substantially reduced prices. Accordingly,
merchandise offered
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to closeout retailers covers most categories of merchandise at all levels of
quality. A closeout retailer's buyers only buy at prices that allow them to
underprice other retailers.
The Company is distinguishable from its competitors within the closeout
retailing industry in several respects. Most retailers in the closeout retailing
industry are either general merchandisers or focus on apparel, while the
Company's focus is on higher-end gift and home furnishings merchandise. In
addition, most closeout retailers focus on lower and middle income consumers,
while the Company generally caters to higher-income customers. Finally, unlike
other closeout retailers which operate on a year-round basis, Tuesday Morning
operates on an event sale basis. The Company believes that its periodic schedule
of openings causes its customers to plan their visits to the Company's stores to
a greater extent than customers of conventional retailers whose product
offerings are more predictable and store hours more extensive.
MERCHANDISE
Tuesday Morning stores sell a wide assortment of new, high-quality, brand-
name, closeout merchandise. The Company does not sell seconds, irregulars, or
factory rejects. The merchandise can be generally described as gift and home
furnishings merchandise and primarily consists of crystal, dinnerware, silver
serving pieces, gourmet housewares, bathroom, bedroom and kitchen accessories,
linens and domestics, luggage, Christmas trim, toys, stationery and silk plants.
Tuesday Morning differs from discount retailers in that it does not stock
continuing lines of merchandise. Although general categories of merchandise are
usually available during each sale, specific lines of merchandise frequently
change, depending upon the availability of closeout merchandise at suitable
prices.
Since its inception, the Company has not experienced any significant
difficulty in obtaining quality closeout merchandise in adequate volumes and at
suitable prices. For the year ended December 31, 1997, the Company's top ten
vendors accounted for approximately 19.6% of total purchases, with no one vendor
accounting for more than 3.5%.
PRICING
Tuesday Morning's pricing policy is to sell all merchandise at 50% to 80%
below the retail prices generally charged by department and specialty stores.
Prices are determined centrally and are uniform at all Tuesday Morning stores.
Once a price is determined for a particular item, labels displaying Tuesday
Morning's three-tiered pricing strategy are affixed to the product. A typical
price tag displays three prices: its competitor's "regular" price, its
competitor's "sale" price and finally the Tuesday Morning closeout price.
Company management and buyers verify retail prices by reviewing prices published
in advertisements and manufacturers' suggested retail price lists and by
visiting department or specialty stores selling similar merchandise. The
Company's advanced management information systems help provide the Company with
excellent control over product pricing, and the availability of daily sales and
inventory information enables the Company to markdown unsold merchandise on a
timely and systematic basis and thereby more effectively manage inventory
levels.
ADVERTISING
The Company plans and implements an event selling advertising program for each
sales event. The program includes direct mail and newspaper advertising and in-
store promotion banners. Prior to each sales event, the Company initiates a
direct mailing to its 4,000,000 preferred customers. These direct mailings offer
customers the opportunity to purchase merchandise prior to the advertising of a
sales event to the general public. After the first three days of each sales
event, the Company commences an advertising campaign in local newspapers in each
of its markets, emphasizing the significant price reductions available to
customers and the high quality of the merchandise offered.
Advertising expenses as a percentage of net sales were approximately 7.2%,
7.3% and 6.4% for the years ended December 31, 1994, 1995 and 1996,
respectively, and 5.8% for the twelve months ended September 30, 1997.
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STORE OPERATIONS
At December 31, 1997, the Company operated 315 Tuesday Morning stores in 33
states. During the year ended December 31, 1997, no single store accounted for
more than 1.3% of the Company's net sales.
The Company does not keep its stores open throughout the year, but instead
opens them seven times a year to conduct approximately four to seven week sales
events during the retailing industry's peak selling seasons. These events
generally occur during the last six weeks of the first quarter, the last eight
weeks of the second and third quarter (which contain two events each) and the
last 12 weeks of the fourth quarter (which also contains two events). To
encourage new and repeat shopping visits for each sales event, the Company has
increased the frequency of merchandise shipments during a sales event. During
each shipment, new items are delivered, stocked and promoted in every Tuesday
Morning store. Tuesday Morning stores are closed to the public between sales
events, and are used in these periods only to house inventory and to restock for
the next sales event.
The Company utilizes a "no-frills" approach to presenting merchandise. Stores
are designed to be functional, with little emphasis placed upon fixtures and
leasehold improvements. All merchandise at each store is displayed by type and
size on racks or counters, and minimum inventory is maintained in stockrooms.
Most merchandise is sold in its original shipping carton. Because most
merchandise is sold on a self-service basis, the Company does not employ people
solely to assist customers in locating merchandise or making selections.
In keeping with Tuesday Morning's advertised policy of "Satisfaction
Guaranteed or Your Money Cheerfully Refunded," any merchandise purchased from
Tuesday Morning stores may be returned within 90 days with proof of purchase,
for any reason. Customers, if not completely satisfied, are given a choice of
either a cash refund or an equivalent value in merchandise.
Operating hours during each sale are typically from 10:00 a.m. to 6:00 p.m.
six days a week and until 8:00 p.m. on Thursday. The Company accepts cash,
personal checks and most major credit cards.
STORE MANAGEMENT
Each store has a manager who is responsible for recruiting, training and
supervising store personnel and assuring that the store is managed in accordance
with Company guidelines and established procedures. Store managers are full-time
employees of the Company. When sales events are not in progress, these employees
review store inventory and supervise restocking activities in preparation for
the next sales event. The Company employs temporary employees at each Tuesday
Morning store to serve as cashiers and to assist in stocking during each sales
event. These temporary employees generally return to work in subsequent sales
events, reducing the need for new hiring prior to each sales event. Typically,
the Company will employ more temporary employees during the first few days of a
sale, when customer traffic is highest.
Company management and area managers visit selected stores while sales are in
progress to review inventory levels and presentation, personnel performance,
expense control, security and adherence to Company procedures. In addition,
regional and area managers periodically meet with Company management to review
store policies and to discuss purchasing, merchandising and advertising
strategies for future sales events.
SITE SELECTION
The Company opened 31 new stores in 1997 and plans to increase its store base
by approximately 32 to 35 stores in each of the next several years, both in new
markets and in existing markets. The new stores are expected to be similar in
size, appearance and operation to existing stores.
When selecting sites for new store locations, the Company reviews detailed
demographic information for each new market area and generally limits its
potential store locations to upper middle class communities. In order to reduce
rental
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<PAGE>
expense, Tuesday Morning does not select prime real estate sites. The Company
believes that its customers are attracted to its stores principally by event
selling, advertising and direct mail marketing that emphasize the large
assortment of quality merchandise and low prices, rather than by location.
Tuesday Morning has generally selected sites where there is a suitable existing
building requiring minimal refurbishing. Fixture costs and store improvements
are not material because of the Company's "no-frills" approach to selling its
merchandise.
WAREHOUSING AND DISTRIBUTION
An important aspect of Tuesday Morning's success involves its ability to
warehouse and distribute merchandise quickly and efficiently. Virtually all
merchandise is received by the Company at its central warehouse and distribution
facilities in Dallas, Texas, where it is inspected, counted, priced, ticketed
and designated for individual stores. The Company warehouses merchandise until
shortly before each sale, at which time merchandise is distributed to individual
Tuesday Morning stores, where it usually remains until sold at that sale or
later sales. The merchandise sold by Tuesday Morning stores is generally carried
by all of its stores. The amount of inventory carried by any single store varies
depending upon the size and projected sales for that store. The Company does not
maintain replenishment inventory in its warehouse and distribution facilities.
Restocking of merchandise occurs only in successive events or in scheduled
merchandise shipments during a sales event, but does not occur in response to
sales activity within individual stores.
The Company has an automated warehouse processing system which includes high-
speed bar code scanners and radio frequency terminals installed in the Company's
forklifts which facilitate efficient sorting and loading of high merchandise
volumes for immediate store delivery. With this technology, the Company can
instantly locate a piece of merchandise within its 905,000 square feet of
warehousing space. The Company also utilizes third party warehousing in
California for forward staging of processed merchandise in order to reduce
restocking lead times as well as to reduce the size of stock rooms in the areas
where real estate costs are expensive and store sizes relatively small. See "--
Management Information Systems." Since 1992, total costs to process inventory
through the Company's warehouse as a percentage of the total cost of inventory
processed have declined 2.3 percentage points, from 10.9% to 8.6%.
The Company utilizes a leased fleet of trucks and trailers to distribute
merchandise to its stores. In addition, at peak stocking periods, the Company
uses common and contract carriers to distribute merchandise to stores.
PROPERTIES
The Company owns one store located adjacent to its corporate offices in
Dallas, Texas. All of the Company's other stores are leased from unaffiliated
parties. The leases for the stores open December 31, 1997 provide for rentals
which ranged from $2.26 to $19.34 per square foot per year, with an average
rental of $8.18 per square foot per year. The annual rent per store is generally
below $50,000 and store rent, as a percent of net sales, was 5.1% for the twelve
months ending December 31, 1997. At December 31, 1997, the remaining maturities
of such leases ranged from three months to approximately 10 years, with the
average term of a store lease being approximately five years. New store leases
typically include "kick clauses," which allow the Company to exit the lease
after 12 to 18 months if the store does not achieve sales expectations. The
Company believes that the termination of any particular lease would not have a
material adverse effect on the Company's operations.
The Company owns approximately 400,000 square feet of building space in
Dallas, Texas. This houses its corporate offices, the main warehouse
distribution facility and one store. The Company also leases 225,000 square feet
of warehouse space in Dallas, Texas. The lease commenced January 1, 1993 and has
been extended to June 30, 2001. In addition, the Company has entered into a
five-year lease for 280,000 square feet of warehouse space which commenced in
May 1997. These current distribution facilities, supplemented with short term
rentals for peak times each year, are considered adequate to meet warehouse
space requirements for the next several years. The Company owns approximately 51
acres of undeveloped land in the north Dallas area. This land is not currently
being used for the business and is currently under contract to be sold.
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MANAGEMENT INFORMATION SYSTEMS
The Company has invested over $10.5 million over the last five years in
computers, bar code scanners and radio frequency terminals, software programming
and related equipment, technology and training. All of the Company's hardware
and software, except for one software package, are Year 2000 compliant. No
significant expenditures are anticipated in the foreseeable future. The Company
maintains a corporate local area network (LAN), an inventory tracking and
processing system and a point of sale system which enable it to efficiently
control and process its inventory. Forklifts at the Company's warehouse are
equipped with bar code scanners and radio frequency terminals, and the Company
has more than 1,000 POS terminals, which capture daily sales data at the SKU
level. The data is polled daily by the central office and used to identify
selling trends on a Company-wide basis for each sale.
TRADEMARKS AND TRADENAMES
The Company has registered the name "Tuesday Morning" as a service mark with
the United States Patent and Trademark office.
COMPETITION
The Company competes in the sale of merchandise with a variety of other retail
merchandisers, including department, discount and specialty stores, many of
which have locations nationwide, are larger and have greater financial resources
than the Company. In addition, at various times throughout the year, department,
discount and specialty stores also offer merchandise similar to that sold by the
Company at reduced prices.
Unlike its competitors, which primarily offer continuing lines of merchandise,
the Company offers changing lines of merchandise, depending on availability at
suitable prices. In addition, the Company distinguishes itself from other
retailers by using an event based selling strategy. The Company believes that
its periodic schedule of openings causes its customers to plan their visits to
the Company's stores to a greater extent than customers of conventional
retailers whose product offerings are more predictable and store hours more
extensive. The Company competes with other retail establishments by offering new
merchandise, all of which is sold at substantial reductions from original retail
prices, and by offering a changing variety of high quality merchandise at prices
which the Company believes the customer will recognize as significant values.
EMPLOYEES
At December 31, 1997, the Company employed approximately 776 persons on a
full-time basis and approximately 3,416 individuals in part-time positions. The
Company's employees are not represented by any union. The Company has not
experienced any work stoppage due to labor disagreements and regards its
employee relations as good.
LEGAL PROCEEDINGS
The Company is not aware of any legal proceedings pending or threatened
against the Company that could have a material adverse effect on its financial
position or results of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages as of January 31, 1998, and principal positions of the
Company's directors, executive officers and key employees are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lloyd L. Ross............. 62 Chairman of the Board
Jerry M. Smith............ 61 President, Chief Executive Officer and Director
Mark E. Jarvis............ 46 Senior Vice President and Chief Financial Officer
G. Michael Anderson....... 45 Senior Vice President, Buying Group
Duane A. Huesers.......... 42 Vice President, Finance and Assistant Secretary
Richard Nance............. 51 Vice President, Information Systems of Tuesday
Morning, Inc.
Karen Costigan............ 48 Vice President, Real Estate of Tuesday Morning, Inc.
Andrew Paris.............. 39 Vice President, Store Operations of Tuesday
Morning, Inc.
William J. Hunckler, III.. 44 Director
Benjamin D. Chereskin..... 39 Director
Robin P. Selati........... 31 Director
</TABLE>
The following is a brief description of the business experience of the
Company's directors, executive officers and key employees.
Lloyd L. Ross is the founder of the Company. Since 1972, Mr. Ross has
devoted his full time to the organization and operation of the Company and has
served as Chairman of the Board and Chief Executive Officer since its
incorporation in 1974. He also served as President of the Company from 1975 to
1985 and from 1989 to 1992. On December 29, 1997, Mr. Ross stepped down as Chief
Executive Officer but continues to serve as Chairman of the Board.
Jerry M. Smith joined the Company in 1984, was elected Vice President-
Advertising/Public Relations and Store Operations in 1986 and was elected Senior
Vice President - Advertising/Public Relations and Store Operations in 1989. He
was elected Executive Vice President and appointed a director in November 1992.
In September 1994, Mr. Smith was elected President and Chief Operating Officer.
On December 29, 1997, Mr. Smith became the Company's Chief Executive Officer.
Mark E. Jarvis joined the Company in September 1992 as Senior Vice
President and Chief Financial Officer. From 1988 to 1992, he served in several
capacities (most recently as Vice President and Treasurer) for Pier 1 Imports,
Inc., a specialty retailer.
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G. Michael Anderson joined the Company in September 1989 as a buyer. In
1991, he was appointed Vice President, Buying, Smallwares Division. Mr. Anderson
was elected Senior Vice President, Buying Group in December 1996. Prior to
joining the Company, Mr. Anderson was a buyer for Affiliated Foods and
Merchandise Manager for Fox-Meyer Drug Company.
Duane A. Huesers joined the Company in 1992 as Vice President, Finance.
Prior to joining the Company, Mr. Huesers served as Senior Vice President and
Chief Financial Officer of Bookstop, Inc., a chain of book superstores.
Richard Nance joined the Company in 1992 as Vice President, Information
Systems. Prior to joining the Company, Mr. Nance was part of the information
systems consulting group hired by the Company in 1991. Mr. Nance was elected
Vice President, Information Systems in 1992.
Karen Costigan joined the Company in 1982 as a Regional Manager of Store
Operations, and became head of the real estate division in 1988. Ms. Costigan
was elected Vice President, Real Estate in 1991. Prior to joining the Company,
Ms. Costigan was Assistant Managing Director of Lord & Taylor in Chicago, Oak
Brook and Dallas Northpark.
Andrew Paris joined the Company in 1990 as Regional Manager of Store
Operations. He was elected Vice President, Store Operations in 1996. Prior to
joining the Company, Mr. Paris was Manager of Ramp Operations at People
Express/Continental Airlines.
William J. Hunckler, III has served as a director of the Company since
December 29, 1997. Mr. Hunckler has been a Vice President of MDP since co-
founding the firm in 1993. Prior to 1993, Mr. Hunckler was with First Chicago
Venture Capital for 13 years. Mr. Hunckler currently serves on the board of
directors of Beverages and More, Inc., The Cornerstone Investments Group, Inc.
and Peter Piper, Inc.
Benjamin D. Chereskin has served as a director of the Company since
December 29, 1997. Mr. Chereskin has been a Vice President of MDP since co-
founding the firm in 1993. Prior to 1993, Mr. Chereskin was with First Chicago
Venture Capital for nine years. Mr. Chereskin currently serves on the board of
directors of Beverages and More, Inc., The Cornerstone Investments Group, Inc.
and Carrols Corporation.
Robin P. Selati has served as a director of the Company since December 29,
1997. Mr. Selati has been with MDP since 1993. His prior experience was with
Alex. Brown & Sons Incorporated as a Financial Analyst in the consumer/retailing
investment banking group. Mr. Selati currently serves on the board of directors
of Peter Piper, Inc. and Carrols Corporation.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued by the Company during the three years ended December 31, 1997 to or
for the Company's chief executive officer and the other executive officers of
the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- -------------------------------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS/SAR'S COMPENSATION(a)
- --------------------------- ---- ------ ------------- --------------
<S> <C> <C> <C> <C>
Lloyd L. Ross.................... 1997 $444,100 -- $8,544
Chief Executive Officer in 1996 1996 375,400 -- 5,751
1995 354,150 -- 6,769
Jerry M. Smith................... 1997 375,100 -- 9,999
President 1996 297,600 -- 9,670
1995 297,100 150,000 7,085
Mark E. Jarvis................... 1997 179,800 -- 7,245
Senior Vice President and 1996 164,600 -- 8,010
Chief Financial Officer 1995 157,950 -- 6.610
G. Michael Anderson (b).......... 1997 209,600 -- 6,170
Senior Vice President 1996 128,100 -- 4,870
</TABLE>
_________________________
(a) The amounts indicated reflect the aggregate value of the Company's
contributions for each of the named executive officers to the Company's
401(k) defined contribution plan, group term life insurance and the
Company's stock purchase plan.
(b) Mr. Anderson was promoted to the position of Senior Vice President, Buying
Group, in December 1996.
CONSULTING AND EMPLOYMENT AGREEMENTS
On December 29, 1997, Lloyd L. Ross, the Company's founder, entered into a
two-year consulting and non-competition agreement which provides that he will
serve as Chairman of the Company's Board of Directors and will facilitate in the
Company's relationships with third parties and suppliers. Mr. Ross's consulting
agreement provides for annual compensation of $250,000 per year (along with
benefits similar to those offered to him prior to the Acquisition) with an
expected time commitment for Mr. Ross of 60 days per year. The consulting
agreement for Mr. Ross also contains noncompete and nonsolicitation covenants
and confidentiality provisions.
On December 29, 1997, Jerry M. Smith, the Company's President since 1994,
entered into a three-year employment agreement which provides that he will serve
as the Company's President and Chief Executive Officer, as well as a director.
Mr. Smith will receive an annual base salary of $475,000 per year, subject to
possible increases, and a maximum annual bonus of up to 50% of his base salary,
and will continue to receive the same benefits offered to him prior to the
Acquisition. Mr. Smith's employment agreement also contains noncompete and
nonsolicitation covenants and confidentiality provisions. See "Risk Factors--
Dependence on Key Personnel."
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INVESTMENT BY MANAGEMENT AND STOCK OPTION PLAN
In connection with the Acquisition, Messrs. Ross, Smith, Jarvis and
Anderson and certain other management members of the Company acquired the
equivalent of approximately 7.6% of the Company's Common Stock outstanding
immediately after the Acquisition. On December 29, 1997, the Company adopted a
new stock option plan under which options may be granted to key employees
covering up to 10% of the Company's fully diluted common equity. Mr. Smith has
been granted options under the new plan covering 3% of such common equity. See
"Certain Transactions."
CERTAIN TRANSACTIONS
Since 1994, Lloyd L. Ross, an executive officer and a director of the
Company, has borrowed funds from the Company from time to time. Mr. Ross's
borrowings, which bore interest at the prime rate, had a balance, including
accrued interest, of approximately $3,450,000 as of the Closing. In 1992, Jerry
M. Smith, an executive officer and a director of the Company, received a loan
for the purchase of Company stock which, including accrued interest, had a
balance of approximately $189,500 as of the Closing. Mr. Smith's loan also bore
interest at the prime rate. On December 29, 1997, the maturity date of each such
loan was extended to the seventh anniversary of the Closing except in certain
circumstances described below. In addition, the interest rate of each such loan
was changed, as of the Closing, from the prime rate of interest to the mid-term
applicable federal rate as defined in Internal Revenue Code Section 1274(d).
In order to effect the Acquisition, the Company entered into a merger
agreement (the "Merger Agreement") with Madison Dearborn Partners II, L.P., a
Delaware limited partnership ("MDP"), and its wholly owned subsidiary, Tuesday
Morning Acquisition Corp. ("Merger Sub"), pursuant to which Merger Sub merged
with and into the Company and the Company became the surviving corporation (the
"Merger"). Prior to the Merger, MDP assigned its rights and interests under the
Merger Agreement to its affiliate, Madison Dearborn.
In the Acquisition, Messrs. Ross and Smith, together with Mark E. Jarvis
and G. Michael Anderson, each an executive officer of the Company, and certain
other members of the Company's management (the "Management Group") invested, in
the aggregate, $7.5 million in shares of junior preferred stock and Common Stock
of the Company. Prior to the Merger, the Management Group contributed shares of
the Company's common stock to Merger Sub in the following amounts: approximately
$5.5 million in the case of Mr. Ross, approximately $1.3 million in the case of
Mr. Smith and a total of approximately $0.7 million from the other members of
the Management Group. Members of the Management Group exercised stock options to
the extent that they did not already own shares necessary to obtain the shares
to be contributed.
In the Merger, Mr. Ross's ownership position in the Merger Sub was
converted into shares of the Company's Common Stock (representing approximately
5.5% of the total outstanding immediately after the Acquisition) and
approximately $5.2 million liquidation value of the Company's Junior Redeemable
Preferred Stock (as defined). See "Description of the Capital Stock - Junior
Redeemable Preferred Stock." On December 29, 1997, Mr. Ross entered into a Term
Put Agreement with the Company and Madison Dearborn which provides him with the
right, 24 months after the Closing, to put his Junior Redeemable Preferred Stock
to the Company or Madison Dearborn for an amount equal to liquidation value plus
any accrued but unpaid dividends. In the event that Mr. Ross exercises the put,
he will be required to transfer his shares of the Company's Common Stock to the
Company or Madison Dearborn, as the case may be, for no additional consideration
and his loan will become due and payable to the Company or Madison Dearborn, as
the case may be, at such time. Mr. Ross's loan will also become due and payable
at such time when the Company exercises its option to redeem his shares of the
Junior Redeemable Preferred Stock.
In the Merger, Mr. Smith's ownership position in the Merger Sub was
converted into shares of the Company's Common Stock (representing approximately
1.3% of the total outstanding immediately after the Acquisition) and
approximately $1.2 million liquidation value of the Junior Perpetual Preferred
Stock (as defined). On December 29, 1997, Mr. Smith entered into an Employment
Put Agreement with the Company which provides him with the right to require the
Company to repurchase approximately 76% of the shares of Common Stock and Junior
Perpetual Preferred Stock held by
49
<PAGE>
him (i) at any time on or after December 31, 2000 or (ii) prior to December 31,
2000 under certain circumstances, including the termination of his employment
without cause and his death, permanent disability or incapacity. Under Mr.
Smith's Employment Put Agreement, the Company will have the option to pay the
purchase price for Mr. Smith's securities 25% in cash and 75% by the issuance of
a subordinated promissory note payable in three equal annual installments,
subject to corporate law restrictions and restrictions contained in the Senior
Credit Facility, the Indenture, the Certificate of Designation and the Exchange
Indenture.
In the Merger, the ownership position in the Merger Sub of the rest of the
Management Group, including those of Messrs. Jarvis and Anderson, was converted
into shares of the Company's Common Stock and Junior Perpetual Preferred Stock.
The Common Stock received by such members of the Company's management
represented approximately 0.7% of the total outstanding immediately after the
Acquisition. They also received shares of Junior Perpetual Preferred Stock
having liquidation values, in the aggregate, of $0.7 million. See "Description
of the Capital Stock--Junior Preferred Stock."
As a result of the transactions described above, following the Acquisition,
the Management Group owned, in the aggregate, approximately $5.2 million
liquidation value of the Junior Redeemable Preferred Stock, $1.9 million
liquidation value of the Junior Perpetual Preferred Stock and approximately 7.6%
of the Company's Common Stock outstanding immediately after the Acquisition.
In connection with the Acquisition, Madison Dearborn acquired a number of
shares representing approximately 85.8% of the Company's Common Stock
outstanding immediately after the Acquisition (approximately 77.2% on a fully
diluted basis) and approximately $80.8 million liquidation value of the Junior
Redeemable Preferred Stock of the Company for an aggregate purchase price of
$85.4 million. Madison Dearborn renders certain management and advisory services
to the Company for which it receives from the Company a fee in the amount of
$350,000 per year.
During 1996, the Company paid to Saunders, Lubinski and White approximately
$11 million for media, advertising and production services. Mr Saunders, a
director of the Company since December 1996, was an officer of Saunders,
Lubinski and White. He has ceased to be affiliated with such firm since January
1, 1997.
In connection with the Acquisition, Madison Dearborn, the Management Group
and the Company entered into a Stockholders Agreement which provides for, among
other things, certain restrictions on the transfer of the Junior Redeemable
Preferred Stock, the Junior Perpetual Stock and the Common Stock held by the
Management Group (collectively, the "Management Shares"), the right of the
Company to sell or cause to be sold all or a portion of the Management Shares in
connection with a sale of the Company, the right of the Company to repurchase
the Management Shares of any member of the Management Group upon the termination
of such member for cause, certain rights by the Management Group to participate
in certain sales of Common Stock by Madison Dearborn under certain
circumstances, certain demand registration rights in favor of Madison Dearborn
by which it may cause the Company to register all or part of the Common Stock
held by it under the Securities Act, and certain "piggyback" registration rights
in favor of Madison Dearborn and the Management Group.
50
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of December 31, 1997 by each
person who beneficially owns more than five percent of such Common Stock and by
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Beneficial Ownership(a)
-----------------------------------
Number of Percent of
Name of Beneficial Owner Shares Shares
------------------------ ---------- ----------
<S> <C> <C>
Madison Dearborn Capital Partners II, L.P.................... 3,216,482 85.8%
Three First National Plaza
Chicago, IL 60602
Lloyd L. Ross (b)............................................ 207,149 5.5%
Jerry M. Smith............................................... 56,377 1.5%
Mark E. Jarvis............................................... 5,650 *
G. Michael Anderson.......................................... 1,883 *
Benjamin D. Chereskin (c).................................... -- --
William J. Hunckler, III (c)................................. -- --
Robin P. Selati (c).......................................... -- --
All directors and executive officers as a group (7 persons).. 271,059 7.2%
</TABLE>
_________________________
* Denotes ownership of less than 1.0%.
(a) "Beneficial ownership" generally means any person who, directly or
indirectly, has or shares voting or investment power with respect to a
security. Unless otherwise indicated, the Company believes that each
shareholder has sole voting and investment power with regard to the shares
listed as beneficially owned .
(b) The address of Mr. Lloyd is the address of the Company.
(c) Messrs. Chereskin, Hunckler and Selati are principals of Madison Dearborn
Partners, Inc., the general partner of Madison Dearborn Partners, L.P., the
general partner of Madison Dearborn Capital Partners II, L.P., and
therefore may be deemed to beneficially own the shares owned by Madison
Dearborn Capital Partners II, L.P.
51
<PAGE>
DESCRIPTION OF THE SENIOR CREDIT FACILITY
As of the Closing, the Company entered into the Senior Credit Facility with
the various lenders thereunder (collectively, the "Lenders"), Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as arranger and
syndication agent, the Subsidiary Guarantors and Fleet National Bank, as
administrative agent (the "Agent"). The following is a summary description of
the principal terms of the Senior Credit Facility. The description set forth
below does not purport to be complete and is qualified in its entirety by
reference to the agreements setting forth the principal terms and conditions of
the Senior Credit Facility, which are available upon request from the Company.
Structure. The Senior Credit Facility consists of (a) Term Loans in an
aggregate principal amount of $110.0 million (consisting of $40.0 million in
Term Loan A loans and $70.0 million in Term Loan B loans) and (b) a Revolving
Credit Facility providing for revolving loans to the Company (including a
sublimit for letters of credit) in an aggregate principal amount at any time not
to exceed the lesser of: (i) $90.0 million and (ii) the Company's borrowing
base described below. The Revolving Credit Facility may be increased to $115.0
million subject to certain restrictions in the Senior Credit Facility and the
Indenture.
The entire amount of the Term Loans was borrowed under the Senior Credit
Facility as of the Closing. No amounts were initially borrowed under the
Revolving Credit Facility. The Revolving Credit Facility may be utilized to fund
the Company's working capital requirements, including issuance of stand-by and
trade letters of credit and for other general corporate purposes.
The borrowing base under the Revolving Credit Facility is up to 50% (60%
during the months of July through October) of the Company's eligible inventory.
Eligible inventory does not include obsolete inventory and certain other items.
Availability. The Revolving Credit Facility is be available at any time
until the fifth anniversary of the Closing subject to the fulfillment of
customary conditions precedent, including the absence of a default under the
Senior Credit Facility and compliance with the borrowing base limitation
described above.
Security; Guarantees. The Company's obligations under the Senior Credit
Facility are guaranteed by each existing and subsequently acquired or organized
subsidiary of the Company, subject to certain exceptions. The Senior Credit
Facility and the guarantees thereof are secured by a perfected first priority
security interest in all substantial tangible and intangible assets of the
Company and the guarantors and proceeds thereof, subject to certain permitted
liens.
Interest; Maturity. Borrowings under the Senior Credit Facility bear
interest, payable quarterly (or at the end of each shorter interest period in
the case of LIBOR loans), at a rate per annum equal (at the Company's option)
to: (i) LIBOR plus an applicable margin or (ii) an alternate base rate equal to
the Agent's corporate base rate plus an applicable margin. Initially, the
applicable LIBOR-margin is 2.5% per annum for the Revolving Credit Facility and
the Term Loan A loans and 3.0% per annum for the Term Loan B loans and 1.0% per
annum less in each case for alternate base rate loans. The applicable margins
vary depending upon the Company's leverage ratio. The Term Loan A loans and the
Revolving Credit Facility mature on the fifth anniversary of the Closing, and
the Term Loan B loans mature on the seventh anniversary. The Term Loans are
required to be repaid, subject to certain exceptions, with: 75% of annual
Excess Cash Flows (as defined) (such percentage to decline if a target ratio of
total senior debt to EBITDA is achieved); 100% of the net proceeds of certain
asset sales, insurance recoveries, debt incurrences and sale leasebacks over
certain thresholds; and 50% of the net proceeds of public and private equity
offerings and capital contributions.
Fees. The Company is required to pay to the Lenders, on a quarterly basis,
a commitment fee equal to 1/2 of 1% per annum on the undrawn portion of the
Revolving Credit Facility, and is required to pay to the Agent an annual agency
fee. The commitment fee will vary depending on the Company's leverage ratio. The
Company is also obligated to pay (i) a per annum letter of credit fee equal to
the applicable LIBOR-margin for the Revolving Credit Facility on the aggregate
undrawn
52
<PAGE>
amount of outstanding letters of credit and (ii) an issuing fee for the letter
of credit issuing bank equal to 1/4 of 1% per annum on the face amount of the
letter of credit.
Covenants. The Senior Credit Facility contains a number of covenants that,
among other things, restrict the ability of the Company and its subsidiaries to
incur additional indebtedness, create liens and give further negative pledges,
make investments or loans or enter into joint ventures, create guarantees and
other contingent obligations, pay dividends on or redeem or repurchase equity
interests, merge, acquire other businesses, sell subsidiary stock, make capital
expenditures, enter into sale leasebacks, sell or discount receivables, engage
in certain transactions with affiliates, change its business, amend the
Indenture or other material agreements, create subsidiaries and prepay other
debt, including the Notes. In addition, the Senior Credit Facility requires
that the Company comply with specified ratios and tests, including minimum
interest coverage and fixed charge coverage ratios, minimum trailing four
quarter EBITDA and a maximum ratio of total debt to trailing four quarter
EBITDA.
Events of Default. The Senior Credit Facility contains customary events of
default, including non-payment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants, cross-
default and cross-acceleration to certain other indebtedness, certain events of
bankruptcy and insolvency, certain events under the Employee Retirement Income
Security Act of 1974, as amended, material judgments, actual or asserted
invalidity of any guarantee or security interest and a change of control in
certain circumstances as set forth therein.
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<PAGE>
DESCRIPTION OF THE UNITS
Each unit consists of one share of Senior Exchangeable Preferred Stock and
one share of Common Stock. The Senior Exchangeable Preferred Stock and the
Common Stock will become separately transferable upon the earlier to occur of
(i) June 15, 1998; (ii) the occurrence of a Change in Control; (iii) the date on
which a Preferred Stock Registration Statement is declared effective; (iv)
immediately prior to any redemption of Preferred Stock by the Company with the
proceeds of a Public Equity Offering and (v) such earlier date as determined by
Merrill Lynch in its sole discretion (the date of the occurrence of an event
specified in clauses (i) - (v) being the "Separation Date"). See "The Preferred
Stock Exchange Offer." See "Description of the Capital Stock" for further
information concerning the Common Stock offered pursuant to the Initial Unit
Offering.
NEW SENIOR EXCHANGEABLE PREFERRED STOCK
The terms of the New Senior Exchangeable Preferred Stock include those
stated in the Certificate of Designation. The form and terms of the New Senior
Exchangeable Preferred Stock are the same as the form and terms of the Old
Senior Exchangeable Preferred Stock (which they replace) except that (i) the New
Senior Exchangeable Preferred Stock bears a Series B designation, (ii) the New
Senior Exchangeable Preferred Stock has been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof, and
(iii) the holders of New Senior Exchangeable Preferred Stock will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for an increase in the dividend rate on the Old Senior
Exchangeable Preferred Stock in certain circumstances relating to the timing of
the Preferred Stock Exchange Offer, which rights will terminate when the
Preferred Stock Exchange Offer is consummated. The New Senior Exchangeable
Preferred Stock is subject to all such terms, and holders of the New Senior
Exchangeable Preferred Stock are referred to the Certificate of Designation for
a statement of them. The following is a summary of the material terms and
provisions of the New Senior Exchangeable Preferred Stock. This summary does not
purport to be a complete description of the New Senior Exchangeable Preferred
Stock and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the New Senior Exchangeable Preferred Stock and the
Certificate of Designation (including the definitions contained therein). A copy
of the Certificate of Designation has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Definitions relating
to certain capitalized terms are set forth under "--Exchange Debentures--Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Certificate of Designation and such definitions are incorporated herein by
reference. The Old Senior Exchangeable Preferred Stock and the New Senior
Exchangeable Preferred Stock are sometimes referred to herein collectively as
the "Senior Exchangeable Preferred Stock." Any descriptions of the Senior
Exchangeable Preferred Stock presented in the future tense shall refer to the
New Senior Exchangeable Preferred Stock, where appropriate.
GENERAL
The Board of Directors of the Company adopted resolutions authorizing the
issuance of up to 1,000,000 shares of Senior Exchangeable Preferred Stock, which
consisted of 250,000 shares of Old Senior Exchangeable Preferred Stock which
were issued in the Initial Unit Offering plus 250,000 additional shares of
Senior Exchangeable Preferred Stock which may be used to pay dividends on the
Senior Exchangeable Preferred Stock if the Company elects to pay dividends in
additional shares of Senior Exchangeable Preferred Stock, and filed a
Certificate of Designation with respect thereto with the Secretary of State of
the State of Delaware as required by Delaware law. The Senior Exchangeable
Preferred Stock will rank junior in right of payment to all liabilities and
obligations (whether or not for borrowed money) of the Company (other than
Common Stock and any present and future classes of preferred stock of the
Company). In addition, creditors and stockholders of the Company's subsidiaries
will also have priority over the Senior Exchangeable Preferred Stock with
respect to claims on the assets of such subsidiaries. The Company may, at its
option, exchange the Senior Exchangeable Preferred Stock, in whole but not in
part, into Exchange Debentures on any scheduled dividend payment date. See "--
Exchange." The Senior Exchangeable Preferred Stock, when issued and paid for
and when issued in lieu of cash dividends, will be fully paid and non-
assessable, and the holders thereof will have no subscription or preemptive
rights related thereto.
54
<PAGE>
RANKING
The Senior Exchangeable Preferred Stock, with respect to dividends and
distributions upon the liquidation, winding-up and dissolution of the Company,
will rank senior to all classes of common stock and each other class of capital
stock or series of preferred stock of the Company, except as set forth in this
paragraph (collectively referred to, together with all classes of common stock
of the Company, as "Junior Securities"). The Certificate of Designation
provides that the Company may not, without the consent of the holders of a
majority of the then outstanding shares of Senior Exchangeable Preferred Stock,
authorize, create (by way of reclassification or otherwise) or issue any class
or series of capital stock of the Company ranking on a parity with the Senior
Exchangeable Preferred Stock (collectively, the "Parity Securities") or any
obligation or security convertible or exchangeable into or evidencing a right to
purchase, shares of any class or series of Parity Securities. The Certificate
of Designation provides that the Company may not, without the consent of the
holders of at least two-thirds of the then outstanding shares of Senior
Exchangeable Preferred Stock, authorize, create (by way of reclassification or
otherwise) or issue any class or series of capital stock of the Company ranking
senior to the Senior Exchangeable Preferred Stock (collectively, the "Senior
Securities") or any obligation or security convertible or exchangeable into or
evidencing a right to purchase, shares of any class or series of Senior
Securities.
DIVIDENDS
Holders of Senior Exchangeable Preferred Stock will be entitled, when, as
and if declared by the Board of Directors, out of funds legally available
therefor, to receive dividends on each outstanding share of the Senior
Exchangeable Preferred Stock, at the annual rate of 13 1/4% of the then
effective liquidation preference per share of Senior Exchangeable Preferred
Stock. Dividends on the Senior Exchangeable Preferred Stock are payable
quarterly in arrears on March 15, June 15, September 15 and December 15 of each
year, commencing on March 15, 1998. The right to dividends on the Senior
Exchangeable Preferred Stock will be cumulative (whether or not earned or
declared), without interest, from the date of issuance of the Senior
Exchangeable Preferred Stock. On and before December 15, 2002, dividends may, at
the option of the Company, be paid either in cash or in additional fully paid
and non-assessable shares of Senior Exchangeable Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends. The
issuance of such additional shares of Senior Exchangeable Preferred Stock will
constitute "payment" of the related dividend for all purposes of the Certificate
of Designation. After December 15, 2002, dividends may only be paid in cash.
If any dividend payable on any dividend payment date on or before December
15, 2002 is not declared or paid in full in cash on such dividend payment date,
the amount payable as dividends on such dividend payment date that is not paid
in cash on such dividend payment date will be added to the liquidation
preference of the Senior Exchangeable Preferred Stock on such dividend payment
date until such dividend is paid in additional fully paid and non-assessable
shares of Senior Exchangeable Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Securities for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
in full or declared and, if payable in cash, a sum in cash sufficient for such
payment set apart for such payment on the Senior Exchangeable Preferred Stock.
If full dividends are not so paid, the Senior Exchangeable Preferred Stock shall
share dividends pro rata with the Parity Securities. No dividends may be paid or
set apart for such payment on Junior Securities (except dividends on Junior
Securities in additional shares of Junior Securities), and no Junior Securities
or Parity Securities may be repurchased, redeemed or otherwise retired nor may
funds be set apart for payment with respect thereto, if full dividends have not
been paid on the Senior Exchangeable Preferred Stock; provided, however, the
Company may repurchase, redeem or otherwise acquire or retire for value the
Management Stock in accordance with the provisions of "Limitation on Restricted
Payments." Holders of the Senior Exchangeable Preferred Stock will not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of the full cumulative dividends as herein described.
55
<PAGE>
VOTING RIGHTS
Holders of the Senior Exchangeable Preferred Stock will have no voting
rights with respect to general corporate matters except as provided by law or as
set forth in the Certificate of Designation. The Certificate of Designation
provides that if (a) dividends on the Senior Exchangeable Preferred Stock are in
arrears and unpaid (and if with respect to dividends payable for periods
beginning after December 15, 2002, such dividends are not paid in cash) for six
quarterly periods (whether or not consecutive); (b) the Company fails to
discharge its obligation to redeem the Senior Exchangeable Preferred Stock on
the Mandatory Redemption Date or fails to otherwise discharge any redemption
obligation with respect to the Senior Exchangeable Preferred Stock; (c) the
Company fails to make a Change in Control Offer if such offer is required by the
provisions set forth under "--Change in Control" below or fails to purchase
shares of Senior Exchangeable Preferred Stock from holders who elect to have
such shares purchased pursuant to the Change in Control Offer; (d) a breach or
violation of any of the provisions described under the caption "--Certain
Provisions" occurs and the breach or violation continues for a period of 30 days
or more after the Company receives notice thereof specifying the default from
the holders of at least 25% of the shares of Senior Exchangeable Preferred Stock
then outstanding; or (e) the Company or any Restricted Subsidiary fails to pay
at the final stated maturity (giving effect to any extensions thereof) the
principal amount of any Indebtedness of the Company or any Restricted
Subsidiary, or the final stated maturity of any such Indebtedness is
accelerated, if the aggregate principal amount of such Indebtedness in default
for failure to pay principal at the final stated maturity (giving effect to any
extensions thereof) or that has been accelerated, aggregates $10.0 million or
more at any time, then the holders of the majority of the then outstanding
Senior Exchangeable Preferred Stock, voting or consenting, as the case may be,
as one class, will be entitled to elect the lesser of two directors of the Board
of Directors or at least 25% of the Board of Directors. Such voting rights will
continue until such time as, in the case of a dividend default, all dividends in
arrears on the Senior Exchangeable Preferred Stock are paid in full (and with
respect to dividends payable for periods beginning after December 15, 2002, paid
in cash) and, in all other cases, any failure, breach or default giving rise to
such voting rights is remedied or waived by the holders of at least a majority
of the shares of Senior Exchangeable Preferred Stock then outstanding, at which
time the term of the directors elected pursuant to the provisions of this
paragraph shall terminate. Each such event described in clauses (a) through (e)
above is referred to herein as a "Voting Rights Triggering Event."
Any vacancy occurring in the office of the director elected by holders of
the Senior Exchangeable Preferred Stock may be filled by the remaining directors
elected by such holders unless and until such vacancy shall be filled by such
holders.
The Certificate of Designation also provides that the Company may not amend
the Certificate of Designation so as to affect adversely the specified rights,
preferences, privileges or voting rights of holders of shares of the Senior
Exchangeable Preferred Stock, or authorize the issuance of any additional shares
of Senior Exchangeable Preferred Stock, without the affirmative vote or consent
of the holders of at least a majority of the outstanding shares of Senior
Exchangeable Preferred Stock, voting or consenting, as the case may be, as one
class. The holders of at least a majority of the outstanding shares of Senior
Exchangeable Preferred Stock, voting or consenting, as the case may be, as one
class, may also waive compliance with any provision of the Certificate of
Designation. In addition, as provided above under "--Ranking," the Company may
not authorize, create (by way of reclassification or otherwise) or issue (i) any
Parity Securities, or any obligation or security convertible into or evidencing
the right to purchase any Parity Securities, without the affirmative vote or
consent of the holders of a majority of the then outstanding shares of Senior
Exchangeable Preferred Stock and (ii) any Senior Securities, or any obligation
or security convertible into or evidencing the right to purchase Senior
Securities, without the affirmative vote or consent of the Holders of at least
two-thirds of the then outstanding shares of the Senior Exchangeable Preferred
Stock, in each case voting as a separate class.
Under Delaware law, holders of preferred stock will be entitled to vote as
a class upon a proposed amendment to the certificate of incorporation, whether
or not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the par value of the shares of such class,
increase or decrease the aggregate number of authorized shares of such class or
alter or change the powers, preferences or special rights of the shares of such
class so as to affect them adversely.
56
<PAGE>
REDEMPTION
Mandatory Redemption
On December 15, 2009 (the "Mandatory Redemption Date"), the Company will be
required to redeem (subject to the legal availability of funds therefor) all
outstanding shares of Senior Exchangeable Preferred Stock at a price equal to
the liquidation preference thereof plus, without duplication, all accumulated
and unpaid dividends, if any, to the date of redemption. The Company will not
be required to make sinking fund payments with respect to the Senior
Exchangeable Preferred Stock.
Optional Redemption
The Company at its option may, but shall not be required to, redeem for
cash the Senior Exchangeable Preferred Stock (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after December 15, 2002, in whole or in part, at the
redemption prices (expressed as a percentage of the liquidation preference
thereof) set forth below, together with, without duplication, all accumulated
and unpaid dividends, if any, to the date of redemption (including an amount in
cash equal to a prorated dividend for the period from the dividend payment date
immediately prior to the date of redemption to the date of redemption), if
redeemed during the twelve-month period beginning on December 15 of each of the
years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002................................. 109.938%
2003................................. 106.625%
2004................................. 103.313%
2005 and thereafter.................. 100.000%
</TABLE>
In addition, at any time on or prior to December 15, 2001, the Company may
redeem for cash all, but not less than all, of the outstanding Senior
Exchangeable Preferred Stock within 20 days of a Public Equity Offering with the
net proceeds of such offering at a redemption price per share equal to 113.25%
of the aggregate liquidation preference thereof, together with, without
duplication, an amount in cash equal to all accumulated and unpaid dividends, if
any, to the date of redemption (including an amount in cash equal to a prorated
dividend for the period from the dividend payment date immediately prior to the
date of redemption to the date of redemption), subject to the right of holders
of record on the relevant record date to receive dividends due on a dividend
payment date.
No optional redemption may be authorized or made unless on or prior to such
redemption full unpaid cumulative dividends shall have been paid or a sum set
apart for such payment on the Senior Exchangeable Preferred Stock.
If less than all of the shares of the Senior Exchangeable Preferred Stock
are to be redeemed, the shares of Senior Exchangeable Preferred Stock to be
redeemed will be selected not more than 60 days prior to the redemption date by
the Transfer Agent by such method as the Transfer Agent will deem fair and
appropriate; provided, however, that no such partial redemption will reduce the
principal amount of the shares of Senior Exchangeable Preferred Stock not
redeemed to less than $100 per share. Notice of redemption will be mailed, first
class postage prepaid, at least 30 but not more than 60 days before the
redemption date to each holder of Senior Exchangeable Preferred Stock to be
redeemed at its registered address. On or after the redemption date, dividends
will cease to accumulate on the shares of Senior Exchangeable Preferred Stock
called for redemption and accepted for payment.
Procedure for Redemption
On and after a redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accumulate on shares
of Senior Exchangeable Preferred Stock called for redemption, and all rights of
holders of such shares will terminate except for the right to receive the
redemption price. The Company will send a
57
<PAGE>
written notice of redemption by first class mail to each holder of record of
shares of Senior Exchangeable Preferred Stock, not fewer than 30 days nor more
than 60 days prior to the date fixed for such redemption.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled dividend payment date, exchange the Senior Exchangeable Preferred
Stock, in whole but not in part, for the Exchange Debentures; provided that (i)
on the date of such exchange there are no accumulated and unpaid dividends on
the Senior Exchangeable Preferred Stock (including the dividend payable on such
date) or other contractual impediments to such exchange; (ii) there shall be
legally available funds sufficient therefor; (iii) no Voting Rights Triggering
Event has occurred and is continuing at the time of such exchange; (iv)
immediately after giving effect to such exchange, no Default or Event of Default
(each as defined in the Exchange Indenture) would exist under the Exchange
Indenture and no default or event of default would exist under any material
instrument governing Indebtedness outstanding at the time; (v) the Exchange
Indenture has been qualified under the Trust Indenture Act, if such
qualification is required at the time of exchange; and (vi) the Company shall
have delivered to the Debenture Trustee an Opinion of Counsel reasonably
satisfactory to such Debenture Trustee (as defined herein) to the effect that
all conditions to be satisfied prior to such exchange have been satisfied. See
"--The Exchange Debentures" below for the terms of the Exchange Debentures.
Holders of Senior Exchangeable Preferred Stock so exchanged will be entitled to
receive a principal amount of Exchange Debentures equal to $1.00 for each $1.00
of the liquidation preference of Senior Exchangeable Preferred Stock held by
such holders at the time of exchange plus an amount per share in cash (or, on or
prior to December 15, 2002, in principal amount of Exchange Debentures) equal to
all accumulated but unpaid dividends to the exchange date (including an amount
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the exchange date to the exchange date).
The Exchange Debentures will be issuable only in denominations of $1,000
and integral multiples thereof. An amount in cash will be paid to holders for
any principal amount otherwise issuable which is less than $1,000. Following
such exchange, all dividends on the Senior Exchangeable Preferred Stock will
cease to accrue, the rights of the holders of Senior Exchangeable Preferred
Stock as stockholders of the Company shall cease and the person or persons
entitled to receive the Exchange Debentures issuable upon exchange shall be
treated as the registered holder or holders of such Exchange Debentures. Notice
of exchange will be mailed at least 30 days but not more than 60 days prior to
the date of exchange to each holder of Senior Exchangeable Preferred Stock. See
"--The Exchange Debentures" below.
In addition, under applicable provisions of the federal bankruptcy law or
comparable provisions of state fraudulent transfer law, if at the time of the
Company's payment of dividends on, redemption of or exchange of Exchange
Debentures for, the Senior Exchangeable Preferred Stock (i) the Company is
insolvent or rendered insolvent by reason thereof, (ii) the Company is engaged
in a business or transaction for which the Company's remaining assets constitute
unreasonably small capital or (iii) the Company intends to incur or believes
that it would incur debts beyond its ability to pay such debts as they mature,
then the relevant distribution to holders of Senior Exchangeable Preferred Stock
could be avoided in whole or in part as a fraudulent conveyance and such holders
could be required to return the same or equivalent amounts to or for the benefit
of existing or future creditors of the Company. The measure of insolvency for
purposes of the foregoing will vary depending on the law of the jurisdiction
which is being applied. Generally the Company would be considered insolvent if
the sum of its debts, including contingent liabilities, were greater than the
fair saleable value of its assets at a fair valuation or if 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.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Senior Exchangeable Preferred Stock will be entitled to
be paid out of the assets of the Company available for distribution $100.00 per
share, plus, without duplication, an amount equal in cash to all accumulated and
unpaid dividends, if any, thereon (including by way of a deemed increase in
liquidation value) to the date fixed for liquidation, dissolution or winding-up
of the Company (including an amount equal to a prorated dividend from the last
dividend payment date to the date fixed for
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liquidation, dissolution or winding-up), before any distribution is made on any
Junior Securities, including, without limitation, on any common stock of the
Company. After payment of the full amount of the liquidation preferences and
accumulated and unpaid dividends to which they are entitled, the holders of
shares of Senior Exchangeable Preferred Stock will not be entitled to any
further participation in any distribution of assets of the Company. However,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more corporations shall be deemed to be a liquidation, dissolution or
winding-up of the Company.
The Certificate of Designation for the Senior Exchangeable Preferred Stock
does not contain any provision requiring funds to be set aside to protect the
liquidation preference of the Senior Exchangeable Preferred Stock, although such
liquidation preference will be substantially in excess of the par value of such
shares of Senior Exchangeable Preferred Stock. In addition, the Company is not
aware of any provision of Delaware law or any controlling decision of the courts
of the State of Delaware (the state of incorporation of the Company) that
requires a restriction upon the surplus of the Company solely because the
liquidation preference of the Senior Exchangeable Preferred Stock will exceed
its par value. Consequently, there will be no restriction upon any surplus of
the Company solely because the liquidation preference of the Senior Exchangeable
Preferred Stock will exceed the par value, and there will be no remedies
available to holders of the Senior Exchangeable Preferred Stock before or after
the payment of any dividend, other than in connection with the liquidation of
the Company, solely by reason of the fact that such dividend would reduce the
surplus of the Company to an amount less than the difference between the
liquidation preference of the Senior Exchangeable Preferred Stock and its par
value.
At September 30, 1997, on a pro forma basis after giving effect to the
Transactions and the application of the net proceeds therefrom, the Company
would have had approximately $176.5 million of Senior Indebtedness (all of which
would represent Indebtedness under the Senior Credit Facility), and $100.0
million of Senior Subordinated Indebtedness (all of which would represent
Indebtedness under the Notes) outstanding, and the Company would have had
additional availability of $16.1 million for borrowings under the Senior Credit
Facility, all of which would be Senior Indebtedness, if borrowed. See "Unaudited
Pro Forma Financial Statements."
CHANGE IN CONTROL
The Certificate of Designation provides that, upon the occurrence of a
Change in Control, the Company will make an offer to purchase for cash all or
any part of the Senior Exchangeable Preferred Stock pursuant to the offer
described below (a "Change in Control Offer") at a price in cash (a "Change in
Control Payment") equal to 101% of the liquidation preference thereof, plus all
accumulated and unpaid dividends, if any, to the date of purchase (including an
amount in cash equal to a prorated dividend for the period from the dividend
payment date immediately prior to the date of purchase to such date). The
Certificate of Designation provides that within 30 days following any Change in
Control, the Company will mail a notice to each holder of Senior Exchangeable
Preferred Stock with a copy to the transfer agent, with the following
information: (a) a Change in Control Offer is being made pursuant to the
covenant entitled "Change in Control," and that all Senior Exchangeable
Preferred Stock properly tendered pursuant to such Change in Control Offer will
be accepted for payment; (b) the purchase price and the purchase date, which
will be no earlier than 30 days nor later than 75 days from the date such notice
is mailed, except as may be otherwise required by applicable law (the "Change in
Control Payment Date"); (c) any Senior Exchangeable Preferred Stock not properly
tendered will remain outstanding and continue to accumulate dividends; (d)
unless the Company defaults in the payment of the Change in Control Payment, all
Senior Exchangeable Preferred Stock accepted for payment pursuant to the Change
in Control Offer will cease to accumulate dividends on the Change in Control
Payment Date; (e) holders electing to have any shares of Senior Exchangeable
Preferred Stock purchased pursuant to a Change in Control Offer will be required
to surrender such shares, properly endorsed for transfer, to the transfer agent
and registrar for the Senior Exchangeable Preferred Stock at the address
specified in the notice prior to the close of business on the third Business Day
preceding the Change in Control Payment Date; (f) holders will be entitled to
withdraw their tendered shares of Senior Exchangeable Preferred Stock and their
election to require the Company to purchase such shares, provided that the
transfer agent receives, not later than the close of business on the last day of
the offer period, a telegram, telex, facsimile transmission or letter setting
forth the name of the holder, the aggregate liquidation preference of the Senior
Exchangeable Preferred Stock tendered for purchase, and a statement that such
holder is withdrawing his tendered shares
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of Senior Exchangeable Preferred Stock and his election to have such shares of
Senior Exchangeable Preferred Stock purchased; and (g) that holders whose shares
of Senior Exchangeable Preferred Stock are being purchased only in part will be
issued new shares of Senior Exchangeable Preferred Stock equal in aggregate
liquidation preference to the unpurchased portion of the shares of Senior
Exchangeable Preferred Stock surrendered, which unpurchased portion must be
equal to $1,000 in aggregate liquidation preference or an integral multiple
thereof.
The Certificate of Designation provides that on the Change in Control
Payment Date, the Company will, to the extent permitted by law, (a) accept for
payment all shares of Senior Exchangeable Preferred Stock or portions thereof
properly tendered pursuant to the Change in Control Offer, (b) deposit with the
transfer agent and registrar an amount in cash equal to the aggregate Change in
Control Payment in respect of all shares of Senior Exchangeable Preferred Stock
or portions thereof so tendered and (c) deliver, or cause to be delivered, to
the transfer agent and registrar for cancellation the shares of Senior
Exchangeable Preferred Stock so accepted together with an Officers' Certificate
stating that such shares of Senior Exchangeable Preferred Stock or portions
thereof have been tendered to and purchased by the Company. The Certificate of
Designation provides that the transfer agent and registrar will promptly mail to
each holder of Senior Exchangeable Preferred Stock the Change in Control Payment
for such Senior Exchangeable Preferred Stock, and the transfer agent will
promptly mail to each holder new shares of Senior Exchangeable Preferred Stock
equal in aggregate liquidation preference to any unpurchased portion of Senior
Exchangeable Preferred Stock surrendered, if any. The Company will publicly
announce the results of the Change in Control Offer on or as soon as practicable
after the Change in Control Payment Date.
If a Change in Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change in Control
Payment for all of the Senior Exchangeable Preferred Stock that might be
delivered by holders of the Senior Exchangeable Preferred Stock seeking to
accept the Change in Control Offer. The failure of the Company to make or
consummate the Change in Control Offer or pay the Change in Control Payment when
due would result in an Event of Default and would give the Transfer Agent and
the holders of the Senior Exchangeable Preferred Stock the rights described
under "--Events of Default."
One of the events which constitutes a Change in Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event holders of the Senior Exchangeable Preferred Stock elect to require
the Company to purchase the Senior Exchangeable Preferred Stock and the Company
elects to contest such election, there can be no assurance as to 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 Senior Exchangeable Preferred Stock upon the occurrence of a Change in
Control may deter a third party from seeking to acquire the Company in a
transaction that would constitute a Change in Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change in Control Offer.
The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than
restrictions existing under the Senior Credit Agreement or under Indebtedness as
in effect on the date of the Indenture) that would materially impair the ability
of the Company to make a Change in Control Offer to purchase the Senior
Exchangeable Preferred Stock or, if such Change in Control Offer is made, to pay
for the Senior Exchangeable Preferred Stock tendered for purchase.
Prior to making a Change in Control Offer the Company shall be required to
have terminated all commitments and repaid in full all Indebtedness under the
Senior Credit Agreement and the Notes, respectively, and or to have obtained the
requisite consents under the Senior Credit Agreement and the Indenture to permit
the purchase of the Senior Exchangeable Preferred Stock as provided for under
this covenant. Failure to mail the notice on the date specified above or to
have satisfied the foregoing condition precedent by the date that the notice is
required to be mailed would constitute a default under the Certificate of
Designation. If, as a result thereof, a default occurs with respect to any
Indebtedness, the funds
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remaining after the repurchase of such Indebtedness may limit the Company's
ability to repurchase the Senior Exchangeable Preferred Stock.
CERTAIN PROVISIONS
The Certificate of Designation contains the following provisions, among
others:
Limitation on Indebtedness. The Company will not, and will not permit any
Restricted Subsidiary to, create, issue, assume, guarantee or in any manner
become directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Indebtedness (including any Acquired Indebtedness),
other than Permitted Indebtedness; provided, however, that the Company and any
Restricted Subsidiary may incur Indebtedness (including Acquired Indebtedness)
if at the time of such incurrence (a) no Voting Rights Triggering Event shall
have occurred and be continuing or shall occur as a consequence thereof and (b)
the Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters
immediately preceding the incurrence of such Indebtedness for which internal
financial statements are available, taken as one period (and after giving pro
forma effect to (i) the incurrence of such Indebtedness 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 four-quarter period, (ii) the
incurrence, repayment or retirement of any other Indebtedness by the Company and
its Restricted Subsidiaries since the first day of such four-quarter period as
if such Indebtedness was incurred, repaid or retired on the first day of such
four-quarter 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 four-quarter period)
and (iii) the acquisition (whether by purchase, merger or otherwise) or
disposition (whether by sale, merger or otherwise) of any company, entity or
business acquired or disposed of by the Company or its Restricted Subsidiaries,
as the case may be, since the first day of such four-quarter period, as if such
acquisition or disposition occurred on the first day of such four-quarter
period), would have been at least equal to 2.0 to 1.0.
Limitations on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(i) declare or pay any dividend on, or make any distribution to the
holders of any Parity Securities or Junior Securities (other than dividends
or distributions payable solely in shares of Qualified Capital Stock (other
than Senior Securities) or in options, warrants or other rights to purchase
shares of Qualified Capital Stock (other than Senior Securities));
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Parity Securities or Junior Securities or any
Capital Stock of the Company or any Affiliate of the Company or any
options, warrants or other rights to acquire Parity Securities or Junior
Securities or such Capital Stock (other than such options, warrants or
rights owned by the Company or a wholly owned Restricted Subsidiary);
(iii) declare or pay any dividend on, or make any distribution to
holders of any shares of Capital Stock of any Restricted Subsidiary (other
than to the Company or any of its wholly owned Restricted Subsidiaries or
to all holders of Capital Stock of such Restricted Subsidiary on a pro rata
basis); or
(iv) make any Investment (other than any Permitted Investment) in
any Person
(such payments or other actions described in (but not excluded from) clauses
(i) through (iv) are collectively referred to as "Restricted Payments"), unless
at the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a board resolution), (1) no Voting Rights
Triggering Event shall have occurred and be continuing, (2) the Company could
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the "Limitation on Indebtedness" provision and (3) the
aggregate amount of all Restricted Payments declared or made after the Issuance
Date shall not exceed the sum of:
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(A) 50% of the Consolidated Adjusted Net Income of the Company
accrued on a cumulative basis during the period beginning on the first day
of the Company's first fiscal quarter after the Issuance Date and ending on
the last day of the Company's last fiscal quarter ending prior to the date
of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Adjusted Net Income shall be a loss, minus 100% of such loss),
plus
(B) the aggregate net cash proceeds received after the Issuance Date
by the Company from the issuance or sale (other than to any Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company (including
upon the exercise of options, warrants or rights) or warrants, options or
rights to purchase shares of Qualified Capital Stock of the Company, plus
(C) the aggregate net cash proceeds received after the Issuance Date
by the Company from the issuance or sale (other than to any Restricted
Subsidiary) of debt securities or Redeemable Capital Stock that have been
converted into or exchanged for Qualified Capital Stock of the Company, to
the extent such securities were originally sold for cash, together with the
aggregate net cash proceeds received by the Company at the time of such
conversion or exchange, plus
(D) to the extent that any Investment constituting a Restricted
Payment that was made after the Issuance Date is sold or is otherwise
liquidated or repaid, an amount (to the extent not included in Consolidated
Adjusted Net Income) equal to the sum of (I) the lesser of (x) the cash
proceeds with respect to such Investment (less the cost of the disposition
of such Investment and net of taxes) and (y) the initial amount of such
Investment, and (II) with respect to solely any Restricted Payment to be
made pursuant to clause (iv) of this paragraph (a), the cash proceeds with
respect to such Investment (less the cost of the disposition of such
Investment and net of taxes) in excess of the amount in (I), plus
(E) $5 million.
(b) Notwithstanding paragraph (a) above, the Company and its
Restricted Subsidiaries may take the following actions so long as (with respect
to clauses (ii), (iii), (iv), (v) and (vi) below) at the time of and after
giving effect thereto no Voting Rights Triggering Event has occurred and is
continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration the payment of such
dividend would have complied with the provisions of paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary) of, shares of Qualified Capital
Stock (other than Senior Securities) of the Company;
(iii) the repurchase, redemption or other acquisition or retirement
for value of shares of Management Stock; provided that (1) the Company is
required, by the terms of written agreements between the Company and each
of Lloyd L. Ross and Jerry M. Smith as in effect on the Issuance Date, to
effect such purchase, redemption or other acquisition or retirement for
value of such shares and (2) the aggregate consideration paid by the
Company for such shares so purchased, redeemed or otherwise acquired or
retired for value does not exceed $25.0 million in the aggregate;
(iv) the repurchase, redemption or other acquisition or retirement
for value of shares of Capital Stock of the Company from employees who have
died (or their estates or beneficiaries) or whose employment has been
terminated; provided that such payment shall not exceed $1.5 million in any
twelve-month period, excluding any amounts used to repurchase, redeem,
acquire or retire for value shares of Capital Stock of the Company pursuant
to clause (iii) above;
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(v) repurchases of Capital Stock of the Company (or warrants or
options convertible into or exchangeable for such Capital Stock) deemed to
occur upon exercise of stock options to the extent that shares of such
Capital Stock (or warrants or options convertible into or exchangeable for
such Capital Stock) represent a portion of the exercise price of such
options; and
(vi) the issuance by the Company of shares of Preferred Stock as
dividends paid in kind on the Preferred Stock of the Company outstanding on
the Issuance Date or on shares of Preferred Stock so issued as payment in
kind dividends, such dividends made pursuant to the terms of the
Certificate of Designation for such Preferred Stock as in effect on the
Issuance Date.
The actions described in clauses (i), (ii), (iii), (iv) and (v) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph (a)
above, and the actions described in clause (vi) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
paragraph (b) and shall not reduce the amount that would otherwise be available
for Restricted Payments under clause (3) of paragraph (a).
(c) Notwithstanding the foregoing, the Company will not, and will not
permit any Restricted Subsidiary to, pay any cash dividends on any shares of
Capital Stock of the Company which shall rank junior to the Senior Exchangeable
Preferred Stock until such time as the Notes have received a rating from Moody's
of at least "B1" or higher.
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue
any Capital Stock (other than to the Company or a wholly owned Restricted
Subsidiary) and (ii) will not permit any Person (other than the Company or a
wholly owned Restricted Subsidiary) to own any Capital Stock of any Restricted
Subsidiary; provided, however, that this provision shall not prohibit (A) the
issuance and sale of all, but not less than all, of the issued and outstanding
Capital Stock of any Restricted Subsidiary owned by the Company or any of its
Restricted Subsidiaries in compliance with the other provisions of the
Certificate of Designation, (B) the ownership by other Persons of Qualified
Capital Stock (other than Preferred Stock) issued prior to the time such
Restricted Subsidiary became a Subsidiary of the Company that was neither issued
in contemplation of such Subsidiary becoming a Subsidiary nor acquired at that
time or (C) the ownership by directors of director's qualifying shares or the
ownership by foreign nationals of Capital Stock of any Restricted Subsidiary, to
the extent mandated by applicable law.
Consolidation, Merger and Sale of Assets. The Company will not, in a single
transaction or through a series of 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 other
Person or 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 the sale, assignment,
conveyance, transfer, lease or other 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 Persons, unless at the time and
immediately after giving effect thereto (i) 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 or such Restricted Subsidiary is
merged or the Person that acquires by sale, assignment, conveyance, transfer,
lease or disposition all or substantially all 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; (ii) the Senior Exchangeable Preferred Stock shall be converted into
or exchanged for and shall become shares of the Surviving Entity having in
respect of the Surviving Entity the same rights and privileges that the Senior
Exchangeable Preferred Stock had immediately prior to such transaction with
respect to the Company; (iii) immediately after giving effect to such
transaction or series of transactions on a pro forma basis, no Voting Rights
Triggering Event, and no event that after the giving of notice or lapse of time
or both would become a Voting Rights Triggering Event, shall have occurred and
be continuing; (iv) immediately before and immediately after giving effect to
such transaction or series of transactions on a pro forma basis (on the
assumption that the transaction or series of transactions occurred on the first
day of the four-quarter period immediately prior to the consummation of such
transaction or series of transactions with the appropriate adjustments with
respect to the transaction or series of transactions being included in such
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pro forma calculation), the Company (or the Surviving Entity, as the case may
be) could incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described above under "Limitation on
Indebtedness"; and (v) the Company shall have delivered to the Transfer Agent an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer comply with the Certificate of Designation.
The Surviving Entity will file an appropriate certificate of designation with
respect to the preferred stock referred to in clause (ii) above with the
Secretary of State (or similar public official) of the jurisdiction under whose
laws it is organized. In such event, the Company will be released from its
obligations under the Certificate of Designation.
Reports and Other Information. The Company will file on a timely basis with
the Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that the
Company would be required to file if it were subject to Section 13 or 15 of the
Exchange Act. The Company will also be required (a) to file with the Transfer
Agent, and provide to each holder of Senior Exchangeable Preferred Stock,
without cost to such holder, copies of such reports and documents within 15 days
after the date on which the Company files such reports and documents with the
Commission or the date on which the Company would be required to file such
reports and documents if the Company were so required, and (b) if filing such
reports and documents with the Commission is not accepted by the Commission or
is prohibited under the Exchange Act, to supply at the Company's cost copies of
such reports and documents to any prospective holder of Senior Exchangeable
Preferred Stock promptly upon written request.
TRANSFER AGENT AND REGISTRAR
United States Trust Company of New York will be the Transfer Agent and
Registrar for the Senior Exchangeable Preferred Stock.
THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under the Exchange
Indenture dated as of December 29, 1997 (the "Exchange Indenture"), among the
Company, as issuer, the Subsidiary Debenture Guarantors, as guarantors, and
United States Trust Company of New York, as trustee (the "Debenture Trustee").
The Exchange Indenture will be subject to and governed by the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The following summary of
the material provisions of the Exchange Indenture does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions, including the definitions of certain terms contained therein and
those made part of the Exchange Indenture by reference to the Trust Indenture
Act. For definitions of certain capitalized terms used in the following
summary, see "--Certain Definitions."
GENERAL
The Exchange Debentures will be unsecured obligations of the Company and
will be limited in aggregate principal amount to the aggregate original
liquidation preference of the Senior Exchangeable Preferred Stock, plus
accumulated and unpaid dividends, if any, on the date of exchange of the Senior
Exchangeable Preferred Stock into Exchange Debentures (plus any additional
Exchange Debentures issued in lieu of cash interest as described herein). The
Exchange Debentures will be issued only in fully registered form without
coupons, in denominations of $1,000 or any integral multiple thereof (other than
with respect to additional Exchange Debentures issued in lieu of cash interest
as described herein). The Exchange Debentures will be subordinated to all
existing and future Senior Indebtedness and Senior Subordinated Indebtedness of
the Company.
The Exchange Debentures will mature on December 15, 2009. Each Exchange
Debenture will accrue interest at the dividend rate of the Senior Exchangeable
Preferred Stock from the Exchange Date or from the most recent interest payment
date to which interest has been paid or provided for. Interest will be payable
quarterly in cash (or, on or prior to December 15, 2002, in additional Exchange
Debentures having a principal amount equal to the cash interest otherwise
payable, or in
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a combination of cash and Exchange Debentures, at the option of the Company) in
arrears on each March 15, June 15, September 15 and December 15 commencing with
the first such date after the Exchange Date. Interest on the Exchange Debentures
will be computed on the basis of a 360-day year comprised of twelve 30-day
months and the actual number of days elapsed.
In the event that the Exchange Date occurs prior to the issuance of the New
Senior Exchangeable Preferred Stock, the provisions of the Preferred Stock
Registration Rights Agreement described below under "The Preferred Stock
Exchange Offer" shall apply to the registration of the Exchange Debentures,
except that the changes in dividend rate referred to therein shall result in
corresponding changes in the interest rate on the Exchange Debentures.
Principal of and premium, if any, and interest on the Exchange Debentures
will be payable, and the Exchange Debentures will be exchangeable and
transferable (subject to compliance with transfer restrictions imposed by
applicable securities laws for so long as the Exchange Debentures are not
registered for resale under the Securities Act), at the office or agency of the
Company in The City of New York (which initially will be the corporate trust
office of the Trustee); provided, however, that, at the option of the Company,
interest may be paid by check mailed to the address of the Person entitled
thereto as such address shall appear on the security register. No service charge
will be made for any registration of transfer or exchange of Exchange
Debentures, but the Company may require payment in certain circumstances of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
DEBENTURE GUARANTEES
Payment of the principal of, premium, if any, and interest on the Exchange
Debentures, when and as the same become due and payable (whether at Stated
Maturity or on a redemption date, or pursuant to a Change in Control Purchase
Offer or an Excess Proceeds Offer, and whether by declaration of acceleration,
call for redemption or otherwise), will be guaranteed, jointly and severally, on
an unsecured subordinated basis by the Subsidiary Debenture Guarantors. The
Exchange Indenture will provide that the obligations of each Subsidiary
Debenture Guarantor under its Debenture Guarantee will be limited so as not to
constitute a fraudulent conveyance under applicable laws.
The Exchange Indenture will require that each Restricted Subsidiary
organized within the United States and certain other Restricted Subsidiaries
issue a Debenture Guarantee. Under certain circumstances, the Company will be
able to designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to the restrictive covenants set
forth in the Exchange Indenture.
The Exchange Indenture will provide further that, so long as no Default
exists, the Debenture Guarantee issued by any Subsidiary Debenture Guarantor
shall be automatically and unconditionally released and discharged upon any
sale, exchange or transfer to any Person that is not an Affiliate of the Company
of all of the Company's and its Restricted Subsidiaries' Capital Stock in, or
all or substantially all the assets of, such Subsidiary Debenture Guarantor
(which transaction is otherwise in compliance with the Exchange Indenture,
including, without limitation, the provisions of "--Certain Covenants--
Limitation on Sale of Assets" and "--Limitation on Issuances and Sales of
Capital Stock of Subsidiaries").
RANKING
The payment of the principal of, premium, if any, and interest on the
Exchange Debentures will be subordinated in right of payment, as set forth in
the Exchange Indenture, to the prior payment in full in cash or cash equivalents
of all Senior Indebtedness and Senior Subordinated Indebtedness whether
outstanding on the date of the Exchange Indenture or thereafter incurred.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relating to the Company or to its assets, or any
liquidation, dissolution or other winding-up of the Company, whether voluntary
or involuntary and whether or not involving insolvency
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or bankruptcy, or any assignment for the benefit of creditors or other
marshaling 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 and Sale of Assets" below), the holders of Senior
Indebtedness and Senior Subordinated Indebtedness will be entitled to receive
payment in full in cash or cash equivalents of all Senior Indebtedness and
Senior Subordinated Indebtedness, or provision shall be made for such payment in
full, before the holders of Exchange Debentures will be entitled to receive any
payment or distribution of any kind or character (other than any payment or
distribution in the form of equity securities or subordinated securities of the
Company or any successor obligor that, in the case of any such subordinated
securities, are subordinated in right of payment to all Senior Indebtedness and
Senior Subordinated Indebtedness that may at the time be outstanding to at least
the same extent as the Exchange Debentures are so subordinated (such equity
securities or subordinated securities hereinafter being "Permitted Junior
Securities") and any payment made pursuant to the provisions described under "--
Certain Covenants--Defeasance or Covenant Defeasance of Exchange Indenture" from
monies or U.S. Government Obligations previously deposited with the Debenture
Trustee) on account of principal of, or premium, if any, or interest on the
Exchange Debentures; and any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than a
payment or distribution in the form of Permitted Junior Securities and payments
made pursuant to the provisions described under "--Certain Covenants--Defeasance
or Covenant Defeasance of Exchange Indenture" from monies or U.S. Government
Obligations previously deposited with the Debenture Trustee), by set-off or
otherwise, to which the holders of the Exchange Debentures or the Debenture
Trustee would be entitled but for the provisions of the Exchange Indenture shall
be paid by the liquidating trustee or agent or other person making such payment
or distribution, whether a trustee in bankruptcy, a receiver or liquidating
trustee or otherwise, directly to the holders of Senior Indebtedness and Senior
Subordinated Indebtedness or their representative or representatives ratably
according to the aggregate amounts remaining unpaid on account of the Senior
Indebtedness and Senior Subordinated Indebtedness to the extent necessary to
make payment in full of all Senior Indebtedness and Senior Subordinated
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of such Senior Indebtedness and Senior Subordinated
Indebtedness.
No payment or distribution of any assets of the Company of any kind or
character, whether in cash, property or securities (other than Permitted Junior
Securities and payments made pursuant to the provisions described under "--
Certain Covenants--Defeasance or Covenant Defeasance of Exchange Indenture" from
monies or U.S. Government Obligations previously deposited with the Exchange
Trustee), may be made by or on behalf of the Company on account of principal of,
premium, if any, or interest on the Exchange Debentures or on account of the
purchase, redemption or other acquisition of Exchange Debentures upon the
occurrence of any default in payment (whether at stated maturity, upon scheduled
installment, by acceleration or otherwise) of principal of, premium, if any, or
interest on Designated Senior Indebtedness (a "Payment Default") until such
Payment Default shall have been cured or waived in writing or shall have ceased
to exist or such Designated Senior Indebtedness shall have been discharged or
paid in full in cash or cash equivalents.
No payment or distribution of any assets of the Company of any kind or
character, whether in cash, property or securities (other than Permitted Junior
Securities and payments made pursuant to the provisions described under "--
Certain Covenants--Defeasance or Covenant Defeasance of Exchange Indenture" from
monies or U.S. Government Obligations previously deposited with the Debenture
Trustee), may be made by or on behalf of the Company on account of principal of,
premium, if any, or interest on the Exchange Debentures or on account of the
purchase, redemption or other acquisition of Exchange Debentures for the period
specified below (a "Payment Blockage Period") upon the occurrence of any default
or event of default with respect to any Designated Senior Indebtedness other
than any Payment Default pursuant to which the maturity thereof may be
accelerated (a "Non-Payment Default") and receipt by the Exchange Trustee of
written notice thereof from the trustee or other representative of holders of
Designated Senior Indebtedness.
The Payment Blockage Period will commence upon the date of receipt by the
Debenture Trustee of written notice from the trustee or such other
representative of the holders of the Designated Senior Indebtedness in respect
of which the Non-Payment Default exists and shall end on the earliest of (i) 179
days thereafter (provided that any Designated Senior Indebtedness as to which
notice was given shall not theretofore have been accelerated), (ii) the date on
which such Non-Payment Default is cured, waived or ceases to exist or such
Designated Senior Indebtedness is discharged or paid in
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full in cash or cash equivalents or (iii) the date on which such Payment
Blockage Period shall have been terminated by written notice to the Debenture
Trustee or the Company from the trustee or such other representative initiating
such Payment Blockage Period, after which the Company will resume making any and
all required payments in respect of the Exchange Debentures, including any
missed payments. In any event, not more than one Payment Blockage Period may be
commenced during any period of 360 consecutive days. No event of default 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
subsequent Payment Blockage Period, 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.
In the event that, notwithstanding the provisions of the preceding four
paragraphs, any payment shall be made to the Debenture Trustee (and not paid
over to the holders of the Exchange Debentures) which is prohibited by such
provisions, then and in such event such payment shall be paid over and delivered
by such Debenture Trustee to the trustee and any other representative of holders
of Designated Senior Indebtedness, as their interests may appear, for
application to Designated Senior Indebtedness. After all Senior Indebtedness
and Senior Subordinated Indebtedness is paid in full and until the Exchange
Debentures are paid in full, holders of the Exchange Debentures shall be
subrogated (equally and ratably with all other Indebtedness pari passu with the
Exchange Debenture) to the rights of holders of Senior Indebtedness and Senior
Subordinated Indebtedness to receive distributions applicable to Senior
Indebtedness and Senior Subordinated Indebtedness to the extent that
distributions otherwise payable to the holders of the Exchange Debentures have
been applied to the payment of Senior Indebtedness and Senior Subordinated
Indebtedness.
Failure by the Company to make any required payment in respect of the
Exchange Debentures when due or within any applicable grace period, whether or
not occurring during a Payment Blockage Period, will result in an Event of
Default and, thereafter, holders of the Exchange Debentures will have the right
to accelerate the maturity thereof. See "--Events of Default."
By reason of such subordination, in the event of liquidation, receivership,
reorganization or insolvency of the Company, creditors of the Company who are
holders of Senior Indebtedness and Senior Subordinated Indebtedness may recover
more, ratably, than the holders of the Exchange Debentures, and assets which
would otherwise be available to pay obligations in respect of the Exchange
Debentures will be available only after all Senior Indebtedness and Senior
Subordinated Indebtedness has been paid in full in cash or cash equivalents, and
there may not be sufficient assets remaining to pay amounts due on any or all of
the Exchange Debentures.
Each Debenture Guarantee will, to the extent set forth in the Exchange
Indenture, be subordinated in right of payment to the prior payment in full of
all senior indebtedness and senior subordinated indebtedness of the Subsidiary
Debenture Guarantors, upon terms substantially comparable to the subordination
of the Exchange Debentures to all Senior Indebtedness and Senior Subordinated
Indebtedness.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemptions or sinking
fund payments prior to maturity of the Exchange Debentures.
OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable at the option of the Company, in
whole or in part, at any time on or after December 15, 2002 at the redemption
prices (expressed as percentages of principal amount) set forth below, together
with accrued and unpaid interest, if any, to the date of redemption, if redeemed
during the 12-month period beginning on December 15 of the years indicated below
(subject to the right of holders of record on relevant record dates to receive
interest due on an interest payment date):
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<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002................................................... 109.938%
2003................................................... 106.625%
2004................................................... 103.313%
2005 and thereafter.................................... 100.000%
</TABLE>
In addition, at any time prior to December 15, 2001, the Company may redeem
all, but not less than all, of the outstanding Exchange Debentures originally
issued under the Exchange Indenture within 20 days of a Public Equity Offering
with the net proceeds of such offering at a redemption price equal to 113.25% of
the principal amount thereof, together with accrued interest, if any, to the
date of redemption (subject to the right of holders of record on relevant record
dates to receive interest due on relevant interest payment dates).
If less than all the Exchange Debentures are to be redeemed, the particular
Exchange Debentures to be redeemed will be selected not more than 60 days prior
to the redemption by the Debenture Trustee by such method as the Debenture
Trustee will deem fair and appropriate; provided, however, that no such partial
redemption will reduce the principal amount of an Exchange Debenture not
redeemed to less than $1,000. Notice of redemption will be mailed, first-class
postage prepaid, at least 30 but not more than 60 days before the redemption
date to each holder of Exchange Debentures to be redeemed at its registered
address. On and after the redemption date, interest will cease to accrue on
Exchange Debentures called for redemption and accepted for payment.
CERTAIN COVENANTS
The Exchange Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit any
Restricted Subsidiary to, create, issue, assume, guarantee or in any manner
become directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Indebtedness (including any Acquired Indebtedness),
other than Permitted Indebtedness; provided, however, that the Company and any
Subsidiary Debenture Guarantor may incur Indebtedness (including Acquired
Indebtedness) if at the time of such incurrence the Consolidated Fixed Charge
Coverage Ratio for the four full fiscal quarters immediately preceding the
incurrence of such Indebtedness for which internal financial statements are
available, taken as one period (and after giving pro forma effect to (i) the
incurrence of such Indebtedness 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 four-quarter period, (ii) the incurrence, repayment or
retirement of any other Indebtedness by the Company and its Restricted
Subsidiaries since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired on the first day of such four-
quarter 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 four-quarter period)
and (iii) the acquisition (whether by purchase, merger or otherwise) or
disposition (whether by sale, merger or otherwise) of any company, entity or
business acquired or disposed of by the Company or its Restricted Subsidiaries,
as the case may be, since the first day of such four-quarter period, as if such
acquisition or disposition occurred on the first day of such four-quarter
period), would have been at least equal to 2.0 to 1.0.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Company (other than
dividends or distributions payable solely in shares of its Qualified
Capital Stock of the Company or in options, warrants or other rights to
acquire such shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of the Company or any
Affiliate of the Company or any options, warrants or other rights to
acquire such shares of
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Capital Stock (other than such options, warrants or rights owned by the
Company or a wholly owned Restricted Subsidiary);
(iii) declare or pay any dividend on, or make any distribution to
holders of, any shares of Capital Stock of any Restricted Subsidiary to any
Person (other than to the Company or any of its wholly owned Restricted
Subsidiaries or to all holders of Capital Stock of such Restricted
Subsidiary on a pro rata basis);
(iv) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Junior Subordinated
Indebtedness of the Company or any Subsidiary Debenture Guarantor; or
(v) make any Investment (other than any Permitted Investment) in any
Person
(such payments or other actions described in (but not excluded from) clauses
(i) through (v) are collectively referred to as "Restricted Payments"), unless
at the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a board resolution), (1) no Default or Event of
Default shall have occurred and be continuing, (2) the Company could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the "Limitation on Indebtedness" covenant and (3) the aggregate
amount of all Restricted Payments declared or made after the Issuance Date shall
not exceed the sum of:
(A) 50% of the Consolidated Adjusted Net Income of the Company
accrued on a cumulative basis during the period beginning on the first day
of the Company's first fiscal quarter after the Issuance Date and ending on
the last day of the Company's last fiscal quarter ending prior to the date
of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Adjusted Net Income shall be a loss, minus 100% of such loss),
plus
(B) the aggregate net cash proceeds received after the Issuance Date
by the Company from the issuance or sale (other than to any Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company (including
upon the exercise of options, warrants or rights) or warrants, options or
rights to purchase shares of Qualified Capital Stock of the Company, plus
(C) the aggregate net cash proceeds received after the Issuance Date
by the Company from the issuance or sale (other than to any Restricted
Subsidiary) of debt securities or Redeemable Capital Stock that have been
converted into or exchanged for Qualified Capital Stock of the Company, to
the extent such securities were originally sold for cash, together with the
aggregate net cash proceeds received by the Company at the time of such
conversion or exchange, plus
(D) to the extent that any Investment constituting a Restricted
Payment that was made after the date of the Exchange Indenture is sold or
is otherwise liquidated or repaid, an amount (to the extent not included in
Consolidated Adjusted Net Income) equal to the sum of (I) the lesser of (x)
the cash proceeds with respect to such Investment (less the cost of the
disposition of such Investment and net of taxes) and (y) the initial amount
of such Investment, and (II) with respect solely to any Restricted Payment
to be made pursuant to clause (v) of this paragraph (a), the cash proceeds
with respect to such Investment (less the cost of the disposition of such
Investment and net of taxes) in excess of the amount in (I), plus
(E) $5 million.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (with respect to clauses
(ii), (iii), (iv), (v), (vi), (vii), (viii) and (ix) below) at the time of and
after giving effect thereto no Default or Event of Default shall have occurred
and be continuing:
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(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration the payment of such
dividend would have complied with the provisions of paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary) of, shares of Qualified Capital
Stock of the Company;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Subordinated Indebtedness in exchange
for, or out of the net cash proceeds of a substantially concurrent issuance
and sale (other than to a Restricted Subsidiary) of, shares of Qualified
Capital Stock of the Company;
(iv) the purchase of any Indebtedness that is expressly subordinated
in right of payment to the Exchange Debentures at a purchase price not
greater than 101% of the principal amount thereof in the event of a Change
in Control in accordance with provisions similar to the "Purchase of
Exchange Debentures upon a Change in Control" covenant; provided that prior
to such purchase the Company has made the Change in Control Offer as
provided in such covenant with respect to the Exchange Debentures and has
purchased all Exchange Debentures validly tendered for payment in
connection with such Change in Control Offer;
(v) the repurchase, redemption or other acquisition or retirement
for value of shares of Management Stock; provided that (1) the Company is
required, by the terms of written agreements between the Company and each
of Lloyd L. Ross and Jerry M. Smith as in effect on the Issuance Date, to
effect such purchase, redemption or other acquisition or retirement for
value of such shares and (2) the aggregate consideration paid by the
Company for such shares so purchased, redeemed or otherwise acquired or
retired for value does not exceed $25.0 million in the aggregate;
(vi) the repurchase, redemption or other acquisition or retirement
for value of shares of Capital Stock of the Company from employees who have
died (or their estates or beneficiaries) or whose employment has been
terminated; provided that such payment shall not exceed $1.5 million in any
twelve-month period, excluding any amounts used to repurchase, redeem,
acquire or retire for value shares of Capital Stock of the Company pursuant
to clause (v) above;
(vii) repurchases of Capital Stock of the Company (or warrants or
options convertible into or exchangeable for such Capital Stock) deemed to
occur upon exercise of stock options to the extent that shares of such
Capital Stock (or warrants or options convertible into or exchangeable for
such Capital Stock) represent a portion of the exercise price of such
options;
(viii) the issuance by the Company of shares of Preferred Stock as
dividends payment in kind on the Preferred Stock of the Company outstanding
on the Issuance Date or on shares of Preferred Stock so issued as payment
in kind dividends, such dividends made pursuant to the terms of the
Certificate of Designation for such Preferred Stock as in effect on the
Issuance Date; and
(ix) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Subordinated Indebtedness (other than
Redeemable Capital Stock) in exchange for, or out of the net cash proceeds
of a substantially concurrent incurrence (other than to a Restricted
Subsidiary) of, new Junior Subordinated Indebtedness so long as (A) the
principal amount of such new Junior Subordinated Indebtedness does not
exceed the principal amount (or, if such Junior Subordinated Indebtedness
being refinanced provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration thereof,
such lesser amount as of the date of determination) of the Indebtedness
being so purchased, redeemed, defeased, acquired or retired, plus either
the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of such Indebtedness being refinanced or
the amount of any premium reasonably determined by the Company as necessary
to accomplish such refinancing, plus, in either case, the amount of
reasonable expenses of the Company incurred in connection with such
refinancing, (B) such new Junior Subordinated Indebtedness is pari passu or
subordinated, as applicable, to the Exchange
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Debentures to the same extent as such Indebtedness so purchased, redeemed,
defeased, acquired or retired and (C) such new Indebtedness has an Average
Life longer than the Average Life of the Exchange Debentures and a final
Stated Maturity of principal later than the final Stated Maturity of
principal of the Exchange Debentures.
The actions described in clauses (i), (ii), (iii), (iv), (v), (vi) and (vii) of
this paragraph (b) shall be Restricted Payments that shall be permitted to be
taken in accordance with this paragraph (b) but shall reduce the amount that
would otherwise be available for Restricted Payments under clause (3) of
paragraph (a) above, and the actions described in clauses (viii) and (ix) of
this paragraph (b) shall be Restricted Payments that shall be permitted to be
taken in accordance with this paragraph (b) and shall not reduce the amount that
would otherwise be available for Restricted Payments under clause (3) of
paragraph (a).
(c) Notwithstanding the foregoing, the Company will not, and will not
permit any Restricted Subsidiary to, pay any cash dividends on any shares of
Capital Stock of the Company which shall rank junior to the Exchange Debentures
until such time as the Notes have received a rating from Moody's of at least
"B1" or higher.
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue
any Capital Stock (other than to the Company or a wholly owned Restricted
Subsidiary) and (ii) will not permit any Person (other than the Company or a
wholly owned Restricted Subsidiary) to own any Capital Stock of any Restricted
Subsidiary; provided, however, that this covenant shall not prohibit (A) the
issuance and sale of all, but not less than all, of the issued and outstanding
Capital Stock of any Restricted Subsidiary owned by the Company or any of its
Restricted Subsidiaries in compliance with the other provisions of the Exchange
Indenture, (B) the ownership by other Persons of Qualified Capital Stock (other
than Preferred Stock) issued prior to the time such Restricted Subsidiary became
a Subsidiary of the Company that was neither issued in contemplation of such
Subsidiary becoming a Subsidiary nor acquired at that time or (C) the ownership
by directors of director's qualifying shares or the ownership by foreign
nationals of Capital Stock of any Restricted Subsidiary, to the extent mandated
by applicable law.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist 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 or any
Restricted Subsidiary (other than the Company or a Restricted Subsidiary)
(collectively, "Interested Persons"), unless (i) such transaction or series of
transactions are on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than would have been able to be
obtained in an arm's-length transaction with third parties that are not
Interested Persons, (ii) with respect to any transaction or series of related
transactions involving aggregate consideration equal to or greater than $1.0
million, the Company has delivered an Officers' Certificate to the Debenture
Trustee certifying that such transaction or series of transactions complies with
clause (i) above and (iii) with respect to any transaction or series of related
transactions involving aggregate consideration equal to or greater than $5.0
million, such transaction or series of related transactions (x) has been
approved by the Board of Directors of the Company (including a majority of the
Disinterested Directors of the Company) or (y) the Company has obtained a
written opinion from a nationally recognized investment banking or valuation
firm certifying that such transaction or series of related transactions is fair
to the Company or its Restricted Subsidiary, as the case may be, from a
financial point of view; provided, however, that this covenant will not restrict
(1) the Company from paying reasonable and customary regular compensation and
fees to directors of the Company or any Restricted Subsidiary who are not
employees of the Company or any Restricted Subsidiary, (2) the payment of
management fees to the Permitted Holders in an aggregate amount not to exceed
$500,000 per year, (3) loans and advances to officers, directors and employees
of the Company or any Restricted Subsidiary in the ordinary course of business
in accordance with the past practices of the Company or any Restricted
Subsidiary not to exceed $3.0 million in the aggregate outstanding at any time,
(4) any transactions made in compliance with the "Limitation on Restricted
Payments" covenant, (5) the issuance and sale of Qualified Capital Stock of the
Company to Persons who are stockholders of the Company at the time of such
issuance and sale and (6) the performance of any written agreement as in effect
on the date of the Exchange Indenture and as amended from time to time, provided
that any such amendment is not less favorable in any material respect to the
Company or any Restricted Subsidiary than the terms of such agreement as in
effect on the date of the Exchange Indenture.
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Limitation on Liens. (a) The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien securing Pari Passu Indebtedness or Junior Subordinated
Indebtedness of the Company on or with respect to any of its property or assets,
including any shares of stock or indebtedness of any Restricted Subsidiary,
whether owned at the date of the Exchange Indenture or thereafter acquired, or
any income, profits or proceeds therefrom, or assign or otherwise convey any
right to receive income thereon, unless (x) in the case of any Lien securing
Pari Passu Indebtedness of the Company, the Exchange Debentures are secured by a
Lien on such property, assets or proceeds that is senior in priority to or pari
passu with such Lien and (y) in the case of any Lien securing Junior
Subordinated Indebtedness of the Company, the Exchange Debentures are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Lien.
(b) The Company will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer to exist any Lien securing Pari
Passu Indebtedness or Junior Subordinated Indebtedness of such Restricted
Subsidiary on or with respect to any such Restricted Subsidiary's properties or
assets, including any shares of stock or Indebtedness of any Subsidiary of such
Restricted Subsidiary, whether owned at the date of the Exchange Indenture or
thereafter acquired, or any income, profits or proceeds therefrom, or assign or
otherwise convey any right to receive income thereon, unless (x) in the case of
any Lien securing Pari Passu Indebtedness of the Restricted Subsidiary, such
Debenture Guarantee is secured by a Lien on such property, assets or proceeds
that is senior in priority to or pari passu with such Lien and (y) in the case
of any Lien securing Junior Subordinated Indebtedness of the Restricted
Subsidiary, such Debenture Guarantee is secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien.
Purchase of Exchange Debentures upon a Change in Control. If a Change in
Control shall occur at any time, then each holder of Exchange Debentures will
have the right to require that the Company purchase such holder's Exchange
Debentures, in whole or in part in integral multiples of $1,000, at a purchase
price (the "Change in Control Purchase Price") in cash in an amount equal to
101% of the principal amount thereof, plus accrued interest, if any, to the date
of purchase (the "Change in Control Purchase Date"), pursuant to the offer
described below (the "Change in Control Offer") and the other procedures set
forth in the Exchange Indenture.
Within 30 days following any Change in Control, the Company shall notify
the Debenture Trustee thereof and give written notice of such Change in Control
to each holder of Exchange Debentures by first-class mail, postage prepaid, at
the address of such holder appearing in the security register, stating, among
other things, (i) the Change in Control Purchase Price and the Change in Control
Purchase Date, which shall be a Business Day no earlier than 30 days nor later
than 75 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act or any applicable
securities laws or regulations; (ii) that any Exchange Debenture not tendered
will continue to accrue interest; (iii) that, unless the Company defaults in the
payment of the Change in Control Purchase Price, any Exchange Debentures
accepted for payment pursuant to the Change in Control Offer shall cease to
accrue interest after the Change in Control Purchase Date; and (iv) certain
procedures that a holder of Exchange Debentures must follow to accept a Change
in Control Offer or to withdraw such acceptance.
If a Change in Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change in Control
Purchase Price for all of the Exchange Debentures that might be delivered by
holders of the Exchange Debentures seeking to accept the Change in Control
Offer. The failure of the Company to make or consummate the Change in Control
Offer or pay the Change in Control Purchase Price when due would result in an
Event of Default and would give the Debenture Trustee and the holders of the
Exchange Debentures the rights described under "--Events of Default."
One of the events which constitutes a Change in Control under the Exchange
Indenture is the disposition of "all or substantially all" of the Company's
assets. This term has not been interpreted under New York law (which is the
governing law of the Exchange Indenture) to represent a specific quantitative
test. As a consequence, in the event holders of the Exchange Debentures elect
to require the Company to purchase the Exchange Debentures and the Company
elects to contest such election, there can be no assurance as to how a court
interpreting New York law would interpret the phrase.
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The existence of a holder's right to require the Company to purchase such
holder's Exchange Debentures upon a Change in Control may deter a third party
from acquiring the Company in a transaction that constitutes a Change in
Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change in Control Offer.
The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than
restrictions existing under the Senior Credit Agreement, the Note Indenture or
under Indebtedness as in effect on the Issuance Date) that would materially
impair the ability of the Company to make a Change in Control Offer to purchase
the Exchange Debentures or, if such Change in Control Offer is made, to pay for
the Exchange Debentures tendered for purchase.
Prior to making a Change in Control Offer the Company shall be required to
have terminated all commitments and repaid in full all Indebtedness under the
Senior Credit Agreement and the Notes, respectively, and or to have obtained the
requisite consents under the Senior Credit Agreement and the Note Indenture to
permit the purchase of the Exchange Debentures as provided for under this
covenant. Failure to mail the notice on the date specified above or to have
satisfied the foregoing condition precedent by the date that the notice is
required to be mailed would constitute an Event of Default under the Exchange
Indenture. If, as a result thereof, a default occurs with respect to any Senior
Indebtedness or Senior Subordinated Indebtedness, the subordination provisions
in the Exchange Indenture would likely restrict payments to the holders of the
Exchange Debentures.
The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than
restrictions existing under the Senior Credit Agreement or under Indebtedness as
in effect on the Issuance Date) that would materially impair the ability of the
Company to make a Change in Control Offer to purchase the Exchange Debentures
or, if such Change in Control Offer is made, to pay for the Exchange Debentures
tendered for purchase.
Limitation on Sale of Assets. (a) The Company will not, and will not
permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Restricted Subsidiary for such
Asset Sale is not less than the fair market value of the assets sold (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a Board Resolution) and (ii) at least 75% of such
consideration consists of cash or Cash Equivalents. The amount of any (I)
Indebtedness of a Restricted Subsidiary that is not a Subsidiary Debenture
Guarantor or any Senior Indebtedness of the Company or any Subsidiary Debenture
Guarantor that is actually assumed by the transferee in such Asset Sale and from
which the Company and the Restricted Subsidiaries are fully released shall be
deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company or the Restricted Subsidiaries (excluding
any liabilities that are incurred in connection with or in anticipation of such
Asset Sale) and (II) notes or other similar obligations received by the Company
or any Restricted Subsidiary from such transferee that are converted, sold or
exchanged within 30 days of the related Asset Sale by the Company or the
Restricted Subsidiaries into cash shall be deemed to be cash, in an amount equal
to the net cash proceeds realized upon such conversion, sale or exchange for
purposes of determining the percentage of cash consideration received by the
Company or the Restricted Subsidiaries.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may use the Net Cash Proceeds thereof, within 12 months after such
Asset Sale, to (i) permanently repay or prepay any then outstanding Senior
Indebtedness or Senior Subordinated Indebtedness of the Company or any
Restricted Subsidiary (and to correspondingly reduce commitments with respect
thereto) or (ii) invest (or enter into a legally binding agreement to invest) in
other properties or assets to replace the properties or assets that were the
subject of the Asset Sale or in properties and assets that will be used in
businesses of the Company or its Restricted Subsidiaries, as the case may be. If
any such legally binding agreement to invest such Net Cash Proceeds is
terminated, then the Company may, within 90 days of such termination or within
12 months of such Asset Sale, whichever is later, invest such Net Cash Proceeds
as provided in clause (i) or (ii)
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(without regard to the parenthetical contained in such clause (ii)) above. The
amount of such Net Cash Proceeds not so used as set forth above in this
paragraph (b) constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million, the
Company shall, within 30 Business Days, make an offer to purchase (an "Excess
Proceeds Offer") from all holders of Exchange Debentures, on a pro rata basis,
in accordance with the procedures set forth below, the maximum principal amount
(expressed as an integral multiple of $1,000) of Exchange Debentures that may be
purchased with the Excess Proceeds. The offer price as to each Exchange
Debenture shall be payable in cash in an amount equal to 100% of the principal
amount of such Exchange Debenture plus accrued interest, if any, to the date
such Excess Proceeds Offer is consummated. To the extent that the aggregate
principal amount of Exchange Debentures tendered pursuant to an Excess Proceeds
Offer is less than the Excess Proceeds, the Company may use such deficiency for
any lawful purposes. If the aggregate principal amount of Exchange Debentures
validly tendered and not withdrawn by holders thereof exceeds the Excess
Proceeds, Exchange Debentures to be purchased will be selected on a pro rata
basis. Upon completion of such Exceeds Proceeds Offer, the amount of Excess
Proceeds shall be reset to zero.
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries. (a)
The Company will not permit any Restricted Subsidiary, directly or indirectly,
to guarantee, assume or in any other manner become liable with respect to any
Indebtedness of the Company unless (i) (A) if such Restricted Subsidiary is not
a Subsidiary Debenture Guarantor, such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture, in form satisfactory to the
Debenture Trustee, providing for a guarantee of the Exchange Debentures by such
Restricted Subsidiary and delivers to such Debenture Trustee an Opinion of
Counsel reasonably satisfactory to such Debenture Trustee to the effect that
such supplemental indenture has been duly executed and delivered by such
Restricted Subsidiary and is in compliance with the terms of the Exchange
Indenture and (B) with respect to any guarantee by a Restricted Subsidiary of
Junior Subordinated Indebtedness of the Company, any such guarantee shall be
subordinated to such Restricted Subsidiary's Debenture Guarantee at least to the
same extent as such guaranteed Indebtedness is subordinated to the Exchange
Debentures and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Debenture Guarantee.
(b) Notwithstanding the foregoing, any guarantee of the Exchange Debentures
created pursuant to the provisions described in the foregoing paragraph (a) will
provide by its terms that it will be automatically and unconditionally released
and discharged upon (i) 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, the applicable Subsidiary Debenture Guarantor
(which sale, exchange or transfer is otherwise in compliance with the Exchange
Indenture) or (ii) the designation of such Restricted Subsidiary as an
Unrestricted Subsidiary in accordance with the terms of the Exchange Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital Stock
to the Company or any other Restricted Subsidiary, (b) pay any Indebtedness owed
to the Company or any other Restricted Subsidiary, (c) make loans or advances to
the Company or any other Restricted Subsidiary, (d) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary (other
than customary restrictions on transfers of property subject to a Lien permitted
under the Exchange Indenture that would not materially adversely affect the
Company's ability to satisfy its obligations under the Exchange Debentures and
the Exchange Indenture) or (e) guarantee any Indebtedness of the Company or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of (i) applicable law, (ii) customary provisions
restricting subletting or assignment of any lease or assignment of any other
contract to which the Company or any Restricted Subsidiary is a party or to
which any of their respective properties or assets are subject, (iii) any
agreement or other instrument of a Person acquired by the Company or any
Restricted Subsidiary in existence at the time of such acquisition (but not
created in contemplation thereof), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so
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acquired, (iv) encumbrances and restrictions in effect on the Issuance Date
pursuant to the Senior Credit Facility and its related documentation, (v) any
encumbrance or restriction contained in contracts for sales of assets permitted
by the "Limitation on Sale of Assets" covenant with respect to the assets to be
sold pursuant to such contract and (vi) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the agreements
containing the encumbrances or restrictions in the foregoing clauses (iii) and
(iv); provided that the terms and conditions of any such encumbrances or
restrictions are not materially less favorable to the holders of the Exchange
Debentures than those under or pursuant to the agreement so extended, renewed,
refinanced or replaced.
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
any Sale and Leaseback Transaction with respect to any property or assets
(whether now owned or hereafter acquired), unless (i) the sale or transfer of
such property or assets to be leased is treated as an Asset Sale and the Company
complies with the "Limitation on Sale of Assets" covenant and (ii) the Company
or such Restricted Subsidiary would be permitted to incur Indebtedness under the
"Limitation on Indebtedness" covenant in the amount of the Capitalized Lease
Obligations incurred in respect of such Sale and Leaseback Transaction;
provided, however, that the Company and its Restricted Subsidiaries will not be
required to comply with this covenant with respect to the sale and leaseback of
the Headquarters Facility.
Limitation on Other Subordinated Indebtedness. Neither the Company nor any
Restricted Subsidiary will incur, create, assume, guarantee or in any other
manner become directly or indirectly liable with respect to or responsible for,
or permit to remain outstanding, any Indebtedness, other than the Exchange
Debentures, that is subordinate or junior in right of payment to any Senior
Subordinated Indebtedness unless such Indebtedness is also pari passu with, or
subordinate in right of payment to, the Exchange Debentures pursuant to
subordination provisions substantially similar to those contained in the
Exchange Indenture.
Limitation on Unrestricted Subsidiaries. The Company will not make, and
will not permit any of its Restricted Subsidiaries to make, any Investments in
Unrestricted Subsidiaries if, at the time thereof, the aggregate amount of such
Investments would exceed the amount of Restricted Payments then permitted to be
made pursuant to the "Limitation on Restricted Payments" covenant. Any
Investments in Unrestricted Subsidiaries permitted to be made pursuant to this
covenant (i) will be treated as the making of a Restricted Payment in
calculating the amount of Restricted Payments made by the Company or a
Restricted Subsidiary and (ii) may be made in cash or property.
Reports. The Company will file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Company would be
required to file if it were subject to Section 13 or 15 of the Exchange Act. The
Company will also be required (a) to file with the Debenture Trustee, and
provide to each holder of Exchange Debentures, without cost to such holder,
copies of such reports and documents within 15 days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required, and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the Exchange
Act, to supply at the Company's cost copies of such reports and documents to any
prospective holder of Exchange Debentures promptly upon written request.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not, in a single transaction or through a series of
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 other Person or 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 the sale, assignment, conveyance, transfer, lease or other
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 Persons, unless at the time and immediately after giving effect
thereto (i) either (a) the Company will be the continuing corporation or (b) the
Person (if other than the
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Company) formed by such consolidation or into which the Company or such
Restricted Subsidiary is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all the
properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis (the "Surviving Entity") (1) 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 (2) will expressly assume, by
a supplemental indenture in form reasonably satisfactory to the Trustee, the
Company's obligation for the due and punctual payment of the principal of,
premium, if any, and interest on all the Exchange Debentures and the performance
and observance of every covenant of the Exchange Indenture on the part of the
Company to be performed or observed; (ii) immediately before and immediately
after giving effect to such transaction or series of transactions on a pro forma
basis (and treating any obligation of the Company or any Restricted Subsidiary
incurred in connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing; (iii)
immediately before and immediately after giving effect to such transaction or
series of transactions on a pro forma basis (on the assumption that the
transaction or series of transactions occurred on the first day of the four-
quarter period immediately prior to the consummation of such transaction or
series of transactions with the appropriate adjustments with respect to the
transaction or series of transactions being included in such pro forma
calculation), the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Exchange Indenture) could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the provisions
of the "Limitation on Indebtedness" covenant; (iv) each Subsidiary Debenture
Guarantor, if any, unless it is the other party to the transactions described
above, shall have by supplemental indenture confirmed that its Debenture
Guarantee will apply to such Person's obligations under the Exchange Indenture
and the Exchange Debentures; and (v) 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 the "Limitation on Liens" covenant are complied
with.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Company or the Surviving
Entity shall have delivered to the Debenture Trustee, in form and substance
reasonably satisfactory to the Debenture Trustee, an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, sale,
assignment, conveyance, transfer, lease or other disposition, and if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture, comply with the requirements of the Exchange Indenture
and that all conditions precedent therein provided for relating to such
transaction have been complied with.
Each Subsidiary Debenture Guarantor, if any (other than any Subsidiary
whose Debenture Guarantee is being released pursuant to the provisions under "--
Debenture Guarantees" or "--Certain Covenants--Limitation on Issuance of
Guarantees of Indebtedness by Subsidiaries" as a result of such transaction),
shall not, and the Company will not permit a Subsidiary Debenture Guarantor to,
in a single transaction or through a series of related transactions, merge or
consolidate with or into any other corporation or other entity (other than the
Company or any Subsidiary Debenture Guarantor), or sell, assign, convey,
transfer, lease or otherwise dispose of its properties and assets on a
consolidated basis substantially as an entirety to any entity (other than the
Company or any Subsidiary Debenture Guarantor) unless (i) either (a) such
Subsidiary Debenture Guarantor shall be the continuing corporation or
partnership or (b) the Person (if other than such Subsidiary Debenture
Guarantor) formed by such consolidation or into which such Subsidiary Debenture
Guarantor is merged or the entity which acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all of the
properties and assets of such Subsidiary Debenture Guarantor, as the case may
be, shall be a corporation or partnership organized and validly existing under
the laws of the United States, any state thereof or the District of Columbia,
and shall expressly assume by an indenture supplemental to the Exchange
Indenture, executed and delivered to the Debenture Trustee, in form satisfactory
to the Debenture Trustee, all the obligations of such Subsidiary Debenture
Guarantor under the Exchange Debentures and the Exchange Indenture; (ii)
immediately before and immediately after giving effect to such transaction on a
pro forma basis, no Default or Event of Default shall have occurred and be
continuing; and (iii) such Subsidiary Debenture Guarantor shall have delivered
to the Debenture Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, sale, assignment, conveyance,
transfer, lease or disposition and such supplemental indenture comply with the
Exchange Indenture.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of the Company or any Subsidiary Debenture Guarantor in accordance with
the
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immediately preceding paragraphs, the successor Person formed by such
consolidation or into which the Company or such Subsidiary Debenture Guarantor,
as the case may be, is merged or the successor Person to which such sale,
assignment, conveyance, transfer, lease or disposition is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
or such Subsidiary Debenture Guarantor, as the case may be, under the Exchange
Indenture and/or the Debenture Guarantees, as the case may be, with the same
effect as if such successor had been named as the Company or such Subsidiary
Debenture Guarantor, as the case may be, therein and/or in the Debenture
Guarantees, as the case may be. When a successor assumes all the obligations of
its predecessor under the Exchange Indenture, the Exchange Debentures or a
Debenture Guarantee, as the case may be, the predecessor shall be released from
those obligations; provided that in the case of a transfer by lease, the
predecessor shall not be released from the payment of principal and interest on
the Exchange Debentures or a Debenture Guarantee, as the case may be.
EVENTS OF DEFAULT AND REMEDIES
The following will be "Events of Default" under the Exchange Indenture:
(i) default in the payment of any interest on any Exchange Debenture
when it becomes due and payable and continuance of such default for a
period of 30 days;
(ii) default in the payment of the principal of or premium, if any,
on any Exchange Debenture at its Maturity (upon acceleration, optional
redemption, required purchase or otherwise);
(iii) default in the performance, or breach, of the provisions
described in "Consolidation, Merger and Sale of Assets," the failure to
make or consummate a Change in Control Offer in accordance with the
provisions of the "Purchase of Exchange Debentures Upon a Change in
Control" covenant or the failure to make or consummate an Excess Proceeds
Offer in accordance with the provisions of the "Limitation on Sale of
Assets" covenant;
(iv) default in the performance, or breach, of any covenant or
warranty of the Company or any Subsidiary Debenture Guarantor contained in
the Exchange Indenture or any Debenture Guarantee (other than a default in
the performance, or breach, of a covenant or warranty which is specifically
dealt with in clause (i), (ii) or (iii) above) and continuance of such
default or breach for a period of 30 days after written notice shall have
been given to the Company by the Trustee or to the Company and the
Debenture Trustee by the holders of at least 25% in aggregate principal
amount of the Exchange Debentures then outstanding;
(v) (A) one or more defaults in the payment of principal of or
premium, if any, on Indebtedness of the Company or any Restricted
Subsidiary aggregating $10.0 million or more, when the same becomes due and
payable at the stated maturity thereof, and such default or defaults shall
have continued after any applicable grace period and shall not have been
cured or waived or (B) Indebtedness of the Company or any Restricted
Subsidiary aggregating $10.0 million or more shall have been accelerated or
otherwise declared due and payable, or required to be prepaid or
repurchased (other than by regularly scheduled required prepayment) prior
to the stated maturity thereof;
(vi) one or more final judgments or orders shall be rendered against
the Company or any Restricted Subsidiary for the payment of money, either
individually or in an aggregate amount, in excess of $10.0 million and
shall not be discharged and either (A) an enforcement proceeding shall have
been commenced by any creditor upon such judgment or order 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 a pending appeal or
otherwise, was not in effect;
(vii) any Debenture Guarantee ceases to be in full force and effect or
is declared null and void or any Subsidiary Debenture Guarantor denies that
it has any further liability under any Debenture Guarantee, or gives notice
to such effect (other than by reason of the termination of the Exchange
Indenture or the release of any such Debenture Guarantee in accordance with
the Exchange Indenture); or
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(viii) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than as specified in clause (viii) above)
shall occur and be continuing, the Debenture Trustee, by written notice to the
Company, or the holders of not less than 25% in aggregate principal amount of
the Exchange Debentures then outstanding, by written notice to the Company, may,
and the Debenture Trustee, upon the written request of such holders, shall
declare the principal of, premium, if any, and accrued interest on all of the
outstanding Exchange Debentures immediately due and payable; provided that so
long as the Senior Credit Agreement shall be in full force and effect, if an
Event of Default shall have occurred and be continuing (other than as specified
in clause (viii) above with respect to the Company), any such acceleration shall
not be effective until the earlier to occur of (x) five Business Days following
delivery of a written notice of such acceleration of the Exchange Debentures to
the agent under the Senior Credit Agreement and (y) the acceleration of any
Indebtedness under the Senior Credit Agreement. Upon any such declaration all
such amounts payable in respect of the Exchange Debentures shall become
immediately due and payable. If an Event of Default specified in clause (viii)
above occurs and is continuing, then the principal of, premium, if any, and
accrued interest on all of the outstanding Exchange Debentures shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Debenture Trustee or any holder of Exchange Debentures.
At any time after a declaration of acceleration under the Exchange
Indenture, but before a judgment or decree for payment of the money due has been
obtained by the Debenture Trustee, the holders of a majority in aggregate
principal amount of the outstanding Exchange Debentures, by written notice to
the Company and the Debenture Trustee, may rescind such declaration and its
consequences if (a) the Company has paid or deposited with the Debenture Trustee
a sum sufficient to pay (i) all overdue interest on all outstanding Exchange
Debentures, (ii) all unpaid principal of and premium, if any, on any outstanding
Exchange Debentures that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Exchange Debentures,
(iii) to the extent that payment of such interest is lawful, interest upon
overdue interest and overdue principal at the rate borne by the Exchange
Debentures, (iv) all sums paid or advanced by the Debenture Trustee under the
Exchange Indenture and the reasonable compensation, expenses, disbursements and
advances of the Debenture Trustee, its agents and counsel; and (b) all Events of
Default, other than the non-payment of amounts of principal of, premium, if any,
or interest on the Exchange Debentures that has become due solely by such
declaration of acceleration, have been cured or waived. No such rescission shall
affect any subsequent default or impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount of
the outstanding Exchange Debentures may, on behalf of the holders of all the
Exchange Debentures, waive any past defaults under the Exchange Indenture,
except a default in the payment of the principal of, premium, if any, or
interest on any Exchange Debenture, or in respect of a covenant or provision
which under the Exchange Indenture cannot be modified or amended without the
consent of the holder of each Exchange Debenture outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Debenture Trustee, the Debenture Trustee will mail to each holder of the
Exchange Debentures notice of the Default or Event of Default within 10 days
after the occurrence thereof. Except in the case of a Default or an Event of
Default in payment of principal of, premium, if any, or interest on any Exchange
Debentures, the Debenture Trustee may withhold the notice to the holders of such
Exchange Debentures if a committee of its trust officers in good faith
determines that withholding the notice is in the interests of the holders of the
Exchange Debentures.
The Company is required to furnish to the Debenture Trustee annual and
quarterly statements as to the performance by the Company and the Subsidiary
Debenture Guarantors of their respective obligations under the Exchange
Indenture and as to any default in such performance. The Company is also
required to notify the Debenture Trustee within five Business Days of the
occurrence of any Default or Event of Default.
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DEFEASANCE OR COVENANT DEFEASANCE OF EXCHANGE INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, and any Subsidiary Debenture Guarantor upon the
outstanding Exchange Debentures discharged ("defeasance"). Such defeasance means
that the Company will be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Exchange Debentures and to have
satisfied all of its other obligations under such Exchange Debentures and the
Exchange Indenture insofar as such Exchange Debentures are concerned, except for
(i) the rights of holders of outstanding Exchange Debentures to receive payments
in respect of the principal of, premium, if any, and interest on such Exchange
Debentures when such payments are due, (ii) the Company's obligations to issue
temporary Exchange Debentures, register the transfer or exchange of any Exchange
Debentures, replace mutilated, destroyed, lost or stolen Exchange Debentures,
maintain an office or agency for payments in respect of the Exchange Debentures
and segregate and hold such payments in trust, (iii) the rights, powers, trusts,
duties and immunities of the Debenture Trustee and (iv) the defeasance
provisions of the Exchange Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and any
Subsidiary Debenture Guarantor released with respect to certain covenants set
forth in the Exchange Indenture, and any omission to comply with such
obligations will not constitute a Default or an Event of Default with respect to
the Exchange Debentures ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance,
(i) the Company must irrevocably deposit or cause to be deposited
with the Debenture Trustee, as trust funds in trust, for the benefit of the
holders of the Exchange Debentures, money in an amount, or U.S. Government
Obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
due on the outstanding Exchange Debentures on the stated maturity date or
on the applicable redemption date, as the case may be, of such principal,
premium, if any, or interest on the outstanding Exchange Debentures;
(ii) no Default or Event of Default will have occurred and be
continuing on the date of such deposit or, insofar as an event of
bankruptcy under clause (viii) of "Events of Default" above is concerned,
at any time during the period ending on the 91st day after the date of such
deposit;
(iii) such defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under, the Exchange
Indenture or any material agreement or instrument to which the Company or
any Subsidiary Debenture Guarantor is a party or by which it is bound;
(iv) in the case of defeasance, the Company shall have delivered to
the Debenture Trustee an Opinion of Counsel stating that the Company has
received from, or there has been published by, the Internal Revenue Service
a ruling, or since the date of the final Prospectus, there has been a
change in applicable federal income tax law, in either case to the effect
that, and based thereon such opinion shall confirm that, the holders of the
outstanding Exchange Debentures 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;
(v) in the case of covenant defeasance, the Company shall have
delivered to the Debenture Trustee an Opinion of Counsel to the effect that
the holders of the Exchange Debentures outstanding 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;
(vi) in the case of defeasance or covenant defeasance, the Company
shall have delivered to the Debenture Trustee an Opinion of Counsel to the
effect that (A) the trust funds will not be subject to any rights of
holders of Senior Indebtedness or Senior Subordinated Indebtedness under
the subordination provisions of the Exchange
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Indenture and (B) after the 91st day following the deposit or after the
date such opinion is delivered, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally;
(vii) the Company shall have delivered to the Debenture Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the holders of the Exchange Debentures or any
Debenture Guarantee over the other creditors of either the Company or any
Subsidiary Debenture Guarantor with the intent of hindering, delaying or
defrauding creditors of either the Company or any Subsidiary Debenture
Guarantor; and
(viii) the Company shall have delivered to the Debenture Trustee an
Officers' Certificate and an Opinion of 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.
SATISFACTION AND DISCHARGE
The Exchange Indenture will cease to be of further effect (except as to
surviving rights of registration of transfer or exchange of the Exchange
Debentures as expressly provided for in the Exchange Indenture) and the
Debenture Trustee, at the expense of the Company, will execute proper
instruments acknowledging satisfaction and discharge of the Exchange Indenture
when (a) either (i) all the Exchange Debentures theretofore authenticated and
delivered (other than destroyed, lost or stolen Exchange Debentures which have
been replaced or paid and Exchange Debentures for whose payment money has been
deposited in trust with the Debenture Trustee or any paying agent 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 Exchange Indenture) have been
delivered to the Debenture Trustee for cancellation or (ii) all Exchange
Debentures not theretofore delivered to the Debenture Trustee for cancellation
(x) have become due and payable, (y) will become due and payable at Stated
Maturity within one year or (z) are to be called for redemption within one year
under arrangements satisfactory to the Debenture Trustee for the giving of
notice of redemption by the Debenture Trustee in the name, and at the expense,
of the Company, and the Company has irrevocably deposited or caused to be
deposited with the Debenture Trustee as trust funds in trust for such purpose an
amount sufficient to pay and discharge the entire Indebtedness on the Exchange
Debentures not theretofore delivered to the Debenture Trustee for cancellation,
for principal of, premium, if any, and interest on the Exchange Debentures to
the date of such deposit (in the case of Exchange Debentures which have become
due and payable) or to the Stated Maturity or redemption date, as the case may
be; (b) the Company has paid or caused to be paid all sums payable under the
Exchange Indenture by the Company; and (c) the Company has delivered to the
Debenture Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent provided in the Exchange Indenture
relating to the satisfaction and discharge of the Exchange Indenture have been
complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
With certain exceptions, modifications and amendments of the Exchange
Indenture may be made by a supplemental indenture entered into by the Company,
the Subsidiary Debenture Guarantors and the Debenture Trustee with the consent
of the holders of a majority in aggregate outstanding principal amount of the
Exchange Debentures then outstanding; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Exchange Debenture affected thereby: (i) change the Stated Maturity
of the principal of, or any installment of interest on, any Exchange Debenture,
or reduce the principal amount thereof, or premium, if any, or the rate of
interest thereon or change the coin or currency in which the principal of any
Exchange Debenture 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); (ii) amend, change or modify the obligation of the Company to
make and consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the "Limitation on Sale of Assets" covenant or the obligation of
the Company to make and consummate a Change in Control Offer in the event of a
Change in Control in accordance with the "Purchase of Exchange Debentures Upon a
Change in Control" covenant, including, in each case, amending, changing or
modifying any definition relating thereto in any manner materially adverse to
the holders of the Exchange Debentures affected thereby; (iii) reduce the
percentage in principal amount of outstanding Exchange
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Debentures, the consent of whose holders is required for any such supplemental
indenture or the consent of whose holders is required for any waiver of
compliance with certain provisions of the Exchange Indenture; (iv) 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 outstanding Exchange
Debentures required for such actions or to provide that certain other provisions
of the Exchange Indenture cannot be modified or waived without the consent of
the holder of each Exchange Debenture affected thereby; (v) except as otherwise
permitted under "Consolidation, Merger and Sale of Assets," consent to the
assignment or transfer by the Company or any Debenture Guarantor of any of their
rights or obligations under the Subsidiary Indenture; or (vi) amend or modify
any of the provisions of the Exchange Indenture relating to any Debenture
Guarantee in any manner adverse to the holders of the Exchange Debentures.
Notwithstanding the foregoing, without the consent of any holder of the
Exchange Debentures, the Company, any Subsidiary Debenture Guarantor and the
Debenture Trustee may modify or amend the Exchange Indenture: (a) to evidence
the succession of another Person to the Company, any Subsidiary Debenture
Guarantor or any other obligor on the Exchange Debentures, and the assumption by
any such successor of the covenants of the Company or such obligor or Subsidiary
Debenture Guarantor in the Exchange Indenture and in the Exchange Debentures and
in any Debenture Guarantee in accordance with "--Consolidation, Merger and Sale
of Assets;" (b) to add to the covenants of the Company, any Subsidiary Debenture
Guarantor or any other obligor upon the Exchange Debentures for the benefit of
the holders of the Exchange Debentures or to surrender any right or power
conferred upon the Company or any other obligor upon the Exchange Debentures, as
applicable, in the Exchange Indenture, in the Exchange Debentures or in any
Debenture Guarantee; (c) to cure any ambiguity, or to correct or supplement any
provision in the Exchange Indenture, the Exchange Debentures or any Debenture
Guarantee which may be defective or inconsistent with any other provision in the
Exchange Indenture, the Exchange Debentures or any Debenture Guarantee or make
any other provisions with respect to matters or questions arising under the
Exchange Indenture, the Exchange Debentures or any Debenture Guarantee; provided
that, in each case, such provisions shall not adversely affect the interest of
the holders of the Exchange Debentures; (d) to comply with the requirements of
the Commission in order to effect or maintain the qualification of the Exchange
Indenture under the Trust Indenture Act; (e) to add a Subsidiary Debenture
Guarantor under the Exchange Indenture; (f) to evidence and provide the
acceptance of the appointment of a successor Debenture Trustee under the
Exchange Indenture; or (g) to mortgage, pledge, hypothecate or grant a security
interest in favor of the Debenture Trustee for the benefit of the holders of the
Exchange Debentures as additional security for the payment and performance of
the Company's and any Subsidiary Debenture Guarantor's obligations under the
Exchange 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 Debenture Trustee pursuant to the
Exchange Indenture or otherwise.
The holders of a majority in aggregate principal amount of the Exchange
Debentures outstanding may waive compliance with certain restrictive covenants
and provisions of the Exchange Indenture.
CONCERNING THE DEBENTURE TRUSTEE
The Exchange Indenture provides that, except during the continuance of an
Event of Default, the Debenture Trustee will perform only such duties as are
specifically set forth in the Exchange Indenture. If an Event of Default has
occurred and is continuing, the Debenture Trustee will exercise such rights and
powers vested in it under the Exchange Indenture and use the same degree of care
and skill in its exercise as a prudent Person would exercise under the
circumstances in the conduct of such Person's own affairs.
The Exchange Indenture and provisions of the Trust Indenture Act
incorporated by reference therein contain limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company or any Subsidiary
Debenture Guarantor, 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 Debenture Trustee is permitted to engage in other transactions;
provided, however, that if it acquires any conflicting interest (as defined) it
must eliminate such conflicting interest or resign.
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GOVERNING LAW
The Exchange Indenture, the Debentures and the Debenture Guarantees are
governed by, and construed in accordance with, the laws of the State of New
York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation and in the Exchange Indenture. Reference is made to the Certificate
of Designation and the Exchange Indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided. For purposes of the Exchange Indenture, unless
otherwise specifically indicated, the term "consolidated" with respect to any
Person refers to such Person consolidated with its Restricted Subsidiaries, and
excludes from such consolidation any Unrestricted Subsidiary as if such
Unrestricted Subsidiary were not an Affiliate of such Person.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Subsidiary or (b) assumed in connection with the
acquisition of assets from such Person. 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.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or (c) any executive officer or director of any such specified Person or
other Person or (d) 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. 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 the
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 (a) any Capital Stock
of any Restricted Subsidiary; (b) all or substantially all of the properties and
assets of the Company or its Restricted Subsidiaries; or (c) any other
properties or assets of any division or line of business 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 or assets (i) that is governed by the provisions of the
Exchange Indenture described under "--Consolidation, Merger and Sale of Assets,"
(ii) between or among the Company and Restricted Subsidiaries in accordance with
the terms of the Exchange Indenture, (iii) that consist of accounts receivable
transferred to third parties that are not Affiliates of the Company or any
Subsidiary of the Company in the ordinary course of business, including by way
of the securitization of such receivables, (iv) of the Company or any Restricted
Subsidiary in exchange for properties or assets of substantially equal value of
another Person to be used in the same line of business being conducted by the
Company or any Restricted Subsidiary at the time of such transfer having a Fair
Market Value of less than $1.0 million in any given fiscal year, (v) to an
Unrestricted Subsidiary in compliance with the "Limitation on Restricted
Payments" covenant, (vi) consisting of the Headquarters Facility to third
parties that are not Affiliates of the Company or any Subsidiary of the Company
or (vii) having a Fair Market Value of less than $1.0 million in any given
fiscal year.
"Average Life" means, as of the date of determination with respect to any
Indebtedness or Senior Exchangeable Preferred Stock, as the case may be, the
quotient obtained by dividing (a) the sum of the products of (i) the number of
years from the date of determination to the date or dates of each successive
scheduled principal payment (including, without limitation, any sinking fund
requirements) of such Indebtedness or liquidation value payment of the Senior
Exchangeable Preferred Stock multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal or liquidation value
payments.
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"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state 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.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any duly authorized committee of such board.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's capital stock, and any rights (other than
debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock, whether now outstanding
or issued after the date of the Exchange Indenture.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purpose of the Exchange Indenture or the Certificate of Designation, as
the case may be, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (a) any evidence of Indebtedness with a maturity
of one year or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (b) certificates of deposit or acceptances with a maturity of one year
or less of any financial institution that is a member of the Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500 million; (c) commercial paper with a maturity of one year or less
issued by a corporation that is not an Affiliate of the Company and is organized
under the laws of any state of the United States or the District of Columbia and
rated at least A-1 by S&P or any successor rating agency or at least P-l by
Moody's or any successor rating agency; (d) repurchase obligations with a term
of not more than seven days for underlying securities of the types described in
clauses (a) and (b) above; and (e) demand and time deposits with a domestic
commercial bank that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500 million.
"Change in Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Permitted Holders, 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
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
Company and either (x) the Permitted Holders beneficially own, directly or
indirectly, in the aggregate Voting Stock of the Company that represents a
lesser percentage of the aggregate ordinary voting power of all classes of the
Voting Stock of the Company, voting together as a single class, than such other
person or group and are not entitled (by voting power, contract or otherwise) to
elect directors of the Company having a majority of the total voting power of
the Board of Directors, or (y) such other person or group is entitled to elect
directors of the Company having a majority of the total voting power of the
Board of Directors; (b) the Company consolidates with, or merges with or into,
another Person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, 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 (i) where the outstanding Voting Stock of the Company is not
converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company) or is converted into
or exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation and cash, securities
and other property (other than Capital Stock of the surviving or transferee
corporation) in an amount that could be paid by the Company as a Restricted
Payment as described under the "Limitation on Restricted Payments" covenant and
(ii) immediately after such transaction, no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted
Holders, is the
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"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 or transferee corporation and either (x) the Permitted Holders
beneficially own, directly or indirectly, in the aggregate Voting Stock of the
surviving or transferee corporation that represents a lesser percentage of the
aggregate ordinary voting power of all classes of the Voting Stock of the
surviving or transferee corporation, voting together as a single class, than
such other person or group and are not entitled (by voting power, contract or
otherwise) to elect directors of the Surviving Entity having a majority of the
total voting power of the Board of Directors, or (y) such other person or group
is entitled to elect directors of the surviving or transferee having a majority
of the total voting power of the elected Board of Directors; or (c) during any
consecutive two year period, 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 of Directors, 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 the Board of
Directors of the Company then in office; or (d) 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 and Sale of Assets."
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of the Company and all Restricted Subsidiaries for such
period as determined in accordance with GAAP, adjusted by excluding, without
duplication, (a) any net after-tax extraordinary gains or losses (less all fees
and expenses relating thereto), (b) any net after-tax gains or losses (less all
fees and expenses relating thereto) attributable to asset dispositions other
than in the ordinary course of business, (c) the portion of net income (or loss)
of any Person (other than the Company or a Restricted Subsidiary), including
Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has
an ownership interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any Restricted Subsidiary in cash
dividends or distributions during such period, (d) the net income (or loss) of
any Person combined with the Company or any Restricted Subsidiary on a "pooling
of interests" basis attributable to any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary is not at the date of determination 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 such Restricted Subsidiary or its stockholders, and (f) for
purposes of calculating Consolidated Adjusted Net Income under the "Limitation
on Restricted Payment" covenant, any net income (or loss) from any Restricted
Subsidiary while it was an Unrestricted Subsidiary at any time during such
period other than any amounts actually received from such Restricted Subsidiary
during such period.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (a) the sum of Consolidated Adjusted Net Income and, to the
extent deducted in computing Consolidated Adjusted Net Income, Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges, in each case, for such period to (b) the Consolidated Interest Expense
for such period.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of the Company and all Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
(1) the sum of (a) the interest expense of the Company and its Restricted
Subsidiaries for such period, including, without limitation, (i) amortization of
debt discount, (ii) the net cost of Interest Rate Agreements (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation and (iv) amortization of debt issuance costs, plus (b) the interest
component of Capitalized Lease Obligations of the Company and its Restricted
Subsidiaries during such period, plus (c) cash dividends due (whether or not
declared) on Preferred Stock by the Company and any Restricted Subsidiary, plus
(d) cash dividends due (whether or not declared) on Redeemable Capital Stock by
the Company and any Restricted Subsidiary, in each case as determined on a
consolidated basis in accordance with GAAP, less (2) interest on the Exchange
Debentures outstanding on the Exchange
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Date paid in kind with Exchange Debentures and on Exchange Debentures so issued
as payment in kind interest, all in accordance with the Exchange Indenture as in
effect on the Issuance Date; provided that (x) 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 the Company, a fixed or floating
rate of interest, shall be computed by applying at the option of the Company,
either the fixed or floating rate, and (y) in making such computation, the
Consolidated Interest Expense 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; provided further that, notwithstanding the foregoing, the interest rate
with respect to any Indebtedness covered by any Interest Rate Agreement shall be
deemed to be the effective interest rate with respect to such Indebtedness after
taking into account such Interest Rate Agreement.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization, depletion and other non-cash expenses of the Company
and any Restricted Subsidiary reducing Consolidated Adjusted Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge that requires an accrual of or reserve for cash charges
for any future period).
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business and designed to protect against or manage
exposure to fluctuations in foreign currency exchange rates.
"Debenture Guarantee" means any guarantee of the obligations of the Company
under the Exchange Indenture and the Exchange Debentures by any Restricted
Subsidiary in accordance with the provisions of the Exchange Indenture.
"Debenture Guarantor Senior Indebtedness" of a Subsidiary Debenture
Guarantor means Indebtedness of such Subsidiary Debenture Guarantor consisting
of (i) a guarantee of any Senior Indebtedness under the Senior Credit Agreement
or any other Senior Indebtedness and (ii) the principal of, premium, if any, and
interest on all other Indebtedness of such Subsidiary Debenture Guarantor (other
than the Debenture Guarantee issued by such Subsidiary Debenture Guarantor),
whether outstanding on the Issuance Date or thereafter created, incurred or
assumed, 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 such Note Guarantee. Notwithstanding the foregoing, "Debenture
Guarantor Senior Indebtedness" of a Subsidiary Debenture Guarantor shall not
include (i) Indebtedness evidenced by the Debenture Guarantee of such Subsidiary
Debenture Guarantor, (ii) Indebtedness of such Subsidiary Debenture Guarantor
that is expressly subordinated in right of payment to any Debenture Guarantor
Senior Indebtedness of such Subsidiary Debenture Guarantor, (iii) Indebtedness
of such Subsidiary Debenture Guarantor that by operation of law is subordinate
to any general unsecured obligations of such Subsidiary Debenture Guarantor,
(iv) Indebtedness of such Subsidiary Debenture Guarantor to the extent incurred
in violation of any covenant of the Exchange Indenture, (v) any liability for
federal, state or local taxes or other taxes, owed or owing by such Subsidiary
Debenture Guarantor, (vi) trade account payables owed or owing by such
Subsidiary Debenture Guarantor, (vii) amounts owed by such Subsidiary Debenture
Guarantor for compensation to employees or for services rendered to such
Subsidiary Debenture Guarantor, (viii) Indebtedness of such Subsidiary Debenture
Guarantor to any Affiliate of the Company, (ix) Redeemable Capital Stock of such
Subsidiary Debenture Guarantor and (x) Indebtedness which when incurred and
without respect to any election under Section 1111(b) of Title 11 of the United
States Code is without recourse to such Subsidiary Debenture Guarantor.
"Debenture Guarantor Senior Subordinated Indebtedness" of a Subsidiary
Debenture Guarantor means Indebtedness of such Subsidiary Debenture Guarantor
consisting of (i) a guarantee of any Senior Subordinated Indebtedness under the
Indenture or any other Senior Subordinated Indebtedness and (ii) the principal
of, premium, if any, and interest on all other Indebtedness of such Subsidiary
Debenture Guarantor (other than the Debenture Guarantee issued by such
Subsidiary Debenture Guarantor), whether outstanding on the date of the Exchange
Indenture or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant
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to which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to such Debenture Guarantee. Notwithstanding
the foregoing, "Debenture Guarantor Senior Subordinated Indebtedness" of a
Subsidiary Debenture Guarantor shall not include (i) Indebtedness evidenced by
the Debenture Guarantee of such Subsidiary Debenture Guarantor, (ii)
Indebtedness of such Subsidiary Debenture Guarantor that is expressly
subordinated in right of payment to any Debenture Guarantor Senior Subordinated
Indebtedness of such Subsidiary Debenture Guarantor, (iii) Indebtedness of such
Subsidiary Debenture Guarantor that by operation of law is subordinate to any
general unsecured obligations of such Subsidiary Debenture Guarantor, (iv)
Indebtedness of such Subsidiary Debenture Guarantor to the extent incurred in
violation of any covenant of the Exchange Indenture, (v) any liability for
federal, state or local taxes or other taxes, owed or owing by such Subsidiary
Debenture Guarantor, (vi) trade account payables owed or owing by such
Subsidiary Debenture Guarantor, (vii) amounts owed by such Subsidiary Debenture
Guarantor for compensation to employees or for services rendered to such
Subsidiary Debenture Guarantor, (viii) Indebtedness of such Subsidiary Debenture
Guarantor to any Affiliate of the Company, (ix) Redeemable Capital Stock of such
Subsidiary Debenture Guarantor and (x) Indebtedness which when incurred and
without respect to any election under Section 1111(b) of Title 11 of the United
States Code is without recourse to such Subsidiary Debenture Guarantor.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) Indebtedness under the Senior
Credit Agreement and (ii) any other Senior Indebtedness permitted under the
Exchange Indenture the principal amount of which is $25 million or more and that
has been designated by the Company as Designated Senior Indebtedness.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Exchange Indenture, a
member of the Board of Directors who does not have any material direct or
indirect financial interest in or with respect to such transaction or series of
transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Issuance Date.
"guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Headquarters Facility" means the headquarters facility and warehouse of
the Company as of the Issuance Date located in Dallas, Texas.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred 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 and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (b) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (c) all indebtedness of such
Person 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
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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, (d) all Capitalized Lease Obligations of such
Person, (e) all obligations of such Person under or in respect of Interest Rate
Agreements or Currency Agreements, (f) all Indebtedness referred to in (but not
excluded from) the preceding clauses 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 (the amount of
such obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured), (g) all guarantees by such
Person of Indebtedness referred to in this definition of any other Person and
(h) all Redeemable Capital Stock of such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends. 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 was purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Certificate of Designation or
the Exchange Indenture, as the case may be, and if such price is based upon, or
measured by, the fair market value of such Redeemable Capital Stock, such fair
market value shall be determined in good faith by the board of directors of the
issuer of such Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection agreements
and other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
designed to protect against or manage exposure to fluctuations in interest
rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee 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 or evidences of Indebtedness 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. In addition, the fair market
value of the net assets of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed
to be an "Investment" made by the Company in such Unrestricted Subsidiary at
such time. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Issuance Date" means the date on which the Old Senior Exchangeable
Preferred Stock was originally issued under the Certificate of Designation.
"Junior Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Debenture Guarantor that is subordinated in right of payment to the
Exchange Debentures or the Debenture Guarantee of such Subsidiary Debenture
Guarantor, as the case may be.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Management Stock" means the Capital Stock of the Company and the options
to acquire Capital Stock of the Company owned by Lloyd L. Ross and Jerry M.
Smith as of the Issuance Date together with Preferred Stock issued as payment in
kind dividends on such Capital Stock that is Preferred Stock and any shares of
Preferred Stock issued as payment in kind dividends thereon, and such dividends
made pursuant to the terms of the certificate of designation for such Preferred
Stock or the certificate of incorporation of the Company, as the case may be, as
in effect on the Issuance Date.
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"Maturity" means, with respect to any Exchange Debenture, the date on
which any principal of such Exchange Debenture becomes due and payable provided
in such Exchange Debenture or in the Exchange Indenture, whether at the Stated
Maturity with respect to such principal or by declaration of acceleration, call
for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of, or stock
or other assets when disposed for, cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary), net of (i) brokerage commissions and other fees
and expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) 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 (v) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve required
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 Debenture
Trustee.
"Pari Passu Indebtedness" means (a) with respect to the Exchange
Debentures, Indebtedness that ranks pari passu in right of payment to the
Exchange Debentures and (b) with respect to any Debenture Guarantee,
Indebtedness that ranks pari passu in right of payment to such Debenture
Guarantee.
"Permitted Holders" means, as of the date of determination, Madison
Dearborn Capital Partners II, L.P. and its Affiliates.
"Permitted Indebtedness" means any of the following:
(a) (i) Indebtedness of the Company under the Senior Credit Agreement
in an aggregate principal amount at any one time outstanding not to exceed
the sum of (A) $110 million less the amount of any permanent reductions
made by the Company in respect of any term loans under the Senior Credit
Agreement and (B) with respect to revolving borrowings, the greater of (1)
$115 million and (2) 60% of the Eligible Inventory (as defined in the
Senior Credit Agreement on the Issuance Date) of the Company and the
Restricted Subsidiaries and (ii) any guarantee by a Subsidiary Debenture
Guarantor of Indebtedness incurred under this clause (i);
(b) Indebtedness of the Company pursuant to the Notes or of any
Restricted Subsidiary pursuant to a Note Guarantee;
(c) Indebtedness of the Company pursuant to the Exchange Debentures or
of any Restricted Subsidiary pursuant to a Debenture Guarantee;
(d) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the date of the Exchange Indenture and listed on a schedule
thereto;
(e) Indebtedness of the Company owing to any wholly owned Restricted
Subsidiary; provided that any Indebtedness of the Company owing to any such
Restricted Subsidiary is subordinated in right of payment from and after
such time as the Exchange Debentures shall become due and payable (whether
at Stated Maturity, acceleration or otherwise) to the payment and
performance of the Company's obligations under the Exchange Debentures;
provided further that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge
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or transfer to the Company or another wholly owned Restricted Subsidiary)
shall be deemed to be an incurrence of such Indebtedness by the Company not
permitted by this clause (e);
(f) Indebtedness of a Restricted Subsidiary owing to the Company or to
another wholly owned Restricted Subsidiary; provided that any such
Indebtedness of any Subsidiary Debenture Guarantor is subordinated in right
of payment to the Debenture Guarantee of such Subsidiary Debenture
Guarantor; provided further that 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 such Restricted Subsidiary not
permitted by this clause (f);
(g) guarantees of any Restricted Subsidiary made in accordance with
the provisions of the "Limitation on Guarantees of Indebtedness by
Restricted Subsidiaries" covenant;
(h) obligations of the Company or any Subsidiary Debenture Guarantor
entered into in the ordinary course of business (i) 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, which obligations
do not exceed the aggregate principal amount of such Indebtedness and (ii)
pursuant to Currency Agreements entered into by the Company or any of its
Restricted Subsidiaries in respect of its (x) assets or (y) obligations, as
the case may be, denominated in a foreign currency;
(i) Indebtedness of the Company or any Subsidiary Debenture Guarantor
in respect of Purchase Money Obligations and Capitalized Lease Obligations
of the Company or any Subsidiary Debenture Guarantor in an aggregate amount
which does not exceed $15.0 million at any one time outstanding;
(j) Indebtedness of the Company or any Subsidiary Debenture Guarantor
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets, including, without limitation, shares of Capital Stock of
Restricted Subsidiaries;
(k) Indebtedness of the Company or any Subsidiary Debenture Guarantor
represented by (x) letters of credit for the account of the Company or any
Restricted Subsidiary or (y) other obligations to reimburse third parties
pursuant to any surety bond or other similar arrangements, which letters of
credit or other obligations, as the case may be, are intended to provide
security for workers' compensation claims, payment obligations in
connection with self-insurance or other similar requirements in the
ordinary course of business;
(l) Acquired Indebtedness of any Restricted Subsidiary that is
organized outside of the United States of America in an aggregate amount
which, together with any Indebtedness permitted to be incurred pursuant to
this clause (l) and refinanced pursuant to clause (q) below, does not
exceed $10.0 million at any one time outstanding;
(m) Indebtedness of the Company owing to Jerry M. Smith under a note
issued pursuant to an agreement between the Company and Jerry M. Smith as
in effect on the Issuance Date, in consideration for the repurchase of
Common Stock of the Company owned by Jerry M. Smith at his retirement, in
an aggregate amount not to exceed $15.0 million outstanding at any time;
(n) Preferred Stock issued as payment in kind dividends on Preferred
Stock and any shares of Preferred Stock issued as payment in kind dividends
thereon, such dividends made pursuant to the terms of the certificate of
designation for such Preferred Stock or the certificate of incorporation of
the Company, as the case may be, as in effect on the Issuance Date;
(o) Indebtedness of the Company or a Subsidiary Debenture Guarantor
incurred in connection with the Company's Headquarters Facility or the
purchase or construction of a new headquarters facility, in each case, as
permitted under the Senior Credit Agreement as in effect on the Issuance
Date;
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(p) Indebtedness of the Company or any Subsidiary Debenture Guarantor
not otherwise permitted by the foregoing clauses (a) through (o) in an
aggregate principal amount not in excess of $20.0 million at any one time
outstanding; and
(q) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
Indebtedness, referred to in clauses (b), (c), (d) and (l) of this
definition, including any successive refinancings, so long as (i) any such
new Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the lesser of the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Indebtedness refinanced or the amount of any premium
reasonably determined as necessary to accomplish such refinancing, (ii)
with respect to the Exchange Indenture, in the case of any refinancing by
the Company of Pari Passu Indebtedness or Junior Subordinated Indebtedness,
such new Indebtedness is made pari passu with or subordinate to the
Exchange Debentures at least to the same extent as the Indebtedness being
refinanced, (iii) with respect to the Exchange Indenture, in the case of
any refinancing by any Subsidiary Debenture Guarantor of Pari Passu
Indebtedness or Junior Subordinated Indebtedness, such new Indebtedness is
made pari passu with or subordinate to the Debenture Guarantee of such
Subsidiary Debenture Guarantor at least to the same extent as the
Indebtedness being refinanced, (iv) such new Indebtedness has an Average
Life longer than the Average Life of the Exchange Debentures or the Senior
Exchangeable Preferred Stock, as the case may be, and a final Stated
Maturity later than the final Stated Maturity of the Exchange Debentures or
the Mandatory Redemption Date, as the case may be, and (v) Indebtedness o f
the Company or a Subsidiary Debenture Guarantor may only be refinanced with
Indebtedness of the Company or a Subsidiary Debenture Guarantor and
Indebtedness of a Restricted Subsidiary may only be refinanced with
Indebtedness of a Restricted Subsidiary and Indebtedness of a Restricted
Subsidiary that is not a Subsidiary Debenture Guarantor may only be
refinanced with Indebtedness of such Restricted Subsidiary.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments in the Company or any wholly owned Restricted
Subsidiary;
(c) intercompany Indebtedness to the extent permitted under clauses
(e) or (f) of the definition of "Permitted Indebtedness";
(d) Investments in an amount not to exceed $10.0 million at any one
time outstanding;
(e) Investments by the Company or any Restricted Subsidiary in another
Person, if as a result of such Investment (i) such other Person becomes a
wholly owned Restricted Subsidiary or (ii) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all
of its assets to, the Company or a wholly owned Restricted Subsidiary;
(f) bonds, notes, debentures and other securities received as
consideration for Assets Sales to the extent permitted under the
"Limitation of Sale of Assets" covenant;
(g) negotiable instruments held for deposit or collection in the
ordinary course of business, except to the extent they would constitute
Investments in Affiliates; or
(h) Investments in the form of the sale (on a "true-sale" non-recourse
basis) or the servicing of receivables transferred from the Company or any
Restricted Subsidiary.
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"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 and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Issuance Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Public Equity Offering" means an offer and sale of Common Stock (which is
Qualified Capital Stock) of the Company made on a primary basis by the Company
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-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"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 class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract 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 Exchange Debentures or is redeemable at the option of the
holder thereof at any time prior to such final Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
final Stated Maturity.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw-Hill,
Inc., and its successors.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Restricted Subsidiary sells or
transfers any property or asset in connection with the leasing of such property
or asset to the seller or transferor.
"Senior Credit Agreement" means the credit agreement dated as of December
29, 1997, among the Company, the several lenders parties thereto, Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as arranger and
syndication agent, and Fleet National Bank, as administrative agent, as such
agreement may be amended, renewed, extended, substituted, restated, refinanced,
restructured, supplemented, increased or otherwise modified from time to time
(including, without limitation, any successive amendments, renewals, extensions,
substitutions, restatements, refinancings, restructurings, supplements or other
modifications of the foregoing); provided that with respect to any agreement
providing for the refinancing of Indebtedness under the Senior Credit Agreement,
such agreement shall be the Senior Credit Agreement under the Exchange Indenture
only if a notice to that effect is delivered by the Company to the Debenture
Trustee and there shall be at any time only one instrument that is the Senior
Credit Agreement under the Exchange Indenture.
"Senior Indebtedness" means (i) all obligations of the Company, now or
hereafter existing, under or in respect of the Senior Credit Agreement, whether
for principal, premium, if any, interest (including interest accruing after the
filing of, or which would have accrued but for the filing of, a petition by or
against the Company under Bankruptcy Law, whether or not such interest is
allowed as a claim after such filing in any proceeding under such law) and other
amounts due in connection therewith (including any fees, premiums, expenses and
indemnities) and (ii) the principal of, premium, if any, and interest on all
other Indebtedness of the Company, whether outstanding on the date of the
Exchange Indenture or thereafter created, incurred or assumed, 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 Senior Subordinated
Indebtedness. Notwithstanding the foregoing, "Senior Indebtedness" shall not
include (i) Indebtedness evidenced by the Exchange Debentures, (ii) Indebtedness
evidenced by the Notes, (iii) Indebtedness of the Company that is expressly
subordinated in right of payment to any Senior Indebtedness of the Company, (iv)
Indebtedness of the Company that by operation of law is subordinate to any
general unsecured obligations
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of the Company, (v) Indebtedness of the Company to the extent incurred in
violation of any covenant prohibiting the incurrence of Indebtedness under the
Exchange Indenture, (vi) any liability for federal, state or local taxes or
other taxes, owed or owing by the Company, (vii) trade account payables owed or
owing by the Company, (viii) amounts owed by the Company for compensation to
employees or for services rendered to the Company, (ix) Indebtedness of the
Company to any Restricted Subsidiary or any other Affiliate of the Company, (x)
Redeemable Capital Stock of the Company and (x) Indebtedness which when incurred
and without respect to any election under Section 1111(b) of Title 11 of the
United States Code is without recourse to the Company or any Restricted
Subsidiary.
"Senior Subordinated Indebtedness" means (i) all obligations of the
Company, now or hereafter existing, under or in respect of the Notes, whether
for principal, premium, if any, interest (including interest accruing after the
filing of, or which would have accrued but for the filing of, a petition by or
against the Company under Bankruptcy Law, whether or not such interest is
allowed as a claim after such filing in any proceeding under such law) and (ii)
the principal of, premium, if any, and interest on all other Indebtedness of the
Company (other than the Exchange Debentures), whether outstanding on the date of
the Exchange Indenture or thereafter created, incurred or assumed, for which, 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 will be subordinate in right of payment to any Senior
Indebtedness or other general unsecured obligations of the Company, unless, such
instrument expressly provides that such Indebtedness will be subordinate in
right of payment to the Notes or any Indebtedness that is pari passu in right of
payment to the Notes. Notwithstanding the foregoing, "Senior Subordinated
Indebtedness" shall not include (i) Indebtedness evidenced by the Exchange
Debentures, (ii) Indebtedness of the Company that is expressly subordinated in
right of payment to any Senior Subordinated Indebtedness of the Company or the
Notes, (iii) Indebtedness of the Company that by operation of law is subordinate
to any general unsecured obligations of the Company, (iv) Indebtedness of the
Company to the extent incurred in violation of any covenant prohibiting the
incurrence of Indebtedness under the Certificate of Designation or the Exchange
Indenture, (v) any liability for federal, state or local taxes or other taxes,
owed or owing by the Company, (vi) trade account payables owed or owing by the
Company, (vii) amounts owed by the Company for compensation to employees or for
services rendered to the Company, (viii) Indebtedness of the Company to any
Restricted Subsidiary or any other Affiliate of the Company, (ix) Redeemable
Capital Stock of the Company and (xi) Indebtedness which when incurred and
without respect to any election under Section 1111(b) of Title 11 of the United
States Code is without recourse to the Company or any Restricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that, together with its Subsidiaries, (i) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated revenues of the Company
and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was
the owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"Stated Maturity" means, when used with respect to any Exchange Debenture
or any installment of interest thereon, the date specified in such Exchange
Debenture as the fixed date on which the principal of such Exchange Debenture or
such installment of interest is due and payable, and, when used with respect to
any other Indebtedness, means the date specified in the instrument governing
such Indebtedness as the fixed date on which the principal of such Indebtedness,
or any installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means (a) with respect to Indebtedness of the
Company, Indebtedness of the Company that is expressly subordinate in right of
payment to any Senior Indebtedness or other general unsecured obligations of the
Company and to any Senior Subordinated Indebtedness, unless such instrument
expressly provides that such Indebtedness will be subordinate in right of
payment to the Exchange Debentures or any Indebtedness that is pari passu in
right of payment with the Exchange Debentures and (b) with respect to
Indebtedness of a Debenture Guarantor, Indebtedness of such Subsidiary Debenture
Guarantor that is expressly subordinate in right of payment to any Debenture
Guarantor Senior Indebtedness or other general unsecured obligations of the
Debenture Guarantor and to any Debenture Guarantor Senior Subordinated
Indebtedness, unless such instrument expressly provides that such Indebtedness
will be subordinate in right
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of payment to the Debenture Guarantees or any Indebtedness that is pari passu in
right of payment with the Debenture Guarantees.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company or
by one or more other Subsidiaries or by the Company and one or more other
Subsidiaries.
"Subsidiary Debenture Guarantor" means TMI Holdings Inc., Tuesday Morning
Inc., Friday Morning, Inc. and TMIL Corporation and any Restricted Subsidiary
that incurs, or would be required to incur a Debenture Guarantee pursuant to the
Exchange Indenture; provided that upon the release and discharge of any Person
from its Debenture Guarantee in accordance with the Exchange Indenture, such
Person shall cease to be a Subsidiary Debenture Guarantor.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of the Company, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary; provided, however, that in no event shall any
Subsidiary Debenture Guarantor be an Unrestricted Subsidiary. The Board of
Directors of the Company may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as
(i) neither the Company nor any Restricted Subsidiary is directly or indirectly
liable for any Indebtedness of such Subsidiary, (ii) no default with respect to
any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or
otherwise) any holder of any other Indebtedness of the Company or any Restricted
Subsidiary to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity, (iii) any
Investment in such Subsidiary made as a result of designating such Subsidiary an
Unrestricted Subsidiary will not violate the provisions of the "Limitation on
Unrestricted Subsidiaries" covenant, (iv) neither the Company nor any Restricted
Subsidiary has a contract, agreement, arrangement, understanding or obligation
of any kind, whether written or oral, with such Subsidiary other than those that
might be obtained at the time from Persons who are not Affiliates of the
Company, and (v) neither the Company nor any Restricted Subsidiary has any
obligation (1) to subscribe for additional shares of Capital Stock or other
equity interest in such Subsidiary, or (2) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Company shall be evidenced to the Debenture Trustee by filing a board
resolution with the Debenture Trustee giving effect to such designation. The
Board of Directors of the Company may designate any Unrestricted Subsidiary as a
Restricted Subsidiary if immediately after giving effect to such designation,
there would be no Default or Event of Default under the Exchange Indenture or,
in the case of the Certificate of Designations, there would be no Voting Rights
Triggering Event, and the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation on Indebtedness"
covenant.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Voting Stock" means any class or classes of Capital Stock 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 any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
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THE PREFERRED STOCK EXCHANGE OFFER
PURPOSE AND EFFECT OF THE PREFERRED STOCK EXCHANGE OFFER
The Old Senior Exchangeable Preferred Stock was originally sold by the
Company on December 29, 1997 to the Initial Purchaser pursuant to the Units
Purchase Agreement. The Initial Purchaser subsequently resold the Old Senior
Exchangeable Preferred Stock to qualified institutional buyers in reliance on
Rule 144A under the Securities Act. As a condition to the Units Purchase
Agreement, the Company entered into the Preferred Stock Registration Rights
Agreement with the Initial Purchaser pursuant to which the Company has agreed,
for the benefit of the holders of the Old Senior Exchangeable Preferred Stock,
at the Company's cost, to use its best efforts to (i) file the Preferred Stock
Exchange Offer Registration Statement within 45 days after the date of the
original issue of the Old Senior Exchangeable Preferred Stock with the
Commission with respect to the Preferred Stock Exchange Offer for the New Senior
Exchangeable Preferred Stock; (ii) use its best efforts to cause the Preferred
Stock Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 days after the date of the original issuance of the
Old Senior Exchangeable Preferred Stock and (iii) unless the Preferred Stock
Exchange Offer would not be permitted by applicable law or Commission policy,
commence the Preferred Stock Exchange Offer and use its best efforts to issue
the New Senior Exchangeable Preferred Stock in exchange for the Old Senior
Exchangeable Preferred Stock on or prior to 150 days after the date of the
original issuance of the Old Senior Exchangeable Preferred Stock. Upon the
Preferred Stock Exchange Offer Registration Statement being declared effective,
the Company will offer the New Senior Exchangeable Preferred Stock in exchange
for surrender of the Old Senior Exchangeable Preferred Stock. The Company will
keep the Preferred Stock Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date on which notice of the
Preferred Stock Exchange Offer is mailed to the holders of the Old Senior
Exchangeable Preferred Stock. For each Old Senior Exchangeable Preferred Stock
surrendered to the Company pursuant to the Preferred Stock Exchange Offer, the
holder of such Old Senior Exchangeable Preferred Stock will receive a New Senior
Exchangeable Preferred Stock having a liquidation preference equal to that of
the surrendered Old Senior Exchangeable Preferred Stock. Dividends on each Old
Senior Exchangeable Preferred Stock will accrue from the date of its original
issue. Dividends on each New Senior Exchangeable Preferred Stock will accrue
from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
certain no-action letters to third parties, the New Senior Exchangeable
Preferred Stock will, in general, be freely tradeable after the Preferred Stock
Exchange Offer without further registration under the Securities Act. However,
any purchaser of Old Senior Exchangeable Preferred Stock who is an "affiliate"
of the Company or who intends to participate in the Preferred Stock Exchange
Offer for the purpose of distributing the New Senior Exchangeable Preferred
Stock (i) will not be able to rely on the interpretation of the staff of the
Commission, (ii) will not be able to tender its Old Senior Exchangeable
Preferred Stock in the Preferred Stock Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Senior Exchangeable Preferred
Stock, unless such sale or transfer is made pursuant to an exemption from such
requirements.
Each holder of the Old Senior Exchangeable Preferred Stock (other than
certain specified holders) who wishes to exchange Old Senior Exchangeable
Preferred Stock for New Senior Exchangeable Preferred Stock in the Preferred
Stock Exchange Offer will be required to represent to the Company in the Letter
of Transmittal that (i) any New Senior Exchangeable Preferred Stock to be
received by it was acquired in the ordinary course of its business, (ii) at the
time of commencement of the Preferred Stock Exchange Offer, it has no
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the New Senior Exchangeable
Preferred Stock, (iii) it is not an "affiliate" (as defined in Rule 405 under
the Securities Act) of the Company or, if it is such an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable and (iv) it is not acting on behalf of
any person who could not truthfully make the foregoing representations. In
addition, in connection with any resales of New Senior Exchangeable Preferred
Stock, any Participating Broker Dealer who acquired the Senior Exchangeable
Preferred Stock for its own account as a result of market making or other
trading activities must deliver a prospectus meeting the requirements of the
Securities Act. The Commission has taken the position that Participating Broker-
Dealers may fulfill their prospectus delivery requirements with respect to the
New Senior Exchangeable Preferred Stock
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(other than a resale of an unsold allotment from the original sale of the Old
Senior Exchangeable Preferred Stock) with the prospectus contained in the
Preferred Stock Exchange Offer Registration Statement. Under the Preferred Stock
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use the prospectus contained in the Preferred Stock Exchange
Offer Registration Statement in connection with the resale of such New Senior
Exchangeable Preferred Stock.
In the event that (i) any changes in law or the applicable interpretations
of the staff of the Commission do not permit the Company to effect the Preferred
Stock Exchange Offer, (ii) for any other reason the Preferred Stock Exchange
Offer is not consummated within 150 days after the Issuance Date, (iii) under
certain circumstances, if the Initial Purchaser shall so request or (iv) any
holder of Old Senior Exchangeable Preferred Stock (other than the Initial
Purchaser) is not eligible to participate in the Preferred Stock Exchange Offer,
the Company will, at its expense, (a) as promptly as practicable, file with the
Commission the Preferred Stock Shelf Registration Statement covering resales of
the Old Senior Exchangeable Preferred Stock, (b) use its best efforts to cause
the Preferred Stock Shelf Registration Statement to be declared effective under
the Securities Act on or prior to 150 days after the Issuance Date and (c) use
its best efforts to keep effective the Preferred Stock Shelf Registration
Statement until the earlier of two years after its effective date or such
shorter period ending when all Old Senior Exchangeable Preferred Stock covered
by the Preferred Stock Shelf Registration Statement have been sold in the manner
set forth and as contemplated in the Preferred Stock Shelf Registration
Statement or when the Old Senior Exchangeable Preferred Stock become eligible
for resale pursuant to Rule 144 under the Securities Act without volume
restrictions, if any. The Company, will, in the event of the filing of the
Preferred Stock Shelf Registration Statement, provide to each holder of the Old
Senior Exchangeable Preferred Stock copies of the prospectus which is a part of
the Preferred Stock Shelf Registration Statement, notify each such holder when
the Preferred Stock Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Senior Exchangeable Preferred Stock. A holder of Old Senior Exchangeable
Preferred Stock that sells its Old Senior Exchangeable Preferred Stock pursuant
to the Preferred Stock Shelf Registration Statement generally will be required
to be named as a selling securityholder in the related prospectus and to deliver
a prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Preferred Stock Registration Rights Agreement
that are applicable to such a holder (including certain indemnification rights
and obligations thereunder). In addition, each holder of the Old Senior
Exchangeable Preferred Stock will be required to deliver information to be used
in connection with the Preferred Stock Shelf Registration Statement and to
provide comments on the Preferred Stock Shelf Registration Statement within the
time periods set forth in the Preferred Stock Registration Rights Agreement in
order to have its Old Senior Exchangeable Preferred Stock included in the
Preferred Stock Shelf Registration Statement and to benefit from the provisions
regarding liquidated damages set forth in the following paragraph.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration statements
will be filed, or, if filed, that they will become effective. In the event that
either (a) the Preferred Stock Exchange Offer Registration Statement is not
filed with the Commission on or prior to the 45th calendar day following the
Issuance Date, (b) the Preferred Stock Exchange Offer Registration Statement has
not been declared effective on or prior to the 120th calendar day following the
Issuance Date or (c) the Preferred Stock Exchange Offer is not consummated or a
Preferred Stock Shelf Registration Statement is not declared effective on or
prior to the 150th calendar day following the Issuance Date, the dividend rate
borne by the Old Senior Exchangeable Preferred Stock shall be increased by one-
quarter of one percent per annum following such 45-day period in the case of
clause (a) above, following such 120-day period in the case of clause (b) above
or following such 150-day period in the case of clause (c) above, which rate
will be increased by an additional one-quarter of one percent per annum for each
90-day period that any additional dividends continue to accumulate; provided
that the aggregate increase in such annual dividend rate may in no event exceed
one percent. Upon (x) the filing of the Preferred Stock Exchange Offer
Registration Statement after the 45-day period described in clause (a) above,
(y) the effectiveness of the Preferred Stock Exchange Offer Registration
Statement after the 120-day period described in clause (b) above or (z) the
consummation of the Preferred Stock Exchange Offer or the effectiveness of a
Preferred Stock Shelf Registration Statement, as the case may be, after the 150-
day period described in clause (c) above, the dividend rate borne by the Old
Senior Exchangeable Preferred Stock from the date of such filing, effectiveness
or consummation, as the case may be, will be reduced to the original dividend
rate if the Company is otherwise in compliance with this paragraph; provided,
however, that if, after any such reduction in dividend rate, a different event
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specified in clause (a), (b) or (c) above occurs, the dividend rate may again be
increased pursuant to the foregoing provisions. Pending the announcement of a
material corporate transaction, if the Company issues a notice that the Shelf
Registration Statement is unusable, or such a notice is required under
applicable securities laws to be issued by the Company, and the aggregate number
of days in any consecutive twelve-month period for which all such notices are
issued or required to be issued exceeds 30 days per occurrence or more than 60
days in the aggregate in a calendar year, then the interest rate borne by the
Old Senior Exchangeable Preferred Stock will be increased by one-quarter of one
percent per annum following the date that such Shelf Registration Statement
ceases to be usable for a period of time in excess of the period permitted
above, which rate shall be increased by an additional one-quarter of one percent
per annum at the beginning of each subsequent 90-day period; provided that the
aggregate increase in such annual dividend rate may in no event exceed one
percent per annum. Upon the Company declaring that the Shelf Registration
Statement is usable after the period of time described in the preceding
sentence, the dividend rate borne by the Old Senior Exchangeable Preferred Stock
will be reduced to the original dividend rate if the Company is otherwise in
compliance with this paragraph; provided, however, that if after any such
reduction in dividend rate a different event of the kind described in the
preceding event occurs, the dividend rate may again be increased pursuant to the
foregoing provisions.
In the event that the Exchange Debentures are issued prior to the issuance
of the New Senior Exchangeable Preferred Stock, the provisions of the Preferred
Stock Registration Rights Agreement will apply equally in respect of the
registration of any Exchange Debentures provided that changes in the dividend
rate as provided for in the Preferred Stock Registration Rights Agreement shall
result in corresponding changes in the interest rate applicable to the Exchange
Debentures.
The summary herein of certain provisions of the Preferred Stock
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by, all the provisions of the Preferred Stock
Registration Rights Agreement, a copy of which will be made available upon
request to the Company and which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Following the consummation of the Preferred Stock Exchange Offer, holders
of the Old Senior Exchangeable Preferred Stock who were eligible to participate
in the Preferred Stock Exchange Offer but who did not tender their Old Senior
Exchangeable Preferred Stock will not have any further registration rights and
such Old Senior Exchangeable Preferred Stock will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Old Senior Exchangeable Preferred Stock could be adversely affected.
TERMS OF THE PREFERRED STOCK EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Senior
Exchangeable Preferred Stock validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $100
liquidation preference of New Senior Exchangeable Preferred Stock in exchange
for each $100 liquidation preference of outstanding Old Senior Exchangeable
Preferred Stock accepted in the Preferred Stock Exchange Offer. Holders may
tender some or all of their Old Senior Exchangeable Preferred Stock pursuant to
the Preferred Stock Exchange Offer. However, Old Senior Exchangeable Preferred
Stock may be tendered only in integral multiples of $100.
The form and terms of the New Senior Exchangeable Preferred Stock are the
same as the form and terms of the Old Senior Exchangeable Preferred Stock except
that (i) the New Senior Exchangeable Preferred Stock bears a Series B
designation and a different CUSIP Number from the Old Senior Exchangeable
Preferred Stock, (ii) the New Senior Exchangeable Preferred Stock has been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the New Senior Exchangeable
Preferred Stock will not be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for an increase in the
dividend rate on the Old Senior Exchangeable Preferred Stock in certain
circumstances relating to the timing of the Preferred Stock Exchange Offer, all
of which rights will terminate when the Preferred Stock Exchange Offer is
terminated. The New Senior Exchangeable Preferred Stock will evidence the same
equity as the Old Senior Exchangeable Preferred Stock and will be entitled to
the benefits of the Certificate of Designation.
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As of the date of this Prospectus, $25,000,000 aggregate liquidation
preference of Old Senior Exchangeable Preferred Stock was outstanding. The
Company has fixed the close of business on , 1998 as the record date for the
Preferred Stock Exchange Offer for purposes of determining the persons to whom
this Prospectus and the Letter of Transmittal will be mailed initially.
Holders of Old Senior Exchangeable Preferred Stock do not have any
appraisal or dissenters' rights under the General Corporation Law of Delaware or
the Certificate of Designation in connection with the Preferred Stock Exchange
Offer. The Company intends to conduct the Preferred Stock Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Senior
Exchangeable Preferred Stock when, as and if the Company has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purpose of receiving the New Senior
Exchangeable Preferred Stock from the Company.
If any tendered Old Senior Exchangeable Preferred Stock is not accepted for
exchange because of an invalid tender, the occurrence of certain other events
set forth herein or otherwise, the certificates for any such unaccepted Old
Senior Exchangeable Preferred Stock will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Senior Exchangeable Preferred Stock in the Preferred
Stock Exchange Offer will not be required to pay brokerage commissions or fees
or, subject to the instructions in the Letter of Transmittal, transfer taxes
with respect to the exchange of Old Senior Exchangeable Preferred Stock pursuant
to the Preferred Stock Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Preferred Stock Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the Preferred Stock
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Preferred Stock Exchange Offer is extended.
In order to extend the Preferred Stock Exchange Offer, the Company will
notify the Exchange Agent of any extension by oral or written notice and will
mail to the registered holders an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Senior Exchangeable Preferred Stock, to extend the Preferred
Stock Exchange Offer or to terminate the Preferred Stock Exchange Offer if any
of the conditions set forth below under "--Conditions" shall not have been
satisfied, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Preferred
Stock Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
DIVIDENDS ON THE NEW SENIOR EXCHANGEABLE PREFERRED STOCK
The New Senior Exchangeable Preferred Stock will accrue dividends from
their date of issuance. Holders of Old Senior Exchangeable Preferred Stock that
are accepted for exchange will accrue dividends thereon to, but not including,
the date of issuance of the New Senior Exchangeable Preferred Stock. Accrual of
dividends on the Old Senior Exchangeable Preferred Stock accepted for exchange
will cease to accrue upon issuance of the New Senior Exchangeable Preferred
Stock.
Dividends accrue in each period ending on March 15, June 15, September 15
and December 15 of each year.
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PROCEDURES FOR TENDERING
Only a holder of Old Senior Exchangeable Preferred Stock may tender such
Old Senior Exchangeable Preferred Stock in the Preferred Stock Exchange Offer.
To tender in the Preferred Stock Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Senior Exchangeable Preferred Stock and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. To be tendered effectively, the Old Senior Exchangeable Preferred Stock,
Letter of Transmittal and other required documents must be completed and
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery
of the Old Senior Exchangeable Preferred Stock may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading "--Purpose and Effect of the Preferred Stock Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD SENIOR EXCHANGEABLE PREFERRED STOCK AND THE
LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS
AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY
MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD SENIOR
EXCHANGEABLE PREFERRED STOCK SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Senior Exchangeable Preferred Stock is
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. See "Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner" included with the Letter of
Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Senior Exchangeable Preferred Stock tendered pursuant thereto is
tendered (i) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of an Eligible Institution. In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be by a
member firm of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Senior Exchangeable Preferred Stock listed therein,
such Old Senior Exchangeable Preferred Stock must be endorsed or accompanied by
a properly completed stock power, signed by such registered holder as such
registered holder's name appears on such Old Senior Exchangeable Preferred Stock
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Senior Exchangeable Preferred Stock
or stock powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, offices of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
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The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Senior Exchangeable Preferred Stock at the book-entry transfer facility,
The Depositary Trust Company (the "Book-Entry Transfer Facility) for the purpose
of facilitating the Preferred Stock Exchange Offer, and subject to the
establishment thereof, any financial institution that is a participant in the
Book-Entry Transfer Facility's system may make book-entry delivery of Old Senior
Exchangeable Preferred Stock by causing such Book-Entry Transfer Facility to
transfer such Old Senior Exchangeable Preferred Stock into the Exchange Agent's
account with respect to the Old Senior Exchangeable Preferred Stock in
accordance with the Book-Entry Transfer Facility's procedures for such transfer.
Although delivery of the Old Senior Exchangeable Preferred Stock may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Senior Exchangeable Preferred Stock and
withdrawal of tendered Old Senior Exchangeable Preferred Stock will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Old Senior Exchangeable Preferred Stock not properly tendered or any Old
Senior Exchangeable Preferred Stock the Company's acceptance of which would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right in its sole discretion to waive any defects, irregularities or
conditions of tender as to particular Old Senior Exchangeable Preferred Stock.
The Company's interpretation of the terms and conditions of the Preferred Stock
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Senior Exchangeable Preferred Stock must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Senior Exchangeable Preferred Stock, neither the Company, the Exchange
Agent nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Senior Exchangeable Preferred Stock will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Old Senior Exchangeable Preferred Stock received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Senior Exchangeable Preferred Stock
and (i) whose Old Senior Exchangeable Preferred Stock is not immediately
available, (ii) who cannot deliver their Old Senior Exchangeable Preferred
Stock, the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer, prior
to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Senior Exchangeable Preferred Stock and the liquidation
preference of Old Senior Exchangeable Preferred Stock tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Senior Exchangeable Preferred Stock (or a confirmation
of book-entry transfer of such Preferred Stock into the Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
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(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Senior Exchangeable Preferred Stock in proper form for transfer (or a
confirmation of book-entry transfer of such Old Senior Exchangeable
Preferred Stock into the Exchange Agent's account at the Book-Entry
Transfer Facility), and all other documents required by the Letter of
Transmittal are received by the Exchange Agent upon five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Senior Exchangeable Preferred Stock
according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Senior Exchangeable
Preferred Stock may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date.
To withdraw a tender of Old Senior Exchangeable Preferred Stock in the
Preferred Stock Exchange Offer, a telegram, telex, letter or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Senior Exchangeable Preferred Stock to be
withdrawn (the "Depositor"), (ii) identify the Old Senior Exchangeable Preferred
Stock to be withdrawn (including the certificate number(s) and liquidation
preference of such Old Senior Exchangeable Preferred Stock, or, in the case of
Old Senior Exchangeable Preferred Stock transferred by book-entry transfer, the
name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Senior Exchangeable
Preferred Stock was tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Old Senior Exchangeable Preferred Stock register the transfer of such Old
Senior Exchangeable Preferred Stock into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old Senior Exchangeable
Preferred Stock is to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Old Senior Exchangeable
Preferred Stock so withdrawn will be deemed not to have been validly tendered
for purposes of the Preferred Stock Exchange Offer and no New Senior
Exchangeable Preferred Stock will be issued with respect thereto unless the Old
Senior Exchangeable Preferred Stock so withdrawn are validly retendered. Any
Old Senior Exchangeable Preferred Stock which have been tendered but which are
not accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Preferred Stock Exchange Offer. Properly withdrawn Old
Senior Exchangeable Preferred Stock may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Preferred Stock Exchange Offer, the
Company shall not be required to accept for exchange, or exchange New Senior
Exchangeable Preferred Stock for, any Old Senior Exchangeable Preferred Stock,
and may terminate or amend the Preferred Stock Exchange Offer as provided herein
before the acceptance of such Old Senior Exchangeable Preferred Stock, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Preferred Stock
Exchange Offer which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Preferred Stock
Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company or any of its
subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the sole
judgment of the Company, might materially impair the ability of the Company
to proceed
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with the Preferred Stock Exchange Offer or materially impair the
contemplated benefits of the Preferred Stock Exchange Offer to the Company;
or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Preferred Stock Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Senior
Exchangeable Preferred Stock and return all tendered Old Senior Exchangeable
Preferred Stock to the tendering holders, (ii) extend the Preferred Stock
Exchange Offer and retain all Old Senior Exchangeable Preferred Stock tendered
prior to the expiration of the Preferred Stock Exchange Offer, subject, however,
to the rights of holders to withdraw such Old Senior Exchangeable Preferred
Stock (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions
with respect to the Preferred Stock Exchange Offer and accept all properly
tendered Old Senior Exchangeable Preferred Stock which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Preferred Stock Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notice of Guaranteed Delivery should be directed
to the Exchange Agent addressed as follows:
By Mail: By Overnight Courier and By Hand
after 4:30 p.m.:
United States Trust Company of New
York United States Trust Company of New
P.O. Box 844 Cooper Station York
New York, New York 10276-0844 770 Broadway
New York, New York 10003
Attention: Corporate Trust Operations
(registered or certified mail Attention: Corporate Trust Operations
recommended)
By Hand up to 4:30 p.m.:
United States Trust Company of New
York
111 Broadway Facsimile Transmission: (212) 780-0592
New York, New York 10006
Confirm by Telephone: (800) 548-6565
Attention: Lower Level Corporate
Trust Window
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Preferred Stock Exchange Offer and will not make any payments to brokers,
dealers, or others soliciting acceptances of the Preferred Stock Exchange Offer.
The Company, however, will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith.
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The cash expenses to be incurred in connection with the Preferred Stock
Exchange Offer will be paid by the Company. Such expenses include fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, among others.
ACCOUNTING TREATMENT
The New Senior Exchangeable Preferred Stock will be recorded at the same
carrying value as the Old Senior Exchangeable Preferred Stock, which is face
value, as reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The expenses of the Preferred Stock Exchange Offer will be expensed at
closing.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Senior Exchangeable Preferred Stock that is not exchanged for New
Senior Exchangeable Preferred Stock pursuant to the Preferred Stock Exchange
Offer will remain restricted securities. Accordingly, such Old Senior
Exchangeable Preferred Stock may be resold only (i) to the Company (upon
redemption thereof or otherwise), (ii) so long as the Old Senior Exchangeable
Preferred Stock is eligible for resale pursuant to Rule 144A, to a person inside
the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in accordance with Rule 144
under the Securities Act, or pursuant to another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE NEW SENIOR EXCHANGEABLE PREFERRED STOCK
With respect to resales of New Senior Exchangeable Preferred Stock, based
on interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, the Company believes that a holder or other person who
receives New Senior Exchangeable Preferred Stock, whether or not such person is
the holder (other than a person that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) who receives New Senior
Exchangeable Preferred Stock in exchange for Old Senior Exchangeable Preferred
Stock in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the New Senior Exchangeable Preferred
Stock, will be allowed to resell the New Senior Exchangeable Preferred Stock to
the public without further registration under the Securities Act and without
delivering to the purchasers of the New Senior Exchangeable Preferred Stock a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
However, if any holder acquires New Senior Exchangeable Preferred Stock in the
Preferred Stock Exchange Offer for the purpose of distributing or participating
in a distribution of the New Senior Exchangeable Preferred Stock, such holder
cannot rely on the position of the staff of the Commission enunciated in such
no-action letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives New
Senior Exchangeable Preferred Stock for its own account in exchange for Old
Senior Exchangeable Preferred Stock, where such Old Senior Exchangeable
Preferred Stock was acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Senior
Exchangeable Preferred Stock.
As contemplated by these no-action letters and the Preferred Stock
Registration Rights Agreement, each holder of the Old Senior Exchangeable
Preferred Stock (other than certain specified holders) who wishes to exchange
Old Senior Exchangeable Preferred Stock for New Senior Exchangeable Preferred
Stock in the Preferred Stock Exchange Offer will be required to represent to the
Company in the Letter of Transmittal that (i) any New Senior Exchangeable
Preferred Stock to be received by it was acquired in the ordinary course of its
business, (ii) at the time of commencement of the Preferred
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Stock Exchange Offer, it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Senior Exchangeable Preferred Stock, (iii) it is not an "affiliate" (as
defined in Rule 405 under the Securities Act) of the Company or, if it is such
an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable and (iv) it is not
acting on behalf of any person who could not truthfully make the foregoing
representations. As indicated above, each Participating Broker-Dealer that
receives a New Senior Exchangeable Preferred Stock for its own account in
exchange for Old Senior Exchangeable Preferred Stock must acknowledge that it
will deliver a prospectus in connection with any resale of such New Senior
Exchangeable Preferred Stock. For a description of the procedures for such
resales by Participating Broker-Dealers, see "Plan of Distribution."
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DESCRIPTION OF THE CAPITAL STOCK
In connection with the Merger, the Company amended its Certificate of
Incorporation to change its authorized share capital to 10,000,000 shares of
Common Stock, 1,000,000 shares of Senior Exchangeable Preferred Stock, 150,000
shares of cumulative junior redeemable preferred stock, par value $.01 per share
(the "Junior Redeemable Preferred Stock") and 2,500 shares of cumulative junior
non-redeemable preferred stock, par value $.01 per share (the "Junior Perpetual
Preferred Stock"). Immediately after consummation of the Transactions, the
Company had outstanding 3,749,994 shares of Common Stock (including the shares
of Common Stock offered pursuant to the Initial Unit Offering), 250,000 shares
of Senior Exchangeable Preferred Stock, 86,009.590 shares of Junior Redeemable
Preferred Stock and 1,918.408 shares of Junior Perpetual Preferred Stock.
The following summary description of certain provisions of the Company's
amended and restated Certificate of Incorporation and By-laws does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the Certificate of Incorporation and the By-laws,
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of shareholders. Subject
to preferential rights with respect to any series of preferred stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors on the Common Stock out of funds legally available
therefore. Upon any voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the Company, the holders of Common Stock are
entitled to share equally and ratably in all remaining assets and funds of the
Company. The holders of Common Stock have no preemptive, subscription,
conversion or cumulative voting rights and are not subject to future calls or
assessments by the Company. All outstanding shares of Common Stock are fully
paid and nonassessable. United States Trust Company of New York is the Transfer
Agent and Registrar for the Common Stock issued in the Initial Unit Offering.
JUNIOR REDEEMABLE PREFERRED STOCK
Ranking. The Junior Redeemable Preferred Stock, with respect to dividends
and distributions upon the liquidation, winding-up and dissolution of the
Company, ranks senior to all classes of common stock of the Company, pari passu
with the Junior Perpetual Preferred Stock and junior to the Senior Exchangeable
Preferred Stock and all other liabilities and obligations of the Company,
whether or not for borrowed money.
Dividends. Holders of Junior Redeemable Preferred Stock are entitled, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, to receive dividends on each outstanding share of the Junior
Redeemable Preferred Stock, at the annual rate of 8.0% of the liquidation value
per share thereof. Dividends on the Junior Redeemable Preferred Stock are
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year. Dividends will compound to the extent not paid on any quarterly
dividend payment date. The right to dividends on the Junior Redeemable Preferred
Stock are cumulative (whether or not earned or declared), without interest, from
the date of issuance of the Junior Redeemable Preferred Stock.
Voting Rights. Holders of the Junior Redeemable Preferred Stock have no
voting rights with respect to general corporate matters except as provided by
law or as set forth in the Certificate of Incorporation.
Redemption. The Company has the option to redeem the Junior Redeemable
Preferred Stock in whole or in part (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor) at any time without premium or penalty. The Company is required to
redeem the Junior Redeemable Preferred Stock upon the earlier of (i) 13th
anniversary of the Closing and (ii) a Sale of the Company (as defined in the
Certificate of Incorporation).
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Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, holders of Junior Redeemable Preferred
Stock are entitled to be paid out of the assets of the Company available for
distribution $1,000.00 per share, plus an amount equal in cash to all
accumulated and unpaid dividends, if any, thereon, prior to any distribution on
any securities of the Company ranking junior to the Junior Redeemable Preferred
Stock, including, without limitation, on any common stock of the Company.
Covenants. The Certificate of Incorporation provides restrictions on the
redemption of securities of the Company ranking junior to the Junior Redeemable
Preferred Stock (other than repurchases of securities from employees of the
Company) and the payment of dividends on such securities and certain amendments
to the Certificate of Incorporation.
Upon redemption, shares of Junior Redeemable Preferred Stock shall be
canceled. Holders of Junior Redeemable Preferred Stock have no preemptive or
other rights to subscribe for or purchase any proportionate part of any new or
additional issues of shares of any class or of securities convertible into
shares of any class.
JUNIOR PERPETUAL PREFERRED STOCK
Ranking. The Junior Perpetual Preferred Stock, with respect to dividends
and distributions upon the liquidation, winding-up and dissolution of the
Company, ranks senior to all classes of common stock of the Company, pari passu
with the Junior Redeemable Preferred Stock and junior to the Senior Exchangeable
Preferred Stock and all other liabilities and obligations of the Company,
whether or not for borrowed money.
Dividends. Holders of Junior Perpetual Preferred Stock are entitled, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, to receive dividends on each outstanding share of the Junior Perpetual
Preferred Stock, at the annual rate of 8.0% of the liquidation value per share
thereof through the 12th anniversary of the Closing, and at the annual rate of
12.0% of the liquidation value per share thereof thereafter if, but only if, the
Company has not offered to redeem such shares prior to such time. Dividends on
the Junior Perpetual Preferred Stock are payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year. Dividends compound to
the extent not paid on any quarterly dividend payment date. The right to
dividends on the Junior Perpetual Preferred Stock is cumulative (whether or not
earned or declared), without interest, from the date of issuance of the Junior
Perpetual Preferred Stock.
Voting Rights. Holders of the Junior Perpetual Preferred Stock have no
voting rights with respect to general corporate matters except as provided by
law or as set forth in the Certificate of Incorporation.
Redemption. The Company has the option, but is not required, to redeem the
Junior Perpetual Preferred Stock in whole or in part (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) at any time without premium or penalty.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, holders of Junior Perpetual Preferred
Stock are entitled to be paid out of the assets of the Company available for
distribution $1,000.00 per share, plus an amount equal in cash to all
accumulated and unpaid dividends, if any, thereon, prior to any distribution on
any securities of the Company ranking junior to the Junior Perpetual Preferred
Stock, including, without limitation, on any common stock of the Company.
Covenants. The Certificate of Incorporation provides restrictions on the
redemption of securities of the Company ranking junior to the Junior Perpetual
Preferred Stock (other than repurchases of securities from employees of the
Company) and the payment of dividends on such securities and certain amendments
to the Certificate of Incorporation.
Upon redemption, shares of Junior Perpetual Preferred Stock shall be
canceled. Holders of Junior Perpetual Preferred Stock have no preemptive or
other rights to subscribe for or purchase any proportionate part of any new or
additional issues of shares of any class or of securities convertible into
shares of any class.
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SHAREHOLDERS AGREEMENT
In connection with the Acquisition, Madison Dearborn, the Management Group
and the Company entered into a Stockholders Agreement which provides for, among
other things, certain restrictions on the transfer of the Management Shares, the
right of the Company to sell or cause to be sold all or a portion of the
Management Shares in connection with a sale of the Company, the right of the
Company to repurchase the Management Shares of any member of the Management
Group upon the termination of such member for cause, certain rights by the
Management Group to participate in certain sales of Common Stock by Madison
Dearborn under certain circumstances, certain demand registration rights in
favor of Madison Dearborn by which it may cause the Company to register all or
part of the Common Stock held by it under the Securities Act, and certain
"piggyback" registration rights in favor of Madison Dearborn and the Management
Group.
COMMON STOCK REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into between the
Company and the Initial Purchaser on December 29, 1997 (the "Common Stock
Registration Rights Agreement"), the holders of Common Stock offered pursuant to
the Initial Unit Offering are entitled, and the Company will be required,
subject to certain limitations, to include their shares of Common Stock in a
registration of shares of Common Stock initiated by the Company under the
Securities Act wherein the aggregate net proceeds to the Company are at least
$30 million and any other registration of Common Stock initiated by the Company
thereafter. In addition, after the first registered secondary offering by
Madison Dearborn or its Affiliates, the holders of 25% or more of the Common
Stock, subject to the Common Stock Registration Rights Agreement, will have the
right to require the Company to effect a demand registration of all or any part
of such holders' shares of Common Stock under the Securities Act (a "Demand
Registration"). In the event the aggregate number of shares of Common Stock
which the holders of the Common Stock offered pursuant to the Initial Unit
Offering request the Company to include in any such registration, together, in
the case of a registration initiated by the Company, with the shares of Common
Stock of the Company to be included in such registration, exceeds the number
which in the opinion of the managing underwriter can be sold in such offering
without materially affecting the offering price of such shares, the number of
shares of each holder to be included in such registration will be reduced pro
rata based on the aggregate number of shares of Common Stock for which
registration has been so requested.
The Company, at its option, may delay the filing of a registration
statement required pursuant to the Demand Registration for up to 60 days if it
is in possession of material information that it reasonably deems advisable not
be disclosed in a registration statement. The Company's right to delay the
filing of a registration statement if it possesses information that it deems
advisable not to disclose does not obviate any disclosure obligations which the
Company may have under the Exchange Act, or other applicable laws; it merely
permits the Company to avoid filing a registration statement if management
believes that such a filing would require the disclosure of information which
otherwise is not required to be disclosed and disclosure of which management
believes is premature or otherwise inadvisable.
The Common Stock Registration Rights Agreement contains customary
provisions whereby the Company and the holders of the Common Stock offered
pursuant to the Initial Unit Offering indemnify and agree to contribute to the
other with regard to losses caused by the misstatement of any information or
omission of any information required to be provided in a registration statement
filed under the Securities Act. The Common Stock Registration Rights Agreement
requires the Company to pay the expenses associated with any registration, other
than sales discounts, commissions, transfer taxes and amounts to be paid by
underwriters or as otherwise required by law.
The summary herein of certain provisions of the Common Stock Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by references to, all of the provisions of the Common
Stock Registration Rights Agreement, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under an Indenture, dated as of December
29, 1997 (the "Indenture"), among the Company, as issuer, certain subsidiaries
of the Company, as guarantors (the "Subsidiary Guarantors"), and Harris Trust
and Savings Bank, as trustee (the "Trustee"). The terms of the Exchange Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act") as in effect on the date of the Indenture. The form and terms of the
Exchange Notes are the same as the form and terms of the Old Notes (which they
replace) except that (i) the Exchange Notes bear a Series B designation, (ii)
the Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, and (iii) the holders of
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for an increase in the
interest rate on the Old Notes in certain circumstances relating to the timing
of the Exchange Offer, which rights will terminate when the Exchange Offer is
consummated. The Exchange Notes are subject to all such terms, and holders of
the Exchange Notes are referred to the Indenture and the Trust Indenture Act for
a statement of them. The following is a summary of the material terms and
provisions of the Exchange Notes. This summary does not purport to be a complete
description of the Exchange Notes and is subject to the detailed provisions of,
and qualified in its entirety by reference to, the Exchange Notes and the
Indenture (including the definitions contained therein). A copy of the Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The Old Notes and the Exchange Notes are sometimes
referred to herein collectively as the "Notes." Any descriptions of the Notes
presented in the future tense shall refer to the Exchange Notes, where
appropriate.
General. The Notes will mature on December 15, 2007, will be limited to
$100,000,000 aggregate principal amount and will be unsecured senior
subordinated obligations of the Company. Each Note will bear interest at a rate
of 11% from December 29, 1997 or from the most recent interest payment date to
which interest has been paid or duly provided for, payable on June 15, 1998 and
semiannually thereafter on June 15 and December 15 in each year until the
principal thereof is paid or duly provided for to the Person in whose name the
Note (or any predecessor Note) is registered at the close of business on the
June 1 or December 1 next preceding such interest payment date.
Note Guarantees. Payment of the principal of, premium, if any, and interest
on the Notes, when and as the same become due and payable, will be guaranteed,
jointly and severally, on an unsecured senior subordinated basis by the
Subsidiary Guarantors.
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after December 15, 2002 at
certain redemption prices (expressed as percentages of principal amount)
declining ratably, together with accrued and unpaid interest, if any, to the
date of redemption (subject to the right of holders of record on relevant record
dates to receive interest due on an interest payment date). In addition, at any
time on or prior to December 15, 2000, the Company may redeem up to 35% of the
aggregate principal amount of the Notes within 20 days of one or more Public
Equity Offerings with the net proceeds of such offering at a redemption price
equal to 111% of the aggregate principal amount thereof, together with accrued
and unpaid interest thereon, if any, to the date of redemption; provided that,
after giving effect to any such redemption, at least $65 million aggregate
principal amount of the Notes remains outstanding.
Change in Control. Upon the occurrence of a Change in Control, each holder
of the Notes shall have the right to require the Company to purchase all or any
portion of such holder's Notes at a purchase price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the date of purchase.
Ranking. The Notes will be unsecured senior subordinated obligations of the
Company and, as such, will be subordinated to all existing and future senior
indebtedness (including indebtedness under the Senior Credit Facility) of the
Company, with respect to principal, premium, if any, and interest. The Notes
will rank pari passu with all other existing and future senior subordinated
indebtedness, if any, of the Company and will rank senior to subordinated
indebtedness, if any, of the Company. By reason of such subordination, holders
of senior indebtedness must be paid in full before holders of the Notes may be
paid in the event of a liquidation, dissolution or other winding up of the
Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy.
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Each Note Guarantee will be an unsecured senior subordinated obligation of
the Subsidiary Guarantor issuing such Note Guarantee, ranking pari passu with
all other existing and future senior subordinated indebtedness of such
Subsidiary Guarantor, if any. The Indebtedness evidenced by each Note Guarantee
will be subordinated on the same basis to Subsidiary Guarantor senior
indebtedness as the Notes are subordinated to senior indebtedness.
Certain Covenants. The Indenture contains covenants, including, but not
limited to, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
issuances and sales of capital stock of Restricted Subsidiaries; (iv) limitation
on transactions with affiliates; (v) limitation on liens; (vi) limitation on
sale of assets; (vii) limitation on merger, consolidation and sale of
substantially all assets; (viii) limitations on guarantees of indebtedness by
Restricted Subsidiaries; (ix) limitation on dividend and other payment
restrictions affecting Restricted Subsidiaries; (x) limitation on investment in
Unrestricted Subsidiaries; (xi) limitation on sale and leaseback transactions;
and (xii) limitations on other senior subordinated indebtedness. The covenants
in the Indenture are substantially similar to the covenants in the Exchange
Indenture, except that the Exchange Debentures are subordinated to the Notes.
See "Description of the Units--Exchange Debentures--Certain Covenants."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary view,
and no ruling from the Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. The Company recommends
that each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's Old Senior Exchangeable Preferred Stock
for New Senior Exchangeable Preferred Stock, including the applicability and
effect of any state, local or foreign tax laws.
The Company believes that the exchange of Old Senior Exchangeable Preferred
Stock for New Senior Exchangeable Preferred Stock pursuant to the Preferred
Stock Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Senior Exchangeable Preferred Stock will not be
considered to differ materially in kind or extent from the Old Senior
Exchangeable Preferred Stock. Rather, the New Senior Exchangeable Preferred
Stock received by a holder will be treated as a continuation of the Old Senior
Exchangeable Preferred Stock in the hands of such holder. As a result, there
will be no federal income tax consequences to holders exchanging Old Senior
Exchangeable Preferred Stock for New Senior Exchangeable Preferred Stock
pursuant to the Preferred Stock Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Senior Exchangeable
Preferred Stock for its own account pursuant to the Preferred Stock Exchange
Offer must acknowledge that it will deliver a Prospectus in connection with any
resale of such New Senior Exchangeable Preferred Stock. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Senior Exchangeable Preferred
Stock received in exchange for Old Senior Exchangeable Preferred Stock where
such Old Senior Exchangeable Preferred Stock was acquired as a result of market-
making activities or other trading activities. The Company has agreed that for a
period of 180 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any Participating Broker-Dealer for use in
connection with any such resale. In addition, until , 1998 (90 days after the
commencement of the Preferred Stock Exchange Offer), all dealers effecting
transactions in the New Senior Exchangeable Preferred Stock may be required to
deliver a prospectus.
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The Company will not receive any proceeds from any sales of the New Senior
Exchangeable Preferred Stock by Participating Broker-Dealers. New Senior
Exchangeable Preferred Stock received by Participating Broker-Dealers for their
own accounts pursuant to the Preferred Stock 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 New Senior
Exchangeable Preferred Stock or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may 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
Participating Broker-Dealer and/or the purchasers of any such New Senior
Exchangeable Preferred Stock. Any Participating Broker-Dealer that resells the
New Senior Exchangeable Preferred Stock that were received by it for its own
account pursuant to the Preferred Stock Exchange Offer and any broker or dealer
that participates in a distribution of such New Senior Exchangeable Preferred
Stock may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any such resale of New Senior Exchangeable Preferred Stock
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the issuance of the New Senior Exchangeable Preferred Stock
will be passed upon for the Company by Kirkland & Ellis, Chicago, Illinois (a
partnership which includes professional corporations).
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for each of the years in the three-year period ended December
31, 1996, included herein have been included herein and in the Registration
Statement of which this Prospectus is a part in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and in the Registration Statement of which this Prospectus is a part and
upon the authority of said firm as experts in accounting and auditing.
109
<PAGE>
TUESDAY MORNING CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.................................................. F-6
Notes to Consolidated Financial Statements for the years ended Decem-
ber 31, 1996, 1995 and 1994.......................................... F-7
Consolidated Balance Sheets (unaudited) as of September 30, 1997 and
1996 and December 31, 1996........................................... F-16
Consolidated Statements of Operations (unaudited) for the three months
ended September 30, 1997 and 1996 and nine months ended September 30,
1997 and 1996........................................................ F-17
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 1997 and 1996.................................... F-18
Notes to Consolidated Financial Statements (unaudited)................ F-19
</TABLE>
Separate financial statements of the Subsidiary Guarantors are not presented
herein because the parent company has no operations or assets separate from
its investment in the Subsidiary Guarantors, the Subsidiary Guarantors are
wholly owned and represent all of the direct and/or indirect subsidiaries of
the parent company and the guarantees of the Subsidiary Guarantors are full
and unconditional and joint and several with the other Subsidiary Guarantors.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board Of Directors and Shareholders
Tuesday Morning Corporation:
We have audited the accompanying consolidated balance sheets of Tuesday
Morning Corporation and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tuesday
Morning Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
kpmg peat marwick llp
Dallas, Texas
February 21, 1997
F-2
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 10,754 $ 6,276
Inventories............................................... 75,493 52,367
Prepaid expenses.......................................... 1,048 993
Other current assets...................................... 726 458
-------- -------
Total current assets.................................. 88,021 60,094
-------- -------
Property, plant and equipment (notes 5 and 6):
Land...................................................... 8,356 8,356
Buildings................................................. 13,926 12,989
Furniture and fixtures.................................... 17,658 15,584
Equipment................................................. 14,469 13,433
Leasehold improvements.................................... 2,082 1,967
-------- -------
56,491 52,329
Less accumulated depreciation and amortization............ (26,104) (21,267)
-------- -------
Net property, plant and equipment......................... 30,387 31,062
-------- -------
Due from Officer (note 2)................................... 2,679 2,211
Other assets (note 2)....................................... 670 876
-------- -------
Total Assets.......................................... $121,757 $94,243
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of mortgage (note 5)................. $ 1,021 $ 1,021
Current installments of capital lease obligation (note
6)....................................................... 625 755
Accounts payable.......................................... 22,543 12,707
Accrued expenses:
Sales tax............................................... 2,105 1,662
Other................................................... 5,637 2,467
Deferred income taxes (note 8)............................ 57 231
Income taxes payable (note 8)............................. 6,465 2,136
-------- -------
Total current liabilities............................. 38,453 20,979
-------- -------
Mortgage on land, buildings and equipment, excluding current
installments (note 5)...................................... 4,594 5,615
Capital lease obligations, excluding current installments
(note 6)................................................... 382 1,007
Deferred income taxes (note 8).............................. 2,800 2,994
Shareholders' equity (note 7):
Preferred stock of $1 par value per share Authorized
2,000,000 shares, none issued............................ -- --
Common stock of $.01 par value per share Authorized
20,000,000 shares; issued 8,181,036 shares at December
31, 1996 and 8,143,586 shares at December 31, 1995....... 82 81
Additional paid-in capital................................ 18,640 18,277
Retained earnings......................................... 58,834 47,318
Less: treasury stock (274,500 shares in 1996 and in
1995).................................................... (2,028) (2,028)
-------- -------
Total shareholders' equity............................ 75,528 63,648
-------- -------
Commitments and contingencies (notes 3, 10 and 12)
Total Liabilities and Shareholders' Equity............ $121,757 $94,243
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Net sales............................................ $256,756 210,265 190,081
Cost of sales........................................ 165,189 137,427 126,931
-------- ------- -------
Gross profit..................................... 91,567 72,838 63,150
Selling, general and administrative expenses......... 71,167 63,040 57,523
-------- ------- -------
Operating income................................. 20,400 9,798 5,627
Other income (expense):
Interest income.................................... 275 204 198
Interest expense................................... (2,767) (3,330) (2,458)
Other, net......................................... 600 592 649
-------- ------- -------
(1,892) (2,534) (1,611)
-------- ------- -------
Earnings before income taxes..................... 18,508 7,264 4,016
Income tax expense (note 8)............................. 6,992 2,491 1,365
-------- ------- -------
Net earnings..................................... $ 11,516 4,773 2,651
======== ======= =======
Net earnings per share and share equivalents .... $ 1.40 0.60 0.34
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------- PAID-IN RETAINED -------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------ ---------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993..................... 8,060 $81 $18,091 $39,894 (330) $(2,342) $55,724
Net earnings............. -- -- -- 2,651 -- -- 2,651
Shares issued in connec-
tion with employee stock
option plan (note 7).... 40 -- 140 -- -- -- 140
Treasury shares sold to
employee stock purchase
plan (note 7)........... -- -- (60) -- 30 175 115
----- --- ------- ------- ---- ------- -------
Balance at December 31,
1994..................... 8,100 81 18,171 42,545 (300) (2,167) 58,630
Net earnings............. -- -- -- 4,773 -- -- 4,773
Shares issued in connec-
tion with employee stock
option plan (note 7).... 44 -- 162 -- -- -- 162
Treasury shares sold to
employee stock purchase
plan (note 7)..............-- -- (56) -- 25 139 83
----- --- ------- ------- ---- ------- -------
Balance at December 31,
1995..................... 8,144 81 18,277 47,318 (275) (2,028) 63,648
Net earnings............. -- -- -- 11,516 -- -- 11,516
Shares issued in connec-
tion with employee stock
option plan (note 7).... 37 1 382 -- -- -- 383
Treasury shares sold to
employee stock purchase
plan (note 7)........... -- -- (19) -- -- -- (19)
----- --- ------- ------- ---- ------- -------
Balance at December 31,
1996..................... 8,181 $82 $18,640 $58,834 (275) $(2,028) $75,528
===== === ======= ======= ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers................ $ 256,756 $ 210,265 $ 190,081
Cash paid to suppliers and employees........ (240,814) (199,448) (177,676)
Interest received........................... 275 204 198
Interest paid............................... (2,767) (3,330) (2,458)
Income taxes (paid) refunded................ (2,858) (1,362) 1,911
--------- --------- ---------
Net cash provided by operating activities
(note 9)................................. 10,592 6,329 12,056
--------- --------- ---------
Cash flows from investing activities:
Loans to officer (note 2)................... (742) (497) (2,605)
Payments from officer (note 2).............. 274 85 207
Proceeds from sale of property, plant and
equipment.................................. -- -- 99
Capital expenditures........................ (4,233) (2,692) (5,693)
--------- --------- ---------
Net cash used by investing activities..... (4,701) (3,104) (7,992)
--------- --------- ---------
Cash flows from financing activities:
Payment of mortgages........................ (1,021) (1,063) (1,298)
Principal payments under capital lease obli-
gation..................................... (754) (666) (214)
Proceeds from exercise of common stock
options/stock purchase plan................ 362 245 255
--------- --------- ---------
Net cash used by financing activities..... (1,413) (1,484) (1,257)
--------- --------- ---------
Net increase in cash and cash equivalents..... 4,478 1,741 2,807
Cash and cash equivalents at beginning of pe-
riod......................................... 6,276 4,535 1,728
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 10,754 $ 6,276 $ 4,535
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation--The consolidated financial statements include the
accounts of Tuesday Morning Corporation and its wholly-owned subsidiaries: TMI
Holdings, Inc., TMIL Corporation, Tuesday Morning, Inc. and Friday Morning,
Inc. (collectively "the Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company owned and operated 286 deep discount retail stores in 33 states
at December 31, 1996 (260 and 246 stores at December 31, 1995 and 1994,
respectively). The Company sells closeout housewares and related gift
merchandise, which it purchases at prices below wholesale prices. Company
stores are open for four sales events each year.
(b) Cash and Cash Equivalents--The Company's policy is to invest cash in
excess of operating requirements in income producing investments. Cash
equivalents of $8,352,000 in 1996 and $4,707,000 in 1995 are investments in
money market funds. The Company considers all short-term investments with
original maturities of three months or less to be cash equivalents.
(c) Inventories--Inventories are stated at the lower of average cost or
market using the retail inventory method for the stores' inventory and the
cost method for warehouse inventory. Buying, distribution and freight costs
are capitalized as part of inventory.
(d) Property, Plant and Equipment--Property, plant and equipment are stated
at cost. Buildings, furniture and fixtures, and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
DEPRECIABLE LIVES
-----------------
<S> <C>
Buildings.................................................. 30 years
Furniture and fixtures..................................... 7 years
Equipment.................................................. 5 to 7 years
</TABLE>
Improvements to leased premises are amortized on a straight-line basis over
the shorter of their useful lives or the expected term of the related lease.
(e) Income Taxes--Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(f) Earnings (loss) per Common Share and Share Equivalent--Earnings (loss)
per common share is based on the weighted average number of common shares, and
when dilutive, share equivalents (note 7) outstanding during the period. The
weighted average number of common shares and share equivalents outstanding for
1996, 1995 and 1994 were 8,215,000, 7,997,000 and 7,890,000, respectively.
(g) Pre-opening Costs--The Company capitalizes certain costs directly
related to opening new stores. Effective August 1, 1995, the Company revised
its policy for capitalizing and amortizing preopening costs associated with
the opening of new stores. The amortization period was reduced from 24 months
to 12 months. The impact of the change in accounting policy did not have a
material impact on the Company's consolidated financial statements.
F-7
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(h) Advertising--Costs for newspaper, television, radio and other media are
expensed as the advertised events take place. Advertising expense for 1996,
1995 and 1994 was $16,475,000, $15,317,000 and $13,652,000, respectively.
(i) Estimates--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(j) Foreign Currency Transactions--The Company has entered into foreign
exchange contracts to hedge its foreign currency transactions related to
specific purchase orders for merchandise. Gains and losses on these contracts
have been minimal and are deferred until the related merchandise is received.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of--The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(l) Stock Option Plan--Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-
value based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the previsions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
(2) RECEIVABLES FROM OFFICERS
At December 31, 1996 and 1995, Other Assets included a receivable from an
officer of the Company of $124,000 and $114,000, respectively. This loan was
initiated in 1992. It bears interest at the prime rate and is secured with
Company stock.
Due from Officer at December 31, 1996 and 1995 is $2,679,000 and $2,211,000,
respectively. This unsecured loan was initiated in 1994 and bears interest at
prime.
(3) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising from the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
F-8
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(4) LINES OF CREDIT
The Company had no balances outstanding related to their line of credit at
December 31, 1996 or 1995. As of December 31, 1996 and 1995, the Company had
outstanding letters of credit of $9,819,000 and $6,186,000, respectively,
primarily for inventory purchases.
In July 1994, the Company entered into a three-year $45,000,000 revolving
line of credit with a new bank. This agreement is secured by a pledge of
substantially all the Company's assets. Borrowings were limited to the lesser
of $45,000,000 or 50% (60% for up to 120 days each year) of eligible
inventory, as defined. The availability is further reduced by the aggregate
undrawn amount of outstanding letters of credit and a reserve for the foreign
currency contracts, discussed in Note 12. At the Company's option, the amount
borrowed bore interest at either the Reference Rate plus 0.75% or the
Eurodollar Rate plus 2.50%. An Unused Line Fee of 0.25%, per annum, was paid
on the difference between $45,000,000 and the average total of the amount
borrowed and letters of credit outstanding.
During 1996, this agreement was further amended to extend the term through
July 1999 and to increase the borrowing capacity to $55,000,000 for the period
beginning July 1 and ending October 31 of each year. This amendment allows the
Company, at its option, to borrow at either the Reference Rate or the
Eurodollar Rate plus 2.00%. The maximum amount of outstanding and unused
Letters of Credit was also increased to $12,000,000.
The weighted-average interest rates were 8.38% and 8.88% during 1996 and
1995, respectively.
In connection with this line of credit, the Company is required to maintain
a minimum net worth and comply with other financial covenants including
limitations on dividends, indebtedness and capital expenditures. At December
31, 1996, the Company was in compliance with these covenants.
(5) MORTGAGE ON PROPERTY, PLANT AND EQUIPMENT
During 1995, the Company entered into a seven-year agreement with a bank to
refinance and consolidate its mortgages on land and buildings. The amount of
the note was $7,146,000, the proceeds of which were used to pay the previous
mortgage notes. The note is secured by land and buildings and bears interest
at LIBOR plus 2.125% (7.755% at December 31, 1996) with principal and interest
due monthly. It matures on June 10, 2002.
Mortgages consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Note payable to bank, in monthly installments of $85 plus
interest.................................................. $5,615 6,636
Less current installments.................................. (1,021) (1,021)
------ ------
$4,594 5,615
====== ======
</TABLE>
In connection with this mortgage, the Company is required to maintain
minimum net worth and comply with other financial covenants. At December 31,
1996, the Company was in compliance with these covenants.
The maturities of the mortgage are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997.................................. $1,021
1998.................................. 1,021
1999.................................. 1,021
2000.................................. 1,021
2001.................................. 1,021
Later years........................... 510
</TABLE>
F-9
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(6) CAPITAL LEASE
During September 1994, the Company entered into a capital lease with a
financial institution to finance part of the acquisition of Point of Sale
registers and Electronic Article Surveillance equipment. The amount financed
under the capital lease totaled $2,642,000. Depreciation expense during 1996
and 1995 was $528,000 per year.
This lease is for five years and contains a bargain purchase option that the
Company would be expected to exercise. This lease bears an implicit interest
rate of approximately 12.5%.
The following is a schedule of future minimum lease payments under the
capital lease together with the present value of the net minimum lease
payments as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997.................................. $ 707
1998.................................. 256
1999.................................. 170
------
Total minimum lease payments........ 1,133
Less: Amount representing interest.... (126)
------
Present value of net minimum lease
payments............................. 1,007
Less: Current installments............ (625)
------
Long term capital lease obligation.... $ 382
======
</TABLE>
(7) SHAREHOLDERS' EQUITY
On May 5, 1992, the Board of Directors of the Company approved the purchase
of the Company's stock in open market purchases to be effected from time to
time. There are no plans for purchases at this time.
The Company has a stock option plan ("the Plan") covering 2,160,500 shares
of the Company's common stock which may be granted to employees of the
Company. Under the Plan, stock options are granted at fair market value and
vest over varying periods not to exceed 10 years.
At December 31, 1996, 829,000 shares were available for grant under the
Plan. The per share weighted-average fair value of stock options granted
during 1995 was $3.09 on the date of the grant using the Black Scholes option-
pricing model with the following assumptions: expected dividend yield of 0%,
risk-free interest rate of 6.1%, an expected life of 5 years and an expected
volatility of 0.506. There were no options granted during 1996.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
Net earnings
As reported.................................................. $11,516 4,773
Pro forma.................................................... 11,321 4,772
Earnings per share
As reported.................................................. $ 1.40 0.60
Pro forma.................................................... 1.38 0.60
</TABLE>
F-10
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Pro forma amounts reflect only options granted in 1996 and 1995. The full
impact of calculating compensation cost for stock options under SFAS No. 123
is not reflected in the pro forma amounts presented above because compensation
cost is recognized over the vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
Following is a summary of transactions relating to the Plan's options for
the three years ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1993................... 996,600 $6.53
Exercised during year.............................. (40,000) 3.54
Canceled during year............................... (1,800) 9.63
Granted during year................................ 100,000 3.63
--------- -----
Outstanding at December 31, 1994................... 1,054,800 6.36
Exercised during year.............................. (44,000) 3.71
Canceled during year............................... (184,500) 8.69
Granted during year................................ 102,500 6.00
--------- -----
Outstanding at December 31, 1995................... 928,800 5.98
Exercised during year.............................. (37,450) 4.72
Canceled during year............................... (1,500) 9.63
Granted during year................................ 0 --
--------- -----
Outstanding at December 31, 1996................... 889,850 $6.03
========= =====
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.38--$9.75 and 5.2
years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was 835,000
and 847,000, respectively, and the weighted-average exercise price of these
options was $5.88 and $5.80, respectively.
In May 1993 the Board of Directors approved a stock purchase plan for
Company employees. It was implemented October 1, 1993. The Company matches the
employee contribution at a rate of 25% up to the first $5,000 per year of
individual employee contributions. Stock is purchased monthly at the average
price of the shares traded during the month. The expense of the Company match
was immaterial.
F-11
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(8) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995 and
1994 consists of (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1996
U.S. Federal..................................... $6,606 (129) 6,478
State, local and other........................... 754 (240) 514
------ ---- -----
Total.......................................... 7,360 (368) 6,992
====== ==== =====
Year ended December 31, 1995
U.S. Federal..................................... 2,390 80 2,470
State, local and other........................... 99 (78) 21
------ ---- -----
Total.......................................... 2,489 2 2,491
====== ==== =====
Year ended December 31, 1994
U.S. Federal..................................... 1,086 279 1,365
State, local and other........................... (34) 34 --
------ ---- -----
Total.......................................... $1,052 313 1,365
====== ==== =====
</TABLE>
A reconciliation of the expected Federal income tax expense to actual tax
expense follows (based upon a tax rate of 35% for 1996 and 34% for 1995 and
1994, in thousands).
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Expected income tax
expense................ $6,478 2,470 1,365
State income taxes, net
of related Federal tax
effect................. 378 90 (16)
Other, net.............. 136 (69) 16
------ ----- -----
$6,992 2,491 1,365
====== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Deferred tax assets:
Compensated absences........................................... $ 169 134
Accrued expenses, principally due to items not yet deductible
for income tax purposes....................................... 499 93
Other.......................................................... 224 151
------ -----
Total gross deferred assets.................................. 892 378
------ -----
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest...................... 3,024 3,107
Inventory costs................................................ 473 231
Other.......................................................... 252 265
------ -----
Total gross deferred tax liabilities......................... 3,749 3,603
------ -----
Net deferred tax liability..................................... $2,857 3,225
====== =====
</TABLE>
F-12
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Management expects the deferred tax assets at December 31, 1996 to be
recovered through the reversal during the carry-forward period of existing
taxable temporary differences giving rise to the deferred income tax
liability. Accordingly, no valuation allowances for deferred tax assets were
considered necessary as of December 31, 1996 or December 31, 1995.
(9) SUPPLEMENTAL CASH FLOW INFORMATION
The reconciliation of net earnings to net cash provided by operating
activities for the years ended December 31, 1996, 1995 and 1994 is as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Net earnings...................................... $11,516 4,773 2,651
------- ------ ------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 4,907 4,583 3,862
Deferred income taxes........................... (369) 2 313
Loss on sale of fixed assets.................... -- -- 12
Changes in operating assets and liabilities:
Income taxes receivable....................... -- -- 2,133
Inventories................................... (23,127) (5,552) 6,736
Prepaid expenses.............................. (55) 681 (683)
Other current assets.......................... (268) 191 597
Other assets.................................. 207 102 (251)
Accounts payable.............................. 9,836 (209) (2,943)
Accrued expenses.............................. 3,616 610 (1,359)
Income taxes payable.......................... 4,329 1,148 988
------- ------ ------
Total adjustments........................... (924) 1,556 9,405
------- ------ ------
Net cash provided by operating activities... $10,592 6,329 12,056
======= ====== ======
</TABLE>
A capital lease obligation of $2,642,000 was incurred when the Company
entered into a lease for new equipment in 1994.
(10) OPERATING LEASES
The Company leases substantially all store locations under noncancellable
operating leases. New store leases do, however, allow the Company to terminate
a lease after 12-18 months if the store does not achieve sales expectations.
Future minimum rental payments under leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1997................................... $15,931
1998................................... 13,996
1999................................... 10,604
2000................................... 8,501
2001................................... 5,649
Later years............................ 2,003
-------
Total minimum rental payments.......... $56,684
=======
</TABLE>
F-13
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
In the normal course of business, management expects to renew or replace
leases for store locations as they expire. Rental expense for 1996, 1995 and
1994 was $14,564,000, $13,124,000 and $12,323,000, respectively.
(11) PROFIT SHARING PLAN
The Company has a 401(K) profit sharing plan for the benefit of its
employees. Under the plan, eligible employees may request the Company to
deduct and contribute from 1% to 15% of their salary to the plan. The Company
also contributes 1% of total compensation for all plan participants, and
matches a portion of each participant's contribution up to 6% of the
participant's compensation. The Company expensed contributions of $403,000,
$327,000, and $330,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
(12) FINANCIAL INSTRUMENTS
As of December 31, 1996 and 1995, the Company had approximately $4,042,000
and $474,000 respectively, of net foreign exchange contracts outstanding which
are expected to be exercised by September of each following year. The
Company's risk that counterparties to these contracts may be unable to perform
is minimized by limiting the counterparties to major financial institutions.
The following table represents the carrying amounts and estimated fair
values of the Company's notes receivable, variable rate long-term debt and
foreign exchange contracts as of December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets--notes receivable..................... $2,878 2,878 2,567 2,567
Liabilities:
Foreign exchange contracts:
unrealized (gain)........................ -- (32) -- (22)
unrealized loss.......................... -- 14 -- --
Variable rate long-term debt............... 5,615 5,615 6,636 6,636
</TABLE>
The carrying values of the Company's variable rate long-term debt and notes
receivable approximate the estimated fair values since the obligations bear
interest at current market rates. The fair values of the foreign exchange
contracts are based on the exchange rates existing at the balance sheet dates.
F-14
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results for 1996 and 1995 follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales............................. $35,740 54,286 48,537 118,193
Comparable store sales increase....... 11.5% 6.7% 18.0% 16.1%
Gross profit.......................... $ 3,397 18,218 18,750 41,203
Net earnings (loss)................... $ (676) 434 698 11,060
Net earnings (loss) per common share
and share equivalent................. $ (0.09) 0.05 0.08 1.33
Weighted-average number of common
shares and share equivalents out-
standing............................. 7,851 8,319 8,370 8,343
<CAPTION>
QUARTERS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales............................. $29,958 47,977 38,240 94,090
Comparable store sales increase....... 15.2% 10.3% (5.6)% 7.4%
Gross profit.......................... $10,349 15,927 14,863 31,699
Net earnings (loss)................... $(2,046) (155) (336) 7,310
Net earnings (loss) per common share
and share equivalent................. $ (0.26) (0.02) (0.04) 0.92
Weighted-average number of common
shares and share equivalents out-
standing............................. 7,797 7,836 7,840 7,980
</TABLE>
F-15
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30,
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 3,029 $ 599
Federal income tax receivable............................ -- 96
Inventories.............................................. 159,687 114,347
Prepaid expenses......................................... 1,203 2,627
Other current assets..................................... 313 211
-------- --------
Total current assets.................................... 164,232 117,880
-------- --------
Property, plant and equipment, at cost:
Land..................................................... 8,356 8,356
Buildings................................................ 13,875 13,285
Furniture and fixtures................................... 19,506 17,138
Equipment................................................ 17,104 14,348
Leasehold improvements................................... 2,277 2,093
-------- --------
61,118 55,220
Less accumulated depreciation & amortization............. (29,679) (24,806)
-------- --------
Net property, plant and equipment....................... 31,439 30,414
-------- --------
Other assets, at cost:
Due from Officer......................................... 2,866 2,617
Other assets............................................. 678 757
-------- --------
Total Assets.............................................. $199,215 $151,668
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of mortgages........................ $ 1,021 $ 1,021
Current installments of capital lease obligation......... 213 772
Accounts payable......................................... 45,181 31,097
Accrued expenses
Sales tax................................................ 1,332 1,068
Other.................................................... 4,922 3,324
Deferred income taxes.................................... 57 231
Income taxes payable..................................... 2,301 --
-------- --------
Total current liabilities............................... 55,027 37,513
-------- --------
Mortgages on land, buildings and equipment................ 3,828 4,849
Long term notes payable................................... 56,127 41,776
Long term capital lease obligation........................ 220 433
Deferred income taxes..................................... 2,800 2,994
Shareholders' equity:
Preferred stock of $1 par value per share Authorized
2,000,000 shares, none issued........................... -- --
Common stock of $.01 par value per share Authorized
30,000,000 shares; issued 12,357,467 shares at September
30, 1997 12,215,379 shares at September 30, 1996
12,271,554 shares at December 31, 1996.................. 123 81
Additional paid-in capital............................... 18,922 18,277
Retained earnings........................................ 64,196 47,773
Less: treasury stock 411,750 shares at September 30, 1997
411,750 shares at September 30, 1996 411,750 shares at
December 31, 1996....................................... (2,028) (2,028)
-------- --------
Total shareholders' equity.............................. 81,213 64,103
-------- --------
Total Liabilities and Shareholders' Equity................ $199,215 $151,668
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-16
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales................... $ 179,058 $ 138,563
Cost of sales............... 112,620 88,199
----------- -----------
Gross profit............ 66,438 50,364
Selling, general and
administrative expenses.... 56,193 48,134
----------- -----------
Operating income........ 10,245 2,230
----------- -----------
Other income (expense):
Interest income........... 250 195
Interest expense.......... (2,330) (2,147)
Other income.............. 420 434
----------- -----------
(1,660) (1,518)
----------- -----------
Income before income
taxes.................. 8,585 712
Income tax.................. 3,219 256
----------- -----------
Net income.............. $ 5,366 $ 456
=========== ===========
Net income per share...... $ 0.43 $ 0.04
=========== ===========
Weighted average common
share and share
equivalents................ 12,556 12,396
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.......................... $ 179,058 $ 138,563
Cash paid to suppliers and employees.................. (227,299) (176,911)
Interest received..................................... 250 195
Interest paid......................................... (2,329) (2,147)
Income taxes paid..................................... (7,383) (2,489)
--------- ---------
Net cash used by operating activities................... (57,703) (42,789)
--------- ---------
Cash flows used by investing activities:
Loans to officers..................................... (373) (406)
Capital expenditures.................................. (4,756) (2,935)
--------- ---------
Net cash used by investing activities................... (5,129) (3,341)
--------- ---------
Cash flows from financing activities:
Proceeds from short and long term borrowings.......... 56,127 41,776
Payment of mortgages.................................. (766) (766)
Principal payments under capital lease obligation..... (574) (557)
Proceeds from exercise of common stock options/stock
purchase plan........................................ 323 --
--------- ---------
Net cash provided by financing activities............... 55,110 40,453
--------- ---------
Net decrease in cash and cash equivalents............... (7,722) (5,677)
Cash and cash equivalents at beginning of period........ 10,753 6,276
--------- ---------
Cash and cash equivalents at end of period.............. $ 3,031 $ 599
========= =========
Reconciliation of net income to net cash used by
operating activities:
Net income.............................................. $ 5,366 $ 456
--------- ---------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization......................... 3,704 3,582
Change in operating assets and liabilities:
Increase in income taxes receivable................. -- (96)
Increase in inventories............................. (84,194) (61,980)
Increase in prepaid expense......................... (155) (1,634)
Decrease in other current assets.................... 414 247
Decrease in other assets and liabilities............ 178 119
Increase in accounts payable........................ 22,638 18,390
Increase (decrease) in accrued expenses............. (1,490) 263
Decrease in income taxes payable.................... (4,164) (2,136)
--------- ---------
Total adjustments................................. (63,069) (43,245)
--------- ---------
Net cash used by operating activities................... $ (57,703) $ (42,789)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In September 1997, the Company and Madison Dearborn Partners II, L.P.
("Madison Dearborn") entered into an Agreement and Plan of Merger under which
Madison Dearborn would acquire all of the Company's outstanding shares of
common stock for $25 per share in cash. The merger was consummated on December
29, 1997.
2. The consolidated interim financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosure normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These unaudited financial statements
include all adjustments, consisting only of those of a normal recurring
nature, which in the opinion of management, are necessary to present fairly
the results of the Company for the interim periods presented and should be
read in conjunction with the consolidated financial statements and notes
thereto in the Company's 1996 Annual Report.
3. Net income per share amounts are based on the weighted average number of
shares and dilutive share equivalents outstanding during the period. See note
6 below.
4. The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
5. Notes payable under the terms of the Company's revolving line of credit
agreement are classified between current and long term in accordance with the
terms of the agreement.
6. On May 13, 1997 the Board of Directors approved a three-for-two stock
split of the Company's common stock. All financial statements presented
reflect this transaction which was completed in June, 1997.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, PERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cautionary Notice Regarding Forward-Looking Statements.................... iii
Available Information..................................................... iii
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 16
Use of Proceeds........................................................... 23
Capitalization............................................................ 24
Unaudited Pro Forma Financial Statements.................................. 24
Selected Consolidated Financial Data...................................... 32
Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................ 33
Business.................................................................. 39
Management................................................................ 46
Certain Transactions...................................................... 49
Principal Shareholders.................................................... 51
Description of the Senior Credit Facility................................. 52
Description of the Units.................................................. 54
The Preferred Stock Exchange Offer........................................ 94
Description of the Capital Stock.......................................... 104
Description of the Exchange Notes......................................... 107
Certain Federal Income Tax Considerations................................. 108
Plan of Distribution...................................................... 108
Legal Matters............................................................. 109
Experts................................................................... 109
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$25,000,000
LOGO
TUESDAY MORNING CORPORATION
OFFER TO EXCHANGE ITS
13 1/4% SERIES B SENIOR
EXCHANGEABLE PREFERRED STOCK DUE 2009 FOR ANY AND ALL OF ITS OUTSTANDING 13
1/4% SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (the "DGCL"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reasons of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Certificates of Incorporation
The Certificate of Incorporation of the Company provides that, to the
fullest extent permitted by the DGCL, a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for a breach of
fiduciary duty as a director.
By-Laws
Article V of the By-laws of the Company ("Article V") provides, among other
things, that each person who was or is made a party or is threatened to be made
a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "Proceeding"), by
reason of the fact that he, or a person of whom he is the legal representative ,
is or was a director or officer, of the Company or is or was serving at the
request of the Company as a director, officer, employee, fiduciary, or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, shall be indemnified and held harmless by the Company to the fullest
extent which it is empowered to do so by the DGCL against all expense, liability
and loss (including attorneys' fees actually and reasonably incurred by such
person in connection with such Proceeding) and such indemnification shall inure
to the benefit of his heirs, executors and administrators; provided, however,
that, except in certain circumstances, the Company shall
II-1
<PAGE>
indemnify any such person seeking indemnification in connection with a
Proceeding initiated by such person only if such Proceeding was authorized by
the board of directors of the Company. The right to indemnification conferred in
Article V shall be a contract right and shall include the right to be paid by
the Company the expenses incurred in defending any such Proceeding in advance of
its final disposition. The Company may, by action of its board of directors,
provide indemnification to employees and agents of the Company with the same
scope and effect as the foregoing indemnification of directors and officers.
Article V further provides that any indemnification of a director or
officer of the Company under Article V or advance of expenses shall be made
promptly, and in any event within 30 days, upon the written request of the
director or officer. If a determination by the Company that the director or
officer is entitled to indemnification pursuant to Article V is required, and
the Company fails to respond within 60 days to a written request for indemnity,
the Company shall be deemed to have approved the request. If the Company denies
a written request for indemnification or advancing of expenses, in whole or in
part, or if payment in full pursuant to such request is not made within 30 days,
the right to indemnification or advances as granted by Article V shall be
enforceable by the director or officer in any court of competent jurisdiction.
Such person's costs and expenses incurred in connection with successfully
establishing his right to indemnification, in whole or in part, in any such
action shall also be indemnified by the Company. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition where
the required undertaking, if any, has been tendered to the Company) that the
claimant has not met the standards of conduct which make it permissible under
the DGCL for the Company to indemnify the claimant for the amount claimed, but
the burden of such defense shall be on the Company. Neither the failure of the
Company (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the DGCL, nor
an actual determination by the Company (including its board of directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
Persons who are not covered by Article V and who are or were employees or agents
of the Company, or who are or were serving at the request of the Company as
employees or agents of another corporation, partnership, joint venture, trust or
other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors.
Article V provides that the Company may purchase and maintain insurance on
its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the Company or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
whether or not the Company would have the power to indemnify such person against
such liability under Article V.
Insurance
All of the Company's directors and officers will be covered by insurance
policies intended to be obtained by the Company against certain liabilities for
actions taken in such capacities, including liabilities under the Securities Act
of 1933.
II-2
<PAGE>
ITEM 21.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
(A) EXHIBITS
<S> <C>
2.1 Agreement and Plan of Merger, dated as of September 12, 1997, by and among
the Company, Merger Sub and MDP.
2.2 Amendment to the Agreement and Plan of Merger, dated as of December 26,
1997, by and among Company, Merger Sub and MDP.
3.1 Certificate of Incorporation of the Company.
3.2 Certificate of Designation
3.3 By-Laws of the Company.
4.1 Indenture, dated as of December 29, 1997, by and between the Company and
the Subsidiary Guarantors and Harris Trust and Savings Bank, as trustee.
4.2 Indenture, dated as of December 29, 1997, by and between the Company and
the Subsidiary Guarantors and United States Trust Company of New York, as
trustee.
4.3 Form of Notes (included in Exhibit 4.1).
4.4 Form of Exchange Notes (included in Exhibit 4.1).
4.5 Credit Agreement, dated as of December 29, 1997, among the Company, as
Borrower, the Subsidiary Guarantors, as Guarantors, each of the lenders
that is a signatory thereto, Merrill Lynch, as Agent and Fleet National
Bank, as Administrative Agent.
4.6 Security Agreement, dated as of December 29, 1997, by and among the
Company, the Subsidiary Guarantors and Fleet National Bank, as
Administrative Agent.
4.7 Registration Rights Agreement, dated as of December 29, 1997, by and among
the Company, the Subsidiary Guarantors and the Initial Purchaser.
5.1 Opinion of Kirkland & Ellis.*
10.1 Subscription Agreement, dated as of December 26, 1997, by and between
Merger Sub and each of the investors listed on the Schedule of Subscribers
attached thereto.
10.2 Subscription Agreement, dated as of December 29, 1997, by and between the
Company and Madison Dearborn.
10.3 Employment Agreement, dated as of December 29, 1997, by and between the
Company and Jerry M. Smith.
10.4 Consulting and Non-Competition Agreement, dated as of December 29, 1997,
by and between the Company and Lloyd L. Ross.
10.5 Employment Put Agreement, dated as of December 29, 1997, by and between
the Company and Jerry M. Smith.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.6 Term Put Agreement, dated as of December 29, 1997, by and among the
Company, Madison Dearborn and Lloyd L. Ross.
10.7 Stock Pledge Agreement, dated as of December 29, 1997, by and between the
Company and Jerry M. Smith.
10.8 Stock Pledge Agreement, dated as of December 29, 1997, by and between the
Company and Lloyd L. Ross.
10.9 1997 Long-Term Equity Incentive Plan of the Company.
10.10 Stock Option Agreement, dated as of December 29, 1997, by and between the
Company and Jerry M. Smith.
10.11 Stockholders Agreement, dated as of December 29, 1997, by and among the
Company, Madison Dearborn and the executives listed on Schedule I attached
thereto.
11.1 Statement Regarding Computation of Ratios of Earnings to Fixed Charges.
11.2. Statement Regarding Computation of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
21.1 Subsidiaries of the Company and each of the Subsidiary Guarantors.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in Part II to the Registration Statement).
25.1 Statement of Eligibility of Trustee on Form T-1.*
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
_________________
* To be filed by amendment.
+ The Company agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to such agreement upon request by the
Commission.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bonafide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering; and
(4) The undersigned registrants hereby undertake as follows:
that prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) The registrants undertake that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrants pursuant to the provisions described under Item 20 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 Securities 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 director, officer
or controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants will,
unless in the opinion of their 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 Securities Act and will be governed by the final adjudication
of such issue.
(6) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(7) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(8) The undersigned registrants hereby undertake 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
II-5
<PAGE>
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.
(9) The undersigned registrants hereby undertake 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Tuesday Morning
Corporation has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas on February 10, 1998.
TUESDAY MORNING CORPORATION
By: /s/ Jerry M. Smith
---------------------------------------
Jerry M. Smith
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benjamin D. Chereskin and Robin P. Selati and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement (and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, for the
offerings which this Registration Statement relates), and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
****
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
--------- -------- -----
<S> <C> <C>
/s/ Jerry M. Smith
- -----------------------------
Jerry M. Smith Chief Executive Officer, President February 10, 1998
and Director
/s/ Mark E. Jarvis
- -----------------------------
Mark E. Jarvis Senior Vice President, Chief February 10, 1998
Financial Officer and Secretary
/s/ G. Michael Anderson
- -----------------------------
Michael Anderson Senior Vice President, Buying Group February 10, 1998
/s/ Lloyd L. Ross
- -----------------------------
Lloyd L. Ross Chairman of the Board February 10, 1998
/s/ William J. Hunckler, III
- -----------------------------
William J. Hunckler, III Director February 10, 1998
/s/ Benjamin D. Chereskin
- -----------------------------
Benjamin D. Chereskin Director February 10, 1998
/s/ Robin P. Selati
- -----------------------------
Robin P. Selati Director February 10, 1998
</TABLE>
II-7
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AMONG
MADISON DEARBORN PARTNERS II, L.P.,
TUESDAY MORNING ACQUISITION CORP.
AND
TUESDAY MORNING CORPORATION
DATED AS OF SEPTEMBER 12, 1997
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of September 12, 1997 (this
"Agreement"), is made and entered into by and among Madison Dearborn Partners
II, L.P., a Delaware limited partnership ("Parent"), Tuesday Morning
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and Tuesday Morning Corporation, a Delaware corporation (the
"Company").
WHEREAS, the general partner of Parent and the respective Boards of
Directors of Sub and the Company have approved the acquisition of the Company
by Parent, by means of the merger (the "Merger") of Sub with and into the
Company, upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, pursuant to those certain option agreements (the "Option
Agreements"), dated as of August 13, 1997, by and between Parent and each of
Messrs. Lloyd L. Ross and Jerry M. Smith (the "Stockholders"), Parent has
acquired an option (the "Option") to purchase 3,896,757 shares of common
stock, par value $0.01 per share, of the Company ("Shares" or "Company Common
Stock") held by the Stockholders (including 1,143,600 Shares issuable to the
Stockholders upon exercise of stock options), which Shares are currently being
held in escrow by NationsBank of Texas, N.A.;
WHEREAS, Parent, Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the consummation thereof;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
The Merger
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law,
as amended (the "DGCL"), Sub shall be merged with and into the Company at the
Effective Time. At the Effective Time, the separate corporate existence of Sub
shall cease, and the Company shall continue as the surviving corporation and a
direct wholly owned subsidiary of Parent (Sub and the Company are sometimes
hereinafter referred to as "Constituent Corporations" and, as the context
requires, the Company is sometimes hereinafter referred to as the "Surviving
Corporation"), and shall continue under the name "Tuesday Morning
Corporation."
1.2 Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1, and subject to the satisfaction or waiver of the conditions set forth in
Article VI, the closing of the merger (the "Closing") shall take place at
10:00 a.m., Chicago time, on the first business day after satisfaction and/or
waiver of all of the conditions set forth in Article VI (the "Closing Date"),
at the offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois
60601, unless another date, time or place is agreed to in writing by the
parties hereto.
1.3 Effective Time of the Merger. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by
filing a certificate of merger (the "Certificate of Merger") with the
Secretary of State of the State of Delaware, as provided in the DGCL, on the
Closing Date. The Merger shall become effective upon such filing or at such
time thereafter as is provided in the Certificate of Merger (the "Effective
Time").
1.4 Effects of the Merger.
(a) The Merger shall have the effects as set forth in the applicable
provisions of the DGCL.
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<PAGE>
(b) The directors of Sub and the officers of the Company immediately prior
to the Effective Time shall, from and after the Effective Time, be the initial
directors and officers of the Surviving Corporation until their successors
have been duly elected or appointed and qualified, or until their earlier
death, resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws.
(c) The Certificate of Incorporation of the Company shall be amended and
restated in its entirety as set forth on Exhibit A hereto, and, from and after
the Effective Time, such amended and restated Certificate of Incorporation
shall be the Certificate of Incorporation of the Surviving Corporation, until
duly amended in accordance with the terms thereof and the DGCL.
(d) The Bylaws of the Company shall be amended and restated in their
entirety as set forth on Exhibit B hereto and, from and after the Effective
Time, such amended and restated Bylaws shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by applicable law, the
Certificate of Incorporation or the Bylaws.
ARTICLE II
Effect of the Merger on the Capital Stock of the Constituent Corporations;
Exchange of Certificates
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder of shares of Company Common
Stock or any holder of shares of capital stock of Sub:
(a) Capital Stock of Sub. Each share of the capital stock of Sub issued
and outstanding immediately prior to the Effective Time shall be converted
into and become one fully paid and nonassessable share of Common Stock, par
value $0.01 per share, of the Surviving Corporation or such other equity
securities of the Surviving Corporation as Parent shall specify.
(b) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of
Company Common Stock and all other shares of capital stock of the Company
that are owned by the Company and all shares of Company Common Stock and
other shares of capital stock of the Company owned by Parent or Sub shall
be canceled and retired and shall cease to exist and no consideration shall
be delivered or deliverable in exchange therefor.
2.2 Conversion of Securities. At the Effective Time, by virtue of the Merger
and without any action on the part of Sub, the Company or the holders of any
of the shares thereof:
(a) (i) Subject to the other provisions of this Section 2.2, each share
of Company Common Stock issued and outstanding immediately prior to the
Effective Time (excluding shares owned, directly or indirectly (other than
the shares covered by the Option), by the Company or by Parent, Sub or any
other Subsidiary of Parent and Dissenting Shares (as defined in Section
2.6)) shall be converted into the right to receive $25.00 per share, net to
the seller in cash, payable to the holder thereof, without any interest
thereon (the "Merger Consideration"), upon surrender and exchange of the
Certificate (as defined in Section 2.3) representing such share of Company
Common Stock. As used in this Agreement, the word "Subsidiary", with
respect to any party, means any corporation, partnership, joint venture or
other organization, whether incorporated or unincorporated, of which: (i)
such party or any other Subsidiary of such party is a general partner; (ii)
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation, partnership,
joint venture or other organization is held by such party or by any one or
more of its Subsidiaries, or by such party and any one or more of its
Subsidiaries; or (iii) at least 25% of the equity, other securities or
other interests is, directly or indirectly, owned or controlled by such
party or by any one or more of its Subsidiaries, or by such party and any
one or more of its Subsidiaries.
(ii) All such shares of Company Common Stock, when converted as provided
in Section 2.2(a)(i), no longer shall be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
2
<PAGE>
Certificate previously evidencing such Shares shall thereafter represent
only the right to receive the Merger Consideration. The holders of
Certificates previously evidencing Shares outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to the
Company Common Stock except as otherwise provided herein or by law and,
upon the surrender of Certificates in accordance with the provisions of
Section 2.3, shall only represent the right to receive for their Shares,
the Merger Consideration, without any interest thereon.
2.3 Payment for Shares.
(a) Paying Agent. Prior to the Effective Time, Sub shall appoint a United
States bank or trust company reasonably acceptable to the Company to act as
paying agent (the "Paying Agent") for the payment of the Merger Consideration,
and Sub shall deposit or shall cause to be deposited with the Paying Agent in
a separate fund established for the benefit of the holders of shares of
Company Common Stock, for payment in accordance with this Article II, through
the Paying Agent (the "Payment Fund"), immediately available funds in amounts
necessary to make the payments pursuant to Section 2.2(a)(i) and this Section
2.3 to holders (other than the Company or Parent, Sub or any other Subsidiary
of Parent, or holders of Dissenting Shares). The Paying Agent shall, pursuant
to irrevocable instructions, pay the Merger Consideration out of the Payment
Fund.
The Paying Agent shall invest portions of the Payment Fund as Parent directs
in obligations of or guaranteed by the United States of America, in commercial
paper obligations receiving the highest investment grade rating from both
Moody's Investors Services, Inc. and Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or banker's acceptances of
commercial banks with capital exceeding $1,000,000,000 (collectively,
"Permitted Investments"); provided, however, that the maturities of Permitted
Investments shall be such as to permit the Paying Agent to make prompt payment
to former holders of Company Common Stock entitled thereto as contemplated by
this Section. The Surviving Corporation shall cause the Payment Fund to be
promptly replenished to the extent of any losses incurred as a result of
Permitted Investments. All earnings on Permitted Investments shall be paid to
the Surviving Corporation. If for any reason (including losses) the Payment
Fund is inadequate to pay the amounts to which holders of shares of Company
Common Stock shall be entitled under this Section 2.3, the Surviving
Corporation shall in any event be liable for payment thereof. The Payment Fund
shall not be used for any purpose except as expressly provided in this
Agreement.
(b) Payment Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall instruct the Paying Agent to
mail to each holder of record (other than the Company or Parent, Sub or any
other Subsidiary of Parent) of a Certificate or Certificates which,
immediately prior to the Effective Time, evidenced outstanding shares of
Company Common Stock (the "Certificates"), (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent, and shall be in such form and have such
other provisions as the Surviving Corporation reasonably may specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for payment therefor. Upon surrender of a Certificate for
cancellation to the Paying Agent together with such letter of transmittal,
duly executed, and such other customary documents as may be required pursuant
to such instructions, the holder of such Certificate shall be entitled to
receive in respect thereof cash in an amount equal to the product of (x) the
number of shares of Company Common Stock represented by such Certificate and
(y) the Merger Consideration, and the Certificate so surrendered shall
forthwith be canceled. Absolutely no interest shall be paid or accrued on the
Merger Consideration payable upon the surrender of any Certificate. If payment
is to be made to a person other than the person in whose name the surrendered
Certificate is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment to a person other
than the registered holder of the surrendered Certificate or established to
the satisfaction of the Surviving Corporation that such tax has been paid or
is not applicable. Until surrendered in accordance with the provisions of this
Section 2.3(b), each Certificate (other than Certificates representing Shares
owned by the Company or Parent, Sub or any other Subsidiary of Parent), shall
represent for all purposes only the right to receive the Merger Consideration.
3
<PAGE>
(c) Termination of Payment Fund; Interest. Any portion of the Payment Fund
which remains undistributed to the holders of Company Common Stock for 180
days after the Effective Time shall be delivered to the Surviving Corporation
upon demand, and any holders of Company Common Stock who have not theretofore
complied with this Article II and the instructions set forth in the letter of
transmittal mailed to such holder after the Effective Time shall thereafter
look only to the Surviving Corporation for payment of the Merger Consideration
to which they are entitled. All interest accrued in respect of the Payment
Fund shall inure to the benefit of and be paid to the Surviving Corporation.
(d) No Liability. Neither Parent nor the Surviving Corporation shall be
liable to any holder of shares of Company Common Stock for any cash from the
Payment Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
2.4 Stock Transfer Books. At the Effective Time, the stock transfer books of
the Company shall be closed and there shall be no further registration of
transfer of shares of Company Common Stock thereafter on the records of the
Company. On or after the Effective Time, any certificates presented to the
Paying Agent or Parent for any reason shall be converted into the Merger
Consideration.
2.5 Stock Option Plans. At or about the Effective Time, the holders of then
outstanding options to purchase Shares under the Company's Restated Incentive
Stock Option Plan and Non-Qualified Stock Option Plan (the "Stock Option
Plans"), whether or not then exercisable (collectively, the "Employee
Options"), shall, in cancellation and settlement thereof, receive for each
Share subject to such Employee Option an amount (subject to any applicable
withholding tax) in cash equal to the difference between the Merger
Consideration and the per Share exercise price of such Employee Option to the
extent such difference is a positive number (such amount being hereinafter
referred to as, the "Option Consideration"). Upon receipt of the Option
Consideration, the Employee Option shall be canceled. The surrender of an
Employee Option to the Company in exchange for the Option Consideration shall
be deemed a release of any and all rights the holder had or may have had in
respect of such Employee Option. Prior to the Closing, the Company shall
obtain all necessary consents or releases from holders of Employee Options
under the Stock Option Plans and take all such other lawful action as may be
necessary to give effect to the transactions contemplated by this Section 2.5.
The Stock Option Plans shall terminate as of the Effective Time, and the
provisions in any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of the
Company or any Subsidiary thereof shall be canceled as of the Effective Time.
Prior to the Closing, the Company shall take all action necessary to (i)
ensure that, following the Effective Time, no participant in the Stock Option
Plans or any other plans, programs or arrangements shall have any right
thereunder to acquire equity securities of the Company, the Surviving
Corporation or any Subsidiary thereof and (ii) terminate all such plans,
programs and arrangements.
2.6 Dissenting Shares. Notwithstanding any other provisions of this
Agreement to the contrary, shares of Company Common Stock that are outstanding
immediately prior to the Effective Time and which are held by stockholders who
shall have not voted in favor of the Merger or consented thereto in writing
and who shall have demanded properly in writing appraisal for such shares in
accordance with Section 262 of the DGCL (collectively, the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Merger Consideration. Such stockholders instead shall be entitled to receive
payment of the appraised value of such shares of Company Common Stock held by
them in accordance with the provisions of such Section 262 of the DGCL, except
that all Dissenting Shares held by stockholders who shall have failed to
perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares of Company Common Stock under such Section 262 of the
DGCL shall thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Merger Consideration upon surrender in the manner
provided in Section 2.3, of the Certificate or Certificates that, immediately
prior to the Effective Time, evidenced such shares of Company Common Stock.
4
<PAGE>
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of the Company. The Company represents
and warrants to Parent and Sub as follows:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation,
has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, and is duly
qualified to do business as a foreign corporation and in good standing to
conduct business in each jurisdiction in which the business it is
conducting, or the operation, ownership or leasing of its properties, makes
such qualification necessary, other than in such jurisdictions where the
failure so to qualify would not (i) have a Material Adverse Effect (as
defined below) with respect to the Company or (ii) impair in any material
respect the ability of the Company to consummate the transactions
contemplated by this Agreement. The Company has heretofore delivered to
Parent complete and correct copies of its and its Subsidiaries' respective
Certificates of Incorporation and Bylaws. All Subsidiaries of the Company
and their respective jurisdictions of incorporation or organization are
identified on Schedule 3.1(a). As used in this Agreement: a "Material
Adverse Effect" shall mean, with respect to any party, the result of one or
more events, changes or effects which, individually or in the aggregate,
would have a material adverse effect on the business, operations, results
of operations, assets, condition (financial or otherwise) or prospects of
such party and its Subsidiaries, taken as a whole.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of the Company consists of 20,000,000 Shares and 2,000,000 shares of
preferred stock, par value $1.00 per share (the "Preferred Stock"). As of
the date hereof: (i) 12,346,974 Shares are issued and 11,917,681 Shares are
outstanding; (ii) no shares of Preferred Stock are issued and outstanding;
and (iii) 1,248,863 Shares are reserved for issuance pursuant to Employee
Options outstanding under the Stock Option Plans. Except for the issuance
of Shares pursuant to the exercise of outstanding Employee Options, there
are no employment, executive termination or similar agreements providing
for the issuance of Shares. No Shares are held by the Company, and no
Shares are held by any Subsidiary of the Company. No bonds, debentures,
notes or other instruments or evidence of indebtedness having the right to
vote (or convertible into, or exercisable or exchangeable for, securities
having the right to vote) on any matters on which the Company stockholders
may vote ("Company Voting Debt") are issued or outstanding. All outstanding
Shares are validly issued, fully paid and nonassessable and are not subject
to preemptive or other similar rights. Except as set forth on Schedule
3.1(b), all outstanding shares of capital stock of the Subsidiaries of the
Company are owned by the Company or a direct or indirect Subsidiary of the
Company, free and clear of all liens, charges, encumbrances, claims and
options of any nature. Except as set forth in this Section 3.1(b), there
are outstanding: (i) no shares of capital stock, Company Voting Debt or
other voting securities of the Company; (ii) no securities of the Company
or any Subsidiary of the Company convertible into, or exchangeable or
exercisable for, shares of capital stock, Company Voting Debt or other
voting securities of the Company or any Subsidiary of the Company; and
(iii) no options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which the Company or any Subsidiary of the
Company is a party or by which it is bound, in any case obligating the
Company or any Subsidiary of the Company to issue, deliver, sell, purchase,
redeem or acquire, or cause to be issued, delivered, sold, purchased,
redeemed or acquired, additional shares of capital stock or any Company
Voting Debt or other voting securities of the Company or of any Subsidiary
of the Company, or obligating the Company or any Subsidiary of the Company
to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. Except as set forth on Schedule 3.1(b), since June
30, 1997, the Company has not (i) granted any options, warrants or rights
to purchase shares of Company Common Stock or (ii) amended or repriced any
Employee Option or the Stock Option Plans. The Company has previously
delivered to Parent a complete and correct list of all outstanding options,
warrants and rights to purchase shares of Company Common Stock and the
exercise prices relating thereto. Except for the Option Agreements, there
are not as of the date hereof and there will not be at the Effective Time
5
<PAGE>
any stockholder agreements, voting trusts or other agreements or
understandings to which the Company is a party or by which it is bound
relating to the voting of any shares of the capital stock of the Company
which will limit in any way the solicitation of proxies by or on behalf of
the Company from, or the casting of votes by, the stockholders of the
Company with respect to the Merger. There are no restrictions on the
Company to vote the stock of any of its Subsidiaries.
(c) Authority; No Violations; Consents and Approvals.
(i) The Company has all requisite corporate power and authority to
enter into this Agreement and, subject to the approval of this
Agreement and the Merger by the holders of a majority of the
outstanding Shares ("Company Stockholder Approval"), to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part
of the Company, subject to the Company Stockholder Approval. This
Agreement has been duly executed and delivered by the Company and,
subject to the Company Stockholder Approval, constitutes a valid and
binding obligation of the Company enforceable in accordance with its
terms and conditions except that the enforcement hereof may be limited
by (a) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
(ii) Except as set forth on Schedule 3.1(c)(ii), the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby by the Company will not conflict with, or result in
any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration (including pursuant to any put right) of any obligation or
the loss of a material benefit under, or the creation of a lien,
pledge, security interest or other encumbrance on assets or property,
or right of first refusal with respect to any asset or property (any
such conflict, violation, default, right of termination, cancellation
or acceleration, loss, creation or right of first refusal, a
"Violation"), pursuant to, (A) any provision of the Certificate of
Incorporation or Bylaws of the Company or any of its Subsidiaries or
(B) except as to which requisite waivers or consents have been obtained
and assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in paragraph (iii) of this Section
3.1(c) are duly and timely obtained or made and the Company Stockholder
Approval has been obtained, result in any Violation of (1) any loan or
credit agreement, note, mortgage, deed of trust, indenture, lease,
Benefit Plan (as defined in Section 3.1(i)), Company Permit (as defined
in Section 3.1(f)), or any other agreement, obligation, instrument,
concession, franchise, or license or (2) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company
or any of its Subsidiaries or their respective properties or assets
(collectively, "Laws"). The Board of Directors of the Company has taken
all actions necessary under the DGCL, including approving the
transactions contemplated by this Agreement, to ensure that Section 203
of the DGCL does not, and will not, apply to the transactions
contemplated in this Agreement.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit from any
court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (a "Governmental
Entity"), is required by or with respect to the Company or any of its
Subsidiaries in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for: (A) the filing of a pre-
merger notification and report form by the Company under the Hart-
Scott-Rodino Antitrust improvements Act of 1976, as amended (the "HSR
Act"), and the expiration or termination of the applicable waiting
period thereunder; (B) the filing with the United States Securities and
Exchange Commission (the "SEC") of (x) a proxy statement in definitive
form relating to a meeting of the holders of Company Common Stock to
approve the Merger (such proxy statement as amended or supplemented
from time to time being hereinafter referred to as the "Proxy
Statement") and (y) such reports under and such other compliance with
the Exchange Act and the rules and regulations thereunder as may be
required in connection with this Agreement and the transactions
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contemplated hereby; (C) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware; (D) such filings and
approvals as may be required by any applicable state securities, "blue
sky" or takeover laws; and (E) such filings in connection with any
state or local tax which is attributable to the beneficial ownership of
the Company's or its Subsidiaries' real property, if any (collectively,
the "Gains and Transfer Taxes").
(d) SEC Documents. The Company has delivered to Parent a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the SEC since January
1, 1994 and prior to the date of this Agreement (the "Company SEC
Documents"), which are all the documents (other than preliminary material)
that the Company was required to file with the SEC since such date. As of
their respective dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC promulgated thereunder applicable to such
Company SEC Documents, and none of the Company SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements of the Company included in the Company SEC
Documents complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles ("GAAP") applied
on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements,
as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present
in accordance with applicable requirements of GAAP (subject, in the case of
the unaudited statements, to normal, recurring adjustments, which will not
be material, either individually or in the aggregate) the consolidated
financial position of the Company and its consolidated Subsidiaries as of
their respective dates and the consolidated results of operations and the
consolidated cash flows of the Company and its consolidated Subsidiaries
for the periods presented therein.
(e) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, on the date it is first mailed to the holders of the
Company Common Stock or at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If, at any
time prior to the Effective Time, any event with respect to the Company or
any of its Subsidiaries, or with respect to other information supplied by
the Company for inclusion in the Proxy Statement, shall occur which is
required to be described in an amendment of, or a supplement to, the Proxy
Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of the Company. The Proxy Statement,
insofar as it relates to the Company or its Subsidiaries or other
information supplied by the Company for inclusion therein will comply as to
form, in all material respects, with the provisions of the Exchange Act or
the rules and regulations thereunder.
(f) Compliance with Applicable Laws. The Company and its Subsidiaries
hold all material permits, licenses, variances, exemptions, orders,
franchises and approvals of all Governmental Entities necessary for the
lawful conduct of their respective businesses (the "Company Permits"). The
Company and its Subsidiaries are in compliance in all material respects
with the terms of the Company Permits (a list of which is set forth on
Schedule 3.1(f)). Except as disclosed in Schedule 3.1(f), the Company and
its Subsidiaries have complied in all material respects with all applicable
laws, ordinances and regulations of all Governmental Entities. As of the
date of this Agreement, no investigation or review by any Governmental
Entity with respect to the Company or any of its Subsidiaries is pending
or, to the knowledge of the Company, threatened.
(g) Litigation. Except as set forth on Schedule 3.1(g), there is no suit,
action or proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company or any Subsidiary of the
Company ("Company Litigation"), nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against the Company or any Subsidiary of the Company ("Company
Order").
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(h) Taxes. Except as set forth on Schedule 3.1(h) hereto:
(i) All Tax Returns required to be filed by or with respect to the
Company and each of its Subsidiaries have been duly and timely filed,
and all such Tax Returns are true, correct and complete in all material
respects. The Company and each of its Subsidiaries has duly and timely
paid (or there has been paid on its behalf) all Taxes that are due, or
claimed or asserted by any taxing authority to be due, from or with
respect to it. With respect to any period for which Taxes are not yet
due with respect to the Company or any Subsidiary, the Company and each
of its Subsidiaries has made due and sufficient current accruals for
such Taxes in accordance with GAAP in the most recent financial
statements contained in the Company SEC Documents. The Company and each
of its Subsidiaries has made (or there has been made on its behalf) all
required estimated Tax payments sufficient to avoid any material
underpayment penalties. The Company and each of its Subsidiaries has
withheld and paid all Taxes required by all applicable laws to be
withheld or paid in connection with any amounts paid or owing to any
employee, creditor, independent contractor or other third party.
(ii) There are no outstanding agreements, waivers, or arrangements
extending the statutory period of limitation applicable to any claim
for, or the period for the collection or assessment of, material Taxes
due from or with respect to the Company or any of its Subsidiaries for
any taxable period. No audit or other proceeding by any court,
governmental or regulatory authority, or similar person is pending or,
to the knowledge of the Company, threatened in regard to any Taxes due
from or with respect to the Company or any of the Subsidiaries or any
Tax Return filed by or with respect to the Company or any of its
Subsidiaries. No assessment of Taxes is proposed against the Company or
any of its Subsidiaries or any of their assets.
(iii) No election under Section 338 of the Code has been made or
filed by or with respect to the Company or any of its Subsidiaries. No
consent to the application of Section 341(f)(2) of the Code (or any
predecessor provision) has been made or filed by or with respect to the
Company or any of its Subsidiaries or any of their assets. None of the
Company or any of its Subsidiaries has agreed to make any adjustment
pursuant to Section 481(a) of the Code (or any predecessor provision)
by reason of any change in any accounting method, and there is no
application pending with any taxing authority requesting permission for
any changes in any accounting method of the Company or any of its
Subsidiaries. None of the assets of the Company or any of its
Subsidiaries is or will be required to be treated as being owned by any
person (other than the Company or its Subsidiaries) pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954,
as amended and in effect immediately before the enactment of the Tax
Reform Act of 1986.
(iv) None of the Company or any of its Subsidiaries is a party to, is
bound by, or has any obligation under, any Tax sharing agreement, Tax
allocation agreement or similar contract.
(v) There is no contract, agreement, plan or arrangement covering any
person that, individually or collectively, could give rise to the
payment of any amount that would not be deductible by the Company or
any of its Subsidiaries by reason of Section 280G of the Code.
(vi) Schedule 3.1(h) accurately sets forth (i) the amount of all
deferred intercompany gains for purposes of Treasury Regulation section
1.1502-13 (including any predecessor regulation) with respect to the
Company and its Subsidiaries; and (ii) the amount of any excess loss
account with respect to the stock of each of the Subsidiaries for
purposes of Treasury Regulation section 1.1502-19 (including any
predecessor regulation).
(vii) The term "Code" shall mean the internal Revenue Code of 1986,
as amended. The term "Taxes" shall mean all taxes, charges, fees,
levies, or other similar assessments or liabilities, including (a)
income, gross receipts, ad valorem, premium, excise, real property,
personal property, sales, use, transfer, withholding, employment,
payroll, and franchise taxes imposed by the United States of America,
or by any state, local, or foreign government, or any subdivision,
agency, or other similar person of the United States or any such
government; and (b) any interest, fines, penalties, assessments, or
additions to taxes resulting from, attributable to, or incurred in
connection with any Tax or any
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contest, dispute, or refund thereof. The term "Tax Returns" shall mean
any report, return, or statement required to be supplied to a taxing
authority in connection with Taxes.
(i) Pension And Benefit Plans; ERISA.
(i) Schedule 3.1(i)(i) sets forth a complete and correct list of:
(A) all "employee benefit plans", as defined in Sections 3(3) and
4(b)(4) of ERISA, under which Company or any of its Subsidiaries has
any obligation or liability, contingent or otherwise ("Benefit Plans");
and
(B) all employment or consulting agreements, and all bonus or other
incentive compensation, deferred compensation, salary continuation
during any absence from active employment for disability or other
reasons, severance, sick days, stock award, stock option, stock
purchase, tuition assistance, club membership, employee discount,
employee loan, or vacation pay agreements, policies or arrangements
which the Company or any of its Subsidiaries maintains or has any
obligation or liability (contingent or otherwise) and each of which has
a cost to the Company or any of its Subsidiaries in excess of $10,000
for any year (the "Employee Arrangements").
(ii) with respect to each Benefit Plan and Employee Arrangement, a
complete and correct copy of each of the following documents (if
applicable) has been delivered to Parent or its representatives: (i) the
most recent plan and related trust documents, and all amendments thereto;
(ii) the most recent summary plan description, and all related summaries of
material modifications thereto; (iii) the most recent Form 5500 (including
schedules and attachments); (iv) the most recent IRS determination letter;
(v) the most recent actuarial reports (including for purposes of Financial
Accounting Standards Board report no. 87, 106 and 112).
(iii) The Company and its Subsidiaries have not during the preceding six
years had any obligation or liability (contingent or otherwise) with
respect to a Benefit Plan which is described in Section 3(35), 3(37),
4(b)(4), 4063 or 4064 of ERISA.
(iv) The Benefit Plans and their related trusts intended to qualify under
Sections 401(a) and 501(a) of the Code, respectively, are qualified under
such sections. Any voluntary employee benefit association which provides
benefits to current or former employees of the Company and its
Subsidiaries, or their beneficiaries, is and has been qualified under
Section 501(c)(9) of the Code.
(v) All contributions or other payments required to have been made by the
Company or any of its Subsidiaries to or under any Benefit Plan or Employee
Arrangement by applicable law or the terms of such Benefit Plan or Employee
Arrangement (or any agreement relating thereto) have been timely and
properly made.
(vi) The Benefit Plans and Employee Arrangements have been maintained and
administered in all material respects in accordance with their terms and
applicable laws.
(vii) Except as disclosed in Schedule 3.1(i)(vii), there are no pending
or, to the best knowledge of the Company, threatened actions, claims or
proceedings against or relating to any Benefit Plan or Employee Arrangement
other than routine benefit claims by persons entitled to benefits
thereunder.
(viii) Except as disclosed in Schedule 3.1(i)(viii), the Company and its
Subsidiaries do not maintain or have an obligation to contribute to retiree
life or retiree health plans which provide for continuing benefits or
coverage for current or former officers, directors or employees of the
Company or any of its Subsidiaries except (i) as may be required under Part
6 of Title I of ERISA) and at the sole expense of the participant or the
participant's beneficiary or (ii) a medical expense reimbursement account
plan pursuant to Section 125 of the Code.
(ix) Except as disclosed in Schedule 3.1(i)(ix) none of the assets of any
Benefit Plan is directly invested in stock of the Company or any of its
affiliates, or property leased to or jointly owned by the Company or any of
its affiliates.
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(x) Except as disclosed in Schedule 3.1(i)(x) or in connection with
equity compensation, neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will (A)
result in any payment becoming due to any employee (current, former or
retired) of the Company and its Subsidiaries, (B) increase any benefits
under any Benefit Plan or Employee Arrangement or (C) result in the
acceleration of the time of payment of, vesting of or other rights with
respect to any such benefits.
(xi) The Company and its Subsidiaries have no liability (contingent or
otherwise) under Section 4069 of ERISA by reason of a transfer of an
underfunded pension plan.
(j) Absence of Certain Changes or Events. Since June 30, 1997, the
business of the Company and its Subsidiaries has been carried on only in
the ordinary and usual course and no event or events has or have occurred
that (either individually or in the aggregate) has had, or could have, a
Material Adverse Effect on the Company.
(k) No Undisclosed Liabilities. Except as specifically and individually
set forth on Schedule 3.1(k) or the other schedules hereto (specific
reference to which shall be made on Schedule 3.1(k)), there are no
liabilities of the Company or any Subsidiary of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or
otherwise, that are material to the Company and its Subsidiaries considered
as a whole other than: (i) liabilities reflected on the Company's audited
financial statements (together with the related notes thereto) filed with
the Company's Annual Statement on Form 10-K for the year ended December 31,
1996 (as filed with the SEC) or unaudited financial statements contained in
the Company's Quarterly Report on Form 10-Q for the quarters ended March
31, 1997 and June 30, 1997 (such audited and unaudited financial statements
being referred to herein as the "Company Financial Statements"); and (ii)
liabilities under this Agreement.
(l) Opinion of Financial Advisor. The Company has received the opinion of
SBC Warburg Dillon Read Inc., (the "Financial Advisor") dated September 12,
1997, to the effect that, as of the date hereof, the Merger Consideration
to be received by the holders of Company Common Stock in the Merger is fair
from a financial point of view to such holders, a signed, true and complete
copy of which opinion shall be delivered to Parent, and such opinion has
not been withdrawn or modified. True and complete copies of all agreements
and understandings between the Company or any of its affiliates and the
Financial Advisor relating to the transactions contemplated by this
Agreement are attached hereto as Schedule 3.1(l).
(m) Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock is the only vote of the
holders of any class or series of the Company's capital stock necessary
(under applicable law or otherwise) to approve the Merger, this Agreement
and the transactions contemplated hereby.
(n) Labor Matters.
(i) Neither the Company nor any of its Subsidiaries is a party to any
labor or collective bargaining agreement, and no employees of the Company
or any of its Subsidiaries are represented by any labor organization.
Within the preceding three years, there have been no representation or
certification proceedings, or petitions seeking a representation
proceeding, pending or, to the knowledge of the Company, threatened to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority. Within the preceding three years, to the
knowledge of the Company, there have been no organizing activities
involving the Company or any of its Subsidiaries with respect to any group
of employees of the Company or any of its Subsidiaries.
(ii) There are no strikes, work stoppages, slowdowns, lockouts, material
arbitrations or material grievances or other material labor disputes
pending or, to the knowledge of the Company, threatened against or
involving the Company or any of its Subsidiaries. There are no unfair labor
practice charges, grievances or complaints pending or, to the knowledge of
the Company, threatened by or on behalf of any employee or group of
employees of the Company or any of its Subsidiaries.
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(iii) Except as set forth on Schedule 3.1(g), there are no complaints,
charges or claims against the Company or any of its Subsidiaries pending
or, to the knowledge of the Company, threatened to be brought or filed with
any governmental authority, arbitrator or court based on, arising out of,
in connection with, or otherwise relating to the employment or termination
of employment of any individual by the Company or any of its Subsidiaries.
(iv) Each of the Company and its Subsidiaries is in material compliance
with all laws, regulations and orders relating to the employment of labor,
including all such laws, regulations and orders relating to wages, hours,
collective bargaining, discrimination, civil rights, safety and health,
workers, compensation and the collection and payment of withholding and/or
social security taxes and any similar tax.
(v) Since January 1, 1996, there has been no "mass layoff" or "plant
closing" (as defined by the Worker Adjustment Retraining and Notification
Act of 1988, as amended ("WARN Act") with respect to the Company or any of
its Subsidiaries.
(o) Intangible Property. Except as set forth on Schedule 3.1(o) attached
hereto, each of the Company and its subsidiaries owns or has a right to use
each material trademark, trade name, patent, service mark, brand mark,
brand name, computer program, database, industrial design and copyright
owned, used or useful in connection with the operation of its businesses,
including any registrations thereof and pending applications therefor, and
each license or other contract relating thereto (collectively, the "Company
Intangible Property"), free and clear of any and all liens, claims or
encumbrances. Schedule 3.1(o) hereto sets forth a complete list of the
Company Intangible Property. The use of the Company Intangible Property by
the Company or its Subsidiaries does not conflict with, infringe upon,
violate or interfere with or constitute an appropriation of any right,
title, interest or goodwill, including any intellectual property right,
trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person.
(p) Environmental Matters.
(i) For purposes of this Agreement:
(A) "Environmental Costs and Liabilities" means any and all
losses, liabilities, obligations, damages, fines, penalties,
judgments, actions, claims, costs and expenses (including fees,
disbursements and expenses of legal counsel, experts, engineers and
consultants and the costs of investigation and feasibility studies
and the costs to clean up, remove, treat, or in any other way
address any Hazardous Materials) arising from or under any
Environmental Law.
(B) "Environmental Law" means any applicable law regulating or
prohibiting Releases of Hazardous materials into any part of the
natural environment, or pertaining to the protection of natural
resources, the environment and public and employee health and safety
from Hazardous Materials including the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") (42 U.S.C. (S)
9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
(S) 1801 et seq.), the Resource Conservation and Recovery Act (42
U.S.C. (S) 6901 et seq.), the Clean Water Act (33 U.S.C. (S) 1251 et
seq.), the Clean Air Act (33 U.S.C. (S) 7401 et seq.), the Toxic
Substances Control Act (15 U.S.C. (S) 7401 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. (S) 136 et
seq.), and the Occupational Safety and Health Act (29 U.S.C. (S) 651
et seq.) ("OSHA") and the regulations promulgated pursuant thereto,
and any such applicable state or local statutes, including the
Industrial Site Recovery Act ("IRSA"), and the regulations
promulgated pursuant thereto, as such laws have been and may be
amended or supplemented through the Closing Date;
(C) "Hazardous Material" means any substance, material or waste
which is regulated by any public or governmental authority in the
jurisdictions in which the applicable party or its Subsidiaries
conducts business, or the United States, including any material or
substance which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or
"restricted hazardous waste," "contaminant," "toxic waste" or "toxic
substance" under any provision of Environmental Law and shall also
include petroleum, petroleum products, asbestos, polychlorinated
biphenyls and radioactive materials;
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(D) "Release" means any release, spill, effluent, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching,
or migration into the environment, or into or out of any property; and
(E) "Remedial Action" means all actions, including any expenditures,
required by a governmental entity or required under any Environmental
Law, or voluntarily undertaken to (I) clean up, remove, treat, or in
any other way ameliorate or address any Hazardous Materials or other
substance in the environment; (II) prevent the Release or threat of
Release, or minimize the further Release of any Hazardous Material so
it does not endanger or threaten to endanger the public health or
welfare or the environment; (III) perform pre-remedial studies and
investigations or post-remedial monitoring and care pertaining or
relating to a Release; or (IV) bring the applicable party into
compliance with any Environmental Law.
(ii) (A) The operations of the Company and its Subsidiaries have been
and, as of the Closing Date, will be, in compliance with all
Environmental Laws;
(B) The Company and its Subsidiaries have obtained and will, as of
the Closing Date, maintain all permits required under applicable
Environmental Laws for the continued operations of their respective
businesses, except such permits the lack of which would not materially
impair the ability of the Company and its Subsidiaries to continue
operations;
(C) The Company and its Subsidiaries are not subject to any
outstanding written orders from, or written agreements with, any
Governmental Entity or other person respecting (I) Environmental Laws,
(II) Remedial Action or (III) any Release or threatened Release of a
Hazardous Material;
(D) The Company and its Subsidiaries have not received any written
communication alleging, with respect to any such party, the violation
of or liability under any Environmental Law, which violation or
liability is outstanding;
(E) Neither the Company nor any of its Subsidiaries has any
contingent liability in connection with the Release of any Hazardous
Material into the environment (whether on-site or off-site) which would
be reasonably likely to result in the Company and its Subsidiaries
incurring Environmental Costs and Liabilities in excess of $100,000;
(F) The operations of the Company or its Subsidiaries do not involve
the transportation, treatment, storage or disposal of hazardous waste,
as defined and regulated under 40 C.F.R. Parts 260-270 (in effect as of
the date of this Agreement) or any state equivalent;
(G) Except as set forth on Schedule 3.1(p) attached hereto, to the
knowledge of the Company, there is not now nor has there been in the
past, on or in any owned property of the Company or its Subsidiaries
any of the following: (I) any underground storage tanks or surface
impoundments, (II) any asbestos-containing materials in friable form or
(III) any polychlorinated biphenyls; and
(H) No judicial or administrative proceedings or governmental
investigations are pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries alleging the
violation of or seeking to impose liability pursuant to any
Environmental Law.
(q) Real Property.
(i) The Company has previously provided to Parent a list of all of
the real property owned in fee by the Company and its Subsidiaries.
Each of the Company and its Subsidiaries has good and marketable title
to each parcel of real property owned by it free and clear of all
mortgages, pledges, liens, encumbrances and security interests, except
(1) those reflected or reserved against in the balance sheet of the
Company dated as of December 31, 1996, (2) taxes and general and
special assessments not in default and payable without penalty and
interest, (3) statutory liens arising or incurred in the ordinary
course of business with respect to which the underlying obligations are
not delinquent and (4) liens which are not substantial in character,
amount or extent and which do not detract from the value, or interfere
with the present use, of the property subject thereto or affected
thereby.
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(ii) The Company has previously provided to Parent a list setting forth
each lease, sublease or other agreement (collectively, the "Real Property
Leases") under which the Company or any of its Subsidiaries uses or
occupies or has the right to use or occupy, now or in the future, any real
property. Each Real Property Lease is valid, binding and in full force and
effect, all rent and other sums and charges payable by the Company and its
Subsidiaries as tenants thereunder are current, no termination event or
condition or uncured default of a material nature on the part of the
Company or any Subsidiary of the Company or, to the Company's knowledge,
the landlord, exists under any Real Property Lease. Each of the Company and
its Subsidiaries has a good and valid leasehold interest in each parcel of
real property leased by it free and clear of all mortgages, pledges, liens,
encumbrances and security interests, except (1) those reflected or reserved
against in the balance sheet of the Company dated as of December 31, 1996,
(2) taxes and general and special assessments not in default and payable
without penalty and interest, (3) statutory liens arising or incurred in
the ordinary course of business with respect to which the underlying
obligations are not delinquent and (4) liens which are not substantial in
character, amount or extent and which do not detract from the value, or
interfere with the present use, of the property subject thereto or affected
thereby.
(r) Board Recommendation. The Board of Directors of the Company, at a
meeting duly called and held, has by the vote of those directors
participating (i) determined that this Agreement and the transactions
contemplated hereby, including the Merger, are fair to and in the best
interests of the stockholders of the Company and has approved the same, and
(ii) resolved to recommend that the holders of the shares of Company Common
Stock approve this Agreement and the transactions contemplated herein,
including the Merger.
(s) Material Contracts. The Company has delivered to Parent (i) true and
complete copies of all written contracts, agreements, commitments,
arrangements, leases (including with respect to personal property),
policies and other instruments to which it or any of its Subsidiaries is a
party or by which it or any such Subsidiary is bound which require payments
to be made in excess of $1,000,000 per year (other than purchase orders
entered into in the ordinary course of business, real estate leases or
agreements listed in any of the other disclosure schedules attached hereto)
(collectively, "Material Contracts") and (ii) a written description of each
Material Contract that has not been reduced to writing. Each of the
Material Contracts is listed on Schedule 3.1(s). Neither the Company nor
any of its Subsidiaries is, or has received any notice or has any knowledge
that any other party is, in default in any material respect under any such
Material Contract; and there has not occurred any event or events that with
the lapse of time or the giving of notice or both would constitute such a
material default.
(t) Related Party Transactions. Except as set forth in the Company SEC
Documents, no director, officer, "affiliate" or "associate" (as such terms
are defined in Rule 12b-2 under the Exchange Act) of the Company or any of
its Subsidiaries (i) has borrowed any monies from or has outstanding any
indebtedness or other similar obligations to the Company or any of its
Subsidiaries; (ii) owns any direct or indirect interest of any kind in, or
is a director, officer, employee, partner, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to participate
in the management, operations or profits of, any person or entity which is
(A) a competitor, supplier, customer, distributor, lessor, tenant, creditor
or debtor of the Company or any of its Subsidiaries, (B) engaged in a
business related to the business of the Company or any of its Subsidiaries,
or (C) participating in any transaction to which the Company or any of its
Subsidiaries is a party; or (iii) is otherwise a party to any contract,
arrangement or understanding with the Company or any of its Subsidiaries.
(u) Indebtedness. Except as set forth on Schedule 3.1(u) hereto (or
otherwise disclosed in the Company Financial Statements), neither the
Company nor any of its Subsidiaries has any outstanding indebtedness for
borrowed money or representing the deferred purchase price of property or
services or similar liabilities or obligations, including any guarantee in
respect thereof ("Indebtedness"), or is a party to any agreement,
arrangement or understanding providing for the creation, incurrence or
assumption thereof.
(v) Liens. Except as set forth on Schedule 3.1(v) (or otherwise disclosed
in the Company Financial Statements), neither the Company nor any of its
Subsidiaries has granted, created, or suffered to exist with
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respect to any of its assets, any mortgage, pledge, charge, hypothecation,
collateral assignment, lien, encumbrance or security agreement of any kind
or nature whatsoever, except for statutory liens arising or incurred in the
ordinary course of business with respect to which the underlying
obligations are not delinquent and liens which are not substantial in
character, amount or extent and which do not detract from the value, or
interfere with the present use, of the property subject thereto or affected
thereby.
(w) Suppliers. There has been no material deterioration in the relations
of the Company and its Subsidiaries with any of their material suppliers
since June 30, 1997.
(x) Disclosure. Neither this Section 3 nor any schedule, attachment,
written statement, document, certificate or other item supplied to Parent
by or on behalf of the Company with respect to the transactions
contemplated by this Agreement contains any untrue statement of a material
fact or omits a material fact necessary to make each statement contained
herein or therein not misleading.
3.2 Representations and Warranties of Parent and Sub. Parent and Sub
represent and warrant to the Company as follows:
(a) Organization, Standing and Power. Parent is a limited partnership and
Sub is a corporation, and each is duly organized, validly existing and in
good standing under the laws of its state of organization, has all
requisite power and authority to own, lease and operate its properties and
to carry on its business as now being conducted, and is duly qualified to
do business as a foreign partnership or corporation and in good standing to
conduct business in each jurisdiction in which the business it is
conducting, or the operation, ownership or leasing of its properties, makes
such qualification necessary, other than in such jurisdictions where the
failure so to qualify could not have a Material Adverse Effect with respect
to Parent.
(b) Authority; No Violations; Consents and Approvals.
(i) Each of Parent and Sub has all requisite partnership or corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary partnership or corporate action on
the part of Parent and Sub. This Agreement has been duly executed and
delivered by each of Parent and Sub and assuming this Agreement constitutes
the valid and binding agreement of the Company, constitutes a valid and
binding obligation of Parent and Sub enforceable in accordance with its
terms and conditions except that the enforcement hereof may be limited by
(a) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a proceeding
at law or in equity).
(ii) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by each of Parent and Sub will not
result in any Violation pursuant to any provision of the respective
Partnership Agreement or Certificate of Incorporation or Bylaws of Parent
or Sub (as applicable) or, except as to which requisite waivers or consents
have been obtained and assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in paragraph (iii) of this
Section 3.2(b) are duly and timely obtained or made, and the Company
Stockholder Approval has been obtained, result in any Violation of any loan
or credit agreement, note, mortgage, indenture, lease, or other agreement,
obligation, instrument, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Parent or
Sub or their respective properties or assets.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, notice to, or permit from any Governmental
Entity, is required by or with respect to Parent or Sub in connection with
the execution and delivery of this Agreement by each of Parent and Sub or
the consummation by each of Parent or Sub of the transactions contemplated
hereby, except for: (A) filings under the HSR Act; (B) the filing with the
SEC of such reports under and such other compliance with the Exchange Act
and the rules and regulations thereunder, as may be required in connection
with this Agreement and the transactions contemplated hereby; (C) the
filing of the Certificate of Merger with the Secretary of State of the
State of Delaware; (D) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws; and (E) such
filings in connection with any Gains and Transfer Taxes.
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(c) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub for inclusion in the Proxy Statement will, at the
date it is first mailed to the Company's stockholders or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If, at any time prior to the Effective Time, any
event with respect to Parent or Sub, or with respect to information
supplied by Parent or Sub for inclusion in the Proxy Statement, shall occur
which is required to be described in an amendment of, or a supplement to,
any of such documents, such event shall be so described to the Company.
(d) Financing. Parent and Sub have delivered to the Company a true and
complete copy of the letters obtained by Parent and Sub from Merrill Lynch
& Co., Inc. to provide debt financing for the transactions contemplated
hereby (the "Financing Letters"). Parent and its Affiliates will provide
$115,000,000 in equity financing for the transactions contemplated hereby.
(e) Due Diligence. Parent and Sub acknowledge that they and their
representatives have conducted an independent due diligence investigation
of the Company and its Subsidiaries prior to the execution of this
Agreement and will continue to do so. At the time of the execution of this
Agreement, the officers of Parent are not aware of facts which would
currently entitle Parent and Sub to decline to effect the Merger pursuant
to Section 6.2(a). Parent and Sub agree to confirm to the Company in
writing at the time the Proxy Statement is mailed to the Company's
stockholders that such officers are not aware of any such facts.
ARTICLE IV
Covenants Relating to Conduct of Business
4.1 Covenants of the Company. During the period from the date of this
Agreement and continuing until the Effective Time, the Company agrees as to
the Company and its Subsidiaries that (except as expressly contemplated or
permitted by this Agreement, or to the extent that Parent shall otherwise
consent in writing):
(a) Ordinary Course. Each of the Company and its Subsidiaries shall carry
on its businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and shall use all
reasonable efforts to preserve intact its present business organization,
keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having
material business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect at the Effective
Time.
(b) Dividends; Changes in Stock. The Company shall not, nor shall it
permit any of its Subsidiaries to: (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock; (ii)
split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock; or (iii) repurchase or
otherwise acquire, or permit any Subsidiary to purchase or otherwise
acquire, any shares of its capital stock, except as required by the terms
of its securities outstanding on the date hereof.
(c) Issuance of Securities. The Company shall not, nor shall it permit
any of its Subsidiaries to, (i) grant any options, warrants or rights, to
purchase shares of Company Common Stock, (ii) amend the terms of or reprice
any option or amend the terms of the Stock Option Plans, or (iii) issue,
deliver or sell, or authorize or propose to issue, deliver or sell, any
shares of its capital stock of any class or series, any Company Voting Debt
or any securities convertible into, or any rights, warrants or options to
acquire, any such shares, Company Voting Debt or convertible securities,
other than the issuance of Shares upon the exercise of Employee Options
that are outstanding on the date hereof.
(d) Governing Documents. The Company shall not amend or propose to amend
its Certificate of Incorporation or Bylaws, except as contemplated hereby.
(e) No Solicitation. From and after the date hereof until the termination
of this Agreement, neither the Company or any of its Subsidiaries, nor any
of their respective officers, directors, employees,
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representatives, agents or affiliates (including any investment banker,
advisor attorney or accountant retained by any of the above) (such
officers, directors, employees, representatives, agents, affiliates,
investment bankers, attorneys and accountants being referred to herein,
collectively, as "Representatives"), will, directly or indirectly, (i)
initiate, solicit or encourage (including by way of furnishing information
or assistance), or take any other action to facilitate, any inquiries or
the making of any proposal that constitutes, or could reasonably be
expected to lead to, any Acquisition Proposal (as defined below), (ii)
provide any information to any other person or entity concerning the
Company (other than information which the Company provides to other persons
in the ordinary course of its business, so long as the Company has no
reason to believe that such information will be used to make or evaluate an
Acquisition Proposal, or as required by law) or (iii) enter into or
maintain or continue discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain an Acquisition Proposal or agree
to or endorse any Acquisition Proposal; and neither the Company nor any of
its Subsidiaries will authorize or permit any of its Representatives to
take any such action, and the Company shall notify Parent orally (within
one business day) and in writing (as promptly as practicable) of all of the
relevant details relating to, and all material aspects of, all inquiries
and proposals which it or any of its Subsidiaries or any of their
respective Representatives may receive relating to any of such matters,
including the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact, and, if such inquiry or proposal is in
writing, the Company shall deliver to Parent a copy of such inquiry or
proposal as promptly as practicable; provided, however, that nothing
contained in this Section 4.1(e) shall prohibit the Board of Directors of
the Company from responding to any unsolicited written, bona fide
Acquisition Proposal if, and only to the extent that, (A) the Board of
Directors of the Company, after consultation with and based upon the advice
of its Financial Advisor, determines in good faith that such Acquisition
Proposal is reasonably capable of being completed on the terms proposed and
would, if consummated, result in a transaction more favorable to the
Company's stockholders than the transaction contemplated herein, (B) the
Board of Directors of the Company, after consultation with and based upon
the advice of independent legal counsel (who may be the Company's regularly
engaged independent legal counsel), determines in good faith that such
action is necessary for the Board of Directors of the Company to comply
with its fiduciary duties to stockholders under applicable law, (C) prior
to taking such action, the Company (x) provides reasonable prior notice to
Parent to the effect that it is taking such action and (y) receives from
such person or entity an executed confidentiality agreement in reasonably
customary form, and (D) the Company shall promptly and continuously advise
Parent as to all of the relevant details relating to, and all material
aspects, of any such discussions or negotiations.
For purposes of this Agreement, "Acquisition Proposal" shall mean any of
the following (other than the transactions among the Company, Parent and
Sub contemplated hereunder) involving the Company or any of its
Subsidiaries: (i) any merger, consolidation, share exchange,
recapitalization, business combination, or other similar transaction; (ii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of all or substantially all of the assets of the Company and its
Subsidiaries, taken as a whole, in a single transaction or series of
transactions; (iii) any tender offer or exchange offer for all or
substantially all of the outstanding shares of capital stock of the Company
or the filing of a registration statement under the Securities Act in
connection therewith; or (iv) any public announcement of a proposal, plan
or intention to do any of the foregoing or any agreement to engage in any
of the foregoing.
(f) No Acquisitions. The Company shall not, nor shall it permit any of
its Subsidiaries to, merge or consolidate with, or acquire any equity
interest in, any corporation, partnership, association or other business
organization, or enter into an agreement with respect thereto. The Company
shall not acquire or agree to acquire any assets of any corporation,
partnership, association or other business organization or division
thereof, except for the purchase of inventory and supplies in the ordinary
course of business.
(g) No Dispositions. Other than sales of inventory in the ordinary course
of business consistent with past practice, the Company shall not, nor shall
it permit any of its Subsidiaries to, sell, lease, encumber or otherwise
dispose of, or agree to sell, lease (whether such lease is an operating or
capital lease), encumber or otherwise dispose of, any of its assets
(including any capital stock or other ownership interest of any Subsidiary
of the Company).
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(h) Governmental Filings. The Company shall promptly provide Parent (or
its counsel) with copies of all filings made by the Company with the SEC or
any other state or federal Governmental Entity in connection with this
Agreement and the transactions contemplated hereby.
(i) No Dissolution, Etc. The Company shall not authorize, recommend,
propose or announce an intention to adopt a plan of complete or partial
liquidation or dissolution of the Company or any of its Subsidiaries.
(j) Other Actions. The Company will not nor will it permit any of its
Subsidiaries to take or agree or commit to take any action that is
reasonably likely to result in any of the Company's representations or
warranties hereunder being untrue in any material respect or in any of the
Company's covenants hereunder or any of the conditions to the Merger not
being satisfied in all material respects.
(k) Certain Employee Matters. The Company and its Subsidiaries shall not
(without the prior written consent of Parent): (i) grant any increases in
the compensation of any of its directors, officers or key employees; (ii)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required or contemplated to be paid prior to the Effective Time
by any of the existing Benefit Plans or Employee Arrangements as in effect
on the date hereof to any such director, officer or key employee, whether
past or present; (iii) enter into any new, or materially amend any
existing, employment or severance or termination agreement with any such
director, officer or key employee; or (iv) except as may be required to
comply with applicable law, become obligated under any new Benefit Plan or
Employee Arrangement, which was not in existence on the date hereof, or
amend any such plan or arrangement in existence on the date hereof if such
amendment would have the effect of materially enhancing any benefits
thereunder.
(l) Indebtedness; Agreements.
(i) The Company shall not, nor shall the Company permit any of its
Subsidiaries to, assume or incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of the Company or any
of its Subsidiaries or guarantee any debt securities of others (other
than borrowings under the Company's existing revolving credit facility
in the ordinary course of business consistent with past practice) or
enter into any operating or capital lease (other than entering into
operating leases in connection with leasing additional retail space in
the ordinary course of business consistent with past practice) or
create any mortgages, liens, security interests or other encumbrances
on the property of the Company or any of its Subsidiaries, or enter
into any "keep well" or other agreement or arrangement to maintain the
financial condition of another person.
(ii) The Company shall not, nor shall the Company permit any of its
Subsidiaries to, enter into, modify, rescind, terminate, waive, release
or otherwise amend in any material respect any of the terms or-
provisions of any Material Contract.
(m) Accounting. The Company shall not take any action, other than in the
ordinary course of business, consistent with past practice or as required
by the SEC or by law, with respect to accounting policies, procedures and
practices.
(n) Capital Expenditures. The Company and its Subsidiaries shall not
incur any capital expenditures in excess of $100,000, except for capital
expenditures contemplated by the Company's budget previously supplied to
Parent.
(o) Requisite Consents. The Company and its Subsidiaries shall use all
commercially reasonable efforts to (i) obtain consents from third parties
to the consummation of the Merger and the transactions contemplated thereby
and hereby, which consents are material to the business of the Company (the
"Requisite Consents") and (ii) ensure that such Requisite Consents are in
full force and effect as of the Closing Date.
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ARTICLE V
Additional Agreements
5.1 Preparation of the Proxy Statement; Company Stockholders Meeting.
(a) As soon as practicable following the date hereof, the Company and Parent
shall prepare the Proxy Statement. The Company will, as soon as practicable
following the date hereof, file the Proxy Statement with the SEC. The Company
will use all commercially reasonable efforts to respond to all SEC comments
with respect to the Proxy Statement and to cause the Proxy Statement to be
mailed to the Company's stockholders at the earliest practicable date.
(b) The Company will, as soon as practicable following the date hereof, duly
call, give notice of, convene and hold a meeting of the Company's stockholders
for the purpose of approving this Agreement and the transactions contemplated
hereby. At such stockholders meeting, Parent shall cause all of the shares of
Company Common Stock then owned by Parent and Sub to be voted in favor of the
Merger.
(c) Sub shall promptly submit this Agreement and the transactions
contemplated hereby for approval and adoption by Parent, as its sole
stockholder, by written consent.
5.2 Access to Information. Upon reasonable notice, each of the Company or
Parent, as the case may be, shall (and shall cause each of its Subsidiaries
to) afford to the officers, employees, accountants, counsel and other
representatives of the other party (including, in the case of Parent and Sub,
potential financing sources and their employees, accountants, counsel and
other representatives), access, during normal business hours during the period
prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, such party shall (and shall
cause each of its Subsidiaries to) furnish promptly to the other party,
(a) copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to SEC requirements and
(b) all other information concerning its business, properties and personnel as
such other party may reasonably request. The Confidentiality Agreement
previously entered into between Parent and the Company (the "Confidentiality
Agreement") shall apply with respect to information furnished thereunder or
hereunder and any other activities contemplated thereby.
5.3 Settlements. Neither the Company nor any of its Subsidiaries shall
effect any settlements of any legal proceedings arising out of or related to
the execution, delivery or performance of this Agreement or the consummation
of any of the transactions contemplated hereby without the prior written
consent of Parent.
5.4 Fees and Expenses.
(a) Except as otherwise provided in this Section 5.4 and except with respect
to claims for damages incurred as a result of the breach of this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.
(b) The Company agrees to pay Parent a fee in immediately available funds
equal to $9,750,000 upon:
(i) the termination of this Agreement under Section 7.1(d) in the event
that any of the following events shall occur (each, a "Trigger Event"):
(1) the Board of Directors of the Company shall have (A) withdrawn or
modified, in a manner adverse to Parent or Sub, its recommendation of
the Agreement or the Merger or (B) failed to confirm its recommendation
of the Agreement or the Merger within two business days after a written
request by Parent to do so after the occurrence of an Acquisition
Proposal;
(2) the Board of Directors of the Company shall have approved,
endorsed or recommended to the stockholders of the Company an
Acquisition Proposal;
(3) the Company shall have entered into an agreement (other than a
confidentiality agreement as contemplated by Section 4.1(e)) with
respect to an Acquisition Proposal;
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(4) any Person or group (other than Parent, Sub or any of their
Affiliates) shall have acquired Company Common Stock after the date of
this Agreement which, when added to Company Common Stock already owned
by such Person or group, constitutes a majority of the outstanding
Company Common Stock or a tender or exchange offer for Company Common
Stock shall have been commenced and such offer ultimately results,
including after the termination of this Agreement, in a Person or group
owning a majority of the outstanding Company Common Stock; or
(5) (A) an Acquisition Proposal is made and (B) the Company fails to
call and hold a stockholders meeting to approve the Agreement and the
Merger as promptly as is reasonably practicable having regard to the
expected timing of the financing of the Merger and, in any event, on or
prior to the 175th calendar day after the date hereof (such time period
shall be extended by an amount of time equal, in the reasonable
judgment of the Company, to any delays beyond the reasonable control of
the Company in obtaining any required regulatory approvals in
connection with the transactions contemplated hereby); or
(ii) the termination of this Agreement under Section 7.1(b) following a
material and willful breach by the Company of any covenant or agreement set
forth in this Agreement, which breach could reasonably be expected to aid
or encourage an Acquisition Proposal and shall not have been cured within
ten business days following receipt by the Company of notice of such
breach.
(c) Upon any termination of this Agreement (other than a termination by the
Company under Section 7.1(b)(i) hereof), the Company shall pay to Parent (not
later than one business day after receipt of reasonable documentation therefor
and in no event prior to January 2, 1998) such amounts as may be necessary to
reimburse Parent and Sub for their reasonable out-of-pocket fees and expenses
incurred or paid by or on behalf of Parent or Sub to third parties in
connection with the Merger or the consummation of any of the transactions
contemplated by this Agreement, including all costs and reasonable fees and
expenses of counsel, investment banking firms, accountants, experts and
consultants, provided that (x) reimbursement for such fees and expenses shall
be limited to $1,000,000 and (y) reimbursement under this sentence shall not
cover fees incurred or paid by or on behalf of Parent or Sub under the
Financing Letters. In addition, in the event the payment becomes due under
Section 5.4(b), the Company shall pay to Parent (not later than one business
day after receipt of reasonable documentation therefor) all fees and expenses
incurred or paid by or on behalf of Parent or Sub under the Financing Letters,
provided that reimbursement for fees and expenses under this sentence shall be
limited to $1,000,000. The Company shall in any event pay the amount requested
(subject to the limits in the preceding two sentences) within one business day
of receipt of reasonable documentation from Parent. The amounts payable to
Parent and Sub under this Section 5.4(c) shall be in addition to (and not an
offset against) the amount (if any) payable to Parent under Section 5.4(b).
(d) Any amounts due under this Section 5.4 that are not paid when due shall
bear interest at the rate of 12% per annum from the date due through and
including the date paid.
5.5 Brokers or Finders. (a) The Company represents, as to itself, its
Subsidiaries and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any
broker's or finders fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement, except the
Financial Advisor and Hatchett Capital Group, Inc., whose fees and expenses
will be paid by the Company in accordance with the Company's agreements with
such firms (copies of which have been delivered by the Company to Parent prior
to the date of this Agreement).
(b) Parent represents, as to itself, its Subsidiaries and its affiliates,
that no agent, broker, investment banker, financial advisor or other firm or
person is or will be entitled to any broker's or finders fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement.
5.6 Indemnification; Directors' and Officers' Insurance.
(a) The Company shall, and from and after the Effective Time, the Surviving
Corporation shall, indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who
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becomes prior to the Effective Time, an officer or director of the Company or
any of its Subsidiaries (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses (including attorneys' fees and expenses),
liabilities or judgments or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be unreasonably
withheld) of or in connection with any threatened or actual claim, action,
suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director or
officer of the Company or any of its Subsidiaries whether pertaining to any
matter existing or occurring at or prior to the Effective Time and whether
asserted or claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), including all Indemnified Liabilities based in whole or in part
on, or arising in whole or in part out of, or pertaining to this Agreement or
the transactions contemplated hereby, in each case to the full extent a
corporation is permitted under the DGCL to indemnify its own directors or
officers as the case may be (and the Company and the Surviving Corporation, as
the case may be, will pay expenses in advance of the final disposition of any
such action or proceeding to each Indemnified Party to the full extent
permitted by law). Without limiting the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Parties (whether arising before or after the Effective Time), the
Company shall defend the Indemnified Parties in such matter with counsel of
the Company's choosing and the Indemnified Parties will use all reasonable
efforts to assist in the vigorous defense of any such matter. In no event will
the Company or the Surviving Corporation be liable for any settlement effected
without its prior written consent which consent shall not unreasonably be
withheld. Any Indemnified Party wishing to claim indemnification under this
Section 5.6, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Company (or after the Effective Time,
the Surviving Corporation) (but the failure so to notify shall not relieve a
party from any liability which it may have under this Section 5.6 except to
the extent such failure prejudices such party), and shall deliver to the
Company (or after the Effective Time, the Surviving Corporation) the
undertaking contemplated by Section 145(e) of the DGCL. The Company and Sub
agree that the foregoing rights to indemnification, including provisions
relating to advances of expenses incurred in defense of any action or suit,
existing in favor of the Indemnified Parties with respect to matters occurring
through the Effective Time, shall survive the Merger and shall continue in
full force and effect for a period of not less than six years from the
Effective Time; provided, however, that all rights to indemnification in
respect of any Indemnified Liabilities asserted or made within such period
shall continue until the disposition of such Indemnified Liabilities.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries (provided that Parent may substitute therefor policies of at
least the same coverage and containing terms and conditions which are not
materially less advantageous to the Indemnified Parties) with respect to
matters arising before the Effective Time, provided that Parent shall not be
required to pay an annual premium for such insurance in excess of 200% of the
last annual premium paid by the Company prior to the date hereof, but in such
case shall purchase as much coverage as possible for such amount. The last
annual premium paid by the Company was $105,000.
(c) The provisions of this Section 5.6 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his heirs and his
personal representatives and shall be binding on all successors and assigns of
Sub, the Company and the Surviving Corporation.
5.7 Commercially Reasonable Efforts. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all commercially
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable, under applicable
laws and regulations or otherwise, to consummate and make effective the
transactions contemplated by this Agreement, subject to the Company
Stockholder Approval, including cooperating fully with the other party,
including by provision of information and making of all necessary filings in
connection with, among other things, approvals under the HSR Act. In case at
any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either of the Constituent Corporations, the
proper officers and directors of each
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party to this Agreement shall take all such necessary action. Without limiting
the generality of the foregoing, the Company agrees to cooperate with Parent's
and Sub's efforts to secure the financing contemplated by the Financing
Letters, such cooperation to include providing such information to Parent's
and Sub's financing sources as Parent or Sub may reasonably request and making
available management and such other employees of the Company as Parent and Sub
may reasonably request to participate in any marketing and sales efforts
relating to sales of securities in connection with the Financing Letters.
5.8 Conduct of Business of Sub. During the period of time from the date of
this Agreement to the Effective Time, Sub shall not engage in any activities
of any nature except as provided in or contemplated by this Agreement.
5.9 Publicity. The parties will consult with each other and will mutually
agree upon any press release or public announcement pertaining to the Merger
and shall not issue any such press release or make any such public
announcement prior to such consultation and agreement, except as may be
required by applicable law, in which case the party proposing to issue such
press release or make such public announcement shall use reasonable efforts to
consult in good faith with the other party before issuing any such press
release or making any such public announcement.
5.10 Withholding Rights. Sub and the Surviving Corporation, as applicable,
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock such amounts as Sub or the Surviving Corporation, as applicable, is
required to deduct and withhold with respect to the making of such payment
under the Code or any provision of state, local or foreign tax law. To the
extent that amounts are so withheld by Sub or the Surviving Corporation, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by Sub or the Surviving
Corporation, as applicable.
ARTICLE VI
Conditions Precedent
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the affirmative vote of the holders of a majority
of the outstanding Shares entitled to vote thereon.
(b) HSR Act. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have
expired, and no restrictive order or other requirements shall have been
placed on the Company, Parent, Sub or the Surviving Corporation in
connection therewith.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
use all commercially reasonable efforts to have any such decree, ruling,
injunction or order vacated.
(d) Statutes. No statute, rule, order, decree or regulation shall have
been enacted or promulgated by any government or governmental agency or
authority which prohibits the consummation of the Merger.
6.2 Conditions of Obligations of Parent and Sub. The obligations of Parent
and Sub to effect the Merger are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Parent
and Sub:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct as of the
date of this Agreement and as of the Closing Date as
21
<PAGE>
though made on and as of the Closing Date, except as otherwise contemplated
by this Agreement and except in those instances where the aggregate amounts
represented by all breaches (other than breaches for which the Company has
obtained the consent of Parent and Sub) of such representations and
warranties are not likely to result in a Material Adverse Effect on the
Company; and Parent shall have received a certificate signed on behalf of
the Company by the chief executive officer and by the chief financial
officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by the
chief executive officer and by the chief financial officer of the Company
to such effect.
(c) Financing. Parent and Sub shall have received the debt financing for
the transactions contemplated hereby on terms substantially as outlined in
the Financing Letters.
(d) Employment Matters. Lloyd L. Ross shall have entered into a two-year
consulting agreement with the Surviving Corporation on terms consistent
with the letter dated September 12, 1997 from Parent to him. Jerry M. Smith
shall have entered into a three-year employment agreement with the
Surviving Corporation on terms consistent with the letter dated September
12, 1997 from Parent to him and shall have made the investment in Sub as
contemplated therein.
(e) No Litigation. There shall be no action, suit or proceeding pending
against Parent, Sub or the Company seeking to restrain or enjoin the
Merger, or seeking a material amount of damages in connection with the
Merger, which action, suit or proceeding has, in the opinion of legal
counsel to Parent, a reasonable possibility of success.
(f) Consents. The Company and the Subsidiaries shall have obtained all of
Requisite Consents.
(g) Dissenting Shares. No more than five percent (5.0%) of the shares of
Company Common Stock outstanding immediately prior to the Effective Time
shall be Dissenting Shares.
6.3 Conditions of Obligations of the Company. The obligation of the Company
to effect the Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by the
Company:
(a) Representations and Warranties. The representations and warranties of
Parent and Sub set forth in this Agreement shall be true and correct as of
the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, except as otherwise contemplated
by this Agreement, and the Company shall have received a certificate signed
on behalf of Parent by the chief executive officer and by the chief
financial officer of Parent to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
the Company shall have received a certificate signed on behalf of Parent by
the Chief Executive officer and by the Chief Financial Officer of Parent to
such effect.
ARTICLE VII
Termination and Amendment
7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company or by Parent:
(a) by mutual written consent of the Company and Parent, or by mutual
action of their respective Boards of Directors;
22
<PAGE>
(b) by either the Company or Parent (i) so long as such party is not then
in material breach of its obligations hereunder, if there has been a breach
of any representation, warranty, covenant or agreement on the part of the
other set forth in this Agreement which breach has not been cured within
five business days following receipt by the breaching party of notice of
such breach, or (ii) if any permanent injunction or other order of a court
or other competent authority preventing the consummation of the Merger
shall have become final and non-appealable;
(c) by either the Company or Parent, so long as such party is not then in
material breach of its obligations hereunder, if the Merger shall not have
been consummated on or before the 180th calendar day following the date
hereof; provided, that the right to terminate this Agreement under this
Section 7.1(c) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in
the failure of the Merger to occur on or before such date; or
(d) by Parent in the event that a Trigger Event has occurred under
Section 5.4(b) prior to the Closing.
7.2 Effect of Termination. In the event of termination of this Agreement by
either the Company or Parent as provided in Section 7.1, this Agreement shall
forthwith become void and there shall be no liability or obligation on the
part of Parent, Sub or the Company or their respective affiliates, officers,
directors or shareholders except (i) with respect to (A) this Section 7.2, (B)
the second sentence of Section 5.2 and (C) Section 5.4, and (ii) to the extent
that such termination results from the material breach by a party hereto of
any of its representations or warranties, or of any of its covenants or
agreements, in each case, as set forth in this Agreement.
7.3 Amendment. Subject to applicable law, this Agreement may be amended,
modified or supplemented only by written agreement of Parent, Sub and the
Company at any time prior to the Effective Date with respect to any of the
terms contained herein; provided, however, that, after this Agreement is
approved by the Company's stockholders, no such amendment or modification
shall reduce the amount or change the form of consideration to be delivered to
the holders of Shares.
7.4 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by mutual action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto; (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto; and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party. The failure of any party hereto to assert any of its rights hereunder
shall not constitute a waiver of such rights.
ARTICLE VIII
General Provisions
8.1 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Article II and Section 5.6
hereof. The Confidentiality Agreement shall survive the execution and delivery
of this Agreement, and the provisions of the Confidentiality Agreement shall
apply to all information and material delivered by any party hereunder.
8.2 Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, and shall be deemed
to be given, dated and received when so delivered personally, telegraphed or
telecopied or, if mailed, five business days after the date of mailing to the
following address or telecopy number, or to such other address or addresses as
such person may subsequently designate by notice given hereunder:
23
<PAGE>
(a)if to Parent or Sub, to:
Madison Dearborn Partners II, L.P.
Three First National Plaza
Chicago, Illinois 60602
Attn: Benjamin D. Chereskin
Telephone: (312) 732-5115
Telecopy: (312) 732-4098
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Carter W. Emerson, P.C.
Telephone: (312) 861-2000
Telecopy: (312) 861-2200
(b) if to the Company, to:
Tuesday Morning Corporation
14621 Inwood Rd.
Dallas, Texas 75244
Attn: Jerry M. Smith
Telephone: (972) 450-8267
Telecopy: (972) 387-2344
with copies to:
Crouch & Hallet, L.L.P.
717 N. Harwood Suite 1400
Dallas, TX 775201
Attn: Bruce Hallett
Telephone: (214) 953-0053
Telecopy: (214) 953-0576
8.3 Interpretation. When a reference is made in this Agreement to Sections,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the word "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available.
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement (together with the Confidentiality Agreement and any
other documents and instruments referred to herein) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof and,
except as provided in Section 5.6, is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
24
<PAGE>
8.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
8.7 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the
other parties, except that (a) Sub may assign, in its sole discretion, any or
all of its rights, interests and obligations hereunder to (i) any newly-formed
direct wholly-owned Subsidiary of Parent or Sub or (ii) any institutional
lender who provides funds to Parent, Sub or the Surviving Corporation for the
consummation of the transactions contemplated hereby and (b) Parent may
assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to Madison Dearborn Capital Partners II, L.P. or any
subsidiary of the type contemplated in clause (a)(i) above. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors and
assigns.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
PARENT:
Madison Dearborn Partners II, L.P.
By: Madison Dearborn Partners, Inc.
/s/ Benjamin Chereskin
By: _________________________________
Benjamin D. Chereskin
SUB:
Tuesday Morning Acquisition Corp.
/s/ Benjamin D. Chereskin
By: _________________________________
Benjamin D. Chereskin
Vice President
COMPANY:
Tuesday Morning Corporation
/s/ Lloyd L. Ross
By: _________________________________
Lloyd L. Ross
Chief Executive Officer
26
<PAGE>
Exhibit 2.2
AMENDMENT TO MERGER AGREEMENT
This Amendment is made as of the 26th day of December, 1997 by the
undersigned parties to the Agreement and Plan of Merger (the "Merger Agreement")
among them dated as of September 12, 1997.
The Merger Agreement is hereby amended to add Exhibit A hereto as Exhibit A
to the Merger Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
TUESDAY MORNING CORPORATION
/s/ Mark E. Jarvis
___________________________
By: Mark E. Jarvis
Its: Chief Financial Officer
TUESDAY MORNING ACQUISITION
CORP.
___________________________
By: Benjamin D. Chereskin
Its: Vice President
MADISON DEARBORN PARTNERS II,
L.P.
By: Madison Dearborn Partners, Inc.
Its: General Partner
___________________________
By: Benjamin D. Chereskin
Its: Vice President
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TUESDAY MORNING CORPORATION
ARTICLE ONE
The name of the corporation is Tuesday Morning Corporation.
ARTICLE TWO
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington,
County of New Castle, 19805. The name of its registered agent at such address is
The Corporation Trust Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV
AUTHORIZED SHARES.
------------------
The total number of shares of capital stock which the Corporation has
authority to issue is 11,152,500 shares, consisting of:
(1) 1,000,000 shares of Senior Exchangeable Preferred Stock, par value
$.01 per share ("Senior Exchangeable Preferred");
-----------------------------
(2) 150,000 shares of Series B-1 Cumulative Junior Redeemable
Preferred Stock, par value $.01 per share ("Series B-1 Preferred");
--------------------
<PAGE>
(3) 2,500 shares of Series B-2 Cumulative Junior Perpetual Preferred
Stock, par value $.01 per share ("Series B-2 Preferred"); and
--------------------
(4) 10,000,000 shares of Common Stock, par value $.01 per share
("Common Stock").
--------------
The Series B-1 Preferred and the Series B-2 Preferred are herein collectively
referred to as the "Series B Preferred." The Senior Exchangeable Preferred and
------------------
Series B Preferred are herein collectively referred to as the "Preferred Stock."
---------------
Certain other capitalized terms used herein are defined in Section 8 of
Paragraph B hereof.
A. SENIOR EXCHANGEABLE PREFERRED.
-----------------------------
Shares of Senior Exchangeable Preferred may be issued from time to
time in one or more series, each of such series to have such powers, preferences
and rights as stated or expressed herein and in the resolution or resolutions
providing for the issue of such series adopted by the Board of Directors of the
Corporation as hereinafter provided. Any shares of Senior Exchangeable
Preferred which are redeemed or otherwise acquired by the Corporation shall be
canceled and shall not be reissued or transferred. Except as otherwise required
by law, different series of Senior Exchangeable Preferred shall not be construed
to constitute different classes of shares for the purposes of voting by classes
unless expressly provided.
Authority is hereby granted to the Board of Directors from time to
time to issue the Senior Exchangeable Preferred in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including, without
limitation, dividend rights, conversion rights, redemption privileges and
liquidation preferences, as shall be stated and expressed in such resolutions,
all to the full extent now or hereafter permitted by the General Corporation Law
of Delaware (the "Corporation Law"). Without limiting the generality of the
---------------
foregoing, except as otherwise provided herein or in the resolutions providing
for the issuance of any other series of Senior Exchangeable Preferred, the
resolutions providing for issuance of any series of Senior Exchangeable
Preferred may provide that such series shall be superior or rank equally or be
junior to the Senior Exchangeable Preferred of any other series to the extent
permitted by law. Except as otherwise provided herein or in the resolutions
providing for the issuance of any series of Preferred Stock, no vote of the
holders of the Preferred Stock or Common Stock shall be a prerequisite to the
issuance of any series of the Preferred Stock authorized by and complying with
the conditions of this Certificate of Incorporation.
Each series of Senior Exchangeable Preferred shall rank senior to the
Series B Preferred as set forth in the resolution or resolutions providing for
the issue of such series of Senior Exchangeable Preferred adopted by the Board
of Directors as herein provided.
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<PAGE>
B. SERIES B PREFERRED STOCK.
-------------------------
Section 1. Dividends.
---------
1A. General Obligation. When and as declared by the Corporation's board
------------------
of directors and to the extent permitted under the Corporation Law, the
Corporation shall pay preferential dividends to the holders of the Series B-1
Preferred as provided in this Section 1. Except as otherwise provided herein,
dividends on each share of the Series B-1 Preferred (a "Series B-1 Share") shall
----------------
accrue on a daily basis at the rate of 8.0% per annum of the sum of the
Liquidation Value thereof plus all accumulated and unpaid dividends thereon,
from and including the date of issuance of such Series B-1 Share to and
including the date on which the Liquidation Value of such Series B-1 Share (plus
all accrued and unpaid dividends thereon) is paid. Except as otherwise provided
herein, dividends on each share of the Series B-2 Preferred (a "Series B-2
----------
Share") shall accrue on a daily basis at the rate of (i) 8.0% per annum through
and until December 29, 2010 and (ii) 12.0% per annum thereafter (unless the
Corporation has offered to redeem such Series B-2 Shares pursuant to Section 4
below) of the sum of the Liquidation Value thereof plus all accumulated and
unpaid dividends thereon, from and including the date of issuance of such Series
B-2 Share to and including the date on which the Liquidation Value of such
Series B-2 Share (plus all accrued and unpaid dividends thereon) is paid. Such
dividends on Series B-1 Shares and Series B-2 Shares (collectively, "Series B
--------
Shares") shall accrue whether or not they have been declared and whether or not
- ------
there are profits, surplus or other funds of the Corporation legally available
for the payment of dividends. The date on which the Corporation initially
issues any Series B Share shall be deemed to be its "date of issuance"
----------------
regardless of the number of times transfer of such Series B Share is made on the
stock records maintained by or for the Corporation and regardless of the number
of certificates which may be issued to evidence such Series B Share.
1B. Dividend Reference Dates. To the extent not paid on March 31,
------------------------
June 30, September 30 and December 31 of each year, beginning March 31, 1998
(the "Dividend Reference Dates"), all dividends which have accrued on each
------------------------
Series B Share outstanding during the three-month period (or other period in the
case of the initial Dividend Reference Date) ending upon each such Dividend
Reference Date shall be accumulated and shall remain accumulated dividends with
respect to such Series B Share until paid.
1C. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to the Series B Preferred, such payment
shall be distributed ratably among the holders of such class based upon the
number of Series B Shares held by each such holder.
Section 2. Liquidation.
-----------
Upon any liquidation, dissolution or winding up of the
Corporation (whether voluntary or involuntary), each holder of Series B
Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Junior Securities, an amount in cash equal to the aggregate
Liquidation Value (plus all accrued and unpaid dividends) of all Series B Shares
held by such holder, and the holders of Series B Preferred shall not be entitled
to any further payment. If, upon any such
-3-
<PAGE>
liquidation, dissolution or winding up of the Corporation, the Corporation's
assets to be distributed among the holders of the Series B Preferred are
insufficient to permit payment to such holders of the aggregate amount which
they are entitled to be paid under this Section 2, then the entire assets to be
distributed shall be distributed ratably among such holders based upon the
aggregate Liquidation Value (plus all accrued and unpaid dividends) of the
Series B Preferred held by each such holder. Prior to the time of any
liquidation, dissolution or winding up of the Corporation, the Corporation shall
declare for payment all accrued and unpaid dividends with respect to the Series
B Preferred. Not less than 60 days prior to the payment date stated therein, the
Corporation shall mail written notice of such liquidation, dissolution or
winding up to each record holder of Series B Preferred. Neither the
consolidation or merger of the Corporation into or with any other entity or
entities (whether or not the Corporation is the surviving entity), nor the sale
or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation, nor any other form of
recapitalization or reorganization affecting the Corporation, shall be deemed to
be a liquidation, dissolution or winding up of the Corporation within the
meaning of this Section 2.
Section 3. Priorities of Series B Preferred on Dividends and
-------------------------------------------------
Redemptions.
-----------
So long as any Series B Preferred remains outstanding, neither
the Corporation nor any Subsidiary shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities, nor shall the Corporation directly
or indirectly pay or declare any dividend or make any distribution upon any
Junior Securities, if at the time of or immediately after any such redemption,
purchase, acquisition, dividend or distribution the Corporation has failed to
pay the full amount of dividends accrued on the Series B Preferred or the
Corporation has failed to make any redemption of the Series B-1 Preferred
required hereunder; provided that the Corporation may purchase shares of Common
Stock from present or former employees of the Corporation and its Subsidiaries
in accordance with the provisions of the Executive Stock Agreements.
Section 4. Redemptions.
-----------
4A. Scheduled Redemptions. The Corporation shall redeem all of the Series
---------------------
B-1 Shares (or such lesser number then outstanding), on the earlier of (i)
December 29, 2010 or (ii) the Sale of the Company.
4B. Optional Redemptions. The Corporation may at any time and from time
--------------------
to time redeem all or any portion of the Series B-1 Preferred or the Series B-2
Preferred then outstanding. Upon any such redemption, the Corporation shall pay
a price per Series B Share equal to the Liquidation Value thereof (plus all
accrued and unpaid dividends thereon). Redemptions made pursuant to this
paragraph shall not relieve the Corporation of its obligation to redeem Series
B-1 Shares on the Scheduled Redemption Dates.
4C. Redemption Payment. For each Series B Share which is to be redeemed,
------------------
the Corporation shall be obligated on the Redemption Date to pay to the holder
thereof (upon surrender by such holder at the Corporation's principal office of
the certificate representing such Series B Share) an amount in immediately
available funds equal to the Liquidation Value of such Series B Share (plus all
accrued and unpaid dividends thereon). If the funds of the Corporation legally
available for redemption of Series B Shares on any Redemption Date are
insufficient to redeem the
-4-
<PAGE>
total number of Series B Shares to be redeemed on such date, those funds which
are legally available shall be used to redeem the maximum possible number of
Series B Shares ratably among the holders of the Series B Shares to be redeemed
based upon the aggregate Liquidation Value of such Series B Shares (plus all
accrued and unpaid dividends thereon) held by each such holder. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of Series B Shares, such funds shall immediately be used to
redeem the balance of the Series B Shares which the Corporation has become
obligated to redeem on any Redemption Date but which it has not redeemed. Prior
to the time of any redemption of Series B Shares, the Corporation shall declare
for payment all accrued and unpaid dividends with respect to the Shares which
are to be redeemed.
4D. Notice of Redemption. The Corporation shall mail written notice of
--------------------
each redemption of Series B Preferred (other than a redemption at the request of
a holder or holders of Series B Preferred) to each record holder of such class
not more than 60 nor less than 30 days prior to the date on which such
redemption is to be made. In case fewer than the total number of Series B
Shares represented by any certificate are redeemed, a new certificate
representing the number of unredeemed Series B Shares shall be issued to the
holder thereof without cost to such holder within five business days after
surrender of the certificate representing the redeemed Series B Shares.
4E. Determination of the Number of Each Holder's Shares to be Redeemed.
------------------------------------------------------------------
The number of Series B Shares to be redeemed from each holder thereof in
redemptions hereunder shall be the number of Series B Shares determined by
multiplying the total number of Series B Shares to be redeemed times a fraction,
the numerator of which shall be the total number of Series B Shares of such
class then held by such holder and the denominator of which shall be the total
number of Series B Shares then outstanding.
4F. Dividends After Redemption Date. No Series B Share is entitled to any
-------------------------------
dividends accruing after the date on which the Liquidation Value of such Series
B Share (plus all accrued and unpaid dividends thereon) is paid to the holder
thereof. On such date all rights of the holder of such Series B Share shall
cease, and such Series B Share shall not be deemed to be issued and outstanding.
4G. Redeemed or Otherwise Acquired Shares. Any Series B Shares which are
-------------------------------------
redeemed or otherwise acquired by the Corporation shall be canceled and shall
not be reissued, sold or transferred.
Section 5. Voting Rights.
-------------
Except as otherwise provided herein and as otherwise required
by law, the Series B Preferred shall have no voting rights; provided that each
holder of Series B Preferred shall be entitled to notice of all stockholders
meetings at the same time and in the same manner as notice is given to the
stockholders entitled to vote at such meeting.
Section 6. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office (or such
other place as the Corporation reasonably designates) a register for the
registration of each series of Series B Preferred.
-5-
<PAGE>
Upon the surrender of any certificate representing shares of Series B Preferred
at such place, the Corporation shall, at the request of the registered holder of
such certificate, execute and deliver a new certificate or certificates in
exchange therefor, representing in the aggregate the number of shares of such
class represented by the surrendered certificate, and the Corporation forthwith
shall cancel such surrendered certificate. Each such new certificate will be
registered in such name and will represent such number of shares of such class
as is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate. The issuance of
new certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance.
Section 7. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of Series B Preferred, and in the case of any such
loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to
the Corporation (provided that if the holder is a financial institution or other
institutional investor, its own agreement will be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate of like kind
representing the number of shares of such class represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate.
Section 8. Definitions.
-----------
"Executive Stock Agreements" mean the Stockholders Agreement, the
--------------------------
Term Put Agreements and the Employment Put Agreement, each originally dated
as of December 29, 1997, and the various executive stock agreements entered into
from time to time by the Corporation and employees of the Corporation or its
Subsidiaries, in each case, as the same may be amended from time to time.
"Junior Securities" means any capital stock or other equity
-----------------
securities of the Corporation, except for the Senior Exchangeable Preferred and
the Series B Preferred.
"Liquidation Value" of any Series B Shares as of any particular date
-----------------
shall be equal to $1,000.00.
"Redemption Date" as to any Series B Share means the date specified
---------------
in the notice of any redemption at the Corporation's option or the applicable
date specified herein in the case of any other redemption; provided that no such
date shall be a Redemption Date unless the Liquidation Value of such Class B
Share (plus all accrued and unpaid dividends thereon) is actually paid in full
on such date, and if not so paid in full, the Redemption Date shall be the date
on which such amount is fully paid.
"Sale of the Company" means the sale of the Corporation pursuant to
-------------------
which such party or parties acquire (i) Common Stock of the Corporation
possessing the voting power under
-6-
<PAGE>
normal circumstances to elect a majority of the Corporation's board of directors
(whether by merger, consolidation, sale or transfer of the Corporation's Common
Stock) or (ii) all or substantially all of the Corporation's assets determined
on a consolidated basis.
"Subsidiary" means any corporation of which the shares of outstanding
----------
capital stock possessing the voting power (under ordinary circumstances) in
electing the board of directors are, at the time as of which any determination
is being made, owned by the Corporation either directly or indirectly through
Subsidiaries.
Section 9. Notices.
-------
All notices referred to herein shall be in writing, shall be
delivered personally or by first class mail, postage prepaid, and shall be
deemed to have been given when so delivered or mailed to the Corporation at its
principal executive offices and to any stockholder at such holder's address as
it appears in the stock records of the Corporation (unless otherwise specified
in a written notice to the Corporation by such holder).
Section 10. Amendment and Waiver.
--------------------
No amendment, modification or waiver of any provision of this
Part B hereof shall be effective without the prior approval or consent of the
holders of a majority of the then outstanding Series B Preferred.
C. COMMON STOCK.
-------------
Section 1. Voting Rights.
-------------
Except as otherwise provided in this Part C or as otherwise
required by applicable law, holders of Common Stock shall be entitled to one (1)
vote per share on all matters to be voted on by the stockholders of the
Corporation.
Section 2. Dividends.
---------
After dividends on the Preferred Stock shall have been paid or
set apart for payment (to the extent such Preferred Stock may be entitled
thereto), subject to the provisions of Section 3 of Part B and to the rights of
the Senior Exchangeable Preferred, the Board may declare a dividend upon the
Common Stock out of the unrestricted and unreserved surplus of the Corporation.
As and when dividends are declared or paid thereon, whether in cash, property or
securities of the Corporation, the holders of Common Stock shall be entitled to
participate in such dividends ratably based on the number of shares of Common
Stock ("Common Shares") held by each such holder.
------ ------
Section 3. Liquidation.
-----------
Subject to the provisions of the Preferred Stock, the holders
of the Common Stock shall be entitled to participate ratably based on the number
of Common Shares held by such
-7-
<PAGE>
holder in all distributions to the holders of Common Stock in any liquidation,
dissolution or winding up of the Corporation.
Section 4. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office (or such
other place as the Corporation reasonably designates) a register for the
registration of Common Shares. Upon the surrender of any certificate
representing any class of Common Shares at such place, the Corporation shall, at
the request of the registered holder of such certificate, execute and deliver a
new certificate or certificates in exchange therefor representing in the
aggregate the number of Common Shares of such class represented by the
surrendered certificate, and the Corporation forthwith shall cancel such
surrendered certificate. Each such new certificate will be registered in such
name and will represent such number of Common Shares of such class as is
requested by the holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate. The issuance of new
certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance.
Section 5. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more Common Shares of any class, and in the case of any such
loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to
the Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement will be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Common Shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
Section 6. Notices.
-------
All notices referred to herein shall be in writing, shall be
delivered personally or by first class mail, postage prepaid, and shall be
deemed to have been given when so delivered or mailed to the Corporation at its
principal executive offices and to any stockholder at such holder's address as
it appears in the stock records of the Corporation (unless otherwise specified
in a written notice to the Corporation by such holder).
Section 7. Legend.
------
7A. Legend Requirement. Each certificate evidencing shares of Common
------------------
Stock originally issued on December 29, 1997 in connection with the
Corporation's offering of units pursuant to that certain Purchase Agreement
dated as of December 15, 1997 shall bear a legend to the following effect,
unless otherwise agreed by the Company and the holder thereof:
-8-
<PAGE>
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST
OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE
HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S.
PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE
TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION
S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE
WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS
PERMITTED BY RULE 144 UNDER THE SECURITIES ACT AND ANY
SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF
THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR
ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) AND (Y)
SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY
APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION
DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY
EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF,
(B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT
TO RULE 144A INSIDE THE UNITED STATES, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D)
PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE
904 OF REGULATION S, (E) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED
THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND
THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH
OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR
(E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO
EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES,
TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM
APPEARING ON THE
-9-
<PAGE>
OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED
BY THE TRANSFEROR TO THE TRUSTEE OR THE REGISTRAR, AS
THE CASE MAY BE. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE
THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S
UNDER THE SECURITIES ACT. THE SECURITIES REPRESENTED BY
THIS CERTIFICATE MAY NOT BE TRADED, EXCHANGED OR
OTHERWISE TRANSFERRED UNTIL (I) JUNE 15, 1998; (II) THE
OCCURRENCE OF A CHANGE IN CONTROL; (III) THE DATE ON
WHICH A PREFERRED STOCK REGISTRATION STATEMENT IS
DECLARED EFFECTIVE; (IV) IMMEDIATELY PRIOR TO ANY
REDEMPTION OF SENIOR EXCHANGEABLE PREFERRED STOCK BY
THE COMPANY WITH THE PROCEEDS OF A PUBLIC EQUITY
OFFERING; OR (V) SUCH EARLIER DATE AS DETERMINED BY
MERRILL LYNCH IN ITS SOLE DISCRETION (THE DATE OF THE
OCCURRENCE OF AN EVENT SPECIFIED IN CLAUSES (I)-(V)
BEING THE "SEPARATION DATE").
7B. Refusal of Transfer. The Company shall refuse to register any
-------------------
transfer of Common Stock in violation of the restrictions contained in the
legend provided for in paragraph 7A above.
ARTICLE FIVE
The name and mailing address of the sole incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Bruce H. Hallett 1601 Elm Street, Suite 3000
Dallas, TX 75201
ARTICLE SIX
The corporation is to have perpetual existence.
ARTICLE SEVEN
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
make, alter or repeal the by-laws of the corporation.
-10-
<PAGE>
ARTICLE EIGHT
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws of the corporation may provide. The books of the
corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the board of directors or in the by-laws
of the corporation. Election of directors need not be by written ballot unless
the by-laws of the corporation so provide.
ARTICLE NINE
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
this corporation shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE NINE shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE TEN
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
-11-
<PAGE>
Exhibit 3.2
CERTIFICATE OF THE DESIGNATION OF THE
POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF THE
13 1/4% SERIES A SENIOR EXCHANGEABLE PREFERRED STOCK AND THE
13 1/4% SERIES B SENIOR EXCHANGEABLE PREFERRED STOCK AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF
- --------------------------------------------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
Tuesday Morning Corporation (the "Company"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
of the Company by its Certificate of Incorporation (hereinafter referred to as
the "Certificate of Incorporation") and pursuant to the provisions of Section
151 of the General Corporation Law of the State of Delaware, said Board of
Directors, by unanimous written consent dated December 29, 1997, duly approved
and adopted the following resolution (the "Resolution"):
RESOLVED, that pursuant to the authority vested in the Board of
Directors by its Certificate of Incorporation, the Board of Directors hereby
creates, authorizes and provides for the issuance of two series of Preferred
Stock of the Company, designated as 13 1/4% Series A Senior Exchangeable
Preferred Stock of the Company, par value $0.01 per share, and 13 1/4% Series B
Senior Exchangeable Preferred Stock of the Company, par value $0.01 per share,
having the designations, preferences, relative, participating, optional and
other special rights of the shares of each such series, and the qualifications,
limitations and restrictions thereof that are set forth in the Certificate of
Incorporation and in this Resolution, as follows:
SECTION 1. Designation and Amount. The designations for the two
----------------------
series of Preferred Stock authorized by this Resolution shall be the 13 1/4%
Series A Senior Exchangeable Preferred Stock, par value $0.01 per share (the
"Series A Senior Preferred Stock") and the 13 1/4% Series B Senior Exchangeable
Preferred Stock, par value $0.01 per share (the "Series B Senior Preferred
Stock" and together with the Series A Senior Preferred Stock, the "Senior
Exchangeable Preferred Stock"). The initial liquidation preference of the
Senior Exchangeable Preferred Stock is $100.00 per share and the original issue
price for each such share is $100.00. The issue price per share or liquidation
preference of the Senior Exchangeable Preferred Stock shall not for any purpose
be considered to be a determination by the Board of Directors with respect to
the capital and surplus of the Company. The number of shares constituting such
Series A Senior Preferred Stock shall be 500,000, consisting of an initial
issuance of 250,000 shares of Series A Senior Preferred Stock and 250,000 shares
of Series A Senior Preferred Stock, if the Company elects to pay dividends in
additional shares of Series A Senior Preferred Stock. The number of shares
constituting such Series B Senior Preferred Stock shall be 500,000, to be
registered under the
<PAGE>
2
Securities Act of 1933, as amended, and exchanged for the outstanding Series A
Senior Preferred Stock and to be issued as dividends if the Company elects to
pay dividends in additional shares of Series B Senior Preferred Stock.
SECTION 2. Dividends. (a) Holders of the outstanding shares of
---------
Senior Exchangeable Preferred Stock (the "Holders") will be entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, dividends on the Senior Exchangeable Preferred Stock at an
annual rate of 13 1/4% (the "Dividend Rate"). All dividends will be cumulative,
whether or not earned or declared, from the Issuance Date and will be payable
quarterly in arrears on March 15, June 15, September 15 and December 15 of each
year, commencing on March 15, 1998, to Holders of record on the March 1, June 1,
September 1 and December 1 immediately preceding the relevant Dividend Payment
Date. On or before December 15, 2002, the Company may, at its option, pay
dividends in cash or in additional fully paid and non-assessable shares of
Senior Exchangeable Preferred Stock having an aggregate liquidation preference
equal to the amount of such dividends, provided, however, that if the Company
pays dividends in additional shares of Senior Exchangeable Preferred Stock,
Holders of Series A Senior Preferred Stock shall be paid in additional shares of
Series A Senior Preferred Stock and Holders of Series B Senior Preferred Stock
shall be paid in additional shares of Series B Senior Preferred Stock. After
December 15, 2002, dividends shall be paid only in cash. If any dividend (or
portion thereof) payable on any Dividend Payment Date on or before December 15,
2002 is not declared or paid in full in cash or in shares of Senior Exchangeable
Preferred Stock as described above on such Dividend Payment Date, the amount of
the accumulated and unpaid dividend will bear interest at the Dividend Rate,
compounding quarterly from such Dividend Payment Date until paid in full. If
any dividend (or portion thereof) payable on any Dividend Payment Date after
December 15, 2002 is not declared or paid in full in cash on such Dividend
Payment Date, the amount of the accumulated and unpaid dividend that is payable
and that is not paid in cash on such date will bear interest at the Dividend
Rate, compounding quarterly from such Dividend Payment Date until paid in full.
Dividends shall cease to accumulate in respect of the shares of Senior
Exchangeable Preferred Stock on the Exchange Date or on the Redemption Date
unless the Company shall have failed to issue the appropriate aggregate
principal amount of Exchange Debentures in respect of the Senior Exchangeable
Preferred Stock on the Exchange Date or shall have failed to pay the relevant
redemption price on the Redemption Date.
(b) All dividends paid with respect to shares of the Senior
Exchangeable Preferred Stock pursuant to Section 2(a) of this Certificate of
Designation shall be paid pro rata to the Holders entitled thereto.
(c) Nothing contained in this Certificate of Designation shall in any
way or under any circumstances be construed or deemed to require the Board of
Directors to declare, or the Company to pay or set apart for payment, any
dividends on shares of the Senior Exchangeable Preferred Stock at any time.
<PAGE>
3
(d) Holders shall be entitled to receive the dividends provided for in
Section 2(a) of this Certificate of Designation (including any accumulated and
unpaid cash dividends on the Senior Exchangeable Preferred Stock) in preference
to and in priority over any cash dividends (including accumulated and unpaid
dividends) upon any of the Junior Securities.
(e) No full dividends may be declared or paid or funds set apart for
the payment of dividends on any Parity Securities for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash, a
sum in cash sufficient for such payment set apart for such payment on the Senior
Exchangeable Preferred Stock. If full dividends are not so paid, the Senior
Exchangeable Preferred Stock will share dividends pro rata with the Parity
Securities. No dividends shall be paid or set apart for such payment on Junior
Securities (except dividends on Junior Securities payable in additional shares
of Junior Securities) and no Junior Securities or Parity Securities may be
repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, if full cumulative dividends have not been paid in
full (or deemed paid) on any issued and outstanding Senior Exchangeable
Preferred Stock; provided, however, the Company may repurchase, redeem or
otherwise acquire or retire for value the Management Stock in accordance with
Section 8(b).
(f) Dividends on account of arrears for any past dividend period and
dividends in connection with any optional redemption may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to Holders of
record of the Senior Exchangeable Preferred Stock on such date, not more than 45
days prior to the payment thereof, as may be fixed by the Board of Directors.
(g) Each fractional share of Senior Exchangeable Preferred Stock
outstanding shall be entitled to a ratably proportionate amount of all dividends
accruing with respect to each outstanding share of Senior Exchangeable Preferred
Stock pursuant to Section 2(a), and all such dividends with respect to such
outstanding fractional shares shall accumulate at the Dividend Rate and shall be
payable in the same manner and at such times as provided for in Section 2(a)
with respect to dividends on each outstanding share of Senior Exchangeable
Preferred Stock.
(h) Dividends payable on the Senior Exchangeable Preferred Stock for
any period less than a year shall be computed on the basis of a 360-day year of
twelve 30-day months and the actual number of days elapsed in the period for
which dividends are payable.
SECTION 3. Liquidation Preference. Upon any voluntary or involuntary
----------------------
liquidation, dissolution or winding-up of the Company, Holders will be entitled
to be paid, out of the assets of the Company available for distribution to
stockholders, the then effective liquidation preference per share of Senior
Exchangeable Preferred Stock, plus, without duplication, an amount in cash equal
to all accumulated and unpaid dividends, if any, thereon (including by way of a
deemed increase in liquidation value) to the date fixed for liquidation,
dissolution or winding-up
<PAGE>
4
(including an amount equal to a prorated dividend for the period from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or winding-
up), before any distribution is made on any Junior Securities, including,
without limitation, on any common stock of the Company. If, upon any voluntary
or involuntary liquidation, dissolution or winding-up of the Company, the
amounts payable with respect to the Senior Exchangeable Preferred Stock and all
other Parity Securities are not paid in full, the Holders of the Senior
Exchangeable Preferred Stock and the holders of the Parity Securities will share
equally and ratably in any distribution of assets of the Company in proportion
to the liquidation preference, together with all accumulated and unpaid
dividends, to which each is entitled. After payment of the full amount of the
liquidation preference and accumulation and unpaid dividends to which they are
entitled, Holders will not be entitled to any further participation in any
distribution of assets of the Company. For the purposes of this Section 3,
neither the sale, conveyance, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more entities shall be deemed to be a liquidation, dissolution or winding-up
of the Company.
The liquidation preference with respect to each outstanding fractional
share of Senior Exchangeable Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payments with respect to each
outstanding full share of Senior Exchangeable Preferred Stock.
SECTION 4. Exchange. (a) The Company may, at its option, subject to
--------
the conditions described below, on any scheduled Dividend Payment Date, exchange
the Senior Exchangeable Preferred Stock, in whole but not in part, for the
Exchange Debentures. At least 30 and not more than 60 days prior to the date
fixed for exchange, the Company shall send a written notice (the "Exchange
Notice") of exchange by mail to each Holder, which notice shall state:
(i) that the Company has elected to exchange the Senior
Exchangeable Preferred Stock into Exchange Debentures pursuant to this
Certificate of Designation;
(ii) the date of such exchange (the "Exchange Date");
(iii) that the Holder is to surrender to the Company, at the place or
places and in the manner designated in the Exchange Notice, its certificate
or certificates representing the shares of Senior Exchangeable Preferred
Stock;
(iv) that dividends on the shares of Senior Exchangeable Preferred
Stock to be exchanged shall cease to accumulate at the close of business on
the day prior to the Exchange Date, whether or not certificates for shares
of Senior Exchangeable Preferred Stock are surrendered for exchange on the
Exchange Date, unless the Company shall default in the delivery of Exchange
Debentures; and
<PAGE>
5
(v) that interest on the Exchange Debentures shall accrue from the
Exchange Date whether or not certificates for shares of Senior Exchangeable
Preferred Stock are surrendered for exchange on the Exchange Date.
On the Exchange Date, if the conditions set forth in clauses (A)
through (F) below are satisfied and if the exchange is then permitted under the
Exchange Indenture, the Company shall issue Exchange Debentures in exchange for
the Senior Exchangeable Preferred Stock as provided in the next paragraph,
provided that: (A) on the Exchange Date there are no accumulated and unpaid
dividends on the Senior Exchangeable Preferred Stock (including the dividend
payable on such date) or other contractual impediments to such exchange; (B)
there shall be legally available funds sufficient for the exchange to occur
(including, without limitation, legally available funds sufficient therefor
under Section 160 and 170 (or any successor provisions) of the General
Corporation Law of the State of Delaware); (C) no Voting Right Triggering Event
has occurred and is continuing at the time of such exchange; (D) immediately
after giving effect to such exchange, no Default or Event of Default (each as
defined in the Exchange Indenture) would exist under the Exchange Indenture,
and no Default or Event of Default would exist under any material instrument
governing Indebtedness outstanding of the Company at the time of such exchange;
(E) the Exchange Indenture shall have been qualified under the Trust Indenture
Act, if qualification is required; and (F) the Company shall have delivered to
the Debenture Trustee, a written Opinion of Counsel, dated the Exchange Date,
regarding the satisfaction of the conditions set forth in clauses (A) through
(E). In the event that any of the conditions set forth in clauses (A) through
(F) of the preceding sentence are not satisfied on the Exchange Date, then no
shares of Senior Exchangeable Preferred Stock shall be exchanged, and in order
to effect an exchange as provided for in this Section 4, the Company shall be
required to fix another date for the exchange and issue a new Exchange Notice
and the Company shall use its best efforts to satisfy such conditions and
effect such exchange as soon as practicable.
(b) Upon any exchange pursuant to this Section 4, Holders shall be
entitled to receive, subject to the provisions hereof, $1.00 principal amount of
Exchange Debentures for each $1.00 of the aggregate of the liquidation
preference of the Senior Exchangeable Preferred Stock and all accumulated and
unpaid dividends thereon, plus, without duplication, an amount in cash equal to
all accumulated and unpaid dividends thereon for the period from the immediately
preceding Dividend Payment Date to the day prior to the Exchange Date; provided
that the Company shall pay cash in lieu of issuing an Exchange Debenture in a
principal amount of less than $1,000 and provided further that the Exchange
Debentures will be issuable only in denominations of $1,000 and integral
multiples thereof.
(c) On or before the Exchange Date, each Holder shall surrender the
certificate or certificates representing such shares of the Senior Exchangeable
Preferred Stock, in the manner and at the place designated in the Exchange
Notice. The Company shall cause the Exchange Debentures to be executed on the
Exchange Date and, upon surrender in accordance with the Exchange Notice of the
certificates for any shares of the Senior Exchangeable Preferred Stock so
<PAGE>
6
exchanged (properly endorsed or assigned for transfer, if the Exchange Notice
shall so state), such shares shall be exchanged by the Company into Exchange
Debentures as aforesaid. The Company shall pay interest on the Exchange
Debentures at the rate and on the dates specified therein from the Exchange
Date.
(d) If the Exchange Notice has been mailed as aforesaid, and if before
the Exchange Date all Exchange Debentures necessary for such exchange shall have
been duly executed by the Company and delivered to the Debentures Trustee with
irrevocable instructions to authenticate the Exchange Debentures necessary for
such exchange, then the rights of the Holders as stockholders of the Company
shall cease (except the right to receive the Exchange Debentures, an amount in
cash, to the extent applicable, equal to the accumulated and unpaid dividends to
the Exchange Date and cash in lieu of any Exchange Debenture that is in a
principal amount less than $1,000), and the person or persons entitled to
receive the Exchange Debentures issuable upon exchange shall be treated for all
purposes as a registered holder or holders of such Exchange Debentures as of the
Exchange Date.
SECTION 5. Voting Rights. (a) Holders, except as otherwise required
-------------
under the laws of the State of Delaware or as set forth below, shall not be
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.
(b) If (i) dividends on the Senior Exchangeable Preferred Stock are in
arrears and unpaid (and if with respect to dividends payable for periods
beginning after December 15, 2002, such dividends are not paid in cash) for six
quarterly periods (whether or not consecutive); (ii) the Company fails to
discharge its obligation to redeem the Senior Exchangeable Preferred Stock on
the Mandatory Redemption Date or fails to otherwise discharge any redemption
obligation with respect to the Senior Exchangeable Preferred Stock; (iii) the
Company fails to make a Change in Control Offer if such offer is required by the
provisions set forth under Section 8 below or fails to purchase shares of Senior
Exchangeable Preferred Stock from holders who elect to have such shares
purchased pursuant to the Change in Control Offer; (iv) a breach or violation of
any other provisions contained in Section 8 hereof occurs and the breach or
violation continues for a period of 30 days or more after the Company receives
notice thereof specifying the default from the holders of at least 25% of the
shares of Senior Exchangeable Preferred Stock then outstanding; or (v) the
Company or any Restricted Subsidiary fails to pay at the final stated maturity
(giving effect to any extensions thereof) the principal amount of any
Indebtedness of the Company or any Restricted Subsidiary, or the final stated
maturity of any such Indebtedness is accelerated, if the aggregate principal
amount of such Indebtedness in default for failure to pay principal at the final
stated maturity (giving effect to any extensions thereof) or that has been
accelerated, aggregates $10,000,000 or more at any time, then the holders of the
majority of the then outstanding Senior Exchangeable Preferred Stock, voting or
consenting, as the case may be, as one class, will be entitled to elect the
lesser of two directors of the Board of Directors or at least 25% of the Board
of Directors. Such voting rights will continue until such time as, in the case
of a dividend default, all dividends in arrears on the Senior Exchangeable
Preferred Stock are paid
<PAGE>
7
in full (and with respect to dividends payable for periods beginning after
December 15, 2002, paid in cash) and, in all other cases, any failure, breach or
default giving rise to such voting rights is remedied or waived by the holders
of at least a majority of the shares of Senior Exchangeable Preferred Stock then
outstanding, at which time the term of the directors elected pursuant to the
provisions of this paragraph shall terminate. Each such event described in
clauses (i) through (v) above is referred to herein as a "Voting Rights
Triggering Event."
(c) The Company shall not modify, change, affect or amend the
Certificate of Incorporation or this Certificate of Designation to affect
materially and adversely the specified rights, preferences, privileges or voting
rights of the Holders of the Senior Exchangeable Preferred Stock, or authorize
the issuance of any additional shares of Senior Exchangeable Preferred Stock,
without the affirmative vote or consent of Holders of at least a majority of the
shares of Senior Exchangeable Preferred Stock then outstanding, voting or
consenting, as the case may be, as one class. In addition, the Company shall
not authorize, create (by way of reclassification or otherwise) or issue (i) any
Parity Securities, or any obligation or security convertible into or evidencing
the right to purchase any Parity Securities, without the affirmative vote or
consent of the Holders of a majority of the then outstanding shares of Senior
Exchangeable Preferred Stock and (ii) any Senior Securities, or any obligation
or security convertible into or evidencing the right to purchase Senior
Securities, without the affirmative vote or consent of the Holders of at least
two-thirds of the outstanding shares of the Senior Exchangeable Preferred Stock,
in each case voting or consenting, as the case may be, as one class.
(d) Immediately after voting power to elect directors shall have
become vested and be continuing in the Holders pursuant to Section 5(b) or if
vacancies shall exist in the offices of directors elected by the Holders, a
proper officer of the Company shall call a special meeting of the Holders for
the purpose of electing the directors which such Holders are entitled to elect.
Any such meeting shall be held at the earliest practicable date, and the Company
shall provide Holders with access to the lists of Holders, pursuant to the
provisions of this Section 5(d). At any meeting held for the purpose of
electing directors at which the Holders shall have the right, voting separately
as a class, to elect directors, the presence in person or by proxy of the
Holders of at least a majority of the outstanding shares of Senior Exchangeable
Preferred Stock shall be required to constitute a quorum of such Holders.
(e) Any vacancy occurring in the office of a director elected by the
Holders may be filled by the remaining directors elected by the Holders unless
and until such vacancy shall be filled by the Holders.
(f) In any case in which the Holders shall be entitled to vote
pursuant to this Section 5 or pursuant to the General Corporation Law of the
State of Delaware, each Holder shall be entitled to one vote for each share of
Senior Exchangeable Preferred Stock held.
<PAGE>
8
(g) Holders of at least a majority of the then outstanding shares of
Senior Exchangeable Preferred Stock, voting or consenting, as the case may be,
separately as a class, may waive compliance with any provision of this
Certificate of Designation.
Further, Holders are entitled to vote as a class upon a proposed
amendment to the Certificate of Incorporation if the amendment would increase or
decrease the par value of the shares of, or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely. Except as set forth above, (i) the creation, authorization or
issuance of any shares of Junior Securities, Parity Securities or Senior
Securities, including the designation of series thereof within the existing
class of Preferred Stock of the Company, or (ii) the increase or decrease in the
amount of authorized Capital Stock of any class, including any Preferred Stock
of the Company, shall not require the consent of the Holders and shall not be
deemed to affect adversely the rights, preferences, privileges or voting rights
of Holders.
SECTION 6. Redemption. (a) Optional Redemption. (i) The Senior
----------
Exchangeable Preferred Stock will be redeemable (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) at the election of the Company, as a whole or from time to time in
part, at any time on or after December 15, 2002 on not less than 30 nor more
than 60 days' prior notice, at the redemption prices (expressed as a percentage
of the then effective liquidation preference thereof) set forth below, plus,
without duplication, all accumulated and unpaid dividends, if any, to the date
of redemption (the "Redemption Date") (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Redemption Date to the Redemption Date), if redeemed during the 12-
month period beginning on December 15 of the years indicated below.
Year Redemption Price
----- ----------------
2002................. 109.938%
2003................. 106.625%
2004................. 103.313%
2005 and thereafter 100.000%
(ii) In addition, at any time prior to December 15, 2001, the Company
may at its option redeem for cash all, but not less than all, of the outstanding
Senior Exchangeable Preferred Stock within 20 days of a Public Equity Offering
with the net proceeds of such offering at a redemption price per share equal to
113.25% of the aggregate liquidation preference thereof, together with, without
duplication, an amount in cash equal to all accumulated and unpaid dividends, if
any, to the Redemption Date (including an amount in cash equal to a prorated
dividend for the period from the Dividend Payment Date immediately prior to the
Redemption Date to the Redemption Date), subject to the right of Holders of
record on the relevant record date to receive dividends due on a Dividend
Payment Date.
<PAGE>
9
(iii) No optional redemption may be authorized or made unless on or
prior to such redemption full unpaid cumulative dividends shall have been paid
or a sum set apart for such payment on the Senior Exchangeable Preferred Stock.
If less then all the Senior Exchangeable Preferred Stock is to be redeemed, the
particular shares to be redeemed will be determined pro rata, except that the
Company may redeem such shares held by any holder of fewer than 100 shares
without regard to such pro rata, redemption requirement. If any Senior
Exchangeable Preferred Stock is to be redeemed in part, the Redemption Notice
that relates to such Senior Exchangeable Preferred Stock shall state the portion
of the liquidation preference to be redeemed. New shares of the same Series of
Senior Exchangeable Preferred Stock having an aggregate liquidation preference
equal to the unredeemed portion will be issued in the name of the holder thereof
upon cancellation of the original shares of Senior Exchangeable Preferred Stock
and, unless the Company fails to pay the redemption price on the Redemption
Date, after the Redemption Date dividends will cease to accumulate on the Senior
Exchangeable Preferred Stock called for redemption.
(b) Mandatory Redemption. The Company shall redeem all outstanding
Senior Exchangeable Preferred Stock (subject to the legal availability of funds
therefor) in whole on the redemption date of December 15, 2009 (the "Mandatory
Redemption Date"), at a redemption price equal to 100% of the liquidation
preference thereof, plus, without duplication, all accumulated and unpaid
dividends, if any, to the date of redemption.
(c) Procedure for Redemption. (i) Not more than 60 and not less then
30 days prior to any Redemption Date, written notice (the "Redemption Notice")
shall be given by first-class mail, postage prepaid, to each Holder of record of
shares to be redeemed on the record date fixed for such redemption of the Senior
Exchangeable Preferred Stock at such Holder's address as the same appears on the
stock register of the Company, provided, however, that no failure to give such
notice nor any deficiency therein shall affect the validity of the procedure for
the redemption of any shares of Senior Exchangeable Preferred Stock to be
redeemed except as to the Holder or Holders to whom the Company has failed to
give such notice or except as to the Holder or Holders whose notice was
defective. The Redemption Notice shall state:
(A) the Redemption Price;
(B) whether all or less than all the outstanding shares of the Senior
Exchangeable Preferred Stock are to be redeemed and the total number of
shares of such Senior Exchangeable Preferred Stock being redeemed;
(C) the number of shares of Senior Exchangeable Preferred Stock held
by the Holder that the Company intends to redeem;
(D) the Redemption Date;
<PAGE>
10
(E) that the Holder is to surrender to the Company, at the place or
places, which shall be designated in such Redemption Notice, its
certificates representing the shares of Senior Exchangeable Preferred
Stock to be redeemed;
(F) that dividends on the shares of the Senior Exchangeable
Preferred Stock to be redeemed shall cease to accumulate on the day prior
to such Redemption Date unless the Company defaults in the payment of the
redemption price; and
(G) the name of any bank or trust company performing the duties
referred to in subsection (c)(v) below.
(ii) On or before the Redemption Date, each Holder of Senior
Exchangeable Preferred Stock to be redeemed shall surrender the certificate or
certificates representing such shares of Senior Exchangeable Preferred Stock to
the Company, in the manner and at the place designated in the Redemption Notice,
and on the Redemption Date the full redemption price for such shares shall be
payable in cash to the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
returned to authorized but unissued shares. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(iii) Unless the Company defaults in the payment in full of the
redemption price, dividends on the Senior Exchangeable Preferred Stock called
for redemption shall cease to accumulate on the day prior to the Redemption
Date, and the Holders of such shares shall cease to have any further rights with
respect thereto on the Redemption Date, other than the right to receive the
redemption price, without interest.
(iv) If a Redemption Notice shall have been duly given, and if, on or
before the Redemption Date specified therein, all funds necessary for such
redemption shall have been set aside by the Company, separate and apart from its
other funds, in trust for the pro rata benefit of the Holders of the Senior
Exchangeable Preferred Stock called for redemption so as to be and continue to
be available therefor, then, notwithstanding that any certificate for shares
so called for redemption shall not have been surrendered for cancellation, all
shares so called for redemption shall no longer be deemed outstanding, and all
rights with respect to such shares shall forthwith on such Redemption Date cease
and terminate, except only the right of the Holders thereof to receive the
amount payable on redemption thereof, without interest.
(v) If a Redemption Notice shall have been duly given or if the
Company shall have given to the bank or trust company hereinafter referred to
irrevocable authorization promptly to give such notice, and if on or before the
Redemption Date specified therein the funds necessary for such redemption shall
have been deposited by the Company with such bank or trust company in trust for
the pro rata benefit of the Holders of the Senior Exchangeable Preferred Stock
called for redemption, then, notwithstanding that any certificate for shares so
called for redemption shall
<PAGE>
11
not have been surrendered for cancellation, from and after the time of such
deposit, all shares so called, or to be so called pursuant to such irrevocable
authorization, for redemption shall no longer be deemed to be outstanding and
all rights with respect of such shares shall forthwith cease and terminate,
except only the right of the Holders thereof to receive from such bank or trust
company at any time after the time of such deposit the funds so deposited,
without interest. The aforesaid bank or trust company shall be organized and in
good standing under the laws of the United States of America or of the State of
New York, shall be doing business in the Borough of Manhattan, The City of New
York, shall have capital, surplus and undivided profits aggregating at least
100,000,000 according to its last published statement of condition, and shall be
identified in the Redemption Notice. Any interest accrued on such funds shall be
paid to the Company from time to time. Any funds so set aside or deposited, as
the case may be, and unclaimed at the end of three years from such Redemption
Date shall, to the extent permitted by law, be released or repaid to the
Company, after which repayment the Holders of the shares so called for
redemption shall look only to the Company for payment thereof.
SECTION 7. Ranking. The Senior Exchangeable Preferred Stock shall,
-------
with respect to dividends and distributions upon liquidation, winding-up and
dissolution of the Company, rank (a) senior to all classes of common stock, the
Series B Preferred, and to each other class of Capital Stock or series of
preferred stock of the Company, established after the Issuance Date by the Board
of Directors, the terms of which expressly provide that it ranks junior to the
Senior Exchangeable Preferred Stock as to dividends and distributions upon
liquidation, winding-up and dissolution of the Company (collectively referred
to, together with all classes of common stock of the Company, as "Junior
Securities"); (b) subject to the approval of the Holders in accordance with
Section 5(c) hereof, on a parity with each other class of Capital Stock or
series of preferred stock established after the Issuance Date by the Board of
Directors the terms of which expressly provide that such class or series will
rank on a parity with the Senior Exchangeable Preferred Stock as to dividends
and distributions upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Parity Securities"); and (c) subject to the
approval of the Holders in accordance with Section 5(c) hereof, junior to each
class of Capital Stock or series of preferred stock established after the
Issuance Date by the Board of Directors and the terms of which do not expressly
provide that such class or series will rank junior to, or on a parity with, the
Senior Exchangeable Preferred Stock as to dividends and distributions upon
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Senior Securities").
SECTION 8. Certain Additional Provisions.
-----------------------------
(a) Limitation on Indebtedness. The Company shall not, and shall not
permit any Restricted Subsidiary to, create, issue, assume, guarantee or in any
manner become directly or indirectly liable for the payment of, or otherwise
incur (collectively, "incur"), any Indebtedness (including any Acquired
Indebtedness), other than Permitted Indebtedness; provided, however, that the
Company and any Restricted Subsidiary may incur Indebtedness (including Acquired
Indebtedness) if at the time of such incurrence (i) no Voting Rights Triggering
Event shall have
<PAGE>
12
occurred and be continuing or shall occur as a consequence thereof and (ii) the
Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters
immediately preceding the incurrence of such Indebtedness for which internal
financial statements are available, taken as one period (and after giving pro
forma effect to (A) the incurrence of such Indebtedness 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 four-quarter period, (B) the
incurrence, repayment or retirement of any other Indebtedness by the Company and
its Restricted Subsidiaries since the first day of such four-quarter period as
if such Indebtedness was incurred, repaid or retired on the first day of such
four-quarter 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 four-quarter period)
and (C) the acquisition (whether by purchase, merger or otherwise) or
disposition (whether by sale, merger or otherwise) of any company, entity or
business acquired or disposed of by the Company or its Restricted Subsidiaries,
as the case may be, since the first day of such four-quarter period, as if such
acquisition or disposition occurred on the first day of such four-quarter
period), would have been at least equal to 2.0 to 1.0.
(b) Limitations on Restricted Payments. (I) The Company shall not,
and shall not permit any Restricted Subsidiary to, directly or indirectly, take
any of the following actions:
(i) declare or pay any dividend on, or make any distribution to
the holders of any Parity Securities or Junior Securities (other than
dividends or distributions payable solely in shares of Qualified Capital
Stock (other than Senior Securities) or in options, warrants or other
rights to purchase shares of Qualified Capital Stock (other than Senior
Securities));
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any Parity Securities or Junior Securities or any
Capital Stock of the Company or any Affiliate of the Company or any
options, warrants or other rights to acquire Parity Securities or Junior
Securities or such Capital Stock (other than such options, warrants or
rights owned by the Company or a wholly owned Restricted Subsidiary);
(iii) declare or pay any dividend on, or make any distribution to
holders of any shares of Capital Stock of any Restricted Subsidiary (other
than to the Company or any of its wholly owned Restricted Subsidiaries or
to all holders of Capital Stock of such Restricted Subsidiary on a pro
rata basis); or
(iv) make any Investment (other than any Permitted Investment) in
any Person
(such payments or other actions described in (but not excluded from) clauses (i)
through (iv) are collectively referred to as "Restricted Payments"), unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment,
<PAGE>
13
if other than cash, as determined by the Board of Directors of the Company,
whose determination shall be conclusive and evidenced by a Board Resolution),
(1) no Voting Rights Triggering Event shall have occurred and be continuing, (2)
the Company could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to Section 8(a) and (3) the aggregate amount of
all Restricted Payments declared or made after the Issuance Date shall not
exceed the sum of:
(A) 50% of the Consolidated Adjusted Net Income of the Company
accrued on a cumulative basis during the period beginning on the first day
of the Company's first fiscal quarter after the Issuance Date and ending
on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Adjusted Net Income shall be a loss, minus 100% of such
loss), plus
(B) the aggregate net cash proceeds received after the Issuance Date
by the Company from the issuance or sale (other than to any Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company (including
upon the exercise of options, warrants or rights) or warrants, options or
rights to purchase shares of Qualified Capital Stock of the Company, plus
(C) the aggregate net cash proceeds received after the Issuance Date
by the Company from the issuance or sale (other than to any Restricted
Subsidiary) of debt securities or Redeemable Capital Stock that have been
converted into or exchanged for Qualified Capital Stock of the Company, to
the extent such securities were originally sold for cash, together with
the aggregate net cash proceeds received by the Company at the time of
such conversion or exchange, plus
(D) to the extent that any Investment constituting a Restricted
Payment that was made after the Issuance Date is sold or is otherwise
liquidated or repaid, an amount (to the extent not included in
Consolidated Adjusted Net Income) equal to (I) the lesser of (x) the cash
proceeds with respect to such Investment (less the cost of the disposition
of such Investment and net of taxes) and (y) the initial amount of such
Investment, or (II) with respect to solely any Restricted Payment to be
made pursuant to clause (iv) of this paragraph (a), the cash proceeds with
respect to such Investment (less the cost of the disposition of such
Investment and net of taxes) in excess of the amount in (I), plus
(E) $5,000,000.
(II) Notwithstanding paragraph (I) above, the Company and its
Restricted Subsidiaries may take the following actions so long as (with respect
to clauses (ii), (iii), (iv), (v) and (vi) below) at the time of and after
giving effect thereto no Voting Rights Triggering Event has occurred and is
continuing:
<PAGE>
14
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration the payment of such
dividend would have complied with the provisions of paragraph (I) above;
(ii) the purchase, redemption or other acquisition or retirement
for value of any shares of Capital Stock of the Company in exchange for,
or out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Restricted Subsidiary) of, shares of Qualified
Capital Stock (other than Senior Securities) of the Company;
(iii) the repurchase, redemption or other acquisition or retirement
for value of shares of Management Stock; provided that (1) the Company is
required, by the terms of written agreements between the Company and each
of Lloyd L. Ross and Jerry M. Smith as in effect on the Issuance Date, to
effect such purchase, redemption or other acquisition or retirement for
value of such shares and (2) the aggregate consideration paid by the
Company for such shares so purchased, redeemed or otherwise acquired or
retired for value does not exceed $25,000,000 in the aggregate;
(iv) the repurchase, redemption or other acquisition or retirement
for value of shares of Capital Stock of the Company from employees who
have died (or their estates or beneficiaries) or whose employment has been
terminated; provided that such payment shall not exceed $1,500,000 in any
twelve-month period, excluding any amounts used to repurchase, redeem,
acquire or retire for value shares of Capital Stock of the Company
pursuant to clause (iii) above;
(v) repurchases of Capital Stock of the Company (or warrants or
options convertible into or exchangeable for such Capital Stock) deemed to
occur upon exercise of stock options to the extent that shares of such
Capital Stock (or warrants or options convertible into or exchangeable for
such Capital Stock) represent a portion of the exercise price of such
options; and
(vi) the issuance by the Company of shares of Preferred Stock as
dividends paid in kind on the Preferred Stock of the Company outstanding
on the Issuance Date or on shares of Preferred Stock so issued as payment-
in-kind dividends, such dividends made pursuant to the terms of the
certificate of designation or the certificate of incorporation, as the
case may be, for such Preferred Stock as in effect on the Issuance Date.
The actions described in clauses (i), (ii), (iii), (iv) and (v) of this
paragraph (II) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (II) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph (I)
above and the actions described in clause (vi) of this paragraph (II) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
paragraph (II) and
<PAGE>
15
shall not reduce the amount that would otherwise be available for Restricted
Payments under clause (3) of paragraph (I).
(III) Notwithstanding the foregoing, the Company shall not, and shall
not permit any Restricted Subsidiary to, pay any cash dividends on any shares of
Capital Stock of the Company which shall rank junior to the Senior Exchangeable
Preferred Stock until such time as the Notes have received a rating from Moody's
of at least "B1" or higher.
(c) Change in Control. If a Change in Control shall occur at any
time, then each Holder of Senior Exchangeable Preferred Stock shall have the
right to require that the Company purchase such Holder's Senior Exchangeable
Preferred Stock, in whole or in part, at a purchase price in cash (a "Change in
Control Payment") in an amount equal to 101% of the liquidation preference of
such Senior Exchangeable Preferred Stock, plus accumulated and unpaid dividends,
if any, to the date of purchase, pursuant to the offer described below (the
"Change in Control Offer") and the other procedures set forth herein.
Within 30 days following any Change in Control, the Company will mail
a notice to each Holder of Senior Exchangeable Preferred Stock with a copy to
the Transfer Agent, with the following information: (i) a Change in Control
Offer is being made pursuant to this Section 8(c) of this Certificate of
Designation, and that all Senior Exchangeable Preferred Stock properly tendered
pursuant to such Change in Control Offer will be accepted for payment; (ii) the
purchase price and the purchase date, which will be no earlier than 30 days nor
later than 75 days from the date such notice is mailed, except as may be
otherwise required by applicable law (the "Change in Control Payment Date");
(iii) any Senior Exchangeable Preferred Stock not properly tendered will remain
outstanding and continue to accumulate dividends; (iv) unless the Company
defaults in the payment of the Change in Control Payment, all Senior
Exchangeable Preferred Stock accepted for payment pursuant to the Change in
Control Offer will cease to accumulate dividends on the Change in Control
Payment Date; (v) Holders electing to have any shares of Senior Exchangeable
Preferred Stock purchased pursuant to a Change in Control Offer will be required
to surrender such shares, properly endorsed for transfer, to the Transfer Agent
for the Senior Exchangeable Preferred Stock at the address specified in the
notice prior to the close of business on the third Business Day preceding the
Change in Control Payment Date; (vi) Holders will be entitled to withdraw their
tendered shares of Senior Exchangeable Preferred Stock and their election to
require the Company to purchase such shares, provided that the Transfer Agent
receives, not later than the close of business on the last day of the offer
period, a telegram, telex, facsimile transmission or letter setting forth the
name of the holder, the aggregate liquidation preference of the Senior
Exchangeable Preferred Stock tendered for purchase, and a statement that such
holder is withdrawing his tendered shares of Senior Exchangeable Preferred Stock
and his election to have such shares of Senior Exchangeable Preferred Stock
purchased; and (vii) that holders whose shares of Senior Exchangeable Preferred
Stock are being purchased only in part will be issued new shares of Senior
Exchangeable Preferred Stock equal in aggregate liquidation preference to the
unpurchased portion of the shares of Senior Exchangeable Preferred Stock
<PAGE>
16
surrendered, which unpurchased portion must be equal to $1,000 in aggregate
liquidation preference or an integral multiple thereof.
On the Change in Control Payment Date, the Company shall, to the
extent permitted by law, (i) accept for payment all shares of Senior
Exchangeable Preferred Stock or portions thereof properly tendered pursuant to
the Change in Control Offer, (ii) deposit with the Transfer Agent an amount in
cash equal to the aggregate Change in Control Payment in respect of all shares
of Senior Exchangeable Preferred Stock or portions thereof so tendered and (iii)
deliver, or cause to be delivered, to the Transfer Agent for cancellation the
shares of Senior Exchangeable Preferred Stock so accepted together with an
Officers' Certificate stating that such shares of Senior Exchangeable Preferred
Stock or portions thereof have been tendered to and purchased by the Company.
The Transfer Agent shall promptly mail to each holder of Senior Exchangeable
Preferred Stock the Change in Control Payment for such Senior Exchangeable
Preferred Stock, and the Transfer Agent shall promptly mail to each holder new
shares of Senior Exchangeable Preferred Stock equal in aggregate liquidation
preference to any unpurchased portion of Senior Exchangeable Preferred Stock
surrendered, if any. The Company shall publicly announce the results of the
Change in Control Offer on or as soon as practicable after the Change in Control
Payment Date.
The Company shall not, and shall not permit any Restricted Subsidiary
to, create or permit to exist or become effective any restriction (other than
restrictions existing under the Senior Credit Agreement or under Indebtedness as
in effect on the Issuance Date) that would materially impair the ability of the
Company to make a Change in Control Offer to purchase the Senior Exchangeable
Preferred Stock or, if such Change in Control Offer is made, to pay for the
Senior Exchangeable Preferred Stock tendered for purchase.
Prior to making a Change in Control Offer, the Company shall terminate
all commitments and repay in full all Indebtedness under the Senior Credit
Agreement and the Notes, respectively, and shall have obtained the requisite
consents under the Senior Credit Agreement and the Indenture to permit the
purchase of the Senior Exchangeable Preferred Stock as provided for herein.
(d) Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (i) shall not permit any Restricted Subsidiary to
issue any Capital Stock (other than to the Company or a wholly owned Restricted
Subsidiary) and (ii) shall not permit any Person (other than the Company or a
wholly owned Restricted Subsidiary) to own any Capital Stock of any Restricted
Subsidiary; provided, however, that this provision shall not prohibit (A) the
issuance and sale of all, but not less than all, of the issued and outstanding
Capital Stock of any Restricted Subsidiary owned by the Company or any of its
Restricted Subsidiaries in compliance with the other provisions herein, (B) the
ownership by other Persons of Qualified Capital Stock (other than Preferred
Stock) issued prior to the time such Restricted Subsidiary became a Subsidiary
of the Company that was neither issued in contemplation of such Subsidiary
<PAGE>
17
becoming a Subsidiary nor acquired at that time or (C) the ownership by
directors of directors' qualifying shares or the ownership by foreign nationals
of Capital Stock of any Restricted Subsidiary, to the extent mandated by
applicable law.
(e) Consolidation, Merger and Sale of Assets. The Company shall not,
in a single transaction or through a series of 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 other Person or 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 the sale, assignment,
conveyance, transfer, lease or other 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 Persons, unless at the time and
immediately after giving effect thereto:
(i) either (a) the Company shall be the continuing corporation or
(b) the Person (if other than the Company) formed by such consolidation or
into which the Company or such Restricted Subsidiary is merged or the
Person that acquires by sale, assignment, conveyance, transfer, lease or
disposition all or substantially all the properties and assets of the
Company and its Restricted Subsidiaries on a consolidated basis (the
"Surviving Entity") shall 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;
(ii) the Senior Exchangeable Preferred Stock shall be converted
into or exchanged for and shall become shares of the Surviving Entity
having in respect of the Surviving Entity the same rights and privileges
that the Senior Exchangeable Preferred Stock had immediately prior to such
transaction with respect to the Company;
(iii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis, no Voting Rights Triggering Event,
and no event that after the giving of notice or lapse of time or both
would become a Voting Rights Triggering Event, shall have occurred and be
continuing;
(iv) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (on the
assumption that the transaction or series of transactions occurred on the
first day of the four-quarter period immediately prior to the consummation
of such transaction or series of transactions with the appropriate
adjustments with respect to the transaction or series of transactions
being included in such pro forma calculation), the Company (or the
Surviving Entity, as the case may be) could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to
Section 8(a) of this Certificate of Designation; and
<PAGE>
18
(v) the Company or the Surviving Entity shall have delivered to
the Transfer Agent an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition comply with this
Certificate of Designation.
The Surviving Entity shall file an appropriate certificate of
designation with respect to the preferred stock referred to in clause (ii) above
with the Secretary of State (or similar public official) of the jurisdiction
under whose laws it is organized. In such event, the Company shall be released
from its obligations under this Certificate of Designation.
(f) Reports and Other Information. The Company shall file on a
timely basis with the Commission, to the extent such filings are accepted by the
Commission and whether or not the Company has a class of securities registered
under the Exchange Act, the annual reports, quarterly reports and other
documents that the Company would be required to file if it were subject to
Section 13 or 15 of the Exchange Act. The Company shall also (a) file with the
Transfer Agent, and provide to each holder of Senior Exchangeable Preferred
Stock, without cost to such holder, copies of such reports and documents within
15 days after the date on which the Company files such reports and documents
with the Commission or the date on which the Company would be required to file
such reports and documents if the Company were so required, and (b) if filing
such reports and documents with the Commission is not accepted by the Commission
or is prohibited under the Exchange Act, to supply at the Company's cost copies
of such reports and documents to any prospective holder of Senior Exchangeable
Preferred Stock promptly upon written request.
SECTION 9. No Reissuance of Senior Exchangeable Preferred Stock.
----------------------------------------------------
None of the shares of Senior Exchangeable Preferred Stock acquired by the
Company by reason of redemption, purchase, or otherwise shall be reissued.
SECTION 10. Business Day. If any payment or redemption shall be
------------
required by the terms hereof to be made on a day that is not a Business Day,
such payment or redemption shall be made on the immediately succeeding Business
Day.
SECTION 11. Transfer Restrictions. (a) The Series A Senior
---------------------
Preferred Stock will bear a legend to the following effect (as applicable)
unless otherwise agreed by the Company and the Holder thereof:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
<PAGE>
19
ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT
FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
(1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B)
IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED
INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF
REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH
IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144
UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER
THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OR
THIS SECURITY) AND THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE
OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
THIS SECURITY) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY
APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER,
SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR
ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT
WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR
SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE
144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E)
TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITY FOR ITS OWN
ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT
(AND IF ACQUIRING THE SECURITIES FROM SUCH AN ACCREDITED INVESTOR,
IS ACQUIRING SECURITIES HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT
LESS THAN $100,000), OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION
FROM THE
<PAGE>
20
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT
IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE
COMPANY, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT
PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D),
(E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM,
AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A
CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE
TRANSFER AGENT. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE
HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON"
HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE TRADED, EXCHANGED OR OTHERWISE TRANSFERRED UNTIL (I) JUNE 15,
1998, (II) THE OCCURRENCE OF A CHANGE IN CONTROL; (III) THE DATE ON
WHICH A PREFERRED STOCK REGISTRATION STATEMENT IS DECLARED EFFECTIVE;
(IV) IMMEDIATELY PRIOR TO ANY REDEMPTION OF SENIOR EXCHANGEABLE
PREFERRED STOCK BY THE COMPANY WITH THE PROCEEDS OF A PUBLIC EQUITY
OFFERING; OR (V) SUCH EARLIER DATE AS DETERMINED BY MERRILL LYNCH IN
ITS SOLE DISCRETION (THE DATE OF THE OCCURRENCE OF AN EVENT SPECIFIED
IN CLAUSES (I)-(V) BEING THE "SEPARATION DATE").
(b) The Transfer Agent shall refuse to register any transfer of
Series A Senior Preferred Stock in violation of the restrictions contained in
the legend provided for in Section 11(a).
(c) The legend provided for in Section 11(a) may be removed if the
Series A Senior Preferred Stock has been registered pursuant to a Preferred
Stock Shelf Registration Statement under the Securities Act. Unlegended Series
B Senior Preferred Stock may be issued in exchange for Series A Senior Preferred
Stock pursuant to a Preferred Stock Exchange Offer.
(d) At any time after the later of the Separation Date and 40 days
following the Issuance Date, upon receipt by the Transfer Agent and the Company
of a certificate substantially in the form of Exhibit A hereto, the Transfer
Agent shall authenticate and deliver one or more shares of unlegended Series A
Senior Preferred Stock in the place of shares of legended Series A Senior
Preferred Stock.
<PAGE>
21
(e) In connection with proposed transfers of Series A Senior Preferred
Stock described in Exhibit B or Exhibit C, the Transfer Agent or the Company may
require the transferor or transferee, as the case may be, to deliver the
appropriate letter attached hereto as Exhibit B or C. Each Holder of Series A
Senior Preferred Stock shall notify the Company or the Transfer Agent in the
event of any transfer by such Holder of any shares of Series A Senior Preferred
Stock to a foreign transferee.
SECTION 12. Definitions. As used in this Certificate of Designation,
-----------
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at
the time such Person becomes a Subsidiary or (b) assumed in connection with the
acquisition of assets from such Person. 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.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or (c) any executive officer or director of any such specified Person or
other Person or (d) 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. 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 the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Average Life" means, as of the date of determination with respect to
any Indebtedness or Senior Exchangeable Preferred Stock, the quotient obtained
by dividing (a) the sum of the products of (i) the number of years from the date
of determination to the date or dates of each successive scheduled principal
payment (including, without limitation, any sinking fund requirements) or
liquidation value payment of such Indebtedness or Senior Exchangeable Preferred
Stock, respectively, multiplied by (ii) the amount of each such principal or
liquidation value payment by (b) the sum of all such principal or liquidation
value payments.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any duly authorized committee of such board.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Transfer Agent.
<PAGE>
22
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York City are
authorized or obligated by law, regulation or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's capital stock, and any rights (other than
debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock, whether now outstanding
or issued after the Issuance Date.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purpose of this Certificate of Designation, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Cash Equivalents" means: (a) any evidence of Indebtedness with a
maturity of one year or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (b) certificates of deposit or acceptances with a
maturity of one year or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500 million; (c) commercial paper with a maturity of
one year or less issued by a corporation that is not an Affiliate of the Company
and is organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1 by S&P or any successor rating
agency or at least P-1 by Moody's or any successor rating agency; (d) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (a) and (b) above; and (e) demand and time
deposits with a domestic commercial bank that is a member of the Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500 million.
"Change in Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, 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
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
Company and either (x) the Permitted Holders beneficially own, directly or
indirectly, in the aggregate Voting Stock of the Company that represents a
lesser percentage of the aggregate ordinary voting power of all classes of the
Voting Stock of the Company, voting together as a single class, than such other
person or group and are not entitled (by voting power, contract or otherwise) to
elect directors of the Company having a majority of the total voting power of
the Board of Directors, or (y) such other person or group is entitled to elect
directors of the Company having a majority of the total voting power of the
Board
<PAGE>
23
of Directors; (b) the Company consolidates with, or merges with or into, another
Person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, 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 (i) where the outstanding Voting Stock of the Company is not
converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company) or is converted into
or exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation and cash, securities
and other property (other than Capital Stock of the surviving or transferee
corporation) in an amount that could be paid by the Company as a Restricted
Payment as described under Section 8(b) of this Certificate of Designation and
(ii) immediately after such transaction, no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted
Holders, 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 or transferee corporation and either (x) the Permitted Holders
beneficially own, directly or indirectly, in the aggregate Voting Stock of the
surviving or transferee corporation that represents a lesser percentage of the
aggregate ordinary voting power of all classes of the Voting Stock of the
surviving or transferee corporation, voting together as a single class, than
such other person or group and are not entitled (by voting power, contract or
otherwise) to elect directors of the Surviving Entity having a majority of the
total voting power of the Board of Directors, or (y) such other person or group
is entitled to elect directors of the surviving or transferee corporation having
a majority of the total voting power of the elected Board of Directors; or (c)
during any consecutive two-year period, 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 of Directors, 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 the Board of
Directors of the Company then in office; or (d) 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 Section 8(e) of
this Certificate of Designation.
"Change in Control Offer" has the meaning specified in Section 8(c)
hereof.
"Change in Control Payment" has the meaning specified in Section 8(c)
hereof.
"Change in Control Payment Date" has the meaning specified in Section
8(c) hereof.
<PAGE>
24
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issuance Date or issued after the Issuance Date, and includes, without
limitation, all series and classes of such common stock.
"Company" means the Person named as the "Company" in the first
paragraph of this Certificate of Designation until a successor Person shall have
become such pursuant to the applicable provisions of this Certificate of
Designation, and thereafter "Company" shall mean such successor Person.
"Consolidated Adjusted Net Income" means, for any period, the
consolidated net income (or loss) of the Company and all Restricted Subsidiaries
for such period as determined in accordance with GAAP, adjusted by excluding,
without duplication, (a) any net after-tax extraordinary gains or losses (less
all fees and expenses relating thereto), (b) any net after-tax gains or losses
(less all fees and expenses relating thereto) attributable to asset dispositions
other than in the ordinary course of business, (c) the portion of net income (or
loss) of any Person (other than the Company or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which the Company or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any Restricted
Subsidiary in cash dividends or distributions during such period, (d) the net
income (or loss) of any Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination, (e) the net income of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary is not at the date of determination 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 such Restricted Subsidiary or its stockholders, and (f)
for purposes of calculating Consolidated Adjusted Net Income under Section 8(b)
of this Certificate of Designation, any net income (or loss) from any Restricted
Subsidiary while it was an Unrestricted Subsidiary at any time during such
period other than any amounts actually received from such Restricted Subsidiary
during such period.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for
any period, the ratio of (a) the sum of Consolidated Adjusted Net Income and, to
the extent deducted in computing Consolidated Adjusted Net Income, Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges, in each case, for such period to (b) the Consolidated Interest Expense
for such period.
"Consolidated Income Tax Expense" means, for any period, the provision
for federal, state, local and foreign income taxes of the Company and all
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
<PAGE>
25
"Consolidated Interest Expense" means, for any period, without
duplication, (1) the sum of (a) the interest expense of the Company and its
Restricted Subsidiaries for such period, including, without limitation, (i)
amortization of debt discount, (ii) the net cost of Interest Rate Agreements
(including amortization of discounts), (iii) the interest portion of any
deferred payment obligation and (iv) amortization of debt issuance costs, plus
(b) the interest component of Capitalized Lease Obligations of the Company and
its Restricted Subsidiaries during such period, plus (c) cash dividends due
(whether or not declared) on Preferred Stock by the Company and any Restricted
Subsidiary, plus (d) cash dividends due (whether or not declared) on Redeemable
Capital Stock by the Company and any Restricted Subsidiary, in each case as
determined on a consolidated basis in accordance with GAAP, less (2) interest on
the Exchange Debentures outstanding on the Exchange Date paid in kind with
Exchange Debentures and on Exchange Debentures so issued as payment in kind
interest, all in accordance with the Exchange Indenture as in effect on the
Issuance Date; provided that (x) 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 the Company, a fixed or floating rate of interest,
shall be computed by applying at the option of the Company, either the fixed or
floating rate, and (y) in making such computation, the Consolidated Interest
Expense 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; provided
further that, notwithstanding the foregoing, the interest rate with respect to
any Indebtedness covered by any Interest Rate Agreement shall be deemed to be
the effective interest rate with respect to such Indebtedness after taking into
account such Interest Rate Agreement.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization, depletion and other non-cash expenses of the Company
and any Restricted Subsidiary reducing Consolidated Adjusted Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge that requires an accrual of or reserve for cash charges
for any future period).
"corporation" includes corporations, associations, companies and
business trusts.
"Currency Agreements" means any spot or forward foreign exchange
agreements and currency swap, currency option or other similar financial
agreements or arrangements entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and designed to protect against
or manage exposure to fluctuations in foreign currency exchange rates.
"Debenture Guarantee" means any guarantee of the obligations of the
Company under the Exchange Indenture and the Exchange Debentures by any
Restricted Subsidiary in accordance with the provisions of the Exchange
Indenture.
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26
"Dividend Payment Date" means each March 15, June 15, September 15 and
December 15 of each year on which dividends shall be paid or are payable, any
Redemption Date and any other date on which dividends in arrears may be paid.
"Dividend Rate" has the meaning specified in Section 2(a) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Exchange Date" has the meaning specified in Section 4(a) hereof.
"Exchange Debentures" means the 13 1/4% Subordinated Exchange
Debentures due 2009 of the Company issuable in exchange for the Senior
Exchangeable Preferred Stock, at the option of the Company, plus any additional
Exchange Debentures issued in lieu of cash interest, pursuant to the Exchange
Indenture as in effect on the Issuance Date.
"Exchange Indenture" means the Indenture dated as of December 29, 1997
among the Company, the Subsidiary Debenture Guarantors and United States Trust
Company of New York, as trustee, relating to the Exchange Debentures.
"Exchange Notice" has the meaning specified in Section 4(a) hereof.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States consistently applied, that
are in effect on the Issuance Date.
"guarantee" means, as applied to any obligation, (a) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Headquarters Facility" means the headquarters facility and warehouse
of the Company as of the Issuance Date located in Dallas, Texas.
"Holder" has the meaning specified in Section 2(a) hereof.
"Indebtedness" means, with respect to any Person, without duplication,
(a) all liabilities of such Person for borrowed money (including overdrafts) or
for the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred in the ordinary course
of business, but including, without limitation, all obligations,
<PAGE>
27
contingent or otherwise, of such Person in connection with any letters of credit
and acceptances issued under letter of credit facilities, acceptance facilities
or other similar facilities, (b) all obligations of such Person evidenced by
bonds, notes, debentures or other similar instruments, (c) all indebtedness of
such Person 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, (d) all
Capitalized Lease Obligations of such Person, (e) all obligations of such Person
under or in respect of Interest Rate Agreements or Currency Agreements, (f) all
Indebtedness referred to in (but not excluded from) the preceding clauses 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 (the amount of such obligation being deemed to be
the lesser of the value of such property or asset and the amount of the
obligation so secured), (g) all guarantees by such Person of Indebtedness
referred to in this definition of any other Person and (h) all Redeemable
Capital Stock of such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends.
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 this Certificate of Designation, and if
such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value shall be determined in good
faith by the board of directors of the issuer of such Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection
agreements and other types of interest rate hedging agreements (including,
without limitation, interest rate swaps, caps, floors, collars and similar
agreements) designed to protect against or manage exposure to fluctuations in
interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee 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 or evidences of Indebtedness 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. In addition, the fair market
value of the net assets of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed
to be an "Investment" made by the Company in such Unrestricted Subsidiary at
such time. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
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28
"Issuance Date" means the date on which the Senior Exchangeable
Preferred Stock is originally issued under this Certificate of Designation.
"Junior Securities" has the meaning specified in Section 7 hereof.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), privilege, security interest, hypothecation, assignment for
security, claim, or preference or priority or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property which such Person has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Management Stock" means the Capital Stock of the Company and the
options to acquire Capital Stock of the Company owned by Lloyd L. Ross and Jerry
M. Smith as of the Issuance Date together with Preferred Stock issued as payment
in kind dividends on such Preferred Stock and any shares of Preferred Stock
issued as payment in kind dividends thereon, such dividends made pursuant to the
terms of the certificate of designation or the certificate of incorporation, as
the case may be, for such Preferred Stock as in effect on the Issuance Date.
"Mandatory Redemption Date" has the meaning specified in Section 6(b)
hereof.
"Notes" means the 11% Senior Subordinated Notes due 2007 of the
Company, issuable pursuant to the Notes Indenture.
"Notes Indenture" means the Indenture dated as of December 29, 1997
among the Company, the Subsidiary Guarantors and Harris Trust and Savings Bank,
as trustee, relating to the Notes.
"Note Guarantee" means any guarantee of the obligations of the Company
under the Notes Indenture and the Notes by the Subsidiary Guarantors in
accordance with the provisions of the Notes Indenture.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer or a Vice President, and by the Treasurer,
an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company,
and delivered to the Transfer Agent.
"Opinion of Counsel" means a written opinion of legal counsel, which
and who may be counsel for the Company, including an employee of the Company,
and who shall be reasonably acceptable to the Transfer Agent.
"Parity Securities" has the meaning specified in Section 8 hereof.
<PAGE>
29
"Permitted Holders" means, as of the date of determination, Madison
Dearborn Capital Partners II, L.P. and its Affiliates.
"Permitted Indebtedness" means any of the following:
(a) (i) Indebtedness of the Company under the Senior Credit Agreement
in an aggregate principal amount at any one time outstanding not to exceed
the sum of (A) $110 million less the amount of any permanent reductions
made by the Company in respect of any term loans under the Senior Credit
Agreement and (B) with respect to revolving borrowings, the greater of (1)
$115 million and (2) 60% of the Eligible Inventory (as defined in the
Senior Credit Agreement on the Issuance Date) of the Company and the
Restricted Subsidiaries and (ii) any guarantee by a Subsidiary Debenture
Guarantor of Indebtedness incurred under this clause (a);
(b) Indebtedness of the Company pursuant to the Notes or of any
Restricted Subsidiary pursuant to a Note Guarantee;
(c) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the date of the Exchange Indenture and listed on a schedule
thereto;
(d) Indebtedness of the Company owing to any wholly owned Restricted
Subsidiary; provided that any Indebtedness of the Company owing to any
such Restricted Subsidiary is subordinated in right of payment from and
after such time as the Exchange Debentures shall become due and payable
(whether at Stated Maturity, acceleration or otherwise) to the payment and
performance of the Company's obligations under such Exchange Debentures;
provided further that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to
the Company or another wholly owned Restricted Subsidiary) shall be deemed
to be an incurrence of such Indebtedness by the Company not permitted by
this clause (d);
(e) Indebtedness of a Restricted Subsidiary owing to the Company or
to another wholly owned Restricted Subsidiary; provided that any such
Indebtedness is subordinated in right of payment to the Debenture
Guarantee of such Subsidiary Debenture Guarantor; provided further that
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 such Restricted Subsidiary not permitted by this clause
(e);
(f) guarantees of any Restricted Subsidiary made in accordance with
the provisions of Section 1015, "Limitation on Guarantees of Indebtedness
by Restricted Subsidiaries," of the Notes Indenture;
<PAGE>
30
(g) obligations of the Company or any Subsidiary Debenture Guarantor
entered into in the ordinary course of business (i) 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, which
obligations do not exceed the aggregate principal amount of such
Indebtedness and (ii) pursuant to Currency Agreements entered into by the
Company or any of its Restricted Subsidiaries in respect of its (x) assets
or (y) obligations, as the case may be, denominated in a foreign currency;
(h) Indebtedness of the Company or any Subsidiary Debenture Guarantor
in respect of Purchase Money Obligations and Capitalized Lease Obligations
of the Company or any Subsidiary Debenture Guarantor in an aggregate
amount which does not exceed $15,000,000 at any one time outstanding;
(i) Indebtedness of the Company or any Subsidiary Debenture Guarantor
consisting of guarantees, indemnities or obligations in respect of
purchase price adjustments in connection with the acquisition or
disposition of assets, including, without limitation, shares of Capital
Stock of Restricted Subsidiaries;
(j) Indebtedness of the Company or any Subsidiary Debenture Guarantor
represented by (x) letters of credit for the account of the Company or any
Restricted Subsidiary or (y) other obligations to reimburse third parties
pursuant to any surety bond or other similar arrangements, which letters
of credit or other obligations, as the case may be, are intended to
provide security for workers' compensation claims, payment obligations in
connection with self-insurance or other similar requirements in the
ordinary course of business;
(k) Acquired Indebtedness of any Restricted Subsidiary that is
organized outside of the United States of America in an aggregate amount
which, together with any Indebtedness permitted to be incurred pursuant to
this clause (k) and refinanced pursuant to clause (p) below, does not
exceed $10,000,000 at any one time outstanding;
(l) Indebtedness of the Company owing to Jerry M. Smith under a note
issued pursuant to a written agreement between the Company and Jerry M.
Smith as in effect on the Issuance Date, in consideration for the
repurchase of Common Stock of the Company owned by Jerry M. Smith at his
retirement, in an aggregate amount not to exceed $15,000,000 outstanding
at any time;
(m) Preferred Stock issued as payment in kind dividends on Preferred
Stock outstanding on the Issuance Date and any shares of Preferred Stock
issued as payment in kind dividends thereon, such dividends made pursuant
to the terms of the certificate of
<PAGE>
31
designation or the certificate of incorporation, as the case may be, for
such Preferred Stock as in effect on the Issuance Date;
(n) Indebtedness of the Company or a Subsidiary Debenture Guarantor
incurred in connection with the Company's Headquarters Facility or the
purchase or construction of a new headquarters facility, in each case, as
permitted under the Senior Credit Agreement as in effect on the Issuance
Date;
(o) Indebtedness of the Company or any Subsidiary Debenture Guarantor
not otherwise permitted by the foregoing clauses (a) through (n) in an
aggregate principal amount not in excess of $20,000,000 at any one time
outstanding; and
(p) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
Indebtedness, referred to in clauses (b), (c) and (k) of this definition,
including any successive refinancings, so long as (i) any such new
Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for
an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of the
date of determination) so refinanced, plus the lesser of the amount of any
premium required to be paid in connection with such refinancing pursuant
to the terms of the Indebtedness refinanced or the amount of any premium
reasonably determined as necessary to accomplish such refinancing, (ii)
such new Indebtedness has an Average Life longer than the Average Life of
the Senior Exchangeable Preferred Stock and a final Stated Maturity later
than the Mandatory Redemption Date and (iii) Indebtedness of the Company
or a Subsidiary Debenture Guarantor may only be refinanced with
Indebtedness of the Company or a Subsidiary Debenture Guarantor and
Indebtedness of a Restricted Subsidiary may only be refinanced with
Indebtedness of a Restricted Subsidiary and Indebtedness of a Restricted
Subsidiary that is not a Subsidiary Debenture Guarantor may only be
refinanced with Indebtedness of such Restricted Subsidiary.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments in the Company or any wholly owned Restricted
Subsidiary;
(c) intercompany Indebtedness to the extent permitted under clause
(d) or (e) of the definition of "Permitted Indebtedness;"
(d) Investments in an amount not to exceed $10,000,000 at any one
time outstanding;
<PAGE>
32
(e) Investments by the Company or any Restricted Subsidiary in
another Person, if as a result of such Investment (i) such other Person
becomes a wholly owned Restricted Subsidiary or (ii) such Person, in one
transaction or a series of related transactions, is merged or consolidated
with or into, or transfers or conveys all or substantially all of its
assets to, the Company or a wholly owned Restricted Subsidiary;
(f) bonds, notes, debentures and other securities received as
consideration for Assets Sales to the extent permitted under Section 1014
of the Notes Indenture;
(g) negotiable instruments held for deposit or collection in the
ordinary course of business, except to the extent they would constitute
Investments in Affiliates; or
(h) Investments in the form of the sale (on a "true-sale" non-
recourse basis) or the servicing of receivables transferred from the
Company or any Restricted Subsidiary.
"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 and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding, or issued
after the Issuance Date, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Preferred Stock Exchange Offer" means an offer by the Company to
exchange the Series A Senior Preferred Stock for the Series B Senior Preferred
Stock pursuant to an effective registration statement.
"Preferred Stock Shelf Registration Statement" means a shelf
registration statement which becomes effective and covers resales of the Series
A Senior Preferred Stock.
"Public Equity Offering" means an offer and sale of common stock
(which is Qualified Capital Stock) of the Company made on a primary basis by the
Company 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-8 or otherwise relating to equity securities issuable under
any employee benefit plan of the Company).
"Purchase Money Obligations" means, with respect to any Person,
obligations, other than Capitalized Lease Obligations, incurred or assumed in
the ordinary course of business in connection with the purchase of property to
be used in the business of such Person within 90
<PAGE>
33
days of such purchase, provided that the amount of any Purchase Money Obligation
shall not exceed the purchase price of the property purchased.
"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 class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract 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 Exchange Debentures or is redeemable at the
option of the holder thereof at any time prior to such final Stated Maturity, or
is convertible into or exchangeable for debt securities at any time prior to
such final Stated Maturity.
"Redemption Date" has the meaning specified in Section 6(a)(i)
hereof.
"Redemption Notice" has the meaning specified in Section 6(c)(i)
hereof.
"Redemption Price" means the price at which the Senior Exchangeable
Preferred Stock may be redeemed.
"Restricted Payment" has the meaning specified in Section 8(b)
hereof.
"Restricted Subsidiary" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; provided,
however, that upon the occurrence of any Unrestricted Subsidiary ceasing to be
an Unrestricted Subsidiary, such Subsidiary shall be included in the definition
of "Restricted Subsidiary."
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Senior Credit Agreement" means the credit agreement dated as of
December 29, 1997 among the Company, the Subsidiary Debenture Guarantors, the
several lenders parties thereto, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as arranger and syndication agent, and Fleet
National Bank, as administrative agent, as such agreement may be amended,
renewed, extended, substituted, restated, refinanced, restructured,
supplemented, increased or otherwise modified from time to time (including,
without limitation, any successive amendments, renewals, extensions,
substitutions, restatements, refinancings, restructurings, supplements or other
modifications of the foregoing); provided that, with respect to any agreement
providing for the refinancing of Indebtedness under the Senior Credit Agreement,
such agreement shall be the Senior Credit Agreement under the Exchange Indenture
only if a notice to that effect is delivered by the Company to the Transfer
Agent and there shall be at any time only one instrument that is the Senior
Credit Agreement under this Certificate of Designation.
<PAGE>
34
"Senior Exchangeable Preferred Stock" has the meaning set forth in
Section 1 hereof.
"Senior Securities" has the meaning specified in Section 7 hereof.
"Series A Senior Preferred Stock" has the meaning set forth in
Section 1 hereof.
"Series B Preferred" means the Series B-1 Cumulative Junior Redeemable
Preferred Stock of the Company, par value $.01 per share and the Series B-2
Cumulative Junior Perpetual Preferred Stock of the Company, par value $.01 per
share, in each case authorized pursuant to the Certificate of Incorporation.
"Series B Senior Preferred Stock" has the meaning set forth in
Section 1 hereof.
"Stated Maturity" means, when used with respect to any Exchange
Debenture or any installment of interest thereon, the date specified in such
Exchange Debenture as the fixed date on which the principal of such Exchange
Debenture or such installment of interest is due and payable, and, when used
with respect to any other Indebtedness, means the date specified in the
instrument governing such Indebtedness as the fixed date on which the principal
of such Indebtedness, or any installment of interest thereon, is due and
payable.
"Subsidiary" means any Person a majority of the equity ownership or
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries or by the Company and one or more
other Subsidiaries.
"Subsidiary Debenture Guarantor" means each of TMI Holdings Inc., a
Delaware corporation, Tuesday Morning Inc., a Texas corporation, Friday Morning,
Inc., a Texas corporation, and TMIL Corporation, a Delaware corporation, and any
Restricted Subsidiary that would be required to incur a Debenture Guarantee
under the Exchange Indenture; provided that, if such Person would be released
and discharged from its Debenture Guarantee in accordance with the Exchange
Indenture, such Person shall cease to be a Subsidiary Debenture Guarantor.
"Subsidiary Guarantor" means each of TMI Holdings Inc., a Delaware
corporation, Tuesday Morning Inc., a Texas corporation, Friday Morning, Inc., a
Texas corporation, and TMIL Corporation, a Delaware corporation, and any
Restricted Subsidiary that incurs a Notes Guarantee under the Notes Indenture;
provided that, upon the release and discharge of any Person from its Notes
Guarantee in accordance with the Notes Indenture, such Person shall cease to be
a Subsidiary Guarantor.
"Transfer Agent" means United States Trust Company of New York or any
successor transfer agent.
<PAGE>
35
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force on the date on which this Certificate of Designation was filed.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of the Company, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary; provided, however, that in no event shall any
Subsidiary Debenture Guarantor be an Unrestricted Subsidiary. The Board of
Directors of the Company may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as
(i) neither the Company nor any Restricted Subsidiary is directly or indirectly
liable for any Indebtedness of such Subsidiary, (ii) no default with respect to
any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or
otherwise) any holder of any other Indebtedness of the Company or any Restricted
Subsidiary to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity, (iii) any
Investment in such Subsidiary made as a result of designating such Subsidiary an
Unrestricted Subsidiary will not violate the provisions of Section 1019
"Limitation on Unrestricted Subsidiaries," of the Exchange Indenture, (iv)
neither the Company nor any Restricted Subsidiary has a contract, agreement,
arrangement, understanding or obligation of any kind, whether written or oral,
with such Subsidiary other than those that might be obtained at the time from
Persons who are not Affiliates of the Company, and (v) neither the Company nor
any Restricted Subsidiary has any obligation (1) to subscribe for additional
shares of Capital Stock or other equity interest in such Subsidiary, or (2) to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results. Any such designation
by the Board of Directors of the Company shall be evidenced to the Transfer
Agent by filing a Board Resolution with the Transfer Agent giving effect to such
designation. The Board of Directors of the Company may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if immediately after giving
effect to such designation, there would be no Voting Rights Triggering Event
under this Certificate of Designation and the Company could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to Section
8(a) of this Certificate of Designation.
"Voting Rights Triggering Event" has the meaning set forth above in
Section 5(b) hereof.
"Voting Stock" means any class or classes of Capital Stock 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 any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
<PAGE>
IN WITNESS WHEREOF, the Company has caused the Certificate of
Designation to be duly executed in its corporate name on this 29th day of
December, 1997.
TUESDAY MORNING CORPORATION
By:_____________________________________________
Name: Jerry M. Smith
Title: Chief Executive Officer and
President
By:_____________________________________________
Name: Mark E. Jarvis
Title: Senior Vice President, Chief Financial
Officer and Secretary
This instrument was acknowledged before me on December 29, 1997 by
Mark E. Jarvis, as Secretary of Tuesday Morning Corporation.
_______________________________________________
Notary Public
(Seal, if any)
<PAGE>
EXHIBIT A
---------
Form of Certificate as to
Completion of Distribution and
Termination of Restricted Period
--------------------------------
[Date]
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Administration
Re: Tuesday Morning Corporation (the "Company") 13 1/4%
Series A Senior Exchangeable Preferred Stock
(the "Series A Senior Preferred Stock") and 13 1/4% Series B
Senior Exchangeable Preferred Stock (the "Series B Senior
----------------------------------------------------------
Preferred Stock")
-----------------
Ladies and Gentlemen:
This letter relates to [insert number of shares] shares of Series A
Senior Preferred Stock represented by the attached Certificate (the "Legended
Certificate") which bears a legend outlining restrictions upon transfer of such
Legended Certificate. Pursuant to Section 11(d) of the Certificate of
Designation (the "Certificate of Designation") filed with the Secretary of State
of the State of Delaware on December 29, 1997 relating to the Series A Senior
Preferred Stock and the Series B Senior Preferred Stock, we hereby certify that
we are a person outside the United States to whom the Series A Senior Preferred
Stock could be transferred in accordance with Rule 904 of Regulation S
promulgated under the Securities Act of 1933, as amended. Accordingly, you are
hereby requested to exchange the shares of Series A Senior Preferred Stock
represented by the Legended Certificate for a like number of shares of Series A
Senior Preferred Stock, which shall be represented by the attached Certificate
(the "Unlegended Certificate"), which does not bear a legend outlining
restrictions upon the transfer of such Unlegended Certificate, all in the manner
provided for in the Certificate of Designation.
<PAGE>
A-2
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Signature of Holder]
<PAGE>
EXHIBIT B
---------
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
-----------------------------------------
[Date]
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Administration
Re: Tuesday Morning Corporation (the "Company") 13 1/4% Series A
Senior Exchangeable Preferred Stock (the "Securities")
------------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of [insert number of shares]
shares of the Securities, we confirm that:
1. The undersigned agrees to be bound by, and not to resell, pledge
or otherwise transfer the Securities, except in compliance with, such
restrictions and conditions and the Securities Act of 1933, as amended (the
"Securities Act").
2. We understand that the offer and sale of the Securities have not
been registered under the Securities Act, and that the Securities my not be
offered at sold except as permitted in the following sentence. We agree, on
our own behalf and on behalf of any accounts for which we are acting as
hereinafter stated, that if we should sell any Securities, we will do so
only (A) to the Company or any subsidiary thereof, (B) in accordance with
Rule 144A under the Securities Act to a "qualified institutional buyer" (as
defined therein), (C) to an institutional "accredited investor" (as defined
below) that, prior to such transfer, furnishes (or has furnished on its
behalf by a U.S. broker-dealer) to you and to the Company a signed letter
substantially in the form of this letter and, if requested by the Company,
an opinion of counsel acceptable to the Company that such transfer is in
compliance with the Securities Act, (D) outside the United States in
accordance with Rule 904 of Regulation S under the Securities Act, (E)
pursuant to the exemption from registration provided by Rule 144 under the
Securities Act, or (F) pursuant to an effective registration statement
under the Securities Act, and
<PAGE>
B-2
we further agree to provide to any person purchasing any of the Securities
from us a notice advising such purchaser that resales of the Securities are
restricted as stated herein.
3. We understand that, on any proposed resale of any Securities or
Conversion Shares, we will be required to furnish to you and the Company
such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies
with the foregoing restrictions. We further understand that the Securities
purchased by us will bear a legend to the effect set out in paragraph 2.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to
be capable at evaluating the merits and risks of our investment in the
Securities and we and any accounts for which we are acting are each able to
bear the economic risk of our or its investment.
5. We are acquiring the Securities purchased by us for our own
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
Very truly yours,
[Signature of Holder]
<PAGE>
EXHIBIT C
---------
Form of Certificate to Be
Delivered in Connection with
Transfers Pursuant to Regulation S
----------------------------------
[Date]
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Administration
Re: Tuesday Morning Corporation (the "Company") 13 1/4% Series A
Senior Exchangeable Preferred Stock (the "Securities")
------------------------------------------------------------
Ladies and Gentlemen
In connection with our proposed sale of [insert number of shares]
shares of the Securities, we confirm that such sale has been effected pursuant
to and in accordance with Regulation S under the Securities Act of 1933, as
amended, and, accordingly, we represent that:
(1) the offer of the Securities was not made to a person in the
United States;
(2) either (a) at the time the buy order was originated, the
transferee was outside the United States or we and any person acting on our
behalf reasonably believed that the transferee was outside the United
States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been pre-
arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act of 1933.
<PAGE>
C-2
In addition, if the sale is made during a restricted period and the
provisions of Rule 903(c)(2) or (3) or Rule 904(c)(1) of Regulation S are
applicable thereto, we confirm that such sale has been made in accordance with
the applicable provisions of Rule 903(c)(2) or (3) or Rule 904(c)(1), as the
case may be.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Signature of Holder]
<PAGE>
Exhibit 3.3
AMENDED AND RESTATED BY-LAWS
OF
TUESDAY MORNING CORPORATION
A Delaware corporation
(Effective as of December 29, 1997)
ARTICLE I
---------
OFFICES
-------
Section 1. Registered Office. The registered office of the corporation in
--------- -----------------
the State of Delaware shall be located at 1209 Orange Street, Corporation Trust
Center, Wilmington, Delaware, County of New Castle 19805. The name of the
corporation's registered agent at such address shall be The Corporation Trust
Company. The registered office and/or registered agent of the corporation may
be changed from time to time by action of the board of directors.
Section 2. Other Offices. The corporation may also have offices at such
--------- -------------
other places, both within and without the State of Delaware, as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place and Time of Meetings. An annual meeting of the
--------- --------------------------
stockholders shall be held each year within one hundred fifty (150) days after
the close of the immediately preceding fiscal year of the corporation for the
purpose of electing directors and conducting such other proper business as may
come before the meeting. The date, time and place of the annual meeting shall
be determined by the president of the corporation; provided, that if the
president does not act, the board of directors shall determine the date, time
and place of such meeting.
Section 2. Special Meetings. Special meetings of stockholders may be
--------- ----------------
called for any purpose and may be held at such time and place, within or without
the State of Delaware, as shall be stated in a notice of meeting or in a duly
executed waiver of notice thereof. Such meetings may be called at any time by
the board of directors or the president and shall be called by the president
upon the written request of holders of shares entitled to cast not less than
twenty-five percent (25%) of the votes at the meeting, such written request
shall state the purpose or purposes of the meeting and shall be delivered to the
president.
<PAGE>
Section 3. Place of Meetings. The board of directors may designate any
--------- -----------------
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
corporation.
Section 4. Notice. Whenever stockholders are required or permitted to
--------- ------
take action at a meeting, written or printed notice stating the place, date,
time, and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than ten (10) nor more than sixty (60) days before the date of the meeting.
All such notices shall be delivered, either personally or by mail, by or at the
direction of the board of directors, the president or the secretary, and if
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, postage prepaid, addressed to the stockholder at his, her or its
address as the same appears on the records of the corporation. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends for the express purpose of objecting at the beginning of
the meeting to the transaction of any business because the meeting is not
lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock
--------- -----------------
ledger of the corporation shall make, at least ten (10) days before every
meeting of the stockholders, a complete list of the stockholders entitled to
vote at such meeting arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 6. Quorum. The holders of a majority of the outstanding shares of
--------- ------
capital stock, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders, except as otherwise provided by
statute or by the certificate of incorporation. If a quorum is not present, the
holders of a majority of the shares present in person or represented by proxy at
the meeting, and entitled to vote at the meeting, may adjourn the meeting to
another time and/or place.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
--------- ------------------
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
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<PAGE>
Section 8. Vote Required. When a quorum is present, the affirmative vote
--------- -------------
of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the question is one upon which by express provisions of an
applicable law or of the certificate of incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 9. Voting Rights. Except as otherwise provided by the General
--------- -------------
Corporation Law of the State of Delaware or by the certificate of incorporation
of the corporation or any amendments thereto and subject to Section 3 of Article
VI hereof, every stockholder shall at every meeting of the stockholders be
entitled to one (1) vote in person or by proxy for each share of common stock
held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
---------- -------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three (3) years
from its date, unless the proxy provides for a longer period. A duly executed
proxy shall be irrevocable if it states that it is irrevocable and if, and only
as long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy. At each meeting of the
stockholders, and before any voting commences, all proxies filed at or before
the meeting shall be submitted to and examined by the secretary or a person
designated by the secretary, and no shares may be represented or voted under a
proxy that has been found to be invalid or irregular.
Section 11. Action by Written Consent. Unless otherwise provided in the
---------- -------------------------
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken and bearing the dates of
signature of the stockholders who signed the consent or consents, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the corporation by delivery to its registered office in
the state of Delaware, or the corporation's principal place of business, or an
officer or agent of the corporation having custody of the book or books in which
proceedings of meetings of the stockholders are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested provided, however, that no consent or consents
delivered by certified or registered mail shall be deemed delivered until such
consent or consents are actually received at the registered office. All
consents properly delivered in accordance with this section shall be deemed to
be recorded when so delivered. No written consent shall be effective to take the
corporate action referred to therein
-3-
<PAGE>
unless, within sixty (60) days of the earliest dated consent delivered to the
corporation as required by this section, written consents signed by the holders
of a sufficient number of shares to take such corporate action are so recorded.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing. Any action taken pursuant to such written consent or
consents of the stockholders shall have the same force and effect as if taken by
the stockholders at a meeting thereof.
ARTICLE III
-----------
DIRECTORS
---------
Section 1. General Powers. The business and affairs of the corporation
--------- --------------
shall be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. The number of directors
--------- -----------------------------------
which shall constitute the first board shall be five (5). Thereafter, the
number of directors shall be established from time to time by resolution of the
board. The directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote in
the election of directors. The directors shall be elected in this manner at the
annual meeting of the stockholders, except as provided in Section 4 of this
Article III. Each director elected shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal and Resignation. Any director or the entire board of
--------- -----------------------
directors may be removed at any time, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the provisions of the corporation's certificate of incorporation,
the provisions of this section shall apply, in respect to the removal without
cause of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class or series and not to the vote of the
outstanding shares as a whole. Any director may resign at any time upon written
notice to the corporation.
Section 4. Vacancies. Vacancies and newly created directorships resulting
--------- ---------
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director. Each director so chosen shall hold office until a
successor is duly elected and qualified or until his or her earlier death,
resignation or removal as herein provided.
Section 5. Annual Meetings. The annual meeting of each newly elected
--------- ---------------
board of directors shall be held without other notice than this by-law
immediately after, and at the same place as, the annual meeting of stockholders.
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<PAGE>
Section 6. Other Meetings and Notice. Regular meetings, other than the
--------- -------------------------
annual meeting, of the board of directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the board of directors may be called by or at
the request of the president on at least twenty-four (24) hours notice to each
director, either personally, by telephone, by mail, or by telegraph.
Section 7. Quorum, Required Vote and Adjournment. A majority of the total
--------- -------------------------------------
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of directors present at a meeting at which a quorum is
present shall be the act of the board of directors. If a quorum shall not be
present at any meeting of the board of directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 8. Committees. The board of directors may, by resolution passed
--------- ----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation, which
to the extent provided in such resolution or these by-laws shall have and may
exercise the powers of the board of directors in the management and affairs of
the corporation except as otherwise limited by law. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 9. Committee Rules. Each committee of the board of directors may
--------- ---------------
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. In the event that a member and that
member's alternate, if alternates are designated by the board of directors as
provided in Section 8 of this Article III, of such committee is or are absent or
disqualified, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the board of directors to act
at the meeting in place of any such absent or disqualified member.
Section 10. Communications Equipment. Members of the board of directors
---------- ------------------------
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.
Section 11. Waiver of Notice and Presumption of Assent. Any member of the
---------- ------------------------------------------
board of directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of
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<PAGE>
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened. Such member shall be
conclusively presumed to have assented to any action taken unless his or her
dissent shall be entered in the minutes of the meeting or unless his or her
written dissent to such action shall be filed with the person acting as the
secretary of the meeting before the adjournment thereof or shall be forwarded by
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to any member
who voted in favor of such action.
Section 12. Action by Written Consent. Unless otherwise restricted by the
---------- -------------------------
certificate of incorporation, any action required or permitted to be taken at
any meeting of the board of directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
ARTICLE IV
----------
OFFICERS
--------
Section 1. Number. The officers of the corporation shall be elected by
--------- ------
the board of directors and shall consist of a president, one or more vice-
presidents, secretary, a treasurer, and such other officers and assistant
officers as may be deemed necessary or desirable by the board of directors. Any
number of offices may be held by the same person. In its discretion, the board
of directors may choose not to fill any office for any period as it may deem
advisable, except that the offices of president and secretary shall be filled as
expeditiously as possible.
Section 2. Election and Term of Office. The officers of the corporation
--------- ---------------------------
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as conveniently
may be. The president shall be elected annually by the board of directors at
the first meeting of the board of directors held after each annual meeting of
stockholders or as soon thereafter as conveniently may be. The president shall
appoint other officers to serve for such terms as he or she deems desirable.
Vacancies may be filled or new offices created and filled at any meeting of the
board of directors. Each officer shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the board of
--------- -------
directors may be removed by the board of directors whenever in its judgment the
best interests of the corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
--------- ---------
death, resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term by the board of
directors then in office.
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<PAGE>
Section 5. Compensation. Compensation of all officers shall be fixed by
--------- ------------
the board of directors, and no officer shall be prevented from receiving such
compensation by virtue of his or her also being a director of the corporation.
Section 6. The President. The president shall be the chief executive
--------- -------------
officer of the corporation; shall preside at all meetings of the stockholders
and board of directors at which he is present; subject to the powers of the
board of directors, shall have general charge of the business, affairs and
property of the corporation, and control over its officers, agents and
employees; and shall see that all orders and resolutions of the board of
directors are carried into effect. The president shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the board of directors to some other officer or agent of the corporation. The
president shall have such other powers and perform such other duties as may be
prescribed by the board of directors or as may be provided in these by-laws.
Section 7. Vice-presidents. The vice-president, or if there shall be more
--------- ---------------
than one, the vice-presidents in the order determined by the board of directors
or by the president, shall, in the absence or disability of the president, act
with all of the powers and be subject to all the restrictions of the president.
The vice-presidents shall also perform such other duties and have such other
powers as the board of directors, the president or these by-laws may, from time
to time, prescribe.
Section 8. The Secretary and Assistant Secretaries. The secretary shall
--------- ---------------------------------------
attend all meetings of the board of directors, all meetings of the committees
thereof and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose. Under the
president's supervision, the secretary shall give, or cause to be given, all
notices required to be given by these by-laws or by law; shall have such powers
and perform such duties as the board of directors, the president or these by-
laws may, from time to time, prescribe; and shall have custody of the corporate
seal of the corporation. The secretary, or an assistant secretary, shall have
authority to affix the corporate seal to any instrument requiring it and when so
affixed, it may be attested by his signature or by the signature of such
assistant secretary. The board of directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors, shall,
in the absence or disability of the secretary, perform the duties and exercise
the powers of the secretary and shall perform such other duties and have such
other powers as the board of directors, the president, or secretary may, from
time to time, prescribe.
Section 9. The Treasurer and Assistant Treasurer. The treasurer shall
--------- -------------------------------------
have the custody of the corporate funds and securities; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation; shall deposit all monies and other valuable effects in the name and
to the credit of the corporation as may be ordered by the board of directors;
shall cause the funds of the corporation to be disbursed when such disbursements
have been duly authorized, taking proper vouchers for such disbursements; and
shall render to the president and the board of directors, at its regular meeting
or when the board of directors so requires, an account of the corporation; shall
have such powers and perform such duties as the board of directors, the presi-
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<PAGE>
dent or these by-laws may, from time to time, prescribe. If required by the
board of directors, the treasurer shall give the corporation a bond (which shall
be rendered every six (6) years) in such sums and with such surety or sureties
as shall be satisfactory to the board of directors for the faithful performance
of the duties of the office of treasurer and for the restoration to the
corporation, in case of death, resignation, retirement, or removal from office,
of all books, papers, vouchers, money, and other property of whatever kind in
the possession or under the control of the treasurer belonging to the
corporation. The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the board of directors, shall in
the absence or disability of the treasurer, perform the duties and exercise the
powers of the treasurer. The assistant treasurers shall perform such other
duties and have such other powers as the board of directors, the president or
treasurer may, from time to time, prescribe.
Section 10. Other Officers, Assistant Officers and Agents. Officers,
---------- ---------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these by-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the board of directors.
Section 11. Absence or Disability of Officers. In the case of the absence
---------- ---------------------------------
or disability of any officer of the corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the board of directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any other
person whom it may select.
ARTICLE V
---------
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
-------------------------------------------------
Section 1. Nature of Indemnity. Each person who was or is made a party or
--------- -------------------
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he, or a person of whom
he is the legal representative, is or was a director or officer, of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by the corporation to the fullest extent which it is empowered to
do so unless prohibited from doing so by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than said law permitted
the corporation to provide prior to such amendment) against all expense,
liability and loss (including attorneys' fees actually and reasonably incurred
by such person in connection with such proceeding) and such indemnification
shall inure to the benefit of his heirs, executors and administrators; provided,
however, that, except as provided in Section 2 hereof, the corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the board of directors of the corporation. The right
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<PAGE>
to indemnification conferred in this Article V shall be a contract right and,
subject to Sections 2 and 5 hereof, shall include the right to be paid by the
corporation the expenses incurred in defending any such proceeding in advance of
its final disposition. The corporation may, by action of its board of directors,
provide indemnification to employees and agents of the corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
--------- -------------------------------------------------------
indemnification of a director or officer of the corporation under Section 1 of
this Article V or advance of expenses under Section 5 of this Article V shall be
made promptly, and in any event within thirty (30) days, upon the written
request of the director or officer. If a determination by the corporation that
the director or officer is entitled to indemnification pursuant to this Article
V is required, and the corporation fails to respond within sixty (60) days to a
written request for indemnity, the corporation shall be deemed to have approved
the request. If the corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within thirty (30) days, the right to indemnification
or advances as granted by this Article V shall be enforceable by the director or
officer in any court of competent jurisdiction. Such person's costs and expenses
incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation Law
of the State of Delaware for the corporation to indemnify the claimant for the
amount claimed, but the burden of such defense shall be on the corporation.
Neither the failure of the corporation (including its board of directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the corporation (including its board of directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
Section 3. Article Not Exclusive. The rights to indemnification and the
--------- ---------------------
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article V shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The corporation may purchase and maintain insurance
--------- ---------
on its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the corporation or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not
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<PAGE>
the corporation would have the power to indemnify such person against such
liability under this Article V.
Section 5. Expenses. Expenses incurred by any person described in Section
--------- --------
1 of this Article V in defending a proceeding shall be paid by the corporation
in advance of such proceeding's final disposition unless otherwise determined by
the board of directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
corporation. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors deems
appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
--------- --------------------
foregoing provisions of this Article V and who are or were employees or agents
of the corporation, or who are or were serving at the request of the corporation
as employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be
--------- ---------------
deemed to be a contract right between the corporation and each director or
officer who serves in any such capacity at any time while this Article V and the
relevant provisions of the General Corporation Law of the State of Delaware or
other applicable law are in effect, and any repeal or modification of this
Article V or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
--------- -----------------------
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article V
with respect to the resulting or surviving corporation as he or she would have
with respect to such constituent corporation if its separate existence had
continued.
ARTICLE VI
----------
CERTIFICATES OF STOCK
---------------------
Section 1. Form. Every holder of stock in the corporation shall be
--------- ----
entitled to have a certificate, signed by, or in the name of the corporation by
the president or a vice-president and the secretary or an assistant secretary of
the corporation, certifying the number of shares of a specific class or series
owned by such holder in the corporation. If such a certificate is countersigned
(1) by
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<PAGE>
a transfer agent or an assistant transfer agent other than the corporation or
its employee or (2) by a registrar, other than the corporation or its employee,
the signature of any such president, vice-presi dent, secretary, or assistant
secretary may be facsimiles. In case any officer or officers who have signed, or
whose facsimile signature or signatures have been used on, any such certificate
or certificates shall cease to be such officer or officers of the corporation
whether because of death, resignation or otherwise before such certificate or
certificates have been delivered by the corporation, such certificate or
certificates may nevertheless be issued and delivered as though the person or
persons who signed such certificate or certificates or whose facsimile signature
or signatures have been used thereon had not ceased to be such officer or
officers of the corporation. All certificates for shares shall be consecutively
numbered or otherwise identified. The name of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the books of the corporation. Shares of stock of the
corporation shall only be transferred on the books of the corporation by the
holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization, and
other matters as the corporation may reasonably require, and accompanied by all
necessary stock transfer stamps. In that event, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates, and record the transaction on its books.
The board of directors may appoint a bank or trust company organized under the
laws of the United States or any state thereof to act as its transfer agent or
registrar, or both in connection with the transfer of any class or series of
securities of the corporation.
Section 2. Lost Certificates. The board of directors may direct a new
--------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the corporation alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his or her legal representative, to give the corporation a bond
sufficient to indemnify the corporation against any claim that may be made
against the corporation on account of the loss, theft or destruction of any such
certificate or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
--------- ---------------------------------------------
the corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which record date shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting. If no record date is fixed by
the board of directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be the close of business
on the next day preceding the day on which notice is given, or if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders
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<PAGE>
shall apply to any adjournment of the meeting; provided, however, that the board
of directors may fix a new record date for the adjourned meeting.
Section 4. Fixing a Record Date for Action by Written Consent. In order
--------- --------------------------------------------------
that the corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the board of directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
statute, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the corporation by
delivery to its registered office in the State of Delaware, its principal place
of business, or an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Delivery
made to the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
statute, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the board of directors adopts the resolution taking such
prior action.
Section 5. Fixing a Record Date for Other Purposes. In order that the
--------- ---------------------------------------
corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is fixed,
the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the board of directors adopts the
resolution relating thereto.
Section 6. Registered Stockholders. Prior to the surrender to the
--------- -----------------------
corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications, and otherwise to exercise all the rights and
powers of an owner. The corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
Section 7. Subscriptions for Stock. Unless otherwise provided for in the
--------- -----------------------
subscription agreement, subscriptions for shares shall be paid in full at such
time, or in such installments and at such times, as shall be determined by the
board of directors. Any call made by the board of directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is
-12-
<PAGE>
due, the corporation may proceed to collect the amount due in the same manner as
any debt due the corporation.
ARTICLE VII
-----------
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
--------- ---------
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or any other purpose
and the directors may modify or abolish any such reserve in the manner in which
it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders
--------- ------------------------
for the payment of money by or to the corporation and all notes and other
evidences of indebtedness issued in the name of the corporation shall be signed
by such officer or officers, agent or agents of the corporation, and in such
manner, as shall be determined by resolution of the board of directors or a duly
authorized committee thereof.
Section 3. Contracts. The board of directors may authorize any officer or
--------- ---------
officers, or any agent or agents, of the corporation to enter into any contract
or to execute and deliver any instrument in the name of and on behalf of the
corporation, and such authority may be general or confined to specific
instances.
Section 4. Loans. The corporation may lend money to, or guarantee any
--------- -----
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer or employee who is a
director of the corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
Section 5. Fiscal Year. The fiscal year of the corporation shall be fixed
--------- -----------
by resolution of the board of directors.
Section 6. Corporate Seal. The board of directors shall provide a
--------- --------------
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the corporation and the words
-13-
<PAGE>
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 7. Voting Securities Owned By Corporation. Voting securities in
--------- --------------------------------------
any other corporation held by the corporation shall be voted by the president,
unless the board of directors specifically confers authority to vote with
respect thereto, which authority may be general or confined to specific
instances, upon some other person or officer. Any person authorized to vote
securities shall have the power to appoint proxies, with general power of
substitution.
Section 8. Inspection of Books and Records. Any stockholder of record, in
--------- -------------------------------
person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during the usual hours for business
to inspect for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean any purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at its
registered office in the State of Delaware or at its principal place of
business.
Section 9. Section Headings. Section headings in these by-laws are for
--------- ----------------
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision of
---------- -----------------------
these by-laws is or becomes inconsistent with any provision of the certificate
of incorporation, the General Corporation Law of the State of Delaware or any
other applicable law, the provision of these by-laws shall not be given any
effect to the extent of such inconsistency but shall otherwise be given full
force and effect.
ARTICLE VIII
------------
AMENDMENTS
----------
These by-laws may be amended, altered, or repealed and new by-laws adopted
at any meeting of the board of directors by a majority vote. The fact that the
power to adopt, amend, alter, or repeal the by-laws has been conferred upon the
board of directors shall not divest the stockholders of the same powers.
-14-
<PAGE>
EXHIBIT 4.1
================================================================================
TUESDAY MORNING CORPORATION
Company
TMI HOLDINGS, INC.
TUESDAY MORNING, INC.
FRIDAY MORNING, INC.
TMIL CORPORATION
Subsidiary Guarantors
and
HARRIS TRUST AND SAVINGS BANK
Trustee
-------------------------
INDENTURE
Dated as of December 29, 1997
-------------------------
$100,000,000
11% Senior Subordinated Notes due 2007
11% Series B Senior Subordinated Notes due 2007
================================================================================
<PAGE>
TUESDAY MORNING CORPORATION
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of December 29, 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
--------------- ---------
<S> <C>
(S) 310(a)(1)......................... 607
(a)(2)............................ 607
(b)............................... 608
(S) 312(c)............................ 701
(S) 314(a)............................ 703
(a)(4)............................ 1004
(c)(1)............................ 102
(c)(2)............................ 102
(e)............................... 102
(S) 315(b)............................ 601
(S) 316(a)(last sentence)............. 101 ("Outstanding")
(a)(1)(A)......................... 502, 512
(a)(1)(B)......................... 513
(b)............................... 508
(c)............................... 104(d)
(S) 317(a)(1)......................... 503
(a)(2)............................ 504
(b)............................... 1003
(S) 318(a)............................ 111
</TABLE>
____________________
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PARTIES....................................................................... 1
RECITALS OF THE COMPANY....................................................... 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions...................................................... 2
Acquired Indebtedness.......................................... 2
Act............................................................ 2
Affiliate...................................................... 2
Agent Bank..................................................... 3
Agent Members.................................................. 3
Asset Sale..................................................... 3
Authenticating Agent........................................... 3
Average Life................................................... 3
Bankruptcy Law................................................. 3
Board of Directors............................................. 4
Board Resolution............................................... 4
Business Day................................................... 4
Capital Stock.................................................. 4
Capitalized Lease Obligation................................... 4
Cash Equivalents............................................... 4
Certificate of Designation..................................... 5
Change in Control.............................................. 5
Commission..................................................... 6
Common Stock................................................... 6
Company........................................................ 6
Company Request" or "Company Order............................. 6
Consolidated Adjusted Net Income............................... 6
Consolidated Fixed Charge Coverage Ratio....................... 7
Consolidated Income Tax Expense................................ 7
Consolidated Interest Expense.................................. 7
Consolidated Non-Cash Charges.................................. 8
Corporate Trust Office......................................... 8
corporation.................................................... 8
Currency Agreements............................................ 8
Custodian...................................................... 8
Default........................................................ 8
Defaulted Interest............................................. 8
Depositary..................................................... 8
</TABLE>
<PAGE>
ii
<TABLE>
<S> <C>
Designated Senior Indebtedness................................. 8
Disinterested Director......................................... 8
Dollar" or "$.................................................. 9
Event of Default............................................... 9
Exchange Act................................................... 9
Exchange Debentures............................................ 9
Exchange Notes................................................. 9
Exchange Offer................................................. 9
Exchange Offer Registration Statement.......................... 9
Fair Market Value.............................................. 9
Generally Accepted Accounting Principles....................... 9
Global Notes................................................... 9
guarantee...................................................... 10
Guarantor Senior Indebtedness.................................. 10
Headquarters Facility.......................................... 10
Holder......................................................... 10
Indebtedness................................................... 10
Indenture...................................................... 11
Initial Notes.................................................. 11
Institutional Accredited Investor.............................. 11
Interest Payment Date.......................................... 11
Interest Rate Agreements....................................... 11
Investment..................................................... 12
Issuance Date.................................................. 12
Lien........................................................... 12
Management Stock............................................... 12
Maturity....................................................... 12
Moody's........................................................ 12
Net Cash Proceeds.............................................. 12
Non-Payment Default............................................ 13
Non-U.S. Person................................................ 13
Note Guarantee................................................. 13
Note Register" and "Note Registrar............................. 13
Notes.......................................................... 13
Officers' Certificate.......................................... 13
Offshore Global Note........................................... 13
Offshore Note Exchange Date.................................... 13
Offshore Physical Note......................................... 13
Opinion of Counsel............................................. 14
Outstanding.................................................... 14
Pari Passu Indebtedness........................................ 15
Paying Agent................................................... 15
Payment Blockage Period........................................ 15
Payment Default................................................ 15
Permitted Holders.............................................. 15
</TABLE>
<PAGE>
iii
<TABLE>
<S> <C>
Permitted Indebtedness......................................... 15
Permitted Investments.......................................... 18
Permitted Junior Securities.................................... 18
Person......................................................... 18
Physical Notes................................................. 18
Place of Payment............................................... 19
Predecessor Note............................................... 19
Preferred Stock................................................ 19
Private Placement Legend....................................... 19
Public Equity Offering......................................... 19
Purchase Money Obligations..................................... 19
QIB............................................................ 19
Qualified Capital Stock........................................ 19
Redeemable Capital Stock....................................... 19
Redemption Date................................................ 20
Redemption Price............................................... 20
Registration Rights Agreement.................................. 20
Registration Statement......................................... 20
Regular Record Date............................................ 20
Regulation S................................................... 20
Representative................................................. 20
Responsible Officer............................................ 20
Restricted Subsidiary.......................................... 20
Rule 144A...................................................... 20
S&P............................................................ 20
Sale and Leaseback Transaction................................. 20
Securities Act................................................. 21
Senior Credit Agreement........................................ 21
Senior Exchangeable Preferred Stock............................ 21
Senior Indebtedness............................................ 21
Shelf Registration Statement................................... 22
Significant Subsidiary......................................... 22
Special Record Date............................................ 22
Stated Maturity................................................ 22
Subordinated Indebtedness...................................... 22
Subsidiary..................................................... 22
Subsidiary Guarantor........................................... 22
Trust Indenture Act" or "TIA................................... 22
Trustee........................................................ 22
United States.................................................. 23
Unrestricted Subsidiary........................................ 23
U.S. Global Note............................................... 23
U.S. Government Obligations.................................... 23
U.S. Physical Note............................................. 24
Vice President................................................. 24
</TABLE>
<PAGE>
iv
<TABLE>
<S> <C>
Voting Stock................................................... 24
SECTION 102. Compliance Certificates and Opinions............................. 24
SECTION 103. Form of Documents Delivered to Trustee........................... 25
SECTION 104. Acts of Holders.................................................. 25
SECTION 105. Notices, Etc., to Trustee, Company, any Subsidiary Guarantor
and Agent Bank................................................ 27
SECTION 106. Notice to Holders; Waiver........................................ 27
SECTION 107. Effect of Headings and Table of Contents......................... 28
SECTION 108. Successors and Assigns........................................... 28
SECTION 109. Separability Clause.............................................. 28
SECTION 110. Benefits of Indenture............................................ 28
SECTION 111. Governing Law.................................................... 28
SECTION 112. Legal Holidays................................................... 29
SECTION 113. Trust Indenture Act Controls..................................... 29
SECTION 114. No Recourse Against Others....................................... 29
SECTION 115. Counterparts..................................................... 29
ARTICLE TWO
NOTE FORMS
SECTION 201. Forms Generally.................................................. 30
SECTION 202. Form of Trustee's Certificate of Authentication.................. 31
SECTION 203. Restrictive Legends.............................................. 31
SECTION 204. Form of Certificate to be Delivered After the Offshore Note
Exchange Date................................................. 34
ARTICLE THREE
THE NOTES
SECTION 301. Amount........................................................... 35
SECTION 302. Denominations.................................................... 36
SECTION 303. Execution, Authentication, Delivery and Dating................... 36
SECTION 304. Temporary Notes.................................................. 37
SECTION 305. Registration, Registration of Transfer and Exchange.............. 38
SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes...................... 39
SECTION 307. Payment of Interest; Interest Rights Preserved................... 40
SECTION 308. Persons Deemed Owners............................................ 41
SECTION 309. Cancellation..................................................... 41
SECTION 310. Computation of Interest.......................................... 42
SECTION 311. Book-Entry Provisions for Global Notes........................... 42
SECTION 312. Transfer Provisions.............................................. 43
SECTION 313. Form of Accredited Investor Certificate.......................... 52
SECTION 314. Form of Regulation S Certificate................................. 55
</TABLE>
<PAGE>
v
<TABLE>
<S> <C>
SECTION 315. Form of Rule 144A Certificate.................................... 56
SECTION 316. CUSIP Numbers.................................................... 58
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.......................... 58
SECTION 402. Application of Trust Money....................................... 60
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default................................................ 60
SECTION 502. Acceleration of Maturity; Rescission and Annulment............... 62
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee....................................................... 63
SECTION 504. Trustee May File Proofs of Claim................................. 64
SECTION 505. Trustee May Enforce Claims Without Possession of Notes........... 65
SECTION 506. Application of Money Collected................................... 65
SECTION 507. Limitation on Suits.............................................. 66
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest.......................................... 66
SECTION 509. Restoration of Rights and Remedies............................... 67
SECTION 510. Rights and Remedies Cumulative................................... 67
SECTION 511. Delay or Omission Not Waiver..................................... 67
SECTION 512. Control by Holders............................................... 67
SECTION 513. Waiver of Past Defaults.......................................... 68
SECTION 514. Waiver of Stay or Extension Laws................................. 68
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities............................. 69
SECTION 602. Notice of Defaults.............................................. 70
SECTION 603. Certain Rights of Trustee....................................... 70
SECTION 604. Trustee Not Responsible for Recitals or Issuance of Notes....... 72
SECTION 605. May Hold Notes.................................................. 72
SECTION 606. Money Held in Trust............................................. 73
SECTION 607. Compensation and Reimbursement.................................. 73
SECTION 608. Corporate Trustee Required; Eligibility......................... 74
SECTION 609. Resignation and Removal; Appointment of Successor............... 74
SECTION 610. Acceptance of Appointment by Successor.......................... 76
SECTION 611. Merger, Conversion, Consolidation or Succession to Business..... 76
</TABLE>
<PAGE>
vi
<TABLE>
<S> <C>
SECTION 612. Appointment of Authenticating Agent............................. 77
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses.................. 78
SECTION 702. Disclosure of Names and Addresses of Holders.................... 79
SECTION 703. Reports by Trustee.............................................. 79
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms............ 79
SECTION 802. Subsidiary Guarantors May Consolidate, Etc., Only on Certain
Terms......................................................... 81
SECTION 803. Successor Substituted........................................... 81
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.............. 82
SECTION 902. Supplemental Indentures with Consent of Holders................. 83
SECTION 903. Execution of Supplemental Indentures............................ 84
SECTION 904. Effect of Supplemental Indentures............................... 84
SECTION 905. Conformity with Trust Indenture Act............................. 84
SECTION 906. Reference in Notes to Supplemental Indentures................... 85
SECTION 907. Notice of Supplemental Indentures............................... 85
SECTION 908. Effect on Senior Indebtedness................................... 85
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if Any, and Interest............ 85
SECTION 1002. Maintenance of Office or Agency................................ 85
SECTION 1003. Money for Notes Payments to Be Held in Trust................... 86
SECTION 1004. Corporate Existence............................................ 87
SECTION 1005. Payment of Taxes and Other Claims.............................. 88
SECTION 1006. Maintenance of Properties...................................... 88
SECTION 1007. Statement by Officers as to Default............................ 88
SECTION 1008. Limitation on Indebtedness..................................... 89
SECTION 1009. Limitation on Restricted Payments.............................. 90
</TABLE>
<PAGE>
vii
<TABLE>
<S> <C>
SECTION 1010. Limitation on Issuances and Sales of Capital Stock of
Restricted Subsidiaries....................................... 94
SECTION 1011. Limitation on Transactions with Affiliates..................... 94
SECTION 1012. Limitation on Liens............................................ 95
SECTION 1013. Purchase of Notes upon Change in Control....................... 95
SECTION 1014. Limitation on Sale of Assets................................... 97
SECTION 1015. Limitations on Guarantees of Indebtedness by Restricted
Subsidiaries.................................................. 99
SECTION 1016. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries............................. 100
SECTION 1017. Limitation on Sale and Leaseback Transactions.................. 100
SECTION 1018. Limitation on Other Senior Subordinated Indebtedness........... 101
SECTION 1019. Limitation on Unrestricted Subsidiaries........................ 101
SECTION 1020. Reports........................................................ 101
SECTION 1021. Waiver of Certain Covenants.................................... 102
ARTICLE ELEVEN
REDEMPTION OF NOTES
SECTION 1101. Redemption..................................................... 102
SECTION 1102. Applicability of Article....................................... 102
SECTION 1103. Election to Redeem; Notice to Trustee.......................... 103
SECTION 1104. Selection by Trustee of Notes to Be Redeemed................... 103
SECTION 1105. Notice of Redemption........................................... 103
SECTION 1106. Deposit of Redemption Price.................................... 105
SECTION 1107. Notes Payable on Redemption Date............................... 105
SECTION 1108. Notes Redeemed in Part......................................... 105
ARTICLE TWELVE
SUBORDINATION OF NOTES
SECTION 1201. Notes Subordinate to Senior Indebtedness....................... 106
SECTION 1202. Payment over of Proceeds upon Dissolution, etc................. 106
SECTION 1203. Suspension of Payment When Designated Senior Indebtedness
in Default.................................................... 107
SECTION 1204. Payment Permitted If No Default................................ 108
SECTION 1205. Subrogation to Rights of Holders of Senior Indebtedness........ 109
SECTION 1206. Provisions Solely to Define Relative Rights.................... 109
SECTION 1207. Trustee to Effectuate Subordination............................ 109
SECTION 1208. No Waiver of Subordination Provisions.......................... 110
SECTION 1209. Distribution or Notice to Representative....................... 110
SECTION 1210. Notice to Trustee.............................................. 110
SECTION 1211. Reliance on Judicial Order or Certificate of Liquidating
Agent......................................................... 111
</TABLE>
<PAGE>
viii
<TABLE>
<S> <C>
SECTION 1212. Rights of Trustee As a Holder of Senior Indebtedness;
Preservation of Trustee's Rights.............................. 112
SECTION 1213. Article Applicable to Paying Agents............................ 112
SECTION 1214. No Suspension of Remedies...................................... 112
SECTION 1215. Trust Moneys Not Subordinated.................................. 112
SECTION 1216. Trustee Not Fiduciary for Holders of Senior Indebtedness....... 112
ARTICLE THIRTEEN
GUARANTEES
SECTION 1301. Note Guarantees................................................ 113
SECTION 1302. Severability................................................... 115
SECTION 1303. Restricted Subsidiaries........................................ 115
SECTION 1304. Subordination of Note Guarantees............................... 115
SECTION 1305. Limitation of Subsidiary Guarantors' Liability................. 115
SECTION 1306. Contribution................................................... 116
SECTION 1307. Subrogation.................................................... 116
SECTION 1308. Reinstatement.................................................. 117
SECTION 1309. Release of a Subsidiary Guarantor.............................. 117
SECTION 1310. Benefits Acknowledged.......................................... 117
ARTICLE FOURTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1401. Company's Option to Effect Defeasance or Covenant
Defeasance.................................................... 117
SECTION 1402. Defeasance and Discharge....................................... 118
SECTION 1403. Covenant Defeasance............................................ 118
SECTION 1404. Conditions to Defeasance or Covenant Defeasance................ 119
SECTION 1405. Deposited Money and Government Obligations to Be Held
in Trust; Other Miscellaneous Provisions...................... 120
SECTION 1406. Reinstatement.................................................. 121
TESTIMONIUM................................................................... 117
SIGNATURES AND SEALS.......................................................... 117
EXHIBIT A - Form of Note
</TABLE>
<PAGE>
INDENTURE, dated as of December 29, 1997, among TUESDAY MORNING
CORPORATION, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
14621 Inwood Road, Dallas, Texas 75244, and TMI HOLDINGS, INC., a Delaware
corporation, TUESDAY MORNING, INC., a Texas corporation, FRIDAY MORNING, INC., a
Texas corporation, and TMIL CORPORATION, a Delaware corporation (collectively,
the "Subsidiary Guarantors"), and HARRIS TRUST AND SAVINGS BANK, an Illinois
corporation, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of and issuance of its
11% Senior Subordinated Notes due 2007 (the "Initial Notes"), and its 11% Series
B Senior Subordinated Notes due 2007 (the "Exchange Notes" and, together with
the Initial Notes, the "Notes"), of substantially the tenor and amount
hereinafter set forth, and to provide therefor the Company has duly authorized
the execution and delivery of this Indenture.
Each Subsidiary Guarantor has duly authorized the guarantee of up to
$100,000,000 aggregate principal amount of the Initial Notes, and upon the
issuance of the Exchange Notes, if any, up to $100,000,000 aggregate principal
amount of the Exchange Notes and to provide therefor each Subsidiary Guarantor
has duly authorized the execution and delivery of this Indenture.
Upon the issuance of the Exchange Notes, if any, or the effectiveness
of the Shelf Registration Statement (as defined herein), this Indenture will be
subject to, and shall be governed by the provisions of the Trust Indenture Act
of 1939, as amended, that are required to be part of or deemed to be part of and
to govern the indentures qualified thereunder.
All things necessary have been done to make the Notes, when duly
executed and duly issued by the Company and authenticated and delivered
hereunder by the Trustee or the Authenticating Agent, the valid obligations of
the Company and to make this Indenture a valid agreement of the Company, in
accordance with their and its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
<PAGE>
2
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein, and the terms "cash transaction" and "self-
liquidating paper", as used in TIA Section 311, shall have the meanings
assigned to them in the rules of the Commission adopted under the Trust
Indenture Act;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with Generally Accepted Accounting
Principles; and
(4) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Subsidiary or (b) assumed in connection with the
acquisition of assets from such Person; provided that, for purposes of Section
1008, such 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.
"Act," when used with respect to any Holder, has the meaning specified in
Section 104.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or (c) any executive officer or director of any such specified Person or
other Person or (d) 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. 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
<PAGE>
3
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Agent Bank" means Fleet National Bank in its capacity as administrative
agent under the Senior Credit Agreement and any future or successor or
replacement administrative agent under the Senior Credit Agreement.
"Agent Members" has the meaning specified in Section 311.
"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 (a) any Capital Stock
of any Restricted Subsidiary; (b) all or substantially all of the properties and
assets of the Company or its Restricted Subsidiaries; or (c) any other
properties or assets of any division or line of business 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 or assets (i) that is governed by the provisions of
Article Eight, (ii) between or among the Company and Restricted Subsidiaries in
accordance with the terms of this Indenture, (iii) that consist of accounts
receivable transferred to third parties that are not Affiliates of the Company
or any Subsidiary of the Company in the ordinary course of business, including
by way of the securitization of such receivables, (iv) of the Company or any
Restricted Subsidiary in exchange for properties or assets of substantially
equal value of another Person to be used in the same line of business being
conducted by the Company or any Restricted Subsidiary at the time of such
transfer having a Fair Market Value of less than $1.0 million in any given
fiscal year, (v) to an Unrestricted Subsidiary, if permitted under Section 1009,
(vi) consisting of the Headquarters Facility to third parties that are not
Affiliates of the Company or any Subsidiary of the Company or (vii) having a
Fair Market Value of less than $1.0 million in any given fiscal year.
"Authenticating Agent" means any Person authorized by the Trustee to act on
behalf of the Trustee to authenticate Notes.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness multiplied by (ii) the amount of
each such principal payment by (b) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state 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.
<PAGE>
4
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any duly authorized committee of such board.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day," when used with respect to any Place of Payment or any other
particular location referred to in this Indenture or in the Notes, means each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in that Place of Payment or other location are authorized
or obligated by law, regulation or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's capital stock, and any rights (other than
debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock, whether now outstanding
or issued after the date of the Indenture.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purpose of this Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
"Cash Equivalents" means: (a) any evidence of Indebtedness with a maturity
of one year or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (b) certificates of deposit or acceptances with a maturity of one year
or less of any financial institution that is a member of the Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500 million; (c) commercial paper with a maturity of one year or less
issued by a corporation that is not an Affiliate of the Company and is organized
under the laws of any state of the United States or the District of Columbia and
rated at least A-1 by S&P or any successor rating agency or at least P-1 by
Moody's or any successor rating agency; (d) repurchase obligations with a term
of not more than seven days for underlying securities of the types described in
clauses (a) and (b) above; and (e) demand and time deposits with a domestic
commercial bank that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $500 million.
<PAGE>
5
"Certificate of Designation" means the certificate of designations,
preferences and rights of the Senior Exchangeable Preferred Stock filed with the
Secretary of State of the State of Delaware on December 29, 1997.
"Change in Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Permitted Holders, 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
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
Company and either (x) the Permitted Holders beneficially own, directly or
indirectly, in the aggregate Voting Stock of the Company that represents a
lesser percentage of the aggregate ordinary voting power of all classes of the
Voting Stock of the Company, voting together as a single class, than such other
person or group and are not entitled (by voting power, contract or otherwise) to
elect directors of the Company having a majority of the total voting power of
the Board of Directors, or (y) such other person or group is entitled to elect
directors of the Company having a majority of the total voting power of the
Board of Directors; (b) the Company consolidates with, or merges with or into,
another Person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, 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 (i) where the outstanding Voting Stock of the Company is not
converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company) or is converted into
or exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation and cash, securities
and other property (other than Capital Stock of the surviving or transferee
corporation) in an amount that could be paid by the Company as a Restricted
Payment as described under Section 1009 and (ii) immediately after such
transaction, no "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, 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 or transferee
corporation and either (x) the Permitted Holders beneficially own, directly or
indirectly, in the aggregate Voting Stock of the surviving or transferee
corporation that represents a lesser percentage of the aggregate ordinary voting
power of all classes of the Voting Stock of the surviving or transferee
corporation, voting together as a single class, than such other person or group
and are not entitled (by voting power, contract or otherwise) to elect directors
of the Surviving Entity having a majority of the total voting power of the Board
of Directors, or (y) such other person or group is entitled to elect directors
of the surviving or transferee having a majority of the total voting power of
the elected
<PAGE>
6
Board of Directors; or (c) during any consecutive two year period, 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 of
Directors, 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 the Board of Directors of the Company then in office; or (d) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with Article Eight.
"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 this Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated, whether voting or
non-voting) of such Person's common stock, whether outstanding on the Issuance
Date or issued after the Issuance Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means the Person named as the "Company" in the first paragraph of
this Indenture until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, its Chief
Executive Officer, its President, its Chief Operating Officer, its Chief
Financial Officer, any Vice President, its Treasurer or an Assistant Treasurer,
and delivered to the Trustee.
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of the Company and all Restricted Subsidiaries for such
period as determined in accordance with GAAP, adjusted by excluding, without
duplication, (a) any net after-tax extraordinary gains or losses (less all fees
and expenses relating thereto), (b) any net after-tax gains or losses (less all
fees and expenses relating thereto) attributable to asset dispositions other
than in the ordinary course of business, (c) the portion of net income (or loss)
of any Person (other than the Company or a Restricted Subsidiary), including
Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has
an ownership interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any Restricted Subsidiary in cash
dividends or distributions during such period, (d) the net income (or loss) of
any Person combined with the Company or any Restricted Subsidiary on a "pooling
of interests" basis attributable to any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar
<PAGE>
7
distributions by such Restricted Subsidiary is not at the date of determination
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 such Restricted Subsidiary or its
stockholders, and (f) for purposes of calculating Consolidated Adjusted Net
Income under Section 1009, any net income (or loss) from any Restricted
Subsidiary while it was an Unrestricted Subsidiary at any time during such
period other than any amounts actually received from such Restricted Subsidiary
during such period.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (a) the sum of Consolidated Adjusted Net Income and, to the
extent deducted in computing Consolidated Adjusted Net Income, Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges, in each case, for such period to (b) the Consolidated Interest Expense
for such period.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of the Company and all Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
(1) the sum of (a) the interest expense of the Company and its Restricted
Subsidiaries for such period, including, without limitation, (i) amortization of
debt discount, (ii) the net cost of Interest Rate Agreements (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation and (iv) amortization of debt issuance costs, plus (b) the interest
component of Capitalized Lease Obligations of the Company and its Restricted
Subsidiaries during such period, plus (c) cash dividends due (whether or not
declared) on Preferred Stock by the Company and any Restricted Subsidiary, plus
(d) cash dividends due (whether or not declared) on Redeemable Capital Stock by
the Company and any Restricted Subsidiary, in each case as determined on a
consolidated basis in accordance with GAAP, less (2) interest on the Exchange
Debentures outstanding on the Exchange Date paid in kind with Exchange
Debentures and on Exchange Debentures so issued as payment in kind interest, all
in accordance with the Debenture Indenture as in effect on the Issuance Date;
provided that (x) 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 the Company, a fixed or floating rate of interest,
shall be computed by applying at the option of the Company, either the fixed or
floating rate, and (y) in making such computation, the Consolidated Interest
Expense 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; provided
further that, notwithstanding the foregoing, the interest rate with respect to
any Indebtedness covered by any Interest Rate Agreement shall be deemed to be
the effective interest rate with respect to such Indebtedness after taking into
account such Interest Rate Agreement.
<PAGE>
8
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization, depletion and other non-cash expenses of the Company
and any Restricted Subsidiary reducing Consolidated Adjusted Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge that requires an accrual of or reserve for cash charges
for any future period).
"Corporate Trust Office" means the principal corporate trust office of the
Trustee, at which at any particular time its corporate trust business shall be
administered, which office on the date of execution of this Indenture is located
at 311 West Monroe Street, Chicago, Illinois 60606.
"corporation" includes corporations, associations, companies and business
trusts.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business and designed to protect against or manage
exposure to fluctuations in foreign currency exchange rates.
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 307.
"Depositary" means The Depository Trust Company, its nominees and
successors.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness under
the Senior Credit Agreement and (ii) any other Senior Indebtedness which, at the
time of determination, has an aggregate principal amount outstanding of at least
$25,000,000 and that has been specifically designated in the instrument
evidencing such Senior Indebtedness as "Designated Senior Indebtedness" by the
Company.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under this Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions.
"Dollar" or "$" means a dollar or other equivalent unit in such coin or
currency of the United States of America as at the time shall be legal tender
for the payment of public and private debts.
<PAGE>
9
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Exchange Debentures" means the 13 1/4% Subordinated Exchange Debentures
due 2009 of the Company issuable in exchange for the Senior Exchangeable
Preferred Stock, plus any additional Exchange Debentures issued in lieu of cash
interest, pursuant to the Exchange Indenture as in effect on the Issuance Date.
"Exchange Notes" has the meaning stated in the first recital of this
Indenture and refers to any Exchange Notes containing terms substantially
identical to the Initial Notes (except that (i) such Exchange Notes shall not
contain terms with respect to transfer restrictions and shall be registered
under the Securities Act, and (ii) certain provisions relating to an increase in
the stated rate of interest thereon shall be eliminated) that are issued and
exchanged for the Initial Notes in accordance with the Exchange Offer, as
provided for in the Registration Rights Agreement and this Indenture.
"Exchange Offer" means the offer by the Company to the Holders of the
Initial Notes to exchange all of the Initial Notes for Exchange Notes, as
provided for in the Registration Rights Agreement.
"Exchange Offer Registration Statement" means the Exchange Offer
Registration Statement as defined in the Registration Rights Agreement.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the date of this Indenture.
"Global Notes" has the meaning set forth in Section 201.
"guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of nonperformance) of all or any
part of such obligation, including, without limiting the foregoing, the payment
of amounts drawn down by letters of credit.
<PAGE>
10
"Guarantor Senior Indebtedness" of a Subsidiary Guarantor means
Indebtedness of such Subsidiary Guarantor consisting of (i) a guarantee of any
Senior Indebtedness under the Senior Credit Agreement or any other Senior
Indebtedness and (ii) the principal of, premium, if any, and interest on all
other Indebtedness of such Subsidiary Guarantor (other than the Note Guarantee
issued by such Subsidiary Guarantor), whether outstanding on the date of this
Indenture or thereafter created, incurred or assumed, 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 such Note Guarantee.
Notwithstanding the foregoing, "Guarantor Senior Indebtedness" of a Subsidiary
Guarantor shall not include (i) Indebtedness evidenced by the Note Guarantee of
such Subsidiary Guarantor, (ii) Indebtedness of such Subsidiary Guarantor that
is expressly subordinated in right of payment to any Guarantor Senior
Indebtedness of such Subsidiary Guarantor, (iii) Indebtedness of such Subsidiary
Guarantor that by operation of law is subordinate to any general unsecured
obligations of such Subsidiary Guarantor, (iv) Indebtedness of such Subsidiary
Guarantor to the extent incurred in violation of any covenant of this Indenture,
(v) any liability for federal, state or local taxes or other taxes, owed or
owing by such Subsidiary Guarantor, (vi) trade account payables owed or owing by
such Subsidiary Guarantor, (vii) amounts owed by such Subsidiary Guarantor for
compensation to employees or for services rendered to such Subsidiary Guarantor,
(viii) Indebtedness of such Subsidiary Guarantor to any Affiliate of the
Company, (ix) Redeemable Capital Stock of such Subsidiary Guarantor and (x)
Indebtedness which when incurred and without respect to any election under
Section 1111(b) of Title 11 of the United States Code is without recourse to
such Subsidiary Guarantor or any Subsidiary.
"Headquarters Facility" means the headquarters facility and warehouse of
the Company as of the Issuance Date located in Dallas, Texas.
"Holder" means the Person in whose name a Note is registered in the Note
Register.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred 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 and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (b) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (c) all indebtedness of such
Person 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, (d) all Capitalized
Lease Obligations of such Person, (e) all obligations of such Person under or in
respect of Interest Rate Agreements or Currency Agreements, (f) all Indebtedness
referred to in (but not excluded from) the preceding clauses of other Persons
and all dividends of other Persons, the payment of which
<PAGE>
11
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 (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (g) all guarantees by such Person of Indebtedness
referred to in this definition of any other Person, and (h) all Redeemable
Capital Stock of such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends.
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 this Indenture, and if such price is
based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"Indenture" means this instrument as originally executed and as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof.
"Initial Notes" has the meaning specified in the recitals to this
Indenture.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
of Regulation D under the Securities Act.
"Interest Payment Date," when used with respect to any Note, means the
Stated Maturity of an installment of interest on such Note.
"Interest Rate Agreements" means any interest rate protection agreements
and other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
designed to protect against or manage exposure to fluctuations in interest
rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee 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 or evidences of Indebtedness 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. In addition, the fair market
value of the net assets of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed
to be an "Investment" made by the Company in such Unrestricted Subsidiary at
<PAGE>
12
such time. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Issuance Date" means the closing date for the sale and original issuance
of Notes hereunder.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Management Stock" means the Capital Stock of the Company and the options
to acquire Capital Stock of the Company owned by Lloyd L. Ross and Jerry M.
Smith as of the Issuance Date together with Preferred Stock issued as payment in
kind dividends on such Preferred Stock and any shares of Preferred Stock issued
as payment in kind dividends thereon, and such dividends made pursuant to the
terms of the certificate of designation 
