<PAGE>
As filed with the Securities and Exchange Commission on April 7, 1998
Registration No. 333-46013
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
AMENDMENT NO. 1
TO
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.[_]
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 APRIL 7, 1998
PROSPECTUS
APRIL 8, 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 MAY 11, 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 $25,699,306
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 15, 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 May 11, 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
period presented gives effect to the Transactions as if they were consummated on
January 1, 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 323 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 323, and has achieved compound annual growth rates for sales and
EBITDA of 16.3% and 16.6%, respectively. During the year ended December 31,
1997, the Company generated comparable store sales growth of 18% and net sales
and EBITDA of $327.3 million and $41.6 million, respectively. This represents an
increase of 27.5% and 60.5%, respectively, over sales and EBITDA for the year
ended December 31, 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
year ended December 31, 1997, Tuesday Morning generated EBITDA of
$41.6 million, a 60.5% increase over the comparable period in 1996. During this
same period, capital expenditures were $5.3 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 December 31, 1997,
approximately 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 18% for 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 "Recapitalization") 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 $225.5 million of aggregate proceeds from the financings described
below (the "Financings") (i) to pay $324.9 million as Recapitalization
consideration, and (ii) to pay $18.5 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
<PAGE>
________________________________________________________________________________
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 $15.5 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 Recapitalization, the Financings, the
other components of the Equity Investment and the repayment of the Old Credit
Facility. The Initial Offering, the Recapitalization, 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 are set forth
in the following table:
<TABLE>
<CAPTION>
AMOUNT
---------------
(IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Senior Credit Facility ($15,454 drawn in January 1998).. $ 125.4
Old Notes............................................... 100,000
Old Senior Exchangeable Preferred Stock................. 25,000
Junior Redeemable Preferred Stock (a)................... 85,998
Junior Perpetual Preferred Stock........................ 1,930
Common Stock (b)........................................ 5,000
--------
Total.............................................. $ 343.3
========
USES OF FUNDS:
Acquisition consideration............................... $ 299.8
Payment to option holders............................... 25,005
Fees and expenses....................................... 18,486
--------
Total.............................................. $ 343.3
========
</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
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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.
_________________
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
Stock................................ The Old Senior Exchangeable Preferred
Stock was sold by the Company
as a component of the Units sold in the
Initial Unit Offering 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
Agreement............................ Pursuant to the Units Purchase
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................... $25,699,306 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, $25,699,306
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
May 11, 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
Stock................................ Each Share of New Senior Exchangeable
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
Preferred Stock....................... The Company will accept for exchange
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 December
31, 1997, the Company had $110.0 million
of Senior Indebtedness (all of which
represented Indebtedness under the
Senior Credit Facility) and $100.0
million of Senior Subordinated
Indebtedness (all of which represented
Indebtedness under the Notes)
outstanding, and the Company had
additional availability of $35.8 million
for revolving credit facility borrowings
under the Senior Credit Facility, all of
which would have been Senior
Indebtedness, if borrowed. 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."
13
<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."
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,
1997 is derived from the audited consolidated financial statements of the
Company. The summary unaudited pro forma statement of operations and other
financial data for the year ended December 31, 1997 gives effect to the
Transactions as if they had occurred on January 1, 1997. 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
Year Ended December 31, Year Ended
---------------------------------- December 31,
1995 1996 1997 1997
--------- ---------- --------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $210,265 $256,756 $327,307 $327,307
Cost of sales........................ 137,427 165,189 208,432 208,432
-------- -------- -------- ---------
Gross profit......................... 72,838 91,567 118,875 118,875
Selling, general and administrative
expenses............................ 63,040 71,167 82,939 83,289
-------- -------- -------- ---------
Recapitalization fees and expenses... -- -- 33,960 --
Total expenses....................... 63,040 71,167 116,899 83,289
Operating Income..................... 9,798 20,400 1,976 35,586
Net interest income (expenses) and
other income........................ (2,534) (1,892) (2,294) (24,492)
-------- -------- -------- ---------
Earnings (loss) before income
taxes............................... 7,264 18,508 (318) 11,094
Net earnings......................... $ 4,773 $ 11,516 $ (3,564) $ (6,934)
BALANCE SHEET DATA (END OF PERIOD):
Working capital...................... $ 38,911 $ 49,481 $ 61,339 $ 61,339
Total assets......................... 94,243 121,757 168,924 168,924
Total debt........................... 8,398 6,622 214,977 214,977
Senior Exchangeable Redeemable
Preferred Stock..................... -- -- 24,643 24,643
Junior Redeemable
Preferred Stock..................... -- -- 85,998 85,998
Total shareholders' equity
(deficit)........................... 63,648 75,528 (219,874) (219,874)
OTHER FINANCIAL DATA:
EBITDAR (a).......................... $ 28,097 $ 40,471 $ 58,985 $ 58,634
Rental expense....................... 13,124 14,564 17,395 17,395
-------- -------- -------- ---------
EBITDA (a)........................... $ 14,973 $ 25,907 $ 41,590 $ 41,239
======== ======== ======== =========
Cash Flows provided by (used in):
Operating activities............ $ 6,518 $ 10,603 $ 1,213 $ 12,854
Investing activities............ (3,113) (4,711) (6,150) (6,150)
Financing activities............ (1,665) (1,413) 17,684 17,684
Capital expenditures................. 2,692 4,233 5,310 5,310
Gross margin......................... 34.6% 35.7% 36.3% 36.3%
S,G&A as a % of net sales............ 30.0% 27.7% 25.3% 25.4%
EBITDA margin........................ 7.1% 10.1% 12.7% 12.6%
Ratio of EBITDA to net
interest expense.................... -- -- -- 1.6x
Ratio of long-term debt to
EBITDA (b).......................... -- -- -- 5.2x
Ratio of earnings to fixed
charges (c)......................... 2.0x 3.5x 1.0x 1.2x
Ratio of earnings to combined fixed
charges and preferred stock
dividends........................... 2.0x 3.5x 1.0x 1.0x
STORE DATA:
Comparable store sales
increases........................... 6.4% 14.0% 18.0% 18.0%
Average sales per store.............. $ 829 $ 925 $ 1,066 $ 1,066
STORES:
Beginning of period.................. 246 260 286 286
Opened............................... 32 33 31 31
Closed............................... (18) (7) (2) (2)
-------- -------- -------- -------
End of period........................ 260 286 315 315
======== ======== ======== =======
</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. The Company had total
indebtedness of $215.0 million and shareholders' deficit of $219.9 million as of
December 31, 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 December
31. 1997, the Company had $110.0 million of Senior Indebtedness (excluding
unused commitments of $35.8 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 had $115.0 million of
Debenture Guarantor Senior Indebtedness, $110.0 million of which 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 1997 and 1996 accounted for approximately 65% and
76%, 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 323 stores (315 as of December 31, 1997)
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 Recapitalization (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 Recapitalization, 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 audited historical consolidated
capitalization of the Company as of December 31, 1997. 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>
(in thousands)
<S> <C>
Debt:
Revolving Credit Facility (a).............................. $ --
Term Loans................................................. 110,000
Old Notes.................................................. 100,000
Mortgages and capitalized leases........................... 4,977
------------
Total debt............................................... 214,977
Redeemable preferred stock:
Old Senior Exchangeable Preferred Stock.................... 24,643
Junior Redeemable Preferred Stock.......................... 85,998
------------
Total redeemable preferred stock......................... 110,641
============
Junior Perpetual Preferred Stock.............................. 1,930
Common Stock.................................................. 5,624
Retained earnings (deficit)................................... (227,428)
------------
Total shareholders' equity (deficit)..................... (219,874)
------------
Total capitalization................................ $ 105,744
============
</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." On
December 31, 1997, the Company had $35.8 million in remaining availability
under the Revolving Credit Facility.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statement of operations (the
"Pro Forma Financial Statements") has been derived by the application of pro
forma adjustments to the Company's historical statement of operations for the
year ended December 31, 1997 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, 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 January 1, 1997 and do not purport to
indicate results of operations 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 Recapitalization 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 STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1997
-------------------------------------------------
Pro Forma
Actual Adjustments (a) Pro Forma
-------------- ----------------- ------------
<S> <C> <C> <C>
Net sales............................................ $ 327,307 $ -- $ 327,307
Cost of sales........................................ 208,432 -- 208,432
-------------- ---------------- ------------
Gross profit...................................... 118,875 -- 118,875
Selling, general and administrative expenses......... 82,939 350 (a) 83,289
-------------- ---------------- ------------
Recapitalization fees and expenses................... 33,960 (33,960)(b) --
-------------- ---------------- ------------
Total expenses....................................... 116,899 (33,610) 83,289
-------------- ---------------- ------------
Operating income.................................. 1,976 33,610 35,586
Other income (expense):
Interest income................................... 325 -- 325
Interest expense.................................. 3,215 (22,198) (25,413)
Other income...................................... 596 -- 596
-------------- ---------------- ------------
(2,294) (22,198) (24,492)
-------------- ---------------- ------------
Income (loss) before income taxes................. 318 11,412 11,094
Income tax........................................... 3,246 914(d) 4,160
-------------- ---------------- ------------
Net income (loss)................................. (3,564) 10,498 6,934
Dividends and accretion of discount on
preferred stock.................................... (57) (7,007) (e) (7,064)
-------------- ---------------- ------------
Earnings (loss) applicable to
common shareholders................................ $ (3,621) $ 3,491 $ (130)
============== ================ ============
</TABLE>
See accompanying notes.
25
<PAGE>
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(a) Represents annual fees for management and advisory services rendered by
Madison Dearborn.
(b) Reverses non-recurring charges of $25,005 for compensation expense from the
payment to management for their stock options and $8,955 for non-debt
issuance costs.
(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 to
achieve the Company's effective tax rate of 37.5%.
(e) The adjustment reflects the effect of junior 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.
26
<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, 1997 is derived from the audited consolidated financial statements
of the Company. The selected unaudited pro forma statement of operations data
for the year ended December 31, 1997 gives effect to the Transactions as if they
had occurred on January 1, 1997. 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>
Pro Forma
Year Ended
Year Ended December 31, December 31,
------------------------------------------------------------- ------------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $175,790 $190,081 $210,265 $256,756 $ 327,307 $ 327,307
Cost of sales...................... 123,148 137,427 137,427 165,189 208,432 208,432
-------- -------- -------- -------- --------- ---------
Gross profit....................... 52,642 63,150 72,838 91,567 118,875 118,875
Selling, general and
administrative expenses.......... 54,895 57,523 63,040 71,167 82,939 83,289
-------- -------- -------- -------- --------- ---------
Acquisition fees and expenses...... --- --- --- --- 33,960 ---
-------- -------- -------- -------- --------- ---------
Total expenses..................... 54,895 57,523 63,040 71,167 116,899 83,289
Operating Income................... (2,253) 5,627 9,798 20,400 1,976 35,586
Net interest income
(expense) and other income....... (319) (1,611) (2,534) (1,892) (2,294) (24,492)
-------- -------- -------- -------- --------- ---------
Earnings (loss) before income
taxes and cumulative effect
of accounting changes............ (2,572) 4,016 7,264 18,508 (318) 11,094
Cumulative effect of accounting
changes (a)...................... 564 --- --- --- --- ---
Net earnings (loss)................ $ (1,052) $ 2,651 $ 4,773 $ 11,516 $ (3,564) $ 6,934
BALANCE SHEET DATA (END OF
PERIOD):
Working capital.................... $ 36,765 $ 32,418 $ 38,911 $ 49,481 $ 61,339 $ 61,639
Total assets....................... 88,967 89,403 94,243 121,757 168,924 168,924
Total debt......................... 8,997 10,127 8,398 6,622 214,977 214,977
Senior Exchangeable Redeemable
Preferred Stock.................. --- --- --- --- 24,643 24,643
Junior Redeemable Preferred
Stock............................ --- --- --- --- 85,998 85,998
Total shareholders' equity
(deficit)........................ 55,724 58,630 63,648 75,528 (219,874) (219,874)
OTHER FINANCIAL DATA:
EBITDAR (b)........................ $ 12,850 $ 22,461 $ 28,097 $ 40,471 $ 58,985 $ 58,634
Rental expense..................... 11,239 12,323 13,124 14,564 17,395 17,395
-------- -------- -------- -------- --------- ---------
EBITDA (b)......................... $ 1,611 $ 10,138 $ 14,973 $ 25,907 $ 41,590 $ 41,239
======== ======== ======== ======== ========= =========
Cash flows provided by (used in):
Operating activities............. $ 14,630 $ 12,056 $ 6,518 $ 10,603 $ 1,213 $ 12,854
Investing activities............. (6,497) (7,992) (3,113) (4,711) (6,150) (6,150)
Financing activities............. (7,932) (1,257) (1,665) (1,413) 17,684 17,684
Capital expenditures............... 4,850 5,693 2,692 4,233 5,310 5,310
Gross margin....................... 30.0% 33.2% 34.6% 35.7% 36.3% 36.3%
S,G&A as a % of net sales.......... 31.2% 30.3% 30.0% 27.7% 25.3% 25.4%
EBITDA margin...................... 0.9% 5.3% 7.1% 10.1% 12.7% 12.6%
Ratio of EBITDA to net
interest expense................. --- --- --- --- --- 1.6x
Ratio of long-term debt to
EBITDA (c)....................... --- --- --- --- --- 5.2x
Ratio of earnings to fixed
charges (d)...................... --- 1.6x 2.0x 3.5x 1.0x 1.2x
Deficiency of earnings to
cover fixed changes.............. 2,572 --- --- --- --- ---
Ratio of earnings to
combined fixed changes and
preferred stock dividends........ --- 1.6x 2.0x 3.5x 1.0x 1.0x
Deficiency of earnings to cover
combined fixed charges and
preferred stock dividends........ 2,572 --- --- --- --- ---
SELECTED STORE DATA:
Comparable store sales
increases (decreases)............ (3.0)% 4.2% 6.4% 14.0% 18.0% 18.0%
Average sales per store............ $ 796 $ 792 $ 829 $ 925 $ 1,066 $ 1.066
STORES:
Beginning of period................ 190 235 246 260 286 286
Opened........................... 48 22 22 33 31 31
Closed........................... (3) (11) (18) (7) (2) (2)
-------- -------- -------- -------- --------- ---------
End of period...................... 235 246 260 286 315 315
======== ======== ======== ======== ========= =========
</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.
27
<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.
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>
Year Ended December 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 65.4 64.3 63.7
----- ----- -----
Gross profit.................................. 34.6 35.7 36.3
===== ===== =====
Selling, general and administrative expense... 30.3 27.7 25.3
Acquisition fees and expense -- -- 10.4
----- ----- -----
Operating income.............................. 4.7 7.9 .6
===== ===== =====
Net interest and other income................. (1.2) (0.7) (.7)
Earnings before income taxes.................. 3.5 7.2 (.1)
----- ----- -----
Net earnings.................................. 2.3% 4.5% (.1%)
</TABLE>
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 year ended December 31,
1996. The increase in net sales was the result of $25.2 million in sales from
new stores open during the period and from an 18% increase in comparable store
sales. Average store sales for 1997 increased $141,000, or 15.2% to $1,066,000
from $925,000 for 1996. The Company's unique niche in the retail industry and
the breadth of experience of its buying organization have allowed it to offer
tremendous values to its customers, which was the primary factor in its strong
comparable store sales growth.
Gross profit increased $27.3 million, or 29.8%, to $118.9 million from $91.6
million for the year ended December 31, 1996. This increase was attributable to
the 27.5% increase in sales
28
<PAGE>
and the improvement in the Company's gross profit percentage which increased
from 35.7% to 36.3%. This 0.6% increase in gross profit percentage was achieved
through the leveraging of the Company's buying and distribution costs, which
remained relatively fixed in relation to the increase in net sales.
Selling, general and administrative expense also benefited from similar
leverage. These expenses increased 16.5% due to the addition of 32 new stores,
inflationary increases and wage increases. However, these expenses declined as a
percentage of net sales to 25.3% from 27.7% in 1996 due to the leverage
resulting from comparable store sales increases.
Acquisition fees and expenses consisted of compensation paid in lieu of
options of $25 million and fees and expenses of $9.0 million incurred in
connection with the Transactions. Fees and expenses relating to debt incurred
in connection with the Transactions were capitalized and will be amortized over
the life of such indebtedness.
Operating income decreased $18.4 million, or 90.2% from $20.4 million to $1.9
million, due to the acquisition fees and expenses discussed above.
EBITDA before acquisition fees and expenses increased $15.7 million, or 61% to
$41.6 million from $25.9 million in 1996. This increase was due to the strong
comparable store sales increase and the leveraging of expenses which increased
gross profit as a percentage of net sales and reduced selling, general and
administrative expenses as a percentage of net sales.
1996 Compared to 1995
29
<PAGE>
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.
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 due to tax rate
increases and 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 reasons set forth above, net income for the year ended December 31,
1996 increased $6.7 million, or 141.27%, to $11.5 million from $4.8 million for
the year ended December 31, 1995.
Liquidity and Capital Resources
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company historically financed its operations with funds generated from
operating activities and borrowings under the Old Credit Facility.
Net cash provided by operating activities for the fiscal years ended December
31, 1995, 1996, and 1997 was 6.5 million, $10.6 million and 1.2 million
respectively. Increases in net cash provided by operating activities for the
above periods were attributable to increases in operating income. Cash and cash
equivalents as of December 31, 1995, 1996, and 1997 were $6.3 million, $10.8
million and 2.5 million, respectively.
Capital expenditures, principally associated with new store openings,
warehouse and system enhancements and maintenance capital expenditures, were
$2.7 million, $4.2 million and $5.3 million for 1995, 1996, and 1997
respectively.
As part of the Recapitalization, 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 December 31, 1997, the Company had $110.0 million
outstanding under the Term Loans and no amounts outstanding under the Revolving
Credit Facility, with $35.8 million of remaining availability thereunder. The
Term Loan A loans and the Revolving Credit Facility loans will mature on the
fifth anniversary of the Closing, and the Term Loan B loans mature on the
seventh anniversary of the Closing. For 30 consecutive days during each twelve
month period, beginning April 1998, the aggregate principal amount of loans
outstanding under the Revolving Credit Facility may not 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 is 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 and the Senior
Exchangeable Preferred Stock, 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
31
<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, before acquisition
expenses, of 1997 and 1996 accounted for approximately 65% and 76%,
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 1996 and 1997.
TUESDAY MORNING SEASONALITY
(Dollars in thousands)
<TABLE>
<CAPTION> EBITA (excluding
Net Sales acquisition expense) Net Earnings (Loss)
----------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter $ 47,514 14.5% $ 2,799 6.7% 744 20.9%
Second Quarter 67,377 20.6 4,607 11.1 1,715 48.1
Third Quarter 64,167 19.6 6,963 16.7 2,907 81.5
Fourth Quarter 148,249 45.3 27,221 65.5 (8,931) (250.5)
-------- ------ ------- ------ ------- -------
Total $327,307 100.0% $41,590 100.0% $(3,565) 100.0%
======== ====== ======= ====== ======= =======
1996
First Quarter $ 35,740 13.9% $ 532 2.1% $ (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 19,662 75.9 11,060 96.0
-------- ------ ------- ------ ------- ------
Total $256,756 100.0% $25,908 100.0% $11,516 100.0%
======== ====== ======= ====== ======= ======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income" and No. 131
"Disclosures about Segments of an Enterprise and Related Information." These
Statements are required to be adopted in 1998. Statement No. 130 will require
the Company to report comprehensive income and its components with the same
prominence as other financial statements. Statement 131 is not expected to
significantly impact the Company's current disclosures.
32
<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.
33
<PAGE>
BUSINESS
GENERAL
Tuesday Morning is the largest closeout retailer of upscale gift and home
furnishings merchandise in the United States, with 323 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 323, and has achieved compound annual growth rates for sales and EBITDA of
16.3% and 16.6%, respectively. During the year ended December 31, 1997, the
Company generated comparable store sales growth of 18% and net sales and EBITDA
of $327.3 million and $41.6 million, respectively. This represents an increase
of 27.5% and 60.5%, respectively, over sales and EBITDA for the years ended
December 31, 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
34
<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 year ended
December 31, 1997, Tuesday Morning generated EBITDA of $41.6 million, a 60.5%
increase over the comparable period in 1996. During this same period, capital
expenditures were $5.3 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 December 31, 1997,
approximately 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 18% for 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
35
<PAGE>
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
36
<PAGE>
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 7.3%,
6.4% and 5.6% for the years ended December 31, 1995, 1996 and 1997,
respectively.
37
<PAGE>
STORE OPERATIONS
At December 31, 1997, the Company operated 315 Tuesday Morning stores (323
stores as of March 15, 1998) 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
38
<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.
39
<PAGE>
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.
40
<PAGE>
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.
41
<PAGE>
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.,
NWL Holdings, 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.,
NWL Holdings, 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., NWL Holdings, Inc. and Carrols Corporation.
42
<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 Recapitalization) 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."
43
<PAGE>
INVESTMENT BY MANAGEMENT AND STOCK OPTION PLAN
In connection with the Recapitalization, 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 Recapitalization, 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 Recapitalization, 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 Recapitalization) 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 Recapitalization) 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
44
<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
Recapitalization, 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 Recapitalization, 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.
In connection with the Recapitalization, 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.
45
<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.
46
<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
47
<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.
48
<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.
49
<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.
50
<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.
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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
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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 December, 31, 1997, the Company had $110.0 million of Senior
Indebtedness (all of which represented Indebtedness under the Senior Credit
Facility) and $100.0 million of Senior Subordinated Indebtedness (all of which
represented Indebtedness under the Notes) outstanding, and the Company had
additional availability of $35.8 million for revolving credit facility
borrowings under the Senior Credit Facility, all of which would have been 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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<PAGE>
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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<PAGE>
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.
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, $25,699,306 aggregate liquidation
preference of Old Senior Exchangeable Preferred Stock was outstanding. The
Company has fixed the close of business on April 8, 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 May
11, 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, 85,998.236 shares of Junior Redeemable
Preferred Stock and 1,929.763 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
cancelled. 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 July 7, 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.
103
<PAGE>
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,
1996 and 1997, and for each of the years in the three-year period ended December
31, 1997, included herein have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and in the
Registration Statement and upon the authority of said firm as experts in
accounting and auditing.
104
<PAGE>
TUESDAY MORNING CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................................. F-6
Notes to Consolidated Financial Statements for the years ended Decem-
ber 31, 1997, 1996 and 1995.......................................... F-7
</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, 1997 and 1996 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 20, 1998
F-2
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ -------- --------
(IN THOUSANDS
EXCEPT FOR SHARE
DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 23,501 $ 10,754
Inventories.................................................... 99,187 75,493
Prepaid expenses............................................... 1,059 961
Other current assets........................................... 574 726
Income tax receivable (note 11)................................ 18 --
-------- --------
Total current assets....................................... 124,339 87,934
-------- --------
Property, plant and equipment (notes 3, 7 and 8)................ 61,612 56,491
Less accumulated depreciation and amortization................. (30,972) (26,104)
-------- --------
Net property, plant and equipment.......................... 30,640 30,387
-------- --------
Other assets, at cost:
Due from Officers (note 4)..................................... 3,643 2,803
Deferred financing costs....................................... 9,629 287
Other assets................................................... 673 346
-------- --------
Total Assets............................................... $168,924 $121,757
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Installments of mortgages (note 7)............................. $ 1,021 $ 1,021
Installments of notes payable (note 6)......................... 1,350 --
Installments of capital lease obligation (note 8).............. 220 625
Accounts payable............................................... 22,253 22,543
Accrued expenses
Sales tax.................................................... 2,812 2,105
Recapitalization expenses.................................... 30,279 --
Other........................................................ 5,010 5,637
Deferred income taxes (note 11)................................ 55 57
Income taxes payable (note 11)................................. -- 6,465
-------- --------
Total current liabilities.................................. 63,000 38,453
-------- --------
Mortgages on land, buildings and equipment, excluding current
installments (note 7).......................................... 3,573 4,594
Notes payable excluding current installments (note 6)........... 208,650 --
Capital lease obligation excluding current installments (note
8)............................................................. 163 382
Deferred income taxes (note 11)................................. 2,771 2,800
Senior exchangeable redeemable preferred stock, par value $0.1
per share, authorized 1,000,000 shares, 250,000 issued at
December 31, 1997; aggregate liquidation preference $25,000
(note 9)....................................................... 24,643 --
Junior redeemable preferred stock, par value $.01 per share,
authorized 150,000 shares, 85,998 issued at December 31, 1997;
aggregate liquidation preference $85,998 (note 9).............. 85,998 --
Shareholders' equity (deficit) (note 10):
Junior perpetual preferred stock, authorized 2,500 shares,
1,930 issued at December 31, 1997; par value $.01 per share,
aggregate liquidation preference $1,930....................... 1,930 --
Common stock par value $.01 per share, authorized 30,000,000
shares; issued 12,271,554 shares at December 31, 1996.
Authorized 10,000,000 shares; issued 3,749,993 shares at
December 31, 1997............................................. 37 123
Additional paid-in capital..................................... 5,587 18,599
Retained earnings (deficit).................................... (227,428) 58,834
Treasury stock 411,750 shares at December 31, 1996............. -- (2,028)
-------- --------
Total shareholders' equity (deficit)....................... (219,874) 75,528
-------- --------
Commitments and contingencies (notes 5, 6, 13, 15 and 17)
Total Liabilities and Shareholders' Equity (Deficit)....... $168,924 $121,757
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales......................................... $327,307 $256,756 $210,265
Cost of sales..................................... 208,432 165,189 137,427
-------- -------- --------
Gross profit.................................. 118,875 91,567 72,838
Selling, general and administrative expenses...... 82,939 71,167 63,040
Recapitalization fees and expenses (note 1)....... 33,960 -- --
-------- -------- --------
Total expenses................................ 116,899 71,167 63,040
Operating profit.............................. 1,976 20,400 9,798
-------- -------- --------
Other income (expense):
Interest income................................. 325 275 204
Interest expense................................ (3,215) (2,767) (3,330)
Other income.................................... 596 600 592
-------- -------- --------
(2,294) (1,892) (2,534)
-------- -------- --------
Earnings (loss) before income taxes........... (318) 18,508 7,264
Income tax expense (note 11)...................... 3,246 6,992 2,491
-------- -------- --------
Net earnings (loss)........................... $ (3,564) $ 11,516 $ 4,773
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNIOR
PERPETUAL
PREFERRED TREASURY TOTAL
COMMON STOCK ADDITIONAL STOCK RETAINED STOCK SHAREHOLDERS'
--------------- PAID-IN ------------- EARNINGS ------------- EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) SHARES AMOUNT (DEFICIT)
------- ------ ---------- ------ ------ --------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994.................... 12,150 122 18,130 -- -- 42,545 (450) (2,167) 58,630
Net earnings............ -- -- -- -- -- 4,773 -- -- 4,773
Shares issued in
connection with
Employee Stock Option
Plan (note 10)........... 66 -- 162 -- -- -- -- -- 162
Treasury shares sold in
connection with Stock
Purchase Plan (note 10).. -- -- (56) -- -- -- 38 139 83
------- ---- ------- --- ----- -------- ---- ------ --------
Balance at December 31,
1995.................... 12,216 122 18,236 -- -- 47,318 (412) (2,028) 63,648
Net earnings............ -- -- -- -- -- 11,516 -- -- 11,516
Shares issued in
connection with
Employee Stock Option
Plan (note 10)........... 56 1 382 -- -- -- -- -- 383
Treasury shares sold in
connection with Stock
Purchase Plan (note 10).. -- -- (19) -- -- -- -- -- (19)
------- ---- ------- --- ----- -------- ---- ------ --------
Balance at December 31,
1996.................... 12,272 123 18,599 -- -- 58,834 (412) (2,028) 75,528
Net loss................ -- -- -- -- -- (3,564) -- -- (3,564)
Exercise of options..... 77 1 519 -- -- -- -- -- 520
Shares issued in
connection with
Employee Stock Option
Plan (note 10)........... 86 1 416 -- -- -- -- -- 417
Treasury shares sold in
connection with Stock
Purchase Plan (note 10).. -- -- (114) -- -- -- -- -- (114)
Redeem shares from
shareholders (note 1).. (12,435) (125) (19,153) -- -- (282,641) 412 2,028 (299,891)
Issuance of common
shares (note 1)........ 3,500 35 4,965 -- -- -- -- -- 5,000
Issuance of junior
perpetual preferred
shares (note 1)........ -- -- -- 2 1,930 -- -- -- 1,930
Issuance of common
shares to senior
preferred shareholders
(note 10)................ 250 2 355 -- -- -- -- -- 357
Dividends on junior and
senior preferred stock. -- -- -- -- -- (57) -- -- (57)
------- ---- ------- --- ----- -------- ---- ------ --------
Balance at December 31,
1997.................... 3,750 37 5,587 2 1,930 (227,428) 0 0 (219,874)
======= ==== ======= === ===== ======== ==== ====== ========
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers................... $327,309 $256,756 $210,265
Cash paid to suppliers and employees........... (313,692) (240,948) (199,454)
Interest received.............................. 325 275 204
Interest paid.................................. (3,026) (2,622) (3,135)
Income taxes paid.............................. (9,703) (2,858) (1,362)
-------- -------- --------
Net cash provided by operating activities.... 1,213 10,603 6,518
-------- -------- --------
Cash flows used by investing activities:
Loans to officers.............................. (2,259) (752) (506)
Payments from officers......................... 1,419 274 85
Capital expenditures........................... (5,310) (4,233) (2,692)
-------- -------- --------
Net cash used by investing activities........ (6,150) (4,711) (3,113)
-------- -------- --------
Cash flows from financing activities:
Proceeds from term notes and senior
subordinated debt............................. 210,000 -- --
Proceeds from shareholders..................... 117,928 -- --
Payments to shareholders....................... (299,891) -- --
Financing fees................................. (9,531) (1) (180)
Payment of mortgages........................... (1,021) (1,021) (1,063)
Principal payments under capital lease
obligation.................................... (624) (754) (666)
Proceeds from exercise of common stock
options/stock purchase plan................... 823 362 245
-------- -------- --------
Net cash provided by (used by) financing
activities.................................. 17,684 (1,414) (1,664)
-------- -------- --------
Net increase in cash and cash equivalents........ 12,747 4,478 1,741
Cash and cash equivalents at beginning of period. 10,754 6,276 4,535
-------- -------- --------
Cash and cash equivalents at end of period....... $ 23,501 $ 10,754 $ 6,276
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(1) RECAPITALIZATION
On December 29, 1997, Madison Dearborn Capital Partners II, L.P. ("Madison
Dearborn"), certain members of management, and certain unaffiliated investors
acquired all of the outstanding capital stock of the Company for an equity
investment of $117,928. The equity investment consisted of (i) an $85,388
investment by Madison Dearborn (comprised of $4,594 of common stock of the
Company, and $80,794 of junior redeemable preferred stock of the Company),
(ii) a $7,540 of investment by certain members of management of the Company
(comprised of $406 in common stock and $7,134 in junior redeemable preferred
stock), and (iii) a $25,000 investment by certain unaffiliated investors in
units consisting of senior exchangeable redeemable preferred stock and common
stock. The Company used the proceeds from the equity investment and
approximately $225,454 of aggregate proceeds from the financings described
below (i) to pay $324,896 as acquisition consideration and (ii) to pay $18,486
in transaction fees and expenses.
The financings consisted of (i) a $200,000 credit facility comprised of a
$110,000 term loan facility, and a $90,000 revolving credit facility which,
subject to certain conditions, can be increased up to $115,000, of which
approximately $15,454 was drawn in January 1998 in connection with the
Transaction, and (ii) $100,000 from the sale of senior subordinated notes.
The sources and uses of funds related to the acquisition are set forth as
follows:
<TABLE>
<S> <C>
Sources of Funds:
Term loans.................................................... $110,000
Revolving credit facility..................................... 15,454
Senior subordinated notes..................................... 100,000
Senior exchangeable preferred stock........................... 25,000
Junior redeemable preferred stock............................. 85,998
Junior perpetual preferred stock.............................. 1,930
Common stock.................................................. 5,000
--------
Total....................................................... $343,382
========
Uses of Funds:
Recapitalization consideration................................ $299,891
Payment to option holders..................................... 25,005
Fees and expenses............................................. 18,486
--------
Total....................................................... $343,382
========
</TABLE>
Fees and expenses of $18,486 consist of $8,955 which was expensed in the
year ended December 31, 1997, and $9,531 which was capitalized as deferred
financing costs. Payments to option holders were expensed in the year ended
December 31, 1997.
The acquisition has been accounted for as a recapitalization and, as such,
has no impact on the historical basis of assets and liabilities.
(2) 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.
F-7
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The Company owned and operated 315 deep discount retail stores in 33 states
at December 31, 1997 (286 and 260 stores at December 31, 1996 and 1995,
respectively). The Company sells close-out housewares and related gift
merchandise, which it purchases at prices below wholesale prices. Company
stores are open for seven 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 $22,312 in 1997 and $8,352 in 1996 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, 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) Deferred Financing Costs--Deferred financing costs represent fees paid
in connection with obtaining bank and other long-term financing. The fees are
amortized over the term of the related financing.
(f) 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.
(g) Pre-opening Costs--The Company capitalizes certain costs directly
related to opening new stores and amortizes these costs over twelve months.
(h) Advertising--Costs for newspaper, television, radio, and other media are
expensed as the advertised events take place. Advertising expense for 1997,
1996 and 1995 was $18,438, $16,475, and $15,317 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.
F-8
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(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. Net losses totaled $159 for 1997 and
were minimal in 1996. Current year losses are primarily due to canceling
foreign exchange contracts entered into under the Company's former bank
relationship as a result of the acquisition.
(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 exceeds 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.
(m) Reclassifications--Certain prior year amounts have been reclassed to
conform to the current period presentation.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net of accumulated depreciation consist of
the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land.................................................. $ 8,356 $ 8,356
Buildings............................................. 13,926 13,926
Furniture and fixtures................................ 19,861 17,658
Equipment............................................. 17,109 14,469
Leasehold improvements................................ 2,360 2,082
-------- --------
$ 61,612 $ 56,491
Less accumulated depreciation......................... (30,972) (26,104)
-------- --------
Total............................................. $330,640 $ 30,387
======== ========
</TABLE>
F-9
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(4) DUE FROM OFFICERS
Due from officers at December 31, 1997 and 1996 is $3,643 and $2,803
respectively. As of December 31, 1997, $3,153 of the amount due from officers
was secured by 219,013 shares of the Company's common stock and 5,502 shares
of the Company's junior preferred stock. The remaining balance due is on open
account and is periodically paid down. Effective December 29, 1997, the
amounts due accrue interest at the mid-term federal rate of 6.02% as defined
by Internal Revenue Service Code Section 1274(d). Previously these loans bore
interest at prime.
(5) 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.
(6) NOTES PAYABLE
At December 31, 1997, notes payable consists of the following:
<TABLE>
<S> <C>
Senior credit facility.......................................... $110,000
Senior subordinated notes....................................... 100,000
--------
210,000
Less current portion............................................ (1,350)
--------
$208,650
========
</TABLE>
Senior Credit Facility--In connection with the Recapitalization, the Company
entered into a senior credit facility agreement on December 29, 1997, which
provides for a revolving credit facility of $90,000 which, subject to certain
conditions, can be increased to $115,000 and a term loan facility totaling
$110,000. This agreement is secured by a pledge of substantially all of the
Company's assets.
The revolving credit facility is for a period of five years and requires a
cleandown to less than $15,000 for thirty consecutive days during each twelve
month period beginning April 1, 1998. Borrowings are limited to the lesser of
$90,000 (unless the maximum has been increased to as much as $115,000, as
provided for in the agreement) or 50% (60% from July 1--October 31 of each
year) of eligible inventory, as defined. The availability is further reduced
by the aggregate undrawn amount of outstanding letters of credit. At the
Company's option, the amount borrowed will bear interest at either LIBOR plus
2.50% or the lender's alternate base rate plus 1.50%. There is a provision
within the agreement to reduce the interest rates as the leverage ratio is
reduced.
The term loan facility consists of two tranches designated A and B. Tranche
A term loans are for $40,000 and mature in five years while tranche B term
loans are $70,000 and mature in seven years. At the Company's option, tranche
A term loans bear interest at LIBOR plus 2.50% or the Alternate Base Rate plus
1.50%. Tranche B term loans bear interest at LIBOR plus 3.00% or the Alternate
Base Rate plus 2.00%. The term loan interest rates will also be reduced as the
leverage ratio is reduced.
The Company had no balances outstanding related to the revolving line of
credit at December 31, 1997. As of December 31, 1997, the Company had
outstanding letters of credit of $9,468 for inventory purchases.
F-10
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The interest rates on the Tranche A and B term loans at December 31, 1997
were 10.0% and 10.5%, respectively. On January 5, 1998 these rates changed to
8.31% and 8.81%, respectively. The Company incurs commitment fees of 0.50% on
the unused portion of the revolving credit facility.
Scheduled, mandatory principal payments for the term loans are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 1,350
1999............................................................. 3,700
2000............................................................. 6,700
2001............................................................. 10,700
2002............................................................. 20,700
thereafter....................................................... 66,850
--------
$110,000
========
</TABLE>
The Company is allowed under the agreement to make voluntary prepayments of
term loan principal.
Beginning in 1998, the senior credit facility agreement contains certain
restrictive covenants which, among other things, require the Company to comply
with certain financial covenants including limitations on dividends,
indebtedness, and capital expenditures.
Senior Subordinated Notes--The senior subordinated notes bear interest at
11.0% and are due on December 15, 2007. These Notes are subordinated to any
amounts outstanding under the senior credit facility. Interest is payable on
June 15 and December 15 of each year. At any time prior to December 15, 2000,
at the option of the Company, up to 35% of the outstanding aggregate face
amount of the senior subordinated notes may be redeemed at a redemption price
of 111.00% using the proceeds of certain equity issuances. Beginning December
15, 2002, the senior subordinated notes will be subject to redemption at the
option of the Company in whole or in part, with proper notice at the
redemption prices set forth below, plus accrued interest.
<TABLE>
<CAPTION>
TWELVE MONTH
PERIOD
BEGINNING PERCENTAGE OF PRINCIPAL
DECEMBER 15 AMOUNT
------------ -----------------------
<S> <C>
2002............................................. 105.50%
2003............................................. 103.67%
2004............................................. 101.83%
2005 and thereafter.............................. 100.00%
</TABLE>
The senior subordinated notes contain certain restrictive covenants which,
among other things, limit the Company's ability to incur additional
indebtedness and pay dividends or distributions or make investments.
F-11
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(7) MORTGAGE ON LAND, BUILDINGS 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, 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%, (7.6% at December 31, 1997) with principal and interest
due monthly. It matures on June 10, 2002.
Mortgages consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Note payable to bank, in monthly installments of $85
plus interest........................................ $ 4,594 $ 5,615
Less current installments............................. (1,021) (1,021)
------- -------
$ 3,573 $ 4,594
======= =======
</TABLE>
In connection with this mortgage, the Company is required to maintain
minimum net worth and comply with other financial covenants. At December 31,
1997, the Company is in compliance with these covenants.
The maturities of the mortgage are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998............................................................... $1,021
1999............................................................... 1,021
2000............................................................... 1,021
2001............................................................... 1,021
2002............................................................... 510
</TABLE>
(8) CAPITAL LEASE
During 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. Depreciation expense during 1997 and 1996 was
$528 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 10.8%.
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, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998............................................................... $251
1999............................................................... 169
----
Total minimum lease payments....................................... 420
Less: Amount representing interest................................. (37)
----
Present value of net minimum lease payments........................ 383
Less: current installments......................................... (220)
----
Long term capital lease obligation................................. $163
====
</TABLE>
F-12
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(9) REDEEMABLE PREFERRED STOCK
On December 29, 1997, in connection with the acquisition, the Company issued
250,000 units consisting of one share of senior exchangeable redeemable
preferred stock ("Senior Preferred Stock") and one share of common stock. The
Senior Preferred Stock and common stock become separately transferable upon
the earlier of (i) a change in control of the Company as defined, (ii) the
date upon which a registration statement under the Securities Act of 1933
relating to the Senior Preferred Stock is declared effective, (iii)
immediately prior to any redemption of the Senior Preferred Stock by the
Company with the proceeds of a public offering, or (iv) any earlier date as
determined by the underwriter of the issue. The proceeds of $25,000 was
allocated between Senior Preferred Stock and common stock based on the
relative values of the common and preferred stock on the transaction date. The
Senior Preferred Stock earns cumulative dividends of 13 1/4% annually, payable
quarterly. On or before December 15, 2002, dividends may, at the option of the
Company, be paid either in cash or additional shares of Senior Preferred
Stock. After December 15, 2002, dividends may only be paid in cash. Each share
of Senior Preferred Stock is exchangeable into debentures, subject to certain
conditions, equal to the liquidation value at the Company's option.
On December 15, 2009, the Company will be required to redeem all outstanding
shares of Senior Preferred Stock at a price equal to liquidation value. The
Company may, at its option, redeem for cash the Senior Preferred Stock on or
after December 15, 2002, at the redemption prices set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................... 109.938%
2003........................................................... 106.625%
2004........................................................... 103.313%
2005 and thereafter............................................ 100.000%
</TABLE>
In addition, the Company may redeem for cash all the outstanding shares of
Senior Preferred Stock within 20 days of a public offering of the Company's
common stock at a redemption price per share equal to 113.25% of the aggregate
liquidation value.
On December 29, 1997, in connection with the acquisition, the Company issued
85,998 shares of junior redeemable preferred stock (the "Junior Redeemable
Preferred"). The Junior Redeemable Preferred earns cumulative dividends of 8%
annually, payable quarterly. Dividends must be paid in cash. The Company has
the option to redeem the Junior Redeemable Preferred at any time without
premium or penalty. The Company is required to redeem the Junior Redeemable
Preferred upon the earlier of December 29, 2010 or a sale of the Company.
In connection with the acquisition, the Chairman of the Board entered into a
put agreement with the Company and Madison Dearborn which provides him the
right on December 29, 1999 to put his Junior Redeemable Preferred to the
Company or Madison Dearborn for an amount equal to liquidation value. In the
event the Chairman exercises his put, he will be required to transfer his
shares of common stock to the Company or Madison Dearborn for no additional
consideration and his loan will become due and payable (see note 4).
In connection with the acquisition, the Company's President entered into a
put agreement with the Company and Madison Dearborn which provides him the
right on or after December 31, 2000 (earlier in certain circumstances) to put
approximately 76% of his Junior Redeemable Stock and common stock to the
Company. Under the put agreement, the Company has the option to pay for the
shares 25% in cash and 75% by the issuance of a subordinated promissory note
payable in three equal annual installments.
F-13
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(10) SHAREHOLDERS' EQUITY
On May 13, 1997, the Board of Directors approved a three-for-two stock split
of the Company's common stock. All share information in the accompanying
financial statements give retroactive effect to the split, which was completed
in June 1997.
On December 29, 1997, in connection with the acquisition, the Company
repurchased and retired all outstanding common stock. All treasury shares were
canceled. New common shares totaling 3,749,993 were issued to Madison
Dearborn, certain members of management and certain unaffiliated investors.
Junior Perpetual Preferred totaling 1,930 shares was issued to Madison
Dearborn and certain members of management. The Junior Perpetual Preferred
earns cumulative dividends of 8% annually, payable quarterly. Dividends must
be paid in cash.
After the acquisition, the Company established a stock option plan (the "New
Plan") which allows the Company's Board of Directors to grant stock options to
directors, officers, key employees and other key individuals performing
services for the Company. The New Plan authorizes grants of options to
purchase up to 416,666 shares of authorized but unissued common stock. Stock
options are granted with an exercise price, terms and vesting determined by
the Compensation Committee of the Board with certain limitations.
At December 29, 1997, options were granted under the New Plan for 125,000
shares which were issued at an exercise price of $1.43 per share and a
contractual life of 3 years, all of which were still outstanding at December
31, 1997. Fair value of options issued on December 29, 1997 under the New Plan
is equal to the exercise price. At December 31, 1997, there were 291,666
additional shares available for grant under the New Plan.
Prior to the effective date of the acquisition, the Company had a stock
option plan (the "Old Plan") covering 2,160,500 shares of the Company's common
stock which could be granted to employees of the Company. Under the Old Plan,
stock options were granted at fair market value and vested over varying
periods not exceeding 10 years. No options were granted in 1997 or 1996 under
the Old Plan.
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 earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996
----- -------
<S> <C> <C>
Net earnings (loss) As reported........................... $(318) $11,516
Pro forma.................................... (323) 11,321
</TABLE>
Pro forma net earnings (loss) reflects only options granted since December
31, 1994. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected over
the options' vesting period of three years and compensation cost for options
granted prior to January 1, 1995 is not considered.
F-14
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
Stock option activity in the Old Plan during the periods indicated is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at December 31, 1994................... 1,582,200 $4.24
Exercised during year........................ (66,000) 2.47
Canceled during year......................... (276,750) 5.79
Granted during year.......................... 153,750 4.00
----------
Balance at December 31, 1995................... 1,393,200 $3.99
Exercised during year........................ (56,175) 3.15
Canceled during year......................... (2,250) 6.42
----------
Balance at December 31, 1996................... 1,334,775 $4.02
Exercised during year........................ (162,512) 2.86
Canceled during year......................... (1,172,263) 4.17
Granted during year.......................... -- --
----------
Balance at December 31, 1997................... -- $ --
==========
</TABLE>
(11) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1997
U.S. Federal..................................... $2,944 (82) 2,862
State, local and other........................... 334 50 384
------ ---- -----
Total............................................ 3,278 (32) 3,246
====== ==== =====
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
====== ==== =====
</TABLE>
A reconciliation of the expected Federal income tax expense (benefit) to
actual tax expense follows (based upon tax rates of 34% for 1997, 35% for 1996
and 34% for 1995):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected Federal income tax expense (benefit)..... $ (108) $6,478 $2,470
Recapitalization expenses not deductible for
Federal taxes.................................... 3,029 -- --
State income taxes, net of related Federal tax
effect........................................... 425 378 90
Other, net........................................ (100) 136 (69)
------ ------ ------
$3,246 $6,992 $2,491
====== ====== ======
</TABLE>
F-15
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Compensated absences..................................... $ 190 $ 169
NOL carry forward........................................ 143 224
Accrued expenses, principally due to items not yet
deductible for income tax purposes...................... 487 499
------ ------
Total gross deferred assets............................ $ 820 $ 892
------ ------
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation and capitalized interest.... $2,886 $3,024
Inventory costs.......................................... 425 473
Other.................................................... 335 252
------ ------
Total gross deferred tax liabilities................... 3,646 3,749
------ ------
Net deferred tax liability............................. $2,826 $2,857
====== ======
</TABLE>
Management expects the deferred tax assets at December 31, 1997 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, 1997 or December 31, 1996.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
The reconciliation of net earnings (loss) to net cash provided by operating
activities for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Net earnings (loss)................................. $(3,564) $11,516 $4,773
Adjustments to reconcile net earnings (loss) to net
cash
provided by operating activities:
Depreciation and amortization..................... 5,057 4,907 4,583
Deferred income taxes............................. (31) (369) 2
Amortization of deferred financing fees........... 189 145 195
Changes in operating assets and liabilities:
Inventories....................................... (23,694) (23,127) (5,552)
Prepaid expenses.................................. (98) (172) 710
Other current assets.............................. 152 (268) 191
Other assets and liabilities...................... (327) 190 67
Accounts payable.................................. (290) 9,836 (209)
Accrued expenses.................................. 30,302 3,616 610
Income taxes payable.............................. (6,483) 4,329 1,148
------- ------- ------
Total adjustments............................... 4,777 (913) 1,556
------- ------- ------
Net cash provided by operating activities....... $ 1,213 $10,603 $6,518
======= ======= ======
</TABLE>
F-16
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(13) OPERATING LEASES
The Company leases substantially all store locations under non-cancelable
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:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998............................................................. $19,307
1999............................................................. 16,299
2000............................................................. 14,351
2001............................................................. 11,480
2002............................................................. 6,592
Later years...................................................... 5,849
-------
Total minimum rental payments.................................... $73,878
=======
</TABLE>
In the normal course of business, management expects to renew or replace
leases for store locations as they expire. Rental expense for 1997, 1996 and
1995 was $17,395, $14,564 and $13,124, respectively.
(14) 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 $433, $403,
and $327 during the years ended December 31, 1997, 1996 and 1995,
respectively.
(15) FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1996, the Company had approximately $5,391 and
$4,042, respectively, of net foreign exchange contracts. 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 receivables from officers, variable rate long-term
debt, and foreign exchange contracts as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Assets--notes receivable..................... $ 3,643 $ 3,490 $2,878 $2,878
Liabilities:
Foreign exchange contracts
unrealized (gain)........................ -- -- -- (32)
unrealized loss.......................... -- 75 -- 14
Variable rate long-term debt............... $114,594 $114,594 $5,615 $5,615
</TABLE>
F-17
<PAGE>
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996, AND 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The fair value of the Company's notes receivable at December 31, 1997 is
less than the carrying value as the notes earn interest at a rate less than
market. The variable rate long-term debt and the notes receivable at December
31, 1996 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.
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results for 1997 and 1996 follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC.
1997 1997 1997 31, 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales................................ $47,514 67,377 64,167 148,249
Comparable store sales increase.......... 23.0% 16.0% 18.0% 17.9%
Gross profit............................. $17,893 23,008 25,536 52,437
Net earnings (loss)...................... $ 744 1,715 2,907 (8,930)
<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............................. $13,397 18,218 18,750 41,203
Net earnings (loss)...................... $ (676) 434 698 11,060
</TABLE>
(17) RELATED PARTY TRANSACTIONS
During 1997, the Company paid Madison Dearborn Partners II, L.P. $3,500 in
fees related to the merger. Starting in 1998, Madison Dearborn Partners II,
L.P. will provide management and advisory services to the Company and will
receive $350 per year.
On December 29, 1997, the Company entered into a three-year employment
agreement with the Company's President, Chief Executive Officer and Director,
providing for $475 in annual salary, subject to possible increases, in
addition to a maximum annual bonus of up to 50% of base salary. The Company
also entered into a two-year consulting and non-competition agreement with the
Company's founder, to serve as Chairman of the Board of Directors and to
facilitate the Company's relationships with third parties and suppliers. The
contract provides for annual compensation of $250 per year. These agreements
also provide for certain non-compete and non-solicitation covenants and
confidentiality provisions.
F-18
<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.............................................................. 15
Use of Proceeds........................................................... 22
Capitalization............................................................ 23
Unaudited Pro Forma Financial Statements.................................. 23
Selected Consolidated Financial Data...................................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................ 27
Business.................................................................. 31
Management................................................................ 38
Certain Transactions...................................................... 41
Principal Shareholders.................................................... 43
Description of the Senior Credit Facility................................. 44
Description of the Units.................................................. 46
The Preferred Stock Exchange Offer........................................ 88
Description of the Capital Stock.......................................... 98
Description of the Exchange Notes......................................... 101
Certain Federal Income Tax Considerations................................. 102
Plan of Distribution...................................................... 102
Legal Matters............................................................. 103
Experts................................................................... 103
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
---------------------
APRIL 8, 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>
_________________
* Previously filed.
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 Amendment No. 1 to 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 April 6, 1998.
TUESDAY MORNING CORPORATION
By: /s/ Jerry M. Smith
---------------------------------------
Jerry M. Smith
Chief Executive Officer and President
****
----
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
--------- -------- -----
<S> <C> <C>
/s/ Jerry M. Smith*
- -----------------------------
Jerry M. Smith Chief Executive Officer, President April 6, 1998
and Director
/s/ Mark E. Jarvis*
- -----------------------------
Mark E. Jarvis Senior Vice President, Chief April 6, 1998
Financial Officer and Secretary
/s/ G. Michael Anderson*
- -----------------------------
Michael Anderson Senior Vice President, Buying Group April 6, 1998
/s/ Lloyd L. Ross*
- -----------------------------
Lloyd L. Ross Chairman of the Board April 6, 1998
/s/ William J. Hunckler, III*
- -----------------------------
William J. Hunckler, III Director April 6, 1998
/s/ Benjamin D. Chereskin*
- -----------------------------
Benjamin D. Chereskin Director April 6, 1998
*By: /s/ Robin P. Selati
-----------------------
Robin P. Selati Director April 6, 1998
</TABLE>
II-7
<PAGE>
Exhibit 23.1
[Letterhead of KPMG Peat Marwick LLP]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors
Tuesday Morning Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
April 3, 1998
<PAGE>
FORM T-1
==============================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) _______
------------------
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)
114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)
------------------
Tuesday Morning Corporation
(Exact name of obligor as specified in its charter)
Delaware 75-2398532
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
14621 Inwood Road
Dallas Texas 75244
(Address of principal executive offices) (Zip Code)
------------------
13 1/4% Subordinated Exchange Debentures due 2009
(Title of the indenture securities)
==============================================
<PAGE>
- 2 -
GENERAL
1. General Information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System).
Federal Deposit Insurance Corporation, Washington, D. C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. Affiliations with the Obligor
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3. Voting Securities of the Trustee
2,999,020 shares of Common Stock - par value $5 per share
4. Trusteeships under Other Indentures
Not applicable.
5. Interlocking Directorates and Similar Relationships with the Obligor or
Underwriters
Not applicable.
<PAGE>
- 3 -
6. Voting Securities of the Trustee Owned by the Obligor or its Officials
Not applicable.
7. Voting Securities of the Trustee Owned by Underwriters or their Officials
Not applicable.
8. Securities of the Obligor Owned or Held by the Trustee
Not applicable.
9. Securities of Underwriters Owned or Held by the Trustee
Not applicable.
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
Affiliates or Securities Holders of the Obligor
Not applicable.
11. Ownership or Holdings by the Trustee of any Securities of a Person Owning
50 Percent or More of the Voting Securities of the Obligor
Not applicable.
12. Indebtedness of the Obligor to the Trustee
Not applicable.
13. Defaults by the Obligor
Not applicable.
14. Affiliations with the Underwriters
Not applicable.
<PAGE>
- 4 -
15. Foreign Trustee
Not applicable.
16. List of Exhibits
T-1.1 -- Organization Certificate, as amended, issued by the
State of New York Banking Department to transact
business as a Trust Company, is incorporated by
reference to Exhibit T-1.1 to Form T-1 filed on
October 6, 1995 with the Commission pursuant to the
Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 in an amended filing to
an original Registration Statement filed on August 28,
1995 (Registration No. 33-96262).
T-1.2 - Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
T-1.4 -- The By-Laws of United States Trust Company of New
York, as amended, is incorporated by reference to
Exhibit T-1.4 to Form T-1 filed on October 6, 1995
with the Commission pursuant to the Trust Indenture
Act of 1939, as amended by the Trust Indenture Reform
Act of 1990 in an amended filing to an original
Registration Statement filed on August 28, 1995
(Registration No. 33-96262 ).
T-1.6 -- The consent of the trustee required by Section 321(b)
of the Trust Indenture Act of 1939, as amended by the
Trust Indenture Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the
trustee pursuant to law or the requirements of its
supervising or examining authority.
NOTE
As of April 2, 1998, the trustee had 2,999,020 shares of Common
Stock outstanding, all of which are owned by its parent company,
U. S. Trust Corporation. The term "trustee" in Item 2, refers to
each of United States Trust Company of New York and its parent
company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility, as to
matters peculiarly within the knowledge of the obligor or its
directors, the trustee has relied upon information furnished to
it by the obligor and will rely on information to be furnished by
the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
<PAGE>
- 5 -
Pursuant to the requirements of the Trust Indenture Act of 1939,
the trustee, United States Trust Company of New York, a
corporation organized and existing under the laws of the State of
New York, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York,
on the 2nd day of April, 1998.
UNITED STATES TRUST COMPANY OF
NEW YORK, Trustee
By: John Guiliano
Vice President
JG/pg
(rev:080996)
<PAGE>
Exhibit T-1.6
-------------
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
---------------------
By: /S/Gerard F. Ganey
Senior Vice President
<PAGE>
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1997
-----------------
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
Cash and Due from Banks $ 80,246
Short-Term Investments 386,006
Securities, Available for Sale 661,596
Loans 1,774,551
Less: Allowance for Credit Losses 16,202
----------
Net Loans 1,758,349
Premises and Equipment 61,477
Other Assets 124,499
----------
Total Assets $3,072,173
==========
LIABILITIES
- -----------
Deposits:
Non-Interest Bearing $ 686,507
Interest Bearing 1,773,254
----------
Total Deposits 2,459,761
Short-Term Credit Facilities 295,342
Accounts Payable and Accrued Liabilities 149,775
----------
Total Liabilities $2,904,878
==========
STOCKHOLDER'S EQUITY
- --------------------
Common Stock 14,995
Capital Surplus 49,541
Retained Earnings 100,235
Unrealized Gains on Securities
Available for Sale (Net of Taxes) 2,524
----------
Total Stockholder's Equity 167,295
----------
Total Liabilities and
Stockholder's Equity $3,072,173
==========
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
Richard E. Brinkmann, SVP & Controller
February 9, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> CT
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and related consolidated statement of income of
Tuesday Morning Corporation and subsidiaries as of December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK>
<NAME>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<TOTAL-ASSETS> 168,924
110,641
1,930
<COMMON> 37
<OTHER-SE> (221,841)
<TOTAL-LIABILITY-AND-EQUITY> 168,924
<TOTAL-REVENUES> 327,307
<INCOME-TAX> 3,246
<INCOME-CONTINUING> (3,564)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,564)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
LETTER OF TRANSMITTAL EXHIBIT 99.1
TO TENDER FOR EXCHANGE
13 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
OF
TUESDAY MORNING CORPORATION
PURSUANT TO THE PROSPECTUS DATED APRIL 8, 1998
THE PREFERRED STOCK EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,NEW YORK CITY
TIME, ON MAY 11, 1998 UNLESS EXTENDED.
TO: UNITED STATES TRUST COMPANY OF NEW YORK (THE "EXCHANGE AGENT")
By Registered or Certified Mail:
United States Trust Company of New York
P.O. Box 844 Cooper Station
New York, New York 10276-0844
Attention: Corporate Trust Operations
By Overnight Courier and By Hand after 4:30 p.m. on the Expiration Date only:
United States Trust Company of New York
770 Broadway--13th Floor
New York, New York 10003
Attn: Corporate Trust Operations
By Hand before 4:30 p.m.:
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attn: Lower Level Corporate Trust Window
By Facsimile: (212) 780-0592
Attn: Corporate Trust Operations
Confirm by telephone: (800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF THIS INSTRUMENT VIA A FACSIMILE NUMBER OTHER THAN THE ONE
LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
The undersigned acknowledges receipt of the Prospectus, dated April 8, 1998
(the "Prospectus") of Tuesday Morning Corporation, a Delaware corporation (the
"Company"), and this Letter of Transmittal (the "Letter of Transmittal"),
which together describe the Company's offer (the "Preferred Stock Exchange
Offer") to exchange $100 liquidation preference of its Series B 13 1/4% Senior
Exchangeable Preferred Stock due 2009 (the "New Senior Exchangeable Preferred
Stock"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement, 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 $25,699,306 aggregate liquidation preference is outstanding. The term
"Expiration Date" shall mean 5:00 p.m., New York City time, on May 11, 1998,
unless the Company, in its
<PAGE>
sole discretion, extends the Preferred Stock Exchange Offer, in which case the
term shall mean the latest date and time to which the Preferred Stock Exchange
Offer is extended. The term "Holder" with respect to the Preferred Stock
Exchange Offer means any person in whose name Old Senior Exchangeable
Preferred Stock are registered on the books of the Company or any other person
who has obtained a properly completed stock power from the registered holder.
Capitalized terms used but not defined herein have the respective meanings set
forth in the Prospectus.
This Letter of Transmittal is to be used by holders of Old Senior
Exchangeable Preferred Stock if (i) certificates representing the Old Senior
Exchangeable Preferred Stock are to be physically delivered to the Exchange
Agent herewith, (ii) tender of the Old Senior Exchangeable Preferred Stock is
to be made by book entry transfer to the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in the Prospectus under the caption "The Preferred Stock
Exchange Offer--Procedures for Tendering" by any financial institution that is
a participant in the Book-Entry Transfer Facility and whose name appears on a
security position listing as the owner of Old Senior Exchangeable Preferred
Stock (such participants acting on behalf of holders, are referred to herein,
together with such holders, as "Acting Holders") or (iii) tender of the Old
Senior Exchangeable Preferred Stock is to be made according to the guaranteed
delivery procedures described in the Prospectus under the caption "The
Preferred Stock Exchange Offer--Guaranteed Delivery Procedures." See
Instruction 2 below. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with
respect to the Preferred Stock Exchange Offer. Holders who wish to tender
their Old Senior Exchangeable Preferred Stock must complete this letter in its
entirety.
[_]CHECK HERE IF TENDERED OLD SENIOR EXCHANGEABLE PREFERRED STOCK IS BEING
DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE
FOLLOWING:
Name of Tendering Institution: _____________________________________________
Account Number: ____________________________________________________________
Transaction Code Number: ___________________________________________________
Aggregate liquidation preference of Tendered Old Senior Exchangeable
Preferred Stock: ___________________________________________________________
If Holders desire to tender Old Senior Exchangeable Preferred Stock pursuant
to the Preferred Stock Exchange Offer and (i) time will not permit this Letter
of Transmittal, certificates representing Old Senior Exchangeable Preferred
Stock or other required document to reach the Exchange Agent prior to the
Expiration Date, or (ii) the procedures for book-entry transfer cannot be
completed prior to the Expiration Date, such Holders may effect a tender of
such Old Senior Exchangeable Preferred Stock in accordance with the guaranteed
delivery procedures set forth in the Prospectus under the caption "The
Preferred Stock Exchange Offer--Guaranteed Delivery Procedures." See
Instruction 2 below.
[_]CHECK HERE IF TENDERED OLD SENIOR EXCHANGEABLE PREFERRED STOCK IS BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY DELIVERED TO THE
EXCHANGE AGENT AND COMPLETE THE FOLLOWING (SEE INSTRUCTION 2):
Name of Registered or Acting Holder(s): ____________________________________
Window Ticket No. (if any): ________________________________________________
Date of Execution of Notice of Guaranteed Delivery:________________________
Name of Eligible Institution that Guaranteed Delivery: _____________________
If Delivered by Book-Entry Transfer, the Account Number: ___________________
Transaction Code Number: ___________________________________________________
2
<PAGE>
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER
THE EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS AVAILABLE TO ANY
PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH RESALES OF THE NEW
SENIOR PREFERRED STOCK.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
Attention: _________________________________________________________________
List below the Old Senior Exchangeable Preferred Stock to which this Letter
of Transmittal relates. If the space provided below is inadequate, the
certificate numbers and aggregate liquidation preference of Old Senior
Exchangeable Preferred Stock should be listed on a separate signed schedule
affixed hereto.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES
- -------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF OLD SENIOR EXCHANGEABLE PREFERRED STOCK*
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE
LIQUIDATION
PREFERENCE AGGREGATE
REPRESENTED LIQUIDATION
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE BY PREFERENCE
(PLEASE FILL IN, IF BLANK) NUMBER(S) CERTIFICATE(S) TENDERED**
<S> <C>
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL
- -------------------------------------------------------------------------------
*Need not be completed by Holders tendering by book-entry transfer.
**Unless indicated in the column labeled "Aggregate Liquidation Preference
Tendered," any tendering Holder of Old Senior Exchangeable Preferred Stock
will be deemed to have tendered the entire aggregate liquidation
preference represented by the column labeled "Aggregate Liquidation
Preference Represented by Certificate(s)." If the space provided above is
inadequate, list the certificate numbers and aggregate liquidation
preferences on a separate signed schedule and affix the list to this
Letter of Transmittal.
- -------------------------------------------------------------------------------
3
<PAGE>
BOX 2 BOX 3
SPECIAL REGISTRATION
INSTRUCTIONS SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if To be completed ONLY if
certificates for Old Senior certificates for Old Senior
Exchangeable Preferred Stock in Exchangeable Preferred Stock in
an aggregate liquidation an aggregate liquidation
preference not tendered, or New preference not tendered, or New
Senior Exchangeable Preferred Senior Exchangeable Preferred
Stock issued in exchange for Old Stock issued in exchange for Old
Senior Exchangeable Preferred Senior Exchangeable Preferred
Stock accepted for exchange, are Stock accepted for exchange, are
to be issued in the name of to be sent to someone other than
someone other than the the undersigned, or to the
undersigned. undersigned at an address other
than that shown above.
Issue certificate(s) to:
Deliver certificate(s) to:
Name _____________________________
(Please Print) Name _____________________________
(Please Print)
Address __________________________
Address __________________________
----------------------------------
(Include Zip Code) ----------------------------------
(Include Zip Code)
----------------------------------
----------------------------------
(Tax Identification or Social
Security Number)
(Tax Identification or Social
Security Number)
BOX 4
BROKER-DEALER STATUS
[_]Check this box if the Beneficial Owner of the Old Senior Exchangeable
Preferred Stock is a Participating Broker-Dealer and such Participating
Broker-Dealer acquired the Old Senior Exchangeable Preferred Stock for
its own account as a result of market-making activities or other trading
activities. IF THIS BOX IS CHECKED, PLEASE SEND A COPY OF THIS LETTER OF
TRANSMITTAL TO MARK E. JARVIS, VIA FACSIMILE: (972) 392-1558.
4
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Preferred Stock Exchange Offer,
the undersigned hereby tenders to the Company, the aggregate liquidation
preference of Old Senior Exchangeable Preferred Stock indicated above.
Subject to and effective upon the acceptance for exchange of the aggregate
liquidation preference of Old Senior Exchangeable Preferred Stock tendered in
accordance with this Letter of Transmittal, the undersigned sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest
in and to the Old Senior Exchangeable Preferred Stock tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent its
agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company) with respect to the tendered Old Senior
Exchangeable Preferred Stock with the full power of substitution to (i)
present such Old Senior Exchangeable Preferred Stock and all evidences of
transfer and authenticity to, or transfer ownership of, such Old Senior
Exchangeable Preferred Stock on the account books maintained by the Book-Entry
Transfer Facility to, or upon, the order of, the Company, (ii) deliver
certificates for such Old Senior Exchangeable Preferred Stock to the Company
and deliver all accompanying evidences of transfer and authenticity to, or
upon the order of, the Company and (iii) present such Old Senior Exchangeable
Preferred Stock for transfer on the books of the Company and receive all
benefits and otherwise exercise all rights of beneficial ownership of such Old
Senior Exchangeable Preferred Stock, all in accordance with the terms of the
Preferred Stock Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Senior
Exchangeable Preferred Stock tendered hereby and that the Company will acquire
good, valid and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claims,
when the same are acquired by the Company. The undersigned hereby further
represents that any New Senior Exchangeable Preferred Stock acquired in
exchange for Old Senior Exchangeable Preferred Stock tendered hereby will have
been acquired in the ordinary course of business of the person receiving such
New Senior Exchangeable Preferred Stock, whether or not such person is the
undersigned, that neither the undersigned nor any other such person has any
arrangement or understanding with any person to participate in the
distribution of such New Senior Exchangeable Preferred Stock and that neither
the undersigned nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company. In addition, the
undersigned and any such person acknowledge that (a) any person participating
in the Preferred Stock Exchange Offer for the purpose of distributing the New
Senior Exchangeable Preferred Stock must, in the absence of an exemption
therefrom, comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale of the New Senior
Exchangeable Preferred Stock and cannot rely on the position of the Staff of
the Securities and Exchange Commission enunciated in no-action letters and (b)
failure to comply with such requirements in such instance could result in the
undersigned or such person incurring liability under the Securities Act for
which the undersigned or such person is not indemnified by the Company. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be necessary or desirable to
complete the assignment, transfer and purchase of the Old Senior Exchangeable
Preferred Stock tendered hereby. If the undersigned is not a broker-dealer,
the undersigned represents that it is not engaged in and does not intend to
engage in, a distribution of New Senior Exchangeable Preferred Stock. If the
undersigned is a broker-dealer that will receive New Senior Exchangeable
Preferred Stock for its own account in exchange for Old Senior Exchangeable
Preferred Stock that were acquired as a result of market-making activities or
other trading activities, it acknowledges that it will deliver a Prospectus in
connection with any resale of such New Senior Exchangeable Preferred Stock,
however, by so acknowledging and by delivering a Prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Unless otherwise notified in accordance with the
instructions set forth herein in Box 4 under "Broker-Dealer Status," the
Company will assume that the undersigned is not a Participating Broker-Dealer.
For purposes of the Preferred Stock Exchange Offer, 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.
5
<PAGE>
If any Old Senior Exchangeable Preferred Stock tendered herewith are not
accepted for exchange pursuant to the Preferred Stock Exchange Offer for any
reason, certificates for any such unaccepted Old Senior Exchangeable Preferred
Stock will be returned, without expense, to the undersigned at the address
shown below or to a different address as may be indicated herein in Box 3
under "Special Delivery Instructions" as promptly as practicable after the
Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representative, successors and assigns.
The undersigned understands that tenders of Old Senior Exchangeable
Preferred Stock pursuant to the procedures described under the caption "The
Preferred Stock Exchange Offer--Procedures for Tendering" in the Prospectus
and in the instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of
the Preferred Stock Exchange Offer, subject only to withdrawal of such tenders
on the terms set forth in the Prospectus under the caption "The Preferred
Stock Exchange Offer--Withdrawal of Tenders."
Unless otherwise indicated in Box 2 under "Special Registration
Instructions," please issue the certificates (or electronic transfers)
representing the New Senior Exchangeable Preferred Stock issued in exchange
for the Old Senior Exchangeable Preferred Stock accepted for exchange and any
certificates (or electronic transfers) for Old Senior Exchangeable Preferred
Stock not tendered or not exchanged, in the name(s) of the undersigned.
Similarly, unless otherwise indicated in Box 3 under "Special Delivery
Instructions," please send the certificates, if any, representing the New
Senior Exchangeable Preferred Stock issued in exchange for the Old Senior
Exchangeable Preferred Stock accepted for exchange and any certificates for
Old Senior Exchangeable Preferred Stock not tendered or not exchanged (and
accompanying documents, as appropriate) to the undersigned at the address
shown below in the undersigned's signature(s). In the event that both "Special
Registration Instructions" and "Special Delivery Instructions" are completed,
please issue the certificates representing the New Senior Exchangeable
Preferred Stock issued in exchange for the Old Senior Exchangeable Preferred
Stock accepted for exchange in the name(s) of, and return any certificates for
Old Senior Exchangeable Preferred Stock not tendered or not exchanged to, the
person(s) so indicated. The undersigned understands that the Company has no
obligation pursuant to the "Special Registration Instructions" and "Special
Delivery Instructions" to transfer any Old Senior Exchangeable Preferred Stock
from the name of the registered Holder(s) thereof if the Company does not
accept for exchange any of the Old Senior Exchangeable Preferred Stock so
tendered.
Holders who wish to tender their Old Senior Exchangeable Preferred Stock and
(i) whose Old Senior Exchangeable Preferred Stock is not immediately available
or (ii) who cannot deliver the Old Senior Exchangeable Preferred Stock, this
Letter of Transmittal or any other documents required hereby to the Exchange
Agent prior to the Expiration Date, may tender their Old Senior Exchangeable
Preferred Stock according to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Preferred Stock Exchange Offer--
Guaranteed Delivery Procedures." See Instruction 2 regarding the completion of
this Letter of Transmittal printed below.
The lines below must be signed by the registered holder(s) exactly as their
name(s) appear(s) on the Old Senior Exchangeable Preferred Stock or by a
participant in the Book-Entry Transfer Facility, exactly as such participant's
name appears on a security position listing as the owner of the Old Senior
Exchangeable Preferred Stock, or by person(s) authorized to become registered
holder(s) by a properly completed stock power from the registered holder(s), a
copy of which must be transmitted with this Letter of Transmittal. If Old
Senior Exchangeable Preferred Stock to which this Letter of Transmittal relate
are held of record by two or more joint holders, then all such holders must
sign this Letter of Transmittal.
6
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT OLD SENIOR
EXCHANGEABLE PREFERRED STOCK IS BEING PHYSICALLY TENDERED HEREBY
X ____________________________________________________________ ___________
Date
X ____________________________________________________________ ___________
Date
Area Code and Telephone Number: ______________________________
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, then such person must (i) set forth
his or her full title below and (ii) submit evidence satisfactory to the
Company of such person's authority so to act. See Instruction 5 regarding
the completion of this Letter of Transmittal printed below.
Name(s): ___________________________________________________________________
(Please Print)
Capacity: __________________________________________________________________
Address: ___________________________________________________________________
(Include Zip Code)
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
Signature(s) Guaranteed by an Eligible Institution: ________________________
(Authorized Signature)
____________________________________________________________________________
(Title)
____________________________________________________________________________
(Name of Firm)
____________________________________________________________________________
(Address, Include Zip Code)
____________________________________________________________________________
(Area Code and Telephone Number)
Dated: _____________________________________________________________________
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE PREFERRED STOCK EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR OLD SENIOR
PREFERRED STOCK OR BOOK-ENTRY CONFIRMATIONS. Certificates representing the
tendered Old Senior Exchangeable Preferred Stock (or a confirmation of book-
entry transfer into the Exchange Agent's account with the Book-Entry Transfer
Facility for tendered Old Senior Exchangeable Preferred Stock transferred
electronically), as well as a properly completed and duly executed copy of
this Letter of Transmittal (or facsimile thereof), a Substitute Form W-9 (or
facsimile thereof) and any other documents required by this Letter of
Transmittal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. The method of delivery of certificates
for Old Senior Exchangeable Preferred Stock and all other required documents
is at the election and sole risk of the tendering holder and delivery will be
deemed made only when actually received by the Exchange Agent. If delivery is
by mail, registered mail with return receipt requested, properly insured, is
recommended. As an alternative to delivery by mail, the holder may wish to use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. Neither the Company nor the Exchange Agent
is under an obligation to notify any tendering holder of the Company's
acceptance of tendered Old Senior Exchangeable Preferred Stock prior to the
completion of the Preferred Stock Exchange Offer.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old
Senior Exchangeable Preferred Stock but whose Old Senior Exchangeable
Preferred Stock are not immediately available and who cannot deliver their
certificates for Old Senior Exchangeable Preferred Stock (or comply with the
procedures for book-entry transfer prior to the Expiration Date), the Letter
of Transmittal and any other documents required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration Date must tender their Old
Senior Exchangeable Preferred Stock according to the guaranteed delivery
procedures set forth below. Pursuant to such procedures:
(i) such tender must be made by or through a firm which is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an
office or correspondent in the United States (an "Eligible Institution");
(ii) prior to the Expiration Date, the Exchange Agent must have received
from the holder and the 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 or numbers of the tendered Old Senior Exchangeable
Preferred Stock, and the aggregate liquidation preference of tendered Old
Senior Exchangeable Preferred Stock and 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 tendered Old Senior Exchangeable
Preferred Stock (or a confirmation of book-entry transfer into the Exchange
Agent's account with the Book-Entry Transfer Facility for Old Senior
Exchangeable Preferred Stock transferred electronically) and any other
required documents will be deposited by the Eligible Institution with the
Exchange Agent; and
(iii) such properly completed and executed Letter of Transmittal and
certificates representing the tendered Old Senior Exchangeable Preferred
Stock in proper form for transfer (or a confirmation of book-entry transfer
into the Exchange Agent's account with the Book-Entry Transfer Facility for
Old Senior Exchangeable Preferred Stock transferred electronically) must be
received by the Exchange Agent within five New York Stock Exchange trading
days after the Expiration Date.
Any holder who wishes to tender Old Senior Exchangeable Preferred Stock
pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery relating to
such Old Senior Exchangeable Preferred Stock prior to the Expiration Date.
Failure to complete the guaranteed delivery procedures outlined above will
not, of itself, affect the validity or effect a revocation of any Letter of
Transmittal form properly completed and executed by a Holder who attempted to
use the guaranteed delivery person.
3. TENDER BY HOLDER. Only a holder of Old Senior Exchangeable Preferred
Stock may tender such Old Senior Exchangeable Preferred Stock in the Preferred
Stock Exchange Offer. Any beneficial owner of Old Senior Exchangeable
Preferred Stock who is not the registered holder and who wishes to tender
should arrange with such holder to execute and
8
<PAGE>
deliver this Letter of Transmittal on such owner's behalf or must, prior to
completing and executing this Letter of Transmittal and delivering such 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.
4. PARTIAL TENDERS. If less than the entire aggregate liquidation preference
of Old Senior Exchangeable Preferred Stock is tendered, the tendering holder
should fill in the aggregate liquidation preference tendered in the column
labeled "Aggregate Liquidation Preference Tendered" of the box entitled
"Description of Old Senior Exchangeable Preferred Stock" (Box 1) above. The
entire aggregate liquidation preference of Old Senior Exchangeable Preferred
Stock delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated. If the entire aggregate liquidation preference of
Old Senior Exchangeable Preferred Stock is not tendered, Old Senior
Exchangeable Preferred Stock for the aggregate liquidation preference of Old
Senior Exchangeable Preferred Stock not tendered and New Senior Exchangeable
Preferred Stock exchanged for any Old Senior Exchangeable Preferred Stock
tendered will be sent to the holder at such holder's registered address (or
transferred to the account of the Book-Entry Facility designated above),
unless a different address (or account) is provided in the appropriate box on
this Letter of Transmittal, as soon as practicable following the Expiration
Date.
5. SIGNATURES ON THE LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURE. If this Letter of Transmittal is signed by
the registered holder(s) of the Old Senior Exchangeable Preferred Stock
tendered herewith, the signatures must correspond with the name(s) as written
on the face of the tendered Old Senior Exchangeable Preferred Stock without
alteration, enlargement, or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility,
the signature must correspond with the name as it appears on the security
position listing as the owner of the Old Senior Exchangeable Preferred Stock.
If any of the tendered Old Senior Exchangeable Preferred Stock are owned of
record by two or more joint owners, all such owners must sign this Letter of
Transmittal. If any tendered Old Senior Exchangeable Preferred Stock are held
in different names on several Old Senior Exchangeable Preferred Stock, it will
be necessary to complete, sign, and submit as many separate copies of the
Letter of Transmittal documents as there are names in which tendered Old
Senior Exchangeable Preferred Stock are held.
If this Letter of Transmittal is signed by the registered holder or Acting
Holder, and New Senior Exchangeable Preferred Stock is to be issued and any
untendered or unaccepted aggregate liquidation preference of Old Senior
Exchangeable Preferred Stock is to be reissued or returned to the registered
holder or Acting Holder, then, the registered holder or Acting Holder need not
and should not endorse any tendered Old Senior Exchangeable Preferred Stock
nor provide a separate stock power. In any other case (including if this
Letter of Transmittal is not signed by the Acting Holder), the registered
holder or Acting Holder must either properly endorse the Old Senior
Exchangeable Preferred Stock tendered or transmit a properly completed
separate stock power with this Letter of Transmittal (in either case, executed
exactly as the name(s) of the registered holder(s) appear(s) on such Old
Senior Exchangeable Preferred Stock, and, with respect to a participant in the
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Old Senior Exchangeable Preferred Stock, exactly as the
name(s) of the participant(s) appear(s) on such security position listings),
with the signature(s) on the endorsement or stock power guaranteed by an
Eligible Institution unless such certificates or stock powers are signed by an
Eligible Institution.
If this Letter of Transmittal or any Old Senior Exchangeable Preferred Stock
or stock powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers 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 this Letter of Transmittal.
No medallion signature guarantee is required if (i) this Letter of
Transmittal is signed by the registered holder(s) of the Old Senior
Exchangeable Preferred Stock tendered herewith (or by a participant in the
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of the Tendered Old Senior Exchangeable Preferred Stock) and the
issuance of New Senior Exchangeable Preferred Stock (and any Old Senior
Exchangeable Preferred Stock not tendered or
9
<PAGE>
not accepted) are to be issued directly to such registered holder(s) (or, if
signed by a participant in the Book-Entry Transfer Facility, any New Senior
Exchangeable Preferred Stock or Old Senior Exchangeable Preferred Stock not
tendered or not accepted are to be deposited to such participant's account at
such Book-Entry Transfer Facility) and neither the "Special Delivery
Instructions" (Box 3) nor the "Special Registration Instructions" (Box 2) has
been completed, or (ii) such Old Senior Exchangeable Preferred Stock is
tendered for the account of an Eligible Institution. In all other cases, all
signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in the applicable box, the name and address (or account at the Book-
Entry Transfer Facility) in which the New Senior Exchangeable Preferred Stock
and/or substitute Old Senior Exchangeable Preferred Stock for aggregate
liquidation preferences not tendered or not accepted for exchange are to be
sent (or deposited), if different from the name and address or account of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the employer identification number or social security number
of the person named must also be indicated and the indicated and the tendering
holders should complete the applicable box.
If no such instructions are given, the New Senior Exchangeable Preferred
Stock (and any Old Senior Exchangeable Preferred Stock not tendered or not
accepted) will be issued in the name of and sent to the Acting Holder of the
Old Senior Exchangeable Preferred Stock or deposited at such Acting Holders'
account at the Book-Entry Transfer Facility.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the sale and transfer of Old Senior Exchangeable Preferred Stock
to it or its order pursuant to the Preferred Stock Exchange Offer. If,
however, a transfer tax is imposed for any reason other than the transfer and
sale of Old Senior Exchangeable Preferred Stock to the Company or its order
pursuant to the Preferred Stock Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or on any other
person) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption from taxes therefrom is not submitted with
this Letter of Transmittal, the amount of transfer taxes will be billed
directly to such tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Old Senior Exchangeable Preferred
Stock listed in this Letter of Transmittal.
8. TAX IDENTIFICATION NUMBER. Federal income tax law required that a holder
of any Old Senior Exchangeable Preferred Stock which are accepted for exchange
must provide the Company (as payor) with its correct taxpayer identification
number ("TIN"), which, in the case of a holder who is an individual, is his or
her social security number. If the Company is not provided with the correct
TIN, the Holder may be subject to a $50 penalty imposed by Internal Revenue
Service. (If withholding results in an over-payment of taxes, a refund may be
obtained.) Certain holders (including, among other, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of
failure to report a interest or dividends or (ii) the Internal Revenue Service
has notified the holder that such holder is no longer subject to backup
withholding. If the Old Senior Exchangeable Preferred Stock are registered in
more than one name or are not in the name of the actual owner, see the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for information on which TIN to report.
The Company reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance 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 right to reject any and all Old Senior Exchangeable Preferred
Stock not validly tendered or any Old Senior Exchangeable Preferred Stock, the
Company's acceptance of which
10
<PAGE>
would, in the opinion of the Company or its counsel, be unlawful. The Company
also reserves the right to waive any conditions of the Preferred Stock
Exchange Offer or defects or irregularities in tenders of Old Senior
Exchangeable Preferred Stock as to any ineligibility of any holder who seeks
to tender Old Senior Exchangeable Preferred Stock in the Preferred Stock
Exchange Offer. The interpretation of the terms and conditions of the
Preferred Stock Exchange Offer (including this Letter of Transmittal and the
instructions hereto) by the Company shall 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. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old
Senior Exchangeable Preferred Stock, but shall not incur any liability for
failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive, or modify specified conditions in the Preferred Stock Exchange Offer in
the case of any tendered Old Senior Exchangeable Preferred Stock.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or
contingent tender of Old Senior Exchangeable Preferred Stock or transmittal of
this Letter of Transmittal will be accepted.
12. MUTILATED, LOST, STOLEN, OR DESTROYED OLD SENIOR EXCHANGEABLE PREFERRED
STOCK. Any tendering holder whose Old Senior Exchangeable Preferred Stock has
been mutilated, lost, stolen, or destroyed should contact the Exchange Agent
at the address indicated above for further instruction.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Preferred Stock Exchange Offer.
14. ACCEPTANCE OF TENDERED OLD SENIOR PREFERRED STOCK AND ISSUANCE OF NEW
SENIOR EXCHANGEABLE PREFERRED STOCK; RETURN OF OLD SENIOR EXCHANGEABLE
PREFERRED STOCK. Subject to the terms and conditions of the Preferred Stock
Exchange Offer, the Company will accept for exchange all validly tendered Old
Senior Exchangeable Preferred Stock as soon as practicable after the
Expiration Date and will issue New Senior Exchangeable Preferred Stock
therefor as soon as practicable thereafter. For purposes of the Preferred
Stock Exchange Offer, the Company shall be deemed to have accepted tendered
Old Senior Exchangeable Preferred Stock when, as and if the Company has given
written and oral notice thereof to the Exchange Agent. If any tendered Old
Senior Exchangeable Preferred Stock is not exchanged pursuant to the Preferred
Stock Exchange Offer for any reason, such unexchanged Old Senior Exchangeable
Preferred Stock will be returned, without expense, to the undersigned at the
address shown above (or credited to the undersigned's account at the Book-
Entry Transfer Facility designated above) or at a different address as may be
indicated under "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Preferred
Stock Exchange Offer--Withdrawal of Tenders."
11
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
TUESDAY MORNING CORPORATION
13 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
This form must be used by a holder of 13 1/4% Senior Exchangeable Preferred
Stock due 2009 (the "Old Senior Exchangeable Preferred Stock") of Tuesday
Morning Corporation (the "Company"), who wishes to tender Old Senior
Exchangeable Preferred Stock to the Exchange Agent pursuant to the guaranteed
delivery procedures described in the "The Preferred Stock Exchange Offer--
Guaranteed Delivery Procedures" of the Prospectus, dated April 8, 1998 (the
"Prospectus"), and in Instruction 2 to the related Letter of Transmittal. Any
holder who wishes to tender Old Senior Exchangeable Preferred Stock pursuant
to such guaranteed delivery procedures must ensure that the Exchange Agent
receives this Notice of Guaranteed Delivery prior to the Expiration Date of
the Preferred Stock Exchange Offer. Capitalized terms not defined herein have
the meanings ascribed to them in the Prospectus or the Letter of Transmittal.
THE PREFERRED STOCK EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
TO: UNITED STATES TRUST COMPANY OF NEW YORK
(THE "EXCHANGE AGENT")
By Registered or Certified Mail:
United States Trust Company of New York
P.O. Box 844 Cooper Station
New York, New York 10276-0844
Attention: Corporate Trust Operations
By Overnight Courier and By Hand after 4:30 p.m. on the Expiration Date only:
United States Trust Company of New York
770 Broadway--13th Floor
New York, New York 10003
Attn: Corporate Trust Operations
By Hand before 4:30 p.m.:
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attn: Lower Level Corporate Trust Window
By Facsimile: (212) 780-0592
Attn: Corporate Trust Operations
Confirm by telephone: (800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE,
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE>
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the liquidation
preference of Old Senior Exchangeable Preferred Stock set forth below pursuant
to the guaranteed delivery procedures set forth in the Prospectus and in
Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Old Senior Exchangeable Preferred Stock
listed below:
CERTIFICATE
NUMBER(S)
(IF KNOWN)
OF OLD
SENIOR
EXCHANGEABLE
PREFERRED
STOCK OR
ACCOUNT
NUMBER AT AGGREGATE
THE LIQUIDATION AGGREGATE
BOOK-ENTRY PREFERENCE LIQUIDATION
FACILITY REPRESENTED PREFERENCE TENDERED
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
PLEASE SIGN AND COMPLETE
- -------------------------------------------------------------------------------
Signatures of Registered Holder(s)
or
Authorized Signatory: ______________
------------------------------------ Date: _________, 1998
Address: _____________________________
------------------------------------ --------------------------------------
Name of Registered Holder(s): ______ Area Code and Telephone No.: _________
------------------------------------
------------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s)
exactly as their name(s) appear on certificates for Old Senior Exchangeable
Preferred Stock or on a security position listing as the owner of Old
Senior Exchangeable Preferred Stock, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary
or representative capacity, such person must provide the following
information.
Please print name(s) and address(es)
Name(s): ___________________________________________________________________
----------------------------------------------------------------------------
Capacity: __________________________________________________________________
Address(es): _______________________________________________________________
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, guarantees deposit with the Exchange
Agent of the Letter of Transmittal (or facsimile thereof), together with
the Old Senior Exchangeable Preferred Stock tendered hereby in proper form
for transfer (or confirmation of the book-entry transfer of such Old Senior
Exchangeable Preferred Stock into the Exchange Agent's account at Book-
Entry Transfer Facility described in the Prospectus under the caption "The
Preferred Stock Exchange Offer--Guaranteed Delivery Procedures" and in the
Letter of Transmittal) and any other required documents, all by 5:00 p.m.,
New York City time, on the fifth New York Stock Exchange trading day
following the Expiration Date.
Name of Firm: ______________________ ------------------------------------
Address: ___________________________ (Authorized Signature)
------------------------------------ Name: ______________________________
Area Code and Telephone No.: _______ Title: _____________________________
Date: _________, 1998
- --------------------------------------------------------------------------------
DO NOT SEND SENIOR PREFERRED STOCK WITH THIS FORM. ACTUAL SURRENDER OF
SENIOR PREFERRED STOCK MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN
EXECUTED LETTER OF TRANSMITTAL.
3
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by
the Exchange Agent at its address set forth herein prior to the Expiration
Date. The method of delivery of this Notice of Guaranteed Delivery and any
other required documents to the Exchange Agent is at the election and sole
risk of the holder, and the delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is by mail, registered mail with
return receipt requested, properly insured, is recommended. As an alternative
to delivery by mail, the holders may wish to consider using an overnight or
hand delivery service. In all cases, sufficient time should be allowed to
assure timely delivery. For a description of the guaranteed delivery
procedures, see Instruction 2 of the Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Old Senior
Exchangeable Preferred Stock referred to herein, the signature must correspond
with the name(s) written on the face of the Old Senior Exchangeable Preferred
Stock without alteration, enlargement, or any change whatsoever. If this
Notice of Guaranteed Delivery is signed by a participant of the Book-Entry
Transfer Facility whose name appears on a security position listing as the
owner of Old Senior Exchangeable Preferred Stock, the signature must
correspond with the name shown on the security position listing as the owner
of the Old Senior Exchangeable Preferred Stock.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Old Senior Exchangeable Preferred Stock listed or
a participant of the Book-Entry Transfer Facility, this Notice of Guaranteed
Delivery must be accompanied by appropriate bond powers, signed as the name of
the registered holder(s) appears on the Old Senior Exchangeable Preferred
Stock or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Preferred Stock Exchange Offer.
4
<PAGE>
EXHIBIT 99.3
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
TUESDAY MORNING CORPORATION
13 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated April
8, 1998 (the "Prospectus"), of Tuesday Morning Corporation (the "Company"),
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that
together constitute the Company's offer (the "Preferred Stock Exchange
Offer"). Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Preferred Stock Exchange Offer with respect to the 13 1/4% Senior Exchangeable
Preferred Stock due 2009 (the "Old Senior Exchangeable Preferred Stock") held
by you for the account of the undersigned.
The aggregate face amount of the Old Senior Exchangeable Preferred Stock
held by you for the account of the undersigned is (FILL IN AMOUNT):
$ of the 13 1/4% Senior Exchangeable Preferred Stock due 2009.
With respect to the Preferred Stock Exchange Offer, the undersigned hereby
instructs you (CHECK APPROPRIATE BOX):
[_]TO TENDER the following Old Senior Exchangeable Preferred Stock held
by you for the account of the undersigned (INSERT LIQUIDATION
PREFERENCE OF OLD SENIOR EXCHANGEABLE PREFERRED STOCK TO BE TENDERED,
IF ANY): $
[_NOT]TO TENDER any Old Senior Exchangeable Preferred Stock held by you
for the account of the undersigned.
If the undersigned instructs you to tender the Old Senior Exchangeable
Preferred Stock held by you for the account of the undersigned, it is
understood that you are authorized (a) to make, on behalf of the undersigned
(and the undersigned, by its signature below, hereby makes to you), the
representation and warranties contained in the Letter of Transmittal that are
to be made with respect to the undersigned as a beneficial owner, including
but not limited to the representations that (i) the undersigned's principal
residence is in the state of (FILL IN STATE) , (ii) the undersigned
is acquiring the New Senior Exchangeable Preferred Stock in the ordinary
course of business of the undersigned, (iii) the undersigned 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, (iv) the undersigned acknowledges that
any person participating in the Preferred Stock Exchange Offer for the purpose
of distributing the New Senior Exchangeable Preferred Stock must comply with
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended (the "Act"), in connection with a secondary resale
transaction of the New Senior Exchangeable Preferred Stock acquired by such
person and cannot rely on the position of the Staff of the Securities and
Exchange Commission set forth in no-action letters that are discussed in the
section of the Prospectus entitled "The Preferred Stock Exchange Offer--Resale
of the New Senior Exchangeable Preferred Stock," and (v) the undersigned is
not an "affiliate," as defined in Rule 405 under the Act, of the Company; (b)
to agree, on behalf of the undersigned, as set forth in the Letter of
Transmittal; and (c) to take such other action as necessary under the
Prospectus or the Letter of Transmittal to effect the valid tender of such Old
Senior Exchangeable Preferred Stock.
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER THE
EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS AVAILABLE TO ANY
PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH RESALES OF THE NEW
SENIOR EXCHANGEABLE PREFERRED STOCK.
[_Check]this box if the Beneficial Owner of the Old Senior Exchangeable
Preferred Stock is a Participating Broker-Dealer and such Participating
Broker-Dealer acquired the Old Senior Exchangeable Preferred Stock for
its own account as a result of market-making activities or other trading
activities. IF THIS BOX IS CHECKED, PLEASE SEND A COPY OF THESE
INSTRUCTIONS TO MARK E. JARVIS, VIA FACSIMILE: (972) 392-1558.
<PAGE>
SIGN HERE
Name of beneficial owner(s): _______________________________________________
Signature(s): ______________________________________________________________
Name (please print): _______________________________________________________
Address: ___________________________________________________________________
______________________________________________________________________
______________________________________________________________________
Telephone number: __________________________________________________________
Taxpayer Identification or Social Security Number: _________________________
Date: ______________________________________________________________________
