AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TUESDAY MORNING CORPORATION
TMI HOLDINGS, INC.
TUESDAY MORNING, INC.
FRIDAY MORNING, INC.
TMIL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6749 75-2398532
DELAWARE 6749 51-0336658
TEXAS 5995 75-1482994
TEXAS 6511 75-163440
DELAWARE 8980 51-0344394
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
14621 INWOOD ROAD
DALLAS, TX 75244
TELEPHONE: (972) 387-3562
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
----------------
MARK E. JARVIS
14621 INWOOD ROAD
DALLAS, TX 75244
TELEPHONE: (972) 387-3562
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
JAMES S. ROWE
KIRKLAND & ELLIS
200 EAST RANDOLPH DRIVE
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 861-2000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
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11% Series B Senior
Subordinated Notes
due 2007.............. $100,000,000 $1,000 $100,000,000 $29,500
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Guarantees of 11% Series
B Senior Subordinated
Notes due 2007........ $100,000,000 (2) (2) None
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No further fee is payable pursuant to Rule 457(n).
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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.
----------------
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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
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
----------------------- ---------------------------------
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 Exchange Notes;
The 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
17. Information with Respect to
Companies Other than S-3 or S-2
Companies...................... Inapplicable
18. Information if Proxies,
Consents or Authorizations are
to be Solicited................ Inapplicable
19. Information if Proxies,
Consents or Authorizations are
not to be Solicited or in an Management; Principal Shareholders; Certain
Exchange Offer................. Transactions
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1998
PRELIMINARY PROSPECTUS
, 1998
TUESDAY MORNING CORPORATION
OFFER TO EXCHANGE ITS 11% SERIES B SENIOR
SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING 11%
SENIOR SUBORDINATED NOTES DUE 2007
LOGO
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998,
UNLESS EXTENDED.
Tuesday Morning Corporation, a Delaware corporation (the "Company"), hereby
offers (the "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 $1,000 principal amount of its 11% Series
B Senior Subordinated Notes due 2007 (the "Exchange Notes"), 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 $1,000
principal amount of its outstanding 11% Senior Subordinated Notes due 2007 (the
"Old Notes"), of which $100,000,000 principal amount is outstanding. 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 will bear a
Series B designation, (ii) the Exchange Notes will have been registered under
the Securities Act and, therefore, will not bear legends restricting their
transfer and (iii) holders of the Exchange Notes will not be entitled to
certain rights of holders of Old Notes under the Registration Rights Agreement
(as defined). The Exchange Notes will evidence the same debt as the Old Notes
(which they replace) and will be issued under and be entitled to the benefits
of an Indenture dated as of December 29, 1997 (the "Indenture") among the
Company, the Subsidiary Guarantors (as defined) and Harris Trust and Savings
Bank, as trustee (the "Trustee"), governing the Old Notes and the Exchange
Notes. The Old Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of the
Exchange Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on , 1998, unless
extended by the Company in its sole discretion (the "Expiration Date"). Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration
Date. The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer."
The Old Notes were sold by the Company on December 29, 1997 to Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman, Sachs &
Co. (collectively, the "Initial Purchasers") in a transaction not registered
under the Securities Act in reliance upon an exemption under the Securities Act
(the "Initial Offering"). The Initial Purchasers subsequently placed the Old
Notes with qualified institutional buyers in reliance upon Rule 144A under the
Securities Act and to non-U.S. persons outside the United States in reliance on
Regulation S under the Securities Act. Accordingly, the Old Notes 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 Exchange
Notes are being offered hereunder in order to satisfy the obligations of the
Company and the Subsidiary Guarantors under the Registration Rights Agreement
entered into by the Company, the Subsidiary Guarantors and the Initial
Purchasers in connection with the Initial Offering (the "Registration Rights
Agreement"). See "The Exchange Offer."
Interest on the Notes will accrue from their date of original issuance and
will be payable semiannually in arrears on June 15 and December 15 of each
year, commencing June 15, 1998, at the rate of 11% per annum.
(Continued on following page)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DESCRIPTION OF CERTAIN RISKS TO
BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE 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.
(Continued from previous page)
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 the redemption prices set
forth herein, together with accrued and unpaid interest to the date of
redemption. In addition, at any time prior to December 15, 2000, the Company
may redeem up to 35% of the aggregate principal amount of the Notes originally
issued with the net cash proceeds of one or more Public Equity Offerings (as
defined), at a redemption price equal to 111% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of redemption;
provided that at least $65 million aggregate principal amount of the Notes
originally issued remains outstanding immediately after such redemption. Upon
the occurrence of a Change in Control (as defined), 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. In addition, the Company will be obligated to offer to repurchase
the Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to date of repurchase in the event of certain Asset Sales (as
defined). See "Description of the Exchange Notes."
The Exchange Notes will be, as the Old Notes (which they replace) are,
unsecured senior subordinated obligations of the Company and will be
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company, including Indebtedness (as defined)
under the Senior Credit Facility (as defined). The Exchange Notes will, as the
Old Notes (which they replace), rank pari passu in right of payment with all
other existing and future Senior Subordinated Indebtedness (as defined), if
any, of the Company. The Exchange Notes will be, as the Old Notes (which they
replace) are, guaranteed (the "Note Guarantees") jointly and severally by all
present and future domestic subsidiaries of the Company (the "Subsidiary
Guarantors"). 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 (as defined) evidenced
by each Note Guarantee will be subordinated on the same basis to Guarantor
Senior Indebtedness (as defined) as the Notes are subordinated to Senior
Indebtedness. At September 30, 1997, on a pro forma basis after giving effect
to the Transactions (as defined) (including the issuance of the Old Notes and
the application of the net proceeds therefrom), the Senior Indebtedness of the
Company would have been approximately $176.5 million (all of which would
represent Indebtedness under the Senior Credit Facility), and the Company
would have had additional availability of $16.1 million for revolving credit
facility borrowings under the Senior Credit Facility, all of which would be
Senior Indebtedness, if borrowed. At September 30, 1997, on a pro forma basis
after giving effect to the Transactions (including the issuance of the Old
Notes and the application of the net proceeds therefrom), Guarantor Senior
Indebtedness of the Subsidiary Guarantors would have been approximately $181.8
million ($176.5 million of which would represent guarantees of Indebtedness
under the Senior Credit Facility). See "Description of the Exchange Notes--
Ranking" and "Description of the Exchange Notes--Note Guarantees."
Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes 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 requirements of the Securities Act, provided that such Exchange Notes
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 Exchange Notes. See "The Exchange Offer--Resale of the
Exchange Notes." Holders of Old Notes wishing to accept the Exchange Offer
must represent to the Company, as required by the Registration Rights
Agreement, that such conditions have been met. Each broker-dealer (a
"Participating Broker-Dealer") that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. 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
ii
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were 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."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter
is being used in connection with the Exchange Offer.
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the
Exchange Notes. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors--Absence of a Public Market
Could Adversely Affect the Value of Exchange Notes." Moreover, to the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SUBSIDIARY GUARANTORS. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE
MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "BOOK-ENTRY; DELIVERY AND FORM", THE COMPANY EXPECTS
THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
REPRESENTED BY A GLOBAL NOTE (AS DEFINED), WHICH WILL BE DEPOSITED WITH, OR ON
BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME OR
IN THE NAME OF CEDE & CO., ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL
NOTE REPRESENTING THE EXCHANGE NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF
WILL BE EFFECTED THROUGH, RECORDS MAINTAINED BY DTC AND ITS PARTICIPANTS.
AFTER THE INITIAL ISSUANCE OF THE GLOBAL NOTE, NOTES IN CERTIFICATED FORM WILL
BE ISSUED IN EXCHANGE FOR THE GLOBAL NOTE ONLY UNDER LIMITED CIRCUMSTANCES AS
SET FORTH IN THE INDENTURE. SEE "BOOK-ENTRY; DELIVERY AND FORM."
iii
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE CONTENTS
OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD
CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OF THE SUBSIDIARY GUARANTORS IS MAKING ANY REPRESENTATION TO
ANY PROSPECTIVE INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN
INVESTMENT THEREIN BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR
SIMILAR LAWS.
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 "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 Exchange Notes being offered hereby. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the 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 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 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,
iv
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 Notes
remain outstanding, it will furnish to the holders of the Notes 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 Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes or
beneficial owner of the Notes, in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
v
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. The following summary information is qualified in its entirety by
reference to, and should be read in conjunction with, the more detailed
information and Consolidated Financial Statements (including the notes thereto)
included elsewhere in this Prospectus. Unless otherwise indicated, references
to the "Company" or "Tuesday Morning" are to Tuesday Morning Corporation and
its subsidiaries. The pro forma consolidated statement of operations for the
periods presented gives effect to the Transactions as if they were consummated
on January 1, 1996. The pro forma consolidated balance sheet gives effect to
the Transactions as if they had occurred on September 30, 1997. See "--The
Transactions."
THE COMPANY
Tuesday Morning is the largest closeout retailer of upscale gift and home
furnishings merchandise in the United States, with 315 stores in 33 states. The
Company operates its stores during seven annual "sales events" that last from
four to seven weeks, while closing them for the remaining weeks of the year.
Tuesday Morning does not sell seconds, irregulars or factory rejects, but
rather specializes in first quality, brand name merchandise such as Ralph
Lauren bed linens, Waterman pens, Limoges hand-decorated boxes, Mikasa dishes,
Farberware cookware, Daum French crystal, Martex bath towels, Fisher-Price
toys, Samsonite luggage and Spode china. The Company purchases its merchandise
at closeout and sells it at prices that are 50% to 80% below those generally
charged by department and specialty stores. The Company believes that its
event-based selling strategy, combined with high quality, reasonably priced
merchandise, attracts upscale "bargain hunters" with strong loyalty to the
Company.
The Company was formed and opened its first store in 1974. Since its initial
public offering in 1986, the Company has increased its number of stores from 63
to 315, and has achieved compound annual growth rates for sales and EBITDA of
16.1% and 16.6%, respectively. During the twelve months ended September 30,
1997, the Company generated comparable store sales growth of 18% and net sales
and EBITDA of $297.3 million and $34.1 million, respectively. This represents
an increase of 27.8% and 72.5%, respectively, over sales and EBITDA for the
twelve months ended September 30, 1996.
BUSINESS STRENGTHS
The Company's success has been largely based on the following strengths:
Unique Event-Based Format. The Company distinguishes itself from other
retailers with a unique "event-based" selling strategy, creating the equivalent
of seven "grand openings" each year. The Company believes that the closing and
reopening of its stores heightens customers' expectations of finding new,
undiscovered merchandise and intensifies their sense of urgency to buy the
Company's products, which are available only in limited quantities. Consistent
with this approach, the Company typically realizes approximately 40% of an
event's total sales in the first four or five days of the event (Wednesday or
Thursday to Sunday).
Strong Merchandising Capabilities. The Company employs a talented and
experienced buying team, which has grown from 10 buyers in 1993 to 22 buyers in
1997, with an average of nearly 20 years of retail experience. The Company's
buyers and its reputation as a preferred, reliable purchaser have enabled it to
establish excellent, long-term relationships with a diverse group of top-of-
the-line vendors. The Company obtains its merchandise primarily by purchasing
from manufacturers their end-of-line products which did not meet their sales
expectations, or merchandise left over from cancellations of orders placed by
other retailers. Merchandise is also obtained by contracting for production
from manufacturers during periods of lower production. Through its
approximately 1,000 vendor relationships, the Company has become one of the
largest retailers for certain categories of luxury brand merchandise, such as
European handmade crystal and fine quality Oriental rugs from China and India.
The Company believes that certain top-of-the-line vendors such as Rosenthal and
Samsonite
prefer to liquidate a majority of their excess inventory through the Company
because of its access to an upscale customer base and its ability to dispose of
high-end, closeout merchandise quickly and without disruption to their normal
retail channels.
Dedicated, Upscale Customer Base. Tuesday Morning has an upscale, loyal
customer following. The Company has developed and maintains a proprietary
preferred customer mailing list of over 4,000,000 customers who have visited
its stores and requested to receive mailings in advance of the Company's sales
events. Customer loyalty is evidenced by the fact that the Company derives
approximately 31% of its sales during the first two or three days of each sales
event, which is advertised only by a mailing to those individuals on the list.
The Company believes, based on its internal research, that its customers are
primarily female from households headed by professionals, typically ranging in
age from 25 to 54 and having a median family income of approximately $55,000.
In addition, the Company believes its customers are knowledgeable shoppers who
frequent five or more national department stores and are able to recognize the
Company's favorable pricing on first quality, name brand merchandise.
Strong Financial Characteristics. Tuesday Morning has demonstrated an ability
to consistently grow sales while generating strong cash flow. For the twelve
months ended September 30, 1997, Tuesday Morning generated EBITDA of $34.1
million, a 72.5% increase over the comparable period in 1996. During this same
period, capital expenditures were $6.1 million. The Company has consistently
grown its EBITDA since 1993 due to the improved profitability of its existing
store base, while requiring only modest capital expenditures to fund growth.
Flexible, Low Cost Real Estate Approach. The Company's stores are
destination-oriented, and can therefore be located in secondary locations of
major suburban markets, such as strip malls and warehouse zones, in close
proximity to their target customers. As a result, the Company's real estate
costs are significantly lower than those of many other retailers, averaging
approximately $8 per square foot. In addition, virtually all new leases contain
a "kick" clause that gives the Company the ability to terminate the lease
without penalty for up to 18 months after lease inception. These kick clauses
provide the Company with significant downside protection in opening new stores
by allowing it to vacate a site that initially proves unprofitable. The Company
is able to obtain kick clauses because it seldom requires significant build out
of a lease site and because it is able to make productive use of challenging
space.
Integrated Management Information Systems and Inventory Controls. The Company
believes its management information systems are among the most advanced in the
retailing industry. These systems enable the Company to manage its flow of
almost 80,000 SKUs from approximately 1,000 vendors on a real-time basis in
order to make timely and accurate purchasing, distribution and merchandising
decisions. The Company's proprietary merchandising and inventory control
systems, point of sale system and state-of-the-art distribution management
system are integrated with its financial reporting systems, providing the
Company's buyers with a significant degree of control over inventory
acquisition, distribution and sales performance. The Company's buyers can
review, at the SKU level and on a real-time basis, the status of every open
purchase order, inbound shipment, warehouse receipt, process shipment and item
of store inventory. These systems further allow management to target
merchandise for markdowns in an effective and systematic manner. At September
30, 1997, less than 5% of the Company's inventory was more than one year old.
BUSINESS STRATEGY
The Company's objective is to sustain its current growth and to enhance its
productivity and operating performance by continuing to build on its existing,
proven strengths. The Company intends to achieve this objective by pursuing the
following existing strategies:
Continue New Store Openings. The Company opened 31 new stores in 1997 and
plans to increase its store base, in new and existing markets, by approximately
32 to 35 stores per year for the foreseeable future. The
2
Company's "no-frills" approach enables it to open this number of stores for an
aggregate cost of only $2 million per year, or approximately $60,000 per store
excluding inventory. The Company intends to profitably increase its penetration
of existing markets, capitalize on the success it has enjoyed in smaller
single-store markets, where there are often no other retailers offering the
Company's first quality products, and prudently expand into new major
metropolitan markets that will provide the basis for long-term expansion.
Enhance Sales Productivity. The Company has achieved average comparable store
sales growth of approximately 6% per year since its initial public offering in
1986 and 19% for the first nine months of 1997. The growth has resulted from
increases in (i) the number of customer transactions, (ii) the average number
of items purchased per customer visit and (iii) the average price of such
items. The average number of customer transactions has increased as a result of
the increased frequency of stocking its stores during a sales event. The
average number of items purchased by customers has increased as a result of the
introduction of additional impulse-oriented merchandise, and the average price
of items purchased has 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 certain unaffiliated investors
acquired (the "Acquisition") all of the outstanding capital stock of the
Company for an equity investment of $117.9 million (the "Equity Investment").
The Equity Investment consisted of (i) an $85.4 million investment by Madison
Dearborn (comprised of $4.6 million of common stock ("Common Stock") of the
Company, 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) a $25.0 million investment by certain unaffiliated investors
in units consisting of senior exchangeable redeemable preferred stock (the
"Senior Exchangeable Preferred Stock") and Common Stock. The Company used the
proceeds from the Equity Investment and approximately $223.4 million of
aggregate proceeds from the financings described below
3
(the "Financings") (i) to pay $323.0 million as Acquisition consideration and
(ii) to pay $18.3 million in transaction fees and expenses. See "Description of
the Units" and "Description of Junior Preferred 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 loans
(collectively, the "Term Loans"), and a $90.0 million revolving credit facility
which, subject to certain conditions, can be increased up to $115.0 million
(the "Revolving Credit Facility"), of which approximately $13.4 million was
drawn in January 1998 in connection with the Transaction and (ii) the proceeds
of the Old Notes. See "Description of the Senior Credit Facility" and
"Description of the Exchange Notes."
The closing of the Initial Offering (the "Closing") was conditioned upon the
simultaneous consummation of the Acquisition, the other Financings, the Equity
Investment and the repayment of the Old Credit Facility. The Initial Offering,
the Acquisition, the Other Financings, the Equity Investment and the repayment
of the Old Credit Facility are collectively referred to herein as the
"Transactions."
The sources and uses of funds related to the Transactions are set forth in
the following table:
AMOUNT
--------------
(IN THOUSANDS)
SOURCES OF FUNDS:
Senior Credit Facility ($13,388 drawn in January 1998)... $123,388
Old Notes................................................ 100,000
Senior Exchangeable Preferred Stock...................... 25,000
Junior Redeemable Preferred Stock (a).................... 86,010
Junior Perpetual Preferred Stock......................... 1,918
Common Stock (b)......................................... 5,000
--------
Total.................................................. $341,316
========
USES OF FUNDS:
Acquisition consideration................................ $323,016
Fees and expenses........................................ 18,300
--------
Total.................................................. $341,316
========
- --------
(a) Consists of approximately $80.8 million from Madison Dearborn and
approximately $5.2 million from management. See "Description of Junior
Preferred Stock."
(b) Consists of approximately $4.6 million from Madison Dearborn and
approximately $0.4 million from management.
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
4
made lead investments in over 10 portfolio companies, including The Sports
Authority, Inc., Consolidated Stores Corporation, Sterling Merchandise Company,
Beverages & More, Inc., The Cornerstone Investment Group, Inc., Carrols
Corporation, Peter Piper, Inc. and Bizmart, Inc.
RECENT DEVELOPMENTS--UNAUDITED
The Transaction was consummated December 29, 1997. Net sales for the year
ended December 31, 1997 increased $70.5 million, or 27.5%, to $327.3 million
from $256.8 million for the comparable period in 1996. Average store sales for
1997 were approximately $1,066,000, as compared to $925,000 for 1996. During
the year ended December 31, 1997, the Company generated comparable store sales
growth of 18% and EBITDA before Transaction expenses of $41.6 million as
compared to EBITDA of $25.9 million for the comparable period in 1996.
Operating income decreased $18.5 million from $20.4 million in 1996 to $1.9
million in 1997. Compensation paid in lieu of options of $25 million and non-
debt fees and expenses of $9.4 million are included in operating income for the
year ended December 31, 1997. In addition, net current assets at December 31,
1997 decreased by $39.8 million from September 30, 1997, due to the sell down
of inventory during the holiday season. All amounts are unaudited. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
----------------
The Company was incorporated in Delaware in 1974. The Company's principal
executive offices are located at 14621 Inwood Road, Dallas, Texas 75244 and its
telephone number is (972) 387-3562.
5
THE INITIAL OFFERING
Notes..................... The Old Notes were sold by the Company on
December 29, 1997 to the Initial Purchasers
pursuant to a Purchase Agreement dated December
15, 1997 (the "Purchase Agreement"). The
Initial Purchasers subsequently resold the Old
Notes to qualified institutional buyers
pursuant to Rule 144A under the Securities Act.
Concurrent Initial Units Concurrent with the Initial Offering, the
Offering................. Company sold 250,000 Units on December 29, 1997
to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Initial
Purchaser") pursuant to a Purchase Agreement,
dated December 15, 1997. Each Unit consists of
one share of 13 1/4% Senior Exchangeable
Preferred Stock (as defined) and one share of
Common Stock (as defined).
Registration Rights Pursuant to the Purchase Agreement, the
Agreement................ Company, the Subsidiary Guarantors and the
Initial Purchasers entered into a Registration
Rights Agreement dated as of December 29, 1997
(the "Registration Rights Agreement"), which
grants the holder of the Old Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange
rights which terminate upon the consummation of
the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered........ $100,000,000 aggregate principal amount of 11%
Series B Senior Subordinated Notes due 2007 of
the Company (the "Exchange Notes").
The Exchange Offer........ $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Old Notes. As of the date hereof, $100,000,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the
Exchange Notes to holders on or promptly after
the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes 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
Exchange Notes are 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
Exchange Notes.
Any Participating Broker-Dealer that acquired
Old Notes 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
Exchange Notes for its own account pursuant to
6
the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with
any resale of such Exchange Notes. 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 Exchange Notes
received in exchange for Old Notes where such
Old Notes were 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, they 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 Exchange Offer
with the intention to participate, or for the
purpose of participating, in a distribution of
the Exchange Notes 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.
Expiration Date........... 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended.
Accrued Interest on the
Exchange Notes and the
Old Notes................
Each Exchange Note will bear interest from its
issuance date. Holders of Old Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the Exchange Notes. Such
interest will be paid with the first interest
payment on the Exchange Notes. Interest on the
Old Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes.
Conditions to the The Exchange Offer is subject to certain
Exchange Offer........... customary conditions, which may be waived by
the Company. See "The Exchange Offer--
Conditions."
Procedures for Tendering Each holder of Old Notes wishing to accept the
Old Notes................ 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 Notes and any other required
documentation to the Exchange Agent (as
defined) at the address set forth herein. By
executing the Letter of Transmittal, each
holder will represent to the Company that,
among other things, the Exchange Notes acquired
pursuant to the Exchange Offer are being
obtained in the ordinary course of business of
the person receiving such Exchange
7
Notes, whether or not such person is the
holder, that neither the holder nor any such
other person has any arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes and
that neither the holder nor any such other
person is an "affiliate," as defined under Rule
405 of the Securities Act, of the Company. See
"The Exchange Offer--Purpose and Effect of the
Exchange Offer" and "The Exchange Offer--
Procedures for Tendering."
Untendered Old Notes...... Following the consummation of the Exchange
Offer, holders of Old Notes eligible to
participate but who do not tender their Old
Notes will not have any further exchange rights
and such Old Notes will continue to be subject
to certain restrictions on transfer.
Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
Consequences of Failure
to Exchange..............
The Old Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes 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 Exchange Offer--Consequences of
Failure to Exchange."
Shelf Registration If any holder of the Old Notes (other than any
Statement................ such holder which is an "affiliate" of the
Company or a Subsidiary Guarantor within the
meaning of Rule 405 under the Securities Act)
is not eligible under applicable securities
laws to participate in the Exchange Offer, and
such holder has satisfied certain conditions
relating to the provision of information to the
Company for use therein, the Company and the
Subsidiary Guarantors have agreed to register
the Old Notes on a shelf registration statement
(the "Shelf Registration Statement") and use
their best efforts to cause it to be declared
effective by the Commission as promptly as
practical on or after the consummation of the
Exchange Offer. The Company and Subsidiary
Guarantors have 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 Notes held by any such holders.
Special Procedures for
Beneficial Owners........
Any beneficial owner whose Old Notes are
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 Notes, either make appropriate arrangements
to register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable
8
time. The Company will keep the Exchange Offer
open for not less than 30 days in order to
provide for the transfer of registered
ownership.
Guaranteed Delivery Holders of Old Notes who wish to tender their
Procedures............... Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, 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 Notes according to the guaranteed delivery
procedures set forth in "The 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 Notes
and Delivery of Exchange
Notes....................
The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Use of Proceeds........... There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Exchange Agent............ Harris Trust and Savings Bank
THE EXCHANGE NOTES
General................... 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. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer." The Exchange
Notes will evidence the same debt as the Old
Notes and will be entitled to the benefits of
the Indenture. See "Description of the Exchange
Notes."
Maturity Date............. December 15, 2007.
Interest Payment Dates.... June 15 and December 15 of each year, commencing
June 15, 1998.
9
Guarantees................ The Exchange Notes will be jointly and severally
guaranteed on an unconditional senior subordinated
basis by the Subsidiary Guarantors. Under certain
circumstances, future subsidiaries of the Company
may be required to guarantee the Exchange Notes. In
addition, the Note Guarantees are subject to re-
lease under certain circumstances. See "Description
of the Exchange Notes--Guarantees" and "Description
of the Exchange Notes--Certain Covenants--Limita-
tion on Guarantees of Indebtedness by Restricted
Subsidiaries."
Optional Redemption....... The Exchange Notes 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, together
with accrued and unpaid interest, if any, to the
date of redemption. 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
Exchange Notes originally issued with the net pro-
ceeds of one or more Public Equity Offerings (as
defined), at a redemption price equal to 111% of
the principal amount thereof, plus accrued and un-
paid interest, if any, to the date of redemption;
provided that at least $65 million aggregate prin-
cipal amount of the Exchange Notes remains out-
standing immediately after such redemption. See
"Description of the Exchange Notes--Optional Re-
demption."
Change in Control......... Upon the occurrence of a Change in Control (as de-
fined), each holder of the Exchange Notes shall
have the right to require the Company to purchase
all or any portion of such holder's Exchange 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. See "De-
scription of the Exchange Notes--Purchase of Ex-
change Notes upon a Change in Control."
Ranking................... The Exchange Notes will be unsecured senior subor-
dinated obligations of the Company and, as such,
will be subordinated to all existing and future Se-
nior Indebtedness (as defined) of the Company, in-
cluding indebtedness under the Senior Credit Facil-
ity. The Exchange 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 (as defined),
if any, of the Company. By reason of such subordi-
nation, holders of Senior Indebtedness must be paid
in full before holders of the Exchange 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 insol-
vency or bankruptcy. At September 30, 1997 on a pro
forma basis after giving effect to the Transactions
and the application of the net proceeds therefrom,
the Company would have had approximately $176.5
million of Senior Indebtedness outstanding (all of
which would represent Indebtedness under the Senior
Credit Facility), and the Company would have had
additional availability of $16.1 million for re-
volving credit facility borrowings under the Senior
Credit Facility, all of which would be Senior In-
debtedness, if borrowed. See "Unaudited Pro Forma
Financial
10
Statements." Additional Senior Indebtedness may be
incurred by the Company from time to time, subject
to certain restrictions. See "Description of the
Exchange Notes--Ranking."
The Exchange Notes also will be guaranteed by all
present and future domestic subsidiaries of the
Company. 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 Guar-
antor, if any. The Indebtedness evidenced by each
Note Guarantee will be subordinated on the same ba-
sis to Guarantor Senior Indebtedness as the Ex-
change Notes are subordinated to Senior Indebted-
ness. See "Description of the Exchange Notes--Rank-
ing."
Certain Covenants......... The Indenture contains covenants, including, but
not limited to, covenants with respect to the fol-
lowing matters: (i) limitation on additional in-
debtedness; (ii) limitation on restricted payments;
(iii) limitation on issuances and sales of capital
stock of Restricted Subsidiaries (as defined); (iv)
limitation on transactions with affiliates; (v)
limitation on liens; (vi) limitation on sale of as-
sets; (vii) limitation on merger, consolidation and
sale of substantially all assets; (viii) limita-
tions on guarantees of indebtedness by Restricted
Subsidiaries; (ix) limitation on dividend and other
payment restrictions affecting Restricted Subsidi-
aries; (x) limitation on sale and leaseback trans-
actions; (xi) limitation on investment in Unre-
stricted Subsidiaries (as defined); and (xii) limi-
tations on other senior subordinated indebtedness.
See "Description of the Exchange Notes--Certain
Covenants."
Use of Proceeds........... The proceeds to the Company from the sale of the
Old Notes were used, together with the proceeds of
the other Financings and the Equity Investment, to
consummate the Acquisition, to repay indebtedness
of the Company under the Old Credit Facility and to
pay related fees and expenses. The Company will not
receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. See "Use of
Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before tendering Old Notes in exchange for Exchange Notes. These
risk factors are generally applicable to the Old Notes as well as the Exchange
Notes.
11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The summary historical financial data presented below for, and as of the end
of, each of the fiscal years in the three-year period ended December 31, 1996
is derived from the audited consolidated financial statements of the Company.
In the opinion of the Company, the unaudited financial information presented
for the nine months ended September 30, 1997 contains all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information included therein. Results for interim periods are not
necessarily indicative of results for the full year. The summary unaudited pro
forma statement of operations and other financial data for the year ended
December 31, 1996 and nine months ended September 30, 1997 gives effect to the
Transactions as if they had occurred on January 1, 1996. The summary unaudited
pro forma balance sheet data at September 30, 1997 gives effect to the
Transactions as if they had occurred on such date. The pro forma data is not
necessarily indicative of the results that actually would have been achieved
had the Transactions occurred on such date or that may be achieved in the
future. This summary information should be read in conjunction with the
consolidated financial statements and unaudited pro forma financial statements
of the Company and the notes thereto and "Capitalization," "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
NINE MONTHS ENDED PRO FORMA TWELVE PRO FORMA NINE
YEAR ENDED DECEMBER 31, SEPTEMBER 30, MONTHS ENDED MONTHS ENDED
---------------------------- ------------------ DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- ---------------- --------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net sales............... $190,081 $210,265 $256,756 $138,563 $179,058 $256,756 $ 179,058
Cost of sales........... 126,931 137,427 165,189 88,199 112,620 165,189 112,620
-------- -------- -------- -------- -------- -------- ---------
Gross profit............ 63,150 72,838 91,567 50,364 66,438 91,567 66,438
Selling, general and
administrative
expenses............... 57,523 63,040 71,167 48,134 56,193 71,517 56,456
-------- -------- -------- -------- -------- -------- ---------
Operating Income........ 5,627 9,798 20,400 2,230 10,245 20,050 9,982
Net interest income
(expense) and other
income................. (1,611) (2,534) (1,892) (1,518) (1,660) (24,225) (18,261)
-------- -------- -------- -------- -------- -------- ---------
Earnings before income
taxes.................. 4,016 7,264 18,508 712 8,585 (4,175) (8,279)
Net earnings (loss)..... $ 2,651 $ 4,773 $ 11,516 $ 456 $ 5,366 $ (2,661) $ (5,174)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital......... $ 32,593 $ 39,115 $ 49,568 $ 80,367 $109,205 $ 46,863 $ 63,921
Total assets............ 89,403 94,243 121,757 151,668 199,215 127,387 209,719
Total debt.............. 10,127 8,398 6,622 48,851 61,409 218,631 281,768
Senior Exchangeable
Preferred Stock........ -- -- -- -- -- 24,643 24,643
Junior Redeemable
Preferred Stock........ -- -- -- -- -- 86,010 86,010
Total shareholders'
equity (deficit)....... 58,630 63,648 75,528 64,103 81,213 (241,746) (234,113)
OTHER FINANCIAL DATA:
EBITDAR (a)............. $ 21,920 $ 27,550 $ 39,874 $ 16,499 $ 26,322 $ 39,524 $ 26,059
Rental expense.......... 11,782 12,577 13,967 10,253 11,953 13,967 11,953
-------- -------- -------- -------- -------- -------- ---------
EBITDA (a).............. $ 10,138 $ 14,973 $ 25,907 $ 6,246 $ 14,369 $ 25,557 $ 14,106
======== ======== ======== ======== ======== ======== =========
Cash flows provided by
(used in):
Operating activities... $ 12,056 $ 6,329 $ 10,592 $(42,789) $(57,703) $(10,409) $ (73,305)
Investing activities... (7,992) (3,104) (4,701) (3,341) (5,129) (4,701) (5,129)
Financing activities... (1,257) (1,484) (1,413) 40,453 55,110 207,298 52,350
Capital expenditures.... 5,693 2,692 4,233 2,935 4,756 4,233 4,756
Gross margin............ 33.2% 34.6% 35.7% 36.4% 37.1% 35.7% 37.1%
S,G&A as a % of net
sales.................. 30.3% 30.0% 27.7% 34.7% 31.4% 27.9% 31.5%
EBITDA margin........... 5.3% 7.1% 10.1% 4.5% 8.0% 10.0% 7.9%
Ratio of EBITDA to net
interest expense....... -- -- -- -- -- 1.1x .8x
Ratio of long-term debt
to EBITDA (b).......... -- -- -- -- -- 8.5x 16.1x
Ratio of earnings to
fixed charges(c)....... 1.6x 2.0x 3.5x 1.1x 2.4x -- --
Deficiency of earnings
to cover fixed charges. -- -- -- -- -- 4,175 8,279
Ratio of earnings to
combined fixed charges
and preferred stock
dividends.............. 1.6x 2.0x 3.5x 1.1x 2.4x -- --
Deficiency of earnings
to cover combined fixed
charges and preferred
stock dividends........ -- -- -- -- -- 15,208 16,554
STORE DATA:
Comparable store sales
increases.............. 4.2% 6.4% 14.0% 11.7% 18.6% 14.0% 18.6%
Average sales per store. $ 792 $ 829 $ 925 $ 512 $ 600 $ 925 $ 600
STORES:
Beginning of period..... 235 246 260 260 286 260 286
Opened................. 22 32 33 23 20 33 20
Closed................. (11) (18) (7) (7) (2) (7) (2)
-------- -------- -------- -------- -------- -------- ---------
End of period........... 246 260 286 276 304 286 304
======== ======== ======== ======== ======== ======== =========
- -------
(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.
12
RISK FACTORS
Prospective investors should carefully consider the factors set forth below,
as well as the other information contained in this Prospectus, before
tendering their Old Notes in the Exchange Offer. The risk factors set forth
below are generally applicable to the Old Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE; RESTRICTIONS ON INDEBTEDNESS
As a result of the Transactions, the Company became highly leveraged, and
the Company's aggregate indebtedness for borrowed money and interest expense
increased and its shareholders' equity decreased. On a pro forma basis after
giving effect to the Transactions, the Company would have had total
indebtedness of $281.8 million and shareholders' deficit of approximately
$234.1 million as of September 30, 1997. In addition, subject to the
restrictions contained in the instruments governing its indebtedness, the
Company may incur additional debt from time to time to finance working
capital, capital expenditures, acquisitions or for other purposes. After
December 15, 2002, the Company will be required to pay dividends on the Senior
Exchangeable Preferred Stock in cash. Furthermore, subject to certain
conditions, the Company's Senior Exchangeable Preferred Stock will be
exchangeable, at the Company's option, for Exchange Debentures (as defined).
The Company's debt service and dividend obligations could have important
consequences to the holders of the Exchange Notes, 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 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 Indenture, the Certificate of Designation (as
defined), the Exchange 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; and (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. See "Business--Strategy."
Required payments of principal and interest on the Company's indebtedness
are expected to be financed from its cash flow from operations. The Company's
ability to make scheduled payments of the principal of, or to pay interest on,
or to refinance its indebtedness (including the Exchange 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 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, including the Notes, 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 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
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 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 or the
Indenture could result in an event of default under either the Senior Credit
Facility or the Indenture, which could result in acceleration of the related
debt and the
13
acceleration of debt under other instruments evidencing indebtedness that may
contain cross-acceleration or cross-default provisions. If, as a result
thereof, a default occurs with respect to Senior Indebtedness, the
subordination provisions in the Indenture would likely restrict payments to
the holders of the Exchange Notes.
SUBORDINATION OF THE EXCHANGE NOTES AND THE NOTE GUARANTEES
The Exchange Notes and the Note Guarantees will be subordinated in right of
payment to all Senior Indebtedness of the Company and Guarantor Senior
Indebtedness of the Subsidiary Guarantors, respectively, including obligations
under the Senior Credit Facility. As of September 30, 1997, on a pro forma
basis after giving effect to the Transactions, the Company would have had
approximately $176.5 million of Senior Indebtedness (excluding unused
commitments of approximately $16.1 million under the Senior Credit Facility),
all of it representing Indebtedness under the Senior Credit Facility, and the
Subsidiary Guarantors would have had approximately $181.8 of Guarantor Senior
Indebtedness, $176.5 million of which would have represented guarantees of
Indebtedness under the Senior Credit Facility. Additional Senior Indebtedness
and Guarantor Senior Indebtedness may be incurred by the Company and the
Subsidiary Guarantors from time to time subject to certain restrictions
contained in the Senior Credit Facility and the Indenture. In the event of
bankruptcy, liquidation or reorganization of the Company or the Subsidiary
Guarantors, the assets of the Company or the Subsidiary Guarantors will be
available to pay obligations on the Exchange Notes only after all Senior
Indebtedness or 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 Notes then outstanding. In addition, under
certain circumstances, no payments may be made with respect to the Exchange
Notes if a default exists with respect to certain Senior 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 Notes are effectively subordinated to all liabilities
(including trade payables) of any subsidiary of the Company that is not a
Subsidiary Guarantor. See "Description of the Senior Credit Facility" and
"Description of the Exchange Notes."
ENCUMBRANCES ON ASSETS TO SECURE SENIOR CREDIT FACILITY
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Exchange Notes 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 Exchange Notes 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.
14
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company's business is highly seasonal, with a significant portion of its
net sales and most or all of its EBITDA generated during the fourth quarter,
which includes the Christmas season. Net sales in the fourth quarter accounted
for over 40% of net sales for each of the last three fiscal years, and EBITDA
for the fourth quarters of 1996 and 1995 accounted for approximately 76% and
90%, respectively, of EBITDA for such years. Because a significant percentage
of the Company's net sales and EBITDA for a year results from operations in
the fourth quarter, the Company has limited ability to compensate for
shortfalls in fourth quarter sales or earnings by changes in its operations or
strategies in other quarters. A significant shortfall in results for the
fourth quarter of any year can thus be expected to have a material adverse
effect on the Company's annual results of operations. The Company's quarterly
results of operations also may fluctuate significantly as a result of a
variety of factors, including the timing of new store openings, net sales
contributed by new stores, increases or decreases in comparable store sales,
timing of certain holidays, changes in the Company's merchandise, general
economic, industry and weather conditions that affect consumer spending and
actions of competitors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
MERCHANDISE SUPPLY AND INVENTORY
The success of the Company's closeout business depends upon its ability to
identify, locate, select and purchase quality merchandise at attractive prices
in order to maintain a balance of product in certain core merchandising
categories along with a changing mix of merchandise. The Company has no
continuing contracts for the purchase of closeout merchandise and relies on
buying opportunities from both existing and new sources, for which it competes
with other closeout merchandisers and wholesalers. Although the Company
believes that its management has longstanding relationships with its suppliers
and is competitively positioned to continue to seek new sources, there can be
no assurance that the Company will be successful in maintaining an adequate
continuing supply of quality merchandise at attractive prices.
EXPANSION PROGRAM
The growth of the Company's net sales and net earnings will depend, to a
significant extent, on the Company's ability to expand its operations through
the opening of new stores in existing and new markets and to operate those
stores profitably. The Company operates 315 stores in 33 states and plans to
open approximately 32 new stores during 1998. Achieving the Company's
expansion goals will depend on a number of factors, including the Company's
ability to identify and secure suitable locations on acceptable terms, open
new stores in a timely manner, hire and train additional store and supervisory
personnel, integrate new stores into its operations on a profitable basis and
extend its information systems. There can be no assurance that the Company
will be able to achieve its expansion goals on a timely or profitable basis.
See "Business--Business Strategy."
Management believes that cash flow from operating activities and borrowings
under the Senior Credit Facility will provide adequate funds to finance the
Company's expansion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
However, if these sources of funds are inadequate to finance the Company's
expansion, it may require capital from additional sources. There can be no
assurance as to the future availability of additional financing or the terms
thereof, and failure to obtain such financing on acceptable terms could
require the Company to alter its expansion plans or otherwise adversely affect
the Company.
CONTROL BY MADISON DEARBORN
Upon consummation of the Transactions, the Company became controlled by
Madison Dearborn, which owned approximately 85.8% of the Company's Common
Stock outstanding immediately after the Acquisition (approximately 77.2% on a
fully diluted basis). Madison Dearborn has the power to elect all of the
Company's board of directors, appoint new management and approve any action
requiring the approval of the Company's shareholders, including adopting
amendments to the Company's Certificate of Incorporation and approving
acquisitions or sales of substantially all of the Company's assets. The
directors elected by Madison Dearborn
15
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 Exchange Notes. 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, Mr. 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 Exchange
Notes and the Senior Credit Facility. Upon the occurrence of a Change in
Control, each holder of the Exchange Notes would be entitled to require the
Company to repurchase the Exchange Notes, in whole or in part, at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, 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 Exchange Notes tendered. In addition,
the Senior Credit Facility will prohibit the repayment of indebtedness on the
Exchange Notes 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. The
Company's failure to make such repayments in such instances would result in a
default under both the Exchange Notes 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 Exchange 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
Exchange 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 Exchange Notes--Purchase of Exchange
Notes Upon a 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 Guarantors, at the time it incurred the
indebtedness evidenced by the Old Notes or the Exchange Notes or its Note
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
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 Subsidiary Guarantor received or
receives less than the reasonably equivalent value or fair consideration for
the incurrence of such indebtedness, the Exchange Notes and the Note
Guarantees could be invalidated or subordinated to all other debts of the
Company or such Subsidiary Guarantors, as the case may be. The Exchange Notes
or Note Guarantees could also be invalidated or subordinated if it were found
that the Company or the Subsidiary Guarantor party thereto, as the case may
be, incurred indebtedness in connection
16
with the Notes or the Exchange Notes or its Note Guarantees with the intent of
hindering, delaying or defrauding current or future creditors of the Company
or such Subsidiary Guarantor, as the case may be. In addition, the payment of
interest and principal by the Company pursuant to the Exchange Notes or the
payment of amounts by a Subsidiary Guarantor pursuant to a Note 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 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 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.
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 Guarantor within 90 days after any payment by
the Company or such Subsidiary Guarantor with respect to the Exchange Notes or
a Note Guarantee, respectively, or after the issuance of a Note Guarantee, or
if the Company or such Subsidiary Guarantor anticipated becoming insolvent at
the time of such payment or issuance, all or a portion of such payment of such
Note 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 Note Guarantees were voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of Exchange Notes would cease
to have any claim in respect of such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantor, whose Note
Guarantee was not avoided or held unenforceable. In such event, the claims of
holders of Exchange Notes against the issuer of an invalid Note Guarantee
would be subject to the prior payment of all liabilities and preferred stock
claims of such Subsidiary 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 Notes
relating to any voided portions of any Note 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 EXCHANGE NOTES
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange
Offer, there has not been any public market for the Old Notes. The Old Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes by holders who are entitled to participate in this Exchange
Offer. The holders of Old Notes (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 Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Old Notes. The Exchange Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to list the Exchange Notes on any national securities
exchange or seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation System. The Initial Purchasers have
advised the Company that they currently intend to make a market in the
Exchange Notes, but they are not obligated to do so and may discontinue such
market making at any time. In
17
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 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 Exchange Notes or as to the liquidity of the trading market for the
Exchange Notes. If a trading market does not develop or is not maintained,
holders of the Exchange Notes may experience difficulty in reselling the
Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may be discontinued at any time.
If a public trading market develops for the Exchange Notes, 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 other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from
their principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes 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
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes 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 Exchange Notes for its
own account in exchange for Old Notes, where such Old Notes were 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 Exchange Notes. See "Plan of Distribution." To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected. See "The Exchange Offer."
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights
Agreement. The Company will not receive any cash proceeds from the issuance of
the Exchange Notes offered hereby. In consideration for issuing the Exchange
Notes contemplated in this Prospectus, the Company will receive Old Notes in
like principal amount, the form and terms of which are the same as the forms
and terms of the Exchange Notes (which replace the Old Notes), except as
otherwise described herein. The Old Notes surrendered in exchange for Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase or decrease in
the indebtedness of the Company. As such, no effect has been given to the
Exchange Offer in the pro forma statements or capitalization tables.
The proceeds to the Company from the sale of the Old Notes in the Initial
Offering were used, together with borrowings under the other Financings and
the Equity Investment, to consummate the Acquisition, to repay indebtedness of
the Company under the Old Credit Facility and to pay related fees and
expenses. See "Prospectus Summary--The Transactions" and "Description of the
Senior Credit Facility."
18
CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of the Company as of September 30, 1997, and as adjusted on a
pro forma basis to give effect to the Transactions as if they had occurred on
such date. See "Use of Proceeds." This table should be read in conjunction
with the "Selected Consolidated Financial Data" and the related notes thereto,
and the Company's consolidated financial statements, including the related
notes thereto, included elsewhere in this Prospectus.
SEPTEMBER 30, 1997
------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
Debt:
Old Credit Facility....................................... $ 56,127 $ --
Revolving Credit Facility (a)............................. -- 66,486
Term Loans................................................ -- 110,000
Old Notes................................................. -- 100,000
Mortgages and capitalized leases.......................... 5,282 5,282
-------- ---------
Total debt.............................................. 61,409 281,768
Redeemable preferred stock:
Senior Exchangeable Preferred Stock....................... -- 24,643
Junior Redeemable Preferred Stock......................... -- 86,010
-------- ---------
Total redeemable preferred stock........................ -- 110,653
Junior Perpetual Preferred Stock............................ -- 1,918
Common Stock................................................ 17,017 5,357
Retained earnings (deficit)................................. 64,196 (241,388)
-------- ---------
Total shareholders' equity (deficit).................... 81,213 (234,113)
-------- ---------
Total capitalization.................................. $142,622 $ 158,308
======== =========
- --------
(a) The Revolving Credit Facility provides for revolving loans to the Company
up to $90.0 million, subject to certain borrowing base limitations. Under
certain circumstances, the Revolving Credit Facility may be increased to
$115.0 million. See "Description of the Senior Credit Facility." Had the
Transactions occurred on September 30, 1997, the Company would have had
approximately $16.1 million in remaining availability under the Revolving
Credit Facility.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements (the
"Pro Forma Financial Statements") have been derived by the application of pro
forma adjustments to the Company's historical financial statements included
elsewhere in this Prospectus. The pro forma consolidated statement of
operations for the periods presented gives effect to the Transactions as if
they were consummated on January 1, 1996. The pro forma consolidated balance
sheet gives effect to the Transactions as if they had occurred on September
30, 1997. The adjustments, which include adjustments relating to the
Transactions, are described in the accompanying notes. The Pro Forma Financial
Statements should not be considered indicative of actual results that would
have been achieved had the Transactions been consummated on the date or for
the periods indicated and do not purport to indicate balance sheet data or
results of operations as of any future date or for any future period. The Pro
Forma Financial Statements should be read in conjunction with the Company's
historical financial statements and the notes thereto included elsewhere in
this Prospectus.
The Acquisition has been accounted for as a recapitalization and, as such,
has no impact on the historical basis of assets and liabilities.
19
TUESDAY MORNING CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
ASSETS
Cash and cash equivalents................... $ 3,029 $ (3,029)(a) $ --
Inventories................................. 159,687 -- 159,687
Income tax receivable....................... -- 7,143 (b) 7,143
Other current assets........................ 1,516 (63)(c) 1,453
-------- --------- ---------
Total current assets.................... 164,232 4,051 168,283
Net property, plant and equipment........... 31,439 -- 31,439
Other assets................................ 3,544 (47)(c) 3,497
Debt issuance costs......................... -- 9,381 (d) 9,381
-------- --------- ---------
Total assets............................ $199,215 $ 13,385 $ 212,600
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Mortgages on land, buildings and equipment.. $ 1,021 $ -- $ 1,021
Revolving Credit Facility................... -- 51,486 (e) 51,486
Term Loans.................................. -- 1,350 (f) 1,350
Capital lease obligation.................... 213 -- 213
Accounts payable............................ 45,181 -- 45,181
Accrued expenses............................ 6,311 -- 6,311
Income taxes payable........................ 2,301 (2,301)(b) --
-------- --------- ---------
Total current liabilities............... 55,027 50,535 105,562
Mortgages on land, buildings and equipment.. 3,828 -- 3,828
Revolving Credit Facility................... 56,127 (41,127)(e) 15,000
Term Loans.................................. -- 108,650 (f) 108,650
Old Notes................................... -- 100,000 (f) 100,000
Capital lease obligation.................... 220 -- 220
Deferred income taxes....................... 2,800 -- 2,800
Redeemable preferred stock:
Senior Exchangeable Preferred Stock....... -- 24,643 24,643
Junior Redeemable Preferred Stock......... -- 86,010 86,010
Junior Perpetual Preferred Stock............ -- 1,918 1,918
Common Stock................................ 17,017 (11,660) 5,357
Retained earnings........................... 64,196 (305,584) (241,388)
-------- --------- ---------
Total shareholders' equity (deficit).... 81,213 (315,326)(g) (234,113)
-------- --------- ---------
Total liabilities and shareholders'
equity (deficit)....................... $199,215 $ 13,385 $ 212,600
======== ========= =========
See accompanying notes.
20
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) The net effect of $(3,029) represents the adjustments to the Company's
cash and debt balances to account for the effects of the Acquisition and
the Financings.
Total Sources:
Term Loans................................................... $110,000
Revolving Credit Facility.................................... 66,486
Old Notes.................................................... 100,000
Senior Exchangeable Preferred Stock issuance................. 25,000
Junior preferred stock issuance.............................. 87,928
Common Stock issuance........................................ 5,000
--------
$394,414
--------
Total Uses:
Acquisition consideration.................................... $323,016
Old Credit Facility.......................................... 56,127
Fees and expenses............................................ 18,300
--------
$397,443
--------
Net.......................................................... $ (3,029)
========
(b) The total of the income tax payable and income tax receivable adjustments
$(9,444) is primarily the tax benefit from recognizing the compensation
expense created by payments to management for their stock options.
(c) These adjustments write off the remaining balance of financing fees
related to the Old Credit Facility.
(d) The pro forma adjustment to debt issuance costs is to reflect fees and
expenses related to the Senior Credit Facility and the Initial Offering.
(e) Up to $90,000 is available under the Revolving Credit Facility for working
capital and general corporate purposes, subject to certain borrowing base
limitations. Had the Acquisition occurred on September 30, 1997, $66,486
would have been drawn in connection with the Acquisition, which would be
$10,359 more than amounts drawn on the Old Credit Facility. The Revolving
Credit Facility contains a $15,000 "cleandown" provision for 30
consecutive days. The amount in excess of the $15,000 is considered to be
a current liability.
(f) Reflects the following:
EXPECTED TERM CURRENT LONG TERM TOTALS
------------- ------- --------- --------
Senior Credit Facility:
Term Loan A.................... 5 years $1,000 $ 39,000 $ 40,000
Term Loan B.................... 7 years 350 69,650 70,000
Notes............................ 10 years -- 100,000 100,000
------ -------- --------
Total........................ $1,350 $208,650 $210,000
====== ======== ========
21
(g) The following represents the net change in shareholders' equity as a
result of the Transactions.
Stock:
Issuance of Junior Perpetual Preferred Stock................ $ 1,918
---------
Issuance of Common Stock.................................... $ 5,357
Redemption of existing common stock(1)...................... (17,017)
---------
$ (11,660)
---------
Retained Earnings:
Payments to previous shareholders at $25 per share in excess
of common stock redemption(1).............................. $(280,925)
Acquisition fees (non-debt) and expenses.................... (8,919)
Compensation expense from payments to management for stock
options (after-tax)(2)..................................... (15,671)
Financing fees from Old Credit Facility (after-tax)......... (69)
---------
$(305,584)
---------
Net....................................................... $(315,326)
=========
- --------
(1) The total purchase price to existing shareholders is $297,942 (11,917,681
shares at $25.00 per share). This is accounted for as a reduction to
common stock of $17,017 and retained earnings of $280,925.
(2) Represents redemption of options to purchase 1,184,863 shares of common
stock at $25.00 per share, net of applicable exercise price and tax
benefit.
22
TUESDAY MORNING CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30, 1997
---------------------------------
PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA
-------- ----------- --------
Net sales................................. $179,058 $ -- $179,058
Cost of sales............................. 112,620 -- 112,620
-------- -------- --------
Gross profit.......................... 66,438 -- 66,438
Selling, general and administrative
expenses................................. 56,193 263 (a) 56,456
-------- -------- --------
Operating income...................... 10,245 (263) 9,982
Other income (expense):
Interest income......................... 250 -- 250
Interest expense........................ (2,330) (16,601)(b) (18,931)
Other income............................ 420 -- 420
-------- -------- --------
(1,660) (16,601) (18,261)
-------- -------- --------
Income (loss) before income taxes..... 8,585 (16,864) (8,279)
Income tax (benefit)...................... 3,219 (6,324)(c) (3,105)
-------- -------- --------
Net income (loss)..................... 5,366 (10,540) (5,174)
Dividends and accretion of discount on
preferred stock.......................... -- (5,296)(d) (5,296)
-------- -------- --------
Earnings (loss) applicable to common
shareholders......................... $ 5,366 $(15,836) $(10,470)
======== ======== ========
Net income (loss) per common share........ $ 0.43 $ -- $ (2.79)
Weighted average common share and share
equivalents.............................. 12,556 -- 3,750 (e)
See accompanying notes.
23
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(a) Represents annual fees for management and advisory services rendered by
Madison Dearborn.
(b) Pro forma interest expense reflects the 11% interest rate on the Notes,
the interest rates applicable to the Senior Credit Facility and
amortization expense from capitalized financing fees of $999.
(c) The adjustment reflects the tax effect of the deductible adjustments at
the Company's effective tax rate of 37.5%.
(d) The adjustment reflects the effect of preferred stock dividends on net
earnings applicable to holders of Common Stock. The Company is restricted
from paying cash dividends on junior preferred stock under the terms of
the Indenture, the Senior Credit Facility, the Certificate of Designation
and, if applicable, the Exchange Indenture.
(e) Represents the number of shares of Common Stock outstanding immediately
after the recapitalization.
24
TUESDAY MORNING CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED
DECEMBER 31, 1996
----------------------------------
PRO FORMA PRO
ACTUAL ADJUSTMENTS (A) FORMA
-------- -------------- --------
Net sales............................... $256,756 $ -- $256,756
Cost of sales........................... 165,189 -- 165,189
-------- -------- --------
Gross profit........................ 91,567 -- 91,567
Selling, general and administrative
expenses............................... 71,167 350 (b) 71,517
-------- -------- --------
Operating income.................... 20,400 (350) 20,050
Other income (expense):
Interest income....................... 275 -- 275
Interest expense...................... (2,767) (22,333)(c) (25,100)
Other income.......................... 600 -- 600
-------- -------- --------
(1,892) (22,333) (24,225)
-------- -------- --------
Income (loss) before income taxes... 18,508 (22,683) (4,175)
Income tax (benefit).................... 6,992 (8,506)(d) (1,514)
-------- -------- --------
Net income (loss)................... 11,516 (14,177) (2,661)
Dividends and accretion of discount on
preferred stock........................ -- (7,061)(e) (7,061)
-------- -------- --------
Earnings (loss) applicable to common
shareholder........................ $ 11,516 $(21,238) $ (9,722)
======== ======== ========
Net income (loss) per common share...... $ 0.93 $ -- $ (2.59)
Weighted average common share and share
equivalents............................ 12,323 -- 3,750 (f)
See accompanying notes.
25
TUESDAY MORNING CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) Does not give effect to non-recurring charges of $25,074 for compensation
expense from the payment to management for their stock options, $9,400 for
non-debt issuance costs and $280 for writing off the financing fees
related to the Old Credit Facility.
(b) Represents annual fees for management and advisory services rendered by
Madison Dearborn.
(c) Pro forma interest expense reflects the 11% interest rate on the Notes,
the interest rates applicable to the Senior Credit Facility and
amortization expense from capitalized financing fees of $1,332.
(d) The adjustment reflects the tax effect of the deductible adjustments at
the Company's effective tax rate of 37.5%.
(e) The adjustment reflects the effect of preferred stock dividends on net
earnings applicable to holders of Common Stock. The Company is restricted
from paying cash dividends on junior preferred stock under the terms of
the Indenture, the Senior Credit Facility, the Certificate of Designation
and, if applicable, the Exchange Indenture.
(f) Represents the number of shares of Common Stock outstanding immediately
after the recapitalization.
26
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and operating data presented below for,
and as of the end of, each of the fiscal years in the five-year period ended
December 31, 1996 is derived from the audited consolidated financial
statements of the Company. In the opinion of the Company, the unaudited
financial information presented for the nine months ended September 30, 1996
and September 30, 1997 contains all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial information
included therein. Results for interim periods are not necessarily indicative
of results for the full year. The selected unaudited pro forma statement of
operations data for the twelve months ended December 31, 1996 and the nine
months ended September 30, 1997 gives effect to the Transactions as if they
had occurred on January 1, 1996. The selected unaudited pro forma balance
sheet data as of September 30, 1997 gives effect to the Transactions as if
they had occurred on such date. The pro forma data is not necessarily
indicative of the results that actually would have been achieved had the
Transactions occurred on such date or that may be achieved in the future. This
selected information should be read in conjunction with the Consolidated
Financial Statements and the unaudited pro forma financial statements of the
Company and the notes thereto and "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
PRO FORMA PRO FORMA
NINE MONTHS ENDED TWELVE MONTHS NINE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, ENDED ENDED
------------------------------------------------- ------------------ DECEMBER 31, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $160,075 $175,790 $190,081 $210,265 $256,756 $138,563 $179,058 $ 256,756 $ 179,058
Cost of sales.......... 104,581 123,148 126,931 137,427 165,189 88,199 112,620 165,189 112,620
-------- -------- -------- -------- -------- -------- -------- --------- ---------
Gross profit........... 55,494 52,642 63,150 72,838 91,567 50,364 66,438 91,567 66,438
Selling, general and
administrative
expenses.............. 45,315 54,895 57,523 63,040 71,167 48,134 56,193 71,517 56,456
-------- -------- -------- -------- -------- -------- -------- --------- ---------
Operating income....... 10,179 (2,253) 5,627 9,798 20,400 2,230 10,245 20,050 9,982
Net interest income
(expense) and other
income................ 36 (319) (1,611) (2,534) (1,892) (1,518) (1,660) (24,225) (18,261)
-------- -------- -------- -------- -------- -------- -------- --------- ---------
Earnings (loss) before
income taxes and
cumulative effect of
accounting changes.... 10,215 (2,572) 4,016 7,264 18,508 712 8,585 (4,175) (8,279)
Cumulative effect of
accounting changes
(a)................... 1,599 564 -- -- -- -- -- -- --
Net earnings (loss).... $ 8,171 $ (1,052) $ 2,651 $ 4,773 $ 11,516 $ 456 $ 5,366 $ (2,661) $ (5,174)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 48,053 $ 36,765 $ 32,593 $ 39,115 $ 49,568 $ 80,367 $109,205 $ 46,863 $ 63,921
Total assets........... 97,175 88,967 89,403 94,243 121,757 151,668 199,215 127,387 209,719
Total debt............. 13,697 8,997 10,127 8,398 6,622 48,851 61,409 218,631 281,768
Senior Exchangeable
Preferred Stock....... -- -- -- -- -- -- -- 24,643 24,643
Junior Redeemable
Preferred Stock....... -- -- -- -- -- -- -- 86,010 86,010
Total shareholders'
equity (deficit)...... 64,564 55,724 58,630 63,648 75,528 64,103 81,213 (241,746) (234,113)
OTHER FINANCIAL DATA:
EBITDAR (b)............ $ 21,020 $ 12,303 $ 21,920 $ 27,550 $ 39,874 $ 16,499 $ 26,322 $ 39,524 $ 26,059
Rental expense......... 8,409 10,692 11,782 12,577 13,967 10,253 11,953 13,967 11,953
-------- -------- -------- -------- -------- -------- -------- --------- ---------
EBITDA (b)............. $ 12,611 $ 1,611 $ 10,138 $ 14,973 $ 25,907 $ 6,246 $ 14,369 $ 25,557 $ 14,106
======== ======== ======== ======== ======== ======== ======== ========= =========
Cash flows provided by
(used in):
Operating activities.. $(18,407) $ 14,630 $ 12,056 $ 6,329 $ 10,592 $(42,789) $(57,703) $ (10,409) $ (73,305)
Investing activities.. (5,166) (6,497) (7,992) (3,104) (4,701) (3,341) (5,129) (4,701) (5,129)
Financing activities.. 3,395 (7,932) (1,257) (1,484) (1,413) 40,453 55,110 207,298 52,350
Capital expenditures... 5,087 4,850 5,693 2,692 4,233 2,935 4,756 4,233 4,756
Gross margin........... 34.7% 30.0% 33.2% 34.6% 35.7% 36.4% 37.1% 35.7% 37.1%
S,G&A as a % of net
sales................. 28.3% 31.2% 30.3% 30.0% 27.7% 34.7% 31.4% 27.9% 31.5%
EBITDA margin.......... 7.9% 0.9% 5.3% 7.1% 10.1% 4.5% 8.0% 10.0% 7.9%
Ratio of EBITDA to net
interest expense...... -- -- -- -- -- -- -- 1.1x .8x
Ratio of long-term debt
to EBITDA (c)......... -- -- -- -- -- -- -- 8.5x 16.1x
Ratio of earnings to
fixed charges (d)..... 3.9x -- 1.6x 2.0x 3.5x 1.1x 2.4x -- --
Deficiency of earnings
to cover fixed
charges............... -- 2,572 -- -- -- -- -- 4,175 8,279
Ratio of earnings to
combined fixed charges
and preferred stock
dividends............. 3.9x -- 1.6x 2.0x 3.5x 1.1x 2.4x -- --
Deficiency of earnings
to cover combined
fixed charges and
preferred stock
dividends............. -- 2,572 -- -- -- -- -- 15,208 16,554
SELECTED STORE DATA:
Comparable store sales
increases (decreases). 8.2% (3.0)% 4.2% 6.4% 14.0% 11.7% 18.6% 14.0% 18.6%
Average sales per
store................. $ 873 $ 796 $ 792 $ 829 $ 925 $ 512 $ 600 925 $ 600
STORES:
Beginning of period.... 150 190 235 246 260 260 286 260 286
Opened................ 44 48 22 32 33 23 20 33 20
Closed................ (4) (3) (11) (18) (7) (7) (2) (7) (2)
-------- -------- -------- -------- -------- -------- -------- --------- ---------
End of period.......... 190 235 246 260 286 276 304 286 304
======== ======== ======== ======== ======== ======== ======== ========= =========
- -------
(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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
consolidated historical and unaudited pro forma financial statements of the
Company and the related notes thereto appearing elsewhere in this Prospectus.
RECENT DEVELOPMENTS--UNAUDITED
The Transaction was consummated on December 29, 1997. Net sales for the year
ended December 31, 1997 increased $70.5 million, or 27.5%, to $327.3 million
from $256.8 million for the comparable period in 1996. Average store sales for
1997 were approximately $1,066,000, as compared to $925,000 for 1996. During
the year ended December 31, 1997, the Company generated comparable store sales
growth of 18% and EBITDA before Transaction expenses of $41.6 million as
compared to EBITDA of $25.9 million for the comparable period in 1996.
Operating income decreased $18.5 million from $20.4 million in 1996 to $1.9
million in 1997. Compensation paid in lieu of options of $25 million and non-
debt fees and expenses of $9.4 million are included in operating income for
the year ended December 31, 1997. In addition, net current assets at December
31, 1997 decreased by $39.8 million from September 30, 1997, due to the sell
down of inventory during the holiday season. All amounts are unaudited. See
"--Seasonality."
RESULTS OF OPERATIONS
The following table sets forth certain financial information from the
Company's consolidated statements of operations expressed as a percentage of
net sales. There can be no assurance that the trends in sales growth or
operating results will continue in the future.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 66.8 65.4 64.3 63.7 63.0
------- ------- ------- -------- --------
Gross profit ................... 33.2 34.6 35.7 36.4 37.1
Selling, general and
administrative expenses........ 30.3 30.0 27.7 34.7 31.4
------- ------- ------- -------- --------
Operating income................ 3.0 4.7 7.9 1.6 5.7
Net interest income and other
income......................... 0.9 1.2 0.7 1.1 0.9
------- ------- ------- -------- --------
Earnings before income taxes.... 2.1 3.5 7.2 0.5 4.8
Net earnings.................... 1.4% 2.3% 4.5% 0.3% 3.0%
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net sales for the nine months ended September 30, 1997 increased $40.5
million, or 29.2%, to $179.1 million from $138.6 million for the comparable
period in 1996. The increase in net sales for the period was the result of
$13.9 million in sales from new stores open during the period and from a 19%
increase in comparable store sales. The increase in comparable store sales was
the result of improvements in product selection, increase in the average price
of items sold and the continuing beneficial effects of the changes implemented
in 1993 and 1994 with respect to the size and training of the Company's buying
staff and the Company's buying and merchandising policies. The Company also
benefited from increases in the frequency of shipments of merchandise to its
stores and average store level inventory, which resulted in an increase in
customer visits and a higher number of transactions.
28
Gross profit increased $16.1 million, or 31.9%, to $66.4 million from $50.4
million for the comparable period in 1996. Gross profit as a percentage of net
sales increased from 36.4% to 37.1%. This increase was primarily attributable
to the leveraging of the Company's distribution costs, which remain relatively
fixed in relation to the increase in net sales.
Selling, general and administrative expenses increased $8.1 million, or
16.8%, to $56.2 million from $48.1 million for the comparable period in 1996.
However, these expenses as a percentage of net sales declined to 31.4% from
34.7% for the comparable period in 1996. These expenses are primarily incurred
at the store level and are relatively fixed, and therefore have also benefited
from the increase in comparable store sales.
Operating income increased $8.1 million, or 368.2%, to $10.2 million from
$2.2 million for the comparable period in 1996. Operating income as a
percentage of net sales increased from 1.6% to 5.7%. These increases were the
result of the factors described above.
Income tax expense increased from 36.0% of net income to 37.5% of net income
due to reduced tax planning opportunities, and an increase in the Company's
federal tax bracket.
Other income and expense remained relatively constant. Other income
represented interest income, primarily in the form of sales tax discounts
which increased as a result of the Company's increase in net sales, and rental
income derived from a strip-center shopping area adjacent to the Company's
headquarters. Other expense represented interest expense and remained
relatively constant due to similar borrowing levels and interest rates.
For the reasons set forth above, net income for the nine months ended
September 30, 1997 increased $4.9 million, to $5.4 million from $0.5 million
for the comparable period in 1996.
1996 Compared to 1995
Net sales for the year ended December 31, 1996 increased $46.5 million, or
22.1%, to $256.8 million from $210.3 million for the year ended December 31,
1995. The increase in net sales was the result of $22.9 million in sales from
new stores open during the period and from a 14% increase in comparable store
sales. The increase in comparable store sales was comprised of a 9.3% increase
in the number of transactions and a 4.1% increase in the average transaction
amount. The increase was primarily the result of continued improvement in
merchandise selection, pricing and mix. In 1996, the Company began to realize
the full benefits of its initiative begun in 1993 to increase the staffing and
training of its buying team. By year end 1996, the size of the Company's
buying team had more than doubled from its size in 1993, which allowed the
Company to continue to develop its strategy of increasing the number of
individual products that it carries and to focus its buying activities on
areas of individual buyer expertise.
Gross profit increased $18.7 million, or 25.7%, to $91.6 million from $72.8
million for the year ended December 31, 1995. Gross profit as a percentage of
net sales increased to 35.7% from 34.6% in 1995. These increases were
primarily achieved through the leveraging of distribution, freight and buying
costs, which increased at a rate less than the increase in sales. The
remainder of this improvement was due to a reduction in markdowns, offset by a
slight increase in product cost.
Selling, general and administrative expenses increased $8.1 million, or
12.9%, to $71.2 million from $63.0 million in 1995. However, these expenses
declined as a percentage of net sales to 27.7% from 30.0% in 1995. These
expenses were primarily related to store operations. The decrease in these
expenses as a percentage of net sales was the result of the leverage obtained
from the significant increases in sales.
Operating income increased $10.6 million, or 108.2%, to $20.4 million from
$9.8 million for 1995. Operating income as a percentage of net sales increased
from 4.7% to 7.9% in 1996. These increases were due to the improvements in
gross profit and selling, general and administrative expenses discussed above.
29
The Company's income tax rate increased both at the Federal and state
levels. Federal tax rate increased from 34.0% to 35.0% due to the increase in
the Company's earnings and an increase in the Company's tax bracket. The
Company's state tax rate increased from 0.3% in 1995 to 2.8% in 1996, because
loss carry-forwards utilized in 1995 were no longer available in 1996, because
of tax rate increases and because of reduced tax planning opportunities.
Interest expense declined by approximately $0.6 million in 1996 due to
reduced average borrowings during the year, which was the result of cash flow
from 1995 operations and reduced interest rates negotiated during 1996.
For the reasons set forth above, net income for the year ended December 31,
1996 increased $6.7 million, or 139.6%, to $11.5 million from $4.8 million for
the year ended December 31, 1995.
1995 Compared to 1994
Net sales for the year ended December 31, 1995 increased $20.2 million, or
10.6%, to $210.3 million from $190.1 million for the year ended December 31,
1994. The increase in net sales was the result of $17.7 million in sales from
new stores open during the period and from a 6.4% increase in comparable store
sales. The increase in comparable store sales was comprised of a 5.4% increase
in the number of transactions and a 1.1% increase in the average transaction
amount. These improvements came in several areas. Product selection, pricing
and mix continued to improve due to the increased number and expertise of new
buyers which were added in 1994 and 1995. The buyers increased their travel
throughout the world to obtain better values and to eliminate middlemen.
Buyers were able to focus on areas where they have significant expertise and
were better able to find the bargains that allow the Company to provide value
to its customers and improve product selection. As examples, the Company added
buyers with expertise in rugs, sporting goods, toys, seasonal items,
housewares, and lawn and garden which allowed for expansion of these
categories. The point of sale system, which was installed in 1994, provided
the Company with more timely information regarding the rate of sale of its
products and allowed management to monitor and more accurately plan markdowns.
Gross profit increased $9.7 million, or 15.3%, to $72.8 million from $63.2
million in 1994. Gross profit as a percentage of net sales increased 1.4
percentage points in 1995, from 33.2% to 34.6%. These increases were primarily
due to improvements in product cost attributable to the expertise of the
buyers hired in 1994 and 1995 and to the leveraging of distribution, freight
and buying costs, which increased less than the increase in sales. Gross
profit in 1995 also increased due to reductions in shrink. Shrink improved in
1994 and 1995 as a result of the enhancements made in the Company's loss
prevention program and the installation of electronic article surveillance
equipment in the Company's stores.
Selling, general and administrative expenses increased $5.5 million, or
9.6%, to $63.0 million from $57.5 million in 1995, which was slightly less
than the increase in net sales. These expenses were primarily store level
expenses and were relatively fixed on a per store basis. The leverage obtained
reduced these expenses as a percentage of sales from 30.3% to 30.0%.
Income tax expense increased from 34.0% to 34.3% due to an increase in state
income taxes which were lower in 1994 due to loss carry forwards, some of
which were fully utilized in 1994.
Interest expense increased $0.9 million, or 35%, due to increased borrowing
levels and increased interest rates on the Company's revolving credit
facility.
For the reasons set forth above, net income for the year ended December 31,
1995 increased $2.1 million, or 77.8%, to $4.8 million from $2.7 million for
the year ended December 31, 1994.
30
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with funds generated
from operating activities and borrowings under the Old Credit Facility.
Net cash provided (used) by operating activities for the fiscal years ended
December 31, 1994, 1995, and 1996 and the nine months ended September 30, 1996
and 1997 was $12.1 million, $6.3 million, $10.6 million, $(42.8) million and
$(57.7) million, respectively. Increases in net cash provided by operating
activities for the above periods were attributable to increases in operating
income, and for 1994, reduction in inventory levels. Uses of net cash by
operating activities was the result of seasonal increases in inventory levels.
Cash and cash equivalents as of December 31, 1994, 1995, 1996 and September
30, 1996 and 1997 were $4.5 million, $6.3 million, $10.8 million, $0.6 million
and $3.0 million, respectively.
Capital expenditures, principally associated with new store openings,
warehouse and system enhancements and maintenance capital expenditures, were
$5.7 million, $2.7 million and $4.2 million for 1994, 1995 and 1996,
respectively, and are expected to be approximately $5.1 million for 1997 and
approximately $4.7 million for 1998.
As part of the Acquisition, the Company entered into the Senior Credit
Facility, which is comprised of the $110.0 million Term Loans and the $90.0
million Revolving Credit Facility. Subject to compliance with the terms of the
Senior Credit Facility and the Indenture, borrowings under the Revolving
Credit Facility may be increased by $25.0 million to accommodate future growth
and for certain other purposes. At September 30, 1997, on a pro forma basis
after giving effect to the Transactions, the Company would have had
outstanding $110.0 million under the Term Loans and $66.5 million under the
Revolving Credit Facility and would have had remaining availability thereunder
of $16.1 million. At Closing, the Company had significantly greater
availability under the Revolving Credit Facility as a result of cash generated
during the fourth quarter. The Term Loan A loans and the Revolving Credit
Facility loans mature on the fifth anniversary of the Closing, and the Term
Loan B loans will mature on the seventh anniversary of the Closing. For a
consecutive 30-day period, measured from April 1 through March 31, beginning
in April 1998, the aggregate principal amount of loans outstanding under the
Revolving Credit Facility is not to exceed $15.0 million. See "Description of
the Senior Credit Facility."
Upon consummation of the Transactions, the Company's total debt and interest
charges increased significantly. Interest payments on the Notes, under the
Senior Credit Facility and on the Exchange Debentures, if issued, represent
significant liquidity requirements for the Company. The Notes require semi-
annual interest payments, and interest on the loans under the Senior Credit
Facility are due quarterly. After December 15, 2002, the Company will be
required to pay dividends on the Senior Exchangeable Preferred Stock in cash.
The Company anticipates that its cash flow generated from operations and
borrowings under the Senior Credit Facility will be sufficient to fund the
Company's working capital needs, planned capital expenditures, scheduled
interest payments (including interest payments on the Notes and amounts
outstanding under the Senior Credit Facility) and scheduled dividend payments
on the Senior Exchangeable Preferred Stock for the foreseeable future. See,
however, "Risk Factors--Substantial Leverage and Debt Service; Restrictions on
Indebtedness." The Company has from time to time received expressions of
interest with respect to the property on which its headquarters is located in
Dallas, Texas and in the future may consider selling such property as a means
of raising additional cash.
The instruments governing the Company's indebtedness 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
31
person or sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company. Such limitations, together
with the highly leveraged nature of the Company, could limit corporate and
operating activities, including the Company's ability to invest in opening new
stores. See "Risk Factors--Substantial Leverage and Debt Service; Restrictions
on Indebtedness."
SEASONALITY
The Company has historically experienced, and the Company expects to
continue to experience, seasonal fluctuations in its business, with a
significant percentage of its net sales and most or all of its EBITDA being
realized in the fourth fiscal quarter, which includes the Christmas selling
season. Net sales in the fourth quarter accounted for over 40% of annual net
sales for each of the last three fiscal years, and EBITDA for the fourth
quarters of 1996 and 1995 accounted for approximately 76% and 90%,
respectively, of annual EBITDA for such years. Because a significant
percentage of the Company's net sales and EBITDA for a year results from
operations in the fourth quarter, the Company has limited ability to
compensate for shortfalls in fourth quarter sales or earnings by changes in
its operations or strategies in other quarters. A significant shortfall in
results for the fourth quarter of any year can thus be expected to have a
material adverse effect on the Company's annual results of operations. See
"Risk Factors--Variability of Quarterly Results and Seasonality."
The following table illustrates the seasonality of the Company's net sales,
EBITDA and net earnings (loss) by quarter for 1995 and 1996.
TUESDAY MORNING SEASONALITY
(DOLLARS IN THOUSANDS)
NET EARNINGS
NET SALES EBITDA (LOSS)
-------------- -------------- --------------
1996
First Quarter............... $ 35,740 13.9% $ 532 2.0% $ (676) (5.9)%
Second Quarter.............. 54,286 21.2 2,484 9.6 434 3.8
Third Quarter............... 48,537 18.9 3,230 12.5 698 6.1
Fourth Quarter.............. 118,193 46.0 19,661 75.9 11,060 96.0
-------- ----- ------- ----- ------- -----
Total..................... $256,756 100.0% $25,907 100.0% $11,516 100.0%
======== ===== ======= ===== ======= =====
1995
First Quarter............... $ 29,958 14.2% $(1,564) (10.4)% $(2,046) (42.9)%
Second Quarter.............. 47,977 22.8 1,702 11.4 (155) (3.2)
Third Quarter............... 38,240 18.2 1,412 9.4 (336) (7.0)
Fourth Quarter.............. 94,090 44.8 13,423 89.6 7,310 153.1
-------- ----- ------- ----- ------- -----
Total..................... $210,265 100.0% $14,973 100.0% $ 4,773 100.0%
======== ===== ======= ===== ======= =====
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" which is effective for both
interim and annual periods ending after December 15, 1997. Statement 128
requires the disclosure of basic and diluted earnings per share, which differ
from the previously reported primary and fully diluted earnings per share. The
Company has not yet determined the effect of this Statement on previously
reported earnings per share.
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.
32
BUSINESS
GENERAL
Tuesday Morning is the largest closeout retailer of upscale gift and home
furnishings merchandise in the United States, with 315 stores in 33 states.
The Company operates its stores during seven annual "sales events" that last
from four to seven weeks, while closing them for the remaining weeks of the
year. Tuesday Morning does not sell seconds, irregulars or factory rejects,
but rather specializes in first quality, brand name merchandise such as Ralph
Lauren bed linens, Waterman pens, Limoges hand-decorated boxes, Mikasa dishes,
Farberware cookware, Daum French crystal, Martex bath towels, Fisher-Price
toys, Samsonite luggage and Spode china. The Company purchases its merchandise
at closeout and sells it at prices that are 50% to 80% below those generally
charged by department and specialty stores. The Company believes that its
event-based selling strategy, combined with high quality, reasonably priced
merchandise, attracts upscale "bargain hunters" with strong loyalty to the
Company.
The Company was formed and opened its first store in 1974. Since its initial
public offering in 1986, the Company has increased its number of stores from
63 to 315, and has achieved compound annual growth rates for sales and EBITDA
of 16.1% and 16.6%, respectively. During the twelve months ended September 30,
1997, the Company generated comparable store sales growth of 18% and net sales
and EBITDA of $297.3 million and $34.1 million, respectively. This represents
an increase of 27.8% and 72.5%, respectively, over sales and EBITDA for the
twelve months ended September 30, 1996.
BUSINESS STRENGTHS
The Company's success has been largely based on the following strengths:
Unique Event-Based Format. The Company distinguishes itself from other
retailers with a unique event-based selling strategy, creating the equivalent
of seven "grand openings" each year. The Company believes that the closing and
reopening of its stores heightens customers' expectations of finding new,
undiscovered merchandise and intensifies their sense of urgency to buy the
Company's products, which are available only in limited quantities. Consistent
with this approach, the Company typically realizes approximately 40% of an
event's total sales in the first four or five days of the event (Wednesday or
Thursday to Sunday).
Strong Merchandising Capabilities. The Company employs a talented and
experienced buying team, which has grown from 10 buyers in 1993 to 22 buyers
in 1997, with an average of nearly 20 years of retail experience. The
Company's buyers and its reputation as a preferred, reliable purchaser have
enabled it to establish excellent, long-term relationships with a diverse
group of top-of-the-line vendors. The Company obtains its merchandise
primarily by purchasing from manufacturers their end-of-line merchandise,
products which did not meet their sales expectations, or merchandise left over
from cancellations of orders placed by other retailers. Merchandise is also
obtained by contracting for production from manufacturers during periods of
lower production. Through its approximately 1,000 vendor relationships, the
Company has become one of the largest retailers for certain categories of
luxury brand merchandise, such as European handmade crystal and fine quality
Oriental rugs from China and India. The Company believes that certain top-of-
the-line vendors such as Rosenthal and Samsonite prefer to liquidate a
majority of their excess inventory through the Company because of its access
to an upscale customer base and its ability to dispose of high-end, closeout
merchandise quickly and without disruption to their normal retail channels.
Dedicated, Upscale Customer Base. Tuesday Morning has an upscale, loyal
customer following. The Company has developed and maintains a proprietary
preferred customer mailing list of over 4,000,000 customers who have visited
its stores and requested to receive mailings in advance of the Company's sales
events. Customer loyalty is evidenced by the fact that the Company derives
approximately 31% of its sales during the first two or three days of each
sales event, which is advertised only by a mailing to those individuals on the
list. The Company believes, based on its internal research, that its customers
are primarily female from households headed
33
by professionals, typically ranging in age from 25 to 54 and having a median
family income of approximately $55,000. In addition, the Company believes its
customers are knowledgeable shoppers who frequent five or more national
department stores and are able to recognize the Company's favorable pricing on
first quality, name brand merchandise.
Strong Financial Characteristics. Tuesday Morning has demonstrated an
ability to consistently grow sales while generating strong cash flow. For the
twelve months ended September 30, 1997, Tuesday Morning generated EBITDA of
$34.1 million, a 72.5% increase over the comparable period in 1996. During
this same period, capital expenditures were $6.1 million. The Company has
consistently grown its EBITDA since 1993 due to the improved profitability of
its existing store base, while requiring only modest capital expenditures to
fund growth.
Flexible, Low Cost Real Estate Approach. The Company's stores are
destination-oriented, and can therefore be located in secondary locations of
major suburban markets, such as strip malls and warehouse zones, in close
proximity to their target customers. As a result, the Company's real estate
costs are significantly lower than those of many other retailers, averaging
approximately $8 per square foot. In addition, virtually all new leases
contain a "kick" clause that gives the Company the ability to terminate the
lease without penalty for up to 18 months after lease inception. These kick
clauses provide the Company with significant downside protection in opening
new stores by allowing it to vacate a site that initially proves unprofitable.
The Company is able to obtain kick clauses because it seldom requires
significant build out of a lease site and because it is able to make
productive use of challenging space.
Integrated Management Information Systems and Inventory Controls. The
Company believes its management information systems are among the most
advanced in the retailing industry. These systems enable the Company to manage
its flow of almost 80,000 SKUs from approximately 1,000 vendors on a real-time
basis in order to make timely and accurate purchasing, distribution and
merchandising decisions. The Company's proprietary merchandising and inventory
control systems, point of sale system and state-of-the-art distribution
management system are integrated with its financial reporting systems,
providing the Company's buyers with a significant degree of control over
inventory acquisition, distribution and sales performance. The Company's
buyers can review, at the SKU level and on a real-time basis, the status of
every open purchase order, inbound shipment, warehouse receipt, process
shipment and item of store inventory. These systems further allow management
to target merchandise for markdowns in an effective and systematic manner. At
September 30, 1997, less than 5% of the Company's inventory was more than one
year old.
BUSINESS STRATEGY
The Company's objective is to sustain its current growth and to enhance its
productivity and operating performance by continuing to build on its existing,
proven strengths. The Company intends to achieve this objective by pursuing
the following existing strategies:
Continue New Store Openings. The Company opened 31 new stores in 1997 and
plans to increase its store base, in new and existing markets, by
approximately 32 to 35 stores per year for the foreseeable future. The
Company's "no-frills" approach enables it to open this number of stores for an
aggregate cost of only $2 million per year, or approximately $60,000 per store
excluding inventory. The Company intends to profitably increase its
penetration of existing markets, capitalize on the success it has enjoyed in
smaller single-store markets, where there are often no other retailers
offering the Company's first quality products, and prudently expand into new
major metropolitan markets that will provide the basis for long-term
expansion.
Enhance Sales Productivity. The Company has achieved average comparable
store sales growth of approximately 6% per year since its initial public
offering in 1986 and 19% for the first nine months of 1997. The growth has
resulted from increases in (i) the number of customer transactions, (ii) the
average number of items purchased per customer visit and (iii) the average
price of such items. The average number of customer transactions has increased
as a result of the increased frequency of stocking its stores during a sales
event. The
34
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.
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
35
their products at substantially reduced prices. Accordingly, merchandise
offered 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.
36
Advertising expenses as a percentage of net sales were approximately 7.2%,
7.3% and 6.4% for the years ended December 31, 1994, 1995 and 1996,
respectively, and 5.8% for the twelve months ended September 30, 1997.
STORE OPERATIONS
At December 31, 1997, the Company operated 315 Tuesday Morning stores in 33
states. During the year ended December 31, 1997, no single store accounted for
more than 1.3% of the Company's net sales.
The Company does not keep its stores open throughout the year, but instead
opens them seven times a year to conduct approximately four to seven week
sales events during the retailing industry's peak selling seasons. These
events generally occur during the last six weeks of the first quarter, the
last eight weeks of the second and third quarter (which contain two events
each) and the last 12 weeks of the fourth quarter (which also contains two
events). To encourage new and repeat shopping visits for each sales event, the
Company has increased the frequency of merchandise shipments during a sales
event. During each shipment, new items are delivered, stocked and promoted in
every Tuesday Morning store. Tuesday Morning stores are closed to the public
between sales events, and are used in these periods only to house inventory
and to restock for the next sales event.
The Company utilizes a "no-frills" approach to presenting merchandise.
Stores are designed to be functional, with little emphasis placed upon
fixtures and leasehold improvements. All merchandise at each store is
displayed by type and size on racks or counters, and minimum inventory is
maintained in stockrooms. Most merchandise is sold in its original shipping
carton. Because most merchandise is sold on a self-service basis, the Company
does not employ people solely to assist customers in locating merchandise or
making selections.
In keeping with Tuesday Morning's advertised policy of "Satisfaction
Guaranteed or Your Money Cheerfully Refunded," any merchandise purchased from
Tuesday Morning stores may be returned within 90 days with proof of purchase,
for any reason. Customers, if not completely satisfied, are given a choice of
either a cash refund or an equivalent value in merchandise.
Operating hours during each sale are typically from 10:00 a.m. to 6:00 p.m.
six days a week and until 8:00 p.m. on Thursday. The Company accepts cash,
personal checks and most major credit cards.
STORE MANAGEMENT
Each store has a manager who is responsible for recruiting, training and
supervising store personnel and assuring that the store is managed in
accordance with Company guidelines and established procedures. Store managers
are full-time employees of the Company. When sales events are not in progress,
these employees review store inventory and supervise restocking activities in
preparation for the next sales event. The Company employs temporary employees
at each Tuesday Morning store to serve as cashiers and to assist in stocking
during each sales event. These temporary employees generally return to work in
subsequent sales events, reducing the need for new hiring prior to each sales
event. Typically, the Company will employ more temporary employees during the
first few days of a sale, when customer traffic is highest.
Company management and area managers visit selected stores while sales are
in progress to review inventory levels and presentation, personnel
performance, expense control, security and adherence to Company procedures. In
addition, regional and area managers periodically meet with Company management
to review store policies and to discuss purchasing, merchandising and
advertising strategies for future sales events.
SITE SELECTION
The Company opened 31 new stores in 1997 and plans to increase its store
base by approximately 32 to 35 stores in each of the next several years, both
in new markets and in existing markets. The new stores are expected to be
similar in size, appearance and operation to existing stores.
37
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 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
38
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.
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.
39
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The names, ages as of January 31, 1998, and principal positions of the
directors, executive officers and key employees of the Company and the
Subsidiary Guarantors are set forth below:
NAME AGE POSITION
---- --- --------
Lloyd L. Ross............ 62 Chairman of the Board
Jerry M. Smith........... 61 President, Chief Executive Officer and
Director of the Company and President and
Chief Operating Officer of Friday Morning,
Inc. and Tuesday Morning, Inc.
Mark E. Jarvis........... 46 Senior Vice President, Chief Financial Officer
and Secretary of the Company, Friday Morning,
Inc. and Tuesday Morning, Inc.
G. Michael Anderson...... 45 Senior Vice President, Buying Group of the
Company and Tuesday Morning, Inc.
Duane A. Huesers......... 42 Vice President, Finance and Assistant
Secretary of the Company and Tuesday Morning,
Inc.
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 Vice President and Assistant Secretary of the
Company and the Subsidiary Guarantors and
Director of the Company
Benjamin D. Chereskin.... 39 Vice President, Assistant Secretary and
Director of the Company, Friday Morning, Inc.
and Tuesday Morning, Inc. and President,
Secretary and Director of TMI Holdings, Inc.
and TMIL Corporation
Robin P. Selati.......... 31 Vice President and Assistant Secretary of the
Company and the Subsidiary Guarantors and
Director of the Company
The following is a brief description of the business experience of the
directors, executive officers and key employees of the Company and the
Subsidiary Guarantors.
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. Mr. Smith has served as President and Chief Operating
Officer of Friday Morning, Inc. and Tuesday Morning, Inc. since inception and
September 1994, respectively.
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. Mr. Jarvis has served as Senior Vice President,
Chief Financial Officer and Secretary of Friday Morning, Inc. and Tuesday
Morning, Inc. since September 1992.
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.
40
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 and as Vice
President and Assistant Secretary of the Company and the Subsidiary Guarantors
since December 29, 1997. Mr. Hunckler has been a Vice President of MDP since
co-founding the firm in 1993. Prior to 1993, Mr. Hunckler was with First
Chicago Venture Capital for 13 years. Mr. Hunckler currently serves on the
board of directors of Beverages and More, Inc., The Cornerstone Investments
Group, Inc. and Peter Piper, Inc.
Benjamin D. Chereskin has served as Vice President, Assistant Secretary and
a director of the Company, Friday Morning, Inc. and Tuesday Morning, Inc. and
as President, Secretary and a director of TMI Holdings, Inc. and TMIL
Corporation since December 29, 1997. Mr. Chereskin has been a Vice President
of MDP since co-founding the firm in 1993. Prior to 1993, Mr. Chereskin was
with First Chicago Venture Capital for nine years. Mr. Chereskin currently
serves on the board of directors of Beverages and More, Inc., The Cornerstone
Investments Group, Inc. and Carrols Corporation.
Robin P. Selati has served as a director of the Company and as Vice
President and Assistant Secretary of the Company and the Subsidiary Guarantors
since December 29, 1997. Mr. Selati has been with MDP since 1993. His prior
experience was with Alex. Brown & Sons Incorporated as a Financial Analyst in
the consumer/retailing investment banking group. Mr. Selati currently serves
on the board of directors of Peter Piper, Inc. and Carrols Corporation.
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.
ANNUAL
COMPENSATION LONG TERM COMPENSATION
------------- -----------------------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS/SAR'S COMPENSATION(A)
- --------------------------- ---- -------- ------------- ---------------
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
41
- --------
(a) The amounts indicated reflect the aggregate value of the Company's
contributions for each of the named executive officers to the Company's
401(k) defined contribution plan, group term life insurance and the
Company's stock purchase plan.
(b) Mr. Anderson was promoted to the position of Senior Vice President, Buying
Group, in December 1996.
CONSULTING AND EMPLOYMENT AGREEMENTS
On December 29, 1997, Lloyd L. Ross, the Company's founder, entered into a
two-year consulting and non-competition agreement which provides that he will
serve as Chairman of the Company's Board of Directors and will facilitate in
the Company's relationships with third parties and suppliers. Mr. Ross's
consulting agreement provides for annual compensation of $250,000 per year
(along with benefits similar to those offered to him prior to the Acquisition)
with an expected time commitment for Mr. Ross of 60 days per year. The
consulting agreement for Mr. Ross also contains noncompete and nonsolicitation
covenants and confidentiality provisions.
On December 29, 1997, Jerry M. Smith, the Company's President since 1994,
entered into a three-year employment agreement which provides that he will
serve as the Company's President and Chief Executive Officer, as well as a
director. Mr. Smith will receive an annual base salary of $475,000 per year,
subject to possible increases, and a maximum annual bonus of up to 50% of his
base salary, and will continue to receive the same benefits and perquisites
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."
INVESTMENT BY MANAGEMENT AND STOCK OPTION PLAN
In connection with the Acquisition, Messrs. Ross, Smith, Jarvis and Anderson
and certain other management members of the Company acquired the equivalent of
approximately 7.6% of the Company's Common Stock outstanding immediately after
the Acquisition. On December 29, 1997 the Company adopted the Tuesday Morning
Corporation 1997 Long-Term Equity Incentive 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, borrowed funds from the Company from time to time. Mr. Ross's
borrowings, which bore interest at the prime rate, had a balance, including
accrued interest, of approximately $3,450,000 as of the Closing. In 1992,
Jerry M. Smith, an executive officer and a director of the Company, received a
loan for the purchase of Company stock which, including accrued interest, had
a balance of approximately $189,500 as of the Closing. Mr. Smith's loan also
bore interest at the prime rate. On December 29, 1997 the maturity date of
each such loan was extended to the seventh anniversary of the Closing except
in certain circumstances described below. In addition, the interest rate of
each such loan was changed, as of the Closing, from the prime rate of interest
to the mid-term applicable federal rate as defined in Internal Revenue Code
Section 1274(d).
In order to effect the Acquisition, the Company entered into a merger
agreement (the "Merger Agreement") with Madison Dearborn Partners II, L.P., a
Delaware limited partnership ("MDP"), and its wholly owned subsidiary, Tuesday
Morning Acquisition Corp. ("Merger Sub"), pursuant to which Merger Sub merged
with and into the Company and the Company became the surviving corporation
(the "Merger"). Prior to the Merger, MDP assigned its rights and interests
under the Merger Agreement to its affiliate, Madison Dearborn.
In the Acquisition, Messrs. Ross and Smith, together with Mark E. Jarvis and
G. Michael Anderson, each an executive officer of the Company, and certain
other members of the Company's management (the
42
"Management Group") invested, in the aggregate, $7.5 million in shares of
junior preferred stock and Common Stock of the Company. Prior to the Merger,
the Management Group contributed shares of the Company's common stock to
Merger Sub in the following amounts: approximately $5.5 million in the case of
Mr. Ross, approximately $1.3 million in the case of Mr. Smith and a total of
approximately $0.7 million from the other members of the Management Group.
Members of the Management Group exercised stock options to the extent that
they did not already own shares necessary to obtain the shares to be
contributed.
In the Merger, Mr. Ross's ownership position in the Merger Sub was converted
into shares of the Company's Common Stock (representing approximately 5.5% of
the total outstanding immediately after the Acquisition) and approximately
$5.2 million liquidation value of the Company's Junior Redeemable Preferred
Stock (as defined). See "Description of Junior Preferred Stock." On December
29, 1997 Mr. Ross entered into a Term Put Agreement with the Company and
Madison Dearborn which provides him with the right, 24 months after the
Closing, to put his Junior Redeemable Preferred Stock to the Company or
Madison Dearborn for an amount equal to liquidation value plus any accrued but
unpaid dividends. In the event that Mr. Ross exercises the put, he will be
required to transfer his shares of the Company's Common Stock to the Company
or Madison Dearborn, as the case may be, for no additional consideration and
his loan will become due and payable to the Company or Madison Dearborn, as
the case may be, at such time. Mr. Ross's loan will also become due and
payable at such time when the Company exercises its option to redeem his
shares of the Junior Redeemable Preferred Stock.
In the Merger, Mr. Smith's ownership position in the Merger Sub was
converted into shares of the Company's Common Stock (representing
approximately 1.3% of the total outstanding immediately after the Acquisition)
and approximately $1.2 million liquidation value of the Junior Perpetual
Preferred Stock (as defined). On December 29, 1997 Mr. Smith entered into an
Employment Put Agreement with the Company which provides him with the right to
require the Company to repurchase approximately 76% of the shares of Common
Stock and Junior Perpetual Preferred Stock held by 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 Junior Preferred Stock."
As a result of the transactions described above, following the Acquisition,
the Management Group owned, in the aggregate, approximately $5.2 million
liquidation value of the Junior Redeemable Preferred Stock, $1.9 million
liquidation value of the Junior Perpetual Preferred Stock and approximately
7.6% of the Company's Common Stock outstanding immediately after the
Acquisition.
Madison Dearborn acquired a number of shares representing approximately
85.8% of the Company's Common Stock outstanding immediately after the
Acquisition (approximately 77.2% on a fully diluted basis) and approximately
$80.8 million liquidation value of the Junior Redeemable Preferred Stock of
the Company for an aggregate purchase price of $85.4 million. Madison Dearborn
renders certain management and advisory services to the Company for which it
receives from the Company a fee in the amount of $350,000 per year.
During 1996, the Company paid to Saunders, Lubinski and White approximately
$11 million for media, advertising and production services. Mr Saunders, a
director of the Company since December 1996, was an officer of Saunders,
Lubinski and White. He has ceased to be affiliated with such firm since
January 1, 1997.
43
In connection with the Acquisition, Madison Dearborn, the Management Group
and the Company entered into a Stockholders Agreement which provides for,
among other things, certain restrictions on the transfer of the Junior
Redeemable Preferred Stock, the Junior Perpetual Stock and the Common Stock
held by the Management Group (collectively, the "Management Shares"), the
right of the Company to sell or cause to be sold all or a portion of the
Management Shares in connection with a sale of the Company, the right of the
Company to repurchase the Management Shares of any member of the Management
Group upon the termination of such member for cause, certain rights by the
Management Group to participate in certain sales of Common Stock by Madison
Dearborn under certain circumstances, certain demand registration rights in
favor of Madison Dearborn by which it may cause the Company to register all or
part of the Common Stock held by it under the Securities Act, and certain
"piggyback" registration rights in favor of Madison Dearborn and the
Management Group.
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.
BENEFICIAL
OWNERSHIP(A)
--------------------
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES SHARES
- ------------------------ --------- ----------
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%
- --------
* 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.
44
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 were 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 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 varies 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
45
Credit Facility on the aggregate undrawn 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.
46
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes offered hereby will be issued as a separate series under
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
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.
The following summary of the material provisions of the Indenture does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Indenture, including the definitions of
certain terms contained therein and those terms 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. For definitions of certain
capitalized terms used in the following summary, see "--Certain Definitions."
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 the rate set forth
on the cover page hereof 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. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable (subject to compliance
with transfer restrictions imposed by applicable securities laws for so long
as the Notes are not registered for resale under the Securities Act), at the
office or agency of the Company in The City of New York maintained for such
purposes (which initially will be the corporate trust office of the Trustee);
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. The Notes will be issued only in
registered form without coupons and only in denominations of $1,000 and any
integral multiple thereof. No service charge will be made for any registration
of transfer or exchange or redemption of Notes, 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.
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 the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued 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):
REDEMPTION
YEAR PRICE
---- ----------
2002................................... 105.50%
2003................................... 103.67%
2004................................... 101.83%
2005 and thereafter.................... 100.00%
In addition, at any time 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
47
such offering at a redemption price equal to 111% 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); provided that, after giving
effect to any such redemption, at least $65 million aggregate principal amount
of the Notes remains outstanding.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date
by the Trustee by such method as the Trustee will deem fair and appropriate;
provided, however, that no such partial redemption will reduce the principal
amount of a Note 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 Notes to be redeemed at its
registered address. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption and accepted for
payment.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
NOTE GUARANTEES
Payment of the principal of, premium, if any, and interest on the Notes,
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), are guaranteed, jointly and severally, on an
unsecured senior subordinated basis by the Subsidiary Guarantors. The
Indenture provides that the obligations of each Subsidiary Guarantor under its
Note Guarantee are limited so as not to constitute a fraudulent conveyance
under applicable laws.
The Subsidiary Guarantors are, as of the date of this Prospectus, TMI
Holdings, Inc., Tuesday Morning, Inc., Friday Morning, Inc. and TMIL
Corporation, all of the Company's Subsidiaries. Under certain circumstances,
the Company will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries are not subject to the
restrictive covenants set forth in the Indenture. The Indenture requires that
each Restricted Subsidiary organized within the United States and certain
other Restricted Subsidiaries issue an Note Guarantee.
The Indenture provides further that, so long as no Default exists or would
exist, the Note Guarantee issued by any Subsidiary 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 Capital Stock in, or all or substantially all the assets
of, such Subsidiary Guarantor (which transaction is otherwise in compliance
with the 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 Notes
will be subordinated in right of payment, as set forth in the Indenture, to
the prior payment in full in cash or cash equivalents of all Senior
Indebtedness whether outstanding on the date of the 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 or bankruptcy, or any
assignment for the benefit of creditors or other marshalling of assets or
liabilities of the Company (except in connection with the consolidation or
merger of the Company or its liquidation or dissolution following the
conveyance, transfer or lease of its properties and assets substantially as an
entirety upon the terms and conditions described under "Consolidation, Merger
and Sale of Assets" below), the holders of Senior Indebtedness are entitled to
receive payment in full in cash or cash equivalents of all Senior
Indebtedness, or provision shall be made for such payment in full, before the
holders of
48
Notes 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 that may at the time be
outstanding to at least the same extent as the Notes 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 Indenture"
from monies or U.S. Government Obligations previously deposited with the
Trustee) on account of principal of, or premium, if any, or interest on the
Notes; 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 Indenture" from monies or U.S. Government Obligations
previously deposited with the Trustee), by set-off or otherwise, to which the
holders of the Notes or the Trustee would be entitled but for the provisions
of the 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 or their representative or representatives ratably
according to the aggregate amounts remaining unpaid on account of the Senior
Indebtedness to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment
or distribution to the holders of such Senior 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 Indenture" from
monies or U.S. Government Obligations previously deposited with the Trustee),
may be made by or on behalf of the Company on account of principal of,
premium, if any, or interest on the Notes or on account of the purchase,
redemption or other acquisition of Notes 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 (as defined below) (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 Covenant--Defeasance or Covenant Defeasance of Indenture" from
monies or U.S. Government Obligations previously deposited with the Trustee),
may be made by or on behalf of the Company on account of principal of,
premium, if any, or interest on the Notes or on account of the purchase,
redemption or other acquisition of Notes 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 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
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 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 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 Notes, 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
49
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 Trustee (and not paid over to the
holders of the Notes) which is prohibited by such provisions, then and in such
event such payment shall be paid over and delivered by such 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 is paid in full and until
the Notes are paid in full, holders of the Notes shall be subrogated (equally
and ratably with all other Indebtedness pari passu with the Notes) to the
rights of holders of Senior Indebtedness to receive distributions applicable
to Senior Indebtedness to the extent that distributions otherwise payable to
the holders of the Notes have been applied to the payment of Senior
Indebtedness.
Failure by the Company to make any required payment in respect of the Notes
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 Notes 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 may recover more, ratably, than the holders of
the Notes, and assets which would otherwise be available to pay obligations in
respect of the Notes will be available only after all Senior 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 Notes.
Each Note Guarantee will be an unsecured senior subordinated obligation of
the respective 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 such
Note Guarantee will be subordinated on the same basis to the Guarantor Senior
Indebtedness as the Notes are subordinated to Senior Indebtedness.
"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 (other than the
Notes), whether outstanding on the date of the 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 Notes. Notwithstanding the foregoing,
"Senior Indebtedness" shall not include (i) Indebtedness evidenced by the
Notes, (ii) Indebtedness of the Company that is expressly subordinated in
right of payment to any Senior 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 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 (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.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness under the
Senior Credit Agreement and (ii) any other Senior Indebtedness which, at the
time of determination, has an aggregate principal amount
50
outstanding of at least $25 million and that has been specifically designated
in the instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by the Company.
"Guarantor Senior Indebtedness" of a Subsidiary Guarantor means Indebtedness
of such Subsidiary Guarantor consisting of (i) a guarantee of any Senior
Indebtedness under the Senior Credit Agreement or any other Senior
Indebtedness and (ii) the principal of, premium, if any, and interest on all
other Indebtedness of such Subsidiary Guarantor (other than the Note Guarantee
issued by such Subsidiary Guarantor), whether outstanding on the date of the
Indenture or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
indebtedness shall not be senior in right of payment to such Note Guarantee.
Notwithstanding the foregoing, "Guarantor Senior Indebtedness" of a Subsidiary
Guarantor shall not include (i) Indebtedness evidenced by the Note Guarantee
of such Subsidiary Guarantor, (ii) Indebtedness of such Subsidiary Guarantor
that is expressly subordinated in right of payment to any Guarantor Senior
Indebtedness of such Subsidiary Guarantor, (iii) Indebtedness of such
Subsidiary Guarantor that by operation of law is subordinate to any general
unsecured obligations of such Subsidiary Guarantor, (iv) Indebtedness of such
Subsidiary Guarantor to the extent incurred in violation of any covenant of
the Indenture, (v) any liability for federal, state or local taxes or other
taxes, owed or owing by such Subsidiary Guarantor, (vi) trade account payables
owed or owing by such Subsidiary Guarantor, (vii) amounts owed by such
Subsidiary Guarantor for compensation to employees or for services rendered to
such Subsidiary Guarantor, (viii) Indebtedness of such Subsidiary Guarantor to
any Affiliate of the Company, (ix) Redeemable Capital Stock of such Subsidiary
Guarantor and (x) Indebtedness which when incurred and without respect to any
election under Section 1111(b) of Title 11 of the United States Code is
without recourse to such Subsidiary Guarantor or any Subsidiary.
CERTAIN COVENANTS
The Indenture contains the following covenants, 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 Subsidiary 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 Qualified Capital Stock of the
Company or in options, warrants or other rights to acquire such shares of
Qualified Capital Stock);
51
(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 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 Subordinated Indebtedness of
the Company or any Subsidiary 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 date of the Indenture 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 date of the Indenture 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 date of the
Indenture 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 date of the
Indenture 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 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), (ix) and (x) below) at
the time of and after giving effect thereto no Default or Event of Default
shall have occurred and be 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;
52
(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 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 Notes 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 Notes 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 Notes and has purchased all Notes 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 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;
(ix) the issuance by the Company of Exchange Debentures in exchange for
Senior Exchangeable Preferred Stock; and
(x) the purchase, redemption, defeasance or other acquisition or
retirement for value of any 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 Subordinated Indebtedness so long as (A) the principal
amount of such new Subordinated Indebtedness does not exceed the principal
amount (or, if such 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 Subordinated
Indebtedness is pari passu or subordinated, as applicable, to the Notes 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 Notes and a final Stated Maturity of
principal later than the final Stated Maturity of principal of the Notes.
53
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), (ix) and (x)
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 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 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 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 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 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 Indenture.
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 Subordinated
54
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 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 Notes 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
Subordinated Indebtedness of the Company, the Notes 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 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 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 Note 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 Subordinated Indebtedness of the Restricted
Subsidiary, such Note Guarantee is secured by a Lien on such property, assets
or proceeds that is senior in priority to such Lien.
Purchase of Notes upon a Change in Control. If a Change in Control shall
occur at any time, then each holder of Notes will have the right to require
that the Company purchase such holder's Notes, 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 Indenture.
Within 30 days following any Change in Control, the Company shall notify the
Trustee thereof and give written notice of such Change in Control to each
holder of Notes 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 Note not tendered will continue to accrue
interest; (iii) that, unless the Company defaults in the payment of the Change
in Control Purchase Price, any Notes 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 Notes 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 Notes that might be delivered by holders of the
Notes 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 Trustee and the holders of the Notes 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 Notes elect to require the Company to purchase the
Notes 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 purchase such
holder's Notes 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.
55
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 Notes
or, if such Change in Control Offer is made, to pay for the Notes 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 or to have obtained the requisite consents under
the Senior Credit Agreement to permit the purchase of the Notes as provided
for under this covenant. Failure to mail the notice on the date specified
below 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 Indenture. If, as a result thereof, a default occurs with respect to any
Senior Indebtedness, the subordination provisions in the Indenture would
likely restrict payments to the holders of the Notes.
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 Notes
or, if such Change in Control Offer is made, to pay for the Notes 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 Guarantor or
any Senior Indebtedness of the Company or any Subsidiary 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 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, existing at the
time such assets are sold. 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) (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 Notes, 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 Notes that may be purchased with the
Excess Proceeds. The offer price as to each Note shall be payable in cash in
an amount equal to 100% of the principal amount of such Note plus accrued
56
interest, if any, to the date such Excess Proceeds Offer is consummated. To
the extent that the aggregate principal amount of Notes 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
Notes validly tendered and not withdrawn by holders thereof exceeds the Excess
Proceeds, Notes 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 Guarantor, such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture, in form satisfactory to the Trustee,
providing for a guarantee of the Notes by such Restricted Subsidiary and
delivers to such Trustee an Opinion of Counsel reasonably satisfactory to such
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 Indenture and (B) with respect to any guarantee by a Restricted
Subsidiary of Subordinated Indebtedness of the Company, any such guarantee
shall be subordinated to such Restricted Subsidiary's Note Guarantee at least
to the same extent as such guaranteed Indebtedness is subordinated to the
Notes 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 Note Guarantee.
(b) Notwithstanding the foregoing, any guarantee of the Notes 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 Guarantor
(which sale, exchange or transfer is otherwise in compliance with the
Indenture) or (ii) the designation of such Restricted Subsidiary as an
Unrestricted Subsidiary in accordance with the terms of the 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 Indenture that would not
materially adversely affect the Company's ability to satisfy its obligations
under the Notes and the 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 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 Notes than those under or pursuant to the agreement so extended,
renewed, refinanced or replaced.
57
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 Senior 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 Notes, that is subordinate or junior in right of payment to any Senior
Indebtedness unless such Indebtedness is also pari passu with, or subordinate
in right of payment to, the Notes pursuant to subordination provisions
substantially similar to those contained in the 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 Trustee, and
provide to each holder of Notes, 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 Notes 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 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 Notes
and the performance and observance of every covenant of the Indenture on the
part of the Company to
58
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 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
Guarantor, if any, unless it is the other party to the transactions described
above, shall have by supplemental indenture confirmed that its Note Guarantee
will apply to such Person's obligations under the Indenture and the Notes; 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 Trustee, in form and substance reasonably
satisfactory to the 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 Indenture and that all
conditions precedent therein provided for relating to such transaction have
been complied with.
Each Subsidiary Guarantor, if any (other than any Subsidiary whose Note
Guarantee is being released pursuant to the provisions under "--Note
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 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 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 Guarantor)
unless (i) either (a) such Subsidiary Guarantor shall be the continuing
corporation or partnership or (b) the Person (if other than such Subsidiary
Guarantor) formed by such consolidation or into which such Subsidiary
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 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 Indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of such Subsidiary Guarantor under the Notes and the 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 Guarantor shall have
delivered to the 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
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 Guarantor in accordance with the
immediately preceding paragraphs, the successor Person formed by such
consolidation or into which the Company or such Subsidiary 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 Guarantor, as the case may be, under the Indenture and/or the
Note Guarantees, as the case may be, with the same effect as if such successor
had been named as the Company or such Subsidiary Guarantor, as the case may
be, therein and/or in the Note Guarantees, as the case may be. When a
successor assumes all the obligations of its predecessor under the Indenture,
the
59
Notes or a Note 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 Notes or a Note Guarantee, as the case may be.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of any interest on any Note 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 Note 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 Notes 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 Guarantor contained in the Indenture or
any Note Guarantee (other than a default in the performance, or breach, of
a covenant or warranty which is specifically dealt with in clauses (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 Trustee by the holders of at least 25% in
aggregate principal amount of the Notes 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 Note Guarantee ceases to be in full force and effect or is
declared null and void or any Subsidiary Guarantor denies that it has any
further liability under any Note Guarantee, or gives notice to such effect
(other than by reason of the termination of the Indenture or the release of
any such Note Guarantee in accordance with the Indenture); or
(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 Trustee or the holders of not less than
25% in aggregate principal amount of the Notes then outstanding, by written
notice to the Company, may, and the Trustee, upon the written request of such
holders, shall declare the principal of, premium, if any, and accrued interest
on all of the outstanding Notes 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 Notes to the agent under the Senior Credit
60
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 Notes 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 Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration and its consequences if (a) the Company has paid or
deposited with the Trustee a sum sufficient to pay (i) all overdue interest on
all outstanding Notes, (ii) all unpaid principal of and premium, if any, on
any outstanding Notes that has become due otherwise than by such declaration
of acceleration and interest thereon at the rate borne by the Notes, (iii) to
the extent that payment of such interest is lawful, interest upon overdue
interest and overdue principal at the rate borne by the Notes, (iv) all sums
paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel; and (b) all Events of Default, other than the non-payment of
amounts of principal of, premium, if any, or interest on the Notes 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 Notes may, on behalf of the holders of all the Notes, waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each holder of the Notes 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 Notes, the Trustee may withhold the
notice to the holders of such Notes if a committee of its trust officers in
good faith determines that withholding the notice is in the interests of the
holders of the Notes.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company and the Subsidiary Guarantors
of their respective obligations under the Indenture and as to any default in
such performance. The Company is also required to notify the Trustee within
five Business Days of the occurrence of any Default or Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, and any Subsidiary Guarantor upon the outstanding
Notes discharged ("defeasance"). Such defeasance means that the Company will
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes and to have satisfied all of its other obligations under
such Notes and the Indenture insofar as such Notes are concerned, except for
(i) the rights of holders of outstanding Notes to receive payments in respect
of the principal of, premium, if any, and interest on such Notes when such
payments are due, (ii) the Company's obligations to issue temporary Notes,
register the transfer or exchange of any Notes, replace mutilated, destroyed,
lost or stolen Notes, maintain an office or agency for payments in respect of
the Notes and segregate and hold such payments in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company and any Subsidiary
Guarantor released with respect to certain covenants set forth in the
Indenture, and any omission to comply with such obligations will not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated
61
solely to, the benefit of the holders of the Notes, money in an amount, or
U.S. Government Obligations which through the scheduled payment of principal
and interest thereon will provide money in an amount, or a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of,
premium, if any, and interest on the outstanding Notes on the Stated Maturity
(or upon redemption, if applicable) of such principal, premium, if any, or
installment of interest; (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 Indenture or any
material agreement or instrument to which the Company or any Subsidiary
Guarantor is a party or by which it is bound; (iv) in the case of defeasance,
the Company shall have delivered to the 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 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 Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (v) in
the case of covenant defeasance, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the holders of the Notes
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 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 under the subordination provisions of the 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 Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the holders of the Notes or any Note Guarantee
over the other creditors of either the Company or any Guarantor with the
intent of hindering, delaying or defrauding creditors of either the Company or
any Subsidiary Guarantor; and (viii) the Company shall have delivered to the
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 Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture) and the Trustee, at the expense of the Company,
will execute proper instruments acknowledging satisfaction and discharge of
the Indenture when (a) either (i) all the Notes theretofore authenticated and
delivered (other than destroyed, lost or stolen Notes which have been replaced
or paid and Notes for whose payment money has been deposited in trust with the
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 Indenture) have been delivered to the Trustee for cancellation or (ii)
all Notes not theretofore delivered to the 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 Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for such purpose an amount sufficient to pay
and discharge the entire Indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation, for principal of, premium, if any, and
interest on the Notes to the date of such deposit (in the case of Notes 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 Indenture by the Company; and (c) the Company has delivered
to the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent provided in the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
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AMENDMENTS AND WAIVERS
With certain exceptions, modifications and amendments of the Indenture may
be made by a supplemental indenture entered into by the Company, the
Subsidiary Guarantors and the Trustee with the consent of the holders of a
majority in aggregate outstanding principal amount of the Notes then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Note affected thereby:
(i) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, 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 Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
after the Stated Maturity thereof (or, in the case of redemption, on or after
the redemption date); (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 Notes
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 Notes affected thereby; (iii) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any such supplemental indenture or the consent of
whose holders is required for any waiver of compliance with certain provisions
of the 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 Notes required for such actions or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the holder of each Note 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 Subsidiary Guarantor of
any of their rights or obligations under the Indenture; or (vi) amend or
modify any of the provisions of the Indenture relating to any Note Guarantee
in any manner adverse to the holders of the Notes.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Company, any Subsidiary Guarantor and the Trustee may modify or
amend the Indenture: (a) to evidence the succession of another Person to the
Company, a Subsidiary Guarantor or any other obligor on the Notes, and the
assumption by any such successor of the covenants of the Company or such
obligor or Subsidiary Guarantor in the Indenture and in the Notes and in any
Note Guarantee in accordance with "--Consolidation, Merger and Sale of
Assets;" (b) to add to the covenants of the Company, any Subsidiary Guarantor
or any other obligor upon the Notes for the benefit of the holders of the
Notes or to surrender any right or power conferred upon the Company or any
other obligor upon the Notes, as applicable, in the Indenture, in the Notes or
in any Note Guarantee; (c) to cure any ambiguity, or to correct or supplement
any provision in the Indenture, the Notes or any Note Guarantee which may be
defective or inconsistent with any other provision in the Indenture, the Notes
or any Note Guarantee or make any other provisions with respect to matters or
questions arising under the Indenture, the Notes or any Note Guarantee;
provided that, in each case, such provisions shall not adversely affect the
interest of the holders of the Notes; (d) to comply with the requirements of
the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act; (e) to add a Subsidiary Guarantor
under the Indenture; (f) to evidence and provide the acceptance of the
appointment of a successor Trustee under the Indenture; or (g) to mortgage,
pledge, hypothecate or grant a security interest in favor of the Trustee for
the benefit of the holders of the Notes as additional security for the payment
and performance of the Company's and any Subsidiary Guarantor's obligations
under the Indenture, in any property, or assets, including any of which are
required to be mortgaged, pledged or hypothecated, or in which a security
interest is required to be granted to the Trustee pursuant to the Indenture or
otherwise.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. If an Event of Default has occurred and is
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continuing, the Trustee will exercise such rights and powers vested in it
under the 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 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 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
Trustee is permitted to engage in other transactions; provided, however, that
if it acquires any conflicting interest (as defined) it must eliminate such
conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Note Guarantees are governed by, and
construed in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
"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 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 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, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the
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date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund requirements) of such Indebtedness
multiplied by (ii) the amount of each such principal payment by (b) the sum of
all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"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 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 Indenture, the amount of such obligation at any
date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (a) any evidence of Indebtedness with a maturity of
one year or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof); (b) certificates of deposit or acceptances with a maturity
of one year or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500 million; and (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
65
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 "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)
66
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 Issuance Date paid in
kind with Exchange Debentures and on Exchange Debentures so issued as payment
in kind interest, all in accordance with the Debenture Indenture as in effect
on the Issuance Date; provided that (x) the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma basis and
(A) bearing a floating interest rate shall be computed as if the rate in
effect on the date of computation had been the applicable rate for the entire
period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Company, a
fixed or floating rate of interest, shall be computed by applying at the
option of the Company, either the fixed or floating rate, and (y) in making
such computation, the Consolidated Interest Expense attributable to interest
on any Indebtedness under a revolving credit facility computed on a pro forma
basis shall be computed based upon the average daily balance of such
Indebtedness during the applicable period; provided further that,
notwithstanding the foregoing, the interest rate with respect to any
Indebtedness covered by any Interest Rate Agreement shall be deemed to be the
effective interest rate with respect to such Indebtedness after taking into
account such Interest Rate Agreement.
"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.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver
a resolution of the Board of Directors under the 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 Debentures" means the 13 1/4% Subordinated Exchange Debentures due
2009 of the Company issuable in exchange for the Senior Exchangeable Preferred
Stock, plus any additional Exchange Debentures issued in lieu of cash
interest, pursuant to the Exchange Indenture as in effect on the Issuance
Date.
"Exchange 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 date of the Indenture.
"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
67
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 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 were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Redeemable Capital Stock, such fair market value 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 Notes were originally issued
under the Indenture.
"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
68
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, 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.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable provided in such Note or in the
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 Trustee.
"Note Guarantee" means any guarantee of the obligations of the Company under
the Indenture and the Notes by any Restricted Subsidiary in accordance with
the provisions of the Indenture.
"Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness
that ranks pari passu in right of payment to the Notes and (b) with respect to
any Note Guarantee, Indebtedness that ranks pari passu in right of payment to
such Note 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 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 or any Restricted Subsidiary outstanding
on the date of the Indenture and listed on a schedule thereto;
69
(d) Indebtedness of the Company owing to any wholly owned Restricted
Subsidiary; provided that any Indebtedness of the Company owing to any such
Restricted Subsidiary is subordinated in right of payment from and after
such time as the Notes shall become due and payable (whether at Stated
Maturity, acceleration or otherwise) to the payment and performance of the
Company's obligations under the Notes; provided further that any
disposition, pledge or transfer of any such Indebtedness to a Person (other
than a disposition, pledge or transfer to the Company or another wholly
owned Restricted Subsidiary) shall be deemed to be an incurrence of such
Indebtedness by the Company not permitted by this clause (d);
(e) Indebtedness of a Restricted Subsidiary owing to the Company or to
another wholly owned Restricted Subsidiary; provided that any such
Indebtedness of any Subsidiary Guarantor is subordinated in right of
payment to the Note Guarantee of such Subsidiary Guarantor; provided
further that any disposition, pledge or transfer of any such Indebtedness
to a Person (other than a disposition, pledge or transfer to the Company or
a wholly owned Restricted Subsidiary) shall be deemed to be an incurrence
of such Indebtedness by such Restricted Subsidiary not permitted by this
clause (e);
(f) guarantees of any Restricted Subsidiary made in accordance with the
provisions of the "Limitation on Guarantees of Indebtedness by Restricted
Subsidiaries" covenant;
(g) obligations of the Company or any Subsidiary Guarantor entered into
in the ordinary course of business (i) pursuant to Interest Rate Agreements
designed to protect the Company or any Restricted Subsidiary against
fluctuations in interest rates in respect of Indebtedness of the Company or
any Restricted Subsidiary, which obligations do not exceed the aggregate
principal amount of such Indebtedness and (ii) pursuant to Currency
Agreements entered into by the Company or any of its Restricted
Subsidiaries in respect of its (x) assets or (y) obligations, as the case
may be, denominated in a foreign currency;
(h) Indebtedness of the Company or any Subsidiary Guarantor in respect of
Purchase Money Obligations and Capitalized Lease Obligations of the Company
or any Subsidiary Guarantor in an aggregate amount which does not exceed
$15.0 million at any one time outstanding;
(i) Indebtedness of the Company or any Subsidiary Guarantor consisting of
guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock of Restricted
Subsidiaries;
(j) Indebtedness of the Company or any Subsidiary Guarantor represented
by (x) letters of credit for the account of the Company or any Restricted
Subsidiary or (y) other obligations to reimburse third parties pursuant to
any surety bond or other similar arrangements, which letters of credit or
other obligations, as the case may be, are intended to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or other similar requirements in the ordinary course of business;
(k) Acquired Indebtedness of any Restricted Subsidiary that is organized
outside of the United States of America in an aggregate amount which,
together with any Indebtedness permitted to be incurred pursuant to this
clause (k) and refinanced pursuant to clause (p) below, does not exceed
$10.0 million at any one time outstanding;
(l) Indebtedness of the Company owing to Jerry M. Smith, under a note
issued pursuant to a written agreement between the Company and Jerry M.
Smith as in effect on the Issuance Date, in consideration for the
repurchase of Common Stock of the Company owned by Jerry M. Smith at his
retirement, in an aggregate amount not to exceed $15.0 million outstanding
at any time;
(m) Preferred Stock issued as payment in kind dividends on Preferred
Stock outstanding on the Issuance Date and any shares of Preferred Stock
issued as payment in kind dividends thereon, such dividends made pursuant
to the terms of the certificate of 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;
(n) Indebtedness of the Company or a Subsidiary 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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(o) Indebtedness of the Company or any Subsidiary Guarantor not otherwise
permitted by the foregoing clauses (a) through (n) in an aggregate
principal amount not in excess of $20.0 million at any one time
outstanding; and
(p) any renewals, extensions, substitutions, refinancings or replacements
(each, for purposes of this clause, a "refinancing") of any Indebtedness,
referred to in clauses (b), (c) and (k) of this definition, including any
successive refinancings, so long as (i) any such new Indebtedness shall be
in a principal amount that does not exceed the principal amount (or, if
such Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced, plus the lesser of the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
as necessary to accomplish such refinancing, (ii) in the case of any
refinancing by the Company of Pari Passu Indebtedness or Subordinated
Indebtedness, such new Indebtedness is made pari passu with or subordinate
to the Notes at least to the same extent as the Indebtedness being
refinanced, (iii) in the case of any refinancing by any Subsidiary
Guarantor of Pari Passu Indebtedness or Subordinated Indebtedness, such new
Indebtedness is made pari passu with or subordinate to the Note Guarantee
of such Subsidiary 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 Notes and a final Stated Maturity
later than the final Stated Maturity of the Notes and (v) Indebtedness of
the Company or a Subsidiary Guarantor may only be refinanced with
Indebtedness of the Company or a Subsidiary Guarantor and Indebtedness of a
Restricted Subsidiary that is not a Subsidiary 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 (d)
or (e) 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.
"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
71
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 Notes 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, the
Subsidiary Guarantors, 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 Indenture only if a
notice to that effect is delivered by the Company to the Trustee and there
shall be at any time only one instrument that is the Senior Credit Agreement
under the Indenture.
"Senior Exchangeable Preferred Stock" means the 13 1/4% Senior Exchangeable
Preferred Stock issued by the Company on the Issuance Date and any shares of
Senior Exchangeable Preferred Stock issued as payment in kind dividends
thereon or on shares of Senior Exchangeable Preferred Stock so issued as
payment in kind dividends pursuant to a certificate of designation as in
effect on the Issuance Date.
"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 Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note 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 Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Notes or the Note Guarantee of such Subsidiary Guarantor, as the case may be.
"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.
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"Subsidiary Guarantor" means TMI Holdings Inc., Tuesday Morning Inc., Friday
Morning, Inc. and TMIL and any Restricted Subsidiary that incurs a Guarantee;
provided that upon the release and discharge of any Person from its Note
Guarantee in accordance with the Indenture, such Person shall cease to be a
Subsidiary 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 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
Trustee by filing a board resolution with the 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 Indenture 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).
73
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on December 29, 1997 to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Old Notes to qualified institutional buyers
in reliance on Rule 144A under the Securities Act and to non-U.S. persons
outside the United States in variance on Regulation S under the Securities
Act. As a condition to the Purchase Agreement, the Company and the Subsidiary
Guarantors entered into the Registration Rights Agreement with the Initial
Purchasers pursuant to which they have agreed, for the benefit of the holders
of the Old Notes, at their cost, to use their best efforts to (i) file the
Exchange Offer Registration Statement within 45 days after the date of the
original issue of the Old Notes with the Commission with respect to the
Exchange Offer for the Exchange Notes; (ii) use their best efforts to cause
the 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 Notes and (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, commence the Exchange Offer and use their
best efforts to issue the Exchange Notes in exchange for the Old Notes within
150 days after the date of the original issuance of the Old Notes. Upon the
Exchange Offer Registration Statement being declared effective, the Company
will offer the Exchange Notes in exchange for surrender of the Old Notes. The
Company and the Subsidiary Guarantors will keep the Exchange Offer open for
not less than 30 days (or longer if required by applicable law) after the date
on which notice of the Exchange Offer is mailed to the holders of the Old
Notes. For each Old Senior Note surrendered to the Company pursuant to the
Exchange Offer, the holder of such Old Note will receive an Exchange Note
having a principal amount equal to that of the surrendered Old Note. Interest
on each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Old Note surrendered in exchange therefor or, if no
interest has been paid on such Old Note, from the original issue date of such
Old Note.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes will, in
general, be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Old Notes who
is an "affiliate" of the Company or who intends to participate in the Exchange
Offer for the purpose of distributing the Exchange Notes (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 Notes in the 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 Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange the Old Notes for Exchange Notes in the Exchange Offer will
be required to represent to the Company in the Letter of Transmittal that (i)
the Exchange Notes to be received by it were acquired in the ordinary course
of its business, (ii) at the time of commencement of the Exchange Offer, it
has no arrangement with any person to participate in the distribution (within
the meaning of the Securities Act) of the Exchange Notes, (iii) it is not an
"affiliate" (as defined in Rule 405 under the Securities Act) of the Company
or any Subsidiary Guarantor 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 Exchange Notes, any Participating Broker-Dealer
who acquired the Exchange Notes 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 Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Exchange Offer Registration Statement. Under the 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 Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes.
74
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
Exchange Offer, (ii) for any other reason the Exchange Offer is not
consummated within 150 days after the Issuance Date, (iii) under certain
circumstances, if the Initial Purchasers shall so request or (iv) any holder
of Old Notes (other than the Initial Purchasers) is not eligible to
participate in the Exchange Offer, the Company and the Subsidiary Guarantors
will, at their expense, (a) as promptly as practicable, file with the
Commission the Shelf Registration Statement covering resales of the Old Notes,
(b) use their best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act on or prior to 150 days after the
Issuance Date and (c) use their best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after its Issuance Date
or such shorter period ending when all Old Notes covered by the Shelf
Registration Statement have been sold in the manner set forth and as
contemplated in the Shelf Registration Statement or when the Old Notes 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 Shelf Registration Statement, provide to each holder of the Old Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old Notes that sells its
Old Notes pursuant to the 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 Registration Rights Agreement that
are applicable to such a holder (including certain indemnification rights and
obligations thereunder). In addition, each holder of the Old Notes will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Old Notes included in the Shelf Registration
Statement and to benefit from the provisions regarding liquidated damages set
forth in the following paragraph.
There can be no assurance that the registration statements described above
will become effective. In the event that either (a) the Exchange Offer
Registration Statement has not been declared effective on or prior to the
120th calendar day following the Issuance Date or (b) the Exchange Offer is
not consummated or a Shelf Registration Statement is not declared effective on
or prior to the 150th calendar day following the Issuance Date, the interest
rate borne by the Old Notes shall be increased by one-quarter of one percent
per annum, following such 120-day period in the case of clause (a) above or
following such 150-day period in the case of clause (b) above, which rate will
be increased by an additional one-quarter of one percent per annum for each
90-day period that any additional interest continues to accrue; provided that
the aggregate increase in such annual interest rate may in no event exceed one
percent. Upon (x) the effectiveness of the Exchange Offer Registration
Statement after the 120-day period described in clause (a) above or (y) the
consummation of the Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be, after the 150-day period described
in clause (b) above, the interest rate borne by the Old Notes from the date of
such effectiveness or consummation, as the case may be, will be reduced to the
original interest rate if the Company and the Subsidiary Guarantors are
otherwise in compliance with this paragraph; provided, however, that if, after
any such reduction in interest rate, a different event specified in clause (a)
or (b) above occurs, the interest 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
Notes 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
interest 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 interest rate borne by the Old
Notes will be reduced to the original interest rate if the Company is
otherwise in compliance with this paragraph; provided, however, that if after
any such reduction in interest rate a
75
different event of the kind described in the preceding event occurs, the
interest rate may again be increased pursuant to the foregoing provisions.
The summary herein of certain provisions of the 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 Registration Rights Agreement, a
copy of which will be made available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
TERMS OF THE 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
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the Exchange Notes bear a Series B
designation and a different CUSIP Number from the Old Notes, (ii) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the 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, all of which rights will terminate when the Exchange Offer is
terminated. The Exchange Notes will evidence the same debt as the Old Notes
and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. The Company has fixed the close of business on
, 1998 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the 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 Notes
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 Exchange Notes from the Company.
If any tendered Old Notes are 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 Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the 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
76
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the 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 Notes, to extend the Exchange Offer or to terminate the
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 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.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Old Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment on the
Exchange Notes on June 15, 1998. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each June 15 and
December 15, commencing on June 15, 1998.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the 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
Notes 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 Notes, 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 Notes 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 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 NOTES 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
77
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 NOTES 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 Notes are 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 Notes tendered pursuant thereto are 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 Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond 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.
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 Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
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 Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes 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 Notes and withdrawal of tendered Old
Notes 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 Notes not properly tendered or any Old Note
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 Notes. The Company's interpretation of the terms and conditions
of the 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 Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or
78
irregularities with respect to tenders of Old Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes 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 Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, 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 Notes and the principal amount of Old Notes 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 Notes (or a confirmation of book-entry transfer of
such Notes 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
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes 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 Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes 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 Notes in the 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 Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes 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 Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are 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 Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Any Old Notes which
have been tendered but
79
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 Exchange Offer. Properly withdrawn Old Notes
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 Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the 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 with the Exchange Offer or materially impair the contemplated
benefits of the 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 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 Notes and
return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
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:
HARRIS TRUST COMPANY OF NEW YORK
By Mail: Overnight Courier:
Wall Street Station 88 Pine Street, 19th Floor
P.O. Box 1023 New York, NY 10005
New York, NY 10268-1023 Attention: Reorganization Dept.
Attention: Reorganization Dept.
By Hand: Facsimile Transmission:
Receive Window (for Eligible Institutions Only)
88 Pine Street, 19th Floor (212) 701-7636 or 7637
New York, NY 10005
Attention: Reorganization Dept.
For Information Telephone (call collect):
(212) 701-7624
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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 telegraph, 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
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the 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.
The cash expenses to be incurred in connection with the 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 Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, less the original issue discount (net of
amortization) 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 Exchange Offer will be expensed
over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are 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 EXCHANGE NOTES
With respect to resales of Exchange Notes, 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
Exchange Notes, 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 Exchange Notes in exchange for Old Notes 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 Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in a distribution of the Exchange
Notes, 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
81
Participating Broker-Dealer that receives Exchange Notes for its own account
in exchange for Old Notes, where such Old Notes were 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 Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder of the Old Notes (other than certain specified holders)
who wishes to exchange the Old Notes for Exchange Notes in the Exchange Offer
will be required to represent to the Company in the Letter of Transmittal that
(i) the Exchange Notes to be received by it were acquired in the ordinary
course of its business, (ii) at the time of commencement of the Exchange
Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes,
(iii) it is not an "affiliate" (as defined in Rule 405 under the Securities
Act) of the Company or any Subsidiary Guarantor 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 an Exchange Note for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
DESCRIPTION OF THE UNITS
Concurrently with the Initial Offering, the Company offered (the "Initial
Unit Offering") 250,000 units (collectively, the "Units"), each consisting of
one share of Senior Exchangeable Preferred Stock, par value $.01 per share
(the "Senior Exchangeable Preferred Stock") of the Company and one share of
Common Stock of the Company.
SENIOR EXCHANGEABLE PREFERRED STOCK
The Senior Exchangeable Preferred Stock was issued pursuant to a certificate
of designation (the "Certificate of Designation"). The following summary
contained herein of certain provisions of the Senior Exchangeable Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Company's Certificate of Incorporation and
the Certificate of Designation, copies of which are available upon request to
the Company.
General. On December 29, 1997 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 Senior
Exchangeable Preferred Stock to be issued in the Unit Offering plus additional
shares of Senior Exchangeable Preferred Stock which may be used to pay
dividends on the Senior Exchangeable Preferred Stock. The Senior Exchangeable
Preferred Stock ranks 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). 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.
Ranking. The Senior Exchangeable 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 and each other class of
capital stock or series of preferred stock of the Company, except as described
below (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 further provides that the Company may not, without
the consent of the holders of at
82
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 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
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. The right to dividends on the Senior Exchangeable Preferred Stock
are 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. After December 15, 2002, dividends may only be
paid in cash.
Voting Rights. Holders of the Senior Exchangeable 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 Designation. The Certificate of
Designation provides that if (a) dividends on the Senior Exchangeable
Preferred Stock are in arrears and unpaid (and if 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 of
Control Offer if such offer is required by the provisions set forth in the
Certificate of Designations or fails to purchase shares of Senior Exchangeable
Preferred Stock from holders who elect to have such shares purchased pursuant
to the Change of Control Offer; (d) a breach or violation of any of the
provisions listed 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 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 the 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."
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 certain redemption prices (expressed as a percentage of
the liquidation preference thereof) declining ratably, together with, without
duplication, all accumulated and unpaid dividends, 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 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
83
preference thereof, together with, without duplication, an amount in cash
equal to all accumulated and unpaid dividends, if any, 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. On December 15, 2009,
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.
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 liquidation, dissolution or winding-up), before any distribution is
made on any Junior Securities, including, without limitation, on any common
stock of the Company.
Change in Control. Upon the occurrence of a Change in Control (as defined in
the Exchange Indenture), the Company will be required to make an offer to
purchase for cash all or any part of the Senior Exchangeable Preferred Stock
at a price in cash 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).
Certain Provisions. The Certificate of Designation 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.
Transfer Agent and Registrar. United States Trust Company of New York is the
Transfer Agent and Registrar for the Senior Exchangeable Preferred Stock.
EXCHANGE DEBENTURES
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 Company's 13 1/4% Subordinated
Exchange Debentures due 2009 (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 to the effect that all conditions to be
satisfied prior to such exchange have been satisfied.
General. 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 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
84
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 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.
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, will be guaranteed, jointly and severally, on an unsecured
subordinated basis by the Subsidiary Debenture Guarantors.
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 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 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 aggregate principal amount thereof, together with accrued and unpaid
interest thereon, if any, to the date of redemption.
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.
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 and senior subordinated indebtedness (including
the Notes) of the Company, 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.
Each Debenture Guarantee, to the extent set forth in the Exchange Indenture,
will 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 of the Company.
Certain Covenants. 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; and (xii) limitations on other Subordinated
Indebtedness. The covenants in the Exchange Indenture are substantially
similar to the covenants in the Indenture, except that the Exchange Debentures
will be subordinated to the Notes. See "Description of the Exchange Notes--
Certain Covenants."
85
DESCRIPTION OF JUNIOR PREFERRED STOCK
In connection with the Merger, the Company amended its Certificate of
Incorporation to change its authorized share capital to include 150,000 shares
of non-voting cumulative junior redeemable preferred stock, par value $.01 per
share (the "Junior Redeemable Preferred Stock"), of the Company and 2,500
shares of non-voting cumulative junior non-redeemable preferred stock, par
value $.01 per share (the "Junior Perpetual Preferred Stock"), of the Company.
Concurrently with the Initial Offering, the Company issued 87,927.998 shares
of junior preferred stock to Madison Dearborn and to certain members of
management, consisting of 86,009.590 shares of Junior Redeemable Preferred
Stock and 1,918.408 shares of Junior Perpetual Preferred Stock. The following
summary of certain provisions of the Junior Redeemable Preferred Stock and the
Junior Perpetual Preferred Stock does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Company's
amended and restated Certificate of Incorporation, which is filed as an
exhibit to the registration statement of which this Prospectus is a part.
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 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 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) the
thirteenth (13th) anniversary of the Closing and (ii) a Sale of the Company
(as defined in the Certificate of Incorporation).
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, holders of Junior Redeemable
Preferred Stock will be 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.
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
86
Company, pari passu with the Junior Redeemable Preferred Stock and junior to
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 twelfth (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 are 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 will be 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.
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.
87
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), 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 Notes for Exchange Notes, including the applicability and
effect of any state, local or foreign tax laws.
The Company believes that the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes will not be considered
to differ materially in kind or extent from the Old Notes. Rather, the
Exchange Notes received by a holder will be treated as a continuation of the
Old Notes in the hands of such holder. As a result, there will be no federal
income tax consequences to holders exchanging Old Notes for Exchange Notes
pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. 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 Exchange
Notes received in exchange for Old Notes where such Old Notes were 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, they will
make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale. In
addition, until , 1998 (90 days after the commencement of the Exchange
Offer), all dealers effecting transactions in the Exchange Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker Dealers. Exchange Notes received by
Participating Broker-Dealers for their own accounts pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, 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 Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes 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.
88
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Kirkland & Ellis, Chicago, Illinois (a partnership which
includes professional corporations).
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1996, and for each of the years in the three-year period ended December
31, 1996, have been included herein and in the Registration Statement of which
this Prospectus is a part in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein and
in the Registration Statement of which this Prospectus is a part and upon the
authority of said firm as experts in accounting and auditing.
89
TUESDAY MORNING CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
Report of KPMG Peat Marwick LLP, Independent Auditors................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.................................................. F-6
Notes to Consolidated Financial Statements for the years ended Decem-
ber 31, 1996, 1995 and 1994.......................................... F-7
Consolidated Balance Sheets (unaudited) as of September 30, 1997 and
1996 and December 31, 1996........................................... F-16
Consolidated Statements of Operations (unaudited) for the three months
ended September 30, 1997 and 1996 and nine months ended September 30,
1997 and 1996........................................................ F-17
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 1997 and 1996.................................... F-18
Notes to Consolidated Financial Statements (unaudited)................ F-19
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
INDEPENDENT AUDITORS' REPORT
The Board Of Directors and Shareholders
Tuesday Morning Corporation:
We have audited the accompanying consolidated balance sheets of Tuesday
Morning Corporation and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tuesday
Morning Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
kpmg peat marwick llp
Dallas, Texas
February 21, 1997
F-2
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995
-------- -------
ASSETS
------
Current assets:
Cash and cash equivalents................................. $ 10,754 $ 6,276
Inventories............................................... 75,493 52,367
Prepaid expenses.......................................... 1,048 993
Other current assets...................................... 726 458
-------- -------
Total current assets.................................. 88,021 60,094
-------- -------
Property, plant and equipment (notes 5 and 6):
Land...................................................... 8,356 8,356
Buildings................................................. 13,926 12,989
Furniture and fixtures.................................... 17,658 15,584
Equipment................................................. 14,469 13,433
Leasehold improvements.................................... 2,082 1,967
-------- -------
56,491 52,329
Less accumulated depreciation and amortization............ (26,104) (21,267)
-------- -------
Net property, plant and equipment......................... 30,387 31,062
-------- -------
Due from Officer (note 2)................................... 2,679 2,211
Other assets (note 2)....................................... 670 876
-------- -------
Total Assets.......................................... $121,757 $94,243
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of mortgage (note 5)................. $ 1,021 $ 1,021
Current installments of capital lease obligation (note
6)....................................................... 625 755
Accounts payable.......................................... 22,543 12,707
Accrued expenses:
Sales tax............................................... 2,105 1,662
Other................................................... 5,637 2,467
Deferred income taxes (note 8)............................ 57 231
Income taxes payable (note 8)............................. 6,465 2,136
-------- -------
Total current liabilities............................. 38,453 20,979
-------- -------
Mortgage on land, buildings and equipment, excluding current
installments (note 5)...................................... 4,594 5,615
Capital lease obligations, excluding current installments
(note 6)................................................... 382 1,007
Deferred income taxes (note 8).............................. 2,800 2,994
Shareholders' equity (note 7):
Preferred stock of $1 par value per share Authorized
2,000,000 shares, none issued............................ -- --
Common stock of $.01 par value per share Authorized
20,000,000 shares; issued 8,181,036 shares at December
31, 1996 and 8,143,586 shares at December 31, 1995....... 82 81
Additional paid-in capital................................ 18,640 18,277
Retained earnings......................................... 58,834 47,318
Less: treasury stock (274,500 shares in 1996 and in
1995).................................................... (2,028) (2,028)
-------- -------
Total shareholders' equity............................ 75,528 63,648
-------- -------
Commitments and contingencies (notes 3, 10 and 12)
Total Liabilities and Shareholders' Equity............ $121,757 $94,243
======== =======
See accompanying notes to consolidated financial statements.
F-3
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
-------- ------- -------
Net sales............................................ $256,756 210,265 190,081
Cost of sales........................................ 165,189 137,427 126,931
-------- ------- -------
Gross profit..................................... 91,567 72,838 63,150
Selling, general and administrative expenses......... 71,167 63,040 57,523
-------- ------- -------
Operating income................................. 20,400 9,798 5,627
Other income (expense):
Interest income.................................... 275 204 198
Interest expense................................... (2,767) (3,330) (2,458)
Other, net......................................... 600 592 649
-------- ------- -------
(1,892) (2,534) (1,611)
-------- ------- -------
Earnings before income taxes..................... 18,508 7,264 4,016
Income tax expense (note 8)............................. 6,992 2,491 1,365
-------- ------- -------
Net earnings..................................... $ 11,516 4,773 2,651
======== ======= =======
Net earnings per share and share equivalents .... $ 1.40 0.60 0.34
======== ======= =======
See accompanying notes to consolidated financial statements.
F-4
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------- PAID-IN RETAINED -------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------ ---------- -------- ------ ------- -------------
Balance at December 31,
1993..................... 8,060 $81 $18,091 $39,894 (330) $(2,342) $55,724
Net earnings............. -- -- -- 2,651 -- -- 2,651
Shares issued in connec-
tion with employee stock
option plan (note 7).... 40 -- 140 -- -- -- 140
Treasury shares sold to
employee stock purchase
plan (note 7)........... -- -- (60) -- 30 175 115
----- --- ------- ------- ---- ------- -------
Balance at December 31,
1994..................... 8,100 81 18,171 42,545 (300) (2,167) 58,630
Net earnings............. -- -- -- 4,773 -- -- 4,773
Shares issued in connec-
tion with employee stock
option plan (note 7).... 44 -- 162 -- -- -- 162
Treasury shares sold to
employee stock purchase
plan (note 7)..............-- -- (56) -- 25 139 83
----- --- ------- ------- ---- ------- -------
Balance at December 31,
1995..................... 8,144 81 18,277 47,318 (275) (2,028) 63,648
Net earnings............. -- -- -- 11,516 -- -- 11,516
Shares issued in connec-
tion with employee stock
option plan (note 7).... 37 1 382 -- -- -- 383
Treasury shares sold to
employee stock purchase
plan (note 7)........... -- -- (19) -- -- -- (19)
----- --- ------- ------- ---- ------- -------
Balance at December 31,
1996..................... 8,181 $82 $18,640 $58,834 (275) $(2,028) $75,528
===== === ======= ======= ==== ======= =======
See accompanying notes to consolidated financial statements.
F-5
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Cash received from customers................ $ 256,756 $ 210,265 $ 190,081
Cash paid to suppliers and employees........ (240,814) (199,448) (177,676)
Interest received........................... 275 204 198
Interest paid............................... (2,767) (3,330) (2,458)
Income taxes (paid) refunded................ (2,858) (1,362) 1,911
--------- --------- ---------
Net cash provided by operating activities
(note 9)................................. 10,592 6,329 12,056
--------- --------- ---------
Cash flows from investing activities:
Loans to officer (note 2)................... (742) (497) (2,605)
Payments from officer (note 2).............. 274 85 207
Proceeds from sale of property, plant and
equipment.................................. -- -- 99
Capital expenditures........................ (4,233) (2,692) (5,693)
--------- --------- ---------
Net cash used by investing activities..... (4,701) (3,104) (7,992)
--------- --------- ---------
Cash flows from financing activities:
Payment of mortgages........................ (1,021) (1,063) (1,298)
Principal payments under capital lease obli-
gation..................................... (754) (666) (214)
Proceeds from exercise of common stock
options/stock purchase plan................ 362 245 255
--------- --------- ---------
Net cash used by financing activities..... (1,413) (1,484) (1,257)
--------- --------- ---------
Net increase in cash and cash equivalents..... 4,478 1,741 2,807
Cash and cash equivalents at beginning of pe-
riod......................................... 6,276 4,535 1,728
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 10,754 $ 6,276 $ 4,535
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation--The consolidated financial statements include the
accounts of Tuesday Morning Corporation and its wholly-owned subsidiaries: TMI
Holdings, Inc., TMIL Corporation, Tuesday Morning, Inc. and Friday Morning,
Inc. (collectively "the Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company owned and operated 286 deep discount retail stores in 33 states
at December 31, 1996 (260 and 246 stores at December 31, 1995 and 1994,
respectively). The Company sells closeout housewares and related gift
merchandise, which it purchases at prices below wholesale prices. Company
stores are open for four sales events each year.
(b) Cash and Cash Equivalents--The Company's policy is to invest cash in
excess of operating requirements in income producing investments. Cash
equivalents of $8,352,000 in 1996 and $4,707,000 in 1995 are investments in
money market funds. The Company considers all short-term investments with
original maturities of three months or less to be cash equivalents.
(c) Inventories--Inventories are stated at the lower of average cost or
market using the retail inventory method for the stores' inventory and the
cost method for warehouse inventory. Buying, distribution and freight costs
are capitalized as part of inventory.
(d) Property, Plant and Equipment--Property, plant and equipment are stated
at cost. Buildings, furniture and fixtures, and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets as follows:
DEPRECIABLE LIVES
-----------------
Buildings.................................................. 30 years
Furniture and fixtures..................................... 7 years
Equipment.................................................. 5 to 7 years
Improvements to leased premises are amortized on a straight-line basis over
the shorter of their useful lives or the expected term of the related lease.
(e) Income Taxes--Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(f) Earnings (loss) per Common Share and Share Equivalent--Earnings (loss)
per common share is based on the weighted average number of common shares, and
when dilutive, share equivalents (note 7) outstanding during the period. The
weighted average number of common shares and share equivalents outstanding for
1996, 1995 and 1994 were 8,215,000, 7,997,000 and 7,890,000, respectively.
(g) Pre-opening Costs--The Company capitalizes certain costs directly
related to opening new stores. Effective August 1, 1995, the Company revised
its policy for capitalizing and amortizing preopening costs associated with
the opening of new stores. The amortization period was reduced from 24 months
to 12 months. The impact of the change in accounting policy did not have a
material impact on the Company's consolidated financial statements.
F-7
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(h) Advertising--Costs for newspaper, television, radio and other media are
expensed as the advertised events take place. Advertising expense for 1996,
1995 and 1994 was $16,475,000, $15,317,000 and $13,652,000, respectively.
(i) Estimates--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(j) Foreign Currency Transactions--The Company has entered into foreign
exchange contracts to hedge its foreign currency transactions related to
specific purchase orders for merchandise. Gains and losses on these contracts
have been minimal and are deferred until the related merchandise is received.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of--The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(l) Stock Option Plan--Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-
value based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the previsions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
(2) RECEIVABLES FROM OFFICERS
At December 31, 1996 and 1995, Other Assets included a receivable from an
officer of the Company of $124,000 and $114,000, respectively. This loan was
initiated in 1992. It bears interest at the prime rate and is secured with
Company stock.
Due from Officer at December 31, 1996 and 1995 is $2,679,000 and $2,211,000,
respectively. This unsecured loan was initiated in 1994 and bears interest at
prime.
(3) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising from the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
F-8
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(4) LINES OF CREDIT
The Company had no balances outstanding related to their line of credit at
December 31, 1996 or 1995. As of December 31, 1996 and 1995, the Company had
outstanding letters of credit of $9,819,000 and $6,186,000, respectively,
primarily for inventory purchases.
In July 1994, the Company entered into a three-year $45,000,000 revolving
line of credit with a new bank. This agreement is secured by a pledge of
substantially all the Company's assets. Borrowings were limited to the lesser
of $45,000,000 or 50% (60% for up to 120 days each year) of eligible
inventory, as defined. The availability is further reduced by the aggregate
undrawn amount of outstanding letters of credit and a reserve for the foreign
currency contracts, discussed in Note 12. At the Company's option, the amount
borrowed bore interest at either the Reference Rate plus 0.75% or the
Eurodollar Rate plus 2.50%. An Unused Line Fee of 0.25%, per annum, was paid
on the difference between $45,000,000 and the average total of the amount
borrowed and letters of credit outstanding.
During 1996, this agreement was further amended to extend the term through
July 1999 and to increase the borrowing capacity to $55,000,000 for the period
beginning July 1 and ending October 31 of each year. This amendment allows the
Company, at its option, to borrow at either the Reference Rate or the
Eurodollar Rate plus 2.00%. The maximum amount of outstanding and unused
Letters of Credit was also increased to $12,000,000.
The weighted-average interest rates were 8.38% and 8.88% during 1996 and
1995, respectively.
In connection with this line of credit, the Company is required to maintain
a minimum net worth and comply with other financial covenants including
limitations on dividends, indebtedness and capital expenditures. At December
31, 1996, the Company was in compliance with these covenants.
(5) MORTGAGE ON PROPERTY, PLANT AND EQUIPMENT
During 1995, the Company entered into a seven-year agreement with a bank to
refinance and consolidate its mortgages on land and buildings. The amount of
the note was $7,146,000, the proceeds of which were used to pay the previous
mortgage notes. The note is secured by land and buildings and bears interest
at LIBOR plus 2.125% (7.755% at December 31, 1996) with principal and interest
due monthly. It matures on June 10, 2002.
Mortgages consist of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
------ ------
Note payable to bank, in monthly installments of $85 plus
interest.................................................. $5,615 6,636
Less current installments.................................. (1,021) (1,021)
------ ------
$4,594 5,615
====== ======
In connection with this mortgage, the Company is required to maintain
minimum net worth and comply with other financial covenants. At December 31,
1996, the Company was in compliance with these covenants.
The maturities of the mortgage are as follows (in thousands):
YEAR AMOUNT
---- ------
1997.................................. $1,021
1998.................................. 1,021
1999.................................. 1,021
2000.................................. 1,021
2001.................................. 1,021
Later years........................... 510
F-9
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(6) CAPITAL LEASE
During September 1994, the Company entered into a capital lease with a
financial institution to finance part of the acquisition of Point of Sale
registers and Electronic Article Surveillance equipment. The amount financed
under the capital lease totaled $2,642,000. Depreciation expense during 1996
and 1995 was $528,000 per year.
This lease is for five years and contains a bargain purchase option that the
Company would be expected to exercise. This lease bears an implicit interest
rate of approximately 12.5%.
The following is a schedule of future minimum lease payments under the
capital lease together with the present value of the net minimum lease
payments as of December 31, 1996 (in thousands):
YEAR AMOUNT
---- ------
1997.................................. $ 707
1998.................................. 256
1999.................................. 170
------
Total minimum lease payments........ 1,133
Less: Amount representing interest.... (126)
------
Present value of net minimum lease
payments............................. 1,007
Less: Current installments............ (625)
------
Long term capital lease obligation.... $ 382
======
(7) SHAREHOLDERS' EQUITY
On May 5, 1992, the Board of Directors of the Company approved the purchase
of the Company's stock in open market purchases to be effected from time to
time. There are no plans for purchases at this time.
The Company has a stock option plan ("the Plan") covering 2,160,500 shares
of the Company's common stock which may be granted to employees of the
Company. Under the Plan, stock options are granted at fair market value and
vest over varying periods not to exceed 10 years.
At December 31, 1996, 829,000 shares were available for grant under the
Plan. The per share weighted-average fair value of stock options granted
during 1995 was $3.09 on the date of the grant using the Black Scholes option-
pricing model with the following assumptions: expected dividend yield of 0%,
risk-free interest rate of 6.1%, an expected life of 5 years and an expected
volatility of 0.506. There were no options granted during 1996.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
1996 1995
------- -----
Net earnings
As reported.................................................. $11,516 4,773
Pro forma.................................................... 11,321 4,772
Earnings per share
As reported.................................................. $ 1.40 0.60
Pro forma.................................................... 1.38 0.60
F-10
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Pro forma amounts reflect only options granted in 1996 and 1995. The full
impact of calculating compensation cost for stock options under SFAS No. 123
is not reflected in the pro forma amounts presented above because compensation
cost is recognized over the vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
Following is a summary of transactions relating to the Plan's options for
the three years ended December 31, 1996:
WEIGHTED-
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at December 31, 1993................... 996,600 $6.53
Exercised during year.............................. (40,000) 3.54
Canceled during year............................... (1,800) 9.63
Granted during year................................ 100,000 3.63
--------- -----
Outstanding at December 31, 1994................... 1,054,800 6.36
Exercised during year.............................. (44,000) 3.71
Canceled during year............................... (184,500) 8.69
Granted during year................................ 102,500 6.00
--------- -----
Outstanding at December 31, 1995................... 928,800 5.98
Exercised during year.............................. (37,450) 4.72
Canceled during year............................... (1,500) 9.63
Granted during year................................ 0 --
--------- -----
Outstanding at December 31, 1996................... 889,850 $6.03
========= =====
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.38--$9.75 and 5.2
years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was 835,000
and 847,000, respectively, and the weighted-average exercise price of these
options was $5.88 and $5.80, respectively.
In May 1993 the Board of Directors approved a stock purchase plan for
Company employees. It was implemented October 1, 1993. The Company matches the
employee contribution at a rate of 25% up to the first $5,000 per year of
individual employee contributions. Stock is purchased monthly at the average
price of the shares traded during the month. The expense of the Company match
was immaterial.
F-11
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(8) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995 and
1994 consists of (in thousands):
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 1996
U.S. Federal..................................... $6,606 (129) 6,478
State, local and other........................... 754 (240) 514
------ ---- -----
Total.......................................... 7,360 (368) 6,992
====== ==== =====
Year ended December 31, 1995
U.S. Federal..................................... 2,390 80 2,470
State, local and other........................... 99 (78) 21
------ ---- -----
Total.......................................... 2,489 2 2,491
====== ==== =====
Year ended December 31, 1994
U.S. Federal..................................... 1,086 279 1,365
State, local and other........................... (34) 34 --
------ ---- -----
Total.......................................... $1,052 313 1,365
====== ==== =====
A reconciliation of the expected Federal income tax expense to actual tax
expense follows (based upon a tax rate of 35% for 1996 and 34% for 1995 and
1994, in thousands).
1996 1995 1994
------ ----- -----
Expected income tax
expense................ $6,478 2,470 1,365
State income taxes, net
of related Federal tax
effect................. 378 90 (16)
Other, net.............. 136 (69) 16
------ ----- -----
$6,992 2,491 1,365
====== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows (in thousands):
1996 1995
------ -----
Deferred tax assets:
Compensated absences........................................... $ 169 134
Accrued expenses, principally due to items not yet deductible
for income tax purposes....................................... 499 93
Other.......................................................... 224 151
------ -----
Total gross deferred assets.................................. 892 378
------ -----
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest...................... 3,024 3,107
Inventory costs................................................ 473 231
Other.......................................................... 252 265
------ -----
Total gross deferred tax liabilities......................... 3,749 3,603
------ -----
Net deferred tax liability..................................... $2,857 3,225
====== =====
F-12
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Management expects the deferred tax assets at December 31, 1996 to be
recovered through the reversal during the carry-forward period of existing
taxable temporary differences giving rise to the deferred income tax
liability. Accordingly, no valuation allowances for deferred tax assets were
considered necessary as of December 31, 1996 or December 31, 1995.
(9) SUPPLEMENTAL CASH FLOW INFORMATION
The reconciliation of net earnings to net cash provided by operating
activities for the years ended December 31, 1996, 1995 and 1994 is as follows
(in thousands):
1996 1995 1994
------- ------ ------
Net earnings...................................... $11,516 4,773 2,651
------- ------ ------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 4,907 4,583 3,862
Deferred income taxes........................... (369) 2 313
Loss on sale of fixed assets.................... -- -- 12
Changes in operating assets and liabilities:
Income taxes receivable....................... -- -- 2,133
Inventories................................... (23,127) (5,552) 6,736
Prepaid expenses.............................. (55) 681 (683)
Other current assets.......................... (268) 191 597
Other assets.................................. 207 102 (251)
Accounts payable.............................. 9,836 (209) (2,943)
Accrued expenses.............................. 3,616 610 (1,359)
Income taxes payable.......................... 4,329 1,148 988
------- ------ ------
Total adjustments........................... (924) 1,556 9,405
------- ------ ------
Net cash provided by operating activities... $10,592 6,329 12,056
======= ====== ======
A capital lease obligation of $2,642,000 was incurred when the Company
entered into a lease for new equipment in 1994.
(10) OPERATING LEASES
The Company leases substantially all store locations under noncancellable
operating leases. New store leases do, however, allow the Company to terminate
a lease after 12-18 months if the store does not achieve sales expectations.
Future minimum rental payments under leases are as follows (in thousands):
YEAR AMOUNT
---- -------
1997................................... $15,931
1998................................... 13,996
1999................................... 10,604
2000................................... 8,501
2001................................... 5,649
Later years............................ 2,003
-------
Total minimum rental payments.......... $56,684
=======
F-13
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
In the normal course of business, management expects to renew or replace
leases for store locations as they expire. Rental expense for 1996, 1995 and
1994 was $14,564,000, $13,124,000 and $12,323,000, respectively.
(11) PROFIT SHARING PLAN
The Company has a 401(K) profit sharing plan for the benefit of its
employees. Under the plan, eligible employees may request the Company to
deduct and contribute from 1% to 15% of their salary to the plan. The Company
also contributes 1% of total compensation for all plan participants, and
matches a portion of each participant's contribution up to 6% of the
participant's compensation. The Company expensed contributions of $403,000,
$327,000, and $330,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
(12) FINANCIAL INSTRUMENTS
As of December 31, 1996 and 1995, the Company had approximately $4,042,000
and $474,000 respectively, of net foreign exchange contracts outstanding which
are expected to be exercised by September of each following year. The
Company's risk that counterparties to these contracts may be unable to perform
is minimized by limiting the counterparties to major financial institutions.
The following table represents the carrying amounts and estimated fair
values of the Company's notes receivable, variable rate long-term debt and
foreign exchange contracts as of December 31, 1996 and 1995 (in thousands):
1996 1995
-------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
Assets--notes receivable..................... $2,878 2,878 2,567 2,567
Liabilities:
Foreign exchange contracts:
unrealized (gain)........................ -- (32) -- (22)
unrealized loss.......................... -- 14 -- --
Variable rate long-term debt............... 5,615 5,615 6,636 6,636
The carrying values of the Company's variable rate long-term debt and notes
receivable approximate the estimated fair values since the obligations bear
interest at current market rates. The fair values of the foreign exchange
contracts are based on the exchange rates existing at the balance sheet dates.
F-14
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results for 1996 and 1995 follows (in
thousands, except per share amounts):
QUARTERS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
Net sales............................. $35,740 54,286 48,537 118,193
Comparable store sales increase....... 11.5% 6.7% 18.0% 16.1%
Gross profit.......................... $ 3,397 18,218 18,750 41,203
Net earnings (loss)................... $ (676) 434 698 11,060
Net earnings (loss) per common share
and share equivalent................. $ (0.09) 0.05 0.08 1.33
Weighted-average number of common
shares and share equivalents out-
standing............................. 7,851 8,319 8,370 8,343
QUARTERS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
--------- -------- --------- --------
Net sales............................. $29,958 47,977 38,240 94,090
Comparable store sales increase....... 15.2% 10.3% (5.6)% 7.4%
Gross profit.......................... $10,349 15,927 14,863 31,699
Net earnings (loss)................... $(2,046) (155) (336) 7,310
Net earnings (loss) per common share
and share equivalent................. $ (0.26) (0.02) (0.04) 0.92
Weighted-average number of common
shares and share equivalents out-
standing............................. 7,797 7,836 7,840 7,980
F-15
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
SEPT. 30, SEPT. 30,
1997 1996
--------- ---------
(IN THOUSANDS)
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 3,029 $ 599
Federal income tax receivable............................ -- 96
Inventories.............................................. 159,687 114,347
Prepaid expenses......................................... 1,203 2,627
Other current assets..................................... 313 211
-------- --------
Total current assets.................................... 164,232 117,880
-------- --------
Property, plant and equipment, at cost:
Land..................................................... 8,356 8,356
Buildings................................................ 13,875 13,285
Furniture and fixtures................................... 19,506 17,138
Equipment................................................ 17,104 14,348
Leasehold improvements................................... 2,277 2,093
-------- --------
61,118 55,220
Less accumulated depreciation & amortization............. (29,679) (24,806)
-------- --------
Net property, plant and equipment....................... 31,439 30,414
-------- --------
Other assets, at cost:
Due from Officer......................................... 2,866 2,617
Other assets............................................. 678 757
-------- --------
Total Assets.............................................. $199,215 $151,668
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of mortgages........................ $ 1,021 $ 1,021
Current installments of capital lease obligation......... 213 772
Accounts payable......................................... 45,181 31,097
Accrued expenses
Sales tax................................................ 1,332 1,068
Other.................................................... 4,922 3,324
Deferred income taxes.................................... 57 231
Income taxes payable..................................... 2,301 --
-------- --------
Total current liabilities............................... 55,027 37,513
-------- --------
Mortgages on land, buildings and equipment................ 3,828 4,849
Long term notes payable................................... 56,127 41,776
Long term capital lease obligation........................ 220 433
Deferred income taxes..................................... 2,800 2,994
Shareholders' equity:
Preferred stock of $1 par value per share Authorized
2,000,000 shares, none issued........................... -- --
Common stock of $.01 par value per share Authorized
30,000,000 shares; issued 12,357,467 shares at September
30, 1997 12,215,379 shares at September 30, 1996
12,271,554 shares at December 31, 1996.................. 123 81
Additional paid-in capital............................... 18,922 18,277
Retained earnings........................................ 64,196 47,773
Less: treasury stock 411,750 shares at September 30, 1997
411,750 shares at September 30, 1996 411,750 shares at
December 31, 1996....................................... (2,028) (2,028)
-------- --------
Total shareholders' equity.............................. 81,213 64,103
-------- --------
Total Liabilities and Shareholders' Equity................ $199,215 $151,668
======== ========
See accompanying notes to consolidated financial statements
F-16
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales................... $ 179,058 $ 138,563
Cost of sales............... 112,620 88,199
----------- -----------
Gross profit............ 66,438 50,364
Selling, general and
administrative expenses.... 56,193 48,134
----------- -----------
Operating income........ 10,245 2,230
----------- -----------
Other income (expense):
Interest income........... 250 195
Interest expense.......... (2,330) (2,147)
Other income.............. 420 434
----------- -----------
(1,660) (1,518)
----------- -----------
Income before income
taxes.................. 8,585 712
Income tax.................. 3,219 256
----------- -----------
Net income.............. $ 5,366 $ 456
=========== ===========
Net income per share...... $ 0.43 $ 0.04
=========== ===========
Weighted average common
share and share
equivalents................ 12,556 12,396
=========== ===========
See accompanying notes to consolidated financial statements
F-17
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Cash received from customers.......................... $ 179,058 $ 138,563
Cash paid to suppliers and employees.................. (227,299) (176,911)
Interest received..................................... 250 195
Interest paid......................................... (2,329) (2,147)
Income taxes paid..................................... (7,383) (2,489)
--------- ---------
Net cash used by operating activities................... (57,703) (42,789)
--------- ---------
Cash flows used by investing activities:
Loans to officers..................................... (373) (406)
Capital expenditures.................................. (4,756) (2,935)
--------- ---------
Net cash used by investing activities................... (5,129) (3,341)
--------- ---------
Cash flows from financing activities:
Proceeds from short and long term borrowings.......... 56,127 41,776
Payment of mortgages.................................. (766) (766)
Principal payments under capital lease obligation..... (574) (557)
Proceeds from exercise of common stock options/stock
purchase plan........................................ 323 --
--------- ---------
Net cash provided by financing activities............... 55,110 40,453
--------- ---------
Net decrease in cash and cash equivalents............... (7,722) (5,677)
Cash and cash equivalents at beginning of period........ 10,753 6,276
--------- ---------
Cash and cash equivalents at end of period.............. $ 3,031 $ 599
========= =========
Reconciliation of net income to net cash used by
operating activities:
Net income.............................................. $ 5,366 $ 456
--------- ---------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization......................... 3,704 3,582
Change in operating assets and liabilities:
Increase in income taxes receivable................. -- (96)
Increase in inventories............................. (84,194) (61,980)
Increase in prepaid expense......................... (155) (1,634)
Decrease in other current assets.................... 414 247
Decrease in other assets and liabilities............ 178 119
Increase in accounts payable........................ 22,638 18,390
Increase (decrease) in accrued expenses............. (1,490) 263
Decrease in income taxes payable.................... (4,164) (2,136)
--------- ---------
Total adjustments................................. (63,069) (43,245)
--------- ---------
Net cash used by operating activities................... $ (57,703) $ (42,789)
========= =========
See accompanying notes to consolidated financial statements
F-18
TUESDAY MORNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In September 1997, the Company and Madison Dearborn Partners II, L.P.
("Madison Dearborn") entered into an Agreement and Plan of Merger under which
Madison Dearborn would acquire all of the Company's outstanding shares of
common stock for $25 per share in cash. The merger was consummated on December
29, 1997.
2. The consolidated interim financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosure normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These unaudited financial statements
include all adjustments, consisting only of those of a normal recurring
nature, which in the opinion of management, are necessary to present fairly
the results of the Company for the interim periods presented and should be
read in conjunction with the consolidated financial statements and notes
thereto in the Company's 1996 Annual Report.
3. Net income per share amounts are based on the weighted average number of
shares and dilutive share equivalents outstanding during the period. See note
6 below.
4. The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
5. Notes payable under the terms of the Company's revolving line of credit
agreement are classified between current and long term in accordance with the
terms of the agreement.
6. On May 13, 1997 the Board of Directors approved a three-for-two stock
split of the Company's common stock. All financial statements presented
reflect this transaction which was completed in June, 1997.
F-19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION 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. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A 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, UNDER 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.
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TABLE OF CONTENTS
PAGE
----
Cautionary Notice Regarding Forward-Looking Statements.................... iv
Available Information..................................................... iv
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 13
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
Unaudited Pro Forma Financial Statements.................................. 19
Selected Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business.................................................................. 33
Management................................................................ 40
Certain Transactions...................................................... 42
Principal Shareholders.................................................... 44
Description of the Senior Credit Facility................................. 45
Description of the Exchange Notes......................................... 47
The Exchange Offer........................................................ 74
Description of the Units.................................................. 82
Description of Junior Preferred Stock..................................... 86
Certain Federal Income Tax Consequences................................... 88
Plan of Distribution...................................................... 88
Legal Matters............................................................. 89
Experts................................................................... 89
Index to Financial Statements............................................. F-1
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$100,000,000
LOGO
TUESDAY MORNING
CORPORATION
OFFER TO EXCHANGE ITS
11% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING
11% SENIOR SUBORDINATED NOTES
DUE 2007
-----------
PROSPECTUS
-----------
, 1998
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
The Company, TMI Holdings, Inc. ("TMIH") and TMIL Corporation ("TMIL") are
each 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") provides, inter alia,
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 reason 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 of Delaware Registrants
The Certificate of Incorporation of each of the Company, TMIH and TMIL
provides that, to the fullest extent permitted by the DGCL, a director of the
Company, TMIH or TMIL (as the case may be) shall not be liable to the Company,
TMI Holdings, Inc. and TMIL Corporation (as the case may be) or its
stockholders for monetary damages for a breach of fiduciary duty as a
director.
By-Laws of Delaware Registrants
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
II-1
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 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.
Article VI of the By-laws of each of TMIH and TMIL ("Article VI") provides,
among other things, that TMIH or TMIL (as the case may be) shall indemnify any
person who was or is a party or is threatened to be made a party 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 TMIH or TMIL (as the case may be)), by reason of the fact that he is
or was a director or officer of TMIH or TMIL (as the case may be), or is or
was serving at the request of TMIH or TMIL (as the case may be) as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of TMIH or TMIL (as the case may be) and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or
II-2
proceeding by judgment, order settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of TMIH or TMIL (as the
case may be) or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was lawful.
Article VI further provides that TMIH or TMIL (as the case may be) shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
TMIH or TMIL (as the case may be) to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of
Holdings or TMIL (as the case may be) or is or was serving at the request of
TMIH or TMIL (as the case may be) as a director, officer, employee he or agent
of another corporation, partnership, joint venture, trust or other
enterprises, against expenses (including attorney's fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of TMIH or TMIL (as the
case may be), except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to TMIH or TMIL (as the case may be) unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Moreover, Article VI provides that to the extent that a director or officer
of TMIH or TMIL (as the case may be) has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Article
VI or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith. Any indemnification under
Article VI (unless ordered by a court) shall be made by TMIH or TMIL (as the
case may be) only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Article VI.
Article VI states that upon resolution passed by the board of directors of
TMIH or TMIL (as the case may be), TMIH or TMIL (as the case may be) may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of TMIH or TMIL (as the case may be) or
is or was serving at the request of TMIH or TMIL (as the case may be) as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his or
her status as such, whether or not TMIH or TMIL (as the case may be) would
have the power to indemnify him against such liability under the provisions of
Article VI.
Texas Business Corporation Act
Article 2.02-1 of the Texas Business Corporation Act, as the same exists or
may hereafter be amended (the "TBCA") empowers a Texas corporation to
indemnify any person who was, is, or is threatened to be made, a named
defendant or respondent to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such action, suit or proceeding, and any inquiry
or investigation that could lead to such an action, suit or proceeding,
because the person is or was a director of such corporation, and any person
who, while serving as a director of such corporation, was serving at the
request of such corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
corporation or enterprise. This indemnity may include judgments, penalties
(including excise and similar taxes), fines, settlements and reasonable
expenses actually incurred by such person in connection with such action, suit
or proceeding, provided that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification of a
director is not permitted if the person is found liable for willful and
intentional misconduct in the performance
II-3
of his duty to the corporation, is found to be liable on the basis of the
receipt of an improper benefit or is found liable to the corporation. A Texas
corporation is also permitted to indemnify and advance expenses to officers,
employees and agents who are not directors to such extent as may be provided
by its articles of incorporation, bylaws, action of board of directors or a
contract, or required by common law. No indemnification shall be permitted if
the person shall have been found liable for willful or intentional misconduct
in the performance of his duty to the corporation. A Texas corporation is
required to indemnify a director or officer against reasonable expenses
incurred by him in connection with a proceeding in which he is named as a
defendant or respondent because he is or was a director or officer if he has
been wholly successful, on the merits or otherwise, in defense of the
proceeding.
Certificates of Incorporation of Texas Registrants
The Certificate of Incorporation of each of Tuesday Morning, Inc. ("TMI")
and Friday Morning, Inc. ("FMI") provides that TMI or FMI (as the case may be)
shall indemnify, to the extent provided in the next sentence, (i) any
director, officer, agent or employee of TMI or FMI (as the case may be); (ii)
any former director, officer, agent or employee of TMI or FMI (as the case may
be); and (iii) any person who may have served at TMI's or FMI's (as the case
may be) request as a director, officer, agent or employee of another
corporation in which TMI or FMI (as the case may be) owns or has owned stock,
or of which TMI or FMI (as the case may be) is or has been a creditor. The
indemnification shall be against expenses actually and necessarily incurred by
such person, and any amount paid in satisfaction of judgments in connection
with any action, suit or proceeding (whether civil or criminal) in which he is
made a party by reason of being or having been such a director, officer, agent
or employee (whether or not such at the time the costs or expenses are
incurred by or imposed on him) except in relation to matters as to which he
shall be adjudged in such action, suit or proceeding to be liable for gross
negligence or willful misconduct in the performance of duty. The Certificate
of Incorporation of each of TMI and FMI provides further that TMI or FMI (as
the case may be) may also reimburse to any such person the reasonable costs of
settlement of any such action, suit or proceeding, if it is found by a
majority of the committee of the directors not involved in the matter (whether
or not a quorum) that (i) it was to the interest of TMI or FMI (as the case
may be) to make such settlement and (ii) such person was not guilty of gross
negligence or willful misconduct.
Bylaws of Texas Registrants
The Bylaws of TMI contains the same indemnification provisions as its
Certificate of Incorporation.
Article VII of the Bylaws of FMI ("Article VII") provides that FMI shall
indemnify persons who are or were a director officer of FMI both in their
capacities as directors and officers of FMI and, if serving at the request of
FMI as a director, officer, trustee, employee, agent or similar functionary of
another foreign or domestic corporation, trust, partnership, joint venture,
sole proprietorship, employee benefit plan or other enterprise, in each of
those capacities, against any and all liability and reasonable expense that
may be incurred by them in connection with or resulting from (a) any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, (b) an appeal in such
an action, suit or proceeding, or (c) any inquiry or investigation that could
lead to such an action, suit or proceeding, all to the full extent permitted
by Article 2.02-1 of the TBCA. FMI shall indemnify persons who are or were an
employee or agent of FMI, or persons who are not or were not employees or
agents of FMI but who are or were serving at the request of FMI as a director,
officer, trustee, employee, agent or similar functionary of another foreign or
domestic corporation, trust, partnership, joint venture, sole proprietorship,
employee benefit plan or other enterprise (collectively, along with the
directors and officers of FMI, such persons are referred to herein as
"Corporate Functionaries") against any and all liability and reasonable
expense that may be incurred by them in connection with or resulting from (a)
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, arbitrative or investigative, (b) an appeal
in such an action, suit or proceeding, or (c) any inquiry or investigation
that could lead to such an action, suit or proceeding, all to the full extent
permitted by Article 2.02-1 of the TBCA. FMI shall indemnify persons who are
or were an employee or agent
II-4
of FMI, or persons who are not or were not employees or agents of FMI but who
are or were serving at the request of FMI as a director, officer, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, trust, partnership, joint venture, sole proprietorship, employee
benefit plan or other enterprise (collectively, along with the directors and
officers of FMI, such persons are referred to herein as "Corporate
Functionaries") against any and all liability and reasonable expense that may
be incurred by them in connection with or resulting from (a) any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, (b) an appeal in such an action,
suit or proceeding, or (c) any inquiry or investigation that could lead to
such an action, suit or proceeding, all to the full extent permitted by
Article 2.02-1 of the TBCA, and FMI may indemnify such persons to the extent
permitted by the TBCA.
In addition, Article VII provides that FMI may purchase or maintain
insurance on behalf of any Corporate Functionary against any liability
asserted against him and incurred by him in such a capacity or arising out of
his status as a Corporate Functionary, whether or not FMI would have the power
to indemnify him or her against the liability under the TBCA or FMI's Bylaws;
provided, however, that if the insurance or other arrangement is with a person
or entity that is not regularly engaged in the business of providing insurance
coverage, the insurance or arrangement may provide for payment of a liability
with respect to which FMI would not have the power to indemnify the person
only if including coverage for the additional liability has been approved by
the shareholders of FMI. Without limiting the power of FMI to procure or
maintain any kind of insurance or arrangement, FMI may, for the benefit of
persons indemnified by FMI, (i) create a trust fund, (ii) establish any form
of self-insurance, (iii) secure its indemnification obligation by grant of any
security interest or other lien on the assets of FMI, or (iv) establish a
letter of credit, guaranty or surety arrangement. Any such insurance or other
arrangement may be procured, maintained or established within FMI by its
affiliates or with any insurer or other person deemed appropriate by the board
of directors of FMI regardless of whether all or part of the stock or other
securities thereof are owned in whole or in part by FMI. In the absence of
fraud, the judgment of the board of directors of FMI as to the terms and
conditions of such insurance or other arrangement and the identity of the
insurer or other person participating in an arrangement shall be conclusive,
and the insurance or arrangement shall not be voidable and shall not subject
the directors approving the insurance or arrangement to liability, on any
ground, regardless of whether directors participating in approving such
insurance or other arrangement shall be beneficiaries thereof.
Insurance
All of the Company's and the Subsidiary Guarantors' directors and officers
will be covered by insurance policies intended to be obtained by the Company
and the Subsidiary Guarantors against certain liabilities for actions taken in
such capacities, including liabilities under the Securities Act of 1933.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
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 Incorporation of TMIH.
3.3 Certificate of Incorporation of TMIL.
3.4 Certificate of Incorporation of TMI.
3.5 Certificate of Incorporation of FMI.
II- 5
3.6 Certificate of Designation.
3.7 By-Laws of the Company.
3.8 By-Laws of TMIH.
3.9 By-Laws of TMIL.
3.10 Bylaws of TMI.
3.11 Bylaws of FMI.
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 Purchasers.
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.
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.
II- 6
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.*
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* To be filed by amendment.
+ The Company agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to such agreement upon request by the
Commission.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(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 of 1933, 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
II- 7
(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 of 1933, 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 of 1933 (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 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- 8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TUESDAY MORNING
CORPORATION HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF DALLAS, STATE OF TEXAS ON FEBRUARY 10, 1998.
Tuesday Morning Corporation
/s/ Jerry M. Smith
By: _________________________________
Jerry M. Smith
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS BENJAMIN D. CHERESKIN AND ROBIN P. SELATI AND
EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT (AND ANY
REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR THE OFFERINGS WHICH THIS REGISTRATION STATEMENT
RELATES), AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Jerry M. Smith Chief Executive Officer, February 10, 1998
____________________________________ President and Director
Jerry M. Smith
/s/ Mark E. Jarvis Senior Vice President, Chief February 10, 1998
____________________________________ Financial Officer and
Mark E. Jarvis Secretary
/s/ G. Michael Anderson Senior Vice President, February 10, 1998
____________________________________ Buying Group
G. Michael Anderson
/s/ Lloyd L. Ross Chairman of the Board February 10, 1998
____________________________________
Lloyd L. Ross
/s/ William J. Hunckler, III Director February 10, 1998
____________________________________
William J. Hunckler, III
/s/ Benjamin D. Chereskin Director February 10, 1998
____________________________________
Benjamin D. Chereskin
/s/ Robin P. Selati Director February 10, 1998
____________________________________
Robin P. Selati
II-9
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TUESDAY MORNING,
INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
DALLAS, STATE OF TEXAS ON FEBRUARY 10, 1998.
Tuesday Morning, Inc.
/s/ Jerry M. Smith
By: _________________________________
Jerry M. Smith
President and Chief Operating
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS BENJAMIN D. CHERESKIN AND ROBIN P. SELATI AND
EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT (AND ANY
REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR THE OFFERINGS WHICH THIS REGISTRATION STATEMENT
RELATES), AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Jerry M. Smith President and Chief February 10, 1998
____________________________________ Operating Officer
Jerry M. Smith
/s/ Mark E. Jarvis Senior Vice President, Chief February 10, 1998
____________________________________ Financial Officer and
Mark E. Jarvis Secretary
/s/ William J. Hunckler, III Vice President and Assistant February 10, 1998
____________________________________ Secretary
William J. Hunckler, III
/s/ Benjamin D. Chereskin Vice President, Assistant February 10, 1998
____________________________________ Secretary and Director
Benjamin D. Chereskin
/s/ Robin P. Selati Vice President and Assistant February 10, 1998
____________________________________ Secretary
Robin P. Selati
II-10
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, FRIDAY MORNING,
INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
DALLAS, STATE OF TEXAS ON FEBRUARY 10, 1998.
Friday Morning, Inc.
/s/ Jerry M. Smith
By: _________________________________
Jerry M. Smith
President and Chief Operating
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS BENJAMIN D. CHERESKIN AND ROBIN P. SELATI AND
EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT (AND ANY
REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR THE OFFERINGS WHICH THIS REGISTRATION STATEMENT
RELATES), AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Jerry M. Smith President and Chief February 10, 1998
____________________________________ Operating Officer
Jerry M. Smith
/s/ Mark E. Jarvis Senior Vice President, Chief February 10, 1998
____________________________________ Financial Officer and
Mark E. Jarvis Secretary
/s/ William J. Hunckler, III Vice President and Assistant February 10, 1998
____________________________________ Secretary
William J. Hunckler, III
/s/ Benjamin D. Chereskin Vice President, Assistant February 10, 1998
____________________________________ Secretary and Director
Benjamin D. Chereskin
/s/ Robin P. Selati Vice President and Assistant February 10, 1998
____________________________________ Secretary
Robin P. Selati
II-11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TMI HOLDINGS,
INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
CHICAGO, STATE OF ILLINOIS ON FEBRUARY 10, 1998.
TMI Holdings, Inc.
/s/ Benjamin D. Chereskin
By: _________________________________
Benjamin D. Chereskin
President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS BENJAMIN D. CHERESKIN AND ROBIN P. SELATI AND
EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT (AND ANY
REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR THE OFFERINGS WHICH THIS REGISTRATION STATEMENT
RELATES), AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATES
--------- -------- -----
/s/ Benjamin D. Chereskin President, Secretary and February 10, 1998
____________________________________ Director
Benjamin D. Chereskin
/s/ William J. Hunckler, III Vice President and Assistant February 10, 1998
____________________________________ Secretary
William J. Hunckler, III
/s/ Robin P. Selati Vice President and Assistant February 10, 1998
____________________________________ Secretary
Robin P. Selati
II-12
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, TMIL CORPORATION
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO,
STATE OF ILLINOIS ON FEBRUARY 10, 1998.
TMIL Corporation
/s/ Benjamin D. Chereskin
By: _________________________________
Benjamin D. Chereskin
President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS BENJAMIN D. CHERESKIN AND ROBIN P. SELATI AND
EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT (AND ANY
REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR THE OFFERINGS WHICH THIS REGISTRATION STATEMENT
RELATES), AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATES
--------- -------- -----
/s/ Benjamin D. Chereskin President, Secretary and February 10, 1998
____________________________________ Director
Benjamin D. Chereskin
/s/ William J. Hunckler, III Vice President and Assistant February 10, 1998
____________________________________ Secretary
William J. Hunckler, III
/s/ Robin P. Selati Vice President and Assistant February 10, 1998
____________________________________ Secretary
Robin P. Selati
II-13