Jo-Ann Stores Form 10-K

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant as of August 1, 2003 was $501.3 million.

The number of common shares outstanding, as of April 5, 2004, of the registrant’s Common Stock was 22,198,824.


	Proxy Statement for 2004 Annual Meeting of Shareholders — Items 10, 11, 12 and 14 of Part III.

Except as otherwise stated, the information contained in this report is given as of January 31, 2004, the end of our latest fiscal year. The words “Jo-Ann Stores, Inc.,” “Jo-Ann Stores,” “Jo-Ann Fabrics and Crafts,” “Jo-Ann etc,” “Registrant,” “Company,” “we,” “our” and “us” refer to Jo-Ann Stores, Inc. and, unless the context requires otherwise, to our subsidiaries. Jo-Ann Stores, Inc. is an Ohio corporation, founded in 1943. Our fiscal year ends on the Saturday closest to January 31 and refers to the year in which the period ends (e.g., fiscal 2004 refers to the period ended January 31, 2004).

We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. We have a well-established, national brand name. Our retail stores (operating as Jo-Ann Fabrics and Crafts traditional stores and Jo-Ann superstores) feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, scrapbooking material, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

As of January 31, 2004, we operated 892 stores in 47 states (806 traditional stores and 86 superstores). Our traditional stores offer a complete selection of fabrics and notions and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. Our traditional stores average 14,400 square feet and generated net sales per store of approximately $1.5 million in fiscal 2004. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores also offer custom framing, floral arrangement and educational programs that our traditional stores do not. Our superstores that were opened prior to fiscal 2003, average 45,000 square feet and generated net sales per store of approximately $6.0 million in fiscal 2004. Our current superstore prototype averages 35,000 square feet and targets sales of $5.25 million in its first year of operation. We opened 13 of these new prototype superstores in fiscal 2004 and we have 14 of the prototype superstores in operation at January 31, 2004.

We believe stability in our business and our industry is partially a function of recession-resistant characteristics. For example, according to a 2002 research study conducted by the Hobby Industry Association, approximately 60 percent of all U.S. households participated in crafts and hobbies in 2002. While expenditures for such projects are generally discretionary in nature, our average sales ticket during fiscal 2004 was relatively low at $22 in our superstores and $16 in our traditional stores. Industry sales, according to the Hobby Industry Association’s Consumer Usage and Purchase Study for 2002, were approximately $29 billion, a 13 percent increase from $25.7 billion in 2001. Our market is highly fragmented and is served by multi-store fabric retailers, arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order vendors and a variety of other retailers.

We provide a solution-oriented shopping experience with employees who are encouraged to assist customers in creating and completing creative projects. Many of our store level employees are sewing and/or craft enthusiasts, which enables them to provide exceptional customer service. We believe our focus on service contributes to a high proportion of repeat business from our customers. A significant portion of our advertising budget is allocated to our direct mail program targeting three million of our preferred customers on a regular basis. According to the 2002 research study conducted by the Hobby Industry Association, avid customers or enthusiasts, who represent approximately 25 percent of the participants in this industry, drive almost 80 percent of industry sales. As a result, we believe our proprietary customer mailing list, which we refresh continuously, is a competitive asset.

We believe that our superstores are uniquely designed to offer a destination location for our customers. We offer over 70,000 SKUs across three broad product categories in our superstores: sewing, crafting and home decorating components, as well as finished seasonal, home accessory and floral products. We manage our vast product selection with SAP Retail, which was implemented in fiscal 2001. We believe that our inventory management systems are the most advanced in our industry. From fiscal 2001 through fiscal 2004, we improved our inventory turns from 1.8 to 2.4 times. We believe that our inventory management systems

We intend to improve our operating performance by opening additional superstores, growing same-store sales and improving margins and inventory productivity. Key elements of this business strategy are:

Open Additional Superstores. Our strategy is to roll out our refined superstore format across the nation. Our research has demonstrated that our customers have a better perception of the quality and pricing of our products when they are presented in our superstore format. We believe that our prototype 35,000 square foot superstore gives us a competitive advantage in the industry. Our superstores provide a unique shopping experience by offering a full creative selection — of sewing, crafting, floral, framing, seasonal and home décor accessories — all under one roof. We generally close 1.3 traditional stores for every superstore that we open. Our superstores typically average over three times the revenues of the traditional stores they replaced. In markets where we have opened multiple superstores, we have been able to grow our revenues significantly and, we believe, expand the market size and our share of market. For example, in Phoenix, Arizona, we have replaced seven of the 15 traditional stores in that market with four superstores over the last six years, and we have increased our revenues in that market from $13 million to $38 million. We believe we have an opportunity to replace an additional six traditional stores in that market with superstores and further grow our revenues. We believe we can replicate our performance in Phoenix in the top 100 to 125 markets across the nation. As of January 31, 2004, we operated 86 superstores in 19 states.

Grow Same-Store Sales. Both our traditional stores and superstores present opportunities to improve same-store sales. Our focus in this effort is improving in-stocks, customer service and merchandise-driven initiatives. We primarily market via direct mail. We send direct mail circulars to three million customers approximately every two weeks. We believe that we can more efficiently and effectively drive repeat business by fine-tuning our direct mail and newspaper insert promotions. We are committed to frequent updates of the category merchandise offerings in our stores to keep our product offering fresh and compelling to our customers. Our focus is on placing key items at compelling prices on our end-cap displays. Because many of our store team members are sewing and crafting enthusiasts themselves, we also believe we can drive increased sales with knowledgeable customer service and assistance.

Improve Margins. We believe we can improve gross margins by further reducing our level of clearance and promotional activity, a strategy we successfully executed over the last half of fiscal 2004, through less aggressive use of coupons and tighter seasonal purchase commitments. We believe we can also improve margins by refining our supply chain management and merchandising in our stores. We continually examine our partnerships with our vendors to improve supply chain efficiency. We also continue to explore new product sourcing opportunities or sources through different channels. We continuously monitor store performance to optimize our store portfolio. For stores that have been open for more than one year, we have only six that are not cash flow positive on a four-wall basis today.

Improve Inventory Productivity. Our enterprise-wide inventory management system enables us to improve our product mix on an ongoing basis. Our SAP Retail merchandising systems have been in operation since March 2000, and we have been operating since July 2001 on our current automated replenishment systems. We believe we have further opportunities to improve the accuracy of our perpetual inventories, perfect our merchandise and assortment planning tools and develop more sophisticated sales forecasting tools in order to replenish goods in our stores more efficiently and effectively. We believe we have the ability to improve margins by further increasing inventory turns. Our goal is to increase inventory turns from 2.4 times in fiscal 2004 to 3 times over the next several years.

The following table shows our net sales by principal product line as a percentage of total net sales:

We offer a broad and comprehensive assortment of fabrics in both our traditional and superstore formats. These fabrics are merchandised by end use much like a department store and are sourced from throughout the world to offer our customers a combination of unique design, fashion forward trends, and value. Our assortments feature a combination of national brands and private labels. Our stores are organized in the following categories for the convenience of the sewer:


	•	fashion and sportswear fabrics, used primarily in the construction of garments for the customer seeking a unique, fashion forward look;

	•	special occasion fabrics used to construct evening wear, bridal and special occasion outfits;

	•	craft fabrics, used primarily in the construction of quilts, craft and seasonal projects for the home;

	•	juvenile designs for the construction of garments as well as blankets and décor accessories;

	•	special-buy or fabrics representing extreme values for our customer;

	•	home decorating fabrics and accessories used in home related projects such as window treatments, furniture and bed coverings (in addition to the in-store assortment, we offer a special order capability for additional designs);

	•	a wide array of notions, which represent items incidental to sewing-related projects — including cutting implements, threads, zippers, trims, tapes, pins, elastics, buttons and ribbons as well as the patterns necessary for most sewing projects; and

	•	sewing-related accessories including lighting, organizers, and sewing machines. Our high volume stores offer a wider selection of sewing machines through leased departments with third parties from whom we receive sublease income.

We offer a broad assortment of hardlines merchandise for the creative enthusiast. Our superstores offer the complete array of categories while our traditional stores, due to their smaller size, merchandise edited assortments. We offer the following hardline selections:


	•	papercrafting components, such as albums, papers, stickers, stamps, and books used in the popular home based activities of scrapbooking and card making;

	•	craft materials, including items used for stenciling, jewelry making, decorative painting, wall decor, and kids crafting;

	•	brand-name fine art materials, including items such as pastels, water colors, oil paints, acrylics, easels, brushes, paper and canvas;

	•	yarn and accessories as well as needlecraft kits and supplies;


	•	a comprehensive assortment of books and magazines to provide inspiration for our customer;

	•	framed art, photo albums and ready-made frames and, in superstores, full service in-store framing departments;

	•	floral products, including artificial flowers, dried flowers and artificial plants, sold separately or in ready-made and custom floral arrangements and a broad selection of accessories essential for floral arranging and wreath making; and

	•	home décor accessories including baskets, candles and accent collections designed to complement our home décor fashions.

In addition to the basic categories described above, our stores regularly feature seasonal products, which complement our core merchandising strategy. Our seasonal offering spans all product lines and includes finished decorations, gifts and accessories that focus on holidays including Easter, Halloween and Christmas, as well as seasonal categories such as patio/garden. We own several private label seasonal brands including the “Cottontale Collection,” “Spooky Hollow,” “Santa’s Workbench,” and “Garden Gate Designs.”

During the Christmas selling season, a significant portion of floor and shelf space is devoted to seasonal crafts, decorating and gift-making merchandise. Due to the project-oriented nature of these items, our peak selling season extends longer than that of other retailers and generally runs from September through December. In fiscal 2004, approximately 32 percent of our net sales and 57 percent of our operating profits were generated during the fourth quarter.

During fiscal 2004, 50 percent of superstore net sales were derived from softlines and 50 percent from hardlines. For our traditional stores, 69 percent of net sales were derived from softlines and 31 percent from hardlines during fiscal 2004.

We have a proprietary mailing list, and we send direct mail circulars to the top customers approximately every two weeks. This allows us to efficiently reach our target market. We focus our advertising on direct mail circulars for our traditional stores. For our superstores, we supplement our direct mail advertising program with newspaper insert advertising. Our circulars and newspaper inserts feature numerous products offered at competitive prices and emphasize the wide selection of merchandise available in our stores.

In our efforts to market the Jo-Ann Stores concept we also focus on developing long-term relationships with our customers. These efforts include providing knowledge and inspiration in-store through classes, demonstrations and project sheets. This inspiration is also reinforced in our quarterly Jo-Ann magazine, sold in our stores and other outlets, and other collateral marketing tactics.

We also reach our customers through our relationship with IdeaForest, which operates joann.com, an on-line site for sewing and craft merchandise, creative ideas, advice and supplies. As part of the strategic relationship, IdeaForest, which operates as an independent entity, is responsible for all on-line marketing and technology support to the joann.com website. We hold a 28.5 percent equity investment in IdeaForest, and we sell product to IdeaForest, with customer fulfillment and service being handled by IdeaForest.

We have numerous domestic and international sources of supply available for each category of product that we sell. During fiscal 2004, approximately 71 percent of our purchases were sourced domestically and 29 percent were sourced internationally. Although we have no long-term purchase commitments with any of our suppliers, we strive to maintain continuity with them. All purchases are centralized through our store support center, allowing store team leaders and store team members to focus on customer sales and service and enabling us to negotiate volume discounts, control product mix and ensure quality. Currently, none of our suppliers represent more than 3 percent of our annual purchase volume and the top ten suppliers represent less than 20 percent of our total annual purchase volume. We currently utilize approximately 900 merchandise suppliers, with the top 200 representing more than 80 percent of our purchasing volume.

At the end of fiscal 2004, we operated two owned distribution centers which ship products to all of our stores on a weekly basis. Based on purchase dollars, approximately 82 percent of the products in our stores are shipped through our distribution center network, with the remaining 18 percent of our purchases shipped directly from our suppliers to our stores. Our primary distribution center facility is located in Hudson, Ohio and supplies product to approximately two-thirds of our store base and our Visalia, California distribution center, which opened in April 2001, services the remaining one-third of our store base.

We transport product from our distribution centers to our stores utilizing contract carriers. Merchandise is shipped directly from our distribution centers to our stores using dedicated core carriers for approximately 90 percent of our store base. For the remaining 10 percent of our chain, we transport product to the stores using less than truckload carriers or through three regional “hubs” where it is crossdocked for local delivery. We do not own either the regional hubs or the local delivery vehicles.

Site Selection. We believe that our store locations are integral to our success. New sites are selected through a coordinated effort of our real estate, finance and operations management teams. In evaluating the desirability of a potential store site, we consider both market demographics and site-specific criteria. Market demographic criteria that we consider important include total population, number of households, median household income, percentage of home ownership versus rental, and historical and projected population growth over a ten-year period. Site-specific criteria that we consider important include rental terms, our position within the strip shopping center, size of the location, age of the shopping center, co-tenants, proximity to highway access, traffic patterns and ease of entry from the major roadways framing the strip location.

Our expansion strategy is to give priority to adding stores in existing superstore markets in order to create economies of scale associated with advertising, distribution, field supervision, and other regional expenses. We believe that there are attractive opportunities in most of our existing markets and in numerous new markets.

Costs of Opening Stores. We employ standard operating procedures that allow us to efficiently open new stores and integrate them into our information and distribution systems. We develop a standardized floor plan, inventory layout, and marketing program for each new store we open. We typically open new stores during the period from February through October to maximize sales, and minimize disruption to store operations, during our peak selling season.

Store Management. Traditional stores generally have four full-time team members and 10 to 15 part-time team members, while superstores typically have approximately 10 full-time team members and 35 to 40 part-time team members. Store team leaders are compensated with a base salary plus a bonus which is tied to quarterly store sales and customer satisfaction survey results and annual store shrink rates. In addition, superstore team leader bonuses are tied to annual store operating profit.

Traditional store team leaders are typically promoted from a group of top performing assistant managers, some of whom started as our customers. This continuity serves to solidify long-standing relationships between our stores and our customers. When a traditional store is closed due to the opening of a superstore, we generally retain its team members to staff the new superstore. Superstore team leaders have primarily been staffed with individuals from outside the Company who have previous experience in managing “big-box” retail concepts; however, as we have increased the number of superstore openings, we are developing training and development programs to promote more new superstore managers from within our organization.

Each store is under the supervision of a district team leader who reports to a regional vice president. Our prospective store team leaders are assigned to one of our existing stores as management-trainees for several weeks where they receive in-depth on-the-job training.

The following table reflects the number of stores opened, expanded or relocated and closed during each of the past five fiscal years (square footage in thousands):

Our new store opening costs depend on the building type, store size and general cost levels in the geographical area. During fiscal 2004, we opened 16 superstores, 13 of which represented our 35,000 square foot prototype. Our average net opening cost of a superstore is $1.9 million, which includes leasehold improvements, furniture, fixtures and equipment, inventory (net of payable support) and pre-opening expenses. Also during fiscal 2004, we opened three traditional stores, with an average square footage of approximately 22,000 square feet. Our average net opening cost of a traditional store is $1.1 million, which includes leasehold improvements, furniture, fixtures and equipment, inventory (net of payable support) and pre-opening expenses.

During fiscal 2005, we expect to open approximately 30 new superstores and five traditional stores and close approximately 70 traditional stores, approximately 40 of which are related to the superstore openings. We currently have committed to leases for 32 of the 35 planned projects.

Our point-of-sale register transactions are polled nightly and our point-of-sale system interfaces with both our financial and merchandising systems. We utilize point-of-sale registers and scanning devices to record the sale of product at a SKU level at our stores. We also utilize handheld radio frequency terminals for a variety of store tasks including price look-up, perpetual inventory exception counting, merchandise receiving, vendor returns and fabric sales processing. In the past two years, we installed broadband communication and new store controllers in all of our stores, resulting in a greatly enhanced customer checkout experience and a better platform to further automate internal store communications.

Information obtained from item-level scanning through our point-of-sale system enables us to identify important trends to eliminate less profitable SKUs, increase in-stock levels of more popular SKUs, analyze product margins and generate data for advertising cost/benefit evaluations. We also believe that our point-of-sale system allows us to provide better customer service by increasing the speed and accuracy of register checkout, enabling us to more rapidly re-stock merchandise and efficiently re-price sale items.

In March 2000, we went live on SAP Retail. The completion of the retail portion of this project merged all of our financial, merchandise and retail systems and linked business processes on a single software platform. The total cost of SAP Retail was approximately $33.0 million and is being amortized over five years. We experienced operating difficulties stemming from the implementation of SAP Retail, as discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” During fiscal year 2002, we stabilized operations under SAP Retail and the system is now being used to fine tune our processes. In-stock positions and inventory turns have significantly improved, primarily driven by our auto-replenishment and improved inventory management capabilities.

During fiscal 2004, there was no public announcement nor is there a public announcement anticipated, about either a new product line or line of business involving the investment of a material portion of our assets.

We do business under the federally registered trademark “Jo-Ann Fabrics and Crafts” and we also own several trademarks relating to our private label products. We believe that our trademarks are significant to our business.

Our business exhibits seasonality which is typical for most retail companies, with much stronger sales in the second half of the year than in the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. Borrowing requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season.

We are engaged in the retail sale of merchandise to the general public and, accordingly, no part of our business is dependent upon a single customer or a few customers. During fiscal 2004, no one store accounted for more than one percent of total net sales.

We sell merchandise to the general public on a cash and carry basis and, accordingly, we have no significant backlog of orders.

We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our stores compete with other specialty fabric and craft retailers and selected mass merchants, including Wal-Mart, that dedicate a portion of their selling space to a limited selection of fabrics and craft supply items. We compete on the basis of product assortment, price, convenience and customer service. We believe the combination of our product assortment, customer service emphasis, systems technology and frequent advertising provides us with a competitive advantage.

There are two public companies that we compete with nationally in the fabric and craft specialty retail industry, one in the fabric segment (Hancock Fabrics, Inc. – 433 stores and $440 million in revenues) and one in the craft segment (Michaels Stores, Inc. – 969 stores and $3.1 billion in revenues). There is also a public company competitor in the craft segment (A.C. Moore, Arts & Crafts, Inc.) that is a rapidly growing regional operator of 81 stores and over $430 million in revenues. The balance of our competition is comprised of regional and local operators. We believe that there are only three or four other competitors, in addition to those described above, with fabric or craft sales exceeding $100 million annually. We believe that we have several advantages over most of our smaller competitors, including:


	•	purchasing power;

	•	ability to support efficient nationwide distribution; and

	•	the financial resources to execute our strategy and capital investment needs going forward.

During the three fiscal years ended January 31, 2004, we have not incurred any material expense on research activities relating to the development of new products or services or the improvement of existing products or services.

We are not engaged in manufacturing. Accordingly, we do not believe that compliance with federal, state and local provisions regulating the discharge of material into the environment or otherwise relating to the protection of the environment will have a material adverse effect upon our capital expenditures, income or competitive position.

As of January 31, 2004, we had approximately 21,750 full and part-time employees, of whom 20,200 worked in our stores, 400 were employed in our Hudson distribution center, 250 were employed in our Visalia distribution center and 900 were employed at our store support center in Hudson. The number of part-time employees is substantially higher during our peak selling season. We believe our employee turnover is below average for retailers primarily because our stores are staffed with sewing and crafting enthusiasts. In addition, we provide an attractive work environment, employee discounts, flexible hours and competitive compensation packages within the local labor markets. Our ability to offer flexible scheduling is important in attracting and retaining these employees since approximately 73 percent of our employees work part-time.

The United Steelworkers of America, Upholstery and Allied Industries Division currently represents employees who work in our Hudson, Ohio distribution center. Our current contract expires on May 2, 2004. Negotiations are currently underway to extend the union contract. We believe that our relations with our

In fiscal 2004, we purchased approximately 29 percent of our products directly from manufacturers located in foreign countries. These foreign suppliers are located primarily in China and other Asian countries. In addition, many of our domestic suppliers purchase a portion of their products from foreign suppliers. Because a large percentage of our products are manufactured or sourced abroad, we are required to order these products further in advance than would be the case if the products were manufactured domestically. If we underestimate consumer demand, we may not be able to fully satisfy our customers on a timely basis. If we overestimate consumer demand, we may be required to hold goods in inventory for a longer period of time or to reduce selling prices in order to clear excess inventory at the end of a selling season. We do not have long-term contracts with any manufacturers.

Foreign manufacturing is also subject to a number of other risks, including work stoppages, transportation delays and interruptions, political instability, economic disruptions, the imposition of tariffs and import and export controls, changes in governmental policies and other events. If any of these events occur, it could result in a material adverse effect on our business, financial condition, results of operations and prospects. In addition, reductions in the value of the U.S. dollar could ultimately increase the prices that we pay for our products.

We also make available, free of charge, on our Internet website at www.joann.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as we file such material, or furnish it to, the Securities and Exchange Commission. We will also post, prior to our Annual Shareholder meeting on June 10, 2004, the charters of our Audit, Compensation and Corporate Governance Committees; our Corporate Governance Guidelines, Code of Business Conduct and Ethics (including the Code of Ethics for the CEO and Financial Officers), and any amendments or waivers thereto. These documents are also available in print to any stockholder requesting a copy from our Investor Relations department at our principal executive offices.

Our store support center and Hudson distribution center are located in a 1.4 million square foot facility on 105 acres in Hudson, Ohio. We own both the facility and the real estate. The distribution center occupies 1.0 million square feet and the remainder is used as our store support center, a superstore, and office space we lease to another tenant. In addition, we own 65 acres of land adjacent to our Hudson, Ohio facility.

During January 2001, we completed construction of a 630,000 square foot distribution center located on an 80-acre site in Visalia, California. We own both the facility and the real estate.

The remaining properties that we occupy are leased retail store facilities, located primarily in high-traffic shopping centers. All store leases are operating leases. Traditional store leases generally have initial terms of five to ten years and renewal options for up to 20 years. Superstore leases generally have initial terms of 10-15 years and renewal options generally ranging from 10-20 years. Certain store leases contain escalation clauses and contingent rents based on a percent of net sales in excess of defined minimums. During the fiscal year-ended January 31, 2004, we incurred $146.0 million of rental expense, including common area maintenance, taxes and insurance for store locations. As we pursue our transformation plan to replace traditional stores with superstores over time, we have been able to build flexibility by reducing the outstanding term of existing traditional store leases through splitting of renewal options or negotiating short-term renewals. We manage our lease exit costs aggressively on traditional stores that we close.

As of January 31, 2004, the current terms of our store leases, assuming we exercise all lease renewal options, were as follows:

We are involved in various litigation matters in the ordinary course of our business. We are not currently involved in any litigation which we expect, either individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

Shareholders voted to approve an amendment to the Company’s Articles of Incorporation providing for a reclassification of the Company’s shares pursuant to which:


	•	each of the Class B Common Shares, which previously did not have voting rights other than as required by law, were amended to have one vote per share and were redesignated as the Company’s “Common Shares”; and

	•	each of the Class A Common Shares, which had one vote per share, were reclassified into 1.15 Common Shares by the following vote:

Also at the special meeting, shareholders of Class A Common Shares voted to approve amendments to the Company’s Code of Regulations that would:


	•	raise from 25 percent to 50 percent the percentage of shares required to call a special meeting of shareholders, by the following vote:


	•	provide for 90 days’ advance notice of any proposals or director nominations to be made by shareholders at any shareholders’ meeting, by the following vote:


	•	require an 80 percent shareholder vote for any change in the number of directors that is not approved by the Company’s Board of Directors, by the following vote:


	•	require an 80 percent shareholder vote to eliminate any of these shareholder protective measures or our staggered board, by the following vote:

The following information is set forth pursuant to Item 401(b) of Regulation S-K.

Alan Rosskamm has been Chairman of the Board, President and Chief Executive Officer of our Company for more than five years. He is a member of one of the two founding families of our Company and has been employed by us since 1978. Mr. Rosskamm is also a Director of Charming Shoppes Inc., a women’s apparel retailer.

Dave Bolen has been Executive Vice President, Merchandising, Marketing and Logistics of our Company since March 2001. He was Executive Vice President, Stores and Business Development from August 1997 to March 2001 and Senior Vice President, General Manager of Jo-Ann etc from March 1997 to August 1997. Prior to joining our Company, he was Executive Vice President-Operations of Michaels Stores, Inc., a national craft retailer, from July 1994 to August 1996.

Brian Carney has been Executive Vice President, Chief Financial Officer of our Company for more than five years. Prior to joining our Company, he was Senior Vice President-Finance from May 1996 to August 1997, and Vice President and Controller from June 1992 to May 1996, of Revco D.S., Inc., a retail drugstore chain (acquired by CVS Corporation in 1997).

Michael Edwards has been Executive Vice President, Operations of our Company since April 2001. Prior to joining our Company, he was Executive Vice President, Merchandising and Chief Marketing Officer of West Marine, Inc., a specialty retailer of boating supplies, from June 1999 to March 2001. He was Vice President, General Merchandise Manager of Golfsmith LP, a retailer of golf equipment, from September 1998 to May 1999. Prior to that, Mr. Edwards was with CompUSA, a retailer of computer-related products, from 1990 to 1998 where he served as Senior Vice President of Merchandising and Operations during his tenure. Mr. Edwards was also a Director and Chairman of the Board of iGo Corporation, a mobile technology products parts provider, from October 1999 to January 2001.

Valerie Gentile Sachs has been Executive Vice President, General Counsel and Secretary of our Company since January 2003. Prior to joining our Company, she was the General Counsel of Marconi plc, of London, England, a global company serving the communications industry, from March 2002. Previously she was Executive Vice President and General Counsel from April 2001 to March 2002, and Vice President and General Counsel from November 2000 to April 2001 of Marconi Communications, Inc., the operating company for Marconi in the Americas. From December 1997 to November 2000 she was Vice President, General Counsel and Secretary for RELTEC Corporation, a network equipment and network services provider. RELTEC Corporation went public in March 1998 and was acquired by Marconi in April 1999.

Rosalind Thompson has been Executive Vice President, Human Resources of our Company since December 1999. She was previously Senior Vice President, Human Resources from March 1992 to December 1999.

The Company’s common shares are traded on the New York Stock Exchange under the ticker symbol “JAS.” As of April 5, 2004, there were 757 common shareholders of record. The closing price of the shares on April 5, 2004 was $29.47.

On November 4, 2003, the Company announced that shareholders approved the reclassification of its Class A and Class B common shares into a single class of stock. All references to the number of shares of Common Stock, stock options, per share prices, and earnings per share amounts in the “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K have been adjusted to retroactively reflect the share reclassification. Shares of the single class of common stock began trading on the New York Stock Exchange on November 5, 2003, under the symbol “JAS.”

In the reclassification, Class B common shares, which did not have voting rights other than as required by law, were amended to have one vote per share and were re-designated as the “common shares.” Each of the Class A common shares, which had one vote per share, were reclassified into 1.15 common shares. This resulted in approximately 1.6 million incremental common shares being issued at the time of the reclassification, increasing the number of common shares outstanding by approximately 8 percent.

The quarterly high and low closing stock prices for fiscal 2004 and 2003 are presented in the table below:

The Company did not pay cash dividends on its common stock during fiscal 2004 and fiscal 2003. The Company’s dividend policy has been to retain earnings for the operation and growth of its business. Payments of dividends, if any, in the future will be determined by the Board of Directors in light of appropriate business conditions.

The following table presents the Company’s selected financial data for each of the five years ending January 31, 2004. The selected financial data was derived from the audited financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and notes thereto. The Company reclassified certain amounts in the financial statements for the five years ending January 31, 2004, in order to conform to the current period presentation. The Company also restated all share and earnings per share amounts to reflect the effect of the share reclassification that was completed on November 4, 2003. See Note 2 – Share Reclassification.


^(a)	All years include 52 weeks except for the fiscal year-ended February 3, 2001, which includes 53 weeks.

^(b)	Same-store sales are defined as net sales from stores that have been open one year or more. Net sales are included in the same-store sales calculation on the first day of the first month following the one-year anniversary of a store’s opening. In conjunction with the expansion or relocation of our stores, we exclude the net sales results from these stores in our same-store sales calculation until the first day of the first month following the one-year anniversary of its expansion or relocation. Further, in a 53-week year, net sales are compared to the comparable 53 weeks of the prior period.

^(c)	Includes store pre-opening and closing costs which the Company reports separately in its consolidated statements of operations for the three years ended January 31, 2004. See the consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.

^(d)	Stock option compensation expense reflects the adoption of the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 7 — Stock-Based Compensation Plans” contained in the financial statements.

^(e)	Debt repurchase and share reclassification expenses include losses on extinguishments of debt and costs associated with the share reclassification. See “Note 2 — Share Reclassification” contained in the financial statements.


^(f)	Included in operating profit for the fiscal years ended February 2, 2002 and February 3, 2001 are charges related to the Turnaround Plan and a fiscal 2002 litigation settlement charge. See “Turnaround Plan and Store Closing Charges” and “Litigation Settlement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


^(g)	Shares outstanding, as well as average basic and diluted shares outstanding used to calculate earnings per share, have been retroactively restated as of the beginning of all periods presented to reflect the impact of the increased shares outstanding as a result of the share reclassification that was approved by shareholders on November 4, 2003. Per share data have also been restated to give effect to the impact of this share reclassification.

^(h)	Book value is calculated by dividing shareholders’ equity by shares outstanding, net of treasury shares.


⁽ⁱ⁾	Return on average equity is calculated by dividing net income by the average of the Company shareholders’ equity as of the beginning and end of its current fiscal year.

^(j)	Total store square footage includes selling floor space and inventory storage areas.

For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements presented in this Form 10-K. All share and earnings per share amounts included in this Form 10-K have been restated to reflect the effect of the share reclassification that we completed on November 4, 2003. The financial information presented for years prior to fiscal 2004 have been reclassified for certain amounts to conform to the fiscal 2004 presentation.

We are the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home decorating and other creative endeavors. Our retail stores (operating as Jo-Ann Fabrics and Crafts traditional stores and Jo-Ann superstores) feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, scrapbooking material, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

As of January 31, 2004, we operated 892 stores in 47 states (806 traditional stores and 86 superstores). Our traditional stores offer a complete selection of fabric and a convenience assortment of crafts, floral, finished seasonal and home décor merchandise. Our traditional stores average 14,400 square feet and generated net sales per store of approximately $1.5 million in fiscal 2004. Our superstores offer an expanded and more comprehensive product assortment than our traditional stores. Our superstores also offer custom framing, floral arrangement and educational programs that our traditional stores do not. Our superstores opened prior to fiscal 2003 average 45,000 square feet and generated net sales per store of approximately $6.0 million in fiscal 2004. Our current superstore prototype averages 35,000 square feet and targets sales of $5.25 million in its first year of operation. We opened 13 of these new prototype superstores in fiscal 2004 and at the end of fiscal 2004, we had 14 prototype superstores in operation.

Management reviews and manages to a number of key indicators in evaluating financial performance, the most significant of which are:


	•	Net sales, including same-store sales by our two store formats, traditional stores and superstores. We also closely monitor per transaction average ticket value and customer traffic, both in total and by store format. We also measure our sales per square foot performance in both of our store formats to our immediate competitors.

	•	Gross margin rate to sales. In addition, gross margin return on investment (“GMROI”) is used by our merchandising organization to evaluate the gross margin performance relative to the average inventory investment. Merchandise selection and future decisions are, in part, based on the GMROI performance.

	•	Selling, general and administrative expense as a rate to sales. We compare operating margins to those of our competitors.

	•	Inventory turnover. We monitor and focus extensive effort on managing our inventory investment, which is our single largest invested asset. Increasing inventory turnover is critical to improving our working capital position and improving our overall GMROI.

	•	Debt to total capitalization. We have a goal of maintaining our year-end debt to total capitalization ratios at or below the current level.

Fiscal 2004 represented our second consecutive year of strong operating performance, after completing a turnaround announced three years ago at the end of fiscal 2001. The reasons for our turnaround are described in further detail below under “Turnaround Plan and Store Closing Charges.”

Having completed all of the key milestones we established as part of the turnaround, most notably a return to profitability with significantly improved operating margins, and a sharp reduction in interest expense

Our strategy is to grow by replacing many of our existing traditional stores with superstores over time. Our research has demonstrated that our customers have a better perception of the quality and pricing of our products when they are presented in our superstore format. We believe that our prototype 35,000 square foot superstore gives us a competitive advantage in the industry. Our superstores provide a unique shopping experience by offering a full creative selection — sewing, crafting, framing, seasonal, floral and home décor accessories — all under one roof. On average we close 1.3 traditional stores for every superstore that we open. Our superstores typically average over three times the revenues of the traditional stores they replaced. In markets where we have opened multiple superstores, we have been able to grow our revenues significantly and, we believe, expand the market size and our share of market.

Fiscal 2003 was a record earnings year in the Company’s 60 year history, and we set expectations for fiscal 2004 to further improve our earnings relative to fiscal 2003. We did not accomplish our fiscal 2004 earnings goal, but we did generate strong operating momentum in the last half of the year. A number of strategic and corporate governance related initiatives were accomplished in fiscal 2004. These are highlighted as follows:


	•	Initiated the rollout of our new 35,000 square foot prototype superstore. During fiscal 2004, we opened 19 new stores after opening only three in fiscal 2003. Of the 19 new stores opened in fiscal 2004, 13 represented our new prototype design. Our current superstore prototype is 10,000 square feet smaller than our larger existing superstore and displays our destination assortment of fabric and crafts in a visually exciting, yet more productive format.

	•	We simplified our equity structure. On November 4, 2003, shareholders approved the reclassification of our former Class A and Class B common shares into a single class of common stock. Shares of the single class of common stock began trading on the New York Stock Exchange on November 5, 2003, under the symbol “JAS.” Separate discussion of the reclassification is contained in the notes to consolidated financial statements under “Note 2 — Share Reclassification.”

In the reclassification, Class B common shares, which did not have voting rights other than as required by law, were amended to have one vote per share and were re-designated as “common shares.” Each of the Class A common shares, which had one vote per share, were reclassified into 1.15 common shares. This resulted in approximately 1.6 million incremental common shares being issued at the time of the reclassification, increasing the number of common shares outstanding by approximately 8 percent to 21.8 million shares.


	•	We enhanced our corporate governance. Two members of the founding families, who were members of the Board of Directors, resigned from active participation on the Board and were appointed to Director Emeritus status. We named two independent directors to our Board to replace them; Tracey Thomas Travis, who is the Senior Vice President, Finance of Limited Brands, Inc., and Patricia Morrison, who is the Chief Information Officer for Office Depot, Inc.

Our financial performance in fiscal 2004, although not up to our planned expectations, was strong for the second straight year and represented the second best earnings performance in the Company’s 60 year history. Highlights of our financial performance are as follows:


	•	Net revenue for fiscal 2004 increased 3.1 percent to $1.734 billion. We improved our same-store sales, despite challenging comparisons. Same-store sales grew 3.6 percent in fiscal 2004 over the prior year increase of 8.4 percent. For the second consecutive year, our same-store sales performance was the strongest among our publicly traded direct competitors in the specialty retail sewing and crafting industry.

	•	We expanded our gross profit margin by 50 basis points, to 46.7 percent of net revenue in fiscal 2004 from 46.2 percent in fiscal 2003. This improvement in fiscal 2004 was due to our decision to be less


		promotional in the second half of the year, reduced clearance sales activity and further improvement of our store shrink rates.

	•	Net income was $1.86 per diluted share, compared to $2.08 per diluted share in fiscal 2003. Fiscal 2004 includes the non-cash pre-tax expense of $5.7 million related to the expensing of stock options, which is important to note when comparing our earnings with our direct competitors, none of whom currently expense stock options. We adopted Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” under the modified prospective method of adoption permitted by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of SFAS No. 123,” and began expensing stock options in the first quarter of fiscal 2004. We also incurred $3.6 million in incremental charges in fiscal 2004 related to the early retirement of our 10 3/8 percent subordinated notes and the completion of our share reclassification.

	•	We continued to focus on debt reduction and the strengthening of our balance sheet and lowered our debt levels to approximately $114 million, our lowest year-end debt level in six years.

On February 26, 2004, shortly after the end of fiscal 2004, we issued $100 million of 7.5 percent senior subordinated notes. The proceeds from these notes were used to redeem $39.2 million of our existing 10 3/8 percent senior subordinated notes outstanding through a tender offer; the remaining $25.2 million of the 10 3/8 percent notes outstanding will be redeemed on May 1, 2004 (the next call date). The remaining proceeds will be used for general corporate purposes and to reduce borrowings under our bank credit facility going forward.

The following table sets forth the financial information through operating profit, expressed as a percentage of net sales. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto.

Net sales. Net sales for fiscal 2004 increased 3.1 percent to $1.734 billion from $1.682 billion in the prior year. Same-store sales increased 3.6 percent compared with a same-store sales increase of 8.4 percent for fiscal 2003. Approximately 80 percent of this increase was driven by an increase in average ticket. Same-store sales growth generated all of the overall net sales increase, as we operated fewer stores at the end of fiscal 2004 than a year ago. Our total store count at the end of the year was down 27 units; however, the number of superstores in operation increased to 86 from 72 in fiscal 2003. Store square footage decreased slightly by 0.4 percent to 15.377 million square feet during the year. Superstores accounted for approximately 27 percent of total net sales for fiscal 2004.

By store format, our same-store sales performance for traditional stores increased 3.7 percent for fiscal 2004 versus a same-store sales increase of 8.5 percent in fiscal 2003, with almost the entire increase attributable to an increase in average ticket. Same-store sales for superstores increased 3.1 percent versus a

same-store sales increase of 7.8 percent for the prior year. The majority of the increase, over 80 percent, was driven by an increase in customer traffic.

During the year, we saw sales strength with positive same-store sales increases in all of our major product categories with the exception of finished seasonal goods. Same-store sales of finished seasonal goods, which represented 12 percent of our total same-store sales for the year, decreased approximately 3.7 percent; however the gross margin rate in this category improved over 200 basis points versus fiscal 2003. We made the decision to be less aggressive in our promotional pricing during the second half of the year versus the prior year. The finished seasonal business, specifically Fall, Halloween and Christmas merchandise, was the category that had the largest negative sales impact from the less promotional stance.

Gross margin. Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude a portion of them from gross margin, including those costs instead in our selling, general and administrative expenses line item. As a percent of net sales, gross margin was 46.7 percent for fiscal 2004 compared with 46.2 percent in the prior year, an increase of 50 basis points. An increase in selling margins of 10 basis points, which was accomplished by a strong performance in the second half of the fiscal year due to a less promotional stance, coupled with a 40 basis point improvement in store shrink rates, were the primary contributors to the increase in the gross margin rate for the year.

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses include store and administrative payroll, employee benefits, distribution costs, store occupancy costs, advertising expenses and administrative expenses. SG&A expenses were $666.2 million for fiscal 2004 versus $635.1 million in the prior year. As a percentage of net sales, SG&A expenses increased to 38.4 percent versus 37.7 percent for fiscal 2003. Higher advertising costs in the third quarter, due to our 60th Anniversary celebration, and increased logistics costs, attributable to the decision to flow seasonal product to stores differently and replenish in-season, were the primary contributors to the deterioration in expense leverage.

Depreciation and amortization. Depreciation and amortization expense increased $1.6 million to $37.7 million in fiscal 2004 from $36.1 million in fiscal 2003, due to the increased level of capital expenditures year-over-year. Further discussion of capital expenditures is provided under “Liquidity and Capital Resources.”

Store pre-opening and closing costs. Pre-opening costs are expensed as incurred and relate to the costs incurred prior to a new store opening, which includes hiring and training costs for new employees and processing of initial merchandise. Store closing costs consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, inventory liquidation costs and other costs incidental to store closings. Store pre-opening and closing costs increased $5.0 million to $10.9 million in fiscal 2004, due to the increased level of real estate activity year-over-year. As a percentage of sales, store pre-opening and closing costs for fiscal 2004 increased to 0.6 percent from 0.4 percent in the prior year. During fiscal 2004, we opened 16 superstores, converted four larger traditional stores to the superstore format and opened three larger traditional stores. We closed 45 traditional stores and one superstore. We expect continued pressure on overall expense, as a rate to sales, to result in fiscal 2005 as the number of new store openings increases to 35 stores from 19 last year.

Stock option compensation expense. Stock option compensation expense of $5.7 million resulted from our adoption of the fair-value based method of accounting for stock options under SFAS No. 123 effective February 2, 2003. We adopted SFAS No. 123 in the first quarter of fiscal 2004 under the modified-prospective method allowed under the transition provisions provided under SFAS No. 148. See Note 1 — Significant Accounting Policies — Stock-Based Compensation.

Debt repurchase and share reclassification expenses. Debt repurchase and share reclassification expenses for fiscal 2004 were $5.5 million versus $1.9 million in the prior year, a $3.6 million increase. Share reclassification expenses associated with the reclassification of our former Class A and Class B common shares into a single class of common stock totaled $1.2 million for the fiscal year. Debt repurchase expenses of $4.3 million were incurred to repurchase, either in the open market or through an early call, approximately

$58.5 million of our 10 3/8 percent senior subordinated notes in fiscal 2004 versus $1.9 million of expenses incurred to repurchase, in the open market, $27.1 million of senior subordinated notes in the prior year. The charges include the cash premium paid for the early redemption and the write-off of the related deferred finance charges.

Operating profit. Operating profit was $84.6 million in fiscal 2004, compared with $98.5 million for fiscal 2003.

Interest expense. Interest expense for fiscal 2004 decreased $7.9 million to $18.1 million from $26.0 million in fiscal 2003. The decrease is primarily due to a reduction of approximately $65 million in our average debt levels between years. Our average debt levels were $174 million this fiscal year versus $239 million last year.

Income taxes. Our effective income tax rate for fiscal 2004 increased to 38.4 percent from 38.0 percent in the prior year, as a result of an adjustment to the effective rate in fiscal 2004 due to a permanent tax difference related to stock option compensation expense, under SFAS No. 123.

Net sales. Net sales for fiscal 2003 were $1.682 billion compared with $1.570 billion in fiscal 2002, an increase of $112.0 million, or 7.1 percent. Same-store sales increased 8.4 percent for fiscal 2003 compared with a same-store sales increase of 5.9 percent for the prior year. Same-store sales generated all of the overall net sales increase, as we operated 40 fewer stores at the end of fiscal 2003 than the year before. Store square footage decreased 2.9 percent during the year.

By store format, our same-store sales for traditional stores increased 8.5 percent for fiscal 2003 compared with a 5.1 percent same-store sales increase in fiscal 2002. Approximately 75 percent of the increase is attributable to a higher average ticket, with the remaining 25 percent increase due to customer traffic. Same-store sales for superstores, which accounted for 25 percent of total revenues, increased 7.8 percent for fiscal 2003 compared with a 9.4 percent same-store sales increase in fiscal 2002. Approximately 60 percent of the increase is attributable to increased customer traffic, with the remainder due to a higher average ticket. We attribute the improvement in same-store sales to strong industry fundamentals, improved merchandising initiatives as well as an improved inventory in-stock position on key basic items and advertised items in our stores.

Gross margin. Gross margins may not be comparable to those of our competitors and other retailers. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude a portion of them from gross margin, including those costs instead in our selling, general and administrative expenses line item. As you review our gross margin performance, we believe you should consider the following important information related to charges recorded in fiscal 2002 (which are discussed in further detail below under “Turnaround Plan and Store Closing Charges”):


	•	During fiscal 2002, sales related to the SKU Reduction Initiative totaled $34 million, recorded at zero gross margin. This negatively impacted the fiscal 2002 gross margin rate by approximately 100 basis points (100 basis points equal one percent).

	•	During fiscal 2002, $2.6 million of the $19.7 million in Turnaround Charges were recorded in cost of sales. This negatively impacted the fiscal 2002 gross margin rate by approximately 20 basis points.

Gross margin for fiscal 2003 was $777.5 million compared with $693.1 million in fiscal 2002. As a percentage of net sales, fiscal 2003 gross margin was 46.2 percent compared with 44.1 percent in the prior year, an increase of 210 basis points. Turnaround Charges recorded in fiscal 2002 accounted for approximately 20 basis points of the improvement, while the absence of the SKU Reduction Initiative sales accounted for another 100 basis points of the improvement. The remaining margin rate improvement was largely driven by improvement in the store shrink expense rate of approximately 150 basis points. Partially offsetting this improvement were lower selling margins caused by the more challenging retail environment in the third and

fourth quarters of fiscal 2003, which necessitated promotional pricing, particularly on seasonal goods, to be more aggressive versus the year earlier period.

Selling, general and administrative expenses. SG&A expenses include store and administrative payroll, employee benefits, distribution costs, store occupancy costs, advertising expenses and administrative expenses. During fiscal 2002, the settlement of certain California wage litigation resulted in a charge of $6.5 million. This negatively impacted the SG&A rate by approximately 40 basis points (which is discussed in further detail below under “Litigation Settlement”)

SG&A expenses were $635.1 million for fiscal 2003 versus $623.2 million in fiscal 2002. As a percentage of net sales, SG&A expenses decreased 200 basis points to 37.7 percent versus 39.7 percent for fiscal 2002. The charge for the litigation settlement recorded in fiscal 2002 discussed above accounted for 40 basis points of the improvement. The remaining rate improvement was due to positive expense leverage realized primarily in store expenses, with strong cost controls complementing the favorable impact of improved same-store sales growth.

Depreciation and amortization. Depreciation and amortization expense for fiscal 2003 decreased $3.2 million to $36.1 million from $39.3 million in fiscal 2002. This decrease was attributable to discontinuing goodwill amortization, pursuant to the adoption of SFAS No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”), which lowered amortization expense by $0.7 million, and due to lower capital expenditures.

Store pre-opening and closing costs. Pre-opening costs are expensed as incurred and relate to the costs incurred prior to opening a new store, which includes hiring and training costs for new employees and processing of initial merchandise. Store closing costs consist of lease termination costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for employees, inventory liquidation costs and other costs incidental to store closings. Store pre-opening and closing costs decreased $15.1 million to $5.9 million in fiscal 2004, primarily due to the Turnaround Charges recorded in fiscal 2002. During fiscal 2002, $17.1 million of the $19.7 million in Turnaround Charges were recorded in store pre-opening and closing costs. See “Turnaround Plan and Store Closing Charges” discussion below.

Debt repurchase expenses. Debt repurchase expenses of $1.9 million were incurred in fiscal 2003 to repurchase $27.1 million of our 10 3/8 percent senior subordinated notes in the open market at a purchase price of $28.3 million or 104.3 percent to par value. The charge is comprised of the premium paid on the purchase plus a pro-rata portion of the capitalized deferred finance charges. In fiscal 2002 debt repurchase expenses were $1.0 million. During fiscal 2002, the Company entered into a $365.0 million senior secured credit facility. The deferred financing costs of $1.0 million related to the prior bank credit facility were written off and are reflected in debt repurchase expenses.

Operating profit. Operating profit for fiscal 2003 was $98.5 million, compared with $8.6 million for fiscal 2002. The fiscal 2002 operating profit was impacted by the $19.7 million in Turnaround Plan charges and $6.5 million in litigation settlement costs recorded. See the “Gross margin,” “Selling, general and administrative expenses” and “Store pre-opening and closing costs” discussions above.

Interest expense. Interest expense for fiscal 2003 was $26.0 million, compared with $32.7 million in fiscal 2002, a decrease of $6.7 million. Substantially all of this decrease was attributable to a decrease in average debt levels. Our average debt levels during fiscal 2003 were $239 million compared with $319 million during fiscal 2002.

Income taxes. Our effective income tax rate was 38.0 percent for both fiscal 2003 and fiscal 2002.

In fiscal 2001, we experienced significant difficulty with the implementation of SAP Retail, negatively impacting our ability to stay in stock on key basic products while, at the same time, being overstocked on slower selling products. As a result, sales were negatively affected and our operating performance suffered.

As a result of these implementation issues, coupled with increased debt from elevated levels of capital spending to install SAP Retail and to construct and open a second distribution center in fiscal 2002, as well as a decline in operating margins, our strategy shifted from accelerating the growth of our superstore concept to improving the productivity of our existing asset base and realizing the benefits from our completed infrastructure investments. At the end of fiscal 2001, we announced the implementation of a turnaround plan (the “Turnaround Plan”). A number of charges were taken during fiscal 2002 and 2001 related to the Turnaround Plan.

These charges included store closing costs, inventory markdowns to net realizable value in connection with a SKU reduction initiative (see “SKU Reduction Initiative” discussion below) and store closings, and asset impairment losses for store fixtures and leaseholds. Summarized below is an analysis of store closing charges, incurred as part of the Turnaround Plan initiatives, as well as store closings from normal operating activity. We also provide discussion on other charges taken as part of the Turnaround Plan initiative.

Store Closing Charges. We review the productivity of our store base on an ongoing basis and actively manage our real estate to preserve maximum flexibility in lease terms. As a result, we have only six stores in operation, that have been operating for more than one year, where the store contribution is not cash flow positive. In addition, despite an aggressive store rationalization policy, pursuant to which we have closed 247 stores in the last five years, we are paying rent on just six store locations where we have not yet obtained a sublease tenant or executed a lease termination. The remaining lease obligation on these six store properties is $1.7 million at the end of fiscal 2004.

In accordance with the then applicable accounting literature (Emerging Issues Task Force Issue (“EITF”) 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” Statement of Financial Accounting Standards (“SFAS”) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges,”) we recorded pre-tax charges in operating expenses of $17.1 million in fiscal 2002 and $6.7 million in fiscal 2001 for restructuring and asset impairment costs resulting from 148 identified store closings associated with the Turnaround Plan. We also incurred expense of $0.5 million in fiscal 2002 for store closings unrelated to the Turnaround Plan.

Through the end of fiscal 2004, 131 of the stores identified for closure as part of the Turnaround Plan have been closed. The remaining stores to be closed, with the exception of eight store locations, will be closed in fiscal 2005. At the end of fiscal 2003, a decision was made to continue to operate these eight locations due to our inability to successfully negotiate an acceptable arrangement to exit the lease. A total of $7.7 million for estimated lease obligations of stores to be closed as part of the Turnaround Plan were reversed in the fourth quarter of fiscal 2003. The reversal related to stores where estimates were revised, as well as the eight stores we could not close. We also recorded an asset impairment charge in the fourth quarter of fiscal 2003 of $6.7 million for various store locations, representing the difference between the asset carrying value and the future net discounted cash flows estimated to be generated by those assets. The remainder of the store closing charges in fiscal 2003 and the store closing charges incurred in fiscal 2004, highlighted in the table below, represent lease obligations and other costs associated with stores identified for closure that were not part of the Turnaround Plan.

As discussed in Note 1 — Significant Accounting Policies, effective December 31, 2002, we began to account for the costs of store closings as required under SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” In addition, we have adopted the new accounting requirements related to asset impairment as required by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), effective February 3, 2002.

The charges to the statement of operations for the three fiscal years ended January 31, 2004 related to store closings are summarized below, and include charges for both store closings as part of our turnaround initiatives, as well as store closings from normal operating activity. These charges are included in the line

Non-cancelable lease obligations for fiscal 2003 and 2002 include the lesser of the estimated buyout or remaining lease obligations of the stores to be closed. Estimated continuing lease obligations were reduced by anticipated sublease rental income. In fiscal 2004, these costs are accounted for in accordance with SFAS No. 146, which requires certain lease costs to be expensed as incurred.

Asset impairments include write-downs of fixed assets to estimated fair value for stores closed, or scheduled to be closed, and certain other store locations where impairment exists. The asset impairment represents the difference between the asset carrying value and our estimate of the future net discounted cash flows to be generated by those assets.

Other costs represent other miscellaneous store closing costs, including among other things, costs related to fixtures, signage and register removal.

Summarized below is a reconciliation of the beginning and ending store closing reserve balances for the three fiscal years ended January 31, 2004:

SKU Reduction Initiative. During the fourth quarter of fiscal 2001, we commenced the SKU Reduction Initiative which entailed a thorough review of our inventory investment and gross margin performance by item (or SKU) utilizing analytical capabilities available under SAP Retail. This analysis identified approximately 10,000 active items, totaling more than $50 million at cost, that were under-performing and

that we decided to discontinue. In connection with this initiative, we recorded a $23.0 million pre-tax charge to reserve for the portion of this product that we estimated would be sold below cost. However, liquidating this inventory at reduced selling prices put pressure on overall realized gross margins in fiscal 2002, since the sales were recorded at a zero gross margin. The SKU Reduction Initiative was the start of an ongoing, disciplined, detailed review of our product mix. We began clearance programs in the second quarter of fiscal 2002 designed to eliminate this product. These clearance programs were completed by the end of fiscal 2002.

In August 2000, a former employee of the Company filed a purported class action complaint against us, on behalf of the Company’s former and current California store management employees. The complaint was filed in the Superior Court of California and alleged that we violated certain California laws by erroneously treating our store management employees as “exempt” employees who are not entitled to overtime compensation. This case was consolidated with a similar class action complaint filed in October 2000 in the Superior Court of California. This case was settled in fiscal 2002 for $6.5 million. The settlement was paid in the first quarter of fiscal 2003.

Our capital requirements are primarily for capital expenditures in connection with new store openings, new store inventory purchases and seasonal working capital requirements. These requirements will be funded through a combination of internally generated cash flows from operations, credit extended by suppliers and borrowings under our bank credit facility.

The following table provides cash flow related information for the three fiscal years ended January 31, 2004.

Net cash provided by operating activities was $48.5 million in fiscal 2004, compared with $119.2 million in fiscal 2003, a decrease of $70.7 million, primarily caused by an increase in inventory and a decrease in accounts payable, together totaling a decrease of $62.1 million from fiscal 2003. Cash flows from operating activities, before changes in operating assets and liabilities, were $95.9 million in fiscal 2004 and were comparable to the $100.9 million generated in fiscal 2003.

Inventories, net of payable support, increased $49.4 million in fiscal 2004, compared with a decrease of $12.7 million in fiscal 2003. The increase in inventory was substantially in core product categories that have experienced solid sales performance, primarily fabric and scrapbooking merchandise. An earlier arrival of spring seasonal goods, compared with the prior year, also contributed to the increase in inventory levels. Inventory turns for fiscal 2004 were approximately 2.4 times, compared with 2.5 times in fiscal 2003 and 2.1 times in fiscal 2002.

Net cash provided by operating activities was $119.2 million in fiscal 2003, compared with $88.2 million in fiscal 2002, an increase of $31.0 million driven by strong operating performance. Cash flows from operating activities, before changes in operating assets and liabilities, were $100.9 million in fiscal 2003 versus $18.4 million in fiscal 2002. During fiscal 2003, the Company generated $18.3 million from changes in

operating assets and liabilities versus $69.9 million in fiscal 2002. During fiscal 2002, the Company achieved significant reductions in inventory from its SKU Reduction Initiative and store closings.

Net cash used for investing activities for fiscal 2004 totaled $47.9 million compared with $22.7 million in fiscal 2003. The increase was due to an increase in capital expenditures, primarily due to new store openings. Capital expenditures were $52.2 million during fiscal 2004 versus $22.7 million in fiscal 2003 and are discussed further below under the caption “Capital Expenditures.” Partially offsetting the increase in capital expenditures were proceeds of $4.3 million from the sale of our equity investment in BouClair, Inc., a Canadian fabric retailer. Total consideration for the sale of BouClair was $6.5 million, $4.3 million of which was received in fiscal 2004. There was no material impact on the statement of operations from the sale of this investment.

Net cash used for investing activities for fiscal 2003 totaled $22.7 million compared with $66.5 million in fiscal 2002 which consisted entirely of capital expenditures.

Capital expenditures for fiscal 2004 totaled $52.2 million. Store related expenditures, including 19 new store openings, represented over 80 percent of the capital spending. During the year, we opened 16 superstores, converted four larger traditional stores to the superstore format and opened three larger traditional stores. The Company also closed 45 traditional stores and one superstore. In addition, five stores the Company had previously reported in its superstore count were reclassified as large traditional stores.

Capital expenditures for fiscal 2003 totaled $22.7 million, our lowest level of capital spending in six years, as we focused on maximizing cash flow to reduce debt. During fiscal 2003, we opened one superstore and two traditional stores and converted two larger traditional stores to our superstore format. We also relocated four traditional stores and closed 42 smaller or under-performing traditional stores and one superstore.

Capital expenditures of $66.5 million in fiscal 2002 included approximately $40.0 million related to the unwind of a synthetic lease facility which was replaced by our new credit facility (discussed further under “Financing” below). The synthetic lease facility was originally used to finance the construction and equipment cost of our distribution center in Visalia, California. During fiscal 2001, construction was completed on this new 630,000 square foot distribution center. This facility was fully operational and shipping product to more than 300 stores, or over 30 percent of our chain, by the end of the second quarter of fiscal 2002.

Excluding the unwind of the synthetic lease, capital expenditures of $26.5 million during fiscal 2002 related primarily to the opening of new superstores and other store related projects. During the year, we opened 12 superstores, relocated or expanded 10 and closed 60 smaller or under-performing traditional stores.

We anticipate capital expenditures in fiscal 2005 of approximately $70 to $75 million. The increase in capital spending is attributable to increased store opening activity and the first phase over the next three years to replace the point-of-sale systems in our stores. During fiscal 2005, we plan to open approximately 30 new superstores and five traditional stores and close approximately 70 stores, 40 of which are attributable to the superstore openings. As we open more new stores and begin to increase capital expenditures in the coming years, we envision our growth plans will be self-funding through cash from operations.

Net cash used for financing activities was $46.4 million during fiscal 2004 compared with $54.4 million during fiscal 2003. Long-term debt at the end of fiscal 2004 was $113.7 million, our lowest year-end debt level in six years. Debt levels decreased $49.2 million during fiscal 2004, compared with a net decrease of $60.8 million in the prior year. During fiscal 2004, we redeemed or repurchased in the open market, approximately $58.5 million of our 10 3/8 percent senior subordinated notes at an aggregate premium of

Net cash used for financing activities during fiscal 2003 was $54.4 million, primarily related to a $60.8 million net decrease in debt borrowings resulting from cash generated by strong operating performance. During fiscal 2003 we repurchased, in the open market, $27.1 million of our 10 3/8 percent senior subordinated notes at a purchase price of $28.3 million or 104.3 percent to par value.

Net cash used for financing activities during fiscal 2002 was $18.1 million, primarily related to a $16.3 million net decrease in debt borrowings. This debt reduction was achieved despite the unwinding of a $40.0 million synthetic lease, which added $40.0 million to our balance sheet debt levels, and changes to our letter of credit payment terms, which we estimate added $30.0 million to our debt levels. The debt reduction in fiscal 2002 was achieved primarily through our inventory reduction efforts.

During fiscal 2004, we purchased a total of 0.1 million of our common shares at an aggregate price of $1.6 million, utilizing proceeds received from stock option exercises. As of January 31, 2004, we are authorized to purchase up to an additional 1.4 million shares of our common stock under previous authorizations from our Board of Directors.

We have three principal sources of liquidity: cash from operations, cash and cash equivalents on hand, and our credit facility. We believe that our credit facility, coupled with cash on hand and cash from operations, will be sufficient to cover our working capital, capital expenditure and debt service requirement needs for the foreseeable future.

Our liquidity is based, in part, on maintaining our current debt ratings. As of January 31, 2004, our long-term unsecured debt was rated “B2” by Moody’s Investor Services and “B-” by Standard & Poor’s. In assessing our credit strength, both Moody’s and Standard & Poor’s consider our capital structure and financial policies, as well as our consolidated balance sheet and other financial information. If our debt ratings were downgraded, it could adversely impact, among other things, our future borrowing costs, access to capital markets and new store operating lease costs.

Our current debt obligations, as of the end of fiscal 2004, include $49.3 million outstanding under our $365 million bank senior credit facility, and $64.4 million outstanding 10 3/8 percent senior subordinated notes. Subsequent to year-end, we issued $100 million of 7.5 percent senior subordinated notes and executed an early tender offer for our remaining 10 3/8 percent senior subordinated notes. Each of these debt obligations are described in further detail below.

Senior Credit Facility. In April 2001, we entered into a four year $365 million senior credit facility (the “credit facility”), led by Fleet Retail Finance, Inc. This credit facility consists of a $325.0 million revolver and a $40.0 million term loan, both secured by a first priority perfected security interest in our inventory, accounts receivable, property and other assets. The credit facility is fully and unconditionally guaranteed by each of our subsidiaries. There is no penalty if we elect to prepay the term loan principal, which is due on April 5, 2005. Interest on borrowings under the credit facility is calculated at the bank’s base rate or London Interbank Offered Rate (“LIBOR”) plus 1.75 percent to 2.25 percent, depending on the level of excess availability (as defined in the credit agreement) that is maintained. At January 31, 2004, our interest on borrowings under our credit facility was LIBOR plus 1.75 percent. The credit facility contains a sub-limit for letters of credit of $150.0 million. Proceeds from the credit facility were used to repay all outstanding borrowings under our prior $300.0 million senior credit facility and refinance a $40.0 million synthetic lease facility. In connection with this refinancing, we acquired the building and equipment at our West Coast distribution center and terminated our synthetic lease facility. Accordingly, the related property, plant and equipment was recorded as a capital expenditure in the first quarter of fiscal 2002. The debt obligation of $40.0 million was also recorded at that time. The deferred financing costs associated with our synthetic lease

facility totaling $1.0 million pre-tax, were written-off and are included in our debt repurchase and share reclassification expenses line item on the statement of operations.

During fiscal 2001, we entered into a synthetic lease facility to fund the construction of the building and acquisition of equipment at our West Coast distribution center in Visalia, California. The cost of the building and equipment acquired using this facility was $40.0 million. The synthetic lease facility was determined to be an operating lease and, accordingly, the distribution center assets and related obligation were not recorded on our balance sheet. The interest payments were capitalized until the facility began operations.

Our decision to unwind the synthetic lease was a result of entering into the new senior secured credit facility. Keeping the synthetic lease as part of our capital structure may have been problematic in syndicating the new senior secured credit facility and, as a result, the decision was made to collapse it.

Effective May 15, 2001, in connection with our financing under the credit facility, the agent bank for the credit facility assumed assignment of our two outstanding interest rate swap agreements. On May 16, 2001, the agent bank terminated those interest rate swap agreements and established a new interest rate swap with a fixed LIBOR of 6.72 percent and a notional amount of $90.0 million, which decreased to $40.0 million on May 1, 2003, until its expiration on April 30, 2005.

As of January 31, 2004, we had borrowings outstanding of $49.3 million under the credit facility at an interest rate of 3.1 percent (which excludes the impact of the interest rate swap referred to above) and $51.1 million of letters of credit outstanding.

Our weighted average interest rate (including the impact of the interest rate swaps referred to above) and weighted average borrowings under the credit facility were 6.3 percent and $88.3 million during fiscal 2004 and 7.9 percent and $104.7 million during fiscal 2003.

The senior credit facility contains covenants that, among other things, restrict the Company’s ability to incur additional indebtedness or guarantee obligations, engage in mergers or consolidations, dispose of assets, make investments, acquisitions, loans or advances, engage in certain transactions with affiliates, conduct certain corporate activities, create liens, or change the nature of its business. The Company is restricted in capital expenditures and its ability to prepay or modify the terms of other indebtedness, pay dividends and make other distributions when Excess Availability, as defined, falls below certain levels. Further, the Company is required to comply with a minimum net worth financial covenant if Excess Availability, as defined, is less than $35 million at any time. As of the end of January 31, 2004, Excess Availability was $178.2 million, and at the Company’s peak borrowing level during fiscal 2004, the Excess Availability was $126.7 million. The senior credit facility also defines various events of default, including cross default provisions, defaults for any material judgments or a change in control. At January 31, 2004, the Company is in compliance with all covenants under its credit agreement.

Senior Subordinated Notes. On May 5, 1999 we issued $150.0 million of 10 3/8 percent senior subordinated notes due May 1, 2007. Interest on the notes is payable on May 1 and November 1 of each year. Deferred charges and the original issue discount (the notes were issued at 98.5 percent of face value) recorded at issuance in the amounts of $4.3 million and $2.3 million, respectively, are reflected in other long-term assets and are being amortized as interest expense over the term of the notes utilizing the effective interest method. We have the option of redeeming the notes at any time after May 1, 2003, in accordance with certain call provisions of the related note indenture. The notes represent unsecured obligations that are subordinated to the credit facility and are fully and unconditionally guaranteed by each of our subsidiaries.

The senior subordinated note indenture contains covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make restricted payments, engage in certain transactions with affiliates, create liens, sell assets, issue guarantees of and pledges securing indebtedness and require an offer to repurchase the notes in the event of a change in control. The indenture defines various events of default, including cross default provisions and defaults for any material judgments. At January 31, 2004, the Company is in compliance with all covenants under its note indenture.

Failure to comply with these restrictions and covenants could result in defaults under the Company’s senior credit facility and/or senior subordinated notes indenture. Any default, if not waived, could result in the Company’s debt becoming immediately due and payable.

During fiscal 2004 and 2003, we purchased $58.5 million and $27.1 million, respectively, in face value of the notes. The purchases were made at an aggregate premium of 105.4 percent and 104.3 percent, respectively, to par value. During fiscal 2004 and 2003, we recorded pre-tax charges of $4.3 million and $1.9 million, respectively, which includes the cash premium paid and the related write-off of applicable deferred debt costs, which are reflected in the debt repurchase and share reclassification expenses line item on the statement of operations.

On February 26, 2004, we completed the placement of $100 million 7.5 percent senior subordinated notes due 2012. Proceeds from the offering were used to repurchase $39.2 million of 10 3/8 percent senior subordinated notes due 2007 that were tendered as part of the refinancing. The balance of the proceeds will be used to repurchase the remaining $25.2 million in 10 3/8 percent senior subordinated notes that remain outstanding on May 1, 2004, the next date when their call premium is reduced, and for general corporate purposes. The financing is expected to save approximately $1 million in interest and more importantly, positions our capital structure to enable our long-term growth strategy. When the debt repurchase of the 10 3/8 percent senior subordinated notes is completed, we will record a pre-tax charge of approximately $4.1 million to recognize the premium paid to retire the notes and write-off the deferred debt costs.

Our liquidity is not currently dependent on the use of off-balance sheet transactions other than letters of credit and operating leases, which are typical in a retail environment.

The following tables summarize our future cash outflows resulting from contractual obligations and commitments as of January 31, 2004:


⁽¹⁾	The above table does not include the placement of $100 million 7.5 percent senior subordinated notes due 2012 nor the repurchase of $39.2 million 10 3/8 percent senior subordinated notes that were tendered as part of the refinancing, both of which occurred subsequent to year end in February 2004.

⁽²⁾	Interest is included as a contractual obligation on the 10 3/8 percent senior subordinated notes only. The calculation of interest on the credit facility is dependent on the average borrowings during the year and a variable interest rate, which currently approximates 3.25 percent (set at 175 basis points over LIBOR). The Company did not include these amounts due to their subjectivity and estimation required. See Liquidity and Capital Resources – Sources of Liquidity for further discussion of the credit facility.

⁽³⁾	Includes commercial letters of credit of $25.9 million and $25.2 million of standby letters of credit.

⁽⁴⁾	The remaining cash payments include $1.7 million associated with lease obligations for stores closed.

Our business exhibits seasonality, which is typical for most retail companies. Our sales are much stronger in the second half of the year than the first half of the year. Net earnings are highest during the months of September through December when sales volumes provide significant operating leverage. Working capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season.

Summarized below are key line items by quarter from our statements of operations and balance sheets:

We believe that inflation has not had a significant effect on the growth of net sales or on net income over the past three years. There can be no assurance, however, that our operating results will not be affected by inflation in the future.

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and/or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes. The use of estimates is pervasive throughout our financial statements, but the accounting policies and estimates we consider most critical are as follows:

Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis. Inventory valuation methods require certain management estimates and judgments. These include estimates of shrink, as well as estimates of net realizable value on product designated for clearance, which affects the ending inventory valuation at cost as well as the gross margins reported for the year.

Our accrual for shrink is based on the actual historical shrink results of our recent store physical inventories. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. Substantially all of our store physical inventory counts are taken in the first three-quarters of each year and the shrink accrual recorded at January 31, 2004 is based on shrink results of prior physical inventories. All of our store locations that have been open one year or more are physically inventoried once a year. We will continue to monitor and adjust our shrink rate estimates based on the results of store physical inventories and shrink trends.

We estimate our reserve for clearance product based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends.

All vendor consideration, including cash discounts, volume discounts and co-operative advertising fees are included as a reduction of cost of sales. Cash discounts and volume discounts are recognized in cost of sales when the related merchandise is sold. Historically, the Company recognized co-operative advertising fees when received from its vendors. Beginning January 1, 2003, upon the adoption of EITF Issue 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor,” and the execution of new or modifications of existing vendor agreements, the Company recognizes co-operative advertising fees when the related merchandise is sold. The effect of adopting the EITF did not have a material impact on the Company’s results of operations or financial position.

Proceeds from the sale of gift cards are recorded as gift card liability and recognized as revenue when redeemed by the holder.

Long-lived assets and certain identifiable intangibles historically have been 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 the assets to future net cash flows estimated by us to be generated by those assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142 which establishes accounting standards for intangible assets and goodwill. The Company adopted SFAS No. 142 on February 3, 2002. The Company performed the first of the required impairment tests of goodwill and based upon the transition impairment test performed on recorded goodwill, no impairment to goodwill exists. In the fourth quarter of fiscal 2004 and 2003, the Company also performed the required annual impairment test of the carrying amount of goodwill and determined that no goodwill impairment existed. Application of the non-amortization provision of SFAS No. 142 reduced amortization expense by approximately $0.7 million in fiscal 2004 and 2003. Fiscal 2002 included amortization expense of $0.7 million.

In August 2001, the FASB issued SFAS No. 144 which supersedes SFAS No. 121 to supply a single accounting approach for measuring impairment of long-lived assets, including a segment of a business accounted for as a discontinued operation or those to be sold or disposed of other than by sale. SFAS No. 144 was adopted in fiscal 2003. See the asset impairment discussion contained above in “Turnaround Plan and Store Closing Charges.”

Prior to December 31, 2002, we accrued costs related to stores closed or identified for closing, which included future rental obligations, carrying costs, and other closing costs. These expenses were accrued when we had committed to closing or relocating a store and were calculated at the lesser of future rental obligations remaining under the lease (less estimated sublease rental income) or the estimated lease termination cost. The determination of the accrual was dependent on our ability to make estimates of costs to be incurred post-closing and of sublease rental income to be received from subleases. Differences in our estimates and assumptions could result in an accrual requirement different from the calculated accrual.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 replaces EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and we began to account for the costs of store closings under SFAS No. 146 on that date.

We estimate certain material expenses in an effort to record those expenses in the period incurred. Our most material estimates relate to compensation, taxes and insurance related expenses, portions of which are self-insured. Our workers’ compensation and general liability insurance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred, but not yet reported. These estimates are based on historical loss development factors. Our employee medical insurance accruals are recorded based on our medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in our estimates and assumptions could result in an accrual requirement materially different from the calculated accrual.

In addition to the accounting pronouncements referenced above in our discussion of critical accounting policies, the following accounting pronouncements may have an impact on our results of operations or financial position, as discussed further below.

SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

During May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in the statement of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no impact on our overall financial position or results of operations.

SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities

During April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS No. 149, the provisions of which are to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 had no impact on our consolidated financial statements.

receives a majority of its expected returns, or both, as a result of holding variable interests, which are ownership, contractual, or other pecuniary interests in an entity. On December 24, 2003, the FASB issued a revision to FIN 46 to defer the adoption requirements in financial statements for public entities that do not have an interest in structures commonly referred to as special-purpose entities, however, adoption will be required for the periods ending after March 15, 2004. Accordingly, we expect to complete our analysis and adopt FIN 46 during our first quarter in fiscal 2005, as required. We are in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon our financial condition or results of operations.

Certain statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements which reflect the Company’s current views of future events and financial performance, involve certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “estimates,” “expects,” “believes,” and similar expressions as they relate to us or future events or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are intended to identify such forward-looking statements. Our actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, changes in customer demand, changes in trends in the fabric and craft industry, seasonality, the availability of merchandise, changes in the competitive pricing for products, the impact of our and our competitors store openings and closings, fuel and energy costs, changes in tariff and freight rates, consumer debt levels, and other capital market and geo-political conditions. We caution readers not to place undue reliance on these forward-looking statements. We assume no obligation to update any of the forward-looking statements.

We are exposed to foreign currency fluctuations on merchandise that is sourced internationally and the impact of interest rate changes on our outstanding borrowings under our credit facility.

We believe foreign currency exchange rate fluctuations do not contain significant market risk due to the nature of our relationships with our international vendors. All merchandise contracts are denominated in U.S. dollars and are subject to negotiation prior to our commitment for purchases. As a result, there is not a direct correlation between merchandise prices and fluctuations in the exchange rate. We sourced approximately 29 percent of our purchases internationally in fiscal 2004. Our international purchases are concentrated in China and other Asian countries.

In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates. Our objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows. Interest rate swaps are primarily utilized to achieve this objective. We utilize interest rate swaps to manage net exposure to interest rate changes related to our debt structure. We estimate that a one-percent increase or decrease in interest rates, based on fiscal 2004 average debt levels, would cause an increase or decrease to interest expense of $0.5 million. This includes the impact resulting from our interest rate swap arrangement, as discussed below. The Company has a $40.0 million interest rate swap with a fixed LIBOR of 6.72 percent that expires on April 30, 2005.

Effective February 4, 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. In accordance with SFAS No. 133, we have reviewed and designated our interest rate swap agreement as a cash flow hedge and recognized the fair value of our interest rate swap agreement on the balance sheet in accrued expenses. Changes in the fair value of this agreement is recorded in other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. During fiscal 2004 and fiscal 2003, unrealized after-tax net gains of $1.0 million and $0.4 million, respectively, were recorded in other comprehensive income (loss). The fiscal 2002 after-tax net loss included a

$1.7 million cumulative transition adjustment, as of the date of adoption of SFAS No. 133. The hedge ineffectiveness (income) expense for fiscal 2004, fiscal 2003 and 2002 was $(0.7) million, $(0.3) million and $1.0 million, respectively, and is reflected in interest expense.

We have prepared the accompanying consolidated financial statements and related information included herein for the years ended January 31, 2004, February 1, 2003 and February 2, 2002. The opinion of Ernst & Young LLP, the Company’s independent auditors, for the years ended January 31, 2004 and February 1, 2003, on those financial statements is included. The opinion of Arthur Andersen LLP, the Company’s former independent public accountants, who have ceased operations, for the year ended February 2, 2002 on those financial statements is included. The primary responsibility for the integrity of the financial information included in this annual report rests with management. This information is prepared in accordance with accounting principles generally accepted in the United States, based on our best estimates and judgments and giving due consideration to materiality.

The Company maintains accounting and control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and which produce records adequate for preparation of financial information. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits to be derived. We believe our systems provide this appropriate balance.

The Board of Directors pursues its responsibility for these financial statements through the Audit Committee, composed exclusively of independent directors. The Audit Committee meets periodically with management, our internal auditors and our independent auditors to discuss the adequacy of financial controls, the quality of financial reporting, and the nature, extent and results of the audit effort. Both the internal auditors and independent auditors have private and confidential access to the Audit Committee at all times.

We have audited the accompanying consolidated balance sheets of Jo-Ann Stores, Inc. and subsidiaries (the Company) as of January 31, 2004 and February 1, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two fiscal years then ended. Our audits also included the financial statement schedule for the years ended January 31, 2004 and February 1, 2003 listed in Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements and schedule of the Company for the fiscal year ended February 2, 2002, were audited by other auditors, who have ceased operations and whose report dated March 7, 2002 expressed an unqualified opinion on those statements before the restatement adjustments and related disclosures described below and in Notes 1, 2, 4, 7, and 12.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule 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 consolidated financial position of Jo-Ann Stores, Inc. and subsidiaries at January 31, 2004 and February 1, 2003, and the consolidated results of their operations and their cash flows for each of the two fiscal years then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule for the years ended January 31, 2004 and February 1, 2003 when considered in relation to the basic financial statements as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2004 the Company changed its method of accounting for stock based compensation.

As discussed above, the consolidated financial statements and schedule of the Company for the year ended February 2, 2002, were audited by other auditors who have ceased operations. However, the Company has made certain adjustments and changes in disclosures to the 2002 consolidated financial statements to reflect the share reclassification noted below and the adoption requirements of new accounting pronouncements, as follows:

(i) as described in Note 2, the Company’s shareholders’ approved a share reclassification of its Class A and Class B Common Shares into a single class of Common Stock in November 2003. This resulted in approximately 1.6 million of incremental shares of Common Stock being issued at the time of the reclassification. Shares, shares outstanding, average shares outstanding utilized to compute basic and diluted earnings per share, and stock options have been retroactively restated to reflect the impact of the increased shares outstanding and stock options as a result of the share reclassification. We audited the retroactive restatement that was applied to (a) the basic and diluted earnings per share amounts in the consolidated statements of operations, (b) the common and treasury shares and stock and additional paid-in capital amounts presented in the consolidated statement of shareholders’ equity, (c) the share and per share amounts included in the Earnings Per Share and Stock-Based Compensation sections of Note 1, and (d) the share, option and price information amounts in Note 7. Our procedures included (a) agreeing the historical share, per share, stock option and additional paid-in capital amounts to the Company’s underlying accounting records obtained from management, (b) testing the mathematical accuracy in the restated amounts giving effect to the share reclassification of Class A Common Shares into Common Stock at an exchange ratio of 1 to 1.15, and (c) agreeing the restated amounts to the amounts reflected in the accompanying consolidated financial statements and footnotes, and

(ii) as described in Note 1, effective in fiscal 2004, the Company adopted Statement of Financial Accounting Standards (Statement) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” and revised the consolidated statement of operations to reclassify the fiscal 2002 loss related to early retirement of debt from extraordinary item to debt repurchase and share reclassification expenses in accordance with the Statement. Our procedures with respect to the consolidated statement of operations and Notes 4 and 12 with respect to the impact of the adoption of this Statement described in Note 1 included (a) agreeing the previously reported net loss related to the early extinguishment of debt to the Company’s underlying accounting records obtained from management, and (b) testing the mathematical accuracy of the restated statement of operations, related per share amounts and restated provision for income taxes which changed as a result of the reclassification.

In our opinion, the adjustments and disclosures described in (i) and (ii) above are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2002 consolidated financial statements of the Company other than with respect to such adjustments and disclosures noted above and, accordingly, we do not express an opinion or any other form of assurance on the 2002 consolidated financial statements taken as a whole.

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Company’s filing on Form 10-K for the fiscal year ended February 2, 2002. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K. See Exhibit 23.1 for further discussion.

We have audited the accompanying consolidated balance sheet of Jo-Ann Stores, Inc. (an Ohio corporation) and Subsidiaries as of February 2, 2002 February 3, 2001, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three fiscal years in the period ended February 2, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jo-Ann Stores, Inc. and Subsidiaries as of February 2, 2002 and February 2, 2001 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002 in conformity with accounting principles generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, effective February 4, 2001, the Company changed its method of accounting for derivative instruments.

Jo-Ann Stores, Inc. (the “Company”), an Ohio corporation, is a fabric and craft retailer with 892 retail stores in 47 states at January 31, 2004. The 806 traditional and 86 superstores feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, scrapbooking materials, artificial and dried flowers, home accents, finished seasonal and home décor merchandise.

The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the fiscal 2003 and 2002 financial statements have been reclassified in order to conform with the current year presentation.

Shares outstanding, stock options, as well as average basic and diluted shares outstanding used to calculate earnings per share, have been retroactively restated to reflect the impact of the increased shares outstanding as a result of the share reclassification as of the beginning of all periods presented. See Note 2 — Share Reclassification.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions, as new information becomes available.

The Company’s fiscal year ends on the Saturday closest to January 31. Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal year refers to the year in which the period ends (e.g., fiscal 2004 refers to the year-ended January 31, 2004).

Cash equivalents are all highly liquid investments with original maturities of three months or less.

Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis. Inventory valuation methods require certain management estimates and judgments, which affect the ending inventory valuation at cost as well as the gross margins reported for the year. These valuation methods include estimates of net realizable value on product designated for clearance and estimates of shrink between periods when the Company conducts store physical inventories to substantiate inventory balances.

The Company’s accrual for shrink is based on the actual historical shrink results of recent store physical inventories. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. Substantially all of our store physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at January 31, 2004 is based on shrink results of

prior physical inventories. All store locations that have been open one year or longer are physically inventoried once a year. The Company continually monitors and adjusts the shrink rate estimates based on the results of store physical inventories and shrink trends.

Inventory reserves for clearance product are estimated based on the consideration of a variety of factors, including, but not limited to, quantities of slow moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of the Company’s estimates can be affected by many factors, some of which are outside of the Company’s control, including changes in economic conditions and consumer buying trends.

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is provided over the estimated useful life of the assets principally by the straight-line method. The major classes of assets and ranges of estimated useful lives are: buildings from 10 to 40 years; furniture, fixtures and equipment from 2 to 10 years; and leasehold improvements for 10 years or the remainder of the lease term, whichever is shorter. Maintenance and repair expenditures are charged to expense as incurred and improvements and major renewals are capitalized.

Property, equipment and leasehold improvements consists of the following (dollars in millions):

The Company capitalized $3.7 and $2.7 million in fiscal 2004 and fiscal 2003, respectively, for internal use software acquired from third parties. The capitalized amounts are included in property, equipment and leasehold improvements and are being amortized on a straight-line basis over periods ranging from three to five years beginning at the time the software becomes operational.

Goodwill represents the excess of purchase price and related costs over the fair value assigned to the net tangible assets acquired from House of Fabrics, Inc. (“HOF”). The goodwill recorded at February 1, 2003 was non-deductible for tax purposes.

Effective February 3, 2002, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In accordance with SFAS No. 142, goodwill is no longer amortized but is subject to impairment testing, using fair value-based approaches. Prior to the adoption of SFAS No. 142, goodwill was amortized using the straight-line method over an estimated life of 40 years. As part of adopting this standard, the Company

performed the first of the required impairment tests of goodwill and based upon the transition impairment tests performed on recorded goodwill, no impairment to goodwill exists. During the fourth quarter of fiscal 2004 and 2003, the Company performed the required annual impairment tests of the carrying amount of goodwill and determined that no goodwill impairment existed. Application of the non-amortization provision of SFAS No. 142 reduced amortization expense by approximately $0.7 million for both fiscal 2004 and fiscal 2003. Fiscal 2002 included amortization expense of $0.7 million.

Effective February 3, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, to supply a single accounting approach for measuring impairment of long-lived assets, including definite lived intangible assets, businesses accounted for as a discontinued operation, assets to be sold and assets to be disposed of other than by sale.

Under SFAS No. 144, long-lived assets, except for goodwill and indefinite lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value 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 the assets to future net cash flows estimated by the Company to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are recorded at the lower of carrying value or estimated net realizable value.

The adoption of SFAS No. 144 did not have a significant impact on the Company’s results of operations or financial position. The carrying values of long-lived assets for stores identified for closure are reduced to their estimated fair value. See Note 3 — Store Closings for details related to the results of impairment testing performed.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. SFAS No. 146 replaces EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Under Issue 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan.

The Company follows SFAS No. 146 to account for costs related to store closings after December 31, 2002. Prior to December 31, 2002, the Company followed Issue 94-3 and accrued for costs of store closings, including future rental obligations, carrying costs and other closing costs when the Company committed to closing or relocating a store. The determination of the accrual was dependent on the Company’s ability to make estimates of costs to be incurred post-closing. Future rental obligations were calculated at the lesser of contractual obligations remaining under the lease (less estimated sublease rental income) or the estimated lease termination cost. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. See Note 3 — Store Closings.

Certain material expenses are estimated in an effort to record those expenses in the period incurred. The most material estimates relate to compensation, taxes and insurance related expenses, portions of which the Company is self-insured for. Workers’ compensation and general liability insurance accruals are recorded based on insurance claims processed as well as historical claims experience for claims incurred, but not yet reported. These estimates are based on historical loss development factors. Employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences in the Company’s estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. Accrued expenses consists of the following (dollars in millions):

A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The price of the 10 3/8 percent senior subordinated notes (the “Notes”) at January 31, 2004 in the high yield debt market was 104.0 percent to par value. Accordingly, the fair value of the 10 3/8 percent Notes was $66.9 million versus their carrying value of $64.4 million.

In the normal course of business, the Company employs established policies and procedures to manage exposure to changes in interest rates. The Company’s objective in managing the exposure to interest rate changes is to limit the volatility and impact of interest rate changes on earnings and cash flows. Interest rate swaps are primarily utilized to achieve this objective. Interest rate swaps are utilized to manage net exposure to interest rate changes related to the Company’s debt structure. The interest rate swap agreements require the Company to pay a fixed interest rate while receiving a floating interest rate based on London Interbank Offered Rate (“LIBOR”). The Company does not enter into financial instruments for trading purposes. The Company has a $40.0 million interest rate swap with a fixed LIBOR rate of 6.72 percent that expires on April 30, 2005.

Effective February 4, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. In accordance with SFAS No. 133, the Company reviewed and designated its interest rate swap agreement as a cash flow hedge and recognized the fair value of its interest rate swap agreement on the balance sheet in accrued expenses. Changes in the fair value of this agreement is recorded in other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects earnings. During fiscal 2004 and fiscal 2003, unrealized after-tax net gains of $1.0 million and $0.4 million, respectively, were recorded in other comprehensive income (loss). The fiscal 2002 after-tax net loss included a $1.7 million cumulative transition adjustment, as of the date of adoption of SFAS No. 133. The hedge ineffectiveness (income) expense for fiscal 2004, fiscal 2003 and 2002 was $(0.7) million, $(0.3) million and $1.0 million, respectively, and is reflected in interest expense.

The Company accounts for income taxes pursuant to the asset and liability method. Under that method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 the tax rate is recognized in income or expense in the period that the change is effective.

The Company recognizes revenue at the time of sale of merchandise to its customers in compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” The Company allows for merchandise to be returned under most circumstances, however, the Company does not provide a reserve as the amounts of returns have not historically had a material impact on the financial statements.

The Company recognizes the sale for layaway and custom orders when the product is delivered to the customer and any remaining balance due from the customer is collected. Deposits received for layaway and custom orders are deferred as a liability until the related product is delivered to the customer.

Proceeds from the sale of gift cards are recorded as gift card liability and recognized as revenue when redeemed by the holder.

Inbound freight and duties related to import purchases and internal transfer costs are considered to be direct costs of the Company’s merchandise and accordingly are recognized when the related merchandise is sold as cost of sales. Purchasing and receiving costs, warehousing costs and other costs of the Company’s distribution network are considered to be period costs not directly attributable to the value of merchandise and accordingly are expensed as incurred as selling, general and administrative expenses. Distribution network costs of $51.5 million, $43.4 million and $42.1 million were included in selling, general and administrative expenses for fiscal 2004, 2003 and 2002, respectively.

All vendor consideration, including cash discounts, volume discounts and co-operative advertising fees are included as a reduction of cost of sales. Cash discounts and volume discounts are recognized in cost of sales when the related merchandise is sold. Historically, the Company recognized co-operative advertising fees when received from its vendors. Beginning January 1, 2003, upon the adoption of Emerging Issues Task Force (“EITF”) Issue 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor,” and the execution of new or modifications of existing vendor agreements, the Company recognizes co-operative advertising fees when the related merchandise is sold. The effect of adopting the EITF did not have a material impact on the Company’s results of operations or financial position. Historically, vendor consideration has not had a significant impact to the trend of cost of sales or gross margin.

Store pre-opening costs are expensed as incurred and relate to the costs incurred prior to a new store opening, which includes the hiring and training costs for new employees and processing of initial merchandise. Store pre-opening costs were $7.6 million, $4.5 million and $3.4 million in fiscal 2004, 2003 and 2002, respectively.

The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense was $47.7 million, $39.7 million and $37.9 million for fiscal 2004, 2003 and 2002, respectively.

Basic and diluted earnings per share are calculated in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per common share are computed by dividing net income (loss) by the weighted average number of shares outstanding during the year. Diluted earnings per share for fiscal 2004 and 2003 include the effect of the assumed exercise of dilutive stock options under the treasury stock method. Stock options are antidilutive for fiscal 2002 and therefore are excluded from the calculation of diluted earnings per share. Basic and diluted earnings per share are as follows:

For fiscal years 2004, 2003 and 2002, 175,000 stock options, 137,000 stock options and 3.8 million stock options, respectively, that could potentially dilute earnings per share in the future, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

Effective February 2, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under the modified prospective method of adoption selected by the Company under the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123,” compensation cost recognized in fiscal year 2004 is the same as that which would have been recognized had the recognition provisions of SFAS No. 123 been applied from its original effective date. The Company believes that this change is to the preferred method of accounting for stock-based compensation.

Prior to fiscal 2004, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Therefore, no stock-based employee compensation for stock options is reflected in fiscal 2003 and 2002 net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

In accordance with the provisions of SFAS No. 123 and SFAS No. 148, $6.4 million ($5.7 million of stock option compensation expense and $0.7 million for amortization expense associated with restricted stock) was

recorded for total stock-based compensation expense in fiscal 2004. In accordance with APB No. 25, total stock-based compensation, which represented amortization expense associated with restricted stock, was $0.2 million and $0.6 million, respectively, for fiscal 2003 and 2002.

The following table illustrates the effect on net income (loss) and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each fiscal year (dollars in millions, except per share data):

The fair values of the options granted under the stock plans were determined at the date of grant using the Black-Scholes option pricing model. The Company does not pay dividends, so no dividend rate assumption was made. The significant assumptions used to calculate the fair value of the option grants were as follows:

In addition to the accounting pronouncements referenced above, the following accounting pronouncements may have an impact on our results of operations or financial position, as discussed further below.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 concludes that debt extinguishments should not be classified as an extraordinary item. SFAS No. 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback

transactions. As a result of adopting SFAS No. 145, the Company reclassified the fiscal 2002 consolidated statement of operations for the loss associated with the early extinguishment of debt from extraordinary item to the line item “debt repurchase and share reclassification expenses”, included in operating profit, in accordance with the statement. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 did not have a significant impact on the Company’s results of operations or financial position.

During May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in the statement of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no impact on the Company’s overall financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” for certain entities which do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both, as a result of holding variable interests, which are ownership, contractual, or other pecuniary interests in an entity. On December 24, 2003, the FASB issued a revision to FIN 46 to defer the adoption requirements in financial statements for public entities that do not have an interest in structures commonly referred to as special-purpose entities, however, adoption will be required for the periods ending after March 15, 2004. Accordingly, the Company expects to complete its analysis and adopt FIN 46 during its first quarter in fiscal 2005, as required. The Company is in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations.

On November 4, 2003, the Company announced that shareholders approved the reclassification of its Class A and Class B common shares into a single class of stock. Shareholders also approved certain other

governance proposals. On November 5, 2003, shares of the single class of stock began trading on the New York Stock Exchange, under the symbol “JAS.”

Under the reclassification, shares of the Company’s Class B common shares, which did not have voting rights other than as required by law, were amended to have one vote per share and were re-designated as the Company’s “common shares.” Each of the Company’s Class A Common shares, which had one vote per share, were reclassified into 1.15 common shares. This resulted in approximately 1.6 million incremental Common shares being issued at the time of the reclassification, increasing the number of common shares outstanding by approximately 8 percent.

The Company reviews the productivity of its store base on an ongoing basis and actively manages its real estate to preserve maximum flexibility in its lease terms. As discussed earlier under Note 1 — Significant Accounting Policies, effective December 31, 2002, the Company began accounting for costs of store closings under SFAS No. 146. In addition, the Company adopted the new accounting requirements related to asset impairment as required by SFAS No. 144, effective February 3, 2002.

During the fourth quarter of fiscal 2001, management developed a turnaround plan (the “Turnaround Plan”), which resulted from a thorough analysis of the Company’s business prompted by operating trends that were occurring. As a result of the Company’s decline in earnings, significant increases in debt and inventory levels, and issues surrounding the implementation of SAP Retail, the Company’s strategy shifted from accelerating the growth of its superstore concept to improving the productivity of its existing asset base and realizing the benefits from its completed infrastructure investments.

In accordance with the then applicable accounting literature (Emerging Issues Task Force Issue (“EITF”) 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” Statement of Financial Accounting Standards (“SFAS”) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges,”) the Company recorded a $17.1 million pre-tax charge to operating expenses in fiscal 2002 for restructuring and asset impairment costs resulting from 148 identified store closings associated with its Turnaround Plan. The Company also incurred expenses of $0.5 million in fiscal 2002 for store closings unrelated to the Turnaround Plan.

Through the end of fiscal 2004, 131 of the stores identified for closure as part of the Turnaround Plan have been closed. The remaining stores to be closed with the exception of eight store locations, will be closed in fiscal 2005. At the end of fiscal 2003, a decision was made to continue to operate these eight locations due to our inability to successfully negotiate an acceptable arrangement to exit the lease. A total of $7.7 million for estimated lease obligations of stores to be closed as part of the Turnaround Plan were reversed in the fourth quarter of fiscal 2003. The reversal related to stores where estimates were revised, as well as the eight stores we could not close. We also recorded an asset impairment charge in the fourth quarter of fiscal 2003 of $6.7 million for various store locations, representing the difference between the asset carrying value and the future net discounted cash flows estimated to be generated by those assets. The remainder of the store closing charges in fiscal 2003 and the store closing charges incurred in fiscal 2004, highlighted in the table below, represent lease obligations and other costs associated with stores identified for closure that were not part of the Turnaround Plan.

The charges to the statement of operations for the three fiscal years ended January 31, 2004 related to store closings are summarized as follows, and include charges both as part of our turnaround initiatives, as well as store closings from normal operating activity (dollars in millions):

Asset impairments include write-downs of fixed assets for stores closed, or scheduled to be closed, and certain other store locations where impairment exists, to estimated fair value. The asset impairment represents the difference between the asset carrying value and the future net discounted cash flows estimated by us to be generated by those assets.

Other costs represent other miscellaneous store closing costs, including among other things, costs related to fixtures, signage and register removal.

Summarized below is a reconciliation of the beginning and ending store closing reserve balances for the three fiscal years ended January 31, 2004 (dollars in millions):

The significant components of the income tax provision (benefit) are as follows (dollars in millions):

The reconciliation of income tax at the statutory rate to the income tax provision (benefit) is as follows:

The significant components of the Company’s deferred tax assets and liabilities are as follows:

The Company has recorded a valuation allowance for equity losses on its minority investment, which may not be realizable.

In April 2001, the Company entered into a four year $365.0 million senior secured credit facility (the “credit facility”), led by Fleet Retail Finance, Inc. This credit facility consists of a $325.0 million revolver and a $40.0 million term loan, both secured by a first priority perfected security interest in our inventory,

accounts receivable, property and other assets. The credit facility is fully and unconditionally guaranteed by each of our subsidiaries. There is no penalty if the Company elects to prepay the term loan principal, which is due on April 30, 2005. Interest on borrowings under the credit facility is calculated at the bank’s base rate or London Interbank Offered Rate (“LIBOR”) plus 1.75 percent to 2.25 percent, depending on the level of excess availability (as defined in the credit agreement) that is maintained. At January 31, 2004, our interest on borrowings under our credit facility was LIBOR plus 1.75 percent. The credit facility contains a sub-limit for letters of credit of $150.0 million. Proceeds from the credit facility were used to repay all outstanding borrowings under the Company’s prior $300.0 million senior credit facility and refinance a $40.0 million synthetic lease facility. In connection with this refinancing of the synthetic lease facility, the Company acquired the building and equipment at the West Coast distribution center. Accordingly, the related property, plant and equipment was recorded as a capital expenditure in the first quarter of fiscal 2002. The debt obligation of $40.0 million was also recorded at that time. The deferred financing costs associated with the synthetic lease facility totaling $1.0 million pre-tax, were written-off and are included in debt repurchase and share reclassification expenses line item on the statement of operations.

During fiscal 2001, the Company entered into a synthetic lease facility to fund the construction of the building and acquisition of equipment at its West Coast distribution center in Visalia, California. The cost of the building and equipment acquired using this facility was $40.0 million. The synthetic lease facility was determined to be an operating lease and, accordingly, the distribution center assets and related obligation were not recorded on the Company’s balance sheet. The interest payments were capitalized until the facility began operations.

The decision of the Company to unwind the synthetic lease was a result of entering into the new senior secured credit facility. Keeping the synthetic lease as part of the Company’s capital structure may have been problematic in syndicating the new senior secured credit facility and, as a result, the decision was made to collapse it.

As of January 31, 2004, the Company had borrowings outstanding of $49.3 million under the credit facility at an interest rate of 3.1 percent (which excludes the impact of the interest rate swap referred to in Financial Instruments of Note 1 — Significant Accounting Policies) and $51.1 million of letters of credit outstanding.

The Company’s weighted average interest rate (including the effect of the interest rate swap) and weighted average borrowings under the credit facility were 6.3 percent and $88.3 million during fiscal 2004 and 7.9 percent and $104.7 million during fiscal 2003.

The senior credit facility contains covenants that, among other things, restrict the Company’s ability to incur additional indebtedness or guarantee obligations, engage in mergers or consolidations, dispose of assets, make investments, acquisitions, loans or advances, engage in certain transactions with affiliates, conduct certain corporate activities, create liens, or change the nature of its business. The Company is restricted in capital expenditures and its ability to prepay or modify the terms of other indebtedness, pay dividends and make other distributions when Excess Availability, as defined, falls below certain levels. Further, the Company is required to comply with a minimum net worth financial covenant if Excess Availability, as defined, is less than $35 million at any time. As of the end of January 31, 2004, Excess Availability was $178.4 million, and at the Company’s peak borrowing level during fiscal 2004, the Excess Availability was $126.7 million. The senior credit facility also defines various events of default, including cross default provisions, defaults for any material judgments or a change in control. At January 31, 2004, the Company is in compliance with all covenants under its credit agreement.

The fair value of the Company’s credit facility approximated carrying value at January 31, 2004 and February 1, 2003.

On May 5, 1999, the Company issued $150.0 million of 10 3/8 percent senior subordinated notes due May 1, 2007 (the “Notes”.) Interest on the Notes is payable on May 1 and November 1 of each year. Deferred charges and the original issue discount (the Notes were issued at 98.5 percent of face value) recorded at issuance in the amounts of $4.3 million and $2.3 million, respectively, are reflected in other long-term assets and are being amortized as interest expense over the term of the Notes utilizing the effective interest method. The Company has the option of redeeming the Notes at any time on or after May 1, 2003, in accordance with certain call provisions of the Notes Indenture. The Notes represent unsecured obligations that are subordinated to the credit facility and are fully and unconditionally guaranteed by each of the Company’s subsidiaries.

The Notes Indenture contains covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, make restricted payments, engage in certain transactions with affiliates, create liens, sell assets, issue guarantees of and pledges securing indebtedness and require an offer to repurchase the Notes in the event of a change in control. The Notes Indenture defines various events of default, including cross default provisions and defaults for any material judgments. At January 31, 2004, the Company is in compliance with all covenants under its Notes Indenture.

Failure to comply with these restrictions and covenants could result in defaults under the Company’s credit facility and/or Notes Indenture. Any default, if not waived, could result in the Company’s debt becoming immediately due and payable.

During fiscal 2004 and 2003, the Company purchased $58.5 million and $27.1 million, respectively, in face value of the Notes. The purchases were made at an aggregate premium of 105.4 percent and 104.3 percent, respectively, to par value. During fiscal 2004 and 2003, the Company recorded pre-tax charges of $4.3 million and $1.9 million, respectively, which includes the cash premium paid and the related write-off of applicable deferred debt costs, which are reflected in the debt repurchase and share reclassification expenses line item on the statement of operations.

On February 26, 2004, the Company completed the placement of $100 million 7.5 percent Senior Subordinated Notes due 2012. Proceeds from the offering were used to repurchase $39.2 million of 10 3/8 percent Senior Subordinated Notes due 2007 that were tendered as part of the refinancing. The balance of the proceeds will be used to repurchase the remaining $25.2 million in 10 3/8 percent Senior Subordinated Notes that remain outstanding on May 1, 2004, the date when their premium is reduced, and for general corporate purposes.

Aggregate maturities of long-term debt for the next five years, before considering the impact of the refinancing completed on February 26, 2004, as described in more detail above, are: 2005 — $0.0; 2006 — $49.3; 2007 — $0.0; 2008 — $64.4; 2009 — $0.0 and thereafter — $0.0.

On November 4, 2003, the Company amended and restated its Shareholders’ Rights Plan (the “Rights Plan”). Under the Rights Plan, as amended and restated, one right is issued for each common share outstanding. The rights are exercisable only if a person or group buys or announces a tender offer for 15 percent or more of the outstanding common shares as defined in the Rights Plan. When exercisable, each right initially entitles a holder of common shares to purchase one common share for $52.17, or under certain circumstances, one common share for $0.43. The rights, which do not have voting privileges, expire at the close of business on October 31, 2010, but may be redeemed by the Board of Directors prior to that time,

under certain circumstances, for $0.005 per right. Until the rights become exercisable, they have no effect on earnings per share.

The Company is a party to an agreement with certain members of the two founding families of the Company, whereby the Company has a right of first refusal to acquire, at market prices, common shares disposed of by either of the families. The total number of common shares, subject to this agreement, was approximately 4.6 million shares as of January 31, 2004.

The Company has various stock-based compensation plans that it utilizes as long-term compensation for its board of directors, executive officers, senior management and other key employees. The Company issues stock under these various stock-award compensation plans and uses treasury shares to fund the Company’s match under the 401(k) savings plan. As discussed in Note 1, the Company adopted SFAS No. 123 in the first quarter of fiscal 2004 under the modified-prospective method under SFAS No. 148 and began expensing the costs of stock options in its statements of operations in fiscal 2004, For restricted stock awards, deferred compensation expense is recorded as “Unamortized restricted stock awards” at the time of the issuance and is amortized over the vesting period of the award (typically five years).

The 1998 Incentive Compensation Plan (the “1998 Plan”) includes a stock option program, a restricted stock program and an employee stock purchase program for employees, and a stock option program, a restricted stock and deferred stock program for non-employee directors. The total number of shares subject to awards, other than those granted under the employee stock purchase program, are limited in any fiscal year to (1) four percent of the number of shares outstanding at the beginning of the fiscal year, plus (2) for each of the two prior fiscal years, the excess of four percent of the number of shares outstanding at the beginning of each such fiscal year over the number of shares subject to awards actually granted in each such fiscal year.

The following table summarizes award activity and the number of shares available for future awards under the 1998 Plan at January 31, 2004:

The employee and non-employee director stock options granted under the 1998 Plan generally become exercisable to the extent of one-fourth of the optioned shares for each full year of continuous employment or service following the date of grant and generally expire seven to ten years after the date of the grant. Stock options granted under the Plan may become exercisable or expire under different terms as approved by the Compensation Committee of the Board of Directors.

The vesting periods for the restricted shares granted under the 1998 Plan are up to five years for employee restricted shares and up to six years for non-employee director restricted shares. All restrictions to such restricted shares terminate if the grantee remains in the continuous service of the Company throughout the vesting period. Unearned compensation resulting from the issuance of restricted shares is being amortized over the vesting periods, and the unamortized portion has been reflected as a reduction of shareholders’ equity.

The following table summarizes the restricted shares granted and weighted average grant price under the 1998 Plan:

The employee stock purchase program (the Associate Stock Ownership Plan or “ASOP”) was established in April 1999, and enables employees to subscribe to purchase shares of common stock on offering dates at six-month intervals, at a purchase price equal to the lesser of 85 percent of the fair market value of the common stock on the first or last day of the offering period. The ASOP meets the requirements of Section 423 of the Internal Revenue Code of 1986. The total number of shares subject to stock purchase rights granted in any fiscal year for the ASOP may not exceed 1,000,000 shares. During fiscal 2004, 2003 and 2002, stock purchase rights of 149,791 shares, 251,016 shares and 340,955 shares, respectively, were granted and exercised under the ASOP.

On March 9, 2000, the Company established a deferred stock program for non-employee directors. This program allows non-employee directors to elect to convert the retainer and meeting fee portion of their cash compensation into deferred stock units. Under this feature, non-employee directors make an irrevocable election prior to the Company’s annual shareholders’ meeting whereby they can elect to convert a percentage (0 percent to 100 percent in 25 percent increments) of their cash compensation for the following year to deferred stock units. The conversion of cash compensation to deferred stock units is based on the closing market price of the Company’s common shares on the date the cash compensation would have been payable if it were paid in cash. These deferred stock units are credited to an account of each non-employee director, although no stock is issued until the earlier of an elected distribution date, as selected by the non-employee director, or retirement. During fiscal 2004, 2003 and 2002, 864 deferred stock units, 1,139 deferred stock units and 8,958 deferred stock units, respectively were deferred under the deferred stock program.

Under the 1996 Stock Option Plan for Non-Employee Directors (the “Directors Stock Option Plan”), the Company had granted stock options to each non-employee director upon the completion of each year of service at prices not less than the fair market value of the common stock at the date of the grant. The options become exercisable to the extent of one-fourth of the optioned shares for each full year of continuous service following the date of grant and generally expire ten years after the date of the grant. The Directors Stock Option Plan is no longer used to grant stock options to non-employee directors of the Company.

In addition to the 1998 Plan, nonqualified stock options have been granted to certain officers and key employees under the 1990 Employee Stock Option and Stock Appreciation Rights Plan (the “1990 Plan”) at prices not less than fair market value of the common stock at the date of grant. Vesting and expiration periods are identical to options issued under the 1998 Plan. The 1990 Plan terminated on March 14, 2000. The termination of the plan does not affect outstanding stock options granted prior to the termination.

In addition to the 1998 Plan, restricted shares of the Company’s common stock were available for, and have been awarded to, executive officers, senior management and other key employees under the 1994 Executive Incentive Plan (the “Executive Plan”). The vesting period for the restricted shares granted under the Executive Plan are up to five years. All restrictions to such restricted shares terminate if the grantee remains in the continuous service of the Company throughout the vesting period. Unearned compensation resulting from the issuance of restricted shares is being amortized over the vesting periods, and the unamortized portion has been reflected as a reduction of shareholders’ equity. The Executive Plan terminated on

January 31, 2004. The termination of the plan does not affect restricted shares outstanding granted prior to the termination. At January 31, 2004, 154,535 restricted shares were outstanding under the Executive Plan.

The following table summarizes the restricted shares granted and weighted average grant price under the Executive Plan:

The following is a summary of the Company’s stock option activity for the 1998 Plan, the 1990 Plan and the Directors Stock Option Plan (collectively the “Plans”):

The following table summarizes the status of stock options outstanding and exercisable at January 31, 2004:

The Company sponsors the Jo-Ann Stores, Inc. Savings Plan 401(k) (the “Savings Plan”), which is a tax deferred savings plan whereby eligible employees may elect quarterly to contribute up to the lesser of 15 percent of annual compensation or the statutory maximum. The Company makes a 50 percent matching contribution in the form of the Company’s common stock, up to a maximum employee contribution of four percent of the employee’s annual compensation. Employer contributions of the Company’s common stock have been made through the issuance of shares out of treasury or by purchasing shares on the open market. The amount of the Company’s matching contributions during fiscal 2004, 2003 and 2002 were $1.0 million, $0.9 million and $1.0 million, respectively. Plan assets included 1,044,957 common shares with a fair market value of $24.6 million at January 31, 2004. Holders of the common shares are entitled to vote their respective shares.

The Company does not provide post-retirement health care benefits for its employees.

The Company is involved in various litigation matters in the ordinary course of its business. The Company is not currently involved in any litigation, which it expects, either individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.

On August 16, 2000, Sandy Lortz, a former employee of the Company, filed a purported class action complaint (the “Lortz Complaint”) against the Company, on behalf of the Company’s former and current California store management employees. The Lortz Complaint was filed in the Superior Court of California and alleged the Company violated certain California laws by erroneously treating its store management employees as “exempt” employees who are not entitled to overtime compensation. This case was consolidated with a similar class action complaint filed on behalf of Regina Salas, filed on October 24, 2000 in the Superior Court of California. A settlement in this case was reached and a pre-tax charge of $6.5 million was recorded in the fourth quarter of fiscal 2002. The settlement was paid in the first quarter of fiscal 2003.

With the exception of one superstore, all of the Company’s retail stores operate out of leased facilities. Traditional store leases generally have initial terms of five to ten years and renewal options for up to 20 years. Superstore leases generally have initial terms of 10-15 years and renewal options generally ranging from 5-20 years. The Company also leases certain computer and store equipment, generally under five-year or less lease terms.

The Company recognizes lease expense for step rent provisions, escalation clauses, capital improvement funding and other lease concessions using the straight-line method over the minimum lease term. The Company does not have lease arrangements that have minimum lease payments dependent on an existing index or rate, such as the consumer price index or the prime interest rate. Certain leases contain escalation clauses and provide for contingent rents based on a percent of sales in excess of defined minimums. In certain instances, the Company is required to pay its pro rata share of real estate taxes and common area maintenance expenses.

The following is a schedule of future minimum rental payments under non-cancelable operating leases. Future minimum rental payments are reduced by a total of $14.6 million of sublease income.

Rent expense excluding common area maintenance and real estate taxes was as follows:

The Company has restated all earnings per share amounts to reflect the effect of the share reclassification that was completed on November 4, 2003 (See Note 2 — Share Reclassification). Summarized below are the unaudited results of operations by quarter for fiscal 2004 and 2003:

Net income in the fourth quarter of fiscal 2004 was increased approximately $1.4 million, net-of-tax, due to certain fourth quarter adjustments, which related to revisions of estimates effecting prior quarters. Gross margin increased by $1.0 million, pre-tax, as a result of adjustments to inventory shrink and clearance reserves. Selling, general and administrative expenses decreased $1.3 million, pre-tax, primarily as a result of an adjustment to an incentive compensation accrual.

Net income in the fourth quarter of fiscal 2003 was increased $2.2 million, net-of-tax, due to certain year-end adjustments, a portion of which related to revisions of estimates effecting previous quarters. Gross margin increased by $4.3 million pre-tax as a result of adjustments to the shrink reserve, net of an increase in the closed store inventory reserves. Selling, general and administrative expenses increased $0.7 million as a result of adjustments made to the closed store reserves for asset impairment and non-cancelable lease obligations.

The Company’s 10 3/8 percent senior subordinated notes and credit facility are fully and unconditionally guaranteed, on a joint and several basis, by the wholly-owned subsidiaries of the Company. The senior subordinated notes are subordinated to the Company’s credit facility. The Company has restated shares outstanding, common stock and paid-in-capital balances to reflect the effect of the share reclassification that was completed on November 4, 2003 (See Note 2 — Share Reclassification). Summarized consolidating

financial information of the Company (excluding its subsidiaries) and the guarantor subsidiaries as of and for the years ended January 31, 2004 is as follows:



		January 31, 2004

Consolidating					Guarantor
Balance Sheets		Parent			Subsidiaries			Eliminations			Consolidated


		(Dollars in millions)
Assets
Current assets:
	Cash and cash equivalents	$	14.3		$	3.1		$	—		$	17.4
	Inventories		154.0			250.6			—			404.6
	Deferred income taxes		19.4			5.6			—			25.0
	Prepaid expenses and other current assets		15.1			8.4			—			23.5

Total current assets			202.8			267.7			—			470.5
Property, equipment and leasehold improvements, net			80.1			123.1			—			203.2
Goodwill, net			—			26.5			—			26.5
Other assets			6.1			1.4			—			7.5
Investment in subsidiaries			55.5			—			(55.5	)		—
Intercompany receivable			331.7			—			(331.7	)		—

Total assets		$	676.2		$	418.7		$	(387.2	)	$	707.7

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable	$	112.0		$	10.0		$	—		$	122.0
	Accrued expenses		78.9			(2.8	)		—			76.1

Total current liabilities			190.9			7.2			—			198.1
Long-term debt			113.7			—			—			113.7
Deferred income taxes			18.8			20.6			—			39.4
Other long-term liabilities			6.6			3.7			—			10.3
Intercompany payable			—			331.7			(331.7	)		—
Shareholders’ equity:
	Common stock		1.3			—			—			1.3
	Additional paid-in capital		131.5			—			—			131.5
	Unamortized restricted stock awards		(2.5	)		—			—			(2.5	)
	Retained earnings		258.8			55.5			(55.5	)		258.8
	Accumulated other comprehensive Loss		(1.6	)		—			—			(1.6	)

			387.5			55.5			(55.5	)		387.5
	Treasury stock, at cost		(41.3	)		—			—			(41.3	)

Total shareholders’ equity			346.2			55.5			(55.5	)		346.2

Total liabilities and shareholders’ equity		$	676.2		$	418.7		$	(387.2	)	$	707.7

[Continued from above table, first column(s) repeated]



		February 1, 2003

Consolidating					Guarantor
Balance Sheets		Parent			Subsidiaries			Eliminations			Consolidated


		(Dollars in millions)
Assets
Current assets:
	Cash and cash equivalents	$	60.2		$	3.0		$	—		$	63.2
	Inventories		132.9			230.2			—			363.1
	Deferred income taxes		21.5			6.7			—			28.2
	Prepaid expenses and other current assets		11.2			6.0			—			17.2

Total current assets			225.8			245.9			—			471.7
Property, equipment and leasehold improvements, net			65.8			124.5			—			190.3
Goodwill, net			—			26.5			—			26.5
Other assets			14.6			1.4			—			16.0
Investment in subsidiaries			22.6			—			(22.6	)		—
Intercompany receivable			371.4			—			(371.4	)		—

Total assets		$	700.2		$	398.3		$	(394.0	)	$	704.5

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable	$	130.3		$	(0.4	)	$	—		$	129.9
	Accrued expenses		94.7			(18.8	)		—			75.9

Total current liabilities			225.0			(19.2	)		—			205.8
Long-term debt			162.9			—			—			162.9
Deferred income taxes			17.6			19.6			—			37.2
Other long-term liabilities			5.3			3.9			—			9.2
Intercompany payable			—			371.4			(371.4	)		—
Shareholders’ equity:
	Common stock		1.3			—			—			1.3
	Additional paid-in capital		113.7			—			—			113.7
	Unamortized restricted stock awards		(0.4	)		—			—			(0.4	)
	Retained earnings		217.8			22.6			(22.6	)		217.8
	Accumulated other comprehensive Loss		(2.6	)		—			—			(2.6	)

			329.8			22.6			(22.6	)		329.8
	Treasury stock, at cost		(40.4	)		—			—			(40.4	)

Total shareholders’ equity			289.4			22.6			(22.6	)		289.4

Total liabilities and shareholders’ equity		$	700.2		$	398.3		$	(394.0	)	$	704.5

Report of Former Independent Public Accountants on the Financial Statement Schedule

This is a copy of the report on the financial schedule previously issued by Arthur Andersen LLP in connection with the Company’s filing on Form 10-K for the fiscal year-ended February 2, 2002. This report on the financial statement schedule has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K nor has Arthur Andersen LLP provided a consent to the inclusion of its report on the financial statement schedule included on page 67 in this Form 10-K. For further discussion, see Exhibit 23.1.

We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Jo-Ann Stores, Inc. and Subsidiaries included in this Form 10-K, and have issued our report thereon dated March 7, 2002. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule on page 57 is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal year that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Information required by this Item 10 as to the Directors of the Registrant is incorporated herein by reference to the information set forth under the caption “Nominees to and Current Members of the Board of Directors” in the Registrant’s definitive proxy statement for its 2004 Annual Meeting of Shareholders to be held on June 10, 2004 (the “Proxy Statement”), which is expected to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the Company’s fiscal year.

The information regarding the Audit Committee of our Board of Directors and the information regarding “audit committee financial experts” are set forth under the caption entitled “Meetings and Committees of the Board of Directors — Audit Committee” in our Proxy Statement, which is incorporated herein by reference.

Information required by this Item 10 as to the Executive Officers of the Registrant is included under Item 4 of Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is incorporated herein by reference to the information set forth in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance”.

Information required by this Item 10 as to Involvement in Certain Legal Proceedings is included under Item 3, Legal Proceedings contained in this document.

The Company has adopted a Code of Business Conduct and Ethics (the “Code”), applicable to the Company’s directors, officers (including the Company’s principal executive officer and principal financial officer) and employees, which has been filed as an exhibit to this Form 10-K. The Company intends to post the Code and any amendments to the Code on its website. In addition, any waivers of the Code for the directors or executive officers of the Company will be disclosed in a report on Form 8-K.

The information required by this Item 11 is incorporated herein by reference to the information set forth under the captions “Compensation of Directors” and “Executive Compensation” in the Proxy Statement.

The information required by this Item 12 is incorporated herein by reference to the information set forth under the caption “Principal Shareholders” in the Proxy Statement.


⁽¹⁾	On February 9, 2001, the Company registered 319,000 common shares to be issued in connection with options to purchase common shares pursuant to award agreements with certain employees. The options were granted under the rules provided for in the 1998 Incentive Compensation Plan. As of January 31, 2004, 164,500 of the 319,000 securities registered remain to be issued.

Ira Gumberg, one of our Directors, is President and Chief Executive Officer and a principal shareholder of J.J. Gumberg Co., which manages numerous shopping centers. Twelve of these shopping centers contain stores of our Company. Two of the leases were entered into after Mr. Gumberg became a Director of our Company, and we believe such leases are on terms no less favorable to us than could have been obtained from an unrelated party. The aggregate rent and related occupancy charges paid during fiscal 2004, 2003 and 2002 on these stores amounted to $1.6 million, $1.4 million and $1.3 million, respectively.

Betty Rosskamm, Alma Zimmerman and the Company are parties to an agreement, dated October 30, 2003, relating to their Jo-Ann Stores Common Shares. Under this agreement, Betty Rosskamm and her lineal descendants and permitted holders (the “Rosskamms”) and Alma Zimmerman and her lineal descendants and permitted holders (the “Zimmermans”) may each sell up to 400,000 Common Shares in any calendar year and may not sell more than 200,000 of those shares in any 180-day period. If either the Rosskamms or Zimmermans plan to sell a number of their respective Common Shares in excess of the number permitted under the agreement, they must first offer to sell those shares to the other family party and to the Company. Each of the Rosskamms and the Zimmermans are permitted to sell an unlimited number of shares to each other free of the Company’s right of first refusal and, with the permission of the other family party to the agreement, to the Company.

The information required by this Item 14 is incorporated herein by reference to the information set forth under the caption “Principal Accounting Firm Fees” in the Proxy Statement.

The consolidated financial statements and the related financial statement schedule filed as part of this Form 10-K are located as set forth in the index on page 33 of this report.

The Company furnished a Current Report on Form 8-K dated November 4, 2003 to report the issuance of a press release announcing shareholder approval of the reclassification of its Class A and Class B Common Shares into a single class of stock. The press release also announced that as a result of the share reclassification, effective November 5, 2003, the Company began trading under the new ticker symbol “JAS” on the New York Stock Exchange.

The Company furnished a Current Report on Form 8-K dated November 6, 2003 to report the issuance of a press release announcing its net sales for the four weeks, thirteen weeks and year-to-date periods ended November 1, 2003.

The Company furnished a Current Report on Form 8-K dated November 17, 2003 to report the issuance of a press release announcing its earnings for the third quarter and year-to-date periods ended November 1, 2003.

The Company furnished a Current Report on Form 8-K dated November 24, 2003 to report the issuance of a press release announcing the election of a new Board member.

The Company furnished a Current Report on Form 8-K dated December 4, 2003 to report the issuance of a press release announcing its net sales for the four weeks and year-to-date period ended November 29, 2003.

The Company furnished a Current Report on Form 8-K dated January 8, 2004 to report the issuance of a press release announcing its net sales for the five weeks and year-to-date period ended January 3, 2004.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

The undersigned, by signing his name hereto, does hereby sign this Form 10-K Annual Report on behalf of the above-named officers and directors of Jo-Ann Stores, Inc., pursuant to powers of attorney executed on behalf of each of such officers and directors.

73 EX-4.1 3 l06203aexv4w1.txt SECOND AMENDED AND RESTATED RIGHTS AGREEMENT Exhibit 4.1 ================================================================================ JO-ANN STORES, INC. AND NATIONAL CITY BANK, NATIONAL ASSOCIATION, AS RIGHTS AGENT SECOND AMENDED AND RESTATED RIGHTS AGREEMENT DATED AS OF NOVEMBER 4, 2003 ================================================================================ TABLE OF CONTENTS

i Section 26. Successors................................................................................ 23 Section 27. Determination and Actions by the Board of Directors, etc.................................. 23 Section 28. Benefits of this Agreement................................................................ 24 Section 29. Severability.............................................................................. 24 Section 30. Governing Law............................................................................. 24 Section 31. Counterparts.............................................................................. 24 Section 32. Descriptive Headings...................................................................... 24 Section 33. Effective Date of Agreement............................................................... 24 Index of Defined Terms................................................................................. 26 EXHIBIT A - FORM OF RIGHT CERTIFICATE................................................................ A-1 EXHIBIT B - SUMMARY OF RIGHTS TO PURCHASE COMMON SHARES.............................................. B-1

ii SECOND AMENDED AND RESTATED RIGHTS AGREEMENT This SECOND AMENDED AND RESTATED RIGHTS AGREEMENT, dated as of November 4, 2003 (this "Agreement"), is made and entered into by and between Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), and National City Bank, National Association, as Rights Agent (the "Rights Agent"). This Agreement amends and restates the Amended and Restated Rights Agreement, dated as of October 31, 2000 (the "Prior Agreement"), between the Company and the Rights Agent. Under the Prior Agreement, one right (a "Right") was distributed with respect to each Class A Common Share and each Class B Common Share (as those terms are hereinafter defined), and the Board of Directors of the Company authorized the issuance of one Right in respect of each Class A Common Share and each Class B Common Share issued prior to the earlier of the Shares Acquisition Date or the Expiration Date (as such terms are hereinafter defined), including in each case shares that are treasury shares and subsequently become outstanding. Under the Prior Agreement, each Right represented the right to purchase one Class A Common Share. On the effective date of this Agreement, (i) each Class A Common Share, which had one vote per share, is being reclassified into 1.15 Class B Common Shares and (ii) each Class B Common Share, which had no voting rights except as required by law, is being amended to have one vote per share and is being redesignated as a "Common Share" (the "Reclassification"). Accordingly, this Agreement provides that, upon completion of the Reclassification, each of the Rights outstanding in respect of the Class A Common Shares will become 1.15 Rights, and each of the Rights outstanding in respect of the Class B Common Shares will remain outstanding and one Right. As a result, one Right will be outstanding in respect of each Common Share outstanding immediately after completion of the Reclassification. No fractional Rights will be issued in the reclassification. In addition, one Right will be issued in respect of each Common Share issued after the completion of the Reclassification and prior to the earlier of the Shares Acquisition Date or the Expiration Date, including Common Shares that are treasury shares and subsequently become outstanding. Each Right will represent the right to purchase one Common Share. The Purchase Price (as defined below) will be changed from $60.00 to $52.17, and the Exercise Price (as defined below) will be changed from $.50 to $.43. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" means any Person (as such term is hereinafter defined) that, together with all Affiliates and Associates (as such terms are hereinafter defined) of the Person, is the Beneficial Owner (as such term is hereinafter defined) of a number of Common Shares that equals or exceeds 15% of the number of Common Shares then outstanding, but will not include the Company, any subsidiary of the Company, any employee benefit plan or 1 employee stock ownership plan of the Company or of any subsidiary of the Company or any person organized, appointed or established by the Company or any subsidiary of the Company for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person will become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company that, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by the Person to 15% or more of the Common Shares then outstanding; except that, if a Person becomes the Beneficial Owner of 15% or more of the Common Shares then outstanding by reason of share purchases by the Company and, after such share purchases by the Company, becomes the Beneficial Owner of any additional Common Shares, then the Person will be deemed to be an "Acquiring Person". In addition, if the Board of Directors of the Company determines in good faith that a Person that would otherwise be an "Acquiring Person" has become the Beneficial Owner of 15% or more of the Common Shares inadvertently, and the Person divests as promptly as practicable a sufficient number of Common Shares so that the Person would no longer be an "Acquiring Person", then the Person will not be deemed to be an "Acquiring Person" for any purposes of this Agreement. (b) "Affiliate" and "Associate" have the meanings given to them in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date hereof. (c) "Associated Acquiring Person" means (i) any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to any Person who holds an equity interest in such Acquiring Person or with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer that the Board of Directors of the Company has determined is part of a plan, arrangement or understanding that has, as a primary purpose or effect, the avoidance of Section 7(e). (d) A Person will be deemed to be the "Beneficial Owner" of and will be deemed to "beneficially own" any securities: (i) that the Person, or any of the Person's Affiliates or Associates, beneficially owns, directly or indirectly; (ii) that the Person or any of the Person's Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; except that, a Person will not be deemed to be the "Beneficial Owner" of or to "beneficially own" (1) securities tendered pursuant to a tender offer made by the Person or any of the Person's Affiliates 2 or Associates until such tendered securities are accepted for purchase, or (2) securities issuable upon exercise of these Rights; (iii) that the Person or any of the Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of, pursuant to any agreement, arrangement or understanding (whether or not in writing); except that, a Person will not be deemed to be the Beneficial Owner of or to "beneficially own" any security under this subparagraph (iii) if the agreement, arrangement or understanding to vote such security (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act and (B) is not then reportable by the Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iv) that are beneficially owned, directly or indirectly, by any other Person with which the Person or any of the Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in subparagraph (iii) of this paragraph (c)) or disposing of any securities of the Company. Notwithstanding the foregoing, (x) a Person will not be deemed to be the Beneficial Owner of, or to "beneficially own," any security if beneficial ownership arises solely as a result of the Person's status as a "clearing agency," as defined in Section 3(a)(23) of the Exchange Act, (y) a Person engaged in business as an underwriter of securities will not be deemed to be the Beneficial Owner of, or to "beneficially own," any securities acquired through the Person's participation in good faith in an underwriting syndicate pursuant to an agreement to which the Company is a party until expiration of 40 calendar days after the date on which the securities are acquired, and (z) for purposes of determining the amount of Common Shares beneficially owned by any of the Family Members, (A) the Common Shares beneficially owned by any one or more of the Family Members will not be deemed to be beneficially owned by any other Family member, whether individually or as part of a group, and (B) the Common Shares beneficially owned by any one or more of the Family Members that, after the date of this Agreement, are transferred (whether the transfer is voluntarily or by operation of law and whether the transfer is of a direct or indirect interest in the shares) to any other Family Member will not be deemed to be beneficially owned by the other Family Member. (e) "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in the State of Ohio are authorized or obligated by law or executive order to close. (f) "Class A Common Shares" means the Class A Common Shares, without par value, of the Company that were outstanding immediately prior to the Reclassification. (g) "Class B Common Shares" means the Class B Common Shares, without par value, of the Company that were outstanding immediately prior to the Reclassification. 3 (h) "Close of business" on any given date means 5:00 P.M., Cleveland time, on such date; except that, if such date is not a Business Day, it will mean 5:00 P.M., Cleveland time, on the next succeeding Business Day. (i) "Common Shares" means the Common Shares, without par value, of the Company that are outstanding immediately after the Reclassification. (j) "Current market price" is defined in Section 11(d). (k) "Exchange Act" is defined in Section 10. (l) "Exercise Price" means the exercise price per share set forth in Section 11(a)(ii). (m) "Expiration Date" is defined in Section 7(a). (n) "Family Members" mean Betty Rosskamm, Alma Zimmerman, Steve Reich, Margrit Reich, their descendants, their spouses, and the spouses of their descendants, the executors, administrators, and custodians of any of the foregoing, and any trust for the benefit of any of the foregoing. (o) "Issuance" includes the issuance of authorized but unissued shares and the transfer of treasury shares. In the event the Common Shares are subdivided into a greater number of shares, the excess of the number of shares into which the Common Shares are subdivided over the number of shares prior to the subdivision will be deemed to be "issued." (p) "NASDAQ" is defined in Section 11(d). (q) "Person" means any individual, firm, corporation or other entity. (r) "Prior Agreement" is defined in the recitals to this Agreement. (s) "Purchase Price" means the purchase price per share set forth in Section 7(b). (t) "Reclassification" is defined in the recitals to this Agreement. (u) "Redemption Price" is defined in Section 22(a). (v) "SEC" means the Securities and Exchange Commission. (w) "Securities Act" is defined in Section 9(c). (x) "Shares Acquisition Date" means the first date of public announcement by the Company or an Acquiring Person (by press release, filing made with the SEC or otherwise) that an Acquiring Person has become such. 4 (y) "Subsidiary" means any corporation or other entity of which a majority of the voting power of the voting equity securities or other equity interests is owned, directly or indirectly, by the Company. (z) "Triggering Event" is defined in Section 11(a)(ii). Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. Any actions that may be taken by the Rights Agent pursuant to the terms of this Agreement may be taken by any such Co-Rights Agent. Section 3. Issue of Right Certificates. (a) Until the Shares Acquisition Date, (i) the Rights will be evidenced (subject to the provisions of Section 3(b)) by the certificates for the Common Shares registered in the names of the holders of the Common Shares (which certificates for the Common Shares will also be deemed to be Right Certificates) and not by separate Right Certificates, and (ii) the right to receive Right Certificates will be transferable only in connection with the transfer of the Common Shares. As soon as practicable after receipt of written notice from the Company that the Shares Acquisition Date has occurred, the Rights Agent will send, by first-class, insured, postage prepaid mail, at the expense of the Company, to each record holder of the Common Shares as of the close of business on the Shares Acquisition Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit A hereto, evidencing one Right for each Common Share held of record as of the close of business on the Shares Acquisition Date. As of the close of business on the Shares Acquisition Date, the Rights will be evidenced solely by such Right Certificates. (b) Rights will be issued in respect of all Common Shares issued (including but not limited to Common Shares that are treasury shares and subsequently become outstanding) or surrendered for transfer or exchange after the completion of the Reclassification, but prior to the earlier of the Shares Acquisition Date or the Expiration Date. Certificates representing such Common Shares will have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a rights agreement between Jo-Ann Stores, Inc., and a rights agent, as such rights agreement may be amended from time to time, a copy of which is on file at the principal executive offices of Jo-Ann Stores, Inc. Under certain circumstances, as set forth in the rights agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Jo-Ann Stores, Inc., will mail to the holder of this certificate a copy of the rights agreement (as in effect on the date of mailing) without charge promptly after receipt of a written request therefor. Under certain circumstances, Rights that are or were beneficially owned by Acquiring Persons or their Affiliates or Associates 5 (as such terms are defined in the rights agreement) and any subsequent holder of such Rights may become null and void. Until the Shares Acquisition Date, the Rights associated with the Common Shares represented by such certificates will be evidenced by such certificates alone, and the surrender for transfer of any of such certificates will also constitute the surrender for transfer of the Rights associated with the Common Shares represented by such certificate. Section 4. Form of Right Certificates. (a) The Right Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof) will be substantially the same as Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law, with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed or of any association on which the Rights may from time to time be authorized for quotation, or to conform to usage. Subject to the provisions of Section 21, the Right Certificates, whenever issued, will entitle the holders thereof to purchase such number of Common Shares (or, following a Triggering Event, Common Shares, other securities, cash or other assets, as the case may be) as will be set forth therein at the Purchase Price (or, upon the occurrence of a Triggering Event, at the Exercise Price), but the number of such shares, the Purchase Price and the Exercise Price will be subject to adjustment as provided herein. (b) Notwithstanding any other provision of this Agreement, any Right Certificate issued pursuant to Section 3 or Section 21 that represents Rights beneficially owned by an Acquiring Person or an Associated Acquiring Person, any Right Certificate issued at any time to any nominee of an Acquiring Person or an Associated Acquiring Person, and any Right Certificate issued pursuant to Section 6 or Section 11 upon transfer, exchange, replacement or adjustment of any Right Certificate referred to in this sentence, will contain the following legend: The Rights represented by this Right Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the rights agreement between Jo-Ann Stores, Inc., and a transfer agent, as amended to date). Accordingly, this Right Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the rights agreement. Section 5. Countersignature and Registration. The Right Certificates will be executed on behalf of the Company by its Chairman of the Board, President or any Vice President, either manually or by facsimile signature, and will be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates will be countersigned manually or by facsimile by the Rights Agent and will not be valid for any purpose unless so countersigned. In case any officer of the Company who has signed any of the Right Certificates ceases to hold such office of the Company before 6 countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates may nevertheless be countersigned by the Rights Agent, issued and delivered with the same force and effect as though the person who signed such Right Certificates had not ceased to hold such office of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, is a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any the Person did not hold such office. Following the Shares Acquisition Date, the Rights Agent will keep or cause to be kept, at one of its offices in Cleveland, Ohio, books for registration and transfer of the Right Certificates. Such books will show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a) Subject to the provisions of Section 4(b), Section 7(e) and Section 13, at any time after the close of business on the Shares Acquisition Date, and at or prior to the close of business on the Expiration Date, any Right Certificate or Certificates may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of Common Shares (or, following a Triggering Event, a like number or amount of Common Shares, other securities, cash or other assets, as the case may be) as the Right Certificate or Right Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates will make such request in writing delivered to the Rights Agent, and will surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office of the Rights Agent in Cleveland, Ohio for such purpose. Neither the Rights Agent nor the Company will be obligated to take any action with respect to the transfer of any such surrendered Right Certificate until the registered holder has completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and has provided such additional evidence of the identity of the Beneficial Owner or former Beneficial Owner, or Affiliates or Associates thereof, as the Company may reasonably request. Thereupon the Rights Agent will, subject to Section 4(b), Section 7(e) and Section 13, countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of the loss, theft or destruction of a Right Certificate, of indemnity or security reasonably satisfactory to them and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and, in case of the mutilation of a Right Certificate, upon surrender to the Rights Agent and cancellation of the mutilated Right Certificate, the Company will make 7 and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights; Null and Void Rights. Subject to Section 7(e), the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Shares Acquisition Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at its principal office in Cleveland, Ohio, together with payment of the aggregate Purchase Price with respect to the total number of Common Shares (or the aggregate Exercise Price with respect to the total number of Common Shares or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercised, at or prior to the close of business on October 31, 2010 (the "Expiration Date"). (b) Each Right will, as of the date of this Amended and Restated Rights Agreement, represent the right to purchase one Common Share, subject to adjustment as provided in Section 11. The Purchase Price for each Common Share pursuant to the exercise of a Right will, as of the date of this Amended and Restated Rights Agreement, be $52.17, subject to further adjustment from time to time as provided in Section 11, and will be payable in lawful money of the United States of America in accordance with Section 7(c). (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment of the Purchase Price for the Common Shares (or the Exercise Price for the Common Shares, other securities, cash or assets, as the case may be) to be purchased and an amount equal to any applicable transfer tax in cash, or by certified check or bank draft payable to the order of the Company, the Rights Agent will, subject to Section 19(k), promptly (i) requisition from any transfer agent of the Common Shares certificates for the total number of Common Shares to be purchased, and the Company hereby irrevocably authorizes its transfer agent to comply with all such requisitions, (ii) if the Company has elected to deposit the total number of Common Shares issuable upon exercise of the Rights with a depositary agent, requisition from the depositary agent depositary receipts representing such number of Common Shares as are to be purchased (in which case certificates for the Common Shares represented by such receipts will be deposited by the transfer agent with the depositary agent), and the Company will direct the depositary agent to comply with all such requisitions, (iii) when applicable, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 13, (iv) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder, and (v) when applicable, after receipt promptly deliver such cash to or upon the order of the registered holder of such Right Certificate. In the event that the Company is obligated to issue securities, pay cash or distribute assets pursuant to Section 11(a)(iii) or Section 13, the Company will make all arrangements necessary so that such securities, cash, and assets are available for issuance, payment, or distribution by the Rights Agent, as and when appropriate. (d) In case the registered holder of any Right Certificate exercises less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights 8 remaining unexercised will be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 13. (e) Notwithstanding anything in this Agreement to the contrary, any Rights that are or were at any time beneficially owned by an Acquiring Person or an Associated Acquiring Person, will become null and void upon the occurrence of a Triggering Event and no holder of such Rights will have any right with respect to such Rights under any provision of this Agreement from and after the occurrence of the Triggering Event. The Company will use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) are complied with, but will have no liability to any holder of Right Certificates or other Person as a result of its failure properly to make any determinations with respect to an Acquiring Person, an Associated Acquiring Person or their transferees or nominees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company will be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder has (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company may reasonably request. Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange will, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form or, if surrendered to the Rights Agent, will be cancelled by it, and no Right Certificates will be issued in lieu thereof except as expressly permitted by the provisions of this Agreement. The Company will deliver to the Rights Agent for cancellation and retirement, and the Rights Agent will cancel and retire, any Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent will deliver all cancelled Right Certificates to the Company or will, at the written request of the Company, destroy such cancelled Right Certificates and, in such case, will deliver a certificate of destruction thereof to the Company. Section 9. Reservation and Availability of Common Shares. (a) The Company will cause to be reserved and kept available out of its authorized and unissued Common Shares or any authorized and issued Common Shares held in its treasury, the number of Common Shares that will be sufficient to permit the exercise in full of all outstanding Rights. (b) The Company will, as soon as practicable following a Triggering Event, cause all Common Shares (or other securities, as the case may be) reserved for issuance upon exercise of the Rights to be, upon official notice of issuance, listed on the stock exchange or market on which the Common Shares are then listed for trading. 9 (c) The Company will, as soon as practicable following the first occurrence of a Triggering Event, (i) prepare and file a registration statement under the Securities Act of 1933 (the "Securities Act") with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, (ii) use its reasonable best efforts to cause such registration statement to become effective as soon as practicable after such filing, and (iii) use its reasonable best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the date of the expiration of the Rights. The Company will also take such actions as may be appropriate under the blue sky laws of the various states in connection with the issuance of the Rights and the securities purchasable upon exercise of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days, the exercisability of the Rights in order to prepare and file such registration statement. Upon any such suspension, the Company will issue a public announcement and notice to the Rights Agent stating that the exercisability of the Rights has been temporarily suspended, and the Company will issue a public announcement and notice to the Rights Agent at such time as the suspension is no longer in effect. Notwithstanding any provision of this Agreement to the contrary, the Rights will not be exercisable in any jurisdiction in which any requisite registration or qualification will not have been obtained. (d) The Company will take all such action as may be necessary to ensure that all Common Shares (or other securities, as the case may be) delivered upon exercise of Rights will, at the time of delivery of the certificates therefor (subject to payment of the Purchase Price or the Exercise Price, as the case may be), be duly and validly authorized and issued, fully paid and nonassessable, freely tradeable, free and clear of any liens, encumbrances or other adverse claims and not subject to any call or first refusal right. (e) The Company will pay when due and payable all federal and state transfer taxes and charges that may be payable in respect of the issuance or delivery of the Right Certificates or of any Common Shares (or other securities, as the case may be) upon the exercise of Rights. The Company will not, however, be required to (a) pay any transfer tax that may be payable in respect of any transfer involved in the transfer or delivery of Right Certificates or the issuance or delivery of certificates for the Common Shares (or other securities, as the case may be) in a name other than that of the registered holder of the Right Certificate evidencing the Rights surrendered for exercise or (b) issue or deliver any certificates for a number of Common Shares (or other securities, as the case may be) upon the exercise of any Rights until any such tax has been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. Common Share Certificate Date. Each person in whose name any certificate for Common Shares (or other securities, as the case may be) is issued upon the exercise of Rights will for all purposes be deemed to have become the holder of record of such Common Shares (or other securities, as the case may be) represented thereby on, and such certificate will be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (or the Exercise Price, as the case may be) and any applicable transfer taxes was made; except that, if the date of such surrender and payment is a date upon which the Common Share (or other security, as the case may be) transfer books of the Company are closed, the Person will be deemed to have become the record holder 10 thereof on, and such certificate will be dated, the next succeeding Business Day on which the Common Shares (or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate will not be entitled to any rights of a shareholder of the Company with respect to shares for which the Rights are exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and will not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. Adjustment of Purchase Price, Exercise Price, Number and Type of Shares or Number of Rights. The Purchase Price and the Exercise Price, the number of Common Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company at any time after the date of this Agreement (A) declares a dividend on the Common Shares payable in Common Shares, (B) subdivides the outstanding Common Shares, (C) combines the outstanding Common Shares into a smaller number of shares, or (D) issues any shares of its capital stock in a reclassification of the Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e), the Purchase Price and the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of Common Shares or shares of capital stock, as the case may be, issuable on such date, will be proportionately adjusted so that the holder of any Right exercised after such time will be entitled to receive the aggregate number and kind of Common Shares or shares of capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Common Share transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs that would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) will be in addition to, and will be made prior to any adjustment required pursuant to Section 11(a)(ii). (ii) In the event any Person becomes an Acquiring Person (a "Triggering Event"), each holder of a Right (except as provided in Section 7(e)) will thereafter have the right to receive, upon exercise of the Right in accordance with the terms of this Agreement, one Common Share for an Exercise Price of $.43 per share; the number of such Common Shares and the Exercise Price will be subject to adjustment as provided in this Section 11. (iii) In the event that there are not enough Common Shares authorized but unissued or held as treasury shares to permit the exercise in full of the Rights in accordance with paragraph (ii) above, the Company will take all such actions as may be necessary to authorize a sufficient number of additional Common Shares to permit the 11 exercise in full of the Rights and will refrain from paying dividends or making any other distributions on the Common Shares until such additional Common Shares have been authorized and made available to the holders of the Rights for issuance upon exercise of their Rights. (b) In case the Company fixes a record date for the issuance of rights or warrants to all holders of Common Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Common Shares at a price per Common Share (or having a conversion price per share, if a security convertible into Common Shares) less than the current market price (as defined in Section 11(d)) per Common Share on such record date, the Purchase Price and the Exercise Price to be in effect after such record date will be determined by multiplying the Purchase Price and the Exercise Price in effect immediately prior to such record date by a fraction, of which the numerator is the number of Common Shares outstanding on such record date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and of which the denominator is the number of Common Shares outstanding on such record date plus the number of additional Common Shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price is paid in a consideration part or all of which is in a form other than cash, the value of such consideration will be as determined in good faith by the Board of Directors of the Company, whose determination will be described in a statement filed with the Rights Agent. Common Shares owned by or held for the account of the Company will not be deemed outstanding for the purpose of any such computation. Such adjustment will be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Purchase Price and the Exercise Price will be adjusted to be the Purchase Price and the Exercise Price that would then be in effect if such record date had not been fixed. (c) In case the Company fixes a record date for the making of a distribution to all holders of Common Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular periodic cash dividend or a dividend payable in Common Shares, but including any dividend payable in stock other than Common Shares) or subscription rights or warrants (excluding those referred to in Section 11(b)), the Purchase Price and the Exercise Price to be in effect after such record date will be determined by multiplying the Purchase Price or the Exercise Price, as the case may be, in effect immediately prior to such record date by a fraction, of which the numerator is the current market price (as defined in Section 11(d)) per Common Share on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination will be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Common Share and of which the denominator is the current market price of one Common Share. Such adjustments will be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price and the Exercise Price will be 12 adjusted to be the Purchase Price and the Exercise Price that would then be in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, the "current market price" or "value" per share of the Common Shares on any date of determination will be the average of the daily closing prices per share of such Common Shares for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; except that, in the event that the "current market price" or "value" per share of the Common Shares is determined during the period following the announcement by the issuer of such Common Shares of (A) a dividend or distribution on such Common Shares payable in such Common Shares or securities convertible into such Common Shares or (B) any subdivision, combination or reclassification of such Common Shares and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current market price" or "value" will be appropriately adjusted to take into account ex-dividend trading. The closing price for each day will be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange (the "NYSE") or, if the Common Shares are not listed or admitted to trading on the NYSE, as reported in the NASDAQ Stock Market ("NASDAQ") or, if the Common Shares are not listed or admitted to trading on the NYSE or NASDAQ, as reported in the principal consolidated transaction reporting system on which the Common Shares are listed or admitted to trading or, if the Common Shares are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system, the average of the high bid and low asked prices in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. or such other organization then reporting transactions in the over-the-counter market or, if on any such date the Common Shares are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system or other organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Shares selected by the Board of Directors of the Company. The term "Trading Day" will mean a day on which the principal national securities exchange or market on which Common Shares are listed or admitted to trading is open for the transaction of business or, if the Common Shares are not listed or admitted to trading on any national securities exchange or market, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of Ohio are not authorized or obligated by law or executive order to close. If the Common Shares are not publicly held or not so listed or traded, "current market price" or "value" per share will mean the value per share as determined in good faith by an independent investment banking firm selected by the Board of Directors, whose determination will be described in a statement filed with the Rights Agent and will be conclusive for all purposes. (e) No adjustment in the Purchase Price or the Exercise Price will be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments that by reason of this Section 11(e) are not required to be made will be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 will be made to the nearest cent or to the nearest ten- 13 thousandth of a Common Share, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 will be made no later than the earlier of (i) three years from the date of the transaction that mandates such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11(a), the holder of any Right exercised after such adjustment becomes entitled to receive upon exercise of such Right any shares of capital stock of the Company other than Common Shares, thereafter the number of, and the Purchase Price and the Exercise Price for, such other shares will be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in Section 11(a) through (m)) inclusive, and the provisions of Section 7, Section 9, Section 10 and Section 13 with respect to the Common Shares will apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price or the Exercise Price hereunder will evidence the right to purchase, at the adjusted Purchase Price or the adjusted Exercise Price, as the case may be, the number of Common Shares (or other securities, as the case may be) purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company has exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price or the Exercise Price as a result of the calculations made in Section 11(b) and Section 11(c), each Right outstanding immediately prior to the making of such adjustment will thereafter evidence the right to purchase, at the adjusted Purchase Price or the adjusted Exercise Price, as the case may be, that number of Common Shares (calculated to the nearest ten-thousandth) obtained by (i) multiplying (x) the number of Common Shares covered by a Right immediately prior to this adjustment by (y) the Purchase Price or the Exercise Price, as the case may be, in effect immediately prior to such adjustment and (ii) dividing the product so obtained by the Purchase Price or the Exercise Price, as the case may be, in effect immediately after such adjustment. (i) The Company may elect on or after the date of any adjustment of the Purchase Price or the Exercise Price to adjust the number of Rights, in substitution for any adjustment in the number of Common Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights will be exercisable for the number of Common Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights will become that number of Rights (calculated to the nearest ten-thousandth), obtained by dividing the Purchase Price or the Exercise Price, as the case may be, in effect immediately prior to such adjustment by the Purchase Price or the Exercise Price, as the case may be, in effect immediately after such adjustment. The Company will make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment to be made. This record date may be the date on which the Purchase Price or the Exercise Price, as the case may be, is adjusted or any day thereafter but, if Right Certificates have been issued, will be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company will, as promptly as practicable, cause to be distributed to holders of Right Certificates on such record date Right 14 Certificates evidencing, subject to Section 13, the additional Rights to which such holders will be entitled as a result of such adjustment or, at the option of the Company, will cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof if required by the Company, new Right Certificates evidencing all the Rights to which such holders will be entitled after such adjustment. Right Certificates so to be distributed will be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price or the adjusted Exercise Price) and will be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Notwithstanding any adjustment or change in the Purchase Price, the Exercise Price or the number of Common Shares issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price, the Exercise Price and the number of Common Shares that were expressed in the initial Right Certificates. (k) Before taking any action that would cause an adjustment reducing the Purchase Price or the Exercise Price below the stated capital, if any, of a Common Share issuable upon exercise of the Rights, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Shares at such adjusted Purchase Price and or at such adjusted Exercise Price, as the case may be. (l) In any case in which this Section 11(i) requires that an adjustment in the Purchase Price or the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date the number of Common Shares issuable upon such exercise over and above the number of Common Shares issuable upon such exercise on the basis of the Purchase Price or the Exercise Price in effect prior to such adjustment; provided, however, that the Company will deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Common Shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11(i) to the contrary notwithstanding, the Company will be entitled to make such reduction in the Purchase Price or the Exercise Price, in addition to those adjustments expressly required by this Section 11(i), as and to the extent that it in its sole discretion determines to be advisable in order that any consolidation or subdivision of Common Shares, issuance wholly for cash of any Common Shares at less than the current market price, issuance wholly for cash of securities that by their terms are convertible into or exchangeable for Common Shares, stock dividends or issuance of rights, options or warrants referred to in this Section 11(i), hereafter made by the Company to holders of its Common Shares will not be taxable to such holders. Section 12. Certificates of Adjusted Purchase Price, Exercise Price or Number of Shares. Whenever an adjustment is made as provided in Section 11(i), the Company will (a) promptly prepare a certificate setting forth such adjustment, and a brief statement of the facts 15 accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Common Shares a copy of such certificate, and (c) mail a brief summary thereof to each holder of a Right Certificate (or, if prior to the Shares Acquisition Date, to each holder of a certificate representing Common Shares) in accordance with Section 24. The Rights Agent will be fully protected in relying on any such certificate and on any adjustment therein contained, will not be obligated or responsible for calculating any adjustment and will not be deemed to have knowledge of such adjustment unless and until it has received such certificate. Section 13. Fractional Rights and Fractional Shares. (a) The Company will not be required to issue fractions of Rights or to distribute Right Certificates that evidence fractional Rights. In lieu of such fractional Rights, the Company will pay to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Right, except that, no consideration will be paid for the fractional Rights that, but for this Section 13(a), would have been issued as a result of the Reclassification. For the purposes of this Section 13(a), the current market value of a whole Right will be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for each day will be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange (the "NYSE") or, if the Rights are not listed or admitted to trading on the NYSE, as reported in NASDAQ or, if the Rights are not listed or admitted to trading on the NYSE or NASDAQ, as reported in the principal consolidated transaction reporting system on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system, the average of the high bid and low asked prices in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. or such other organization then reporting transactions in the over-the-counter market or, if on any such date the Rights are not listed or admitted to trading on the NYSE or NASDAQ or reported by any consolidated transaction reporting system or other organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. (b) The Company will not be required to issue fractions of Common Shares upon exercise of the Rights or to distribute certificates that evidence fractional shares. In lieu of fractional Common Shares, the Company may pay to the registered holders of Right Certificates at the time such Right Certificates are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Common Share. For purposes of this Section 13(b), the current market value of one Common Share will be the closing price of a Common Share (as determined pursuant to Section 11(d)) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right. 16 Section 14. Rights of Action. All rights of action in respect of this Agreement are vested in the respective registered holders of the Right Certificates (and, prior to the Shares Acquisition Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Shares Acquisition Date, of any Common Share), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Shares Acquisition Date, of the Common Shares), may, in the holder's own behalf and for the holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, the holder's right to exercise the Rights evidenced by such Right Certificate. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. Section 15. Agreement of Right Holders. Every holder of a Right by accepting such Right consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Shares Acquisition Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Shares Acquisition Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent in Cleveland, Ohio, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; and (c) subject to Section 6, Section 7(e) and Section 7(f), the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Shares Acquisition Date, the associated Common Share certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Share certificate made by anyone other than the Company or the Rights Agent) for all purposes, and neither the Company nor the Rights Agent will be affected by any notice to the contrary. Section 16. Right Certificate Holder Not Deemed a Shareholder. No holder, as such, of a Right Certificate will be entitled to vote, receive dividends or be deemed for any purpose to be the holder of the number of Common Shares that may at any time be issuable on the exercise of the Rights represented thereby, nor will anything contained herein or in any Right Certificate give to any holder, as such, of a Right Certificate any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 23), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate have been exercised in accordance with the provisions of this Agreement. 17 Section 17. Concerning the Rights Agent. (a) The Company will pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time on demand of the Rights Agent, to reimburse it for or pay its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent as a result of anything done or omitted to be done by the Rights Agent in connection with the acceptance and administration of this Agreement, including without limitation the costs and expenses of defending against any claim of liability in connection therewith. The costs and expenses of enforcing this right of indemnification will also be paid by the Company. The indemnification provided for hereunder will survive the expiration of the Rights and the termination of this Agreement. (b) The Rights Agent may conclusively rely upon and will be protected and will incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Right Certificate or certificate for Common Shares or other securities, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other document believed by it in good faith to be genuine and to be signed, executed and, where necessary, verified or acknowledged by the proper person or persons. (c) Notwithstanding anything in this Agreement to the contrary, in no event will the Rights Agent be liable for special, indirect or consequential loss or damage of any kind (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action. Section 18. Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent will be a party, or any corporation, succeeding to the shareholder services business of the Rights Agent or any successor Rights Agent, will be the successor to the Rights Agent under this Agreement without the execution or filing of any document or any further act on the part of any of the parties hereto, provided that such corporation is for appointment as a successor Rights Agent under the provisions of Section 20. In case at the time such successor Rights Agent succeeds to the agency created by this Agreement any of the Right Certificates has been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor so countersigned; in case at that time any of the Right Certificates have not been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases, such Right Certificates will have the full force provided in the Right Certificates and in this Agreement. 18 (b) In case at any time the name of the Rights Agent is changed and at such time any of the Right Certificates has been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; in case at that time any of the Right Certificates have not been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases, such Right Certificates will have the full force provided in the Right Certificates and in this Agreement. Section 19. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, and no implied duties or obligations will be read into this Agreement against the Rights Agent, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, will be bound: (a) Before the Rights Agent acts or refrains from acting, the Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel will be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent deems it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof is specifically prescribed in this Agreement) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate will be full authorization to the Rights Agent for any action taken or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent will be liable hereunder only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify such statements or recitals, but all such statements and recitals are and will be deemed to have been made by the Company only. (e) The Rights Agent will not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof and as provided in Section 17); nor will it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor will it be responsible for any adjustment required under the provisions of Section 11 or the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice of any such adjustment); nor will it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Common Shares to be issued pursuant to this Agreement or any Right 19 Certificate or as to whether any Common Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it will not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein will preclude the Rights Agent from acting in any other capacity for the Company or for any other Person. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent will not be answerable or accountable for any act, default, neglect or misconduct of any such attorney or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement will require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there will be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) The Rights Agent will not be required to take notice or be deemed to have notice of any fact, event or determination (including, without limitation, any dates or events defined in this Agreement or the designation of any Person as an Acquiring Person, Associated Acquiring Person, Affiliate or Associate) under this Agreement unless and until the Rights Agent is specifically notified in writing by the Company of such fact, event or determination. (l) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 or 2 thereof, the Rights Agent will not take any further action with respect to such requested exercise or transfer without first consulting with the Company. 20 Section 20. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days notice in writing mailed by registered or certified mail to the Company and to each transfer agent of the Common Shares; if the resignation occurs after a Triggering Event, notice in writing will, at the expense of the Company, also be sent by first class mail to the holders of the Right Certificates. The Rights Agent or any successor Rights Agent that the Company may appoint may, prior to a Triggering Event, be removed by the Company and be discharged from its duties under this Agreement upon 30 days notice in writing mailed by registered or certified mail to the Rights Agent and to each transfer agent of the Common Shares. If the Rights Agent resigns or is removed by the Company or otherwise becomes incapable of acting, the Company will appoint a successor to the Rights Agent. If the Company fails to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who will, with such notice, submit his Right Certificate for inspection by the Company) or after it has given notice of such removal, then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a successor Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, will be a corporation organized and doing business under the law of the United States or of any other state of the United States, in good standing, that is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority or that has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent will be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent will deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company will file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares. Failure to give any notice provided for in this Section 20 or any defect therein, however, will not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 21. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price or the Exercise Price per share and the number, kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. Section 22. Redemption. (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of the Shares Acquisition Date or the Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.005 per Right, appropriately further adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (the "Redemption Price"). 21 (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights will be to receive the Redemption Price. Within ten calendar days after the action of the Board of Directors ordering the redemption of the Rights, the Company will give notice of such redemption to the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Shares Acquisition Date, on the registry books of the transfer agent for the Common Shares. Any notice that is mailed in the manner herein provided will be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any of the Rights at any time in any manner other than that specifically set forth in this Section 22 or in connection with the repurchase of Common Shares prior to the Shares Acquisition Date. Section 23. Notice of Certain Events. In case the Company proposes at any time following the Shares Acquisition Date to (a) pay any dividend payable in stock of any class to the holders of Common Shares or make any other distribution to the holders of Common Shares (other than dividends payable in Common Shares and regular cash dividends), (b) offer to the holders of Common Shares rights or warrants to subscribe for or to purchase any additional Common Shares or shares of stock of any class or any other securities, rights or options, (c) effect any reclassification of its Common Shares, (d) effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, or (e) effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company will give to the Rights Agent and to each holder of a Right, in accordance with Section 24, a notice of such proposed action, which will specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up is to take place and the date of participation therein by the holders of the Common Shares, if any such date is to be fixed, and such notice will be so given, in the case of any action described in clause (a) or (b) above, at least twenty days prior to the record date for determining holders of the Common Shares for purposes of such action and, in the case of any such other action, at least twenty days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares, whichever will be the earlier. In case of any Triggering Event, then the Company will as soon as practicable thereafter give to the Rights Agent and to each holder of a Right, in accordance with Section 24, a notice of the occurrence of such Triggering Event, which will specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii). Section 24. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company will be sufficiently given or made if personally delivered or sent by first-class mail, 22 postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Jo-Ann Stores, Inc. 5555 Darrow Road Hudson, Ohio 44236 Attention: President Subject to the provisions of Section 20, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent will be sufficiently given or made if personally delivered or sent by registered or certified mail and will be deemed given upon receipt, addressed (until another address is filed in writing with the Company) as follows: National City Bank 1900 East 9th Street Cleveland, Ohio 44114 Attention: Corporate Trust Administration Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to or on the holder of any Right Certificate will be sufficiently given or made if personally delivered or sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 25. Supplements and Amendments. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order to (i) cure any ambiguity, (ii) correct or supplement any provision contain herein which may be defective or inconsistent with any other provision herein, or (iii) prior to the Shares Acquisition Date, change or supplement the provisions hereunder that the Company may deem necessary or desirable and not adverse to the interests of the holders of Common Shares. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 25, the Rights Agent will execute such supplement or amendment unless the Rights Agent determines in good faith that such supplement or amendment would adversely affect its interests under this Agreement. Prior to the Shares Acquisition Date, the interests of the holders of Rights will be deemed coincident with the interests of the holders of Common Shares. Notwithstanding anything in this Agreement to the contrary, no supplement or amendment that changes the rights and duties of the Rights Agent under this agreement will be effective against the Rights Agent without the execution of such supplement or amendment by the Rights Agent. Section 26. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent will bind and inure to the benefit of their respective successors and assigns hereunder. Section 27. Determination and Actions by the Board of Directors, etc. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at any particular time, including for purposes of determining the particular percentage of such 23 outstanding Common Shares of which any Person is the Beneficial Owner, will be made in accordance with the provisions of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company will have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board, or the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend or supplement this Agreement). All such actions, calculations, interpretations and determinations (including, for the purpose of clause (ii) below, all omissions with respect to the foregoing) that are done or made by the Board in good faith, will (i) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Right Certificates and all other parties, and (ii) not subject the Board to any liability to any holder of any Right Certificate. Section 28. Benefits of this Agreement. Nothing in this Agreement will be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Shares Acquisition Date, the registered holders of the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement will be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Shares Acquisition Date, the registered holders of the Common Shares). Section 29. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect and will in no way be affected, impaired or invalidated Section 30. Governing Law. This Agreement and each Right Certificate will be deemed to be a contract made under the laws of the State of Ohio and for all purposes will be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 31. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts will for all purposes be deemed to be an original, and all such counterparts will together constitute but one and the same instrument. Section 32. Descriptive Headings. Descriptive headings of the Sections of this Agreement are inserted for convenience only and will not control or affect the meaning or construction of any of the provisions hereof. Section 33. Effective Date of Agreement. This Agreement will become effective upon completion of the Reclassification. [signature page follows] 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. JO-ANN STORES, INC. ATTEST: By:/s/ Valerie Gentile Sachs By: /s/ Robert D. Icsman Name: Valerie Gentile Sachs Name: Robert D. Icsman Title: Executive Vice President, Title: Senior Legal Counsel & General Counsel & Secretary Assistant Secretary NATIONAL CITY BANK, ATTEST: NATIONAL ASSOCIATION By: /s/ Sharon R. Boughter By: /s/ Victor W. LaTessa Name: Sharon R. Boughter Name: Victor W. LaTessa Title: Officer Title: Vice President 25 INDEX OF DEFINED TERMS
Page ---- Acquiring Person................................................................ 1 Affiliate....................................................................... 2 Agreement....................................................................... 1 Associate....................................................................... 2 Associated Acquiring Person..................................................... 2 Beneficial Owner................................................................ 2 beneficially own................................................................ 2 Business Day.................................................................... 3 Class A Common Shares........................................................... 3 Class B Common Shares........................................................... 3 Close of business............................................................... 4 Common Shares................................................................... 4 Company......................................................................... 1 current market price............................................................ 12 Exchange Act.................................................................... 2 Exercise Price.................................................................. 4 Expiration Date................................................................. 8 Family Members.................................................................. 4 Issuance........................................................................ 4 NASDAQ.......................................................................... 13 NYSE............................................................................ 13 Person.......................................................................... 4 Prior Agreement................................................................. 1 Purchase Price.................................................................. 4 Reclassification................................................................ 1 Redemption Price................................................................ 21 Right........................................................................... 1 Rights Agent.................................................................... 1 SEC............................................................................. 4 Securities Act.................................................................. 9 Shares Acquisition Date......................................................... 4 Subsidiary...................................................................... 4 Trading Day..................................................................... 13 Triggering Event................................................................ 11
26 EXHIBIT A [FORM OF RIGHT CERTIFICATE] Certificate No. R - ___________ Rights NOT EXERCISABLE AFTER october 31, 2010 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.005 PER RIGHT ON THE TERMS SET FORTH IN THE amended and restated RIGHTS AGREEMENT. [THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN ASSOCIATED ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN Section 7(e) OF THE RIGHTS AGREEMENT.]* RIGHT CERTIFICATE This certifies that _________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of a rights agreement, as amended to date (the "Rights Agreement"), between Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), and ____________________, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Shares Acquisition Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Cleveland time, on October 31, 2010, at the principal office of the Rights Agent, or its successors as Rights Agent, in __________, ___________, one Common Share of the Company (the "Common Share"), at a purchase price of $52.17 per share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate, the number of Common Shares that may be purchased upon exercise thereof and the Purchase Price per share set forth above are the numbers and Purchase Price as of November 4, 2003, based on the Common Shares of the Company as constituted at such date. Upon the occurrence of a Triggering Event (as such term is defined in the Rights Agreement), each Right will entitled the holder to receive, upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed, one Common Share for an Exercise Price of $.43 per share (the "Exercise Price"). If the Rights evidenced by this Right Certificate are or at any time were beneficially owned by an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement), such Rights will become null and void and no holder hereof - ----------------- * The portion of the legend in brackets will be inserted only if applicable. A-1 will have any right with respect to such Rights from and after the occurrence of such Triggering Event. As provided in the Rights Agreement, the Purchase Price, the Exercise Price and number and kind of Common Shares or other securities that may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement; reference is made to the Rights Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal office of the Rights Agent in ________, ________. In addition, the Company will mail to the holder of this certificate a copy of the Rights Agreement (as in effect on the date of mailing) without charge promptly after receipt of a written request therefor. This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Common Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered entitled such holder to purchase. If this Right Certificate is exercised in part, the holder will be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Right Certificate may be redeemed by the Company at its option at a redemption price of $0.005 per Right. The Company will not issue any fractional Common Shares upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof may make a cash payment, as provided in the Rights Agreement. No holder of this Right Certificate will be entitled to vote or receive dividends or be deemed for any purpose the holder of the Common Shares or of any other securities of the Company that may at any time be issuable on the exercise hereof, nor will anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate have been exercised as provided in the Rights Agreement. This Right Certificate will not be valid or obligatory for any purpose until it has been countersigned by the Rights Agent. A-2 WITNESS the signature (which may be by facsimile) of the proper officers of the Company. Dated as of __________________, 20___. JO-ANN STORES, INC. ATTEST: By:_____________________________ By:_____________________________ Name:___________________________ Name:___________________________ Title:__________________________ Title:__________________________ Countersigned: By:_____________________________ Name:___________________________ Title:__________________________ A-3 [FORM OF REVERSE SIDE OF RIGHT CERTIFICATE] FORM OF ASSIGNMENT (To be executed by the registered holder if the holder desires to transfer the Right Certificate) FOR VALUE RECEIVED _________________________________ hereby sells, assigns and transfers unto (Please print name and address of transferee) this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________________ as attorney, to transfer the Right Certificate on the books of Jo-Ann Stores, Inc., with full power of substitution. Dated: __________________, 20___ Signature Signature Guaranteed: CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Right Certificate [ ] is [ ] is not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any Person who is, was or subsequently became an Acquiring Person or an Associated Acquiring Person. Dated: __________________, 20___ Signature NOTICE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration, enlargement or change. A-4 FORM OF ELECTION TO PURCHASE COMMON SHARES (To be executed if the holder desires to exercise the Right Certificate in accordance with Section 11(a)(ii) of the Rights Agreement) To Jo-Ann Stores, Inc.: The undersigned hereby irrevocably elects to exercise ________________ Rights represented by this Right Certificate to purchase the Common Shares issuable upon the exercise of such Rights and requests that certificates for such shares be issued in the name of: (Please print name and address) Please insert social security or other identifying number:______________________________ If such number of Rights are not all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights will be registered in the name of and delivered to: (Please print name and address) Please insert social security or other identifying number:______________________________ Dated: __________________, 20___ Signature (Signature must conform in all respects to name of the holder as specified on the face of this Right Certificate) Signature Guaranteed: A-5 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Associated Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any Person who is, was or subsequently became an Acquiring Person or an Associated Acquiring Person. Dated: ______________, 20___ Signature NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the fact of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. A-6 EXHIBIT B SUMMARY OF RIGHTS TO PURCHASE COMMON SHARES The Board of Directors of Jo-Ann Stores, Inc. (the "Company") has authorized the issuance of one Right for each outstanding Common Share, without par value, of the Company (the " Common Shares"). As of November 4, 2003, each Right entitles the registered holder to purchase from the Company one Common Share at a price of $52.17 (the "Purchase Price"), subject to adjustment. Following the Shares Acquisition Date (as hereinafter defined) and under the conditions described below, each Right entitles the registered holder (other than an Acquiring Person (as hereinafter defined) or Associated Acquiring Person) to acquire one Common Share for an exercise price of $.43 per share (the "Exercise Price"). The description and terms of the Rights are set forth in a rights agreement (the "Rights Agreement") between the Company and a rights agent (the "Rights Agent"). Until there is a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Common Shares then outstanding (the "Shares Acquisition Date"), the Rights will be evidenced by the certificate for such Common Share. The Rights Agreement provides that, until the Shares Acquisition Date, the Rights will be transferred with and only with the associated Common Shares. Until the Shares Acquisition Date (or the earlier redemption or expiration of the Rights), the surrender for transfer of any certificate for Common Shares will also constitute the transfer of the Rights associated with the Common Shares represented by the certificates. As soon as practicable following the Shares Acquisition Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Shares Acquisition Date, and thereafter such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Shares Acquisition Date. The Rights will expire at the close of business on October 31, 2010 unless earlier redeemed by the Company as described below. Upon the occurrence of a Triggering Event (as defined in the Rights Agreement), each holder of a Right, other than Rights that were or are beneficially owned by an Acquiring Person or an Associated Acquiring Person (which will thereafter be void), will have the right to receive, upon exercise of the Right and payment of the Exercise Price, one Common Share of the Company. The Purchase Price and the Exercise Price, and the number of Common Shares or other securities issuable upon exercise of the Rights, are subject to adjustment from time to time to prevent dilution. With certain exceptions, no adjustment in the Purchase Price or the Exercise Price will be required until cumulative adjustments require an adjustment of at least 1% in the Purchase Price or the Exercise Price. No fractional shares will be issued and, in lieu thereof, an adjustment in cash will be made based on the market price of the Common Shares on the last trading date prior to the date of exercise. B-1 Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. At any time prior to the Shares Acquisition Date, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right (the "Redemption Price"). Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company will make announcement thereof, and the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The provisions of the Rights Agreement may be amended by the Board of Directors in order to cure any ambiguity, to correct any defect or inconsistency or, prior to the Shares Acquisition Date, to make changes deemed to be not adverse to the interests of the holders of the Rights. A copy of the Rights Agreement has been, and any amendments thereto will be, filed with the Securities and Exchange Commission as an exhibit to the Company's registration of the Rights on Form 8-A. A copy of the Rights Agreement is available from the Company free of charge to any holder of Common Shares of the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as it may be amended from time to time. B-2 EX-4.4 4 l06203aexv4w4.txt INDENTURE Exhibit 4.4 JO-ANN STORES, INC., AS ISSUER, JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. TEAM JO-ANN, INC. FCA OF OHIO, INC. HOUSE OF FABRICS, INC. AS GUARANTORS, AND NATIONAL CITY BANK, AS TRUSTEE --------------- INDENTURE DATED AS OF FEBRUARY 26, 2004 --------------- $100,000,000 7.50% SENIOR SUBORDINATED NOTES DUE 2012 Reconciliation and tie between Trust Indenture Act of 1939, as amended, and Indenture, dated as of February 26, 2004
Trust Indenture Indenture Act Section Section - ------------------------------------------------------------------------------------------- ------------------- Section 310 (a)(1)......................................................................... 609 (a)(2)......................................................................... 609 (b)............................................................................ 608, 610 Section 311 (a)............................................................................ 613 (c)............................................................................ Not Applicable Section 312 (a)............................................................................ 701 (b)............................................................................ 702 (c)............................................................................ 702 Section 313 (a)............................................................................ 703 Section 314 (a)............................................................................ 704 (a)(4)......................................................................... 1019 (b)............................................................................ Not Applicable (c)(1)......................................................................... 103, 104, 404, 1201 (c)(2)......................................................................... 103, 104, 404, 1201 (d)............................................................................ Not Applicable (e)............................................................................ 103 Section 315 (a)............................................................................ 601(b) (b)............................................................................ 602 (c)............................................................................ 601(a) (d)............................................................................ 601(c), 603 (e)............................................................................ 514 Section 316 (a)(last sentence)............................................................. 101 ("Outstanding") (a)(1)(A)...................................................................... 502, 512 (a)(1)(B)...................................................................... 513 (a)(2)......................................................................... Not Applicable (b)............................................................................ 508 (c)............................................................................ 105 Section 317 (a)(1)......................................................................... 503 (a)(2)......................................................................... 504 (b)............................................................................ 1003 Section 318 (a)............................................................................ 108
- ------------------ Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this Indenture. -1- TABLE OF CONTENTS
PAGE ---- PARTIES.......................................................................................................... 1 RECITALS......................................................................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 101. Definitions................................................................................ 2 "Acquired Indebtedness................................................................ 2 "Additional Securities................................................................ 2 "Affiliate............................................................................ 3 "Applicable Procedures................................................................ 3 "Asset Sale........................................................................... 3 "Average Life to Stated Maturity...................................................... 3 "Bankruptcy Law....................................................................... 4 "Board of Directors................................................................... 4 "Board Resolution..................................................................... 4 "Book-Entry Security.................................................................. 4 "Borrowing Base....................................................................... 4 "Business Day......................................................................... 4 "Capital Lease Obligation............................................................. 4 "Capital Stock........................................................................ 4 "Change of Control.................................................................... 5 "Clearstream.......................................................................... 5 "Commission........................................................................... 6 "Commodity Price Protection Agreement................................................. 6 "Company.............................................................................. 6 "Company Request...................................................................... 6 "Consolidated Fixed Charge Coverage Ratio............................................. 6 "Consolidated Income Tax Expense...................................................... 7 "Consolidated Interest Expense........................................................ 7 "Consolidated Net Income (Loss)....................................................... 8 "Consolidated Net Tangible Assets..................................................... 8 "Consolidated Non-cash Charges........................................................ 8 "Consolidated Rental Payments......................................................... 8 "Consolidation........................................................................ 9 "Corporate Trust Office............................................................... 9 "Credit Facility...................................................................... 9
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PAGE ---- "Currency Hedging Agreements.......................................................... 9 "Default.............................................................................. 9 "Depositary........................................................................... 10 "Designated Senior Indebtedness....................................................... 10 "Disinterested Director............................................................... 10 "Euroclear............................................................................ 10 "Event of Default..................................................................... 10 "Exchange Act......................................................................... 10 "Exchange Offer....................................................................... 10 "Exchange Offer Registration Statement................................................ 10 "Fair Market Value.................................................................... 10 "GAAP................................................................................. 10 "Global Securities.................................................................... 11 "Guarantee............................................................................ 11 "Guaranteed Debt...................................................................... 11 "Guarantor............................................................................ 11 "Holder............................................................................... 11 "Indebtedness......................................................................... 11 "Indenture............................................................................ 12 "Indenture Obligations................................................................ 12 "Initial Securities................................................................... 12 "Initial Purchasers................................................................... 12 "Interest Payment Date................................................................ 12 "Interest Rate Agreements............................................................. 13 "Investment........................................................................... 13 "Issue Date........................................................................... 13 "Lien................................................................................. 13 "Maturity............................................................................. 13 "Moody's.............................................................................. 14 "Net Cash Proceeds.................................................................... 14 "Non-U.S. Person...................................................................... 14 "Officers' Certificate................................................................ 14 "Opinion of Counsel................................................................... 15 "Opinion of Independent Counsel....................................................... 15 "Outstanding.......................................................................... 15 "Pari Passu Indebtedness.............................................................. 16 "Paying Agent......................................................................... 16 "Permitted Investment................................................................. 16 "Person............................................................................... 16 "Predecessor Security................................................................. 16 "Preferred Stock...................................................................... 17 "Prospectus........................................................................... 17 "Public Equity Offering............................................................... 17
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PAGE ---- "Purchase Money Obligation............................................................ 17 "Qualified Capital Stock.............................................................. 18 "Redeemable Capital Stock............................................................. 18 "Redemption Date...................................................................... 18 "Redemption Price..................................................................... 18 "Registration Rights Agreement........................................................ 18 "Registration Statement............................................................... 18 "Regular Record Date.................................................................. 18 "Regulation S......................................................................... 18 "Regulation S Global Securities....................................................... 18 "Responsible Officer.................................................................. 19 "Restricted Subsidiary................................................................ 19 "Rule 144A............................................................................ 19 "Rule 144A Global Securities.......................................................... 19 "S&P.................................................................................. 19 "Securities Act....................................................................... 19 "Senior Guarantor Indebtedness........................................................ 19 "Senior Indebtedness.................................................................. 20 "Senior Representative................................................................ 20 "Series B Global Securities........................................................... 20 "Shelf Registration Statement......................................................... 20 "Special Record Date.................................................................. 21 "Stated Maturity...................................................................... 21 "Subordinated Indebtedness............................................................ 21 "Subsidiary........................................................................... 21 "Successor Security................................................................... 21 "Temporary Cash Investments........................................................... 21 "Trustee.............................................................................. 22 "Trust Indenture Act.................................................................. 22 "Unrestricted Subsidiary.............................................................. 22 "Unrestricted Subsidiary Indebtedness................................................. 22 "Voting Stock......................................................................... 22 "Wholly Owned Restricted Subsidiary................................................... 22 Section 102. Other Definitions.......................................................................... 23 Section 103. Compliance Certificates and Opinions....................................................... 24 Section 104. Form of Documents Delivered to Trustee..................................................... 25 Section 105. Acts of Holders............................................................................ 25 Section 106. Notices, etc., to the Trustee, the Company and any Guarantor............................... 27 Section 107. Notice to Holders; Waiver.................................................................. 27 Section 108. Conflict with Trust Indenture Act.......................................................... 28 Section 109. Effect of Headings and Table of Contents................................................... 28 Section 110. Successors and Assigns..................................................................... 28
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PAGE ---- Section 111. Separability Clause........................................................................ 28 Section 112. Benefits of Indenture...................................................................... 28 Section 113. GOVERNING LAW.............................................................................. 29 Section 114. Legal Holidays............................................................................. 29 Section 115. Independence of Covenants.................................................................. 29 Section 116. Schedules and Exhibits..................................................................... 29 Section 117. Counterparts............................................................................... 29 ARTICLE TWO SECURITY FORMS Section 201. Forms Generally............................................................................ 30 Section 202. Form of Face of Security................................................................... 32 Section 203. Form of Reverse of Securities.............................................................. 44 Section 204. Form of Guarantee.......................................................................... 53 ARTICLE THREE THE SECURITIES Section 301. Title and Terms............................................................................ 53 Section 302. Denominations.............................................................................. 54 Section 303. Execution, Authentication, Delivery and Dating............................................. 54 Section 304. Temporary Securities....................................................................... 56 Section 305. Registration, Registration of Transfer and Exchange........................................ 56 Section 306. Book Entry Provisions for Global Securities................................................ 58 Section 307. Special Transfer and Exchange Provisions................................................... 59 Section 308. Mutilated, Destroyed, Lost and Stolen Securities........................................... 62 Section 309. Payment of Interest; Interest Rights Preserved............................................. 63 Section 310. CUSIP Numbers.............................................................................. 64 Section 311. Persons Deemed Owners...................................................................... 65 Section 312. Cancellation............................................................................... 65 Section 313. Computation of Interest.................................................................... 65 ARTICLE FOUR DEFEASANCE AND COVENANT DEFEASANCE Section 401. Company's Option to Effect Defeasance or Covenant Defeasance............................... 65 Section 402. Defeasance and Discharge................................................................... 66 Section 403. Covenant Defeasance........................................................................ 66 Section 404. Conditions to Defeasance or Covenant Defeasance............................................ 67
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PAGE ---- Section 405. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions................................................................... 69 Section 406. Reinstatement.............................................................................. 70 ARTICLE FIVE REMEDIES Section 501. Events of Default.......................................................................... 70 Section 502. Acceleration of Maturity; Rescission and Annulment......................................... 72 Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee............................ 73 Section 504. Trustee May File Proofs of Claim........................................................... 74 Section 505. Trustee May Enforce Claims without Possession of Securities................................ 75 Section 506. Application of Money Collected............................................................. 75 Section 507. Limitation on Suits........................................................................ 76 Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.................. 76 Section 509. Restoration of Rights and Remedies......................................................... 77 Section 510. Rights and Remedies Cumulative............................................................. 77 Section 511. Delay or Omission Not Waiver............................................................... 77 Section 512. Control by Holders......................................................................... 77 Section 513. Waiver of Past Defaults.................................................................... 78 Section 514. Undertaking for Costs...................................................................... 78 Section 515. Waiver of Stay, Extension or Usury Laws.................................................... 79 Section 516. Remedies Subject to Applicable Law......................................................... 79 ARTICLE SIX THE TRUSTEE Section 601. Duties of Trustee.......................................................................... 79 Section 602. Notice of Defaults......................................................................... 80 Section 603. Certain Rights of Trustee.................................................................. 81 Section 604. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof........................................................................... 82 Section 605. Trustee and Agents May Hold Securities; Collections; etc................................... 82 Section 606. Money Held in Trust........................................................................ 83 Section 607. Compensation and Indemnification of Trustee and Its Prior Claim............................ 83 Section 608. Conflicting Interests...................................................................... 83 Section 609. Trustee Eligibility........................................................................ 84
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PAGE ---- Section 610. Resignation and Removal; Appointment of Successor Trustee.................................. 84 Section 611. Acceptance of Appointment by Successor..................................................... 86 Section 612. Merger, Conversion, Consolidation or Succession to Business................................ 86 Section 613. Preferential Collection of Claims Against Company.......................................... 87 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 701. Company to Furnish Trustee Names and Addresses of Holders.................................. 87 Section 702. Disclosure of Names and Addresses of Holders............................................... 87 Section 703. Reports by Trustee......................................................................... 88 Section 704. Reports by Company and Guarantors.......................................................... 88 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS Section 801. Company and Guarantors May Consolidate, etc., Only on Certain Terms........................ 89 Section 802. Successor Substituted...................................................................... 92 ARTICLE NINE SUPPLEMENTAL INDENTURES Section 901. Supplemental Indentures and Agreements without Consent of Holders.......................... 92 Section 902. Supplemental Indentures and Agreements with Consent of Holders............................. 93 Section 903. Execution of Supplemental Indentures and Agreements........................................ 95 Section 904. Effect of Supplemental Indentures.......................................................... 95 Section 905. Conformity with Trust Indenture Act........................................................ 95 Section 906. Reference in Securities to Supplemental Indentures......................................... 96 Section 907. Notice of Supplemental Indentures.......................................................... 96 ARTICLE TEN COVENANTS Section 1001. Payment of Principal, Premium and Interest................................................. 96 Section 1002. Maintenance of Office or Agency............................................................ 96
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PAGE ---- Section 1003. Money for Security Payments to Be Held in Trust............................................ 97 Section 1004. Corporate Existence........................................................................ 98 Section 1005. Payment of Taxes and Other Claims.......................................................... 99 Section 1006. Maintenance of Properties.................................................................. 99 Section 1007. Maintenance of Insurance................................................................... 99 Section 1008. Limitation on Indebtedness................................................................. 100 Section 1009. Limitation on Restricted Payments.......................................................... 103 Section 1010. Limitation on Transactions with Affiliates................................................. 107 Section 1011. Limitation on Liens........................................................................ 108 Section 1012. Limitation on Sale of Assets............................................................... 109 Section 1013. Limitation on Issuances of Guarantees of and Pledges for Indebtedness...................... 113 Section 1014. Limitation on Senior Subordinated Indebtedness............................................. 115 Section 1015. Purchase of Securities upon a Change of Control............................................ 115 Section 1016. Limitation on Subsidiary Capital Stock..................................................... 119 Section 1017. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries............... 119 Section 1018. Limitations on Unrestricted Subsidiaries................................................... 120 Section 1019. Provision of Financial Statements.......................................................... 122 Section 1020. Statement by Officers as to Default........................................................ 123 Section 1021. Waiver of Certain Covenants................................................................ 123 ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 1101. Rights of Redemption....................................................................... 124 Section 1102. Applicability of Article................................................................... 124 Section 1103. Election to Redeem; Notice to Trustee...................................................... 124 Section 1104. Selection by Trustee of Securities to Be Redeemed.......................................... 124 Section 1105. Notice of Redemption....................................................................... 125 Section 1106. Deposit of Redemption Price................................................................ 126 Section 1107. Securities Payable on Redemption Date...................................................... 126 Section 1108. Securities Redeemed or Purchased in Part................................................... 127 ARTICLE TWELVE SATISFACTION AND DISCHARGE Section 1201. Satisfaction and Discharge of Indenture.................................................... 127 Section 1202. Application of Trust Money................................................................. 128
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PAGE ---- ARTICLE THIRTEEN SUBORDINATION OF SECURITIES Section 1301. Securities Subordinate to Senior Indebtedness.............................................. 129 Section 1302. Payment Over of Proceeds Upon Dissolution, etc............................................. 129 Section 1303. Suspension of Payment When Designated Senior Indebtedness in Default....................... 130 Section 1304. Payment Permitted if No Default............................................................ 132 Section 1305. Subrogation to Rights of Holders of Senior Indebtedness.................................... 132 Section 1306. Provisions Solely to Define Relative Rights................................................ 132 Section 1307. Trustee to Effectuate Subordination........................................................ 133 Section 1308. No Waiver of Subordination Provisions...................................................... 133 Section 1309. Notice to Trustee.......................................................................... 134 Section 1310. Reliance on Judicial Orders or Certificates................................................ 135 Section 1311. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights..... 135 Section 1312. Article Applicable to Paying Agents........................................................ 135 Section 1313. No Suspension of Remedies.................................................................. 136 Section 1314. Trustee's Relation to Senior Indebtedness.................................................. 136 ARTICLE FOURTEEN GUARANTEES Section 1401. Guarantors' Guarantee...................................................................... 136 Section 1402. Continuing Guarantee; No Right of Set-Off; Independent Obligation.......................... 136 Section 1403. Guarantee Absolute......................................................................... 138 Section 1404. Right to Demand Full Performance........................................................... 140 Section 1405. Waivers.................................................................................... 140 Section 1406. The Guarantors Remain Obligated in Event the Company Is No Longer Obligated to Discharge Indenture Obligations............................................................ 141 Section 1407. Fraudulent Conveyance; Contribution; Subrogation........................................... 142 Section 1408. Guarantee Is in Addition to Other Security................................................. 142 Section 1409. Release of Security Interests.............................................................. 143 Section 1410. No Bar to Further Actions.................................................................. 143 Section 1411. Failure to Exercise Rights Shall Not Operate as a Waiver; No Suspension of Remedies........ 143 Section 1412. Trustee's Duties; Notice to Trustee........................................................ 143 Section 1413. Successors and Assigns..................................................................... 144 Section 1414. Release of Guarantee....................................................................... 144 Section 1415. Execution of Guarantee..................................................................... 144
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PAGE ---- Section 1416. Guarantee Subordinate to Senior Guarantor Indebtedness..................................... 145 Section 1417. Payment Over of Proceeds Upon Dissolution of the Guarantor, etc............................ 145 Section 1418. Default on Senior Guarantor Indebtedness................................................... 147 Section 1419. Payment Permitted by Each of the Guarantors if No Default.................................. 147 Section 1420. Subrogation to Rights of Holders of Senior Guarantor Indebtedness.......................... 147 Section 1421. Provisions Solely to Define Relative Rights................................................ 148 Section 1422. Trustee to Effectuate Subordination........................................................ 148 Section 1423. No Waiver of Subordination Provisions...................................................... 149 Section 1424. Notice to Trustee by Each of the Guarantors................................................ 149 Section 1425. Reliance on Judicial Orders or Certificates................................................ 150 Section 1426. Rights of Trustee as a Holder of Senior Guarantor Indebtedness; Preservation of Trustee's Rights........................................................................... 151 Section 1427. Article Applicable to Paying Agents........................................................ 151 Section 1428. No Suspension of Remedies.................................................................. 151 Section 1429. Trustee's Relation to Senior Guarantor Indebtedness........................................ 151
TESTIMONIUM SIGNATURES AND SEALS ACKNOWLEDGMENTS ANNEX A Form of Intercompany Note SCHEDULE I Existing Indebtedness SCHEDULE II Existing Dividend Restrictions EXHIBIT A Regulation S Certificate EXHIBIT B Restricted Securities Certificate EXHIBIT C Unrestricted Security Certificate APPENDIX I Form of Transferee APPENDIX II Form of Transferee Certificate -ix- INDENTURE, dated as of February 26, 2004, between Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), and Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, Team Jo-Ann, Inc., an Ohio corporation, FCA of Ohio, Inc., an Ohio corporation, and House of Fabrics, Inc., a Delaware corporation (each a "Guarantor" and collectively, the "Guarantors"), and National City Bank, as trustee (the "Trustee"). RECITALS OF THE COMPANY AND THE GUARANTORS The Company has duly authorized the creation of an issue of 7.50% Senior Subordinated Notes due 2012, Series A (the "Series A Securities" or the "Initial Securities"), and an issue of 7.50% Senior Subordinated Notes due 2012, Series B (the "Series B Securities" and, together with the Series A Securities, the "Securities"), of substantially the tenor and amount hereinafter set forth (subject to the ability of the Company to issue Additional Securities hereunder as described herein), and to provide therefor the Company has duly authorized the execution and delivery of this Indenture and the Securities; Each Guarantor has duly authorized the issuance of a Guarantee of the Securities, of substantially the tenor hereinafter set forth, and to provide therefor, each Guarantor has duly authorized the execution and delivery of this Indenture and its Guarantee; This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act that are required to be part of and to govern indentures qualified under the Trust Indenture Act; All acts and things necessary have been done to make (i) the Securities, when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company, (ii) the Guarantees, when executed by each of the Guarantors and delivered hereunder, the valid obligation of each of the Guarantors and (iii) this Indenture a valid agreement of the Company and each of the Guarantors in accordance with the terms of this Indenture; NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: -1- ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to $, US$, dollars or United States dollars shall refer to the lawful currency of the United States of America; and (f) all references herein to particular Sections or Articles refer to this Indenture unless otherwise so indicated. Certain terms used principally in Article Four are defined in Article Four. "Acquired Indebtedness" means Indebtedness of a Person (1) existing at the time such Person becomes a Restricted Subsidiary or (2) assumed in connection with the acquisition of assets from such Person, in each case, other than Indebtedness incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary or such acquisition, as the case may be. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Restricted Subsidiary, as the case may be. "Additional Securities" means further Securities (other than the Initial Securities) issued under this Indenture in accordance with the terms of this Indenture including, Section 303 hereof, as part of the same series as the Initial Securities ranking equally with the Initial Securities in all respects (other than the issuance dates and, at the option of the Company, the date from which interest will accrue), subject to compliance with Section 1008 herein. The Initial Securities and any Additional Securities subsequently issued under this Indenture shall be treated as a single class for all purposes under this -2- Indenture, including, without limitation, waivers, amendments, redemptions, and offers to purchase. "Affiliate" means, with respect to any specified Person: (1) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; (2) any other Person that owns, directly or indirectly, 5% or more of any class or series of such specified Person's (or any of such Person's direct or indirect parent's) Capital Stock or any officer or director of any such specified Person or other Person or, with respect to any natural Person, any person having a relationship with such Person by blood, marriage or adoption not more remote than first cousin; or (3) any other Person 5% or more of the Voting Stock of which is beneficially owned or held directly or indirectly by such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, Euroclear and Clearstream, in each case to the extent applicable to such transaction and as in effect at the time of such transfer or transaction. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback transaction) (collectively, a "transfer"), directly or indirectly, in one or a series of related transactions, of: (1) any Capital Stock of any Restricted Subsidiary; (2) all or substantially all of the properties and assets of any division or line of business of the Company or any Restricted Subsidiary; or (3) any other properties or assets of the Company or any Restricted Subsidiary other than in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include any transfer of properties and assets (A) that is governed by the provisions described under Article Eight hereof, (B) that is by the Company to any Wholly Owned Restricted Subsidiary, or by any Restricted Subsidiary to the Company or any Wholly Owned Restricted Subsidiary in accordance with the terms of the Indenture, (C) that would be within the definition of a Restricted Payment under Section 1009 hereof and would be permitted to be made as a Restricted Payment (and shall be deemed a Restricted Payment) under such Section 1009, (D) that is of obsolete equipment in the ordinary course of business or inventory and fixtures in connection with the closing of retail stores, or (E) the Fair Market Value of which in the aggregate does not exceed $10,000,000 in any transaction or series of related transactions. "Average Life to Stated Maturity" means, as of the date of determination with respect to any Indebtedness, the quotient obtained by dividing (1) the -3- sum of the products of (a) the number of years from the date of determination to the date or dates of each successive scheduled principal payment of such Indebtedness multiplied by (b) the amount of each such principal payment by (2) the sum of all such principal payments. "Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as amended, or any similar United States federal or state law or foreign law relating to bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Board of Directors" means the board of directors of the Company or any Guarantor, as the case may be, or any duly authorized committee of such board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or any Guarantor, as the case may be, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Book-Entry Security" means any Global Securities bearing the legend specified in Section 202 evidencing all or part of a series of Securities, authenticated and delivered to the Depositary for such series or its nominee, and registered in the name of such Depositary or nominee. "Borrowing Base" means, as of the date of determination, an amount equal to 65% of the book value of all inventory owned by the Company or any Guarantor as of the end of the most recent fiscal quarter preceding such date of determination. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions or trust companies in The City of New York or the city in which the Corporate Trust Office of the Trustee is located are authorized or obligated by law, regulation or executive order to close. "Capital Lease Obligation" of any Person means any obligation of such Person and its Restricted Subsidiaries on a Consolidated basis under any capital lease of (or other agreement conveying the right to use) real or personal property which, in accordance with GAAP, is required to be recorded as a capitalized lease obligation. "Capital Stock" of any Person means any and all shares, interests, participations, rights in or other equivalents (however designated) of such Person's capital stock, other equity interests whether now outstanding or issued after the date hereof, partnership interests (whether general or limited), limited liability company interests, any other interest or participation that confers on a Person that right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person, including any -4- Preferred Stock, and any rights (other than debt securities convertible into Capital Stock), warrants or options exchangeable for or convertible into such Capital Stock. "Change of Control" means the occurrence of any of the following events: (1) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding Voting Stock of the Company; (2) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company (together with any new directors whose election to such board or whose nomination for election by the stockholders of the Company was approved by a vote of 662/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of such board of directors then in office; (3) the Company consolidates with or merges with or into any Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with or merges into or with the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Company is changed into or exchanged for (1) Voting Stock of the surviving corporation which is not Redeemable Capital Stock or (2) cash, securities and other property (other than Capital Stock of the surviving corporation) in an amount which could be paid by the Company as a Restricted Payment as described under Section 1009 hereof (and such amount shall be treated as a Restricted Payment subject to the provisions of Section 1009 hereof) and (B) immediately after such transaction, no "person" or "group," is the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding Voting Stock of the surviving corporation; or (4) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution other than in a transaction which complies with the provisions described under Article Eight herein. For purposes of this definition, any transfer of an equity interest of an entity that was formed for the purpose of acquiring voting stock of the Company will be deemed to be a transfer of such portion of such voting stock as corresponds to the portion of the equity of such entity that has been so transferred. "Clearstream" means Clearstream, Societe Anonyme (or any successor securities clearing agency). -5- "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of the Indenture such Commission is not existing and performing the duties now assigned to it under the Securities Act, Exchange Act and Trust Indenture Act then the body performing such duties at such time. "Commodity Price Protection Agreement" means any forward contract, commodity swap, commodity option or other similar financial agreement or arrangement relating to, or the value of which is dependent upon, fluctuations in commodity prices. "Company" means Jo-Ann Stores, Inc., a corporation incorporated under the laws of Ohio, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. To the extent necessary to comply with the requirements of the provisions of Sections 310 through 317 of the Trust Indenture Act as they are applicable to the Company, the term "Company" shall include any other obligor with respect to the Securities for purposes of complying with such provisions. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its President, its Chief Executive Officer, its Chief Financial Officer or a Vice President (regardless of Vice Presidential designation), and by any one of its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Fixed Charge Coverage Ratio" of any Person means, for any period, the ratio of (a) the sum of Consolidated Net Income (Loss), and in each case to the extent deducted in computing Consolidated Net Income (Loss) for such period, Consolidated Interest Expense, Consolidated Income Tax Expense, Consolidated Non-cash Charges and one third of Consolidated Rental Payments for such period, of such Person and its Restricted Subsidiaries on a Consolidated basis, all determined in accordance with GAAP, less all noncash items increasing Consolidated Net Income for such period and less all cash payments during such period relating to noncash charges that were added back to Consolidated Net Income in determining the Consolidated Fixed Charge Coverage Ratio in any prior period to (b) the sum of Consolidated Interest Expense for such period, plus one third of Consolidated Rental Payments during such period, plus cash and noncash dividends paid on any Redeemable Capital Stock or Preferred Stock of such Person and its Restricted Subsidiaries during such period, in each case after giving pro forma effect (as calculated in accordance with Article 11 of Regulation S-X under the Securities Act or any successor provision) to (1) the incurrence of the Indebtedness giving rise to the need to make such calculation and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred, and the application of such proceeds occurred, on the first day of such period; (2) the incurrence, repayment or retirement of any other Indebtedness by the Company and its Restricted Subsidiaries since -6- the first day of such period as if such Indebtedness was incurred, repaid or retired at the beginning of such period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average daily balance of such Indebtedness during such period); (3) in the case of Acquired Indebtedness or any acquisition occurring at the time of the incurrence of such Indebtedness, the related acquisition, assuming such acquisition had been consummated on the first day of such period; and (4) any acquisition or disposition by the Company and its Restricted Subsidiaries of any company or any business or any assets out of the ordinary course of business, whether by merger, stock purchase or sale or asset purchase or sale, or any related repayment of Indebtedness, in each case since the first day of such period, assuming such acquisition or disposition had been consummated on the first day of such period; provided that (1) in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness computed on a pro forma basis and (A) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period and (B) which was not outstanding during the period for which the computation is being made but which bears, at the option of such Person, a fixed or floating rate of interest, shall be computed by applying at the option of such Person either the fixed or floating rate and (2) in making such computation, the Consolidated Interest Expense of such Person attributable to interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Income Tax Expense" of any Person means, for any period, the provision for federal, state, local and foreign income taxes of such Person and its Consolidated Restricted Subsidiaries for such period as determined in accordance with GAAP. "Consolidated Interest Expense" of any Person means, without duplication, for any period, the sum of (a) the interest expense of such Person and its Restricted Subsidiaries for such period, on a Consolidated basis, including, without limitation, (1) amortization of debt discount, (2) the net costs associated with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price Protection Agreements (including amortization of discounts), (3) the interest portion of any deferred payment obligation, (4) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptance financing and (5) accrued interest, plus (b)(1) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period and (2) all capitalized interest of such Person and its Restricted Subsidiaries plus (c) the interest expense under any Guaranteed Debt of such Person and any Restricted Subsidiary to the extent not included under clause (a)(4) above, whether or not paid by such Person or its Restricted Subsidiaries. -7- "Consolidated Net Income (Loss)" of any Person means, for any period, the Consolidated net income (or loss) of such Person and its Restricted Subsidiaries for such period on a Consolidated basis as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income (or loss), by excluding, without duplication, (1) all extraordinary gains or losses net of taxes (less all fees and expenses relating thereto), (2) the portion of net income (or loss) of such Person and its Restricted Subsidiaries on a Consolidated basis allocable to minority interests in unconsolidated Persons or Unrestricted Subsidiaries to the extent that cash dividends or distributions have not actually been received by such Person or one of its Consolidated Restricted Subsidiaries, (3) net income (or loss) of any Person combined with such Person or any of its Restricted Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (4) any gain or loss, net of taxes, realized upon the termination of any employee pension benefit plan, (5) gains or losses, net of taxes (less all fees and expenses relating thereto), in respect of dispositions of assets other than in the ordinary course of business, (6) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (7) any restoration to net income of any contingency reserve, except to the extent provision for such reserve was made out of income accrued at any time following the date of this Indenture, or (8) any net gain arising from the acquisition of any securities or extinguishment, under GAAP, of any Indebtedness of such Person. "Consolidated Net Tangible Assets" of any Person means, as of any date of determination, the total assets, less goodwill and other intangibles and less deferred tax assets, in each case as shown on the balance sheet of the Company and its Restricted Subsidiaries for the most recently ended fiscal quarter for which financial statements are available, determined on a consolidated basis in accordance with GAAP. "Consolidated Non-cash Charges" of any Person means, for any period, the aggregate depreciation, amortization and other non-cash charges of such Person and its Restricted Subsidiaries on a Consolidated basis for such period, as determined in accordance with GAAP (excluding any non-cash charge which requires an accrual or reserve for cash charges for any future period). "Consolidated Rental Payments" of any Person means, for any period, the aggregate rental obligations of such Person and its Restricted Subsidiaries on a Consolidated basis, as determined in accordance with GAAP, payable in respect of such period under leases of real or personal property, not including taxes, insurance, maintenance and similar expenses that the lessee is obligated to pay under the terms of the relevant leases (net of income from subleases thereof, not including taxes, insurance, maintenance and similar expenses that the sublessee is obligated to pay under the terms of -8- such sublease), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of such Person and its Restricted Subsidiaries or in the Securities thereto, excluding, however, in any such calculation, (a) that portion of Consolidated Interest Expense of such Person representing payments by such Person or any of its consolidated Restricted Subsidiaries in respect of Capital Lease Obligations (net of payments to such Person or any of its consolidated Subsidiaries under subleases qualifying as capitalized lease subleases to the extent that such payments would be deducted in determining Consolidated Interest Expense) and (b) the aggregate amount of amortization of obligations of such Person and its consolidated Restricted Subsidiaries in respect of such Capital Lease Obligations for such period (net of payments to such Person or any of its consolidated Restricted Subsidiaries under subleases qualifying as capitalized lease subleases to the extent that such payments would be deducted in determining such amortization amount). "Consolidation" means, with respect to any Person, the consolidation of the accounts of such Person and each of its subsidiaries if and to the extent the accounts of such Person and each of its subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP. The term "Consolidated" shall have a similar meaning. "Corporate Trust Office" means the office of the Trustee or an affiliate or agent thereof at which at any particular time the corporate trust business for the purposes of this Indenture shall be principally administered, which office at the date of execution of this Indenture is located at Corporate Trust Department, Locator 01-3116, 629 Euclid Ave., Suite 635, Cleveland, Ohio 44114-3484. "Credit Facility" means the Credit Agreement, dated as of April 24, 2001, among the Company, the other borrowers named therein, the lending institutions named therein and the other parties thereto, as such agreement, in whole or in part has been and may be, amended, renewed, increased, extended, substituted, refinanced, restructured, replaced, supplemented or otherwise modified from time to time (including, without limitation, any successive renewals, extensions, substitutions, refinancings, restructurings, replacements, supplementations or other modifications of the foregoing) (including the addition of one or more lenders and/or agents to an existing facility or the replacement of one or more lenders and/or agents in a new facility). "Currency Hedging Agreements" means one or more of the following agreements which shall be entered into by one or more financial institutions: foreign exchange contracts, currency swap agreements or other similar agreements or arrangements designed to protect against the fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. -9- "Depositary" means, with respect to the Securities issued in the form of one or more Book-Entry Securities, The Depository Trust Company ("DTC"), its nominees and successors, or another Person designated as Depositary by the Company, which must be a clearing agency registered under the Exchange Act. "Designated Senior Indebtedness" means (1) all Senior Indebtedness under the Credit Facility and (2) any other Senior Indebtedness which at the time of determination has an aggregate principal amount outstanding of at least $25 million and which is specifically designated in the instrument evidencing such Senior Indebtedness or the agreement under which such Senior Indebtedness arises as "Designated Senior Indebtedness" by the Company. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of the Company who does not have any material direct or indirect financial interest in or with respect to such transaction or series of related transactions. "Euroclear" means the Euroclear Clearance System (or any successor securities clearing agency). "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. "Exchange Offer" means the exchange offer by the Company and the Guarantors of Series B Securities for Series A Securities to be effected pursuant to Section 2.1 of the Registration Rights Agreement. "Exchange Offer Registration Statement" means the registration statement under the Securities Act contemplated by Section 2.1 of the Registration Rights Agreement. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length free market transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. Fair Market Value shall be determined by the Board of Directors of the Company acting in good faith and shall be evidenced by a resolution of the Board of Directors. "GAAP" means generally accepted accounting principles in the United States, consistently applied, which are in effect on the date of this Indenture (and, with respect to periodic reporting requirements, as in effect from time to time). -10- "Global Securities" means the Rule 144A Global Securities, the Regulation S Global Securities and the Series B Global Securities to be issued as Book-Entry Securities issued to the Depositary in accordance with Section 306. "Guarantee" means the guarantee by any Guarantor of the Company's Indenture Obligations. "Guaranteed Debt" of any Person means, without duplication, all Indebtedness of any other Person referred to in the definition of Indebtedness below guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (1) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (3) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (4) to maintain working capital or equity capital of the debtor, or otherwise to maintain the net worth, solvency or other financial condition of the debtor or to cause such debtor to achieve certain levels of financial performance or (5) otherwise to assure a creditor against loss; provided that the term "guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantor" means any Subsidiary which is a guarantor of the Securities, including any Person that is required after the date hereof to execute a guarantee of the Securities pursuant to Section 1011 or Section 1013 herein until a successor replaces such party pursuant to the applicable provisions of this Indenture and, thereafter, shall mean such successor. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indebtedness" means, with respect to any Person, without duplication, (1) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities arising in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit issued under letter of credit facilities, acceptance facilities or other similar facilities, (2) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (3) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables arising in the ordinary course of business, (4) all obligations under Interest Rate Agreements, Currency Hedging -11- Agreements or Commodity Price Protection Agreements of such Person, (5) all Capital Lease Obligations of such Person, (6) all Indebtedness referred to in clauses (1) through (5) above of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien, upon or with respect to property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (7) all Guaranteed Debt of such Person, (8) all Redeemable Capital Stock issued by such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends, (9) Preferred Stock of any Restricted Subsidiary of the Company or any Guarantor and (10) any amendment, supplement, modification, deferral, renewal, extension, refunding or refinancing of any liability of the types referred to in clauses (1) through (9) above. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock. "Indenture" means this instrument as originally executed (including all exhibits and schedules thereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture or under the Securities, including any Guarantor, to pay principal of, premium, if any, and interest when due and payable, and all other amounts due or to become due under or in connection with this Indenture, the Securities and the performance of all other obligations to the Trustee and the holders under this Indenture and the Securities, according to the respective terms hereof and thereof. "Initial Securities" has the meaning stated in the first recital of this Indenture. "Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch & Co., Wachovia Capital Markets, LLC, SG Cowen Securities Corporation and McDonald Investments Inc. (or the initial purchasers with respect to Additional Securities issued after the date hereof). "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. -12- "Interest Rate Agreements" means one or more of the following agreements which shall be entered into by one or more financial institutions: interest rate protection agreements (including, without limitation, interest rate swaps, caps, floors, collars and similar agreements) and/or other types of interest rate hedging agreements from time to time. "Investment" means, with respect to any Person, directly or indirectly, any advance, loan (including guarantees), or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase, acquisition or ownership by such Person of any Capital Stock, bonds, notes, debentures or other securities issued or owned by any other Person and all other items that would be classified as investments on a balance sheet prepared in accordance with GAAP. Investments shall exclude extensions of trade credit on commercially reasonable terms in accordance with normal trade practices. If the Company or any of its Restricted Subsidiaries sells or otherwise disposes of any Capital Stock of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of the Company (other than the sale of all of the outstanding Capital Stock of such Subsidiary), the Company will be deemed to have made an Investment on the date of such sale or disposition equal to the Fair Market Value of the Company's Investments in such Subsidiary that were not sold or disposed of in an amount determined as provided in Section 1009 hereof. "Issue Date" means the original issue date of the Securities under this Indenture. "Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory or otherwise), privilege, security interest, assignment, deposit, arrangement, easement, hypothecation, claim, preference, priority or other encumbrance upon or with respect to any property of any kind (including any conditional sale, capital lease or other title retention agreement, any leases in the nature thereof, and any agreement to give any security interest), real or personal, movable or immovable, now owned or hereafter acquired. A Person will be deemed to own subject to a Lien any property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease Obligation or other title retention agreement. "Maturity" means, when used with respect to the Securities, the date on which the principal of the Securities becomes due and payable as therein provided or as provided in this Indenture, whether at Stated Maturity, the Offer Date or the Redemption Date and whether by declaration of acceleration, Offer in respect of Excess Proceeds, Change of Control Offer in respect of a Change of Control, call for redemption or otherwise. -13- "Moody's" means Moody's Investors Service, Inc. or any successor rating agency. "Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person, the proceeds thereof (without duplication in respect of all Asset Sales) in the form of cash or Temporary Cash Investments including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Temporary Cash Investments (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) net of (1) brokerage commissions and other reasonable fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (2) provisions for all taxes payable as a result of such Asset Sale, (3) payments made to retire Indebtedness where payment of such Indebtedness is secured by the assets or properties the subject of such Asset Sale, (4) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale and (5) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee and (b) with respect to any issuance or sale of Capital Stock or options, warrants or rights to purchase Capital Stock, or debt securities or Capital Stock that have been converted into or exchanged for Capital Stock as referred to under Section 1009 herein, the proceeds of such issuance or sale in the form of cash or Temporary Cash Investments including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Temporary Cash Investments (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of attorney's fees, accountant's fees and brokerage, consultation, underwriting and other fees and expenses actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Non-U.S. Person" means a Person that is not a "U.S. person" as defined in Regulation S under the Securities Act. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President, the Chief Executive Officer, the Chief Financial Officer or a Vice President (regardless of Vice Presidential designation), and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company or any Guarantor, as the case may be, and in form and substance reasonably satisfactory to, and delivered to, the Trustee. -14- "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, any Guarantor or the Trustee, unless an Opinion of Independent Counsel is required pursuant to the terms of this Indenture, and who shall be reasonably acceptable to the Trustee, and which opinion shall be in form and substance reasonably satisfactory to the Trustee. "Opinion of Independent Counsel" means a written opinion of counsel which is issued by a Person who is not an employee, director or consultant (other than non-employee legal counsel) of the Company or any Guarantor and who shall be reasonably acceptable to the Trustee, and which opinion shall be in form and substance reasonably satisfactory to the Trustee. "Outstanding" when used with respect to Securities means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or any Affiliate thereof) in trust or set aside and segregated in trust by the Company or any Affiliate thereof (if the Company or any Affiliate thereof shall act as its own Paying Agent) for the Holders of such Securities; provided that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor reasonably satisfactory to the Trustee has been made; (c) Securities, to the extent provided in Sections 402 and 403, with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Four; and (d) Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee and the Company proof reasonably satisfactory to each of them that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company, any Guarantor, or any other obligor upon the Securities or any Affiliate of the Company, any Guarantor or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, -15- demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the reasonable satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company, any Guarantor or any other obligor upon the Securities or any Affiliate of the Company, any Guarantor or such other obligor. "Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is equal in right of payment to the Securities and (b) with respect to any Guarantee, Indebtedness which ranks equal in right of payment to such Guarantee. "Paying Agent" means any Person (including the Company) authorized by the Company to pay the principal of, premium, if any, or interest on, any Securities on behalf of the Company. "Permitted Investment" means (1) Investments in any Wholly Owned Restricted Subsidiary or any Person which, as a result of such Investment, (a) becomes a Wholly Owned Restricted Subsidiary or (b) is merged or consolidated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or any Wholly Owned Restricted Subsidiary; (2) Indebtedness of the Company or a Restricted Subsidiary described under clauses (4), (5) and (6) of the definition of "Permitted Indebtedness"; (3) Investments in any of the Securities; (4) Temporary Cash Investments; (5) Investments acquired by the Company or any Restricted Subsidiary in connection with an Asset Sale permitted under Section 1012 herein to the extent such Investments are non-cash proceeds as permitted under such Section; (6) Investments in existence on the date of the Indenture; (7) any Investments received in good faith in settlement or compromise of obligations of trade creditors or customers that were incurred in the ordinary course of business, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer; (8) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and worker's compensation, performance and other similar deposits provided to third parties in the ordinary course of business; and (9) other Investments which in the aggregate outstanding at any one time do not total more than $25,000,000. In connection with any assets or property contributed or transferred to any Person as an Investment, such property and assets shall be equal to the Fair Market Value (as determined by the Company's Board of Directors) at the time of Investment. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and -16- delivered under Section 308 in exchange for a mutilated Security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Stock" means, with respect to any Person, any Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over the Capital Stock of any other class in such Person. "Prospectus" means the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Series A Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Public Equity Offering" means an underwritten public offering of common stock (other than Redeemable Capital Stock) of the Company with gross proceeds to the Company of at least $35 million pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-4 (or any successor form covering substantially the same transactions), Form S-8 (or any successor form covering substantially the same transactions) or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "Purchase Money Obligation" means any Indebtedness secured by a Lien on assets related to the business of the Company and any additions and accessions thereto, which are purchased or constructed by the Company at any time after the Securities are issued; provided that (1) the security agreement or conditional sales or other title retention contract pursuant to which the Lien on such assets is created (collectively a "Purchase Money Security Agreement") shall be entered into within 90 days after the purchase or substantial completion of the construction of such assets and shall at all times be confined solely to the assets so purchased or acquired, any additions and accessions thereto and any proceeds therefrom, (2) at no time shall the aggregate principal amount of the outstanding Indebtedness secured thereby be increased, except in connection with the purchase of additions and accessions thereto and except in respect of fees and other obligations in respect of such Indebtedness and (3) (A) the aggregate outstanding principal amount of Indebtedness secured thereby (determined on a per asset basis in the case of any additions and accessions) shall not at the time such Purchase Money Security Agreement is entered into exceed 100% of the purchase price to the Company of the assets subject thereto or (B) the Indebtedness secured thereby shall be with recourse solely to the assets so purchased or acquired, any additions and accessions thereto and any proceeds therefrom. -17- "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. "Redeemable Capital Stock" means any Capital Stock that, either by its terms or by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the principal of the Securities or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity (other than upon a change of control of, or sale of assets by, the Company in circumstances where the holders of the Securities would have similar rights), or is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity at the option of the holder thereof. "Redemption Date" when used with respect to any Security to be redeemed pursuant to any provision in this Indenture means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" when used with respect to any Security to be redeemed pursuant to any provision in this Indenture means the price at which it is to be redeemed pursuant to this Indenture. "Registration Rights Agreement" means (1) the Registration Rights Agreement, dated as of February 26, 2004 among the Company, the Guarantors and the Initial Purchasers and (2) with respect to any Additional Securities issued subsequent to the date hereof, the registration rights agreement entered into for the benefit of the holders of such Additional Securities, if any. "Registration Statement" means any registration statement of the Company and the Guarantors which covers any of the Series A Securities (and related guarantees) or Series B Securities (and related guarantees) pursuant to the provisions of the Registration Rights Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Regular Record Date" for the interest payable on any Interest Payment Date means the February 15th or August 15th (whether or not a Business Day) next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Regulation S Global Securities" means one or more permanent global Securities in registered form representing the aggregate principal amount of Securities sold in reliance on Regulation S under the Securities Act. -18- "Responsible Officer" when used with respect to the Trustee means any officer or employee assigned to the Corporate Trust Office or any agent of the Trustee appointed hereunder, including any vice president, assistant vice president, secretary, assistant secretary, or any other officer or assistant officer of the Trustee or any agent of the Trustee appointed hereunder to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board of Directors of the Company by a Board Resolution delivered to the Trustee as an Unrestricted Subsidiary pursuant to and in compliance with Section 1018 herein. "Rule 144A" means Rule 144A under the Securities Act. "Rule 144A Global Securities" means one or more permanent global Securities in registered form representing the aggregate principal amount of Securities sold in reliance on Rule 144A under the Securities Act. "S&P" means Standard & Poor's Rating Group, a division of McGraw Hill, Inc. or any successor rating agency. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. "Senior Guarantor Indebtedness" means the principal of, premium, if any, and interest (including interest, to the extent allowable, accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy law) on any Indebtedness of any Guarantor (other than as otherwise provided in this definition), whether outstanding on the date of this Indenture or thereafter created, incurred or assumed, and whether at any time owing, actually or contingent, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to any Guarantee. Notwithstanding the foregoing, "Senior Guarantor Indebtedness" shall not include (1) Indebtedness evidenced by the Guarantees, (2) Indebtedness that is subordinated or junior in right of payment to any Indebtedness of any Guarantor, (3) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is without recourse to any Guarantor, (4) Indebtedness which is represented by Redeemable Capital Stock, (5) any liability for foreign, federal, state, local or other taxes owed or owing by any Guarantor to the extent such liability constitutes Indebtedness, (6) Indebtedness of any Guarantor to a Subsidiary or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, (7) to the extent it might constitute Indebtedness, amounts owing for goods, materials or services purchased in the ordinary course of business or consisting of trade accounts payable owed or owing by such Guarantor, and amounts owed by such Guarantor for compensation to employees or -19- services rendered to such Guarantor, (8) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture and (9) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness. "Senior Indebtedness" means the principal of, premium, if any, and interest (including interest, to the extent allowable, accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy law) on any Indebtedness of the Company (other than as otherwise provided in this definition), whether outstanding on the date of this Indenture or thereafter created, incurred or assumed, and whether at any time owing, actually or contingent, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Securities. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (1) Indebtedness evidenced by the Securities, (2) Indebtedness that is subordinate or junior in right of payment to any Indebtedness of the Company, (3) Indebtedness which when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is without recourse to the Company, (4) Indebtedness which is represented by Redeemable Capital Stock, (5) any liability for foreign, federal, state, local or other taxes owed or owing by the Company to the extent such liability constitutes Indebtedness, (6) Indebtedness of the Company to a Subsidiary or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, (7) to the extent it might constitute Indebtedness, amounts owing for goods, materials or services purchased in the ordinary course of business or consisting of trade accounts payable owed or owing by the Company, and amounts owed by the Company for compensation to employees or services rendered to the Company, (8) that portion of any Indebtedness which at the time of issuance is issued in violation of the Indenture and (9) Indebtedness evidenced by any guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness. "Senior Representative" means the agent or representative of holders of any Designated Senior Indebtedness. "Series B Global Securities" means one or more permanent Global Securities in registered form representing the aggregate principal amount of Series B Securities exchanged for Series A Securities pursuant to the Exchange Offer. "Shelf Registration Statement" means a "shelf" registration statement of the Company and the Guarantors pursuant to Section 2.2 of the Registration Rights Agreement, which covers all of the Registrable Securities (as defined in the Registration Rights Agreement) on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. -20- "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 309. "Stated Maturity" means, when used with respect to any Indebtedness or any installment of interest thereon, the dates specified in such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest, as the case may be, is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor subordinated in right of payment to the Securities or a Guarantee, as the case may be. "Subsidiary" of a Person means (1) any corporation more than 50% of the outstanding voting power of the Voting Stock of which is owned or controlled, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries thereof, (2) any limited partnership of which such Person or any Subsidiary of such Person is a general partner, or (3) any other Person in which such Person, or one or more other Subsidiaries of such Person, or such Person and one or more other Subsidiaries, directly or indirectly, has more than 50% of the outstanding partnership or similar interests or has the power, by contract or otherwise, to direct or cause the direction of the policies, management and affairs thereof. "Successor Security" of any particular Security means every Security issued after, and evidencing all or a portion of the same debt as that evidenced by, such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 308 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Temporary Cash Investments" means (1) any evidence of Indebtedness, maturing not more than one year after the date of acquisition, issued by the United States of America, or an instrumentality or agency thereof, and guaranteed fully as to principal, premium, if any, and interest by the full faith and credit of the United States of America, (2) any certificate of deposit, maturing not more than one year after the date of acquisition, issued by, or time deposit of, a commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500,000,000 whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, (3) commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate or Subsidiary of the Company) organized and existing under the laws of the United States of America, any state thereof or the District of Columbia with a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P and (4) any money market deposit accounts issued or offered by a domestic commercial bank -21- having capital and surplus in excess of $500,000,000; provided that the short term debt of such commercial bank has a rating, at the time of Investment, of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture, until a successor trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or any successor statute. "Unrestricted Subsidiary" means any Subsidiary of the Company (other than a Guarantor) designated as such pursuant to and in compliance with Section 1018 herein. "Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means Indebtedness of such Unrestricted Subsidiary (1) as to which neither the Company nor any Restricted Subsidiary is directly or indirectly liable (by virtue of the Company or any such Restricted Subsidiary being the primary obligor on, guarantor of, or otherwise liable in any respect to, such Indebtedness), except Guaranteed Debt of the Company or any Restricted Subsidiary to any Affiliate, in which case (unless the incurrence of such Guaranteed Debt resulted in a Restricted Payment at the time of incurrence) the Company shall be deemed to have made a Restricted Payment equal to the principal amount of any such Indebtedness to the extent guaranteed at the time such Affiliate is designated an Unrestricted Subsidiary and (2) which, upon the occurrence of a default with respect thereto, does not result in, or permit any holder of any Indebtedness of the Company or any Subsidiary to declare, a default on such Indebtedness of the Company or any Subsidiary or cause the payment thereof to be accelerated or payable prior to its Stated Maturity; provided that notwithstanding the foregoing any Unrestricted Subsidiary may guarantee the Securities. "Voting Stock" of a Person means Capital Stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time Capital Stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the Capital Stock of which is owned by the Company or another Wholly Owned Restricted Subsidiary (other than directors' qualifying shares). -22- Section 102. Other Definitions.
Term Defined in Section ---- ------------------ "Act" 105 "Agent Members" 306 "Change of Control Offer" 1015 "Change of Control Purchase Date" 1015 "Change of Control Purchase Notice" 1015 "Change of Control Purchase Price" 1015 "control" 101 "covenant defeasance" 403 "Defaulted Interest" 309 "defeasance" 402 "Defeasance Redemption Date" 404 "Defeased Securities" 401 "Designation" 1018 "Designation Amount 1018 "DTC" 101 "Excess Proceeds" 1012 "incur" 1008 "Initial Period" 1303 "Non-payment Default" 1303 "Offer" 1012 "Offer Date" 1012 "Offered Price" 1012 "Pari Passu Debt Amount" 1012 "Pari Passu Offer" 1012 "Payment Blockage Period" 1303 "Payment Default" 1303 "Permitted Indebtedness" 1008 "Permitted Guarantor Junior Securities" 1417 "Permitted Junior Securities" 1302 "Permitted Payment" 1009 "Private Placement Legend" 202 "Purchase Money Security Agreement" 101 "refinancing" 1008 "Registration Default" 202 "Required Filing Date" 1019 "Restricted Payments" 1009 "Restricted Period" 201 "Revocation" 1018 "Securities" Recitals
-23- "Security Amount" 1012 "Security Register" 305 "Security Registrar" 305 "Series A Securities" Recitals "Series B Securities" Recitals "Special Payment Date" 309 "Surviving Entity" 801 "Surviving Guarantor Entity" 801 "transfer" 101 "U.S. Government Obligations" 404

Section 103. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company and any Guarantor (if applicable) and any other obligor on the Securities (if applicable) shall furnish to the Trustee an Officers' Certificate in a form and substance reasonably acceptable to the Trustee stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, and an Opinion of Counsel in a form and substance reasonably acceptable to the Trustee stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such certificates or opinions is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or individual or firm signing such opinion has read and understands such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual or such firm, he or it has made such examination or investigation as is necessary to enable him or it to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual or such firm, such condition or covenant has been complied with. -24- Section 104. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate of an officer of the Company, any Guarantor or other obligor on the Securities may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company, any Guarantor or other obligor on the Securities stating that the information with respect to such factual matters is in the possession of the Company, any Guarantor or other obligor on the Securities, unless such officer or counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Opinions of Counsel required to be delivered to the Trustee may have qualifications customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. Any certificate or opinion of an officer of the Company, any Guarantor or other obligor on the Securities may be based, insofar as it relates to accounting matters, upon a certificate or opinion of, or representations by, an accountant or firm of accountants in the employ of the Company, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the accounting matters upon which his certificate or opinion may be based are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent with respect to the Company. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Section 105. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such -25- Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 105. (b) The ownership of Securities shall be proved by the Security Register. (c) Any request, demand, authorization, direction, notice, consent, waiver or other Act by the Holder of any Security shall bind every future Holder of the same Security or the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company, any Guarantor or any other obligor of the Securities in reliance thereon, whether or not notation of such action is made upon such Security. (d) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (e) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of such Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding Trust Indenture Act Section 316(c), any such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not more than 30 days prior to the first solicitation of Holders generally in connection therewith and no later than the date such first solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for purposes of determining whether Holders of the requisite proportion of -26- Securities then Outstanding have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for this purpose the Securities then Outstanding shall be computed as of such record date; provided that no such request, demand, authorization, direction, notice, consent, waiver or other Act by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after such record date. (f) For purposes of this Indenture, any action by the Holders which may be taken in writing may be taken by electronic means or as otherwise reasonably acceptable to the Trustee. Section 106. Notices, etc., to the Trustee, the Company and any Guarantor. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holder or by the Company or any Guarantor or any other obligor on the Securities shall be sufficient for every purpose (except as provided in Section 501(c)) hereunder if in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or at any other address previously furnished in writing to the Holders or the Company, any Guarantor or any other obligor on the Securities by the Trustee; or (b) the Company or any Guarantor by the Trustee or any Holder shall be sufficient for every purpose (except as provided in Section 501(c)) hereunder if in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to the Company or such Guarantor addressed to it c/o Jo-Ann Stores, Inc., 5555 Darrow Road, Hudson, Ohio 44236, Attention: Chief Financial Officer, or at any other address previously furnished in writing to the Trustee by the Company or such Guarantor. Section 107. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to each Holder affected by such event, at its address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for -27- notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provision of this Indenture, then any method of giving such notice as shall be reasonably satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 108. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, the provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. Section 109. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 110. Successors and Assigns. All covenants and agreements in this Indenture by the Company and the Guarantors shall bind their respective successors and assigns, whether so expressed or not. Section 111. Separability Clause. In case any provision in this Indenture or in the Securities or Guarantees shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 112. Benefits of Indenture. Nothing in this Indenture or in the Securities or Guarantees, express or implied, shall give to any Person (other than the parties hereto and their successors hereunder, any Paying Agent and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. -28- Section 113. GOVERNING LAW. THIS INDENTURE, THE SECURITIES AND THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. Section 114. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Maturity or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal or premium, if any, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date or Redemption Date, or at the Maturity or Stated Maturity and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, Redemption Date, Maturity or Stated Maturity, as the case may be, to the next succeeding Business Day. Section 115. Independence of Covenants. All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. Section 116. Schedules and Exhibits. All schedules and exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. Section 117. Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be deemed an original; but all such counterparts shall together constitute but one and the same instrument. -29- ARTICLE TWO SECURITY FORMS Section 201. Forms Generally. The Securities, the Guarantees and the Trustee's certificate of authentication thereon shall be in substantially the forms set forth in this Article Two, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted hereby and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange, any organizational document or governing instrument or applicable law or as may, consistently herewith, be determined by the officers executing such Securities and Guarantees, as evidenced by their execution of the Securities and Guarantees. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The definitive Securities shall be printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Initial Securities offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more Rule 144A Global Securities, substantially in the form set forth in Section 202, deposited upon issuance with the Trustee, as custodian for the Depositary, registered in the name of the Depositary or its nominee, in each case for credit to an account of a direct or indirect participant of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Securities offered and sold in reliance on Regulation S shall be issued in the form of one or more Regulation S Global Securities, substantially in the form set forth in Section 202, deposited upon issuance with the Trustee, as custodian for the Depositary, registered in the name of the Depositary or its nominee, in each case for credit by the Depositary to an account of a direct or indirect participant of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided; provided, however, that upon such deposit through and including the 40th day after the later of the commencement of the Offering and the original issue date of the Securities (such period through and including such 40th day, the "Restricted Period"), all such Securities shall be credited to or through accounts maintained at the Depositary by or on behalf of Euroclear or Clearstream unless exchanged for interests in the Rule 144A Global -30- Securities in accordance with the transfer and certification requirements described below. The aggregate principal amount of the Regulation S Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Series B Securities exchanged for Series A Securities shall be issued initially in the form of one or more Series B Global Securities, substantially in the form set forth in Section 202, deposited upon issuance with the Trustee, as custodian for the Depositary, registered in the name of the Depositary or its nominee, in each case for credit to an account of a direct or indirect participant of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Series B Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. With respect to any Additional Securities issued subsequent to the date of this Indenture, (1) all references in Section 202 herein and elsewhere in this Indenture to a Registration Rights Agreement shall be to the registration rights agreement entered into with respect to such Additional Securities, (2) any references in Section 202 and elsewhere in this Indenture to the Exchange Offer, Exchange Offer Registration Statement, Shelf Registration Statement, Initial Purchasers, Registration Default, and any other term related thereto shall be to such terms as they are defined in such registration rights agreement entered into with respect to such Additional Securities, (3) all time periods described in the Securities with respect to the registration of such Additional Securities shall be as provided in such registration rights agreement entered into with respect to such Additional Securities and (4) all provisions of this Indenture shall be construed and interpreted to permit the issuance of such Additional Securities and to allow such Additional Securities to become fungible and interchangeable with the Initial Securities originally issued under this Indenture. Section 202. Form of Face of Security. (a) The form of the face of any Series A Securities authenticated and delivered hereunder shall be substantially as follows: Unless and until (i) an Initial Security is sold under an effective Registration Statement or (ii) an Initial Security is exchanged for a Series B Security in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, then such Initial Security shall bear the legend set forth below (the "Private Placement Legend") on the face thereof: THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR -31- OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A INSIDE THE UNITED STATES, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) OUTSIDE THE UNITED STATES PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. AS USED HEREIN, THE TERMS "UNITED STATES," "OFFSHORE TRANSACTION," AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. -32- [Legend if Security is a Global Security] THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. -33- JO-ANN STORES, INC. 7.50% SENIOR SUBORDINATED NOTE DUE 2012, SERIES A CUSIP NO. ______________ No. __________ $_______________________ Jo-Ann Stores, Inc., an Ohio corporation (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______ or registered assigns, the principal sum of _______ United States dollars on March 1, 2012, at the office or agency of the Company referred to below, and to pay interest thereon from February 26, 2004, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on March 1 and September 1 in each year, commencing September 1, 2004 at the rate of 7.50% per annum, subject to adjustments as described in the second following paragraph, in United States dollars, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The Holder of this Series A Security is entitled to the benefits of the Registration Rights Agreement among the Company, the Guarantors and the Initial Purchasers, dated February 26, 2004, pursuant to which, subject to the terms and conditions thereof, the Company and the Guarantors are obligated to consummate the Exchange Offer pursuant to which the Holder of this Security (and the related Guarantees) shall have the right to exchange this Security (and the related Guarantees) for 7.50% Senior Subordinated Notes due 2012, Series B and related guarantees (herein called the "Series B Securities") in like principal amount as provided therein. In addition, the Company and the Guarantors have agreed to use their best efforts to register the Securities for resale under the Securities Act through a Shelf Registration Statement in the event that the Exchange Offer is not consummated within 210 calendar days after the original issue of the Securities or under certain other circumstances. The Series A Securities and the Series B Securities are together (including related Guarantees) referred to as the "Securities." The Series A Securities rank pari passu in right of payment with the Series B Securities. In the event that (a) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 90th calendar day following the date of original issue of the Series A Securities, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 180th calendar day following the date of original -34- issue of the Series A Securities, (c) the Exchange Offer is not consummated on or prior to the 210th calendar day following the date of original issue of the Series A Securities, (d) a Shelf Registration Statement required to be filed is not declared effective on or prior to the later of 210 days after the date of original issue of the Series A Securities or 45 days after the event requiring the filing of the Shelf Registration Statement or (e) the Shelf Registration Statement required to be filed upon the occurrence of the events described above is declared effective but shall thereafter become unusable for more than 30 days in the aggregate (each such event referred to in clauses (a) through (e) above, a "Registration Default"), the interest rate borne by the Series A Securities shall be increased by one-quarter of one percent per annum upon the occurrence of any Registration Default, which rate (as increased as aforesaid) will increase by an additional one-quarter of one percent each 90-day period that such additional interest continues to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. Immediately following the cure of a Registration Default the accrual of additional interest with respect to that particular Registration Default will cease. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the February 15th or August 15th (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Series A Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may either be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by this Indenture not inconsistent with the requirements of such exchange, all as more fully provided in this Indenture. Payment of the principal of, premium, if any, and interest on, this Security, and exchange or transfer of the Security, will be made at the office or agency of the Company in The City of New York maintained for that purpose (which initially will be a corporate trust office of an affiliate of the Trustee, National City Bank, located at The Depository Trust Company, Transfer Agent Drop Service, 55 Water Street, Jeanette Park Entrance, New York, NY 10041), or at such other office or agency as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Security Register. -35- Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security is entitled to the benefits of the Guarantees by the Guarantors of the punctual payment when due and performance of the Indenture Obligations made in favor of the Trustee for the benefit of the Holders. Reference is made to Article Fourteen of the Indenture for a statement of the respective rights, limitations of rights, duties and obligations under the Guarantees of the Guarantors. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof or by the authenticating agent appointed as provided in the Indenture by manual signature of an authorized signer, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by the manual or facsimile signature of its authorized officers. JO-ANN STORES, INC. By:______________________________________________ Name: Title: Attest: ____________________________ Name: Brian Carney Title: Executive Vice President and Chief Financial Officer -36- TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 7.50% Senior Subordinated Notes due 2012, Series A referred to in the within-mentioned Indenture. NATIONAL CITY BANK, as Trustee By: ______________________________________ Authorized Signer Dated: February 26, 2004 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 1012 or Section 1015, as applicable, of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 1012 or Section 1015 as applicable, of the Indenture, state the amount (in original principal amount): $ _______________. Date: ___________________ Your Signature: ______________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: __________________________________ [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] -37- (b) The form of the face of any Series B Securities authenticated and delivered hereunder shall be substantially as follows: [Legend if Security is a Global Security] THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT AND ANY SUCH CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. -38- JO-ANN STORES, INC. 7.50% SENIOR SUBORDINATED NOTE DUE 2012, SERIES B CUSIP NO. ______________ No. __________ $_____________________ Jo-Ann Stores, Inc., an Ohio corporation (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______ or registered assigns, the principal sum of _______ United States dollars on March 1, 2012, at the office or agency of the Company referred to below, and to pay interest thereon from February 26, 2004, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on March 1 and September 1 in each year, commencing September 1, 2004 at the rate of 7.50% per annum, in United States dollars, until the principal hereof is paid or duly provided for; provided that to the extent interest has not been paid or duly provided for with respect to the Series A Security exchanged for this Series B Security, interest on this Series B Security shall accrue from the most recent Interest Payment Date to which interest on the Series A Security which was exchanged for this Series B Security has been paid or duly provided for. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. This Series B Security was issued pursuant to the Exchange Offer pursuant to which the 7.50% Senior Subordinated Notes due 2012, Series A, and related Guarantees (herein called the "Series A Securities") in like principal amount were exchanged for the Series B Securities and related Guarantees. The Series B Securities rank pari passu in right of payment with the Series A Securities. For any period in which the Series A Security exchanged for this Series B Security was outstanding, in the event that (a) the Exchange Offer Registration Statement shall not have been filed with the Commission on or prior to the 90th calendar day following the date of original issue of the Series A Securities, (b) the Exchange Offer Registration Statement shall not have been declared effective on or prior to the 180th calendar day following the date of original issue of the Series A Securities, (c) the Exchange Offer shall not have been consummated on or prior to the 210th calendar day following the date of original issue of the Series A Securities, (d) a Shelf Registration Statement required to have been filed shall not have been declared effective on or prior to the later of 210 days after the original issue of the Series A Securities or 45 days after the -39- event requiring the filing of the Shelf Registration Statement, or (e) the Shelf Registration Statement shall have been declared effective but thereafter shall have become unusable for more than 30 days in the aggregate (each such event referred to in clauses (a) through (e) above, a "Registration Default"), the interest rate borne by the Series A Securities shall have increased by one-quarter of one percent per annum upon the occurrence of any Registration Default, which rate (as increased as aforesaid) shall have increased by an additional one-quarter of one percent each 90-day period, if any, that such additional interest shall have continued to accrue under any such circumstance, with an aggregate maximum increase in the interest rate equal to one percent (1%) per annum. Immediately following the cure of a Registration Default the accrual of additional interest with respect to the particular Registration Default shall have ceased; provided, however, that, if after any such reduction in interest rate, a different event specified in clause (a), (b), (c), (d) or (e) above shall have occurred, the interest rate again shall have increased pursuant to the foregoing provisions. To the extent that interest at such increased rate shall not have been paid or duly provided for with respect to the Series A Security exchanged for this Series B Security, interest on this Series B Security shall accrue at such increased rate, from the most recent Interest Payment Date to which interest at such increased rate on the Series A Security exchanged for this Series B Security has been paid or duly provided for, to the date on which the particular Registration Default shall have been cured. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the February 15th or August 15th (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the interest rate borne by the Series B Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may either be paid to the Person in whose name this Security (or any Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in this Indenture. Payment of the principal of, premium, if any, and interest on, this Security, and exchange or transfer of the Security, will be made at the office or agency of the Company in The City of New York maintained for such purpose (which initially will be a corporate trust office of an affiliate of the Trustee, National City Bank, located at The Depository Trust Company, Transfer Agent Drop Service, 55 Water Street, Jeanette Park Entrance, New York, NY 10041), or at such other office or agency as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of -40- payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security is entitled to the benefits of the Guarantees by the Guarantors of the punctual payment when due and performance of the Indenture Obligations made in favor of the Trustee for the benefit of the Holders. Reference is made to Article Fourteen of the Indenture for a statement of the respective rights, limitations of rights, duties and obligations under the Guarantees of the Guarantors. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof or by the authenticating agent appointed as provided in the Indenture by manual signature of an authorized signer, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by the manual or facsimile signature of its authorized officers. JO-ANN STORES, INC. By:______________________________________________ Name: Title: Attest: _________________________ Name: Brian Carney Title: Executive Vice President and Chief Financial Officer -41- TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 7.50% Senior Subordinated Notes due 2012, Series B referred to in the within-mentioned Indenture. NATIONAL CITY BANK, as Trustee By: _________________________________ Authorized Signer Dated: OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 1012 or Section 1015, as applicable, of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 1012 or Section 1015 as applicable, of the Indenture, state the amount (in original principal amount): $ _______________. Date: ___________________ Your Signature: _____________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ______________________________________ [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] -42- Section 203. Form of Reverse of Securities. (a) The form of the reverse of the Series A Securities shall be substantially as follows: JO-ANN STORES, INC. 7.50% Senior Subordinated Note due 2012, Series A This Security is one of a duly authorized issue of Securities of the Company designated as its 7.50% Senior Subordinated Notes due 2012, Series A (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $100,000,000, issued under and subject to the terms of an indenture (herein called the "Indenture") dated as of February 26, 2004, among the Company, the Guarantors and National City Bank, as trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Guarantors, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Company may, from time to time, without notice to or the consent of the Holders of the Securities, create and issue Additional Securities under the Indenture ranking equally with the Initial Securities in all respects (or in all respects other than the payment of interest accruing prior to the issue date of such Additional Securities or except for the first payment of interest following the issue date of such Additional Securities), subject to the limitations described in Section 1008 of the Indenture. Such Additional Securities will be consolidated and form a single series with the Initial Securities and have the same terms as to status, redemption or otherwise as the Initial Securities. The Securities are subject to redemption at any time on or after March 1, 2008, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral multiple thereof, at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning March 1 of the years indicated below:
Redemption Year Price - ---- ---------- ~~2008...................................... 103.750% 2009...................................... 101.875%~~
and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the rights of Holders of record on relevant record dates to receive interest due on an Interest Payment Date). -43- In addition, at any time on or prior to March 1, 2007, the Company, at its option, may use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under the Indenture at a redemption price equal to 107.500% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that this redemption provision shall not be applicable with respect to any transaction that results in a Change of Control. At least 65% of the initial aggregate principal amount of Securities must remain outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities or portions thereof to be redeemed in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed, or if the Securities are not so listed, pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change of Control, each Holder may require the Company to purchase such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to a Change of Control Offer in accordance with the procedures set forth in the Indenture. Under certain circumstances, if all or a portion of the Net Cash Proceeds received by the Company from any Asset Sale are not required to be applied to repay permanently any Senior Indebtedness or any Senior Guarantor Indebtedness, or if the Company determines not to apply such Net Cash Proceeds to the permanent prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness is then outstanding, and if the Company has not invested such Net Cash Proceeds in properties and assets that replace the properties and assets that were the subject of the Asset Sale or in properties and assets which will be used in the businesses of the Company or its Restricted Subsidiaries existing on the date of the Indenture or in businesses reasonably related thereto and such Net Cash Proceeds not used or invested exceeds a specified amount, the Company will be required to apply such proceeds to the repayment of the Securities and certain Indebtedness ranking pari passu in right of payment to the Securities. In the case of any redemption or repurchase of Securities in accordance with the Indenture, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities of record as of the close of business on the relevant Regular Record Date or Special Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in -44- accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or repurchase of this Security in accordance with the Indenture in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Securities and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Holders, certain amendments which require the consent of Holders of 66 2/3% of the outstanding principal amount of the Securities and certain amendments which require the consent of all the Holders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the Guarantors and the rights of the Holders under the Indenture and the Securities and the Guarantees at any time by the Company and the Trustee with the consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of at least a majority in aggregate principal amount of the Securities (Holders of 66 2/3% in aggregate principal amount of the Securities or 100% of the Holders in certain circumstances) at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company and the Guarantors with certain provisions of the Indenture and the Securities and the Guarantees and certain past Defaults under the Indenture and the Securities and the Guarantees and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. The Securities are, to the extent and manner provided in Article Thirteen of the Indenture, subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, any Guarantor or any other obligor on the Securities (in the event such Guarantor or such other obligor is obligated to make payments in respect of the Securities), which is absolute and -45- unconditional, to pay the principal of, premium, if any, and interest on, this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Certificated securities shall be transferred to all beneficial holders in exchange for their beneficial interests in the Rule 144A Global Securities or the Regulation S Global Securities if (i) such Depositary (A) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (B) has ceased to be a clearing agency registered as such under the Exchange Act, and in either case the Company fails to appoint a successor Depositary within 90 days, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Securities in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to such Global Security. Upon any such issuance, the Trustee is required to register such certificated Series A Securities in the name of, and cause the same to be delivered to, such Person or Persons (or the nominee of any thereof). All such certificated Series A Securities would be required to include the Private Placement Legend. Series A Securities in certificated form are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series A Securities are exchangeable for a like aggregate principal amount of Securities of a differing authorized denomination, as requested by the Holder surrendering the same. At any time when the Company is not subject to Sections 13 or 15(d) of the Exchange Act, upon the written request of a Holder of a Series A Security, the Company will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of such Series A Security who such Holder informs the Company is reasonably believed to be a "Qualified Institutional Buyer" within the meaning of Rule 144A under the Securities Act, as the case may be, in order to permit compliance by such Holder with Rule 144A under the Securities Act. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. -46- Prior to due presentment of this Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security is overdue, and neither the Company, any Guarantor, the Trustee nor any such agent shall be affected by notice to the contrary. THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. All terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. [The Transferee Certificate, in the form of Appendix I hereto, will be attached to the Series A Security.] (b) The form of the reverse of the Series B Securities shall be substantially as follows: JO-ANN STORES, INC. 7.50% Senior Subordinated Note due 2012, Series B This Security is one of a duly authorized issue of Securities of the Company designated as its 7.50% Senior Subordinated Notes due 2012, Series B (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $100,000,000, issued under and subject to the terms of an indenture (herein called the "Indenture") dated as of February 26, 2004, among the Company, the Guarantors and National City Bank, as trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Guarantors, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Company may, from time to time, without notice to or the consent of the Holders of the Securities, create and issue Additional Securities under the Indenture ranking equally with the Initial Securities in all respects (or in all respects other than the payment of interest accruing prior to the issue date of such Additional Securities or except for the first payment of interest following the issue date of such Additional Securities), subject to the limitations described in Section 1008 of the Indenture. Such Additional -47- Securities will be consolidated and form a single series with the Initial Securities and have the same terms as to status, redemption or otherwise as the Initial Securities. The Securities are subject to redemption at any time on or after March 1, 2008, at the option of the Company, in whole or in part, on not less than 30 nor more than 60 days' prior notice, in amounts of $1,000 or an integral multiple thereof, at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning March 1 of the years indicated below:
Redemption Year Price - ---- ---------- ~~2008...................................... 103.750% 2009...................................... 101.875%~~
and thereafter at 100% of the principal amount, in each case, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the rights of Holders of record on relevant record dates to receive interest due on an Interest Payment Date). In addition, at any time on or prior to March 1, 2007, the Company may, at its option, use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under the Indenture at a redemption price equal to 107.500% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that this redemption provision shall not be applicable with respect to any transaction that results in a Change of Control. At least 65% of the initial aggregate principal amount of Securities must remain outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities or portions thereof to be redeemed in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed or, if the Securities are not so listed, pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. Upon the occurrence of a Change of Control, each Holder may require the Company to purchase such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to a Change of Control Offer in accordance with the procedures set forth in the Indenture. Under certain circumstances, if all or a portion of the Net Cash Proceeds received by the Company from any Asset Sale are not required to be applied to repay -48- permanently any Senior Indebtedness or Senior Guarantor Indebtedness, or if the Company determines not to apply such Net Cash Proceeds to the permanent prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness is then outstanding, and if the Company has not invested such Net Cash Proceeds in properties and assets that replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the businesses of the Company or its Restricted Subsidiaries existing on the date of the Indenture or in businesses reasonably related thereto, and such Net Cash Proceeds not used or invested exceeds a specified amount, the Company will be required to apply such proceeds to the repayment of the Securities and certain Indebtedness ranking pari passu in right of payment to the Securities. In the case of any redemption or repurchase of Securities in accordance with the Indenture, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities of record as of the close of business on the relevant Regular Record Date or Special Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or repurchase of this Security in accordance with the Indenture in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal amount of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire Indebtedness on the Securities and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions (including certain amendments permitted without the consent of any Holders, certain amendments which require the consent of Holders of 66 2/3% of the outstanding principal amount of the Securities and certain amendments which required the consent of all of the Holders) as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the Guarantors and the rights of the Holders under the Indenture and the Securities and the Guarantees at any time by the Company and the Trustee with the consent of the Holders of at least a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of at least a majority in aggregate principal amount of the Securities (Holders of 66 2/3% in aggregate principal amount of the Securities or 100% of the Holders in certain circumstances) at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the -49- Company and the Guarantors with certain provisions of the Indenture and the Securities and the Guarantees and certain past Defaults under the Indenture and the Securities and the Guarantees and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. The Securities are, to the extent and manner provided in Article Thirteen of the Indenture, subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, any Guarantor or any other obligor on the Securities (in the event such Guarantor or such other obligor is obligated to make payments in respect of the Securities), which is absolute and unconditional, to pay the principal of, and premium, if any, and interest on, this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Certificated securities shall be transferred to all beneficial holders in exchange for their beneficial interests in the Rule 144A Global Securities or the Regulation S Global Securities if (i) such Depositary (A) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (B) has ceased to be a clearing agency registered as such under the Exchange Act, and in either case the Company fails to appoint a successor Depositary within 90 days, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Securities in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to such Global Security. Upon any such issuance, the Trustee is required to register such certificated Series B Securities in the name of, and cause the same to be delivered to, such Person or Persons (or the nominee of any thereof). Series B Securities in certificated form are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series B Securities -50- are exchangeable for a like aggregate principal amount of Securities of a differing authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security is overdue, and neither the Company, any Guarantor, the Trustee nor any such agent shall be affected by notice to the contrary. THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. All terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. [The Transferee Certificate, in the form of Appendix II hereto, will be attached to the Series B Security.] Section 204. Form of Guarantee. The form of Guarantee shall be set forth on the Securities substantially as follows: GUARANTEE For value received, each of the undersigned hereby absolutely, fully and unconditionally and irrevocably guarantees, jointly and severally with each other Guarantor, to the holder of this Security the payment of principal of, premium, if any, and interest on this Security upon which these Guarantees are endorsed in the amounts and at the time when due and payable whether by declaration thereof, or otherwise, and interest on the overdue principal and interest, if any, of this Security, if lawful, and the payment or performance of all other obligations of the Company under the Indenture or the Securities, to the holder of this Security and the Trustee, all in accordance with and subject to the terms and limitations of this Security and Article Fourteen of the Indenture. This Guarantee will not become effective until the Trustee duly executes the certificate of authentication on this Security. These Guarantees shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of law principles thereof. The Indebtedness evidenced by these Guarantees is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior -51- Guarantor Indebtedness, whether outstanding on the date of the Indenture or thereafter, and the Guarantees are issued subject to such provisions. Dated: February 26, 2004 JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. TEAM JO-ANN, INC. FCA OF OHIO, INC. HOUSE OF FABRICS, INC. By ____________________________________ Name: Title: Attest: ________________________ Name: Brian Carney Title: Vice President ARTICLE THREE THE SECURITIES Section 301. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $100,000,000 in principal amount of Securities, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 303, 304, 305, 306, 307, 308, 906, 1012, 1015 or 1108. Notwithstanding the foregoing, the Company may, from time to time, without notice to or the consent of the Holders of Securities, create and issue Additional Securities under this Indenture ranking equally with the Initial Securities in all respects (or in all respects other than the payment of interest accruing prior to the issue date of such Additional Securities or except for the first payment of interest following the issue date of such Additional Securities), subject to the limitations described in Section 1008 hereof. Such Additional Securities will be consolidated and form a single series with the Initial Securities and have the same terms as to status, redemption or otherwise as the Initial Securities. The Securities shall be known and designated as the "7.50% Senior Subordinated Notes due 2012" of the Company. The Stated Maturity of the Securities shall be March 1, 2012, and the Securities shall each bear interest at the rate of 7.50% per annum, as such interest rate may be adjusted as set forth in the Securities, from February 26, 2004, or from the most recent Interest Payment Date to which interest has been paid, -52- payable semiannually on March 1 and September 1 in each year, commencing September 1, 2004 until the principal thereof is paid or duly provided for. Interest on any overdue principal, interest (to the extent lawful) or premium, if any, shall be payable on demand. The principal of, premium, if any, and interest on, the Securities shall be payable and the Securities shall be exchangeable and transferable at an office or agency of the Company in The City of New York maintained for such purposes; provided, however, that payment of interest may be made at the option of the Company by check mailed to addresses of the Persons entitled thereto as shown on the Security Register. For all purposes hereunder, the Series A Securities and the Series B Securities will be treated as one class and are together referred to as the "Securities." The Series A Securities rank pari passu in right of payment with the Series B Securities. The Securities shall be subject to repurchase by the Company pursuant to an Offer as provided in Section 1012. Holders shall have the right to require the Company to purchase their Securities, in whole or in part, in the event of a Change of Control pursuant to Section 1015. The Securities shall be redeemable as provided in Article Eleven and in the Securities. The Indebtedness evidenced by the Securities shall rank junior to and be subordinated in right of payment to the prior payment in full of all other Senior Indebtedness. The Securities shall be senior subordinated Indebtedness of the Company ranking equal to all other existing and future senior subordinated Indebtedness of the Company and senior to all Subordinated Indebtedness of the Company. At the election of the Company, the entire Indebtedness on the Securities or certain of the Company's obligations and covenants and certain Events of Default thereunder may be defeased as provided in Article Four. Section 302. Denominations. The Securities shall be issuable only in fully registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. Section 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by one of its Chairman of the Board, its President, its Chief Executive Officer, its Chief Financial Officer or one of its Vice Presidents under its corporate seal reproduced thereon attested -53- by its Secretary or one of its Assistant Secretaries. The signatures of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee (with Guarantees endorsed thereon) for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as provided in this Indenture and not otherwise. Each Security shall be dated the date of its authentication. No Security or Guarantee endorsed thereon shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company or any Guarantor, pursuant to Article Eight, shall, in a single transaction or through a series of related transactions, be consolidated or merged with or into any other Person or shall sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person, and the successor Person resulting from such consolidation or surviving such merger, or into which the Company or such Guarantor shall have been merged, or the successor Person which shall have participated in the sale, assignment, conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Securities authenticated or delivered prior to such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Securities executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Securities surrendered for such exchange and of like principal amount; and the Trustee, upon the request of the successor Person, shall authenticate and deliver Securities as specified in such request for the purpose of such exchange. If Securities shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section 303 in exchange or substitution for or upon registration of transfer of any -54- Securities, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Securities at the time Outstanding for Securities authenticated and delivered in such new name. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities on behalf of the Trustee. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Security Registrar or Paying Agent to deal with the Company and its Affiliates. Section 304. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 305. Registration, Registration of Transfer and Exchange. The Company shall cause the Trustee to keep, so long as it is the Security Registrar, at the Corporate Trust Office of the Trustee, or such other office as the Trustee may designate, a register (the register maintained in such office or in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as the Security Registrar may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee shall initially be the "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. The Company may change the Security Registrar or appoint one or more co-Security Registrars without notice. -55- Upon surrender for registration of transfer of any Security at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series of any authorized denomination or denominations, of a like aggregate principal amount. Furthermore, any Holder of the Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interests in such Global Security may be effected only through a book-entry system maintained by the Holder of such Global Security (or its agent), and that ownership of a beneficial interest in a Security shall be required to be reflected in a book entry. At the option of the Holder, Securities of any authorized denomination or denominations may be exchanged for other Securities of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, Securities of the same series which the Holder making the exchange is entitled to receive; provided that no exchange of Series A Securities for Series B Securities shall occur until an Exchange Offer Registration Statement shall have been declared effective by the Commission and the Exchange Offer shall have expired and that the Series A Securities exchanged for the Series B Securities shall be canceled. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same Indebtedness, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer, or for exchange, repurchase or redemption, shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to a Holder for any registration of transfer, exchange or redemption of Securities, except for any tax or other governmental charge that may be imposed in connection therewith, other than exchanges pursuant to Sections 303, 304, 305, 308, 906, 1012, 1015 or 1108 not involving any transfer. The Company shall not be required (a) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of the Securities selected for redemption under Section 1104 and ending at the close of business on the day of such mailing or (b) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of Securities being redeemed in part. -56- Every Security shall be subject to the restrictions on transfer provided in the legend required to be set forth on the face of each Security pursuant to Section 202, and the restrictions set forth in this Section 305, and the Holder of each Security, by such Holder's acceptance thereof (or interest therein), agrees to be bound by such restrictions on transfer. Except as provided in the preceding paragraph, any Security authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, any Global Security, whether pursuant to this Section 305, Section 304, 308, 906 or 1108 or otherwise, shall also be a Global Security and bear the legend specified in Section 202. Section 306. Book Entry Provisions for Global Securities. (a) Each Global Security initially shall (i) be registered in the name of the Depositary for such Global Security or the nominee of such Depositary, (ii) be deposited with, or on behalf of, the Depositary or with the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 202. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under such Global Security, and the Depositary may be treated by the Company, the Guarantors, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Guarantors, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Security. (b) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (i) such Depositary (A) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (B) has ceased to be a clearing agency registered as such under the Exchange Act, and in either case the Company fails to appoint a successor Depositary within 90 days, (ii) the Company, at its option, executes and delivers to the Trustee a Company Order stating that it elects to cause the issuance of the Securities in certificated form and that all Global Securities shall be exchanged in whole for Securities that are not Global Securities (in which case such exchange shall be effected by the Trustee) or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to such Global Security. -57- (c) If any Global Security is to be exchanged for other Securities or canceled in whole, it shall be surrendered by or on behalf of the Depositary or its nominee to the Trustee, as Security Registrar, for exchange or cancellation as provided in this Article Three. If any Global Security is to be exchanged for other Securities or canceled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article Three or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Trustee, as Security Registrar, whereupon the Trustee, in accordance with the Applicable Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security, the Trustee shall, subject to this Section 306(c) and as otherwise provided in this Article Three, authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) to or upon the order of, and registered in such names as may be directed by, the Depositary or its authorized representative. Upon the request of the Trustee in connection with the occurrence of any of the events specified in the preceding paragraph, the Company shall promptly make available to the Trustee a reasonable supply of Securities that are not in the form of Global Securities. The Trustee shall be entitled to rely upon any order, direction or request of the Depositary or its authorized representative which is given or made pursuant to this Article Three if such order, direction or request is given or made in accordance with the Applicable Procedures. (d) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Article Three or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof. (e) The Depositary or its nominee, as registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under the Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Procedures. Accordingly, any such owner's beneficial interest in a Global Security will be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Agent Members. Section 307. Special Transfer and Exchange Provisions. (a) Certain Transfers and Exchanges. Transfers and exchanges of Securities and beneficial interests in a Global Security of the kinds specified in this Section 307 shall be made only in accordance with this Section 307. -58- (i) Rule 144A Global Security to Regulation S Global Security. If the owner of a beneficial interest in the Rule 144A Global Security wishes at any time to transfer such interest to a Person who wishes to acquire the same in the form of a beneficial interest in the Regulation S Global Security, such transfer may be effected only in accordance with the provisions of this paragraph and paragraph (iv) below and subject to the Applicable Procedures. Upon receipt by the Trustee, as Security Registrar, of (a) an order given by the Depositary or its authorized representative directing that a beneficial interest in the Regulation S Global Security in a specified principal amount be credited to a specified Agent Member's account and that a beneficial interest in the Rule 144A Global Security in an equal principal amount be debited from another specified Agent Member's account and (b) a Regulation S Certificate in the form of Exhibit A hereto, satisfactory to the Trustee and duly executed by the owner of such beneficial interest in the Rule 144A Global Security or his attorney duly authorized in writing, then the Trustee, as Security Registrar but subject to paragraph (iv) below, shall reduce the principal amount of the Rule 144A Global Security and increase the principal amount of the Regulation S Global Security by such specified principal amount as provided in Section 306(c). (ii) Regulation S Global Security to Rule 144A Global Security. If the owner of a beneficial interest in the Regulation S Global Security wishes at any time to transfer such interest to a Person who wishes to acquire the same in the form of a beneficial interest in the Rule 144A Global Security, such transfer may be effected only in accordance with this paragraph (ii) and subject to the Applicable Procedures. Upon receipt by the Trustee, as Security Registrar, of (a) an order given by the Depositary or its authorized representative directing that a beneficial interest in the Rule 144A Global Security in a specified principal amount be credited to a specified Agent Member's account and that a beneficial interest in the Regulation S Global Security in an equal principal amount be debited from another specified Agent Member's account and (b) if such transfer is to occur during the Restricted Period, a Restricted Securities Certificate in the form of Exhibit B hereto, satisfactory to the Trustee and duly executed by the owner of such beneficial interest in the Regulation S Global Security or his attorney duly authorized in writing, then the Trustee, as Security Registrar, shall reduce the principal amount of the Regulation S Global Security and increase the principal amount of the Rule 144A Global Security by such specified principal amount as provided in Section 306(c). (iii) Exchanges between Global Security and Non-Global Security. A beneficial interest in a Global Security may be exchanged for a Security that is not a Global Security as provided in Section 307(b), provided that, if such interest is a beneficial interest in the Rule 144A Global Security, or if such interest is a beneficial interest in the Regulation S Global Security and such exchange is to occur during the Restricted Period, then such interest -59- shall bear the Private Placement Legend (subject in each case to Section 307(b). (iv) Regulation S Global Security to be Held Through Euroclear or Clearstream during Restricted Period. The Company shall use its best efforts to cause the Depositary to ensure that, until the expiration of the Restricted Period, beneficial interests in the Regulation S Global Security may be held only in or through accounts maintained at the Depositary by Euroclear or Clearstream (or by Agent Members acting for the account thereof), and no person shall be entitled to effect any transfer or exchange that would result in any such interest being held otherwise than in or through such an account; provided that this paragraph (iv) shall not prohibit any transfer or exchange of such an interest in accordance with paragraph (ii) above. (b) Private Placement Legends. Rule 144A Securities and their Successor Securities and Regulation S Securities and their Successor Securities shall bear a Private Placement Legend, subject to the following: (i) subject to the following clauses of this Section 307(b), a Security or any portion thereof which is exchanged, upon transfer or otherwise, for a Global Security or any portion thereof shall bear the Private Placement Legend borne by such Global Security while represented thereby; (ii) subject to the following Clauses of this Section 307(b), a new Security which is not a Global Security and is issued in exchange for another Security (including a Global Security) or any portion thereof, upon transfer or otherwise, shall bear the Private Placement Legend borne by such other Security; (iii) Exchange Securities, and all other Securities sold or otherwise disposed of pursuant to an effective registration statement under the Securities Act, together with their respective Successor Securities, shall not bear a Private Placement Legend; (iv) at any time after the Securities may be freely transferred without registration under the Securities Act or without being subject to transfer restrictions pursuant to the Securities Act, a new Security which does not bear a Private Placement Legend may be issued in exchange for or in lieu of a Security (other than a Global Security) or any portion thereof which bears such a legend if the Trustee has received an Unrestricted Securities Certificate substantially in the form of Exhibit C hereto, satisfactory to the Trustee and duly executed by the Holder of such legended Security or his attorney duly authorized in writing, and after such date and receipt of such certificate, the Trustee shall authenticate and deliver such a new Security in -60- exchange for or in lieu of such other Security as provided in this Article Three; (v) a new Security which does not bear a Private Placement Legend may be issued in exchange for or in lieu of a Security (other than a Global Security) or any portion thereof which bears such a legend if, in the Company's judgment, placing such a legend upon such new Security is not necessary to ensure compliance with the registration requirements of the Securities Act, and the Trustee, at the direction of the Company, shall authenticate and deliver such a new Security as provided in this Article Three; and (vi) notwithstanding the foregoing provisions of this Section 307(b), a Successor Security of a Security that does not bear a particular form of Private Placement Legend shall not bear such form of legend unless the Company has reasonable cause to believe that such Successor Security is a "restricted security" within the meaning of Rule 144, in which case the Trustee, at the direction of the Company, shall authenticate and deliver a new Security bearing a Private Placement Legend in exchange for such Successor Security as provided in this Article Three. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Security Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 306 or this Section 307. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Security Registrar. Section 308. Mutilated, Destroyed, Lost and Stolen Securities. If (a) any mutilated Security is surrendered to the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company, any Guarantor and the Trustee, such security or indemnity, in each case, as may be required by them to save each of them harmless, then, in the absence of notice to the Company, any Guarantor or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon a Company Request the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a replacement Security of like tenor and principal amount, bearing a number not contemporaneously outstanding and each Guarantor shall execute a replacement Guarantee. -61- In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a replacement Security, pay such Security. Upon the issuance of any replacement Securities under this Section, the Company may require the payment of a sum sufficient to pay all documentary, stamp or similar issue or transfer taxes or other governmental charges that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every replacement Security and Guarantee issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company and any Guarantor, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 309. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on the Stated Maturity of such interest shall be paid to the Person in whose name the Security (or any Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest payment. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on the Stated Maturity of such interest, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest"), shall forthwith cease to be payable to the Holder on the Regular Record Date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Subsection (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or any relevant Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date (not less than 30 days after such notice) of the proposed payment (the "Special Payment Date"), and at the same time the Company shall deposit with -62- the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the Special Payment Date, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Subsection provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the Special Payment Date and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company in writing of such Special Record Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date and Special Payment Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities are registered on such Special Record Date and shall no longer be payable pursuant to the following Subsection (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by this Indenture not inconsistent with the requirements of such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this Subsection, such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 309, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 310. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and the Company, or the Trustee on behalf of the Company, shall use CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Securities; and provided further, however, that -63- failure to use CUSIP numbers in any notice of redemption or exchange shall not affect the validity or sufficiency of such notice. Section 311. Persons Deemed Owners. Prior to and at the time of due presentment of a Security for registration of transfer, the Company, any Guarantor, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 309) interest on, such Security and for all other purposes whatsoever, whether or not such Security is overdue, and neither the Company, any Guarantor, the Trustee nor any agent of the Company, any Guarantor or the Trustee shall be affected by notice to the contrary. Section 312. Cancellation. All Securities surrendered for payment, purchase, redemption, registration of transfer or exchange shall be delivered to the Trustee and, if not already canceled, shall be promptly canceled by it. The Company and any Guarantor may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company or such Guarantor may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 312, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be destroyed and certification of their destruction delivered to the Company, unless by a Company Order received by the Trustee prior to such destruction, the Company shall direct that the canceled Securities be returned to it. The Trustee shall provide the Company a list of all Securities that have been canceled from time to time as requested by the Company. Section 313. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. ARTICLE FOUR DEFEASANCE AND COVENANT DEFEASANCE Section 401. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 402 or Section 403 be applied to all -64- of the Outstanding Securities (the "Defeased Securities"), upon compliance with the conditions set forth below in this Article Four. Section 402. Defeasance and Discharge. Upon the Company's exercise under Section 401 of the option applicable to this Section 402, the Company, each Guarantor and any other obligor upon the Securities, if any, shall be deemed to have been discharged from its obligations with respect to the Defeased Securities on the date the conditions set forth in Section 404 below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company, each Guarantor and any other obligor under this Indenture shall be deemed to have paid and discharged the entire Indebtedness represented by the Defeased Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 405 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company and upon Company Request, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Securities to receive, solely from the trust fund described in Section 404 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on, such Securities, when such payments are due, (b) the Company's obligations with respect to such Defeased Securities under Sections 304, 305, 308, 1002 and 1003, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including, without limitation, the Trustee's rights under Section 607, and (d) this Article Four. Subject to compliance with this Article Four, the Company may exercise its option under this Section 402 notwithstanding the prior exercise of its option under Section 403 with respect to the Securities. Section 403. Covenant Defeasance. Upon the Company's exercise under Section 401 of the option applicable to this Section 403, the Company and each Guarantor shall be released from its obligations under any covenant or provision contained or referred to in Sections 1005 through 1019, inclusive, and the provisions of clause (iii) of Section 801(a), with respect to the Defeased Securities, on and after the date the conditions set forth in Section 404 below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Securities shall thereafter be deemed to be not "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Defeased Securities, the Company and each Guarantor may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision -65- herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(c) or (g) but, except as specified above, the remainder of this Indenture and such Defeased Securities shall be unaffected thereby. Section 404. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 402 or Section 403 to the Defeased Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (a) cash in United States dollars in an amount, (b) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms and with no further reinvestment will provide, not later than one day before the due date of payment, money in an amount, or (c) a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants or a nationally recognized investment banking firm expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee to pay and discharge, the principal of, premium, if any, and interest on, the Defeased Securities, on the Stated Maturity of such principal or interest (or on any date after March 1, 2008 (such date being referred to as the "Defeasance Redemption Date") if at or prior to electing to exercise either its option applicable to Section 402 or its option applicable to Section 403, the Company has delivered to the Trustee an irrevocable notice to redeem the Defeased Securities on the Defeasance Redemption Date). For this purpose, "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (ii) 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; (2) In the case of an election under Section 402, the Company shall have delivered to the Trustee an Opinion of Independent Counsel in the United States stating that (A) the Company has received from, or there has been published by, the Internal Revenue -66- Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Independent Counsel in the United States shall confirm that, the Holders of the Outstanding Securities 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; (3) In the case of an election under Section 403, the Company shall have delivered to the Trustee an Opinion of Independent Counsel in the United States to the effect that the Holders of the Outstanding Securities 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; (4) No Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Section 501(h) or (i) is concerned, at any time during the period ending on the 91st day after the date of deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (5) Such defeasance or covenant defeasance shall not cause the Trustee for the Securities to have a conflicting interest in violation of and for purposes of the Trust Indenture Act with respect to any securities of the Company or any Guarantor; (6) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default under, this Indenture or any other material agreement or instrument to which the Company, any Guarantor or any Restricted Subsidiary is a party or by which it is bound; (7) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940 unless such trust shall be registered under such Act or exempt from registration thereunder; (8) The Company shall have delivered to the Trustee an Opinion of Independent Counsel in the United States to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (9) 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 Securities or any Guarantee over the other creditors of the Company or any Guarantor with the intent of defeating, hindering, delaying or defrauding creditors of the Company, any Guarantor or others; -67- (10) No event or condition shall exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the Securities on the date of such deposit or at any time ending on the 91st day after the date of such deposit; and (11) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Independent Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 402 or the covenant defeasance under Section 403 (as the case may be) have been complied with. Opinions of Counsel or Opinions of Independent Counsel required to be delivered under this Section shall be in form and substance reasonably satisfactory to the Trustee and may have qualifications customary for opinions of the type required and counsel delivering such opinions may rely on certificates of the Company or government or other officials customary for opinions of the type required, which certificates shall be limited as to matters of fact, including that various financial covenants have been complied with. Section 405. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all United States dollars and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 404 in respect of the Defeased Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (excluding the Company or any of its Affiliates acting as Paying Agent), as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 404 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is imposed, assessed or for the account of the Holders of the Defeased Securities. Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any United States dollars or U.S. Government Obligations held by it as provided in Section 404 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect defeasance or covenant defeasance. -68- Section 406. Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or U.S. Government Obligations in accordance with Section 402 or 403, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities and any Guarantor's obligations under any Guarantee shall be revived and reinstated, with present and prospective effect, as though no deposit had occurred pursuant to Section 402 or 403, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such United States dollars or U.S. Government Obligations in accordance with Section 402 or 403, as the case may be; provided, however, that if the Company makes any payment to the Trustee or Paying Agent of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, the Trustee or Paying Agent shall promptly pay any such amount to the Holders of the Securities and the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the United States dollars and U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE FIVE REMEDIES Section 501. Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) there shall be a default in the payment of any interest on any Security when it becomes due and payable, and such default shall continue for a period of 30 days (whether or not permitted by the subordination provisions of the Indenture); (b) there shall be a default in the payment of the principal of (or premium, if any, on) any Security at its Maturity (upon acceleration, optional or mandatory redemption, if any, required repurchase or otherwise) (whether or not prohibited by the subordination provisions of the Indenture); (c) (i) there shall be a default in the performance, or breach, of any covenant or agreement of the Company or any Guarantor under this Indenture or any Guarantee (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with in clause (a), (b) or in clause (ii), (iii) or (iv) of this clause (c)) and such default or breach shall continue for a period of 30 days after written notice -69- has been given, by certified mail, (x) to the Company by the Trustee or (y) to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Outstanding Securities; (ii) there shall be a default in the performance or breach of the provisions described in Article Eight herein; (iii) the Company shall have failed to make or consummate an Offer in accordance with the provisions of Section 1012 herein; or (iv) the Company shall have failed to make or consummate a Change of Control Offer in accordance with the provisions of Section 1015 herein; (d) one or more defaults shall have occurred under any of the agreements, indentures or instruments under which the Company, any Guarantor or any Restricted Subsidiary then has outstanding Indebtedness in excess of $10,000,000 individually or in the aggregate, and either (i) such default results from the failure to pay such Indebtedness at its stated final maturity or (ii) such default or defaults have resulted in the acceleration of the maturity of such Indebtedness; (e) any Guarantee shall for any reason cease to be, or shall for any reason be asserted in writing by any Guarantor or the Company not to be, in full force and effect and enforceable in accordance with its terms, except to the extent contemplated by this Indenture and any such Guarantee; (f) one or more judgments, orders or decrees of any court or regulatory or administrative agency for the payment of money in excess of $10,000,000, either individually or in the aggregate, shall be rendered against the Company, any Guarantor or any Restricted Subsidiary or any of their respective properties and shall not be discharged and either (i) any creditor shall have lawfully commenced an enforcement proceeding upon such judgment, order or decree or (ii) there shall have been a period of 60 consecutive days during which a stay of enforcement of such judgment or order, by reason of an appeal or otherwise, shall not be in effect; (g) any holder or holders of at least $10,000,000 in aggregate principal amount of Indebtedness of the Company, any Guarantor or any Restricted Subsidiary after a default under such Indebtedness shall notify the Trustee of the intended sale or disposition of any assets of the Company, any Guarantor or any Restricted Subsidiary that have been pledged to or for the benefit of such holder or holders to secure such Indebtedness or shall commence proceedings, or take any action (including by way of set-off), to retain in satisfaction of such Indebtedness or to collect on, seize, dispose of or apply in satisfaction of Indebtedness, assets of the Company, any Guarantor or any Restricted Subsidiary (including funds on deposit or held pursuant to lock-box and other similar arrangements); (h) there shall have been the entry by a court of competent jurisdiction of (i) a decree or order for relief in respect of the Company, any Guarantor or any Restricted Subsidiary in an involuntary case or proceeding under any applicable Bankruptcy Law or (ii) a decree or order adjudging the Company, any Guarantor or any Restricted Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement, adjustment or composition -70- of or in respect of the Company, any Guarantor or any Restricted Subsidiary under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company, any Guarantor or any Restricted Subsidiary or of any substantial part of their respective properties, or ordering the winding up or liquidation of their affairs, and any such decree or order for relief shall continue to be in effect, or any such other decree or order shall be unstayed and in effect, for a period of 60 consecutive days; or (i) (i) the Company, any Guarantor or any Restricted Subsidiary commences a voluntary case or proceeding under any applicable Bankruptcy Law or any other case or proceeding to be adjudicated bankrupt or insolvent, (ii) the Company, any Guarantor or any Restricted Subsidiary consents to the entry of a decree or order for relief in respect of the Company, such Guarantor or such Restricted Subsidiary in an involuntary case or proceeding under any applicable Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against it, (iii) the Company, any Guarantor or any Restricted Subsidiary files a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, (iv) the Company, any Guarantor or any Restricted Subsidiary (1) consents to the filing of such petition or the appointment of, or taking possession by, a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company, any Guarantor or such Restricted Subsidiary or of any substantial part of their respective properties or (2) makes an assignment for the benefit of creditors or (v) the Company, any Guarantor or any Restricted Subsidiary takes any corporate action in furtherance of any such actions in this paragraph (i). Section 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Sections 501(h) and (i) within) shall occur and be continuing with respect to this Indenture, the Trustee or the holders of not less than 25% in aggregate principal amount of the Securities then Outstanding may, and the Trustee at the request of such holders shall, declare all unpaid principal of, premium, if any, and accrued interest on all Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the holders of the Securities) and upon any such declaration, such principal, premium, if any, and interest shall become due and payable immediately. If an Event of Default specified in clause (h) or (i) of Section 501 occurs and is continuing, then all the Securities shall ipso facto become and be due and payable immediately in an amount equal to the principal amount of the Securities, together with accrued and unpaid interest, if any, to the date the Securities become due and payable, without any declaration or other act on the part of the Trustee or any holder. Thereupon, the Trustee may, at its discretion, proceed to protect and enforce the rights of the holders of the Securities by appropriate judicial proceedings. After a declaration of acceleration with respect to the Securities, but before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the holders of a majority in aggregate principal amount -71- of the Securities Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Outstanding Securities, (iii) the principal of and premium, if any, on any Outstanding Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities; (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (c) all Events of Default, other than the non-payment of principal of, premium, if any, and interest on the Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent Default or impair any right consequent thereon. Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company and each Guarantor covenant that if (a) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of or premium, if any, on any Security at the Stated Maturity thereof or otherwise, the Company and such Guarantor will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and premium, if any, and interest, with interest upon the overdue principal and premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the -72- costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company or any Guarantor, as the case may be, fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any Guarantor or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, any Guarantor or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders under this Indenture or any Guarantee by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, including seeking recourse against any Guarantor pursuant to the terms of any Guarantee, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein or therein, or to enforce any other proper remedy, including, without limitation, seeking recourse against any Guarantor pursuant to the terms of a Guarantee, or to enforce any other proper remedy, subject however to Section 512. No recovery of any such judgment upon any property of the Company or any Guarantor shall affect or impair any rights, powers or remedies of the Trustee or the Holders. Section 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor, including any Guarantor, upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, and premium, if any, and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; -73- and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 505. Trustee May Enforce Claims without Possession of Securities. All rights of action and claims under this Indenture, the Securities or the Guarantees may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article or otherwise on behalf of the Holders or the Trustee pursuant to this Article or through any proceeding or any arrangement or restructuring in anticipation or in lieu of any proceeding contemplated by this Article shall be applied, subject to applicable law, in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; SECOND: To the payment of the amounts then due and unpaid upon the Securities for principal, premium, if any, and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal, premium, if any, and interest; and -74- THIRD: The balance, if any, to the Person or Persons entitled thereto, including the Company, provided that all sums due and owing to the Holders and the Trustee have been paid in full as required by this Indenture. Section 507. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or the Securities, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as trustee hereunder; (c) such Holder or Holders have offered to the Trustee a reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 15 days after its receipt of such notice, request and offer (and if requested, provision) of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 15-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture, any Security or any Guarantee to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, any Security or any Guarantee, except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right based on the terms stated herein, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and (subject to Section 309) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or repurchase, on the Redemption Date or the -75- repurchase date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. Section 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Guarantee and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, any Guarantor, any other obligor on the Securities, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 510. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 512. Control by Holders. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture (including, without limitation, Section 507) or any Guarantee, expose the Trustee to personal liability, or be unduly prejudicial to Holders not joining therein; and -76- (b) subject to the provisions of Section 315 of the Trust Indenture Act, the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 513. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of 66 2/3% in aggregate principal amount of the Outstanding Securities or the Holders of all Outstanding Securities waive any past Default hereunder and its consequences, except a Default (a) in the payment of the principal of, premium, if any, or interest on any Security (which may only be waived with the consent of each Holder of Securities effected); or (b) in respect of a covenant or a provision hereof which under this Indenture cannot be modified or amended without the consent of the Holders of 66 2/3% in aggregate principal amount of the Outstanding Securities or the Holder of each Security Outstanding affected by such modification or amendment. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 514. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant, but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on, any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date). -77- Section 515. Waiver of Stay, Extension or Usury Laws. Each of the Company and the Guarantors covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company or any Guarantor from paying all or any portion of the principal of, premium, if any, or interest on the Securities contemplated herein or in the Securities or which may affect the covenants or the performance of this Indenture; and each of the Company and the Guarantors (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 516. Remedies Subject to Applicable Law. All rights, remedies and powers provided by this Article Five may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law in the premises, and all the provisions of this Indenture are intended to be subject to all applicable mandatory provisions of law which may be controlling in the premises and to be limited to the extent necessary so that they will not render this Indenture invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. ARTICLE SIX THE TRUSTEE Section 601. Duties of Trustee. Subject to the provisions of Trust Indenture Act Sections 315(a) through 315(d): (a) if a Default or an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise or use under the circumstances in the conduct of his own affairs; (b) except during the continuance of a Default or an Event of Default: (1) the Trustee need perform only those duties as are specifically set forth in this Indenture and no covenants or obligations shall be implied in this Indenture that are adverse to the Trustee; and -78- (2) in the absence of bad faith or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture; (c) the Trustee may not be relieved from liability for its own grossly negligent action, its own grossly negligent failure to act, or its own willful misconduct, except that: (1) this Subsection (c) does not limit the effect of Subsection (b) of this Section 601; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was grossly negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith, in accordance with a direction of the Holders of a majority in principal amount of Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power confirmed upon the Trustee under this Indenture; (d) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; (e) whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to Subsections (a), (b), (c) and (d) of this Section 601; and (f) the Trustee shall not be liable for interest on any money or assets received by it. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. Section 602. Notice of Defaults. Within 30 days after a Responsible Officer of the Trustee receives notice of the occurrence of any Default, the Trustee shall transmit by mail to all Holders and any other Persons entitled to receive reports pursuant to Section 313(c) of the Trust Indenture -79- Act, as their names and addresses appear in the Security Register, notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of, premium, if any, or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as a trust committee of Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. Section 603. Certain Rights of Trustee. Subject to the provisions of Section 601 hereof and Trust Indenture Act Sections 315(a) through 315(d): (a) the Trustee may rely and shall be protected in acting or refraining from acting upon receipt by it of any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of Indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) the Trustee may consult with counsel of its selection and any advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred therein; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture other than any liabilities arising out of the gross negligence, bad faith or willful misconduct of the Trustee; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, appraisal, bond, debenture, note, coupon, security or other paper or document unless requested in writing to do so by the Holders of not less than a majority in aggregate principal amount of the Securities then Outstanding; provided that, if the payment within a reasonable time to the Trustee of the - 80 - costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation so requested by the Holders of not less than a majority in aggregate principal amount of the Securities Outstanding shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; provided, further, the Trustee in its discretion may make such further inquiry or investigation into such facts or matters as it may deem fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. Section 604. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company and the Guarantors, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and that the statements made by it in any Statement of Eligibility and Qualification on Form T-1 to be supplied to the Company will be true and accurate subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 605. Trustee and Agents May Hold Securities; Collections; etc. The Trustee, any Paying Agent, Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities, with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent and, subject to Trust Indenture Act Sections 310 and 311, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. - 81 - Section 606. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by mandatory provisions of law. Except for funds or securities deposited with the Trustee pursuant to Article Four, the Trustee shall be required to invest all moneys received by the Trustee, until used or applied as herein provided, in Temporary Cash Investments in accordance with the written directions of the Company. Section 607. Compensation and Indemnification of Trustee and Its Prior Claim. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Company covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its gross negligence, bad faith or willful misconduct. The Company also covenants and agrees to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any claim, loss, liability, tax, assessment, governmental charge (other than taxes applicable to the Trustee's compensation hereunder) or expense incurred without gross negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs of enforcement of this Section 607 and the costs and expenses of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section 607 to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for reasonable expenses, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee and each predecessor Trustee. Section 608. Conflicting Interests. The Trustee shall comply with the provisions of Section 310(b) of the Trust Indenture Act. - 82 - Section 609. Trustee Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as trustee under Trust Indenture Act Section 310(a) and which shall have a combined capital and surplus of at least $250,000,000, to the extent there is an institution eligible and willing to serve. If the Trustee does not have a Corporate Trust Office in The City of New York, the Trustee may appoint an agent in The City of New York reasonably acceptable to the Company to conduct any activities which the Trustee may be required under this Indenture to conduct in The City of New York. If such Trustee publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 609, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 609, the Trustee shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 610. Resignation and Removal; Appointment of Successor Trustee. (a) No resignation or removal of the Trustee and no appointment of a successor trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor trustee under Section 611. (b) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice thereof to the Company no later than 20 Business Days prior to the proposed date of resignation. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board of Directors of the Company, a copy of which shall be delivered to the resigning Trustee and a copy to the successor trustee. If an instrument of acceptance by a successor trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may, or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint and prescribe a successor trustee. (c) The Trustee may be removed at any time for any cause or for no cause by an Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of Trust Indenture Act Section 310(b) after written request therefor by the Company - 83 - or by any Holder who has been a bona fide Holder of a Security for at least six months, (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, the Holder of any Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor trustee and shall comply with the applicable requirements of Section 611. If, within 60 days after such resignation, removal or incapability, or the occurrence of such vacancy, the Company has not appointed a successor Trustee, a successor trustee shall be appointed by the Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee. Such successor trustee so appointed shall forthwith upon its acceptance of such appointment become the successor trustee and supersede the successor trustee appointed by the Company. If no successor trustee shall have been so appointed by the Company or the Holders of the Securities and accepted appointment in the manner hereinafter provided, the Trustee or the Holder of any Security who has been a bona fide Holder for at least six months may, subject to Section 514, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor trustee and the address of its Corporate Trust Office or agent hereunder. - 84 - Section 611. Acceptance of Appointment by Successor. Every successor trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee as if originally named as Trustee hereunder; but, nevertheless, on the written request of the Company or the successor trustee, upon payment of its charges pursuant to Section 607 then unpaid, such retiring Trustee shall pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. No successor trustee with respect to the Securities shall accept appointment as provided in this Section 611 unless at the time of such acceptance such successor trustee shall be eligible to act as trustee under the provisions of Trust Indenture Act Section 310(a) and this Article Six and shall have a combined capital and surplus of at least $250,000,000 and have a Corporate Trust Office or an agent selected in accordance with Section 609. Upon acceptance of appointment by any successor trustee as provided in this Section 611, the Company shall give notice thereof to the Holders of the Securities, by mailing such notice to such Holders at their addresses as they shall appear on the Security Register. If the acceptance of appointment is substantially contemporaneous with the appointment, then the notice called for by the preceding sentence may be combined with the notice called for by Section 610. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be given at the expense of the Company. Section 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee (including the trust created by this Indenture) shall be the successor of the Trustee hereunder, provided that such corporation shall be eligible under Trust Indenture Act Section 310(a) and this Article Six and shall have a combined capital and surplus of at least $250,000,000 and have a Corporate Trust Office or an agent selected in accordance with Section 609, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not - 85 - delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or other obligor under the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). A Trustee who has resigned or been removed shall be subject to Trust Indenture Act Section 311(a) to the extent indicated therein. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semiannually, not more than 10 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (b) at such other times as the Trustee may reasonably request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content to that in subsection (a) hereof as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Security Registrar, no such list need be furnished. Section 702. Disclosure of Names and Addresses of Holders. Holders may communicate pursuant to Trust Indenture Act Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities, and the Trustee shall comply with Trust Indenture Act Section 312(b). The Company, the Trustee, the Security Registrar and any other Person shall have the protection of Trust Indenture Act - 86 - Section 312(c). Further, every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders in accordance with Trust Indenture Act Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Trust Indenture Act Section 312. Section 703. Reports by Trustee. (a) Within 60 days after May 15 of each year commencing with the first May 15 after the issuance of Securities, the Trustee, if so required under the Trust Indenture Act, shall transmit by mail to all Holders, in the manner and to the extent provided in Trust Indenture Act Section 313(c), a brief report dated as of such May 15 in accordance with and with respect to the matters required by Trust Indenture Act Section 313(a). The Trustee shall also transmit by mail to all Holders, in the manner and to the extent provided in Trust Indenture Act Section 313(c), a brief report in accordance with and with respect to the matters required by Trust Indenture Act Section 313(b)(2). (b) A copy of each report transmitted to Holders pursuant to this Section 703 shall, at the time of such transmission, be mailed to the Company and filed with each stock exchange, if any, upon which the Securities are listed and also with the Commission. The Company will notify the Trustee promptly if the Securities are listed on any stock exchange. Section 704. Reports by Company and Guarantors. The Company, and each Guarantor, as the case may be, shall: (a) file with the Trustee, within 15 days after the Company or any Guarantor, as the case may be, is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company or any Guarantor may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company or any Guarantor, as the case may be, is not required to file information, documents or reports pursuant to either of said Sections, then it shall (i) deliver to the Trustee annual audited financial statements of the Company and its Subsidiaries, prepared on a Consolidated basis in conformity with GAAP, within 120 days after the end of each fiscal year of the Company, and (ii) file with the Trustee and, to the extent permitted by law, the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a - 87 - security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company or any Guarantor, as the case may be, with the conditions and covenants of this Indenture as are required from time to time by such rules and regulations (including such information, documents and reports referred to in Trust Indenture Act Section 314(a)); and (c) within 15 days after the filing thereof with the Trustee, transmit by mail to all Holders in the manner and to the extent provided in Trust Indenture Act Section 313(c), such summaries of any information, documents and reports required to be filed by the Company or any Guarantor, as the case may be, pursuant to Section 1019 hereunder and subsections (a) and (b) of this Section as are required by rules and regulations prescribed from time to time by the Commission. ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS Section 801. Company and Guarantors May Consolidate, etc., Only on Certain Terms. (a) The Company will not, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person or group of Persons, or permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions, if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a Consolidated basis to any other Person or group of Persons, unless at the time and after giving effect thereto: (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 is merged or the Person which acquires by sale, assignment, conveyance, transfer, lease or disposition all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a corporation, partnership, limited liability company or other entity duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person expressly assumes, by a - 88 - supplemental indenture, in a form reasonably satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture and the Registration Rights Agreement, as the case may be, and the Securities and this Indenture and the Registration Rights Agreement will remain in full force and effect as so supplemented (and any Guarantees will be confirmed as applying to such Surviving Entity's obligation); (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or any of its Restricted Subsidiaries which becomes the obligation of the Company or any of its Restricted Subsidiaries as a result of such transaction as having been incurred at the time of such transaction), no Default or Event of Default will have occurred and be continuing; (iii) immediately before and immediately after giving effect to such transaction on a pro forma basis (on the assumption that the transaction occurred on the first day of the four-quarter period for which financial statements are available ending immediately prior to the consummation of such transaction with the appropriate adjustments with respect to the transaction being included in such pro forma calculation), the Company (or the Surviving Entity if the Company is not the continuing obligor hereunder) could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 1008; (iv) at the time of the transaction, each Guarantor, if any, unless it is the other party to the transactions described above, will have by supplemental indenture confirmed that its Guarantee shall apply to such Person's obligations under this Indenture and under the Securities; (v) at the time of the transaction if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of Section 1011 are complied with; and (vi) at the time of the transaction the Company or the Surviving Entity will have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger, transfer, sale, assignment, conveyance, transfer, lease or other transaction and the supplemental indenture in respect thereof comply with this Indenture and that all conditions precedent herein provided for relating to such transaction have been complied with. - 89 - Notwithstanding the foregoing, (1) any Guarantor may consolidate with, merge into or transfer all or part of its properties and assets to another Guarantor and (2) the Company may merge with an Affiliate that has no significant assets or liabilities and was formed solely for the purpose of changing the Company's jurisdiction of organization to another state of the United States, provided that the surviving entity assumes, by supplemental indenture in form reasonably satisfactory to the Trustee, the Company's obligations under this Indenture, the Securities and the Registration Rights Agreement. (b) Each Guarantor will not, and the Company will not permit a Guarantor to, in a single transaction or through a series of related transactions, consolidate with or merge with or into any other Person (other than the Company or any Guarantor) or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person or group of Persons (other than the Company or any Guarantor) or permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis to any other Person or group of Persons (other than the Company or any Guarantor), unless at the time and after giving effect thereto: (i) either (1) the Guarantor will be the continuing corporation, partnership, limited liability company or other entity in the case of a consolidation or merger involving the Guarantor or (2) the Person (if other than the Guarantor) formed by such consolidation or into which such Guarantor is merged or the Person which acquires by sale, assignment, conveyance, transfer, lease or disposition all or substantially all of the properties and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis (the "Surviving Guarantor Entity") will be a corporation, partnership, limited liability company or other entity duly organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and such Person expressly assumes, by a supplemental indenture, in a form reasonably satisfactory to the Trustee, all the obligations of such Guarantor under its Guarantee of the Securities and this Indenture and the Registration Rights Agreement, and such Guarantee, Indenture and Registration Rights Agreement will remain in full force and effect; (ii) immediately before and immediately after giving effect to such transaction on a pro forma basis, no Default or Event of Default will have occurred and be continuing; and (iii) at the time of the transaction such Guarantor or the Surviving Guarantor Entity will have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' - 90 - Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger, transfer, sale, assignment, conveyance, lease or other transaction and the supplemental indenture in respect thereof comply with this Indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. (c) Notwithstanding the foregoing, the provisions of Section 801(b) shall not apply to any Guarantor whose Guarantee of the Securities is unconditionally released and discharged in accordance with paragraph (b) under Section 1013. Section 802. Successor Substituted. 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 Guarantor, if any, in accordance with Section 801, the successor Person formed by such consolidation or into which the Company or such 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 Guarantor, as the case may be, under this Indenture, the Securities and/or the related Guarantee, as the case may be, with the same effect as if such successor had been named as the Company or such Guarantor, as the case may be, herein, in the Securities and/or in the Guarantee, as the case may be, and the Company or such Guarantor, as the case may be, shall be discharged (other than in a transaction that results in the transfer of assets constituting or accounting for less than 95% of the Consolidated assets (as of the last balance sheet date available to the Company) of the Company or the Consolidated revenue of the Company (as of the last 12-month period for which financial statements are available)) from all obligations and covenants under the Indenture and the Securities or its Guarantee, as the case may be; 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 Securities or its Guarantee, as the case may be. ARTICLE NINE SUPPLEMENTAL INDENTURES Section 901. Supplemental Indentures and Agreements without Consent of Holders. Without the consent of any Holders, the Company, the Guarantors, if any, and any other obligor under the Securities when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto or agreements or other instruments with respect to the Indenture, the - 91 - Securities or any Guarantee, in form and substance satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another Person to the Company or a Guarantor or any other obligor upon the Securities, and the assumption by any such successor of the covenants of the Company or such Guarantor or obligor herein and in the Securities and in any Guarantee in accordance with Article Eight; (b) to add to the covenants of the Company, any Guarantor or any other obligor upon the Securities for the benefit of the Holders, or to surrender any right or power conferred upon the Company or any Guarantor or any other obligor upon the Securities, as applicable, herein, in the Securities or in any Guarantee; (c) to cure any ambiguity, or to correct or supplement any provision herein or in any supplemental indenture, the Securities or any Guarantee which may be defective or inconsistent with any other provision herein or in the Securities or any Guarantee or to make any other provisions with respect to matters or questions arising under this Indenture, the Securities or the Guarantees; provided that, in each case, such provisions shall not adversely affect the interest of the Holders; (d) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by Section 905 or otherwise; (e) to add a Guarantor pursuant to the requirements of Section 1013 hereof or otherwise; (f) to evidence and provide the acceptance of the appointment of a successor trustee hereunder; (g) to mortgage, pledge, hypothecate or grant a security interest in favor of the Trustee for the benefit of the Holders as additional security for the payment and performance of the Company's or any Guarantor's Indenture Obligations, 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 this Indenture or otherwise; or (h) to provide for the issuance of Additional Securities under this Indenture. Section 902. Supplemental Indentures and Agreements with Consent of Holders. Except as permitted by Section 901, with the consent of the Holders of at least a majority in aggregate principal amount of the Outstanding Securities (including consents obtained in connection with a tender offer or exchange offer for Securities), by - 92 - Act of said Holders delivered to the Company, each Guarantor, if any, and the Trustee, the Company and each Guarantor (if a party thereto) when authorized by Board Resolutions, and the Trustee may (i) enter into an indenture or indentures supplemental hereto or agreements or other instruments with respect to any Guarantee in form and substance satisfactory to the Trustee, for the purpose of adding any provisions to or amending, modifying or changing in any manner or eliminating any of the provisions of this Indenture, the Securities or any Guarantee (including but not limited to, for the purpose of modifying in any manner the rights of the Holders under this Indenture, the Securities or any Guarantee) or (ii) waive compliance with any provision in this Indenture, the Securities or any Guarantee (other than waivers of past Defaults covered by Section 513 and waivers of covenants which are covered by Section 1021); provided, however, that no such supplemental indenture, agreement or instrument shall, without the consent of the Holder of each Outstanding Security affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, or change to an earlier date any Redemption Date of, or waive a default in the payment of the principal of, premium, if any, or interest on, any such Security or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which the principal of any Security 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); (b) amend, change or modify the obligation of the Company to make and consummate an Offer with respect to any Asset Sale or Asset Sales in accordance with Section 1012 or the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control in accordance with Section 1015, including, in each case, amending, changing or modifying any definitions relating thereto; (c) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver or compliance with certain provisions of this Indenture; (d) modify any of the provisions of this Section 902 or Section 513 or 1021, except to increase the percentage of such Outstanding Securities required for such actions or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each such Security affected thereby; (e) except as otherwise permitted under Article Eight, consent to the assignment or transfer by the Company or any Guarantor of any of its rights and obligations hereunder; or - 93 - (f) amend or modify any of the provisions of this Indenture relating to the subordination of the Securities or any Guarantee in any manner adverse to the Holders of the Securities or any Guarantee; and provided, further, that no such supplemental indenture, agreement or instrument shall, without the consent of the Holders of 66 2/3% of the Outstanding Securities, release the obligations of a Guarantor under its Guarantee of the Securities. Upon the written request of the Company and each Guarantor, if any, accompanied by a copy of Board Resolutions authorizing the execution of any such supplemental indenture or Guarantee, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall join with the Company and each Guarantor in the execution of such supplemental indenture or Guarantee. It shall not be necessary for any Act of Holders under this Section 902 to approve the particular form of any proposed supplemental indenture or Guarantee or agreement or instrument relating to any Guarantee, but it shall be sufficient if such Act shall approve the substance thereof. Section 903. Execution of Supplemental Indentures and Agreements. In executing, or accepting the additional trusts created by, any supplemental indenture, agreement, instrument or waiver permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Trust Indenture Act Sections 315(a) through 315(d) and Section 602 hereof) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate stating that the execution of such supplemental indenture, agreement or instrument (a) is authorized or permitted by this Indenture and (b) does not violate the provisions of any agreement or instrument evidencing any other Indebtedness of the Company, any Guarantor or any other Restricted Subsidiary. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture, agreement or instrument which affects the Trustee's own rights, duties or immunities under this Indenture, any Guarantee or otherwise. Section 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the Trust Indenture Act as then in effect. - 94 - Section 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article Nine may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any such supplemental indenture may be prepared and executed by the Company and each Guarantor and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 907. Notice of Supplemental Indentures. Promptly after the execution by the Company, any Guarantor and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Security affected, in the manner provided for in Section 106, setting forth in general terms the substance of such supplemental indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. ARTICLE TEN COVENANTS Section 1001. Payment of Principal, Premium and Interest. The Company shall duly and punctually pay the principal of, premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. Section 1002. Maintenance of Office or Agency. The Company shall maintain an office or agency where Securities may be presented or surrendered for payment. The Company also will maintain in The City of New York an office or agency where Securities may be surrendered for registration of transfer, redemption or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of an affiliate of the Trustee, at The Depository Trust Company, Transfer Agent Drop Service, 55 Water Street, Jeanette Park Entrance, New York, NY 10041, will be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of the location and any change in the location of any such offices or agencies. If at any time the Company shall fail to maintain any such required offices or agencies or shall fail to furnish the - 95 - Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the office of the Trustee and the Company hereby appoints the Trustee such agent as its agent to receive all such presentations, surrenders, notices and demands. The Company may from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Securities may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such office or agency. The Trustee shall initially act as Paying Agent for the Securities. Section 1003. Money for Security Payments to Be Held in Trust. If the Company or any of its Affiliates shall at any time act as Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, segregate and hold in trust for the benefit of the Holders entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. If the Company or any of its Affiliates is not acting as Paying Agent, the Company will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, deposit with a Paying Agent a sum in same day funds sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. If the Company is not acting as Paying Agent, the Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on the Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company or any Guarantor (or any other obligor upon the Securities) in the making of any payment of principal, premium, if any, or interest on the Securities; (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and - 96 - (d) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal and premium, if any, or interest has become due and payable shall promptly be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), and mail to each such Holder, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification, publication and mailing, any unclaimed balance of such money then remaining will promptly be repaid to the Company. Section 1004. Corporate Existence. Subject to Article Eight, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence and related rights and franchises (charter and statutory) of the Company and each Restricted Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise or the corporate existence of any such Restricted Subsidiary if the Board of Directors of the Company shall determine that the preservation thereof is no longer necessary or desirable in the conduct of the business of the Company and its Restricted Subsidiaries as a whole; and provided, further, however, that the foregoing shall not prohibit a sale, transfer or conveyance of a Restricted Subsidiary or any of its assets in compliance with the terms of this Indenture. - 97 - Section 1005. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, on or before the date the same shall become due and payable, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any of its Restricted Subsidiaries shown to be due on any return of the Company or any of its Restricted Subsidiaries or otherwise assessed or upon the income, profits or property of the Company or any of its Restricted Subsidiaries if failure to pay or discharge the same could reasonably be expected to have a material adverse effect on the ability of the Company or any Guarantor to perform its obligations hereunder and (b) all lawful claims for labor, materials and supplies, which, if unpaid, would by law become a Lien upon the property of the Company or any of its Restricted Subsidiaries, except for any Lien permitted to be incurred under Section 1011, if failure to pay or discharge the same could reasonably be expected to have a material adverse effect on the ability of the Company or any Guarantor to perform its obligations hereunder; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted and in respect of which appropriate reserves (in the good faith judgment of management of the Company) are being maintained in accordance with GAAP. Section 1006. Maintenance of Properties. The Company shall cause all material properties owned by the Company or any of its Restricted Subsidiaries or used or held for use in the conduct of its business or the business of any of its Restricted Subsidiaries to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the reasonable judgment of the Company may be consistent with sound business practice and necessary so that the business carried on in connection therewith may be properly conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the reasonable judgment of the Company, desirable in the conduct of its business or the business of any of its Restricted Subsidiaries; and provided, further, however, that the foregoing shall not prohibit a sale, transfer or conveyance of a Restricted Subsidiary or any of its properties or assets in compliance with the terms of this Indenture. Section 1007. Maintenance of Insurance. The Company shall at all times keep all of its and its Restricted Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated - 98 - and owning like properties in the same general geographic areas in which the Company and its Restricted Subsidiaries operate, except where the failure to do so could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or prospects of the Company and its Restricted Subsidiaries, taken as a whole. Section 1008. Limitation on Indebtedness. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, create, issue, incur, assume, guarantee or otherwise in any manner become directly or indirectly liable for the payment of or otherwise incur, contingently or otherwise (collectively, "incur"), any Indebtedness (including any Acquired Indebtedness), unless such Indebtedness is incurred by the Company or any Guarantor or constitutes Acquired Indebtedness of a Restricted Subsidiary and, in each case, the Company's Consolidated Fixed Charge Coverage Ratio for the most recent four full fiscal quarters for which financial statements are available immediately preceding the incurrence of such Indebtedness taken as one period is at least equal to or greater than 2.0:1. Notwithstanding the foregoing, the Company and, to the extent specifically set forth below, the Restricted Subsidiaries may incur each and all of the following (collectively, the "Permitted Indebtedness"): (i) Indebtedness of the Company or any Guarantor (and/or guarantees thereof by Restricted Subsidiaries of the Company) under the Credit Facility in an aggregate principal amount at any one time outstanding not to exceed the greater of (a) $365,000,000 under any term, revolving or swingline credit facility thereunder or in respect of letters of credit thereunder minus (x) the amount by which any commitments or term loans thereunder are permanently reduced and minus, to the extent not subtracted by clause (x), (y) the aggregate amount of Net Cash Proceeds of Asset Sales applied to permanently reduce the loans or commitments with respect to such Indebtedness pursuant to Section 1012 herein or (b) the amount of the Borrowing Base as of the date of such incurrence; (ii) Indebtedness of the Company pursuant to the Securities (excluding any Additional Securities) and Indebtedness of any Guarantor pursuant to a Guarantee of the Securities and any Series B Securities issued in exchange for the Series A Securities pursuant to the Registration Rights Agreement; (iii) Indebtedness of the Company or any Restricted Subsidiary outstanding on the date of the Indenture, listed on Schedule I hereto and not otherwise referred to in this definition of "Permitted Indebtedness;" (iv) Indebtedness of the Company owing to a Restricted Subsidiary; provided that any Indebtedness of the Company owing to a Restricted Subsidiary that is not - 99 - a Guarantor is made pursuant to an intercompany note in the form attached to this Indenture as Annex A and is unsecured and is subordinated in right of payment from and after such time as the Securities shall become due and payable (whether at Stated Maturity, acceleration or otherwise) to the payment and performance of the Company's obligations under the Securities; provided, further, that any disposition, pledge (other than a Lien securing the Credit Facility) or transfer of any such Indebtedness to a Person (other than a disposition, pledge or transfer to a Restricted Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the Company or other obligor not permitted by this clause (iv); (v) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the Company or another Wholly Owned Restricted Subsidiary; provided that any such Indebtedness is made pursuant to an intercompany note in the form attached to this Indenture as Annex A; provided, further, that (a) any disposition, pledge (other than a Lien securing the Credit Facility) or transfer of any such Indebtedness to a Person (other than a disposition, pledge or transfer to the Company or a Wholly Owned Restricted Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the obligor not permitted by this clause (v), and (b) any transaction pursuant to which any Wholly Owned Restricted Subsidiary, which has Indebtedness owing to the Company or any other Wholly Owned Restricted Subsidiary, ceases to be a Wholly Owned Restricted Subsidiary shall be deemed to be the incurrence of Indebtedness by such Wholly Owned Restricted Subsidiary that is not permitted by this clause (v); (vi) guarantees of any Restricted Subsidiary of Indebtedness of the Company or any of its Restricted Subsidiaries which is permitted to be incurred under this Indenture, provided that such guarantees are made in accordance with Section 1013 herein; (vii) obligations of the Company or any Guarantor entered into in the ordinary course of business (a) pursuant to Interest Rate Agreements designed to protect the Company or any Restricted Subsidiary against fluctuations in interest rates in respect of Indebtedness of the Company or any Restricted Subsidiary as long as such obligations do not exceed the aggregate principal amount of such Indebtedness then outstanding, (b) under any Currency Hedging Agreements, relating to (i) Indebtedness of the Company or any Restricted Subsidiary and/or (ii) obligations to purchase or sell inventory or other assets or properties, in each case, incurred in the ordinary course of business of the Company or any Restricted Subsidiary; provided, however, that such Currency Hedging Agreements do not increase the Indebtedness or other obligations of the Company or any Restricted Subsidiary outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder or (c) under any Commodity Price Protection Agreements which do not increase the amount of Indebtedness or other obligations of the Company or any Restricted Subsidiary outstanding other than as a result of fluctuations in commodity prices or by reason of fees, indemnities and compensation payable thereunder; - 100 - (viii) Indebtedness of the Company or any Guarantor represented by Capital Lease Obligations or Purchase Money Obligations or other Indebtedness incurred or assumed in connection with the acquisition or development of real or personal, movable or immovable, property, in each case, incurred for the purpose of financing or refinancing all or any part of the purchase price or cost of construction or improvement of property used in the business of the Company, in an aggregate principal amount pursuant to this clause (viii) not to exceed 10% of the Consolidated Net Tangible Assets of the Company outstanding at the time any such Indebtedness is incurred; provided that the principal amount of any Indebtedness permitted under this clause (viii) did not in each case at the time of incurrence exceed the Fair Market Value, as determined by the Company in good faith, of the acquired or constructed asset or improvement so financed; (ix) any renewals, extensions, substitutions, refundings, refinancings or replacements (collectively, a "refinancing") of any Indebtedness described in clauses (ii) and (iii) of this definition of "Permitted Indebtedness," including any successive refinancings so long as the borrower under such refinancing is the Company or, if not the Company, the same as the borrower of the Indebtedness being refinanced and the aggregate principal amount of Indebtedness represented thereby (or if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness plus any accreted value attributable thereto since the original issuance of such Indebtedness) is not increased by such refinancing plus the lesser of (I) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (II) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing and (A) in the case of any refinancing of Indebtedness that is Subordinated Indebtedness, such new Indebtedness is made subordinated to the Securities at least to the same extent as the Indebtedness being refinanced and (B) in the case of Pari Passu Indebtedness or Subordinated Indebtedness, as the case may be, such refinancing does not reduce the Average Life to Stated Maturity or the Stated Maturity of such Indebtedness; and (x) Indebtedness of the Company or any Guarantor in addition to that described in clauses (i) through (ix) above, and any renewals, extensions, substitutions, refinancings or replacements of such Indebtedness, so long as the aggregate principal amount of all such Indebtedness shall not exceed $25,000,000 outstanding at any one time in the aggregate. For purposes of determining compliance with this Section 1008, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness permitted by this covenant, the Company in its sole discretion shall classify or reclassify such item of Indebtedness and only be required to include the amount of such Indebtedness as one of such types. - 101 - Indebtedness permitted by this Section 1008 need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this covenant permitting such Indebtedness. Accrual of interest, accretion or amortization of original issue discount and the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on any Redeemable Capital Stock or Preferred Stock in the form of additional shares of the same class of Redeemable Capital Stock or Preferred Stock will not be deemed to be an incurrence of Indebtedness for purposes of this Section 1008; provided, in each such case, that the amount thereof as accrued is included in the Consolidated Fixed Charge Coverage Ratio of the Company. Notwithstanding the foregoing, if the Credit Facility's revolving credit facility or another revolving credit facility is increased or established, as the case may be, in compliance with the limitation described in the first paragraph of this Section 1008, then all subsequent borrowings under such revolving facility, as increased or established, shall be deemed permissible under the limitation described in the first paragraph of this Section 1008. Section 1009. Limitation on Restricted Payments. (a) The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable solely in shares of its Qualified Capital Stock or in options, warrants or other rights to acquire shares of such Qualified Capital Stock); (ii) purchase, redeem, defease or otherwise acquire or retire for value, directly or indirectly, the Company's Capital Stock or any Capital Stock of any Affiliate of the Company (other than Capital Stock of any Wholly Owned Restricted Subsidiary of the Company) or options, warrants or other rights to acquire such Capital Stock; (iii) make any principal payment on, or repurchase, redeem, defease, retire or otherwise acquire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Indebtedness; (iv) declare or pay any dividend or distribution on any Capital Stock of any Restricted Subsidiary to any Person (other than (a) to the Company or - 102 - any of its Wholly Owned Restricted Subsidiaries or (b) dividends or distributions made by a Restricted Subsidiary on a pro rata basis to all stockholders of such Restricted Subsidiary); or (v) make any Investment in any Person (other than any Permitted Investments) (any of the foregoing actions described in clauses (i) through (v), other than any such action that is a Permitted Payment (as defined below), collectively, "Restricted Payments") (the amount of any such Restricted Payment, if other than cash, shall be the Fair Market Value of the assets proposed to be transferred, as determined by the board of directors of the Company, whose determination shall be conclusive and evidenced by a board resolution), unless (1) immediately before and immediately after giving effect to such proposed Restricted Payment on a pro forma basis, no Default or Event of Default shall have occurred and be continuing and such Restricted Payment shall not be an event which is, or after notice or lapse of time or both, would be, an "event of default" under the terms of any Indebtedness of the Company or its Restricted Subsidiaries; (2) immediately before and immediately after giving effect to such Restricted Payment on a pro forma basis, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 1008 herein; and (3) after giving effect to the proposed Restricted Payment, the aggregate amount of all such Restricted Payments declared or made after the date of this Indenture and all Designation Amounts does not exceed the sum of: (A) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on February 1, 2004 and ending on the last day of the Company's last fiscal quarter ending prior to the date of the Restricted Payment (or, if such aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of such loss); (B) the aggregate Net Cash Proceeds received after the date of this Indenture by the Company either (x) as capital contributions in the form of common equity to the Company or (y) from the issuance or sale (other than to any of its Subsidiaries) of Qualified Capital Stock of the Company or any options, warrants or rights to purchase such Qualified Capital Stock of the Company (except, in each case, to the extent such proceeds are used to purchase, redeem or otherwise retire Capital Stock or Subordinated Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b) below) (and excluding the Net Cash Proceeds from the issuance of Qualified Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (C) the aggregate Net Cash Proceeds received after the date of this Indenture by the Company (other than from any of its Subsidiaries) upon the exercise of any options, warrants or rights to purchase Qualified Capital Stock of the - 103 - Company (and excluding the Net Cash Proceeds from the exercise of any options, warrants or rights to purchase Qualified Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (D) the aggregate Net Cash Proceeds received after the date of this Indenture by the Company from the conversion or exchange, if any, of debt securities or Redeemable Capital Stock of the Company or its Restricted Subsidiaries into or for Qualified Capital Stock of the Company plus, to the extent such debt securities or Redeemable Capital Stock were issued after the date of this Indenture, the aggregate of Net Cash Proceeds from their original issuance (and excluding the Net Cash Proceeds from the conversion or exchange of debt securities or Redeemable Capital Stock financed, directly or indirectly, using funds borrowed from the Company or any Subsidiary until and to the extent such borrowing is repaid); (E) (a) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the date of this Indenture, an amount (to the extent not included in Consolidated Net Income) equal to the lesser of the return of capital with respect to such Investment and the initial amount of such Investment, in either case, less the cost of the disposition of such Investment and net of taxes, and (b) in the case of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary (as long as the designation of such Subsidiary as an Unrestricted Subsidiary was deemed a Restricted Payment), the Fair Market Value of the Company's interest in such Subsidiary provided that such amount shall not in any case exceed the amount of the Restricted Payment deemed made at the time the Subsidiary was designated as an Unrestricted Subsidiary; and (F) $25,000,000. (b) Notwithstanding the foregoing, and in the case of clauses (ii) through (viii) below, so long as no Default or Event of Default is continuing or would arise therefrom, the foregoing provisions shall not prohibit the following actions (each of clauses (i) through (viii) being referred to as a "Permitted Payment"): (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such date of declaration such payment was permitted by the provisions of paragraph (a) of this Section and such payment shall have been deemed to have been paid on such date of declaration and shall not have been deemed a "Permitted Payment" for purposes of the calculation required by paragraph (a) of this Section 1009; (ii) the repurchase, redemption, or other acquisition or retirement for value of any shares of any class of Capital Stock of the Company in exchange for (including - 104 - any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares or scrip), or out of the Net Cash Proceeds of a substantially concurrent issuance and sale for cash (other than to a Subsidiary) of, other shares of Qualified Capital Stock of the Company; provided that the Net Cash Proceeds from the issuance of such shares of Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a) of this Section 1009; (iii) the repurchase, redemption, defeasance, retirement or acquisition for value or payment of principal of any Subordinated Indebtedness in exchange for, or in an amount not in excess of the Net Cash Proceeds of, a substantially concurrent issuance and sale for cash (other than to any Subsidiary of the Company) of any Qualified Capital Stock of the Company, provided that the Net Cash Proceeds from the issuance of such shares of Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a) of this Section 1009; (iv) the repurchase, redemption, defeasance, retirement, refinancing, acquisition for value or payment of principal of any Subordinated Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through the substantially concurrent issuance of new Subordinated Indebtedness of the Company, provided that any such new Subordinated Indebtedness (1) shall be in a principal amount that does not exceed the principal amount so refinanced (or, if such Subordinated Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, then such lesser amount as of the date of determination), plus the lesser of (I) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (II) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing; (2) has an Average Life to Stated Maturity greater than the remaining Average Life to Stated Maturity of the Securities; (3) has a Stated Maturity for its final scheduled principal payment later than the Stated Maturity for the final scheduled principal payment of the Securities; and (4) is expressly subordinated in right of payment to the Securities at least to the same extent as the Subordinated Indebtedness to be refinanced; (v) the purchase of any Subordinated Indebtedness or Redeemable Capital Stock of the Company at a purchase price not greater than 101% of the principal amount or liquidation preference of such Subordinated Indebtedness or Redeemable Capital Stock in the event of a Change of Control pursuant to a provision similar to Section 1015 hereof; provided that prior to consummating any such repurchase, the Company has made the Change of Control Offer required by the Indenture and has repurchased all Securities validly tendered for payment in connection with such Change of Control Offer; (vi) the repurchase of any Subordinated Indebtedness or Redeemable Capital Stock of the Company at a purchase price not greater than 100% of the principal - 105 - amount or liquidation preference of such Subordinated Indebtedness or Redeemable Capital Stock in the event of an Asset Sale pursuant to a provision similar to the Section 1012 hereof; provided that prior to consummating any such repurchase, the Company has made the Offer required by this Indenture and has repurchased all Securities validly tendered for payment in connection with such Offer; (vii) the repurchase of Capital Stock deemed to occur upon exercise of stock options to the extent that shares of such Capital Stock represent a portion of the exercise price of such options; and (viii) the payment of cash in lieu of the issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exercisable for Capital Stock of the Company. Section 1010. Limitation on Transactions with Affiliates. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with or for the benefit of any Affiliate of the Company (other than the Company or a Wholly Owned Restricted Subsidiary) unless such transaction or series of related transactions is entered into in good faith and in writing and (a) such transaction or series of related transactions is on terms that are not substantially less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that would be available in a comparable transaction in arm's-length dealings with an unrelated third party, (b) with respect to any transaction or series of related transactions involving aggregate value in excess of $5,000,000, such transaction or series of related transactions has been approved by a majority of the Disinterested Directors of the Board of Directors of the Company, or in the event there is only one Disinterested Director, by such Disinterested Director, and (c) with respect to any transaction or series of related transactions involving aggregate value in excess of $10,000,000, the Company delivers to the Trustee a written opinion of an investment banking firm of national standing or other recognized independent expert with experience appraising the terms and conditions of the type of transaction or series of related transactions for which an opinion is required stating that the transaction or series of related transactions is fair to the Company or such Restricted Subsidiary from a financial point of view; provided, however, that this provision shall not apply to (1) employment agreements and employee benefit arrangements with any officer or director of the Company, including under any stock option or stock incentive plans, entered into in the ordinary course of business, consistent with the past practices of the Company or such Restricted Subsidiary and (2) transactions pursuant to agreements in effect on the date of this Indenture, including amendments thereto entered into after that date, provided that the terms of any such amendment are not less favorable to the Company or such Restricted Subsidiary than the terms of such agreement prior to such amendment. - 106 - Section 1011. Limitation on Liens. The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any kind securing any Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Restricted Subsidiary) upon any property or assets (including any intercompany notes) of the Company or any Restricted Subsidiary owned on the date of this Indenture or acquired after the date of this Indenture, or assign or convey any right to receive any income or profits therefrom, unless the Securities (or a Guarantee in the case of Liens of a Guarantor) are directly secured equally and ratably with (or, in the case of Subordinated Indebtedness, prior or senior thereto, with the same relative priority as the Securities shall have with respect to such Subordinated Indebtedness) the obligation or liability secured by such Lien except for Liens (A) securing any Indebtedness which became Indebtedness pursuant to a transaction permitted under Article Eight herein or securing Acquired Indebtedness which in each case was created prior to (and not created in connection with, or in contemplation of) the incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Restricted Subsidiary) and which Indebtedness is permitted under the provisions of Section 1008 herein or (B) securing any Indebtedness incurred in connection with any refinancing, renewal, substitutions or replacements of any such Indebtedness described in clause (A), so long as the aggregate principal amount of Indebtedness represented thereby (or if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness plus any accreted value attributable thereto since the original issuance of such Indebtedness) is not increased by such refinancing by an amount greater than the lesser of (1) the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced or (2) the amount of premium or other payment actually paid at such time to refinance the Indebtedness, plus, in either case, the amount of expenses of the Company incurred in connection with such refinancing, provided, however, that in the case of clauses (A) and (B), any such Lien only extends to the assets that were subject to such Lien securing such Indebtedness prior to the related acquisition by the Company or its Restricted Subsidiaries. Notwithstanding the foregoing, any Lien securing the Securities granted pursuant to this covenant shall be automatically and unconditionally released and - 107 - discharged upon the release by the holders of the Pari Passu Indebtedness or Subordinated Indebtedness described above of their Lien on the property or assets of the Company or any Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness), at such time as the holders of all such Pari Passu Indebtedness or Subordinated Indebtedness also release their Lien on the property or assets of the Company or such Restricted Subsidiary, or upon any sale, exchange or transfer to any Person not an Affiliate of the Company of the property or assets secured by such Lien, or of all of the Capital Stock held by the Company or any Restricted Subsidiary in, or all or substantially all the assets of, any Restricted Subsidiary creating such Lien. Section 1012. Limitation on Sale of Assets. (a) The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i) at least 75% of the consideration from such Asset Sale is received in cash and (ii) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets subject to such Asset Sale (as determined by the Board of Directors of the Company and evidenced in a Board Resolution). (b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not required to be applied to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness then outstanding as required by the terms thereof, or the Company determines not to apply such Net Cash Proceeds to the permanent prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness, or if no such Senior Indebtedness or Senior Guarantor Indebtedness is then outstanding, then the Company or a Restricted Subsidiary may within 360 days of the Asset Sale invest the Net Cash Proceeds in properties and other assets that (as determined by the Board of Directors of the Company) replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the businesses of the Company or its Restricted Subsidiaries existing on the date of this Indenture or in businesses reasonably related thereto. The amount of such Net Cash Proceeds not used or invested within 360 days of the Asset Sale as set forth in this paragraph constitutes "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $25,000,000 or more, the Company will apply the Excess Proceeds to the repayment of the Securities and any other Pari Passu Indebtedness outstanding with similar provisions requiring the Company to make an offer to purchase such Indebtedness with the proceeds from any Asset Sale as follows: (A) the Company will make an offer to purchase (an "Offer") from all holders of the Securities in accordance with the procedures set forth in this Indenture in the maximum principal amount (expressed as a multiple of $1,000) of Securities that may be purchased out of an amount (the "Security Amount") equal to the product of such Excess Proceeds multiplied by a fraction, the numerator of which is the outstanding principal amount of the Securities, and the denominator of which is the sum of the outstanding - 108 - principal amount (or accreted value in the case of Indebtedness issued with original issue discount) of the Securities and such Pari Passu Indebtedness (subject to proration in the event such amount is less than the aggregate Offered Price (as defined herein) of all Securities tendered) and (B) to the extent required by such Pari Passu Indebtedness to permanently reduce the principal amount of such Pari Passu Indebtedness (or accreted value in the case of Indebtedness issued with original issue discount), the Company will make an offer to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over the Security Amount; provided that in no event will the Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the principal amount (or accreted value) of such Pari Passu Indebtedness plus the amount of any premium required to be paid to repurchase such Pari Passu Indebtedness. The offer price for the Securities will be payable in cash in an amount equal to 100% of the principal amount of the Securities plus accrued and unpaid interest, if any, to the date (the "Offer Date") such Offer is consummated (the "Offered Price"), in accordance with the procedures set forth in this Indenture. To the extent that the aggregate Offered Price of the Securities tendered pursuant to the Offer is less than the Security Amount relating thereto or the aggregate amount of Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu Debt Amount, the Company may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Securities and Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Securities to be purchased on a pro rata basis. Upon the completion of the purchase of all the Securities tendered pursuant to an Offer and the completion of a Pari Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero. (d) If the Company becomes obligated to make an Offer pursuant to clause (c) above, the Securities and the Pari Passu Indebtedness shall be purchased by the Company, at the option of the holders thereof, in whole or in part in integral multiples of $1,000, on a date that is not earlier than 30 days and not later than 60 days from the date the notice of the Offer is given to holders, or such later date as may be necessary for the Company to comply with the requirements under the Exchange Act. (e) In the event that the Company is required to make an Offer but is restricted from making an Offer pursuant to clause (c) above under the terms of any of its outstanding Senior Indebtedness, then the Company need not make such an Offer pursuant to clause (c) above and shall not be deemed to be in default in the performance of such covenant by virtue of not making such an Offer, provided that in any such event (1) the Company shall use all or a portion of the Net Cash Proceeds of any Asset Sale to repay permanently any Senior Indebtedness or Senior Guarantor Indebtedness then outstanding as required by the terms thereof or (2) the Company or a Restricted Subsidiary shall within 360 days of the Asset Sale invest the Net Cash Proceeds in properties and other assets that (as determined by the Board of Directors of the Company) replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the - 109 - businesses of the Company or its Restricted Subsidiaries existing on the date of this Indenture or in businesses reasonably related thereto. (f) The Company will comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws or regulations in connection with an Offer. (g) Subject to paragraph (f) above, within 30 days after the date on which the amount of Excess Proceeds equals or exceeds $25,000,000, the Company shall send or cause to be sent by first-class mail, postage prepaid, to the Trustee and to each Holder, at his address appearing in the Security Register, a notice stating or including: (1) that the Holder has the right to require the Company to repurchase, subject to proration, such Holder's Securities at the Offered Price; (2) the Offer Date; (3) the instructions a Holder must follow in order to have his Securities purchased in accordance with paragraph (c) of this Section; (4) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q, as applicable, and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Sales otherwise described in the offering materials (or corresponding successor reports) (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required pursuant to Section 1019), (ii) a description of material developments, if any, in the Company's business subsequent to the date of the latest of such reports, (iii) if material, appropriate pro forma financial information, and (iv) such other information, if any, concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed investment decision regarding the Offer; (5) the Offered Price; (6) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002; (7) that Securities must be surrendered prior to the Offer Date to the Paying Agent at the office of the Paying Agent or to an office or agency referred to in Section 1002 to collect payment; - 110 - (8) that any Securities not tendered will continue to accrue interest and that unless the Company defaults in the payment of the Offered Price, any Security accepted for payment pursuant to the Offer shall cease to accrue interest on and after the Offer Date; (9) the procedures for withdrawing a tender; and (10) that the Offered Price for any Security which has been properly tendered and not withdrawn and which has been accepted for payment pursuant to the Offer will be paid promptly following the Offered Date. (h) Holders electing to have Securities purchased hereunder will be required to surrender such Securities at the address specified in the notice prior to the Offer Date. Holders will be entitled to withdraw their election to have their Securities purchased pursuant to this Section 1012 if the Company receives, not later than one Business Day prior to the Offer Date, a telegram, telex, facsimile transmission or letter setting forth (1) the name of the Holder, (2) the certificate number of the Security in respect of which such notice of withdrawal is being submitted, (3) the principal amount of the Security (which shall be $1,000 or an integral multiple thereof) delivered for purchase by the Holder as to which his election is to be withdrawn, (4) a statement that such Holder is withdrawing his election to have such principal amount of such Security purchased, and (5) the principal amount, if any, of such Security (which shall be $1,000 or an integral multiple thereof) that remains subject to the original notice of the Offer and that has been or will be delivered for purchase by the Company. (i) The Company shall (i) not later than the Offer Date, accept for payment Securities or portions thereof tendered pursuant to the Offer, (ii) not later than 10:00 a.m. (New York time) on the Offer Date, deposit with the Trustee or with a Paying Agent an amount of money in same day funds (or New York Clearing House funds if such deposit is made prior to the Offer Date) sufficient to pay the aggregate Offered Price of all the Securities or portions thereof which are to be purchased on that date and (iii) not later than 10:00 a.m. (New York time) on the Offer Date, deliver to the Paying Agent an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Offered Price of the Securities purchased from each such Holder, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Paying Agent at the Company's expense to the Holder thereof. For purposes of this Section 1012, the Company shall choose a Paying Agent which shall not be the Company. Subject to applicable escheat laws, the Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest, if any, - 111 - thereon, held by them for the payment of the Offered Price; provided, however, that (x) to the extent that the aggregate amount of cash deposited by the Company with the Trustee in respect of an Offer exceeds the aggregate Offered Price of the Securities or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and (y) unless otherwise directed by the Company in writing, promptly after the Business Day following the Offer Date the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon. (j) Securities to be purchased shall, on the Offer Date, become due and payable at the Offered Price and from and after such date (unless the Company shall default in the payment of the Offered Price) such Securities shall cease to bear interest. Such Offered Price shall be paid to such Holder promptly following the later of the Offer Date and the time of delivery of such Security to the relevant Paying Agent at the office of such Paying Agent by the Holder thereof in the manner required. Upon surrender of any such Security for purchase in accordance with the foregoing provisions, such Security shall be paid by the Company at the Offered Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Offer Date shall be payable to the Person in whose name the Securities (or any Predecessor Securities) is registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 309; provided, further, that Securities to be purchased are subject to proration in the event the Excess Proceeds are less than the aggregate Offered Price of all Securities tendered for purchase, with such adjustments as may be appropriate by the Trustee so that only Securities in denominations of $1,000 or integral multiples thereof, shall be purchased. If any Security tendered for purchase shall not be so paid upon surrender thereof by deposit of funds with the Trustee or a Paying Agent in accordance with paragraph (i) above, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Offer Date at the rate borne by such Security. Any Security that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Security Registrar or the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, one or more new Securities of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered that is not purchased. The Company shall publicly announce the results of the Offer on or as soon as practicable after the Offer Date. Section 1013. Limitation on Issuances of Guarantees of and Pledges for Indebtedness. (a) The Company will not cause or permit any Restricted Subsidiary, other than a Guarantor, directly or indirectly, to secure the payment of any Senior Indebtedness of - 112 - the Company and the Company will not, and will not permit any Restricted Subsidiary to, pledge any intercompany securities representing obligations of any Restricted Subsidiary (other than a Guarantor) to secure the payment of any Senior Indebtedness unless in each case such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a guarantee of payment of the Securities by such Restricted Subsidiary, which guarantee shall be on the same terms as the guarantee of the Senior Indebtedness (if a guarantee of Senior Indebtedness is granted by any such Restricted Subsidiary) except that the guarantee of the Securities need not be secured and shall be subordinated to the claims against such Restricted Subsidiary in respect of Senior Indebtedness to the same extent as the Securities are subordinated to Senior Indebtedness of the Company under the Indenture. (b) The Company will not cause or permit any Restricted Subsidiary (which is not a Guarantor), directly or indirectly, to guarantee, assume or in any other manner become liable with respect to any Indebtedness of the Company or any Restricted Subsidiary unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee of the Securities on the same terms as the guarantee of such Indebtedness except that (A) such guarantee need not be secured unless required pursuant to Section 1011 herein, (B) if such Indebtedness is by its terms Senior Indebtedness, any such assumption, guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be senior to such Restricted Subsidiary's Guarantee of the Securities to the same extent as such Senior Indebtedness is senior to the Securities and (C) if such Indebtedness is by its terms expressly subordinated to the Securities, any such assumption, guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be subordinated to such Restricted Subsidiary's Guarantee of the Securities at least to the same extent as such Indebtedness is subordinated to the Securities. (c) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary of the Securities shall provide by its terms that it (and all Liens securing the same) shall 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, such Restricted Subsidiary, which transaction is in compliance with the terms of this Indenture and such Restricted Subsidiary is released from all guarantees, if any, by it of other Indebtedness of the Company or any Restricted Subsidiaries and (ii) with respect to any Guarantees created after the date of this Indenture, the release by the holders of the Indebtedness of the Company described in clauses (a) and (b) above of their security interest or their guarantee by such Restricted Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness), at such time as (A) no other Indebtedness of the Company has been secured or guaranteed by such Restricted Subsidiary, as the case may be, or (B) the holders of all such other Indebtedness which is secured or guaranteed by such Restricted Subsidiary also release their security interest in or guarantee by such Restricted - 113 - Subsidiary (including any deemed release upon payment in full of all obligations under such Indebtedness). Section 1014. Limitation on Senior Subordinated Indebtedness. The Company will not, and will not permit or cause any Guarantor to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise in any manner become directly or indirectly liable for or with respect to or otherwise permit to exist any Indebtedness that is subordinate in right of payment to any Indebtedness of the Company or such Guarantor, as the case may be, unless such Indebtedness is also pari passu with the Securities or the Guarantee of such Guarantor or subordinated in right of payment to the Securities or such Guarantee at least to the same extent as the Securities or such Guarantee are subordinated in right of payment to Senior Indebtedness or Senior Indebtedness of such Guarantor, as the case may be. Section 1015. Purchase of Securities upon a Change of Control. (a) If a Change of Control occurs, then each Holder shall have the right to require that the Company purchase all or any part (in integral multiples of $1,000) of such Holder's Securities pursuant to the offer described below in this Section 1015 (the "Change of Control Offer") and in accordance with the other procedures set forth in subsections (b), (c), (d) and (e) of this Section 1015. In the Change of Control Offer, the Company shall offer to purchase all of the Securities at a purchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount of such Securities, plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Purchase Date") (subject to the rights of holders of record on relevant record dates to receive interest due on an interest payment date). (b) Within 30 days of any Change of Control or, at the Company's option, prior to such Change of Control but after it is publicly announced, the Company shall notify the Trustee and give written notice (a "Change of Control Purchase Notice") of such Change of Control to each Holder by first-class mail, postage prepaid, at his address appearing in the Security Register. The Change of Control Purchase Notice shall state, among other things: (1) that a Change of Control has occurred or will occur, the date of such event, and that such Holder has the right to require the Company to repurchase such Holder's Securities at the Change of Control Purchase Price; (2) the circumstances and relevant facts regarding such Change of Control (including but not limited to information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); - 114 - (3) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q, as applicable, and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required to be prepared by the Company and any Guarantor pursuant to Section 1019), (ii) a description of material developments, if any, in the Company's business subsequent to the date of the latest of such reports and (iii) such other information, if any, concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed investment decision regarding the Change of Control Offer; (4) that the Change of Control Offer is being made pursuant to this Section 1015 and that all Securities properly tendered pursuant to the Change of Control Offer will be accepted for payment at the Change of Control Purchase Price; (5) the Change of Control Purchase Date, which shall be fixed by the Company on a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed, or such later date as is necessary to comply with requirements under the Exchange Act; provided that the Change of Control Purchase Date may not occur prior to the Change of Control; (6) the Change of Control Purchase Price; (7) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002; (8) that Securities must be surrendered on or prior to the Change of Control Purchase Date to the Paying Agent at the office of the Paying Agent or to an office or agency referred to in Section 1002 to collect payment; (9) that the Change of Control Purchase Price for any Security which has been properly tendered and not withdrawn will be paid promptly following the Change of Control Offer Purchase Date; (10) the procedures that a Holder must follow to accept a Change of Control Offer or to withdraw such acceptance; (11) that any Security not tendered will continue to accrue interest; and - 115 - (12) that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Securities accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date. (c) Upon receipt by the Company of the proper tender of Securities, the Holder of the Security in respect of which such proper tender was made shall (unless the tender of such Security is properly withdrawn) thereafter be entitled to receive solely the Change of Control Purchase Price with respect to such Security. Upon surrender of any such Security for purchase in accordance with the foregoing provisions, such Security shall be paid by the Company at the Change of Control Purchase Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Change of Control Purchase Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 309. If any Security tendered for purchase in accordance with the provisions of this Section 1015 shall not be so paid upon surrender thereof, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Change of Control Purchase Date at the rate borne by such Security. Holders electing to have Securities purchased will be required to surrender such Securities to the Paying Agent at the address specified in the Change of Control Purchase Notice at least one Business Day prior to the Change of Control Purchase Date. Any Security that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Security Registrar or the Trustee, as the case may be, duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, one or more new Securities of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered that is not purchased. (d) The Company shall (i) not later than the Change of Control Purchase Date, accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) not later than 10:00 a.m. (New York time) on the Business Day following the Change of Control Purchase Date, deposit with the Trustee or with a Paying Agent an amount of money in same day funds (or New York Clearing House funds if such deposit is made prior to the Change of Control Purchase Date) sufficient to pay the aggregate Change of Control Purchase Price of all the Securities or portions thereof which have been so accepted for payment and (iii) not later than 10:00 a.m. (New York time) on the Business Day following the Change of Control Purchase Date, deliver to the Paying Agent an Officers' Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Change of Control Purchase Price - 116 - of the Securities purchased from each such Holder, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Paying Agent at the Company's expense to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer on the Change of Control Purchase Date. For purposes of this Section 1015, the Company shall choose a Paying Agent which shall not be the Company. (e) A tender made in response to a Change of Control Purchase Notice may be withdrawn if the Company receives, not later than one Business Day prior to the Change of Control Purchase Date, a telegram, telex, facsimile transmission or letter, specifying, as applicable: (1) the name of the Holder; (2) the certificate number of the Security in respect of which such notice of withdrawal is being submitted; (3) the principal amount of the Security (which shall be $1,000 or an integral multiple thereof) delivered for purchase by the Holder as to which such notice of withdrawal is being submitted; (4) a statement that such Holder is withdrawing his election to have such principal amount of such Security purchased; and (5) the principal amount, if any, of such Security (which shall be $1,000 or an integral multiple thereof) that remains subject to the original Change of Control Purchase Notice and that has been or will be delivered for purchase by the Company. (f) Subject to applicable escheat laws, the Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest or dividends, if any, thereon, held by them for the payment of the Change of Control Purchase Price; provided, however, that, (x) to the extent that the aggregate amount of cash deposited by the Company pursuant to clause (ii) of paragraph (d) above exceeds the aggregate Change of Control Purchase Price of the Securities or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and (y) unless otherwise directed by the Company in writing, promptly after the Business Day following the Change of Control Purchase Date the Trustee shall return any such excess to the Company together with interest, if any, thereon. - 119 - (g) The Company shall comply, to the extent applicable, with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws or regulations in connection with a Change of Control Offer. (h) Notwithstanding the foregoing, the Company will not be required to make a Change of Control Offer if a third party makes the Change of Control Offer, in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and purchases all the Securities validly tendered and not withdrawn under such Change of Control Offer. Section 1016. Limitation on Subsidiary Capital Stock. (a) The Company will not permit any Restricted Subsidiary of the Company to issue, sell or transfer any Capital Stock, except for (1) Capital Stock issued or sold to, held by or transferred to the Company or a Wholly Owned Restricted Subsidiary and (2) Capital Stock issued by a Person prior to the time (A) such Person becomes a Restricted Subsidiary, (B) such Person merges with or into a Restricted Subsidiary or (C) a Restricted Subsidiary merges with or into such Person; provided that such Capital Stock was not issued or incurred by such Person in anticipation of the type of transaction contemplated by subclause (A), (B) or (C). This clause (a) shall not apply on the acquisition of all the outstanding Capital Stock of such Restricted Subsidiary in accordance with the terms of this Indenture. (b) The Company will not permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to acquire Capital Stock of any Restricted Subsidiary from the Company or any Restricted Subsidiary, except upon the acquisition of all the outstanding Capital Stock of such Restricted Subsidiary in accordance with the terms of this Indenture. Section 1017. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (1) pay dividends or make any other distribution on its Capital Stock or any other interest or participation in or measured by its profits, (2) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (3) make any Investment in the Company or any other Restricted Subsidiary or (4) transfer any of its properties or assets to the Company or any other Restricted Subsidiary. However, this covenant does not prohibit any encumbrance or restriction (1) pursuant to an agreement in effect on the date of this Indenture and listed on Schedule II to this Indenture; (2) with respect to a Restricted Subsidiary that is not a Restricted Subsidiary of the Company on the date of the Indenture, in existence at the time such Person becomes a Restricted Subsidiary of the Company and - 120 - not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary, provided that such encumbrances and restrictions are not applicable to the Company or any Restricted Subsidiary or the properties or assets of the Company or any Restricted Subsidiary other than such Subsidiary which is becoming a Restricted Subsidiary; (3) pursuant to any agreement governing any Indebtedness represented by Capital Lease Obligations or Purchase Money Obligations permitted to be incurred under the provisions of the covenant described in Section 1008 hereof as to the assets financed with the proceeds of such Indebtedness; (4) existing under applicable law or any requirement of any regulatory body; (5) which is customarily contained in non-assignment provisions in leases, licenses or contracts; (6) which is customarily contained in (A) asset sale agreements permitted to be incurred under the provisions of Section 1012 hereof that limit the transfer of such assets pending the closing of such sale and (B) any other agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending its sale or other disposition; (7) which is customarily contained in security agreements or mortgages securing Indebtedness permitted under the Indenture to the extent such restrictions restrict the transfer of property subject to such security agreements or mortgages; and (8) under any agreement that extends, renews, refinances or replaces the agreements containing the encumbrances or restrictions in the foregoing clauses (1) through (7), or in this clause (8), provided that the terms and conditions of any such encumbrances or restrictions are no more restrictive in any material respect than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced. Section 1018. Limitations on Unrestricted Subsidiaries. The Company may designate after the Issue Date any Subsidiary (other than a Guarantor) as an "Unrestricted Subsidiary" under this Indenture (a "Designation") only if: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) the Company would be permitted to make an Investment (other than a Permitted Investment) at the time of Designation (assuming the effectiveness of such Designation) pursuant to the first paragraph of Section 1009 herein in an amount (the "Designation Amount") equal to the greater of (1) the net book value of the Company's interest in such Subsidiary calculated in accordance with GAAP or (2) the Fair Market Value of the Company's interest in such Subsidiary as determined in good faith by the Company's Board of Directors; (c) the Company would be permitted to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 1008 hereof at the time of such Designation (assuming the effectiveness of such Designation); - 119 - (d) such Unrestricted Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the Company which is not simultaneously being designated an Unrestricted Subsidiary; (e) such Unrestricted Subsidiary is not liable, directly or indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness, provided that an Unrestricted Subsidiary may provide a Guarantee for the Securities; and (f) such Unrestricted Subsidiary is not a party to any agreement, contract, arrangement or understanding at such time with the Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company or, in the event such condition is not satisfied, the value of such agreement, contract, arrangement or understanding to such Unrestricted Subsidiary shall be deemed a Restricted Payment. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to Section 1009 hereof for all purposes of this Indenture equal to the Designation Amount. The Company shall not and shall not cause or permit any Restricted Subsidiary to at any time (a) provide credit support for, or subject any of its property or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness) (other than Permitted Investments in Unrestricted Subsidiaries) or (b) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary. For purposes of the foregoing, the Designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall be deemed to be the Designation of all of the Subsidiaries of such Subsidiary as Unrestricted Subsidiaries. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the Indenture; and (c) unless such redesignated Subsidiary shall not have any Indebtedness outstanding (other than Indebtedness that would be Permitted Indebtedness), - 120 - immediately after giving effect to such proposed Revocation, and after giving pro forma effect to the incurrence of any such Indebtedness of such redesignated Subsidiary as if such Indebtedness was incurred on the date of the Revocation, the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 1009 herein. All Designations and Revocations must be evidenced by a resolution of the Board of Directors of the Company delivered to the Trustee certifying compliance with the foregoing provisions. Section 1019. Provision of Financial Statements. Whether or not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the Company and each Guarantor will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which the Company and such Guarantor would have been required to file with the Commission pursuant to Sections 13(a) or 15(d) if the Company or such Guarantor were so subject, such documents to be filed with the Commission on or prior to the date (the "Required Filing Date") by which the Company and such Guarantor would have been required so to file such documents if the Company and such Guarantor were so subject. The Company and any Guarantor will also in any event (a) within 15 days of each Required Filing Date (1) transmit by mail to all holders, as their names and addresses appear in the Security Register, without cost to such holders and (2) file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company and such Guarantor would have been required to file with the Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act if the Company and such Guarantor were subject to either of such Sections and (b) if filing such documents by the Company and such Guarantor with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective holder at the Company's cost. If any Guarantor's or secured party's financial statements would be required to be included in the financial statements filed or delivered pursuant to this Indenture if the Company were subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall include such Guarantor's financial statements in any filing or delivery pursuant to this Indenture. In addition, so long as any of the Securities remain outstanding, the Company will make available to any prospective purchaser of Securities or beneficial owner of Securities in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act, until such time as the Company has either exchanged the Securities for securities identical in all material respects which have been registered under the Securities Act or until such time as the holders thereof have disposed of such Securities pursuant to an effective registration statement under the Securities Act. - 121 - Section 1020. Statement by Officers as to Default. (a) The Company and the Guarantors will deliver to the Trustee, on or before a date not more than 120 days after the end of each fiscal year of the Company ending after the date hereof, and 60 days after the end of each fiscal quarter ending after the date hereof, a written statement signed by two executive officers of the Company and the Guarantors, one of whom shall be the principal executive officer, principal financial officer or principal accounting officer of the Company and the Guarantors, as to compliance herewith, including whether or not, after a review of the activities of the Company during such year or such quarter and of the Company's and each Guarantor's performance under this Indenture, to the best knowledge, based on such review, of the signers thereof, the Company and each Guarantor have fulfilled all of their respective obligations and are in compliance with all conditions and covenants under this Indenture throughout such year or quarter, as the case may be, and, if there has been a Default specifying each Default and the nature and status thereof and any actions being taken by the Company and the Guarantors with respect thereto. (b) When any Default or Event of Default has occurred and is continuing, or if the Trustee or any Holder or the trustee for or the holder of any other evidence of Indebtedness of the Company or any Subsidiary gives any notice or takes any other action with respect to a claimed default, the Company and the Guarantors shall deliver to the Trustee by registered or certified mail or facsimile transmission followed by an originally executed copy of an Officers' Certificate specifying such Default, Event of Default, notice or other action, the status thereof and what actions the Company and the Guarantors are taking or propose to take with respect thereto, within five Business Days after the occurrence of such Default or Event of Default. Section 1021. Waiver of Certain Covenants. The Company and the Guarantors may omit in any particular instance to comply with any covenant or condition set forth in Sections 1006 through 1011, 1013, 1014, and 1016 through 1020, if, before or after the time for such compliance, the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding shall, by Act of such Holders, waive such compliance in such instance with such covenant or provision, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. - 122 - ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 1101. Rights of Redemption. (a) The Securities are subject to redemption at any time on or after March 1, 2008, at the option of the Company, in whole or in part, subject to the conditions, and at the Redemption Prices, specified in the form of Security, together with accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on relevant Regular Record Dates and Special Record Dates to receive interest due on relevant Interest Payment Dates and Special Payment Dates). (b) In addition, at any time prior to March 1, 2007, the Company, at its option, may use the net proceeds of one or more Public Equity Offerings to redeem up to an aggregate of 35% of the aggregate principal amount of Securities originally issued under this Indenture at a redemption price equal to 107.500% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the Redemption Date; provided that at least 65% of the initial aggregate principal amount of Securities remains outstanding immediately after the occurrence of such redemption. In order to effect the foregoing redemption, the Company must mail a notice of redemption no later than 30 days after the closing of the related Public Equity Offering and must consummate such redemption within 60 days of the closing of the Public Equity Offering. Section 1102. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article Eleven. Section 1103. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 1101 shall be evidenced by a Company Order and an Officers' Certificate. In case of any redemption at the election of the Company, the Company shall, not less than 45 nor more than 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice period shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount of Securities to be redeemed. Section 1104. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities or portions thereof to be redeemed shall be selected not more than 30 days prior to the Redemption Date. The Trustee shall select the Securities or portions thereof to be redeemed in compliance with the requirements of the principal national securities - 123 - exchange, if any, on which the Securities are listed, or if the Securities are not so listed, pro rata, by lot or by any other method the Trustee shall deem fair and reasonable. The amounts to be redeemed shall be equal to $1,000 or any integral multiple thereof. The Trustee shall promptly notify the Company and the Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. Section 1105. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at its address appearing in the Security Register. All notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all Outstanding Securities are to be redeemed, the identification of the particular Securities to be redeemed; (d) in the case of a Security to be redeemed in part, the principal amount of such Security to be redeemed and that after the Redemption Date upon surrender of such Security, new Security or Securities in the aggregate principal amount equal to the unredeemed portion thereof will be issued; (e) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (f) that on the Redemption Date the Redemption Price will become due and payable upon each such Security or portion thereof to be redeemed, and that (unless the Company shall default in payment of the Redemption Price) interest thereon shall cease to accrue on and after said date; (g) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002 where such Securities are to be surrendered for payment of the Redemption Price; - 124 - (h) the CUSIP number, if any, relating to such Securities; and (i) the procedures that a Holder must follow to surrender the Securities to be redeemed. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. If the Company elects to give notice of redemption, it shall provide the Trustee with a certificate stating that such notice has been given in compliance with the requirements of this Section 1105. The notice if mailed in the manner herein provided shall be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. Section 1106. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company or any of its Affiliates is acting as Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money in same day funds sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date or Special Payment Date) accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. The Paying Agent shall promptly mail or deliver to Holders of Securities so redeemed payment in an amount equal to the Redemption Price of the Securities purchased from each such Holder. All money, if any, earned on funds held in trust by the Trustee or any Paying Agent shall be remitted to the Company. For purposes of this Section 1106, the Company shall choose a Paying Agent which shall not be the Company. Section 1107. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates and Special Record Dates according to the terms and the provisions of Section 309. - 125 - If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate borne by such Security. Section 1108. Securities Redeemed or Purchased in Part. Any Security which is to be redeemed or purchased only in part shall be surrendered to the Paying Agent at the office or agency maintained for such purpose pursuant to Section 1002 (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company, the Security Registrar or the Trustee, as the case may be, duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security so surrendered that is not redeemed or purchased. ARTICLE TWELVE SATISFACTION AND DISCHARGE Section 1201. Satisfaction and Discharge of Indenture. This Indenture shall be discharged and shall cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Securities as expressly provided for herein) as to all Outstanding Securities hereunder, and the Trustee, upon Company Request and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either (1) all the Securities theretofore authenticated and delivered (other than (i) lost, stolen or destroyed Securities which have been replaced or paid as provided in Section 308 or (ii) all Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided in Section 1003) have been delivered to the Trustee for cancellation; or (2) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable at their Stated Maturity within one year or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee - 126 - for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; (b) the Company or any Guarantor has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust an amount in United States dollars sufficient to pay and discharge the entire Indebtedness on the Securities not theretofore delivered to the Trustee for cancellation, including the principal of, premium, if any, and accrued interest on, such Securities at such Maturity, Stated Maturity or Redemption Date; (c) the Company or any Guarantor has paid or caused to be paid all other sums payable hereunder by the Company and any Guarantor; and (d) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Independent Counsel, in form and substance satisfactory to the Trustee, each stating that (i) all conditions precedent herein relating to the satisfaction and discharge hereof have been complied with and (ii) such satisfaction and discharge will not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company, any Guarantor or any Restricted Subsidiary is a party or by which the Company, any Guarantor or any Restricted Subsidiary is bound. Notwithstanding the satisfaction and discharge hereof, the obligations of the Company to the Trustee under Section 607 and, if United States dollars shall have been deposited with the Trustee pursuant to subclause (2) of subsection (a) of this Section 1201, the obligations of the Trustee under Section 1202 and the last paragraph of Section 1003 shall survive. Section 1202. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all United States dollars deposited with the Trustee pursuant to Section 1201 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal of, premium, if any, and interest on, the Securities for whose payment such United States dollars have been deposited with the Trustee. - 127 - ARTICLE THIRTEEN SUBORDINATION OF SECURITIES Section 1301. Securities Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Security, by such Holder's acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Securities and the payment of the principal of, premium, if any, and interest on, the Securities are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of the Senior Indebtedness. This Article Thirteen shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold Senior Indebtedness; and such provisions are made for the benefit of the holders of Senior Indebtedness; and such holders are made obligees hereunder and they or each of them may enforce such provisions as provided herein. Section 1302. Payment Over of Proceeds Upon Dissolution, etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary, or (c) any assignment for the benefit of creditors or any other marshaling of assets or liabilities of the Company, then and in any such event: (1) the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due on or in respect of Senior Indebtedness before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character (excluding securities of the Company or any other corporation that are equity securities or are subordinated in right of payment to all Senior Indebtedness, that may be outstanding, to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article ("Permitted Junior Securities")) on account of the principal of, premium, if any, or interest on the Securities or on account of the purchase, redemption, defeasance or other acquisition of, or in respect of, the Securities (other than amounts previously set aside with the Trustee, or payments previously made, in either case, pursuant to the provisions of Sections 402 and 403 of this Indenture); and (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding Permitted Junior Securities), by set-off or otherwise, to which the Holders or the Trustee would be entitled but for the provisions of this Article shall be paid by the liquidating trustee or agent or other Person - 128 - 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 or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, 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; and (3) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (excluding Permitted Junior Securities), in respect of principal, premium, if any, and interest on the Securities before all Senior Indebtedness is paid in full, then and in such event such payment or distribution (excluding Permitted Junior Securities) shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payments or distributions of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company with or into, another Person or the liquidation or dissolution of the Company following the sale, assignment, conveyance, transfer, lease or other disposal of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Section if the Person formed by such consolidation or the surviving entity of such merger or the Person which acquires by sale, assignment, conveyance, transfer, lease or other disposal of such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposal, comply with the conditions set forth in Article Eight. Section 1303. Suspension of Payment When Designated Senior Indebtedness in Default. (a) Unless Section 1302 shall be applicable, upon the occurrence of any default in the payment of any Designated Senior Indebtedness beyond any applicable grace period (a "Payment Default") and after the receipt by the Trustee from a Senior Representative of any Designated Senior Indebtedness of written notice of such default, no payment (other than amounts previously set aside with the Trustee or payments previously made, in either case, pursuant to Section 402 or 403 in this Indenture) or distribution of any assets of the Company of any kind or character (excluding Permitted Junior Securities) may - 129 - be made on account of the principal of, premium, if any, or interest on, the Securities, or on account of the purchase, redemption, defeasance or other acquisition of or in respect of, the Securities unless and until such Payment Default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness shall have been discharged or paid in full, after which the Company shall (subject to the other provisions of this Article Thirteen) resume making any and all required payments in respect of the Securities, including any missed payments. (b) Unless Section 1302 shall be applicable, (1) upon the occurrence and during the continuance of any non-payment default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may then be accelerated immediately (a "Non-payment Default") and (2) after the receipt by the Trustee and the Company from a Senior Representative of any Designated Senior Indebtedness of written notice of such Non-payment Default, no payment (other than any amounts previously set aside with the Trustee, or payments previously made, in either case, pursuant to the provisions of Sections 402 or 403 in this Indenture) or distribution of any assets of the Company of any kind or character (excluding Permitted Junior Securities) may be made by the Company on account of the principal of, premium, if any, or interest on, the Securities, or on account of the purchase, redemption, defeasance or other acquisition of, or in respect of, the Securities for the period specified below ("Payment Blockage Period"). (c) The Payment Blockage Period shall commence upon the receipt of notice of the Non-payment Default by the Trustee and the Company from a Senior Representative and shall end on the earliest of (i) the 179th day after such commencement, (ii) the date on which such Non-payment Default (and all Non-payment Defaults as to which notice is given after such Payment Blockage Period is initiated) is cured, waived or ceases to exist or on which such Designated Senior Indebtedness is discharged or paid in full, or (iii) the date on which such Payment Blockage Period (and all other Non-payment Defaults as to which notice is given after such Payment Blockage Period is initiated) shall have been terminated by written notice to the Company or the Trustee from the Senior Representative initiating such Payment Blockage Period. When the Payment Blockage Period ends, the Company shall promptly resume making any and all required payments in respect of the Securities, including any missed payments. In no event will a Payment Blockage Period extend beyond 179 days from the date of the receipt by the Company or the Trustee of the notice initiating such Payment Blockage Period (such 179-day period referred to as the "Initial Period"). Any number of notices of Non-payment Defaults may be given during the Initial Period. However, during any period of 365 consecutive days only one Payment Blockage Period, during which payment of principal of, or interest on, the Securities may not be made, may commence, the duration of such period may not exceed 179 days, and there must be a 186 consecutive day period in any 365 day period during which no Payment Blockage Period is in effect. No Non-payment Default with respect to Designated Senior Indebtedness that existed or was continuing on the date of the commencement of any Payment Blockage Period will be, or can be, made the basis for the commencement of a - 130 - second Payment Blockage Period, whether or not within a period of 365 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days subsequent to the commencement of the Initial Period. The Company shall deliver a notice to the Trustee promptly after the date on which any Non-payment Default is cured or waived or ceases to exist or on which the Designated Senior Indebtedness related thereto is discharged or paid in full, and the Trustee is authorized to act in reliance on such notice. (d) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to a Senior Representative of the holders of the Designated Senior Indebtedness or as a court of competent jurisdiction shall direct. Section 1304. Payment Permitted if No Default. Nothing contained in this Article, elsewhere in this Indenture or in any of the Securities shall prevent the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding-up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 1302 or under the conditions described in Section 1303, from making payments at any time of principal of, premium, if any, or interest on the Securities. Section 1305. Subrogation to Rights of Holders of Senior Indebtedness. After the payment in full of all Senior Indebtedness, the Holders of the Securities shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of, premium, if any, and interest on, the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. Section 1306. Provisions Solely to Define Relative Rights. The provisions of this Article are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the - 131 - obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest on, the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company or the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness (1) in any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Company referred to in Section 1302, to receive, pursuant to and in accordance with such Section, cash, property and securities otherwise payable or deliverable to the Trustee or such Holder, or (2) under the conditions specified in Section 1303, to prevent any payment prohibited by such Section or enforce their rights pursuant to Section 1303(d). Section 1307. Trustee to Effectuate Subordination. Each Holder of a Security by such Holder's acceptance thereof authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee such Holder's attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Company whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the indebtedness of the Company owing to such Holder in the form required in such proceedings and the causing of such claim to be approved. Section 1308. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any - 132 - property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) release any Person liable in any manner for the collection or payment of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other Person; provided, however, that in no event shall any such actions limit the right of the Holders of the Securities to take any action to accelerate the maturity of the Securities pursuant to Article Five of this Indenture or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Article. Section 1309. Notice to Trustee. (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from a Senior Representative or any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section by Noon, Eastern Time, on the Business Day prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on any Security), then, anything herein contained to the contrary notwithstanding but without limiting the rights and remedies of the holders of Senior Indebtedness, a Senior Representative or any trustee, fiduciary or agent thereof, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it after such date; nor shall the Trustee be charged with knowledge of the curing of any such default or the elimination of the act or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect. (b) The Trustee shall be entitled to rely on the delivery to it of a written notice to the Trustee and the Company by a Person which represents itself as a Senior Representative or a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a Senior Representative or a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor); provided, however, that failure to give such notice to the Company shall not affect in any way the ability of the Trustee to rely on such notice. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the - 133 - amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 1310. Reliance on Judicial Orders or Certificates. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, or a certificate of a Senior Representative, delivered to the Trustee or to the Holders of Securities for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article, provided that the foregoing shall apply only if such court has been fully apprised of the provisions of this Article. Section 1311. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. Section 1312. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting under this Indenture, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1311 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. - 134 - Section 1313. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Article Five of this Indenture or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article of the holders, from time to time, of Senior Indebtedness to receive the cash, property or securities receivable upon the exercise of such rights or remedies. Section 1314. Trustee's Relation to Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Article against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and the Trustee shall not be liable to any holder of Senior Indebtedness if it shall in good faith mistakenly (absent willful misconduct) pay over or deliver to Holders, the Company or any other Person moneys or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article or otherwise. ARTICLE FOURTEEN GUARANTEES Section 1401. Guarantors' Guarantee. For value received, each of the Guarantors, in accordance with this Article Fourteen, hereby absolutely, fully, unconditionally and irrevocably guarantees, jointly and severally with each other and with each other Person which may become a Guarantor hereunder, to the Trustee and the Holders, as if the Guarantors were the principal debtor, the punctual payment and performance when due of all Indenture Obligations (which for purposes of this Guarantee shall also be deemed to include all commissions, fees, charges, costs and other expenses (including reasonable legal fees and disbursements of one counsel) arising out of or incurred by the Trustee or the Holders in connection with the enforcement of this Guarantee). Section 1402. Continuing Guarantee; No Right of Set-Off; Independent Obligation. (a) This Guarantee shall be a continuing guarantee of the payment and performance of all Indenture Obligations and shall remain in full force and effect until the payment in full of all of the Indenture Obligations and shall apply to and secure any ultimate balance due or remaining unpaid to the Trustee or the Holders; and this Guarantee shall not - 135 - be considered as wholly or partially satisfied by the payment or liquidation at any time or from time to time of any sum of money for the time being due or remaining unpaid to the Trustee or the Holders. Each Guarantor, jointly and severally, covenants and agrees to comply with all obligations, covenants, agreements and provisions applicable to it in this Indenture including those set forth in Article Eight. Without limiting the generality of the foregoing, each Guarantor's liability shall extend to all amounts which constitute part of the Indenture Obligations and would be owed by the Company under this Indenture and the Securities but for the fact that they are unenforceable, reduced, limited, impaired, suspended or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Company. (b) Each Guarantor, jointly and severally, hereby guarantees that the Indenture Obligations will be paid to the Trustee without set-off or counterclaim or other reduction whatsoever (whether for taxes, withholding or otherwise) in lawful currency of the United States of America. (c) Each Guarantor, jointly and severally, guarantees that the Indenture Obligations shall be paid strictly in accordance with their terms regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the holders of the Securities. (d) Each Guarantor's liability to pay or perform or cause the performance of the Indenture Obligations under this Guarantee shall arise forthwith after demand for payment or performance by the Trustee has been given to the Guarantors in the manner prescribed in Section 106 hereof. (e) Except as provided herein, the provisions of this Article Fourteen cover all agreements between the parties hereto relative to this Guarantee and none of the parties shall be bound by any representation, warranty or promise made by any Person relative thereto which is not embodied herein; and it is specifically acknowledged and agreed that this Guarantee has been delivered by each Guarantor free of any conditions whatsoever and that no representations, warranties or promises have been made to any Guarantor affecting its liabilities hereunder, and that the Trustee shall not be bound by any representations, warranties or promises now or at any time hereafter made by the Company to any Guarantor. (f) This Guarantee is a guarantee of payment, performance and compliance and not of collectibility and is in no way conditioned or contingent upon any attempt to collect from or enforce performance or compliance by the Company or upon any event or condition whatsoever. (g) The obligations of the Guarantors set forth herein constitute the full recourse obligations of the Guarantors enforceable against them to the full extent of all their assets and properties. - 136 - Section 1403. Guarantee Absolute. The obligations of the Guarantors hereunder are independent of the obligations of the Company under the Securities and this Indenture and a separate action or actions may be brought and prosecuted against any Guarantor whether or not an action or proceeding is brought against the Company and whether or not the Company is joined in any such action or proceeding. The liability of the Guarantors hereunder is irrevocable, absolute and unconditional and (to the extent permitted by law) the liability and obligations of the Guarantors hereunder shall not be released, discharged, mitigated, waived, impaired or affected in whole or in part by: (a) any defect or lack of validity or enforceability in respect of any Indebtedness or other obligation of the Company or any other Person under this Indenture or the Securities, or any agreement or instrument relating to any of the foregoing; (b) any grants of time, renewals, extensions, indulgences, releases, discharges or modifications which the Trustee or the Holders may extend to, or make with, the Company, any Guarantor or any other Person, or any change in the time, manner or place of payment of, or in any other term of, all or any of the Indenture Obligations, or any other amendment or waiver of, or any consent to or departure from, this Indenture or the Securities, including any increase or decrease in the Indenture Obligations; (c) the taking of security from the Company, any Guarantor or any other Person, and the release, discharge or alteration of, or other dealing with, such security; (d) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Indenture Obligations and the obligations of any Guarantor hereunder; (e) the abstention from taking security from the Company, any Guarantor or any other Person or from perfecting, continuing to keep perfected or taking advantage of any security; (f) any loss, diminution of value or lack of enforceability of any security received from the Company, any Guarantor or any other Person, and including any other guarantees received by the Trustee; - 137 - (g) any other dealings with the Company, any Guarantor or any other Person, or with any security; (h) the Trustee's or the Holders' acceptance of compositions from the Company or any Guarantor; (i) the application by the Holders or the Trustee of all monies at any time and from time to time received from the Company, any Guarantor or any other Person on account of any indebtedness and liabilities owing by the Company or any Guarantor to the Trustee or the Holders, in such manner as the Trustee or the Holders deems best and the changing of such application in whole or in part and at any time or from time to time, or any manner of application of collateral, or proceeds thereof, to all or any of the Indenture Obligations, or the manner of sale of any collateral; (j) the release or discharge of the Company or any Guarantor of the Securities or of any Person liable directly as surety or otherwise by operation of law or otherwise for the Securities, other than an express release in writing given by the Trustee, on behalf of the Holders, of the liability and obligations of any Guarantor hereunder; (k) any change in the name, business, capital structure or governing instrument of the Company or any Guarantor or any refinancing or restructuring of any of the Indenture Obligations; (l) the sale of the Company's or any Guarantor's business or any part thereof; (m) subject to Section 1414, any merger or consolidation, arrangement or reorganization of the Company, any Guarantor, any Person resulting from the merger or consolidation of the Company or any Guarantor with any other Person or any other successor to such Person or merged or consolidated Person or any other change in the corporate existence, structure or ownership of the Company or any Guarantor or any change in the corporate relationship between the Company and any Guarantor, or any termination of such relationship; (n) the insolvency, bankruptcy, liquidation, winding-up, dissolution, receivership, arrangement, readjustment, assignment for the benefit of creditors or distribution of the assets of the Company or its assets or any resulting discharge of any obligations of the Company (whether voluntary or involuntary) or of any Guarantor (whether voluntary or involuntary) or the loss of corporate existence; - 138 - (o) subject to Section 1414, any arrangement or plan of reorganization affecting the Company or any Guarantor; (p) any failure, omission or delay on the part of the Company to conform or comply with any term of this Indenture; (q) any limitation on the liability or obligations of the Company or any other Person under this Indenture, or any discharge, termination, cancellation, distribution, irregularity, invalidity or unenforceability in whole or in part of this Indenture; (r) any other circumstance (including any statute of limitations) that might otherwise constitute a defense available to, or discharge of, the Company or any Guarantor; or (s) any modification, compromise, settlement or release by the Trustee, or by operation of law or otherwise, of the Indenture Obligations or the liability of the Company or any other obligor under the Securities, in whole or in part, and any refusal of payment by the Trustee, in whole or in part, from any other obligor or other guarantor in connection with any of the Indenture Obligations, whether or not with notice to, or further assent by, or any reservation of rights against, each of the Guarantors. Section 1404. Right to Demand Full Performance. In the event of any demand for payment or performance by the Trustee from any Guarantor hereunder, the Trustee or the Holders shall have the right to demand its full claim and to receive all dividends or other payments in respect thereof until the Indenture Obligations have been paid in full, and the Guarantors shall continue to be jointly and severally liable hereunder for any balance which may be owing to the Trustee or the Holders by the Company under this Indenture and the Securities. The retention by the Trustee or the Holders of any security, prior to the realization by the Trustee or the Holders of its rights to such security upon foreclosure thereon, shall not, as between the Trustee and any Guarantor, be considered as a purchase of such security, or as payment, satisfaction or reduction of the Indenture Obligations due to the Trustee or the Holders by the Company or any part thereof. Each Guarantor, promptly after demand, will reimburse the Trustee and the Holders for all costs and expenses of collecting such amount under, or enforcing this Guarantee, including, without limitation, the reasonable fees and expenses of counsel. Section 1405. Waivers. (a) Each Guarantor hereby expressly waives (to the extent permitted by law) notice of the acceptance of this Guarantee and notice of the existence, renewal, - 139 - extension or the non-performance, non-payment, or non-observance on the part of the Company of any of the terms, covenants, conditions and provisions of this Indenture or the Securities or any other notice whatsoever to or upon the Company or such Guarantor with respect to the Indenture Obligations, whether by statute, rule of law or otherwise. Each Guarantor hereby acknowledges communication to it of the terms of this Indenture and the Securities and all of the provisions therein contained and consents to and approves the same. Each Guarantor hereby expressly waives (to the extent permitted by law) diligence, presentment, protest and demand for payment with respect to (i) any notice of sale, transfer or other disposition of any right, title to or interest in the Securities by the Holders or in this Indenture, (ii) any release of any Guarantor from its obligations hereunder resulting from any loss by it of its rights of subrogation hereunder and (iii) any other circumstances whatsoever that might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety or that might otherwise limit recourse against such Guarantor. (b) Without prejudice to any of the rights or recourses which the Trustee or the Holders may have against the Company, each Guarantor hereby expressly waives (to the extent permitted by law) any right to require the Trustee or the Holders to: (i) enforce, assert, exercise, initiate or exhaust any rights, remedies or recourse against the Company, any Guarantor or any other Person under this Indenture or otherwise; (ii) value, realize upon, or dispose of any security of the Company or any other Person held by the Trustee or the Holders; (iii) initiate or exhaust any other remedy which the Trustee or the Holders may have in law or equity; or (iv) mitigate the damages resulting from any default under this Indenture; before requiring or becoming entitled to demand payment from such Guarantor under this Guarantee. Section 1406. The Guarantors Remain Obligated in Event the Company Is No Longer Obligated to Discharge Indenture Obligations. It is the express intention of the Trustee and the Guarantors that if for any reason the Company has no legal existence, is or becomes under no legal obligation to discharge the Indenture Obligations owing to the Trustee or the Holders by the Company or if any of the Indenture Obligations owing by the Company to the Trustee or the Holders becomes irrecoverable from the Company by operation of law or for any reason whatsoever, this Guarantee and the covenants, agreements and obligations of the Guarantors - 140 - contained in this Article Fourteen shall nevertheless be binding upon the Guarantors, as principal debtor, until such time as all such Indenture Obligations have been paid in full to the Trustee and all Indenture Obligations owing to the Trustee or the Holders by the Company have been discharged, or such earlier time as Section 402 shall apply to the Securities and the Guarantors shall be responsible for the payment thereof to the Trustee or the Holders upon demand. Section 1407. Fraudulent Conveyance; Contribution; Subrogation. (a) Each Guarantor that is a Subsidiary of the Company and, by its acceptance hereof, each Holder hereby confirm that it is the intention of all such parties that the Guarantee by such Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and such Guarantor hereby irrevocably agree that the obligations of such Guarantor under its Guarantee shall be limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under this Indenture, will result in the obligations of such Guarantor under its Guarantee not constituting such fraudulent transfer or conveyance. (b) Each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Guarantor, if any, in a pro rata amount based on the net assets of each Guarantor, determined in accordance with GAAP. (c) Each Guarantor hereby waives all rights of subrogation or contribution, whether arising by contract or operation of law (including, without limitation, any such right arising under federal bankruptcy law) or otherwise by reason of any payment by it pursuant to the provisions of this Article Fourteen. Section 1408. Guarantee Is in Addition to Other Security. This Guarantee shall be in addition to and not in substitution for any other guarantees or other security which the Trustee may now or hereafter hold in respect of the Indenture Obligations owing to the Trustee or the Holders by the Company and (except as may be required by law) the Trustee shall be under no obligation to marshal in favor of each of the Guarantors any other guarantees or other security or any moneys or other assets which the Trustee may be entitled to receive or upon which the Trustee or the Holders may have a claim. - 141 - Section 1409. Release of Security Interests. Without limiting the generality of the foregoing and except as otherwise provided in this Indenture, each Guarantor hereby consents and agrees, to the fullest extent permitted by applicable law, that the rights of the Trustee hereunder, and the liability of the Guarantors hereunder, shall not be affected by any and all releases for any purpose of any collateral, if any, from the Liens and security interests created by any collateral document and that this Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Indenture Obligations is rescinded or must otherwise be returned by the Trustee upon the insolvency, bankruptcy or reorganization of the Company or otherwise, all as though such payment had not been made. Section 1410. No Bar to Further Actions. Except as provided by law, no action or proceeding brought or instituted under Article Fourteen and this Guarantee and no recovery or judgment in pursuance thereof shall be a bar or defense to any further action or proceeding which may be brought under Article Fourteen and this Guarantee by reason of any further default or defaults under Article Fourteen and this Guarantee or in the payment of any of the Indenture Obligations owing by the Company. Section 1411. Failure to Exercise Rights Shall Not Operate as a Waiver; No Suspension of Remedies. (a) No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, power, privilege or remedy under this Article Fourteen and this Guarantee shall operate as a waiver thereof, nor shall any single or partial exercise of any rights, power, privilege or remedy preclude any other or further exercise thereof, or the exercise of any other rights, powers, privileges or remedies. The rights and remedies herein provided for are cumulative and not exclusive of any rights or remedies provided in law or equity. (b) Nothing contained in this Article Fourteen shall limit the right of the Trustee or the Holders to take any action to accelerate the maturity of the Securities pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law. Section 1412. Trustee's Duties; Notice to Trustee. (a) Any provision in this Article Fourteen or elsewhere in this Indenture allowing the Trustee to request any information or to take any action authorized by, or on behalf of any Guarantor, shall be permissive and shall not be obligatory on the Trustee except as the Holders may direct in accordance with the provisions of this Indenture or - 142 - where the failure of the Trustee to request any such information or to take any such action arises from the Trustee's gross negligence, bad faith or willful misconduct. (b) The Trustee shall not be required to inquire into the existence, powers or capacities of the Company, any Guarantor or the officers, directors or agents acting or purporting to act on their respective behalf. Section 1413. Successors and Assigns. All terms, agreements and conditions of this Article Fourteen shall extend to and be binding upon each Guarantor and its successors and permitted assigns and shall enure to the benefit of and may be enforced by the Trustee and its successors and assigns; provided, however, that the Guarantors may not assign any of their rights or obligations hereunder other than in accordance with Article Eight. Section 1414. Release of Guarantee. Concurrently with the payment in full of all of the Indenture Obligations, the Guarantors shall be released from and relieved of their obligations under this Article Fourteen. Upon the delivery by the Company to the Trustee of an Officers' Certificate and, if requested by the Trustee, an Opinion of Counsel to the effect that the transaction giving rise to the release of this Guarantee was made by the Company in accordance with the provisions of this Indenture and the Securities, the Trustee shall execute any documents reasonably required in order to evidence the release of the Guarantors from their obligations under this Guarantee. If any of the Indenture Obligations are revived and reinstated after the termination of this Guarantee, then all of the obligations of the Guarantors under this Guarantee shall be revived and reinstated as if this Guarantee had not been terminated until such time as the Indenture Obligations are paid in full, and each Guarantor shall enter into an amendment to this Guarantee, reasonably satisfactory to the Trustee, evidencing such revival and reinstatement. This Guarantee shall terminate with respect to each Guarantor and shall be automatically and unconditionally released and discharged as provided in Section 1015(c). Section 1415. Execution of Guarantee. (a) To evidence the Guarantee, each Guarantor hereby agrees to execute the guarantee substantially in the form set forth in Section 204, to be endorsed on each Security authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of each Guarantor by its Chairman of the Board, its President, its Chief Executive Officer, Chief Operating Officer or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. - 143 - (b) Any person that was not a Guarantor on the date of this Indenture may become a Guarantor by executing and delivering to the Trustee (i) a supplemental indenture in form and substance satisfactory to the Trustee, which subjects such person to the provisions (including the representations and warranties) of this Indenture as a Guarantor, (ii) in the event that as of the date of such supplemental indenture any Registrable Securities are outstanding, an instrument in form and substance satisfactory to the Trustee which subjects such person to the provisions of the Registration Rights Agreement with respect to such outstanding Registrable Securities, and (iii) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such person and constitutes the legal, valid and binding obligation of such person (subject to such customary assumptions and exceptions as may be acceptable to the Trustee in its reasonable discretion). (c) If an officer whose signature is on this Indenture no longer holds that office at the time the Trustee authenticates a Security on which this Guarantee is endorsed, such Guarantee shall be valid nevertheless. Section 1416. Guarantee Subordinate to Senior Guarantor Indebtedness. Each Guarantor covenants and agrees, and each Holder of a Guarantee, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Guarantees is hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Senior Guarantor Indebtedness; provided, however, that the Indebtedness represented by this Guarantee in all respects shall rank equally with, or prior to, all existing and future Indebtedness of such Guarantor that is expressly subordinated to such Guarantor's Senior Guarantor Indebtedness. This Article Fourteen shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold Senior Guarantor Indebtedness; and such provisions are made for the benefit of the holders of Senior Guarantor Indebtedness; and such holders are made obligees hereunder and they or each of them may enforce such provisions. Section 1417. Payment Over of Proceeds Upon Dissolution of the Guarantor, etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to any Guarantor or to its assets, or (b) any liquidation, dissolution or other winding up of any Guarantor, whether voluntary or involuntary, or (c) any assignment for the benefit of creditors or any other marshaling of assets or liabilities of any Guarantor, then and in any such event: - 144 - (1) the holders of Senior Guarantor Indebtedness shall be entitled to receive payment in full of all amounts due on or in respect of all Senior Guarantor Indebtedness before the Holders of the Securities are entitled to receive any payment or distribution of any kind or character (excluding securities of any Guarantor or any other corporation that are equity securities or are subordinated in right of payment to all Senior Guarantor Indebtedness, that may be outstanding, to substantially the same extent as, or to a greater extent than, the Guarantees are so subordinated as provided in this Article ("Permitted Guarantor Junior Securities")) on account of the Guarantee of such Guarantor (other than amounts previously set aside with the Trustee, or payments previously made, in either case, pursuant to the provisions of Sections 402 and 403 of this Indenture); and (2) any payment or distribution of assets of any Guarantor of any kind or character, whether in cash, property or securities (excluding Permitted Guarantor Junior Securities), by set-off or otherwise, to which the Holders or the Trustee would be entitled but for the provisions of this Article 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 Guarantor Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Guarantor Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Guarantor Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Guarantor Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Guarantor Indebtedness; and (3) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of any Guarantor of any kind or character, whether in cash, property or securities (excluding Permitted Guarantor Junior Securities), in respect the Guarantee of such Guarantor before all Senior Guarantor Indebtedness is paid in full, then and in such event such payment or distribution (excluding Permitted Guarantor Junior Securities) shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payments or distributions of assets of such Guarantor for application to the payment of all Senior Guarantor Indebtedness remaining unpaid, to the extent necessary to pay all Senior Guarantor Indebtedness in full after giving effect to any concurrent payment or distribution to or for the holders of Senior Guarantor Indebtedness. The consolidation of any Guarantor with, or the merger of any Guarantor with or into, another Person or the liquidation or dissolution of any Guarantor following the sale, assignment, conveyance, transfer, lease or other disposal of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, - 145 - assignment for the benefit of creditors or marshaling of assets and liabilities of such Guarantor for the purposes of this Section if the Person formed by such consolidation or the surviving entity of such merger or the Person which acquires by sale, assignment, conveyance, transfer, lease or other disposal of such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposal, comply with the conditions set forth in Article Eight. Section 1418. Default on Senior Guarantor Indebtedness. (a) Upon the maturity of any Senior Guarantor Indebtedness by lapse of time, acceleration or otherwise, all principal thereof and interest thereon and other amounts due in connection therewith shall first be paid in full or such payment duly provided for before any payment is made by any of the Guarantors or any Person acting on behalf of any of the Guarantors in respect of the Guarantee of such Guarantor. (b) No payment (excluding payments in the form of Permitted Guarantor Junior Securities) shall be made by any Guarantor in respect of its Guarantee during the period in which Section 1417 shall be applicable, during any suspension of payments in effect under Section 1303(a) of this Indenture or during any Payment Blockage Period in effect under Sections 1303(b) and (c) of this Indenture. (c) In the event that, notwithstanding the foregoing, any Guarantor shall make any payment to the Trustee or the Holder of its Guarantee prohibited by the foregoing provisions of this Section, then and in such event such payment shall be paid over and delivered forthwith to the representatives of the holders of the Senior Guarantor Indebtedness or as a court of competent jurisdiction shall direct. Section 1419. Payment Permitted by Each of the Guarantors if No Default. Nothing contained in this Article, elsewhere in this Indenture or in any of the Securities shall prevent any Guarantor, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding-up, assignment for the benefit of creditors or other marshaling of assets and liabilities of such Guarantor referred to in Section 1417 or under the conditions described in Section 1418, from making payments at any time of principal of, premium, if any, or interest on the Securities. Section 1420. Subrogation to Rights of Holders of Senior Guarantor Indebtedness. After the payment in full of all Senior Guarantor Indebtedness, the Holders of the Securities shall be subrogated to the rights of the holders of such Senior Guarantor Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Guarantor Indebtedness until the principal of, premium, if any, and interest on, the Securities shall be paid in full. For purposes of such subrogation, no - 146 - payments or distributions to the holders of Senior Guarantor Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Guarantor Indebtedness by Holders of the Securities or the Trustee, shall, as among any Guarantor, its creditors other than holders of Senior Guarantor Indebtedness, and the Holders of the Securities, be deemed to be a payment or distribution by such Guarantor to or on account of the Senior Guarantor Indebtedness. Section 1421. Provisions Solely to Define Relative Rights. The provisions of Sections 1416 through 1429 of this Indenture are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Guarantor Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among any Guarantor, its creditors other than holders of Senior Guarantor Indebtedness and the Holders of the Securities, the obligation such Guarantor, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest on, the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against each of the Guarantors of the Holders of the Securities and creditors of each of the Guarantors other than the holders of Senior Guarantor Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Guarantor Indebtedness (1) in any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshaling of assets and liabilities of the Guarantors referred to in Section 1417, to receive, pursuant to and in accordance with such Section, cash, property and securities otherwise payable or deliverable to the Trustee or such Holder, or (2) under the conditions specified in Section 1418, to prevent any payment prohibited by such Section or enforce their rights pursuant to Section 1418(c). Section 1422. Trustee to Effectuate Subordination. Each Holder of a Security by such Holder's acceptance thereof authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee such Holder's attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of any Guarantor whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the indebtedness of any Guarantor owing to such Holder in the form required in such proceedings and the causing of such claim to be approved. - 147 - Section 1423. No Waiver of Subordination Provisions. (a) No right of any present or future holder of any Senior Guarantor Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of any Guarantor or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by any Guarantor with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section, the holders of Senior Guarantor Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Guarantor Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Guarantor Indebtedness or any instrument evidencing the same or any agreement under which Senior Guarantor Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Guarantor Indebtedness; (3) release any Person liable in any manner for the collection or payment of Senior Guarantor Indebtedness; and (4) exercise or refrain from exercising any rights against any of the Guarantors and any other Person; provided, however, that in no event shall any such actions limit the right of the Holders of the Securities to take any action to accelerate the maturity of the Securities pursuant to Article Five of this Indenture or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Article. Section 1424. Notice to Trustee by Each of the Guarantors. (a) Each Guarantor shall give prompt written notice to the Trustee of any fact known to such Guarantor which would prohibit the making of any payment to or by the Trustee in respect of the Guarantee. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from any Guarantor or a holder of Senior Guarantor Indebtedness or any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section by Noon, Eastern Time, on the Business Day prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of, premium, if any, or interest on any Security), then, anything herein contained to the contrary notwithstanding but without limiting the rights and remedies of - 148 - the holders of Senior Guarantor Indebtedness or any trustee, fiduciary or agent thereof, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it after such date; nor shall the Trustee be charged with knowledge of the curing of any such default or the elimination of the act or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect. (b) The Trustee shall be entitled to rely on the delivery to it of a written notice to the Trustee and each Guarantor by a Person which represents itself as a representative of one or more holders of Guarantor Senior or a holder of Senior Guarantor Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a representative of or a holder of Senior Guarantor Indebtedness (or a trustee, fiduciary or agent therefor); provided, however, that failure to give such notice to the Company or any Guarantor shall not affect in any way the ability of the Trustee to rely on such notice. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Guarantor Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Guarantor Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 1425. Reliance on Judicial Orders or Certificates. Upon any payment or distribution of assets of any Guarantor referred to in this Article, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Holders of Securities for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Guarantor Indebtedness and other indebtedness of such Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article, provided that the foregoing shall apply only if such court has been fully apprised of the provisions of this Article. - 149 - Section 1426. Rights of Trustee as a Holder of Senior Guarantor Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Guarantor Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Guarantor Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. Section 1427. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting under this Indenture, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1426 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. Section 1428. No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Article Five of this Indenture or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article of the holders, from time to time, of Senior Guarantor Indebtedness to receive the cash, property or securities receivable upon the exercise of such rights or remedies. Section 1429. Trustee's Relation to Senior Guarantor Indebtedness. With respect to the holders of Senior Guarantor Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of Senior Guarantor Indebtedness shall be read into this Article against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Guarantor Indebtedness and the Trustee shall not be liable to any holder of Senior Guarantor Indebtedness if it shall in good faith mistakenly (absent willful misconduct) pay over or deliver to Holders, the Company or any other Person moneys or assets to which any holder of Senior Guarantor Indebtedness shall be entitled by virtue of this Article or otherwise. * * * - 150 - IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. JO-ANN STORES, INC. By: /s/ Donald R. Tomoff ------------------------------------- Name: Donald R. Tomoff Title: Vice President, Finance Attest: /s/ Wendy E. Stewart ------------------------ Name: Wendy E. Stewart Title: - 151 - JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. TEAM JO-ANN, INC. FCA OF OHIO, INC. HOUSE OF FABRICS, INC. By: /s/ Donald R. Tomoff ------------------------------------- Name: Donald R. Tomoff Title: Treasurer Attest: /s/ Wendy E. Stewart ------------------------ Name: Wendy E. Stewart Title: - 152 - NATIONAL CITY BANK By: /s/ Holly Pattison ------------------------------ Name: Holly Pattison Title: Vice President - 153 - STATE OF OHIO ) ) ss.: COUNTY OF SUMMIT ) On the 26th day of February, 2004, before me personally came Donald R. Tomoff, to me known, who, being by me duly sworn, did depose and say that he resides at Hudson, Ohio; that he is Vice President, Finance of Jo-Ann Stores, Inc., an Ohio corporation, Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, Team Jo-Ann, Inc., an Ohio corporation, FCA of Ohio, Inc., an Ohio corporation, and House of Fabrics, Inc., a Delaware corporation, each of which is a corporation described in and which executed the foregoing instrument; and that he signed his name thereto pursuant to authority of the Board of Directors of each of such corporations. (NOTARIAL SEAL) /s/ Wendy E. Stewart --------------------------- Wendy E. Stewart, Notary Public STATE OF OHIO Resident Summit County My Commission Expires April 28, 2004 - 1 - STATE OF OHIO ) ) ss.: COUNTY OF CUYAHOGA ) On the 26th day of February, 2004, before me personally came Holly Pattison, to me known, who, being by me duly sworn, did depose and say that she resides at Cleveland, Ohio; that she is Vice President of National City Bank, a corporation described in and which executed the foregoing instrument; and that she signed her name thereto pursuant to authority of the Board of Directors of such corporation. (NOTARIAL SEAL) /s/ Daniel T. Young --------------------------- Daniel T. Young, Attorney at Law Notary Public - State of Ohio My commission has no expiration date. Section 147.03 R.C. - 1 - ANNEX A INTERCOMPANY NOTE _________________, 20___ Evidences of all loans or advances ("Loans") made hereunder shall be reflected on the grid attached hereto. FOR VALUE RECEIVED, _______, a ____________ corporation (the "Maker"), HEREBY PROMISES TO PAY ON DEMAND to the order of _______ (the "Holder") the principal sum of the aggregate unpaid principal amount of all Loans (plus accrued interest thereon) at any time and from time to time made hereunder which has not been previously paid. All capitalized terms used herein that are defined in, or by reference in, the Indenture among Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, Team Jo-Ann, Inc., an Ohio corporation, FCA of Ohio, Inc., an Ohio corporation, and House of Fabrics, Inc., a Delaware corporation, and National City Bank, as trustee, dated as of February 26, 2004 (the "Indenture"), have the meanings assigned to such terms therein, or by reference therein, unless otherwise defined. ARTICLE I TERMS OF INTERCOMPANY NOTE Section 1.01 Note Not Forgivable. Unless the Maker of the Loan hereunder is the Company or any Guarantor, the Holder may not forgive any amounts owing under this intercompany note. Section 1.02 Interest: Prepayment. (a) The interest rate ("Interest Rate") on the Loans shall be a rate per annum reflected on the grid attached hereto. (b) The interest, if any, payable on each of the Loans shall accrue from the date such Loan is made and, subject to Section 2.01, shall be payable upon demand of the Holder. (c) To the extent permitted by law, if the principal or accrued interest, if any, of the Loans is not paid on the date demand is made, interest on the unpaid principal and interest will accrue at a rate equal to the Interest Rate, if any, plus 100 basis points per annum from maturity until the principal and interest on such Loans are fully paid. (d) Subject to Section 2.01, any amounts hereunder may be repaid at any time by the Maker. - 1 - Section 1.02 Subordination. Subject to Section 2.01, all Loans hereunder shall be subordinated in right of payment to the payment and performance of the obligations of the Company and any Subsidiary (which Subsidiary is also an obligor under the Indenture, the Securities, a Guarantee or other Senior Indebtedness or Pari Passu Indebtedness, as the case may be, whether as a borrower or guarantor) under the Indenture, the Securities, the Guarantees or any other Indebtedness ranking senior to or pari passu with the Securities. ARTICLE II EVENTS OF DEFAULT Section 2.01 Events of Default. If after the date of issuance of this Loan (i) an Event of Default has occurred under the Indenture, (ii) an Event of Default (as defined) has occurred under the Credit Facility or (iii) an "event of default" (as defined) has occurred under any other Indebtedness of the Company or any Subsidiary, then (x) in the event the Maker is (A) a Subsidiary which is not a Guarantor or (B) a Guarantor in the case where the Holder is the Company, all amounts owing under the Loans hereunder shall be immediately due and payable to the Holder, (y) in the event the Maker is the Company, the amounts owing under the Loans hereunder shall not be due and payable at any time and shall not be paid and (z) in the event the Maker is a Guarantor and the Holder is not the Company or any Guarantor, the amounts owing under the Loans hereunder shall not be due and payable at any time and shall not be paid; provided, however, that if such Event of Default or event of default has been waived, cured or rescinded, such amounts shall no longer be due and payable in the case of clause (x), and such amounts may be paid in the case of clauses (y) and (z). If the Holder is a Subsidiary, then the Holder hereby agrees that if it receives any payments or distributions on any Loan from the Company or a Guarantor which is not payable pursuant to clause (y) or (z) of the prior sentence after any Event of Default described in clauses (i) or (ii) or any event of default described in clause (iii) above has occurred, is continuing and has not been waived, cured or rescinded, it will pay over and deliver forthwith to the Company or such Guarantor, as the case may be, all such payments and distributions. ARTICLE III MISCELLANEOUS Section 3.01 Amendments, Etc. No amendment or waiver of any provision of this intercompany note, or consent to depart herefrom is permitted at any time for any reason, except with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities. Section 3.02 Assignment. No party to this Agreement may assign, in whole or in part, any of its rights and obligations under this intercompany note, except to its legal successor in interest. Section 3.03 Third Party Beneficiaries. The holders of the Securities or any other Indebtedness ranking pari passu with or senior to, the Securities or any Guarantees, - 2 - including without limitation, any Indebtedness incurred under the New Credit Facility, shall be third party beneficiaries to this intercompany note and upon an Event of Default shall have the right to enforce this intercompany note against the Company or any of its Subsidiaries. Section 3.04 Headings. Article and Section headings in this intercompany note are included for convenience of reference only and shall not constitute a part of this intercompany note for any other purpose. Section 3.05 Entire Agreement. This intercompany note sets forth the entire agreement of the parties with respect to its subject matter and supersedes all previous understandings, written or oral, in respect thereof. Section 3.06 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF). - 3 - Section 3.07 Waivers. The Maker hereby waives presentment, demand for payment, notice of protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement hereof. By:___________________________ - 4 - BORROWINGS, MATURITIES, AND PAYMENTS OF PRINCIPAL
Amount of Maturity of Amount Borrowing/ Borrowing/ Interest Principal Paid Unpaid Principal Notation Date Principal Principal Rate or Prepaid Balance Made by - ---- ---------- ---------- ------- -------------- ---------------- --------
- 5 - SCHEDULE I Existing Indebtedness None - 1 - SCHEDULE II Existing Dividend Restrictions None - 1 - EXHIBIT A REGULATION S CERTIFICATE (For transfers pursuant to Section 307(a)(i) of the Indenture) National City Bank Corporate Trust Department, Locator 01-3116 629 Euclid Ave., Suite 635 Cleveland, Ohio 44114-3484 Re: 7.50% Senior Subordinated Notes due 2012 of Jo-Ann Stores, Inc. (the "Securities") Reference is made to the Indenture, dated as of February 26, 2004 (the "Indenture"), among Jo-Ann Stores, Inc., a Ohio corporation (the "Company"), Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, Team Jo-Ann, Inc., an Ohio corporation, FCA of Ohio, Inc., an Ohio corporation, House of Fabrics, Inc., a Delaware corporation, and National City Bank, as Trustee. Terms used herein and defined in the Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to US$____________ principal amount of Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s). ___________________________ CERTIFICATE No(s). _____________________ The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner." The Specified Securities are represented by a Global Security and are held through the Depositary or an Agent Member in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be transferred to a person (the "Transferee") who will take delivery in the form of a Regulation S Global Security. In connection with such transfer, the Owner hereby certifies that, unless such transfer is being effected pursuant to an effective registration statement under the Securities Act, it is being effected in accordance with Rule 904 or Rule 144 under the Securities Act and with all applicable securities laws of the states of the United States and other jurisdictions. Accordingly, the Owner hereby further certifies as follows: - 1 - (1) Rule 904 Transfers. If the transfer is being effected in accordance with Rule 904: (A) the Owner is not a distributor of the Securities, an affiliate of the Company or any such distributor or a person acting on behalf of any of the foregoing; (B) the offer of the Specified Securities was not made to a person in the United States; (C) either: (i) at the time the buy order was originated, the Transferee was outside the United States or the Owner and any person acting on its behalf reasonably believed that the Transferee was outside the United States, or (ii) the transaction is being executed in, on or through the facilities of the Eurobond market, as regulated by the Association of International Bond Dealers, or another designated offshore securities market and neither the Owner nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States; (D) no directed selling efforts have been made in the United States by or on behalf of the Owner or any affiliate thereof; (E) if the Owner is a dealer in securities or has received a selling concession, fee or other remuneration in respect of the Specified Securities, and the transfer is to occur during the Restricted Period, then the requirements of Rule 904(c)(1) have been satisfied; and (F) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (2) Rule 144 Transfers. If the transfer is being effected pursuant to Rule 144: (A) the transfer is occurring after a holding period of at least one year (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and is being effected in accordance with the applicable amount, manner of sale and notice requirements of Rule 144; or - 2 - (B) the transfer is occurring after a holding period of at least two years has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Company. - 3 - This certificate and the statements contained herein are made for your benefit and the benefit of the Company and the Initial Purchasers. Dated: (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By:_______________________________________ Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) - 4 - EXHIBIT B RESTRICTED SECURITIES CERTIFICATE (For transfers pursuant to Section 307(a)(ii) of the Indenture) National City Bank Corporate Trust Department, Locator 01-3116 629 Euclid Ave., Suite 635 Cleveland, Ohio 44114-3484 Re: 7.50% Senior Subordinated Notes due 2012 of Jo-Ann Stores, Inc. (the "Securities") Reference is made to the Indenture, dated as of February 26, 2004 (the "Indenture"), among Jo-Ann Stores, Inc., a Ohio corporation (the "Company"), Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, Team Jo-Ann, Inc., an Ohio corporation, FCA of Ohio, Inc., an Ohio corporation, House of Fabrics, Inc., a Delaware corporation, and National City Bank, as Trustee. Terms used herein and defined in the Indenture or in Rule 144A or Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to US$_____________ principal amount of Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s). ___________________________ ISIN No(s). If any. ____________________ CERTIFICATE No(s). _____________________ The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner." The Specified Securities are represented by a Global Security and are held through the Depositary or an Agent Member in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be transferred to a person (the "Transferee") who will take delivery in the form of a Restricted Security. In connection with such transfer, the Owner hereby certifies that, unless such transfer is being effected pursuant to an effective registration statement under the Securities Act, it is being effected in accordance with Rule 144A or Rule 144 under the Securities Act and all applicable securities laws of the states of the United States and other jurisdictions. Accordingly, the Owner hereby further certifies as follows: (1) Rule 144A Transfers. If the transfer is being effected in - 1 - accordance with Rule 144A: (A) the Specified Securities are being transferred to a person that the Owner and any person acting on its behalf reasonably believe is a "qualified institutional buyer" within the meaning of Rule 144A, acquiring for its own account or for the account of a qualified institutional buyer; and (B) the Owner and any person acting on its behalf have taken reasonable steps to ensure that the Transferee is aware that the Owner may be relying on Rule 144A in connection with the transfer; and (2) Rule 144 Transfers. If the transfer is being effected pursuant to Rule 144: (A) the transfer is occurring after a holding period of at least one year (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and is being effected in accordance with the applicable amount, manner of sale and notice requirements of Rule 144; or (B) the transfer is occurring after a holding period of at least two years has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Company. - 2 - This certificate and the statements contained herein are made for your benefit and the benefit of the Company and the Initial Purchasers. Dated: (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By:________________________________________ Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) - 3 - EXHIBIT C UNRESTRICTED SECURITIES CERTIFICATE (For removal of Securities Act Legends pursuant to Section 307(b)) National City Bank Corporate Trust Department, Locator 01-3116 629 Euclid Ave., Suite 635 Cleveland, Ohio 44114-3484 Re: 7.50% Senior Subordinated Notes due 2012 of Jo-Ann Stores, Inc. (the "Securities") Reference is made to the Indenture, dated as of February 26, 2004, among Jo-Ann Stores, Inc., a Ohio corporation (the "Company"), Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, Team Jo-Ann, Inc., an Ohio corporation, FCA of Ohio, Inc., an Ohio corporation, House of Fabrics, Inc., a Delaware corporation, and National City Bank, as Trustee. Terms used herein and defined in the Indenture or in Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to US$_____________ principal amount of Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s). ___________________________ CERTIFICATE No(s). _____________________ The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner". If the Specified Securities are represented by a Global Security, they are held through the Depositary or an Agent Member in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Security, they are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be exchanged for Securities bearing no Private Placement Legend pursuant to Section 307(b) of the Indenture. In connection with such exchange, the Owner hereby certifies that the exchange is occurring after a holding period of at least two years (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Company or from an affiliate of the Company, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Company. The Owner also acknowledges that any future transfers of the Specified Securities must comply with all - 1 - applicable securities laws of the states of the United States and other jurisdictions. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and the Initial Purchasers. Dated: (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By:________________________________________ Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) - 2 - APPENDIX I [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ----------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- (Please print or typewrite name and address including zip code of assignee) - ---------------------------------------------------------------------------- the within Security and all rights thereunder, hereby irrevocably constituting and appointing - ---------------------------------------------------------------------------- attorney to transfer such Security on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES FOR SERIES A SECURITIES EXCEPT PERMANENT OFFSHORE PHYSICAL CERTIFICATES] In connection with any transfer of this Security occurring prior to the date which is the earlier of the date of an effective Registration Statement or February 26, 2006, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act of 1933 provided by Rule 144A thereunder. or [ ] (b) this Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If none of the foregoing boxes is checked, the Trustee or other Security Registrar shall not be obligated to register this Security in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 307 of the Indenture shall have been satisfied. - 1 - Date: _______________________ ________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee: _____________________________ [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15] TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933 and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:__________________ ____________________________________________________ NOTICE: To be executed by an authorized signatory - 2 - APPENDIX II FORM OF TRANSFEREE CERTIFICATE I or we assign and transfer this Security to: Please insert social security or other identifying number of assignee ____________________________________________________________________________ ____________________________________________________________________________ Print or type name, address and zip code of assignee and irrevocably appoint________________________________________________________________ [Agent], to transfer this Security on the books of the Company. The Agent may substitute another to act for him. Dated ____________________ Signed __________ (Sign exactly as name appears on the other side of this Security) [Signature must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved guarantee medallion program pursuant to Securities and Exchange Commission Rule 17 Ad-15] - 1 - EX-4.5 5 l06203aexv4w5.txt REGISTRATION RIGHTS AGREEMENT Exhibit 4.5 REGISTRATION RIGHTS AGREEMENT DATED AS OF FEBRUARY 26, 2004 AMONG JO-ANN STORES, INC. (AN OHIO CORPORATION), JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. (AN OHIO CORPORATION), TEAM JO-ANN, INC. (AN OHIO CORPORATION), FCA OF OHIO, INC. (AN OHIO CORPORATION) AND HOUSE OF FABRICS, INC. (A DELAWARE CORPORATION) AND MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, WACHOVIA CAPITAL MARKETS, LLC SG COWEN SECURITIES CORPORATION MCDONALD INVESTMENTS INC. TABLE OF CONTENTS
PAGE ---- 1. Definitions...................................................... 1 2. Registration Under the 1933 Act.................................. 5 2.1 Exchange Offer.......................................... 5 2.2 Shelf Registration...................................... 7 2.3 Expenses................................................ 8 2.4. Effectiveness........................................... 9 2.5 Interest................................................ 9 3. Registration Procedures.......................................... 10 4. Indemnification; Contribution.................................... 18 5. Miscellaneous.................................................... 21 5.1 Rule 144 and Rule 144A.................................. 21 5.2 No Inconsistent Agreements.............................. 21 5.3 Amendments and Waivers.................................. 22 5.4 Notices................................................. 22 5.5 Successor and Assigns................................... 22 5.6 Third Party Beneficiaries............................... 22 5.7. Specific Enforcement.................................... 23 5.8. Restriction on Resales.................................. 23 5.9 Counterparts............................................ 23 5.10 Headings................................................ 23 5.11 GOVERNING LAW........................................... 23 5.12 Severability............................................ 23
i REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into this 26th day of February, 2004, among Jo-Ann Stores, Inc., an Ohio corporation (the "Company"), Jo-Ann Stores Supply Chain Management, Inc. (an Ohio corporation), Team Jo-Ann, Inc. (an Ohio corporation), FCA of Ohio, Inc. (an Ohio corporation) and House of Fabrics, Inc. (a Delaware corporation) (collectively, the "Guarantors"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC, SG Cowen Securities Corporation and McDonald Investments Inc. (collectively the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement, dated February 19, 2004, among the Company, the Guarantors and the Initial Purchasers (the "Purchase Agreement"), which provides for (i) the sale by the Company to the Initial Purchasers of an aggregate of $100 million principal amount of the Company's 7.50% Senior Subordinated Notes due 2012, Series A (the "Securities") and (ii) the issue and sale by the Guarantors and the purchase by the Initial Purchasers of the guarantees (the "Guarantees") of the Company's obligations under the Securities. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company and the Guarantors have agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 Act" shall mean the Securities Act of 1933, as amended. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "Closing Date" shall mean the Closing Time as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Company and the Guarantors, provided, however, that such depositary must have an address in the Borough of Manhattan, in the City of New York. 1 "Exchange Offer" shall mean the exchange offer by the Company and the Guarantors of Exchange Securities (and related Guarantees) for Registrable Securities pursuant to Section 2.1 hereof. "Exchange Offer Registration" shall mean a registration under the 1933 Act effected pursuant to Section 2.1 hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form or on any successor form used for substantially the same transactions), and all amendments and supplements to such registration statement, including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. "Exchange Period" shall have the meaning set forth in Section 2.1 hereof. "Exchange Securities" shall mean, collectively, the 7.50% Senior Subordinated Notes due 2012, Series B issued by the Company under the Indenture and the related guarantees issued by the Guarantors under the Indenture, containing terms identical to the Securities and the Guarantees in all material respects (except for references to certain interest rate provisions, restrictions on transfers and restrictive legends), to be offered to Holders of Securities and Guarantees in exchange for Registrable Securities pursuant to the Exchange Offer. "Guarantors" shall have the meaning set forth in the preamble and shall also include the Guarantors' successors. "Holder" shall mean an Initial Purchaser, for so long as it owns any Registrable Securities, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture and each Participating Broker-Dealer that holds Exchange Securities for so long as such Participating Broker-Dealer is required to deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities. "Indenture" shall mean the Indenture relating to the Securities and the Guarantees, dated as of February 26, 2004, among the Company, the Guarantors and National City Bank, as trustee, and as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the terms thereof. "Initial Purchaser" or "Initial Purchasers" shall have the meaning set forth in the preamble. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of Outstanding (as defined in the Indenture) Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company, the Guarantors and other obligors on the Securities or Guarantees or any Affiliate (as defined 2 in the Indenture) of the Company or any Guarantor shall be disregarded in determining whether such consent or approval was given by the Holders of such required percentage amount. "Participating Broker-Dealer" shall mean any of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC, SG Cowen Securities Corporation and McDonald Investments Inc. and any other broker-dealer which makes a market in the Securities and Guarantees and exchanges Registrable Securities in the Exchange Offer for Exchange Securities. "Person" shall mean an individual, partnership (general or limited), corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Private Exchange" shall have the meaning set forth in Section 2.1 hereof. "Private Exchange Securities" shall have the meaning set forth in Section 2.1 hereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including any such prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. "Registrable Securities" shall mean, collectively, the Securities, the Guarantees, and, if issued, the Private Exchange Securities; provided, however, that Securities, Guarantees and, if issued, the Private Exchange Securities, shall cease to be Registrable Securities when (i) a Registration Statement with respect to such Securities and Guarantees shall have been declared effective under the 1933 Act and such Securities and Guarantees shall have been disposed of pursuant to such Registration Statement, (ii) such Securities and Guarantees have been sold to the public pursuant to Rule 144 (or any similar provision then in force, but not Rule 144A) under the 1933 Act, (iii) such Securities and Guarantees shall have ceased to be outstanding or (iv) the Exchange Offer is consummated (except in the case of Securities and Guarantees purchased from the Company and the Guarantors and continued to be held by the Initial Purchasers or other Securities which may not be exchanged in the Exchange Offer). "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantors with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities 3 Dealers, Inc. (the "NASD") registration and filing fees, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any holder of Registrable Securities in accordance with the rules and regulations of the NASD, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities and any filings with the NASD), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges, (v) all rating agency fees, (vi) the fees and disbursements of counsel for the Company and the Guarantors and of the independent public accountants of the Company and the Guarantors, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, (vii) the fees and expenses of the Trustee, and any escrow agent or custodian, (viii) the reasonable fees and disbursements of Fried, Frank, Harris, Shriver & Jacobson, special counsel representing the Holders of Registrable Securities and (ix) any fees and disbursements of the underwriters customarily required to be paid by issuers or sellers of securities and the fees and expenses of any special experts retained by the Company and the Guarantors in connection with any Registration Statement, but excluding underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Registration Statement" shall mean any registration statement of the Company and the Guarantors which covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission or any successor agency or government body performing the functions currently performed by the United States Securities and Exchange Commission. "Shelf Registration" shall mean a registration effected pursuant to Section 2.2 hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company and the Guarantors pursuant to the provisions of Section 2.2 of this Agreement which covers all of the Registrable Securities or all of the Private Exchange Securities on an appropriate form under Rule 415 under the 1933 Act, or any successor or similar rule that may be adopted by the SEC, and all amendments and supplements to such 4 registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" shall mean the trustee with respect to the Securities and the Guarantees under the Indenture. 2. Registration Under the 1933 Act. 2.1 Exchange Offer. The Company and the Guarantors shall, for the benefit of the Holders, at the Company's cost, (A) prepare and, as soon as practicable but not later than 90 days following the Closing Date, file with the SEC an Exchange Offer Registration Statement on an appropriate form under the 1933 Act with respect to a proposed Exchange Offer and the issuance and delivery to the Holders, in exchange for the Registrable Securities (other than Private Exchange Securities), of a like principal amount of Exchange Securities, (B) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the 1933 Act within 180 days of the Closing Date, (C) use its best efforts to keep the Exchange Offer Registration Statement effective until the closing of the Exchange Offer and (D) use its best efforts to cause the Exchange Offer to be consummated not later than 210 days following the Closing Date. The Exchange Securities will be issued under the Indenture. Upon the effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall commence the Exchange Offer as promptly as practicable, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities for Exchange Securities (assuming that such Holder (a) is not an affiliate of the Company or any of the Guarantors within the meaning of Rule 405 under the 1933 Act, (b) is not a broker-dealer tendering Registrable Securities acquired directly from the Company or any of the Guarantors for its own account, (c) acquired or will acquire the Exchange Securities in the ordinary course of such Holder's business and (d) has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing the Exchange Securities) to transfer such Exchange Securities from and after their receipt without any limitations or restrictions under the 1933 Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company and the Guarantors shall: (a) mail, as promptly as practicable after the effectiveness of the Exchange Offer Registration Statement, to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Exchange Offer open for acceptance for a period of not less than 20 business days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (c) utilize the services of the Depositary for the Exchange Offer; 5 (d) permit Holders to withdraw tendered Registrable Securities at any time prior to 11:59 p.m. (Eastern Time), on the last business day of the Exchange Period, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange, and a statement that such Holder is withdrawing such Holder's election to have such Securities and Guarantees exchanged; (e) notify each Holder that any Registrable Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and (f) otherwise comply in all respects with all applicable laws relating to the Exchange Offer. If, prior to consummation of the Exchange Offer, the Initial Purchasers hold any Securities acquired by them and having the status of an unsold allotment in the initial distribution (which securities may not be exchanged in the Exchange Offer), the Company upon the request of any Initial Purchaser shall, simultaneously with the delivery of the Exchange Securities in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange (the "Private Exchange") for the Securities held by such Initial Purchaser, a like principal amount of debt securities of the Company, guaranteed by the Guarantors, that are identical (except that such securities shall bear appropriate transfer restrictions) to the Exchange Securities (the "Private Exchange Securities"). The Exchange Securities and the Private Exchange Securities shall be issued under (i) the Indenture or (ii) an indenture identical in all material respects to the Indenture and which, in either case, has been qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), or is exempt from such qualification and shall provide that the Exchange Securities shall not be subject to the transfer restrictions set forth in the Indenture but that the Private Exchange Securities shall be subject to such transfer restrictions. The Indenture or such indenture shall provide that the Exchange Securities, the Private Exchange Securities and the Securities (and related Guarantees) shall vote and consent together on all matters as one class and that none of the Exchange Securities, the Private Exchange Securities or the Securities (and related Guarantees) will have the right to vote or consent as a separate class on any matter. The Private Exchange Securities shall be of the same series as, and the Company and the Guarantors shall use all commercially reasonable efforts to have the Private Exchange Securities bear the same CUSIP number as, the Exchange Securities. As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, as the case may be, the Company and the Guarantors shall: (i) accept for exchange all Registrable Securities validly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and the letter of transmittal which shall be an exhibit thereto; 6 (ii) accept for exchange all Securities validly tendered pursuant to the Private Exchange; (iii) deliver to the Trustee for cancellation all Registrable Securities so accepted for exchange; and (iv) cause the Trustee promptly to authenticate and deliver Exchange Securities or Private Exchange Securities, as the case may be, to each Holder of Registrable Securities so accepted for exchange in a principal amount equal to the principal amount of the Registrable Securities of such Holder so accepted for exchange. Interest on each Exchange Security and Private Exchange Security will accrue from the last date on which interest was paid on the Registrable Securities surrendered in exchange therefor or, if no interest has been paid on the Registrable Securities, from the date of original issuance of the Registrable Securities. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than (i) that the Exchange Offer or the Private Exchange, or the making of any exchange by a Holder, does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) the valid tendering of Registrable Securities in accordance with the Exchange Offer and the Private Exchange, (iii) that each Holder of Registrable Securities exchanged in the Exchange Offer shall have represented that all Exchange Securities to be received by it shall be acquired in the ordinary course of its business and that at the time of the consummation of the Exchange Offer it shall have no arrangement or understanding with any person to participate in the distribution (within the meaning of the 1933 Act) of the Exchange Securities and shall have made such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations and (iv) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer or the Private Exchange which, in the Company's and the Guarantors' judgment, would reasonably be expected to impair the ability of the Company and the Guarantors to proceed with the Exchange Offer or the Private Exchange. The Company and the Guarantors shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. 2.2 Shelf Registration. (i) If, because of any changes in law, SEC rules or regulations or applicable interpretations thereof by the staff of the SEC, the Company or the Guarantors are not permitted to effect the Exchange Offer as contemplated by Section 2.1 hereof, (ii) if for any other reason the Exchange Offer Registration Statement is not declared effective within 180 days following the Closing Date or the Exchange Offer is not consummated within 210 days after the Closing Date, (iii) upon the request of any of the Initial Purchasers or (iv) upon the request of any Holder that is not permitted to participate in the Exchange Offer or does not receive fully tradeable Exchange Securities pursuant to the Exchange Offer, then in case of each of clauses (i) through (iv) the Company and the Guarantors shall, at their cost: 7 (a) As promptly as practicable, file with the SEC, and thereafter shall use their best efforts to cause to be declared effective as promptly as practicable but no later than 210 days after Closing Date or 45 days after the occurrence of any of the events listed above, whichever is later, a Shelf Registration Statement relating to the offer and sale of the Registrable Securities by the Holders from time to time in accordance with the methods of distribution elected by the Majority Holders participating in the Shelf Registration and set forth in such Shelf Registration Statement. (b) Use their best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the SEC, or for such shorter period that will terminate when all Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or cease to be outstanding or otherwise to be Registrable Securities (the "Effectiveness Period"); provided, however, that the Effectiveness Period in respect of the Shelf Registration Statement shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements under the 1933 Act and as otherwise provided herein; provided, further, that any such extension pursuant to the preceding proviso shall extend no more than 90 days. (c) Notwithstanding any other provisions hereof, use their best efforts to ensure that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any supplement thereto complies in all material respects with the 1933 Act and the rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any supplement to such Prospectus (as amended or supplemented from time to time), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. The Company and the Guarantors shall not permit any securities other than Registrable Securities to be included in the Shelf Registration Statement. The Company and the Guarantors further agree, if necessary, to supplement or amend the Shelf Registration Statement, as required by Section 3(b) below, and to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. 2.3 Expenses. The Company and the Guarantors shall pay all Registration Expenses in connection with the registration pursuant to Section 2.1 or 2.2. Each Holder shall 8 pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. 2.4. Effectiveness. (a) The Company and the Guarantors will be deemed not to have used their best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if the Company or any Guarantor voluntarily takes any action that would, or omits to take any commercially reasonable action which omission would, result in any such Registration Statement not being declared or remaining effective or in the Holders of Registrable Securities covered thereby not being able to exchange or offer and sell such Registrable Securities during that period as and to the extent contemplated hereby, unless such action is required by applicable law. (b) An Exchange Offer Registration Statement pursuant to Section 2.1 hereof or a Shelf Registration Statement pursuant to Section 2.2 hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Registrable Securities pursuant to an Exchange Offer Registration Statement or a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference, until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. 2.5 Interest. The Indenture executed in connection with the Securities and the Guarantees will provide that in the event that either (a) the Exchange Offer Registration Statement is not filed with the SEC on or prior to the 90th calendar day following the Closing Date, (b) the Exchange Offer Registration Statement has not been declared effective on or prior to the 180th calendar day following Closing Date, (c) the Exchange Offer is not consummated on or prior to the 210th calendar day following the Closing Date, or (d) a Shelf Registration Statement required to be filed pursuant to Section 2.2 is not declared effective on or prior to the later of 210 days after the original issuance of the Registrable Securities or 45 days after the occurrence of the applicable event listed in clauses (i) to (iv) of Section 2.2, whichever is later, (each such event referred to in clauses (a) through (d) above, a "Registration Default"), the interest rate borne by the Securities shall be increased ("Additional Interest") by one-quarter of one percent per annum upon the occurrence of each Registration Default, which rate (as so increased) will increase by one quarter of one percent each 90-day period that such Additional Interest continues to accrue under any such circumstance, provided that the maximum aggregate increase in the interest rate will in no event under this Agreement exceed one percent (1%) per annum. Immediately following the cure of a Registration Default the accrual of Additional Interest with respect to that particular Registration Default will cease. If the Shelf Registration Statement is unusable by the Holders for any reason during the period it is required to be effective, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable exceeds 30 days in the aggregate, then the interest rate borne by the Securities will be increased 9 by 0.25% per annum of the principal amount of the Securities for the first 90-day period (or portion thereof) beginning on the 31st such date that such Shelf Registration Statement ceases to be usable, which rate shall be increased by an additional 0.25% per annum of the principal amount of the Securities at the beginning of each subsequent 90-day period, provided that the maximum aggregate increase in the interest rate under this Agreement will in no event exceed one percent (1%) per annum. Any amounts payable under this paragraph shall also be deemed "Additional Interest" for purposes of this Agreement. Immediately upon the Shelf Registration Statement once again becoming usable, the interest rate borne by the Securities will be reduced to the original interest rate. Additional Interest shall be computed based on the actual number of days elapsed in each 90-day period in which the Shelf Registration Statement is unusable. The Company shall notify the Trustee within three business days after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an "Event Date"). Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders of Registrable Securities, on or before the applicable semiannual interest payment date, immediately available funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder of Securities entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date. 3. Registration Procedures. In connection with the obligations of the Company and the Guarantors with respect to Registration Statements pursuant to Sections 2.1 and 2.2 hereof, the Company and the Guarantors shall: (a) prepare and file with the SEC a Registration Statement, within the relevant time period specified in Section 2, on the appropriate form under the 1933 Act, which form (i) shall be selected by the Company and the Guarantors, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof, (iii) shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the SEC to be filed therewith or incorporated by reference therein, and (iv) shall comply in all respects with the requirements of Regulation S-T under the 1933 Act, and use their best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary under applicable law to keep such Registration Statement effective for the applicable period required by this Agreement or by law; and cause each Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the 1933 Act and comply with the provisions of the 1933 Act, the 1934 Act and the rules and regulations thereunder applicable to them with respect to the disposition of all securities covered 10 by each Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the selling Holders thereof (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each affected Holder of Registrable Securities, at least five business days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holders that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders participating in the Shelf Registration; (ii) furnish to each Holder of Registrable Securities and to each underwriter of an underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or underwriter may reasonably request, including financial statements and schedules and, if the Holder so requests, all exhibits to the related registration statement in order to facilitate the public sale or other disposition of the Registrable Securities; and (iii) hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (d) use their best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request by the time the applicable Registration Statement is declared effective by the SEC, and do any and all other acts and things which may be reasonably necessary or advisable to enable each such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company and the Guarantors shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), or (ii) take any action which would subject it to general service of process or taxation in any such jurisdiction where it is not then so subject; (e) notify promptly each Holder of Registrable Securities under a Shelf Registration or any Participating Broker-Dealer who has notified the Company and the Guarantors that it is utilizing the Exchange Offer Registration Statement as provided in paragraph (f) below and, if requested by such Holder or Participating Broker-Dealer, confirm such notice in writing promptly (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for post-effective amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) in the case of a Shelf Registration, if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company or any Guarantor contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to 11 the offering cease to be true and correct in all material respects, (v) of the happening of any event or the discovery of any facts during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading, (vi) of the receipt by the Company or any Guarantor of any notification with respect to the suspension of the qualification of the Registrable Securities or the Exchange Securities, as the case may be, for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (vii) of any determination by the Company or any Guarantor that a post-effective amendment to such Registration Statement would be appropriate; (f) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution" which section shall be acceptable to Merrill Lynch on behalf of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Securities to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the judgment of Merrill Lynch on behalf of the Participating Broker-Dealers and its counsel, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Securities for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company and the Guarantors the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request, (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Securities covered by such Prospectus or any amendment or supplement thereto, and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision (or any other similar provision requested by Merrill Lynch on behalf of the Participating Broker-Dealers): "If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of market-making activities or other trading activities, it must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of Exchange Securities received in respect of such Registrable Securities pursuant to the Exchange Offer;" and 12 (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Registrable Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the 1933 Act; (g) (i) in the case of an Exchange Offer, furnish counsel for the Initial Purchasers and (ii) in the case of a Shelf Registration, furnish counsel for the Holders of Registrable Securities copies of any comment letters received from the SEC or any other request by the SEC or any state securities authority for amendments or supplements to a Registration Statement and Prospectus or for additional information; (h) make best efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (i) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, and each underwriter, if any, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference and all exhibits thereto, unless requested); (j) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders or the underwriters, if any, may reasonably request at least three business days prior to the closing of any sale of Registrable Securities; (k) in the case of a Shelf Registration, upon the occurrence of any event or the discovery of any facts, each as contemplated by Sections 3(e)(v) and 3(e)(vi) hereof, as promptly as practicable after the occurrence of such an event, use their best efforts to prepare a supplement or post-effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities or Participating Broker-Dealers, such Prospectus will not contain at the time of such delivery any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or will remain so qualified. At such time as such public disclosure is otherwise made or the Company determines that such disclosure is not necessary, in each case to correct any misstatement of a material fact or to include any omitted material fact, the Company and the Guarantors agree promptly to notify each Holder of such determination and to furnish each Holder such number of copies of the Prospectus as amended or supplemented, as such Holder may reasonably request; (l) in the case of a Shelf Registration, a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or 13 amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers on behalf of such Holders; and make representatives of the Company and the Guarantors as shall be reasonably requested by the Holders of Registrable Securities, or the Initial Purchasers on behalf of such Holders, available for discussion of such document; (m) obtain a CUSIP number for all Exchange Securities, Private Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with printed certificates for the Exchange Securities, Private Exchange Securities or the Registrable Securities, as the case may be, in a form eligible for deposit with the Depositary; (n) (i) cause the Indenture to be qualified under the TIA in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, (ii) cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and (iii) execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (o) in the case of a Shelf Registration, enter into agreements (including underwriting agreements) and take all other customary and appropriate actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (i) make such representations and warranties to the Holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them; (ii) obtain opinions of counsel to the Company and the Guarantors and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority in principal amount of the Registrable Securities being sold) addressed to each selling Holder and the underwriters, if any, covering the matters customarily covered in opinions requested in sales of securities or underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (iii) obtain "cold comfort" letters and updates thereof from the Company's and the Guarantors' independent certified public accountants (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial 14 statements are, or are required to be, included in the Registration Statement) addressed to the underwriters, if any, and use reasonable efforts to have such letter addressed to the selling Holders of Registrable Securities (to the extent consistent with Statement on Auditing Standards No. 72 of the American Institute of Certified Public Accounts), such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with similar underwritten offerings; (iv) enter into a securities sales agreement with the Holders and an agent of the Holders providing for, among other things, the appointment of such agent for the selling Holders for the purpose of soliciting purchases of Registrable Securities, which agreement shall be in form, substance and scope customary for similar offerings; (v) if an underwriting agreement is entered into, cause the same to set forth indemnification provisions and procedures substantially equivalent to the indemnification provisions and procedures set forth in Section 4 hereof with respect to the underwriters and all other parties to be indemnified pursuant to said Section or, at the request of any underwriters, in the form customarily provided to such underwriters in similar types of transactions; and (vi) deliver such documents and certificates as may be reasonably requested and as are customarily delivered in similar offerings to the Holders of a majority in principal amount of the Registrable Securities being sold and the managing underwriters, if any. The above shall be done at (i) the effectiveness of such Registration Statement (and each post-effective amendment thereto) and (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder; (p) in the case of a Shelf Registration or if a Prospectus is required to be delivered by any Participating Broker-Dealer in the case of an Exchange Offer, make available for inspection by representatives of the Holders of the Registrable Securities, any underwriters participating in any disposition pursuant to a Shelf Registration Statement, any Participating Broker-Dealer and any counsel or accountant retained by any of the foregoing, all financial and other records, pertinent corporate documents and properties of the Company and the Guarantors reasonably requested by any such persons, and cause the respective officers, directors, employees, and any other agents of the Company and the Guarantors to supply all information reasonably requested by any such representative, underwriter, special counsel or accountant in connection with a Registration Statement, and make such representatives of the Company and the Guarantors available for discussion of such documents as shall be reasonably requested by the Initial Purchasers; (q) (i) in the case of an Exchange Offer Registration Statement, a reasonable time prior to the filing of any Exchange Offer Registration Statement, any Prospectus forming a 15 part thereof, any amendment to an Exchange Offer Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Initial Purchasers and to counsel to the Holders of Registrable Securities and make such changes in any such document prior to the filing thereof as the Initial Purchasers or counsel to the Holders of Registrable Securities may reasonably and timely request and, except as otherwise required by applicable law, not file any such document in a form to which the Initial Purchasers on behalf of the Holders of Registrable Securities and counsel to the Holders of Registrable Securities shall not have previously been advised and furnished a copy of or to which the Initial Purchasers on behalf of the Holders of Registrable Securities or counsel to the Holders of Registrable Securities shall reasonably and timely object, and make the representatives of the Company and the Guarantors available for discussion of such documents as shall be reasonably and timely requested by the Initial Purchasers; and (ii) in the case of a Shelf Registration, a reasonable time prior to filing any Shelf Registration Statement, any Prospectus forming a part thereof, any amendment to such Shelf Registration Statement or amendment or supplement to such Prospectus, provide copies of such document to the Holders of Registrable Securities, to the Initial Purchasers, to counsel for the Holders and to the underwriter or underwriters of an underwritten offering of Registrable Securities, if any, make such changes in any such document prior to the filing thereof as the Initial Purchasers, the counsel to the Holders or the underwriter or underwriters reasonably and timely request and not file any such document in a form to which the Majority Holders, the Initial Purchasers on behalf of the Holders of Registrable Securities, counsel for the Holders of Registrable Securities or any underwriter shall not have previously been advised and furnished a copy of or to which the Majority Holders, the Initial Purchasers on behalf of the Holders of Registrable Securities, counsel to the Holders of Registrable Securities or any underwriter shall reasonably and timely object, and make the representatives of the Company and the Guarantors available for discussion of such document as shall be reasonably and timely requested by the Holders of Registrable Securities, the Initial Purchasers on behalf of such Holders, counsel for the Holders of Registrable Securities or any underwriter. (r) in the case of a Shelf Registration, use its best efforts to cause all Registrable Securities to be listed on any securities exchange on which similar debt securities issued by the Company or any Guarantor are then listed if requested by the Majority Holders, or if requested by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any; (s) in the case of a Shelf Registration, use its best efforts to cause the Registrable Securities to be rated by the appropriate rating agencies, if so requested by the Majority Holders, or if requested by the underwriter or underwriters of an underwritten offering of Registrable Securities, if any; (t) otherwise comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earnings statement covering at least 12 months which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; 16 (u) cooperate and assist in any filings required to be made with the NASD and, in the case of a Shelf Registration, in the performance of any due diligence investigation by any underwriter and its counsel (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD); and (v) upon consummation of an Exchange Offer or a Private Exchange, obtain a customary opinion of counsel to the Company and the Guarantors addressed to the Trustee for the benefit of all Holders of Registrable Securities participating in the Exchange Offer or Private Exchange, and which includes an opinion that (i) the Company, and the Guarantors, as the case may be, have duly authorized, executed and delivered the Exchange Securities and/or Private Exchange Securities, as applicable, and the related indenture, and (ii) each of the Exchange Securities and related indenture constitute a legal, valid and binding obligation of the Company and the Guarantors, as the case may be, enforceable against the Company and the Guarantors, as the case may be, in accordance with its respective terms (with customary exceptions). If following the date hereof there has been a change in SEC policy with respect to exchange offers such as the Exchange Offer, such that in the opinion of counsel to the Company or the Holders there is a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantors hereby agree, if reasonable under the circumstances, to seek a no-action letter or other favorable decision from the SEC allowing the Company and the Guarantors to consummate an Exchange Offer for the Notes. The Company and the Guarantors hereby agree to pursue the issuance of such a decision to the SEC staff level. In connection with the foregoing, the Company and the Guarantors hereby agree to take all such other actions as are requested by the SEC or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the SEC, (B) delivering to the SEC staff an analysis prepared by counsel to the Company and the Guarantors, setting forth the legal basis, if any, upon which such counsel has concluded that such an Exchange Offer shall be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the SEC staff of such submission. In the case of a Shelf Registration Statement, the Company and the Guarantors may (as a condition to such Holder's participation in the Shelf Registration) require each Holder of Registrable Securities to furnish to the Company and the Guarantors such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company and the Guarantors may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company and the Guarantors of the happening of any event or the discovery of any facts, each of the kind described in Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(k) hereof, and, if so directed by the Company and the Guarantors, such Holder will deliver to the Company and the Guarantors (at their expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. 17 If any of the Registrable Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the underwriter or underwriters and manager or managers that will manage such offering will be selected by the Majority Holders of such Registrable Securities included in such offering and shall be acceptable to the Company and the Guarantors. No Holder of Registrable Securities may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 4. Indemnification; Contribution. (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless the Initial Purchasers, each Holder, each Participating Broker-Dealer, each Person who participates as an underwriter (any such Person being an "Underwriter") and each Person, if any, who controls any Holder or Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 4(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by any indemnified party), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or 18 omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company or the Guarantors by the Initial Purchaser, Holder, Participating Broker-Dealer or Underwriter expressly for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (b) Each Holder severally, but not jointly, agrees to indemnify and hold harmless the Company, the Guarantors, the Initial Purchasers, each Underwriter and the other selling Holders, and each of their respective directors and officers, and each Person, if any, who controls the Company, any of the Guarantors, the Initial Purchasers, any Underwriter or any other selling Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus included therein (or any amendment or supplement thereto) in reliance upon and in conformity with written information with respect to such Holder furnished to the Company or the Guarantors by such Holder expressly for use in the Shelf Registration Statement (or any amendment thereto) or such Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Shelf Registration Statement. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure so to notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an 19 unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) If the indemnification provided for in this Section 4 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, in such proportion as is appropriate to reflect the relative fault of the Company and the Guarantors on the one hand and the Holders and the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantors on the one hand and the Holders and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Guarantors, the Holders or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantors, the Holders and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 4 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 4, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities and Guarantees sold by it were offered exceeds the amount of any damages which such 20 Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution under this Section 4 from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 4, each Person, if any, who controls an Initial Purchaser or Holder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser or Holder, and each director of the Company or any Guarantor, and each Person, if any, who controls the Company or any Guarantor within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or such Guarantor. The Initial Purchasers' respective obligations to contribute pursuant to this Section 4 are several in proportion to the principal amount of Securities set forth opposite their respective names in Schedule A to the Purchase Agreement and not joint. 5. Miscellaneous. 5.1 Rule 144 and Rule 144A. For so long as the Company or any Guarantor is subject to the reporting requirements of Section 13 or 15 of the 1934 Act, the Company and each Guarantor covenants that they will file the reports required to be filed by them under the 1933 Act and Section 13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC thereunder. If the Company and the Guarantors cease to be so required to file such reports, the Company and the Guarantors covenant that they will upon the request of any Holder of Registrable Securities (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the 1933 Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933 Act and will take such further action as any Holder of Registrable Securities may reasonably request, and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by (i) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, (ii) Rule 144A under the 1933 Act, as such Rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company and the Guarantors will deliver to such Holder a written statement as to whether they have complied with such requirements. 5.2 No Inconsistent Agreements. The Company and each Guarantor have not entered into and the Company and each Guarantor will not after the date of this Agreement enter into any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not and will not for the term of this Agreement in any way conflict with the rights granted to the holders of the Company's and each Guarantors' other issued and outstanding securities under any such agreements. 21 5.3 Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Guarantors have obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or departure. 5.4 Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (a) if to a Holder, at the most current address given by such Holder to the Company and the Guarantors by means of a notice given in accordance with the provisions of this Section 5.4, which address initially is the address set forth in the Purchase Agreement with respect to the Initial Purchasers; and (b) if to the Company or any Guarantor, initially at the Company's or such Guarantor's address set forth in the Purchase Agreement, and thereafter at such other address of which notice is given in accordance with the provisions of this Section 5.4. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee under the Indenture, at the address specified in such Indenture. 5.5 Successor and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. 5.6 Third Party Beneficiaries. The Initial Purchasers (even if the Initial Purchasers are not Holders of Registrable Securities) shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Holders, on the other hand, and shall have the right to enforce such agreements directly to the extent they deem such enforcement necessary or advisable to protect their rights or the rights of 22 Holders hereunder. Each Holder of Registrable Securities shall be a third party beneficiary to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights hereunder. 5.7. Specific Enforcement. Without limiting the remedies available to the Initial Purchasers and the Holders, the Company and the Guarantors acknowledge that any failure by the Company and the Guarantors to comply with their obligations under Sections 2.1 through 2.4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantors' obligations under Sections 2.1 through 2.4 hereof. 5.8. Restriction on Resales. Until the expiration of two years after the original issuance of the Securities and the Guarantees, the Company and the Guarantors will not, and will cause their "affiliates" (as such term is defined in Rule 144(a)(1) under the 1933 Act) not to, resell any Securities and Guarantees which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act) that have been reacquired by any of them and shall immediately upon any purchase of any such Securities and Guarantees submit such Securities and Guarantees to the Trustee for cancellation. 5.9 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 5.10 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 5.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 5.12 Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Very truly yours, JO-ANN STORES 23 By /s/ Donald R. Tomoff ---------------------------------------- Name: Donald R. Tomoff Title: Vice President, Finance JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. TEAM JO-ANN, INC. FCA OF OHIO, INC. HOUSE OF FABRICS, INC. By /s/ Donald R. Tomoff ---------------------------------------- Name: Donald R. Tomoff Title: Treasurer 24 CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED WACHOVIA CAPITAL MARKETS, LLC SG COWEN SECURITIES CORPORATION MCDONALD INVESTMENTS INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By /s/ Christopher K. Ooten ------------------------------ Authorized Signatory Name: Christopher K. Ooten 25 EX-10.2 6 l06203aexv10w2.txt LIST OF EXECUTIVE OFFICERS Exhibit 10.2 JO-ANN STORES, INC. LIST OF EXECUTIVE OFFICERS WHO ARE PARTIES TO THE SPLIT DOLLAR LIFE INSURANCE AGREEMENT WITH THE REGISTRANT Dave Bolen Brian Carney Michael Edwards Valerie Gentile Sachs Rosalind Thompson EX-10.4 7 l06203aexv10w4.txt LIST OF EXECUTIVE OFFICERS Exhibit 10.4 JO-ANN STORES, INC. LIST OF EXECUTIVE OFFICERS WHO PARTICIPATE IN THE REGISTRANT'S 1979 SUPPLEMENTAL RETIREMENT PLAN, AS AMENDED Dave Bolen Brian Carney Michael Edwards Valerie Gentile Sachs Rosalind Thompson EX-10.9 8 l06203aexv10w9.txt 1998 INCENTIVE COMPENSATION PLAN EXHIBIT 10.9 JO-ANN STORES, INC. (formerly Fabri-Centers of America, Inc.) 1998 INCENTIVE COMPENSATION PLAN AS AMENDED 1. PURPOSE The purpose of this Plan is enable the Company to attract and retain qualified employees and outside Directors, to provide incentives, and to reward performance. To achieve this purpose, this Plan provides the authority to grant of Awards payable in Shares, in cash, or in a combination of Shares and cash. 2. DEFINITIONS (a) "AFFILIATE AND ASSOCIATE" - These terms have the meanings given to them in Rule 12b-2 under the Exchange Act. (b) "AWARD" - A grant of Stock Appreciation Rights, Stock Awards, Stock Options, Stock Purchase Rights, Incentive Compensation Awards, or other incentives under this Plan. (c) "BOARD OF DIRECTORS" - The Board of Directors of the Company. (d) "CHANGE IN CONTROL" - A "Change of Control" will be deemed to occur if at any time after the date of the adoption of this Plan: (i) Any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan or employee share ownership plan of the Company or any Subsidiary of the Company, or any Person organized, appointed, or established by the Company or any Subsidiary of the Company for or pursuant to the terms of any such plan), alone or together with any of its Affiliates or Associates, becomes the Beneficial Owner of securities of the Company having 20% or more of the voting power of the Company. For purposes of this Section 2(d)(i), the terms "Beneficial Owner" and "Person" have the meanings given to them in the Rights Agreement, dated October 22, 1990, between the Company and Harris Bank and Trust, as Rights Agent, as amended or restated from time to time (the "Rights Agreement"), or in any rights agreement or similar agreement that replaces or supersedes the Rights Agreement. (ii) At any time during a period of 24 consecutive months, individuals who were Directors at the beginning of the period no longer constitute a majority of the members of the Board of Directors unless the election, or the nomination for election by the Company's shareholders, of each Director who was not a Director at the beginning of the period is approved by at least a majority of the Directors who are in office at the time of the election or nomination and were Page 1 Directors at the beginning of the period. (iii) The Company is merged, consolidated, or reorganized into or with another Person and, as a result of the merger, consolidation, or reorganization, securities having less than a majority of the voting power of such Person in the election of Directors outstanding immediately after the merger, consolidation, or reorganization are held by the holders of securities of the Company entitled to vote generally in the election of directors outstanding immediately prior to the merger, consolidation, or reorganization. (e) "CLASS A SHARES" - Class A Common Shares, without par value, of the Company or any equity security or securities of the Company that are issued in substitution or exchange therefor in a recapitalization of the Company. (f) "CLASS B SHARES" - Class B Common Shares, without par value, of the Company or any equity security or securities of the Company that are issued in substitution or exchange therefor in a recapitalization of the Company. (g) "CODE" - The Internal Revenue Code of 1986, or any law that supersedes or replaces it, as amended from time to time. (h) "COMMITTEE" - The Compensation Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors authorizes to administer this Plan. (i) "COMPANY" - Jo-Ann Stores, Inc. (formerly Fabri-Centers of America, Inc.), an Ohio corporation. (j) "COVERED EMPLOYEES" - An officer of the Company whose compensation is subject to the $1,000,000 limit on deductibility under Section 162(m) of the Code, or any provision that supersedes or replaces Section 162(m) of the Code, as amended from time to time. (k) "DIRECTOR" - A director of the Company. (l) "EXCHANGE ACT" - Securities Exchange Act of 1934, and any law that supersedes or replaces it, as amended from time to time. (m) "FAIR MARKET VALUE" of Shares - The value of Shares determined by the Committee, or pursuant to rules established by the Committee, on a basis consistent with regulations under the Code. (n) "INCENTIVE COMPENSATION AWARD" - This term has the meaning given to it in Section 6(a)(iv). Page 2 (o) "INCENTIVE STOCK OPTION" - A Stock Option that meets the requirements of Section 422 of the Code, or any provision that supersedes or replaces Section 422 of the Code, as amended from time to time. (p) "PARTICIPANT" - Any person to whom an Award has been granted under this Plan. (q) "PERFORMANCE CRITERIA" - This term has the meaning given to it in Section 7(b). (r) "PERFORMANCE GOAL" - This term has the meaning given to it in Section 7(a). (s) "RESTRICTED STOCK" - An Award of Shares that are subject to restrictions or risk of forfeiture. (t) "RULE 16b-3" - Rule 16b-3 under the Exchange Act, or any rule that supersedes or replaces it, as amended from time to time. (u) "SHARES" - Class A Shares or Class B Shares, as the case may be. (v) "STOCK APPRECIATION RIGHT" - This term has the meaning given to it in Section 6(a)(i). (w) "STOCK AWARD" - This term has the meaning given to it in Section 6(a)(ii). (x) "STOCK EQUIVALENT UNIT" - An Award that is valued by reference to the Fair Market Value of Shares. (y) "STOCK OPTION" - This term has the meaning given to it in Section 6(a)(iii). (Z) "STOCK PURCHASE RIGHT" - A right to participate in a stock purchase program, including but not limited to a stock purchase program that meets the requirements of Section 423 of the Code. (aa) "SUBSIDIARY" - A corporation, limited liability company, business trust, partnership, joint venture, or other organization of which securities having a majority of the voting power are owned, directly or indirectly, by the Company. 3. ELIGIBILITY All outside Directors and employees of the Company or any of its Subsidiaries will be eligible to receive Awards. 4. ADMINISTRATION Page 3 (a) COMMITTEE. Subject to Sections 4(b) and 4(c), this Plan will be administered by the Committee. The Committee will, subject to the terms of this Plan, have the authority to: (i) select the eligible Directors and employees who will receive Awards, (ii) determine the number and types of Awards to be granted, (iii) determine the terms, conditions, vesting periods, and restrictions applicable to the Awards, (iv) establish Performance Goals for performance-based Awards, (v) prescribe the forms of any notices, agreements, or other instruments relating to the Awards, (vi) grant the Awards, (vii) adopt, alter, and repeal rules governing this Plan, (viii) interpret the terms and provisions of this Plan and any Awards granted under this Plan, and (ix) otherwise supervise the administration of this Plan. All decisions by the Committee will be made with the approval of not less than a majority of its members. (b) AWARDS SUBJECT TO SECTION 16(b) OF THE EXCHANGE ACT. Notwithstanding the provisions of Section 4(a), if any member of the Committee does not qualify as a "Non-Employee Director" within the meaning of Rule 16b-3, the "Committee" will, for purposes of making any Award that (i) constitutes a "purchase" of securities within the meaning of Section 16(b) of the Exchange Act by an individual who is subject to potential liability under Section 16(b) of the Exchange Act and (ii) does not otherwise qualify for an exemption under Rule 16b-3, be deemed to consist only of those members of the Committee who qualify as such Non-Employee Directors. (c) AWARDS SUBJECT TO SECTION 162(m) OF THE CODE. Notwithstanding the provisions of Section 4(b), if any member of the Committee does not qualify as an "outside director" within the meaning of Section 162(m) of the Code, the "Committee" will, for purposes of making and performance-based Awards to Covered Employees, be deemed to consist only of those members who qualify as such outside directors. (d) DELEGATION. The Committee may delegate any of its authority to any other Person or Persons that it deems appropriate, provided the delegation does not (i) cause this Plan, or any Awards granted under this Plan, to fail to qualify for the exemption provided by Rule 16b-3 or (ii) result in a reduction in the amount of compensation associated with any Award that is deductible for federal income tax purposes under Section 162(m) of the Code. (e) DECISIONS FINAL. All decisions by the Committee, and by any other person or persons to whom the Committee has delegated authority, will be final and binding on all persons. 5. SHARES AVAILABLE UNDER PLAN; LIMITATIONS ON INCENTIVE (a) MAXIMUM AGGREGATE NUMBER OF SHARES. Subject to Sections 4(c) and 4(d), the total number of Shares (whether Class A Shares, Class B Shares, or a combination of Class A Shares and Class B Shares) subject to Awards (other than Stock Purchase Rights meeting the requirements of Section 423 of the Code) granted in any fiscal year of the Company may not exceed the sum of (i) four percent (4%) of the number of Shares (including both Class A Shares and Class B Shares) outstanding at the beginning of the fiscal year and (ii) for each of the two Page 4 prior fiscal years, the excess of four percent (4%) of the number of Shares outstanding at the beginning of each such fiscal year over the number of Shares subject to Awards actually granted in each such fiscal year. With respect to Stock Purchase Rights meeting the requirements of Section 423 of the Code granted during any fiscal year, the total number of shares subject to Stock Purchase Rights granted in any fiscal year may not exceed 1,000,000. The maximum number of Shares that may be issued or delivered upon exercise of Incentive Stock Options granted under this Plan is 1,000,000. Shares issued or delivered under this Plan may consist of authorized and unissued shares, treasury shares, or shares to be purchased by the Company, as determined by the Committee. (b) MAXIMUM NUMBER OF SHARES AND AMOUNT OF INCENTIVE COMPENSATION AWARD FOR EACH PARTICIPANT. Subject to Sections 4(c) and 4(d), the number of Shares subject to Awards granted to any Participant, and the amount of any Incentive Compensation Award payable in cash to any Participant, may not exceed: (i) With respect to Stock Options (other than Incentive Stock Options), 500,000 Shares in any fiscal year of the Company. If the exercise price of any Stock Option granted to the Participant in that fiscal year is less than the Fair Market Value of the Shares subject to the Stock Option at the date of grant, then, with respect to all Stock Options granted to the Participant in that fiscal year, the aggregate amount of the excess of (A) the Fair Market Value of the Shares subject to the Stock Options at the dates of grant over (B) the respective exercise prices may not exceed $1,000,000. (ii) With respect to Stock Appreciation Rights, 100,000 Shares in any fiscal year of the Company. (iii) With respect to Incentive Stock Options, the aggregate Fair Market Value (determined as of the time the Incentive Stock Option is granted) of the Shares with respect to which Incentive Stock Options may be exercisable for the first time by any Participant in any calendar year may not exceed $100,000 or such other maximum amount as may be permitted by the Code. (iv) With respect to Restricted Stock, in any fiscal year of the Company, the number of Shares granted may not exceed 100,000 on the date of hire and 50,000 otherwise in any fiscal year of the Company. (v) With respect to Stock Awards other than Stock Options and Restricted Stock, 100,000 Shares in any fiscal year of the Company. (vi) With respect to Incentive Compensation Awards payable in cash, the lesser of $1,000,000 or 150% of annual base salary in respect to any fiscal year of the Company. Page 5 (c) CHARGING OF SHARES. Shares subject to an Award that is forfeited, terminated, canceled, or surrendered without having been exercised (other than (i) Shares subject to a Stock Option that is canceled upon the exercise of a related Stock Appreciation Right and (ii) Shares subject to an Award that is surrendered in payment of the exercise price of a Stock Option or a Stock Purchase Right or in payment of taxes associated with an Award) will again be available for grant under this Plan, without reducing the number of Shares that may be subject to Awards or that are available for the grant of Awards in any fiscal year. The assumption of awards granted by an organization acquired by the Company, or the grant of Awards under this Plan in substitution for any such awards, will not reduce the number of Shares available for the grant of Awards under this Plan. Stock Equivalent Units that represent deferred compensation, and Shares issued in payment of deferred compensation, will not reduce the number of Shares that may be subject to Awards or that are available for the grant of Awards under the Plan or to any Participant in any fiscal year, except to the extent of matching or other related grants by the Company or any discount in the price used to convert the deferred compensation into Stock Equivalent Units or Shares. (d) ADJUSTMENT. In the event of any change in the Shares by reason of a merger, consolidation, reorganization, recapitalization, or similar transaction, or in the event of a stock dividend, stock split, distribution to shareholders (other than normal cash dividends), or rights offering or similar sale of Shares for less than their Fair Market Value at the time of sale, the Committee will adjust the number and class of shares that may be issued under this Plan, the number and class of shares that may be issued to any Participant in any fiscal year, the number and class of shares subject to outstanding Awards, the exercise price applicable to outstanding Awards, and any value determinations applicable to outstanding Awards. 6. AWARDS (a) TYPES OF AWARDS. Awards may include, but are not limited to, the following: (i) STOCK APPRECIATION RIGHT - A right to receive a payment, in cash or Shares, equal to the excess of (A) the Fair Market Value of a specified number of Shares on the date the right is exercised over (B) the Fair Market Value of the Shares on the date the right is granted, all as determined by the Committee. The right may be conditioned upon the occurrence of certain events, such as a Change in Control of the Company, or may be unconditional, as determined by the Committee. (ii) STOCK AWARD - An Award that is made in Shares, Restricted Stock, or Stock Equivalent Units. (iii) STOCK OPTION - A right to purchase a specified number of Shares, during a specified period, and at a specified exercise price, all as determined by Page 6 the Committee. A Stock Option may be an Incentive Stock Option or a Stock Option that does not qualify as an Incentive Stock Option. In addition to the terms, conditions, vesting periods, and restrictions established by the Committee, Incentive Stock Options must comply with the requirements of Section 422 of the Code. The exercise price of Incentive Stock Options granted to any Participants, and the exercise price of any Stock Options granted to Covered Employees, may not be less than the Fair Market Value of the Shares subject to the Stock Option on the date of grant. (iv) INCENTIVE COMPENSATION AWARD - An Award that, in the discretion of the Committee, is payable either in Shares or in cash and is contingent upon the achievement of Performance Goals established by the Committee. (v) STOCK PURCHASE RIGHT - A right to participate in a stock purchase program, including but not limited to a stock purchase program that meets the requirements of Section 423 of the Code. Among other requirements, Section 423 currently provides that (A) only employees of the Company, or of any direct or indirect subsidiary of the Company designated by the Committee, may receive Stock Purchase Rights that qualify under Section 423 ("Section 423 Rights"), (B) Section 423 Rights may not be granted to any Participant who, immediately after the Section 423 Rights are granted, owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company, (C) Section 423 Rights must be granted to all employees of the Company, and of any direct or indirect subsidiary of the Company designated by the Compensation Committee, except that there may be excluded (1) employees who have been employed less than two years, (2) employees whose customary employment is 20 hours or less per week, (3) employees whose customary employment is for not more than five months in any calendar year, and (4) highly compensated employees (within the meaning of Section 414(q) of the Code), (D) all employees granted Section 423 Rights must have the same rights and privileges, except that the number of Shares that may be purchased by any employee upon exercise of Section 423 Rights may bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employee, (E) the exercise price of Section 423 Rights may not be less than the lesser of (1) eighty five percent (85%) of the Fair Market Value of the Shares at the time Section 423 Rights are granted, or (2) eighty five percent (85%) of the Fair Market Value of the Shares at the time the Section 423 Rights are exercised; (F) Section 423 Rights cannot be exercised after the expiration of 27 months from the date the Section 423 Rights are granted, and (G) no employee may be granted Section 423 Rights, under this Plan and any other plans of the Company and its subsidiaries, that permit the purchase of Shares with a Fair Market Value of more than $25,000 (determined at the time the Section 423 Rights are granted) in any calendar year. Page 7 (b) GRANT OF AWARDS. More than one Award may be granted to the same Participant. Awards may be granted singly or in combination or tandem with other Awards. The Company may assume awards granted by an organization acquired by the Company or may grant Awards in replacement of, or in substitution for, any such awards. 7. PERFORMANCE-BASED AWARDS UNDER SECTION 162(m) OF THE CODE (a) SELECTION OF PARTICIPANTS AND ESTABLISHMENT OF PERFORMANCE GOALS. The Committee will determine the period of time during which any Award that is performance-based for purposes of Section 162(m) of the Code may be earned. The Committee will also establish, not later than 90 days after the commencement of the award period (or such earlier or later date as may be the applicable deadline for the Award to be performance-based for purposes of Section 162(m) of the Code), one or more performance objectives ("Performance Goals") to be met by the Company, or by one or more of its Subsidiaries or other business units, as a condition to the payment of the Award. The Performance Goals may, in the discretion of the Committee, include a range of performance objectives (such as minimum, middle, and maximum objectives) the achievement of which will entitle Participants to receive different amounts of compensation. (b) PERFORMANCE CRITERIA. The Performance Goals will be based on one or more of the following criteria ("Performance Criteria"): sales, earnings, earnings per Share, return on equity, completion of acquisitions or other projects, and market price per Share. These Performance Criteria may be measured before or after taxes, interest, depreciation, amortization, discontinued operations, affect of accounting changes, acquisition expenses, restructuring expenses, non-operating items, or usual charges, as determined by the Committee at the time the Performance Goals are established. 8. DEFERRAL OF PAYMENT The Committee may, in its discretion, permit Participants to defer the payment of some or all of the Shares or cash subject to their Awards, as well as other compensation or fees, in accordance with procedures established by the Committee to assure that the recognition of taxable income is deferred under the Code. Deferred amounts may, to the extent permitted by the Committee, be credited as cash or Stock Equivalent Units and paid in cash or in Shares. The Committee may also, in its discretion, establish rules and procedures for the crediting of interest on deferred cash and dividend equivalents on Stock Equivalent Units. The Committee may also, in its discretion, provide for matching or other grants in connection with such deferrals. Page 8 9. PAYMENT OF EXERCISE PRICE (a) MANNER OF PAYMENT. The exercise price of a Stock Option (other than an Incentive Stock Option), a Stock Purchase Right, and any other Stock Award for which the Committee has established an exercise price may be paid in cash, by the transfer of Shares, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods, as and to the extent permitted by the Committee. The exercise price of an Incentive Stock Option may be paid in cash, by the transfer of Shares, or by a combination of these methods, as and to the extent permitted by the Committee at the time of grant, but may not be paid by the surrender of all or part of an Award. The Committee may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of this Plan, including loans by the Company. (b) USE OF RESTRICTED STOCK. In the event shares of Restricted Stock are used to pay the exercise price of a Stock Option or a Stock Purchase Right, a number of the Shares issued upon the exercise of the Stock Option or Stock Purchase Right equal to the number of shares of Restricted Stock used to pay the exercise price will be subject to the same restrictions as the Restricted Stock. 10. TAXES ASSOCIATED WITH AWARD Prior to the payment of an Award, the Company may withhold, or require a Participant to remit to the Company, an amount sufficient to pay any federal, state, and local taxes associated with the Award. The Committee may, in its discretion and subject to such rules as the Committee may adopt, permit a Participant to pay any or all taxes associated with the Award (other than an Incentive Stock Option) in cash, by the transfer of Shares, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods. The Committee may permit a Participant to pay any or all taxes associated with an Incentive Stock Option in cash, by the transfer of Shares, or by a combination of these methods, but not by the surrender of all or part of an Award. 11. TERMINATION OF EMPLOYMENT If the employment of a Participant terminates for any reason, all unexercised, deferred, and unpaid Awards may be exercisable or paid only in accordance with rules established by the Committee. 12. TERMINATION OF AWARDS UNDER CERTAIN CONDITIONS The Committee may cancel any unexpired, unpaid, or deferred Award at any time if the Participant is not in compliance with all applicable provisions of this Plan or with the terms or conditions of the Award or if the Participant, without the prior written consent of the Company, engages in any of the following activities: Page 9 (i) Renders services to an organization, or engages in a business, that is, in the judgment of the Committee, in competition with the Company. (ii) Discloses to anyone outside of the Company, or uses for any purpose other than the Company's business, any confidential information or material relating to the Company, whether acquired by the Participant during or after employment with the Company. The Committee may, in its discretion and as a condition to the exercise of an Award, require a Participant to acknowledge in writing that he or she is in compliance with all applicable provisions of this Plan and with the terms and conditions of the Award and has not engaged in any activities referred to in clauses (i) and (ii) above. 13. CHANGE IN CONTROL; ACQUISITION OF THE COMPANY (a) CHANGE IN CONTROL. In the event of a Change in Control of the Company, unless otherwise determined by the Committee, (i) all Stock Appreciation Rights, Stock Options, and Stock Purchase Rights then outstanding will become fully exercisable as of the date of the Change in Control, (ii) all restrictions and conditions applicable to Restricted Stock and other Stock Awards will be deemed to have been satisfied as of the date of the Change in Control, and (iii) all Incentive Compensation Awards will be deemed to have been fully earned as of the date of the Change in Control. (b) ACQUISITION OF THE COMPANY. With respect to Stock Options and any other Awards that entitled Participants to receive Shares, in the event of an acquisition of the Company in which the holders of Shares receive other securities or cash in exchange for their Shares, the Committee may, in its discretion, arrange for (1) the grant by the acquiror of substitute Stock Options or Awards that entitle Participants to receive, in lieu of the Shares they otherwise would be entitled to receive, of the securities or cash for which the Shares would have been exchanged in the acquisition or (2) the cancellation of the Stock Options and other Awards in consideration of the securities or cash for which the Shares would have been exchanged in the acquisition, net of any exercise price. 14. AMENDMENT OR SUSPENSION OF THIS PLAN; AMENDMENT OF OUTSTANDING AWARDS (a) AMENDMENT OR SUSPENSION OF THIS PLAN. The Board of Directors may amend or suspend this Plan at any time. Shareholder approval for any such amendment will be required only to the extent necessary to preserve the deductibility of compensation associated with any Award for federal income tax purposes under Section 162(m) of the Code. (b) AMENDMENT OF OUTSTANDING AWARDS. The Committee may, in its discretion, amend the terms of any Award, prospectively or retroactively, but no such amendment may, Page 10 except as provided in Section 13(b), impair the rights of any Participant without his or her consent. The Committee may, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Award. 15. NONASSIGNABILITY Unless otherwise determined by the Committee, (i) no Award granted under this Plan may be transferred or assigned by the Participant to whom it is granted other than by will, pursuant to the laws of descent and distribution, or (except in the case of an Incentive Stock Option) pursuant to a qualified domestic relations order and (ii) an Award granted under this Plan may be exercised, during the Participant's lifetime, only by the Participant or by the Participant's guardian or legal representative. 16. GOVERNING LAW The interpretation, validity, and enforcement of this Plan will, to the extent not otherwise governed by the Code or the securities laws of the United States, be governed by the law of the State of Ohio. 17. RIGHTS OF EMPLOYEES Nothing in this Plan will confer upon any Participant the right to continued employment by the Company or limit in any way the Company's right to terminate any Participant's employment at will. 18. EFFECTIVE AND TERMINATION DATES (a) EFFECTIVE DATE. This Plan will become effective on the date it is approved by the holders of a majority of the Shares then outstanding. (b) TERMINATION DATE. This Plan will continue in effect until June 3, 2008. Page 11 EX-10.10 9 l06203aexv10w10.txt AGREEMENT Exhibit 10.10 AGREEMENT THIS SECOND AMENDED AND RESTATED AGREEMENT (this "Agreement"), dated October 30, 2003, among JO-ANN STORES, INC., an Ohio corporation formerly known as Fabri-Centers of America, Inc. (the "Company"), BETTY ROSSKAMM, ("Betty Rosskamm") and ALMA ZIMMERMAN ("Alma Zimmerman"), amends and restates that certain Amended and Restated Agreement among the Company, Betty Rosskamm and Justin and Alma Zimmerman dated September 26, 1997. IN CONSIDERATION OF good and valuable consideration, the adequacy of which is hereby acknowledged, the parties agree as follows: 1. THE SHARES. The "Shares" covered by this Agreement shall be those common shares of the Company owned on June 2, 1987 or thereafter acquired by Martin and Betty Rosskamm or Justin and Alma Zimmerman, including those which were reclassified on August 2, 1995 as Class A voting shares of Common Stock, without par value, and Class B non-voting shares of Common Stock, without par value, and are to be reclassified on or about November 4, 2003, as Common Shares, without par value, of the Company. The "Shares" shall not, however, include any shares which were transferred prior to the date hereof in a transfer permitted under Section 2 and are now held by the recipient free of the right of first refusal in Section 3. 2. PERMITTED TRANSFERS. (a) DEFINITIONS. For purposes of this Section 2 and the remaining provisions of this Agreement the following terms shall have the following meanings: (i) "Rosskamms" shall refer to Betty Rosskamm, the lineal descendants from time to time living of Betty Rosskamm, the spouse of any lineal descendent of Betty Rosskamm, and the executor, administrator or personal representative of any of the foregoing persons. (ii) "Zimmermans" shall refer to the Justin Zimmerman Trust, Alma Zimmerman, the lineal decedents from time to time living of Alma Zimmerman, the spouse of any lineal decedent of Alma Zimmerman, and the executor, administrator or personal representative of any of the foregoing persons. (iii) "Permitted Holder" shall refer to (A) any of the Rosskamms or Zimmermans, (B) a trustee of a trust all of the beneficial interests of which are held by one or more of the Rosskamms or Zimmermans, and (C) a general or limited partnership, limited liability company, corporation or other entity all of the equity and voting interests of which are held by or for the benefit of one or more of the Rosskamms or Zimmermans or a Permitted Holder. For purposes of Section 3, a Permitted Holder described in clause (C) of the preceding sentence shall be deemed to have disposed of all Shares held by such Permitted Holder if a person, other than a Permitted Holder, directly holds an equity interest or has the right to vote a voting interest of such Permitted Holder. (iv) If Betty Rosskamm is deceased or incapacitated, her "Successor" shall be Alan Rosskamm and Jackie Rothstein, unless prior to her death or incapacitation she appointed in writing another person to be her successor for purposes of this Agreement. If Alan Rosskamm or Jackie Rothstein, or such other person, as the case may be, is deceased or incapacitated, Betty Rosskamm's "Successor" shall be her oldest then living lineal descendent. (v) If Alma Zimmerman is deceased or incapacitated, her "Successor" shall be Robert Forchheimer and Joan Wittenberg, unless prior to her death or incapacitation she appointed in writing another person to be her successor for purposes of this Agreement. If Robert Forchheimer or Joan Wittenberg or such other person, as the case may be, is deceased or incapacitated, Alma Zimmerman's "Successor" shall be her oldest then living lineal descendent. (b) SALES OF LIMITED NUMBER OF SHARES. The parties recognize that excessive sales of Shares by the Rosskamms or the Zimmermans might adversely affect the market for the publicly traded shares of the Company. Accordingly, all of the Rosskamms and their Permitted Holders, in the aggregate on the one hand, and all of the Zimmermans and their Permitted Holders, in the aggregate on the other hand, are free to sell up to 400,000 Shares (as adjusted for stock splits, stock dividends or similar recapitalization) free of the right of first refusal in Section 3 in each calendar year during the term of this Agreement, but not more than 200,000 shares may be sold in any 180-day period. Any purchasers of Shares sold under this Section 2(b) will take and hold the Shares free of the right of first refusal in Section 3. (c) CHARITABLE CONTRIBUTIONS. The Rosskamms and their Permitted Holders and the Zimmermans and their Permitted Holders are each entitled from time to time to make gifts of Shares that qualify as charitable contributions for federal income tax purposes. Any recipients of Shares given under this Section 2(c) will take and hold the Shares free of the right of first refusal in Section 3. (d) TRANSFERS TO A PERMITTED HOLDER. Any Permitted Holder is entitled from time to time to transfer an unlimited number of Shares to any other Permitted Holder. Any Permitted Holder who receives Shares under this Section 2(d) will, except as provided in Section 2(f) or 2(g), take and hold the Shares subject to the right of first refusal in Section 3. (e) TRANSFERS BY ESTATE TO RECIPIENTS OTHER THAN A PERMITTED HOLDER. The Rosskamms and their Permitted Holders and the Zimmermans and their Permitted Holders are each entitled from time to time to give, bequeath, or transfer by testate or intestate succession an unlimited number of Shares to any Permitted Holder. An executor, administrator, or personal representative who receives Shares as part of the estate of any of the foregoing persons, whether by testate or intestate succession, is entitled to transfer the Shares to any Permitted Holder. Any Permitted Holder who receives Shares under this Section 2(e) will take and hold the Shares subject to the right of first refusal in Section 3. Except for transfers permitted pursuant to Sections 2 (b) or (c), an executor, administrator, or personal representative who receives Shares as part of the estate of any of the Rosskamms, their Permitted Holders or any of the Zimmermans or their Permitted Holders, whether by testate or intestate succession, may transfer the Shares to recipients other than a Permitted Holder only after the proper parties are afforded the right of first refusal set forth in Section 3. (f) SALE TO THE ZIMMERMANS OR THE COMPANY. Any of the Rosskamms or their Permitted Holders is entitled from time to time to sell an unlimited number of Shares to the Zimmermans or, with the consent of Alma Zimmerman (or, if she is then deceased or incapacitated, her Successor), to the Company at prices and on other terms negotiated by the parties. The Zimmermans or the Company, as the case may be, will take and hold any Shares purchased under this Section 2(f) free of the right of first refusal in Section 3. (g) SALE TO THE ROSSKAMMS OR THE COMPANY. Any of the Zimmermans or their Permitted Holders is entitled from time to time to sell an unlimited number of Shares to the Rosskamms or, with the consent of Betty Rosskamm (or, if she is then deceased or incapacitated, her Successor), to the Company at prices and on other terms negotiated by the parties. The Rosskamms and the Company will take and hold any shares purchased under this Section 2(g) free of the right of first refusal in Section 3. 3. RIGHT OF FIRST REFUSAL. Except for transfers expressly permitted under Section 2, Alma Zimmerman (or, if she is then deceased or otherwise incapacitated, her Successor) and the Company will have a right of first refusal, upon the terms and conditions set forth in this Section 3, with respect to any disposition, whether voluntary or by operation of law, of Shares by the Rosskamms or their Permitted Holders, and conversely, Betty Rosskamm (or, if she is then deceased or otherwise incapacitated, her Successor) and the Company will have a right of first refusal, upon the terms and conditions set forth in this Section 3, with respect to any disposition, whether voluntary or by operation of law, of Shares by the Zimmermans or their Permitted Holders. In each case the party proposing to dispose of shares is the "Transferor," and the party holding the right of first refusal is the "Offeree." (a) NOTICE OF PROPOSED DISPOSITION. Whenever a Transferor proposes to dispose of all or part of his or her Shares (except for transfers expressly permitted under Section 2), he or she must offer the Shares to the Offeree and the Company, by means of a written notice substantially in the form attached to this Agreement as Exhibit A. (b) EXERCISE OF RIGHT; PURCHASE PRICE AND TERMS. For a period of 20 days after delivery of the notice of the proposed disposition, the Offeree will have the right to purchase all or any portion of the Shares to be disposed of, and the Company will have the right to purchase any of the Shares that the Offeree elects not to purchase; however, the right of the Offeree and the Company to purchase these Shares is conditioned upon the purchase, by the Offeree, the Company, or both, of all (but not less than all) of the Shares to be disposed of. The purchase price will be the Market Price of the Shares, as defined in Section 4, payable in cash upon completion of the purchase. The Offeree or the Company must deliver written notice to the Transferor of the election to exercise the right of first refusal within the 20-day period, and the purchase of the Shares must be completed within 30 days after this notice is delivered. (c) FAILURE TO EXERCISE; COMPLETION OF PROPOSED DISPOSITION. If the Offeree and/or the Company do not exercise the right of first refusal and purchase the Shares in accordance with Section 3(b), the Transferor may dispose of the Shares, provided, however, that the proposed disposition must be completed within 60 days after the expiration of the 20-day period within which the Offeree and the Company were entitled to exercise the right of first refusal. Upon compliance with all of the requirements of this Section 3, including the completion of the disposition within the 60-day period, the purchaser or recipient may acquire the Shares free of the restrictions set forth in this Agreement, including the right of first refusal in this Section 3. If the proposed disposition is not completed within the 60-day period or any of the other requirements of this Section 3 are not met or waived in writing by the Offeree and the Company, the disposition may not be completed and the Shares will remain subject to the restrictions set forth in this Agreement, but the Transferor may at any time give a new notice of proposed disposition. 4. MARKET PRICE. The "Market Price" of the Shares will be an amount equal to the product obtained by multiplying the number of Shares to be purchased times the average, over the period of 20 consecutive days on which trading in the Shares is reported ending 10 calendar days prior to the date on which the Rosskamms or Zimmermans or the Company deliver notice of the exercise of the right (the "20 trading days"), of: (a) the closing price of the Shares on each of the 20 trading days as reported by the National Association of Securities Dealers and Instinet for New York Stock Exchange Composite Transactions, or (b), if such shares are no longer traded on a national securities exchange but are traded in the NASDAQ over-the-counter markets for national market issues, the last sales price of such shares on each of the 20 trading days as quoted in the NASDAQ National Market System, or (c), if such shares are not traded on a national securities exchange or in the NASDAQ over-the-counter markets for national market issues, the mean between the representative bid and asked prices for such shares on each of the 20 trading days as quoted in NASDAQ or another generally recognized reporting system. 5. BINDING EFFECT; EXECUTION OF COUNTERPARTS BY RECIPIENTS; ENFORCEMENT. This Agreement will bind the Company, its successors and assigns, and the Zimmermans, the Rosskamms, and any Permitted Holder, and their successors, assigns, executors, administrators, and personal representatives. The Rosskamms, Zimmermans or the Company may, in their or its discretion, require any Permitted Holder, as a condition to the transfer of any Shares to the Permitted Holder, to sign a counterpart of this Agreement or other instrument to confirm that the Permitted Holder will take and hold the Shares subject to the right of first refusal in Section 3. The failure by any Permitted Holder to sign a counterpart of this Agreement or other instrument will not, however, relieve the Permitted Holder of his, her or its obligation to comply with Section 3. The Rosskamms and Zimmermans will monitor and keep track of sales permitted under Section 2(b). This Agreement is for the benefit of and may be enforced by the Company, the Rosskamms, the Zimmermans, and any Permitted Holder and the successors, assigns, executors, administrators, and personal representatives of any of the foregoing persons. 6. LEGEND ON SHARES. As soon as practicable following the completion of the reclassification of the Class A voting shares and the Class B non-voting shares into a single class of voting Common Shares, Betty Rosskamm and Alma Zimmerman will deliver to National City Bank, as transfer agent, certificates for all of the Class A shares and Class B shares owned by them. Betty Rosskamm and Alma Zimmerman agree that the new certificates to be issued to them, representing the Common Shares into which the Class A shares and the Class B shares have been reclassified, shall bear the following legend: The sale or other disposition of the shares represented by this certificate is subject to restrictions set forth in a Second Amended and Restated Agreement, dated October 30, 2003, among Jo-Ann Stores, Inc., Betty Rosskamm, and Alma Zimmerman as amended from time to time. Certain transferees of these shares will take and hold the shares subject to the restrictions set forth in the Agreement. Jo-Ann Stores, Inc. will mail to the shareholder a copy of this Agreement without charge within five days after receipt of written request therefor. In addition, the Rosskamms and the Zimmermans consent to the placing of this legend on (a) certificates issued to them for any Shares acquired by them after the date of this Agreement and (b) certificates for any Shares issued to a Permitted Holder who takes and holds the Shares subject to the right of first refusal in Section 3. 7. NOTICES. Any notices or other communications required or permitted to be delivered under this Agreement will be deemed to be delivered when hand delivered or received by the addressee through the United States mail (registered or certified mail, return receipt requested) and addressed as follows: (a) To the Company at 5555 Darrow Road Hudson, Ohio 44236 Attention: Chief Executive Officer (b) To Betty Rosskamm at: 5200 Three Village Drive, Apt. 2, J-K, Lyndhurst, Ohio 44124 Or at the address of any then current residence known to the Company or the Zimmermans. (c) To Alma Zimmerman at: 688 Sulgrave Road, Shaker Heights, Ohio 44122 Or at the address of any then current residence known to the Company or the Rosskamms. Any part may change the address to which notices are to be given by notifying the other parties of the change. 8. TERM. This Agreement shall not become effective unless and until the Class A voting shares and the Class B non-voting shares are reclassified into a single class of voting Common Shares. If such reclassification does not occur, the Amended and Restated Agreement among the Company, Betty Rosskamm and Justin and Alma Zimmerman dated September 26, 1997 shall continue in effect until amended or terminated in accordance with its terms. Once this Agreement becomes effective, the term of this Agreement shall continue until the date fifteen years after the death of Betty Rosskamm, or, if earlier, fifteen years after the death of Alma Zimmerman. 9. MISCELLANEOUS. The rights of any party under this Agreement may not be assigned without the prior written consent of all of the other parties. This Agreement will be interpreted and enforced in accordance with the laws of the State of Ohio; constitutes the entire agreement among the parties on its subject matter; may be executed in two or more counterparts; and may be amended only in writing signed by all of the parties. IN WITNESS WHEREOF, the parties have signed this Agreement on the date first written above. JO-ANN STORES, INC. By /s/ Valerie Gentile Sachs _______________________ Valerie Gentile Sachs Title: Executive Vice President, General Counsel & Secretary /s/ Betty Rosskamm ___________________________________ Betty Rosskamm /s/ Alma Zimmerman ___________________________________ Alma Zimmerman EXHIBIT A NOTICE OF PROPOSED DISPOSITION [Date] Betty Rosskamm 5200 Three Village Drive, Apt. 2, J-K, Lyndhurst, Ohio 44124 - - OR - Alma Zimmerman 688 Sulgrave Road, Shaker Heights, Ohio 44122 - - AND - Jo-Ann Stores, Inc. 5555 Darrow Road Hudson, Ohio 44236 Attention: Chief Executive Officer This notice is being given to you in accordance with the Second Amended and Restated Agreement, dated October 30, 2003, among Jo-Ann Stores, Inc., Betty Rosskamm, and Alma Zimmerman. The undersigned hereby proposes to make the following transfer of shares that is subject to your right of first refusal: Number of shares proposed to be disposed: ________________ Number of shares sold or otherwise disposed in the last six months by me, my family or Permitted Holders (see definitions in Section 2) ____________________ Nature of transfer (please check the applicable box): [ ] market sale (that is, on the NYSE) [ ] private sale (that is, directly to the purchaser) [ ] other (please describe: ________________________) If the recipient of the shares is known, please identify: __________________________________________________ Proposed price: ________________ Sincerely, EX-10.13 10 l06203aexv10w13.txt SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 10.13 SECOND AMENDMENT TO CREDIT AGREEMENT This Second Amendment to Credit Agreement is made as of this 17th day of March, 2003 by and among JO-ANN STORES, INC., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, as Lead Borrower for the Borrowers, being said JO-ANN STORES, INC., and FCA of Ohio, Inc., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, and House of Fabrics, Inc., a Delaware corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, and Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236 each of the Lenders party to the Credit Agreement (defined below) (together with each of their successors and assigns, referred to individually as a "Lender" and collectively as the "Lenders"), and FLEET NATIONAL BANK, as Issuing Bank, a national banking association having a place of business at 100 Federal Street, Boston, Massachusetts 02110; and FLEET RETAIL FINANCE INC., as Administrative Agent and Collateral Agent for the Lenders, a Delaware corporation, having its principal place of business at 40 Broad Street, Boston, Massachusetts 02109; and CONGRESS FINANCIAL CORPORATION, as Documentation Agent; and GMAC COMMERCIAL FINANCE LLC (f/k/a GMAC Commercial Credit LLC), NATIONAL CITY COMMERCIAL FINANCE, INC. AND THE CIT GROUP/BUSINESS CREDIT, INC., as Co-Agents in consideration of the mutual covenants herein contained and benefits to be derived herefrom. W I T N E S S E T H A. Reference is made to the Credit Agreement (as amended and in effect, the "Credit Agreement") dated as of April 24, 2001 by and among the Lead Borrower, the Borrowers, the Lenders, the Issuing Bank, the Agents, the Documentation Agent and the Co-Agents. B. The parties to the Credit Agreement desire to modify and amend certain provisions of the Credit Agreement, as provided herein. Accordingly, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. 2. Amendments to Article VI of the Credit Agreement. The provisions of Article VI of the Credit Agreement are hereby amended as follows: a. By deleting the word "and" at the end of Section 6.04(e). b. By deleting the period at the end of Section 6.04(f) and inserting ";and" in its stead. c. By adding the following new subsection to Section 6.04: (g) Other investments in the aggregate amount of $10,000,000, provided that (i) no Default or Event of Default exists at the time of, or after giving effect to, the proposed investment, and (ii) average Excess Availability (A) for the thirty days prior to the making of any such investment and (B) on a pro forma basis for the ninety days immediately following the making of any such investment, shall be equal to or greater than $50,000,000. 3. Conditions Precedent to Effectiveness. This Second Amendment shall not be effective until each of the following conditions precedent have been fulfilled to the satisfaction of the Administrative Agent: a. This Second Amendment shall have been duly executed and delivered by the Borrowers and the Required Lenders, shall be in full force and effect, and shall be in form and substance satisfactory to the Administrative Agent and the Lenders. b. All action on the part of the Borrowers necessary for the valid execution, delivery and performance by the Borrowers of this Second Amendment shall have been duly and effectively taken and evidence thereof satisfactory to the Administrative Agent shall have been provided to the Administrative Agent. c. The Borrowers shall have provided such additional instruments and documents to the Administrative Agent as the Administrative Agent and Administrative Agent's counsel may have reasonably requested. 7. Miscellaneous. a. This Second Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. b. This Second Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof. c. Any determination that any provision of this Second Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not effect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Second Amendment. d. The Borrowers shall pay on demand all costs and expenses of the Agents, including, without limitation, reasonable attorneys' fees in connection with the preparation, negotiation, execution and delivery of this Second Amendment. e. The Borrowers warrant and represent that the Borrowers have consulted with independent legal counsel of the Borrowers' selection in connection with this Second Amendment and is not relying on any representations or warranties of the Agents, the Lenders or their counsel in entering into this Second Amendment. IN WITNESS WHEREOF, the parties have duly executed this Second Amendment as of the day and year first above written. JO-ANN STORES, INC. as Lead Borrower and Borrower By: /s/ Donald R. Tomoff ------------------------------------ Name: Donald R. Tomoff ---------------------------------- Title: Vice President, Finance --------------------------------- FCA OF OHIO, INC. as Borrower By: /s/ Donald R. Tomoff ------------------------------------ Name: Donald R. Tomoff ---------------------------------- Title: Treasurer --------------------------------- HOUSE OF FABRICS, INC. as Borrower By: /s/ Donald R. Tomoff ------------------------------------ Name: Donald R. Tomoff ---------------------------------- Title: Treasurer --------------------------------- JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. as Borrower By: /s/ Donald R. Tomoff ------------------------------------ Name: Donald R. Tomoff ---------------------------------- Title: Treasurer ---------------------------------

FLEET RETAIL FINANCE INC., as Administrative Agent, as Collateral Agent, as Swingline Lender, and as Lender By: /s/ James R. Dore ------------------------------------ Name: James R. Dore ---------------------------------- Title: Managing Director --------------------------------- FLEET NATIONAL BANK, as Issuing Bank By: /s/ James R. Dore ------------------------------------ Name: James R. Dore ---------------------------------- Title: Managing Director --------------------------------- CONGRESS FINANCIAL CORPORATION, as Documentation Agent and Lender By: /s/ John Williammee, Jr. ------------------------------------ Name: John Williammee, Jr. ---------------------------------- Title: Vice President ---------------------------------

GMAC COMMERCIAL FINANCE LLC as Co-Agent and Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- NATIONAL CITY COMMERCIAL FINANCE, INC. as Co-Agent and Lender By: /s/ Dennis Hatvany ------------------------------------ Name: Dennis Hatvany ---------------------------------- Title: Vice President ---------------------------------

THE CIT GROUP/BUSINESS CREDIT, INC. as Co-Agent and Lender By: /s/ Lori C. Hilker ------------------------------------ Name: Lori C. Hilker ---------------------------------- Title: Vice President --------------------------------- FOOTHILL CAPITAL CORPORATION as Lender By: /s/ Brad Engel ------------------------------------ Name: Brad Engel ---------------------------------- Title: Assistant Vice President ---------------------------------

THE PROVIDENT BANK as Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- COMERICA BANK as Lender By: /s/ Timothy C. Griffin ------------------------------------ Name: Timothy C. Griffin ---------------------------------- Title: Vice President --------------------------------- GE CAPITAL as Lender By: /s/ Linda Capalui Skinner ------------------------------------ Name: Linda Capalui Skinner ---------------------------------- Title: Vice President --------------------------------- SIEMENS FINANCIAL SERVICES, INC. as Lender By: /s/ Frank Amodio ------------------------------------ Name: Frank Amodio ---------------------------------- Title: Vice President - Credit ---------------------------------

ORIX BUSINESS CREDIT, INC. as Lender By: /s/ Thomas W. Buda, Jr. ------------------------------------ Name: Thomas W. Buda, Jr. ---------------------------------- Title: Vice President --------------------------------- RZB FINANCE, LLC as Lender By: /s/ John A. Valiska ------------------------------------ Name: John A. Valiska ---------------------------------- Title: Group Vice President --------------------------------- By: /s/ Christoph Hoedl ------------------------------------ Name: Christoph Hoedl ---------------------------------- Title: Vice President --------------------------------- US BANK N.A. as Lender By: /s/ David A. Hickey ------------------------------------ Name: David A. Hickey ---------------------------------- Title: Assistant Vice President ---------------------------------

KEY BANK NATIONAL ASSOCIATION as Lender By: /s/ Marianne T. Meil ------------------------------------ Name: Marianne T. Meil ---------------------------------- Title: Vice President --------------------------------- WEBSTER WHITEHALL BUSINESS CREDIT CORPORATION as Lender By: /s/ Brian Kennedy ------------------------------------ Name: Brian Kennedy ---------------------------------- Title: Vice President --------------------------------- LASALLE BUSINESS CREDIT, INC. as Lender By: /s/ Catherine D. Saccany ------------------------------------ Name: Catherine D. Saccany ---------------------------------- Title: First Vice President ---------------------------------

SENIOR DEBT PORTFOLIO as Lender By: Boston Management and Research as Investment Advisor By: /s/ Payson F. Swaffield ------------------------------------ Name: Payson F. Swaffield ---------------------------------- Title: Vice President --------------------------------- GRAYSON & CO. as Lender By: Boston Management and Research as Investment Advisor By: /s/ Payson F. Swaffield ------------------------------------ Name: Payson F. Swaffield ---------------------------------- Title: Vice President --------------------------------- EATON VANCE SENIOR INCOME TRUST as Lender By: Eaton Vance Management as Investment Advisor By: /s/ Payson F. Swaffield ------------------------------------ Name: Payson F. Swaffield ---------------------------------- Title: Vice President ---------------------------------

EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management as Investment Advisor By: /s/ Payson F. Swaffield ------------------------------------ Name: Payson F. Swaffield ---------------------------------- Title: Vice President --------------------------------- OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor By: /s/ Payson F. Swaffield ------------------------------------ Name: Payson F. Swaffield ---------------------------------- Title: Vice President ---------------------------------

EX-10.14 11 l06203aexv10w14.txt THIRD AMENDMENT TO CREDIT AGREEMENT Exhibit 10.14 THIRD AMENDMENT TO CREDIT AGREEMENT This Third Amendment to Credit Agreement is made as of this 18th day of February, 2004 by and among JO-ANN STORES, INC., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, as Lead Borrower for the Borrowers, being said JO-ANN STORES, INC., and FCA of Ohio, Inc., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, and House of Fabrics, Inc., a Delaware corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236, and Jo-Ann Stores Supply Chain Management, Inc., an Ohio corporation, having a principal place of business at 5555 Darrow Road, Hudson, Ohio 44236 each of the Lenders party to the Credit Agreement (defined below) (together with each of their successors and assigns, referred to individually as a "Lender" and collectively as the "Lenders"), and FLEET NATIONAL BANK, as Issuing Bank, a national banking association having a place of business at 100 Federal Street, Boston, Massachusetts 02110; and FLEET RETAIL GROUP, INC. (f/k/a Fleet Retail Finance Inc.), as Administrative Agent and Collateral Agent for the Lenders, a Delaware corporation, having its principal place of business at 40 Broad Street, Boston, Massachusetts 02109; and CONGRESS FINANCIAL CORPORATION, as Documentation Agent; and GMAC COMMERCIAL FINANCE LLC (f/k/a GMAC Commercial Credit LLC), NATIONAL CITY COMMERCIAL FINANCE, INC. AND THE CIT GROUP/BUSINESS CREDIT, INC., as Co-Agents in consideration of the mutual covenants herein contained and benefits to be derived herefrom. W I T N E S S E T H A. Reference is made to the Credit Agreement (as amended and in effect, the "Credit Agreement") dated as of April 24, 2001 by and among the Lead Borrower, the Borrowers, the Lenders, the Issuing Bank, the Agents, the Documentation Agent and the Co-Agents. B. The parties to the Credit Agreement desire to modify, amend and waive certain provisions of the Credit Agreement, as provided herein. Accordingly, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. 2. Amendments to Article I of the Credit Agreement. The provisions of Article I of the Credit Agreement are hereby amended as follows: a. by deleting the definition of "Indenture" in its entirety and substituting the following in its stead: "Indenture" means the Indenture dated May 5, 1999 with respect to the Lead Borrower's issuance of 10 3/8% Senior Subordinated Notes in the aggregate face amount of $150,000,000.00 due in 2007, as amended by a Supplemental Indenture dated as of February 19, 2004. b. by adding the following new definition in appropriate alphabetical order: "Subordinated Debt Indenture" shall mean the Indenture dated February 26, 2004 among the Lead Borrower, certain of its Subsidiaries, as Guarantors and National City Bank, as Trustee with respect to the Lead Borrower's issuance of 7.50% Senior Subordinated Notes in the aggregate face amount of $100,000,000 due in 2012. 3. Amendments to Article VI of the Credit Agreement. The provisions of Article VI of the Credit Agreement are hereby amended as follows: a. By deleting the provisions of Section 6.01(a)(vi) in its entirety and substituting the following in its stead: (vi) Indebtedness under the Indenture and any refinancings or replacements of such Indebtedness provided that the Indebtedness permitted hereunder, when aggregated with the Indebtedness permitted pursuant to Sections 6.01(a)(x) and 6.01(a)(xi) hereof, shall not exceed $225,000,000. b. By deleting the provisions of Section 6.01(a)(x) in their entirety and substituting the following in their stead: (x) Indebtedness under the Subordinated Debt Indenture provided that the Indebtedness permitted hereunder, when aggregated with the Indebtedness permitted pursuant to Sections 6.01(a)(vi) and 6.01(a)(xi) hereof, shall not exceed $225,000,000; and (xi) other unsecured Indebtedness provided that the Indebtedness permitted hereunder, when aggregated with the Indebtedness permitted pursuant to Sections 6.01(a)(vi) and 6.01(a)(x) hereof, shall not exceed $225,000,000, and provided further that the terms of such Indebtedness are reasonably acceptable to the Administrative Agent. 2 c. By deleting the period at the end of Section 6.04(f) and adding the following immediately thereafter: ; and (g) in addition to Guarantees permitted pursuant to Section 6.04(d) hereof, Guarantees of Indebtedness permitted under Section 6.01(a)(x) hereof. d. By deleting the period and adding the following at the end of Section 6.08: ; and (iv) the foregoing shall not apply to restrictions set forth in the Subordinated Debt Indenture as in effect on February 26, 2004. 4. Limited Waiver. The Lenders hereby waive the provisions of Section 5.01(k) of the Credit Agreement which require the Loan Parties to furnish thirty (30) Business Days prior notice of the incurrence of any Indebtedness. This waiver is furnished solely in connection with the Loan Parties' incurrence of Indebtedness under the Subordinated Debt Indenture and is not a continuing waiver. The provisions of Section 5.01(k) shall remain in full force and effect with respect to all other transactions. 5. Conditions Precedent to Effectiveness. This Third Amendment shall not be effective until each of the following conditions precedent have been fulfilled to the satisfaction of the Administrative Agent: a. This Third Amendment shall have been duly executed and delivered by the Borrowers and the Required Lenders, shall be in full force and effect, and shall be in form and substance satisfactory to the Administrative Agent and the Required Lenders. b. All action on the part of the Borrowers necessary for the valid execution, delivery and performance by the Borrowers of this Third Amendment shall have been duly and effectively taken and evidence thereof satisfactory to the Administrative Agent shall have been provided to the Administrative Agent. c. The Borrowers shall have provided such additional instruments and documents to the Administrative Agent as the Administrative Agent and Administrative Agent's counsel may have reasonably requested. 6. Miscellaneous. a. This Third Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument. b. This Third Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof. 3 c. Any determination that any provision of this Third Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not effect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Third Amendment. d. The Borrowers shall pay on demand all costs and expenses of the Agents, including, without limitation, reasonable attorneys' fees in connection with the preparation, negotiation, execution and delivery of this Third Amendment. e. The Borrowers warrant and represent that the Borrowers have consulted with independent legal counsel of the Borrowers' selection in connection with this Third Amendment and are not relying on any representations or warranties of the Agents, the Lenders or their counsel in entering into this Third Amendment. IN WITNESS WHEREOF, the parties have duly executed this Third Amendment as of the day and year first above written. JO-ANN STORES, INC. as Lead Borrower and Borrower by /s/ Donald R. Tomoff --------------------------------------- Name: Donald R. Tomoff ------------------------------------ Title: Vice President, Finance ----------------------------------- FCA OF OHIO, INC. as Borrower by /s/ Donald R. Tomoff --------------------------------------- Name: Donald R. Tomoff ------------------------------------ Title: Treasurer ----------------------------------- HOUSE OF FABRICS, INC. as Borrower by /s/ Donald R. Tomoff --------------------------------------- Name: Donald R. Tomoff ------------------------------------ Title: Treasurer ----------------------------------- 4 JO-ANN STORES SUPPLY CHAIN MANAGEMENT, INC. as Borrower by /s/ Donald R. Tomoff --------------------------------------- Name: Donald R. Tomoff ------------------------------------ Title: Treasurer ----------------------------------- FLEET RETAIL GROUP, INC., as Administrative Agent, as Collateral Agent, as Swingline Lender, and as Lender By: /s/ James R. Dore -------------------------------------- Name: James R. Dore ------------------------------------ Title: Managing Director ----------------------------------- FLEET NATIONAL BANK, as Issuing Bank By: /s/ James R. Dore -------------------------------------- Name: James R. Dore ------------------------------------ Title: Managing Director ----------------------------------- CONGRESS FINANCIAL CORPORATION, as Documentation Agent and Lender By: /s/ John Williammee, Jr. -------------------------------------- Name: John Williammee, Jr. ------------------------------------ Title: Vice President ----------------------------------- GMAC COMMERCIAL FINANCE LLC as Co-Agent and Lender By: /s/ Edward Hill -------------------------------------- Name: Edward Hill ------------------------------------ Title: Senior Vice President ----------------------------------- 5 NATIONAL CITY COMMERCIAL FINANCE, INC. as Co-Agent and Lender By: /s/ Elizabeth M. Lynch -------------------------------------- Name: Elizabeth M. Lynch ------------------------------------ Title: Senior Vice President ----------------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. as Co-Agent and Lender By: /s/ Mike Richman -------------------------------------- Name: Mike Richman ------------------------------------ Title: Vice President ----------------------------------- FOOTHILL CAPITAL CORPORATION as Lender By: /s/ Brad Engel -------------------------------------- Name: Brad Engel ------------------------------------ Title: Assistant Vice President ----------------------------------- THE PROVIDENT BANK as Lender By: /s/ Mary Sue Wolfer -------------------------------------- Name: Mary Sue Wolfer ------------------------------------ Title: Credit Officer ----------------------------------- COMERICA BANK as Lender By: /s/ Timothy C. Griffin -------------------------------------- Name: Timothy C. Griffin ------------------------------------ Title: Vice President ----------------------------------- 6 GENERAL ELECTRIC CAPITAL CORPORATION as Lender By: /s/ Lisa Huber -------------------------------------- Name: Lisa Huber ------------------------------------ Title: Duly Authorized Signatory ----------------------------------- SIEMENS FINANCIAL SERVICES, INC. as Lender By: /s/ Frank Amodio -------------------------------------- Name: Frank Amodio ------------------------------------ Title: Vice President - Credit ----------------------------------- ORIX FINANCIAL SERVICES, INC. as Lender By: /s/ John W. Pors -------------------------------------- Name: John W. Pors ------------------------------------ Title: Vice President ----------------------------------- RZB FINANCE, LLC as Lender By: /s/ Christoph Hoedl -------------------------------------- Name: Christoph Hoedl ------------------------------------ Title: Vice President ----------------------------------- By: /s/ Astrid Wilke -------------------------------------- Name: Astrid Wilke ------------------------------------ Title: Vice President ----------------------------------- US BANK N.A. as Lender By: /s/ David A. Hickey -------------------------------------- Name: David A. Hickey ------------------------------------ Title: Assistant Vice President ----------------------------------- 7 KEY BANK NATIONAL ASSOCIATION as Lender By: /s/ David J. Wechter -------------------------------------- Name: David J. Wechter ------------------------------------ Title: Vice President ----------------------------------- WEBSTER BUSINESS CREDIT CORPORATION (f/k/a Whitehall Business Credit Corporation) as Lender By: /s/ Brian Kennedy -------------------------------------- Name: Brian Kennedy ------------------------------------ Title: Vice President ----------------------------------- LASALLE BUSINESS CREDIT, INC. as Lender By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- SENIOR DEBT PORTFOLIO as Lender By: Boston Management and Research as Investment Advisor By: /s/ Michael B. Botthof -------------------------------------- Name: Michael B. Botthof ------------------------------------ Title: Vice President ----------------------------------- GRAYSON & CO. as Lender By: Boston Management and Research as Investment Advisor By: /s/ Michael B. Botthof -------------------------------------- Name: Michael B. Botthof ------------------------------------ Title: Vice President ----------------------------------- 8 EATON VANCE SENIOR INCOME TRUST as Lender By: Eaton Vance Management as Investment Advisor By: /s/ Michael B. Botthof -------------------------------------- Name: Michael B. Botthof ------------------------------------ Title: Vice President ----------------------------------- EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management as Investment Advisor By: /s/ Michael B. Botthof -------------------------------------- Name: Michael B. Botthof ------------------------------------ Title: Vice President ----------------------------------- OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor By: /s/ Michael B. Botthof -------------------------------------- Name: Michael B. Botthof ------------------------------------ Title: Vice President ----------------------------------- EX-14 12 l06203aexv14.txt CODE OF BUSINESS CONDUCT AND ETHICS Exhibit 14 JO-ANN STORES, INC. CODE OF BUSINESS CONDUCT AND ETHICS 1. REPORT ILLEGAL OR UNETHICAL BEHAVIOR. - ------------------------------------------------------------------------------- YOUR ROLE: Report any wrongdoings that may adversely affect the Company, our investors, our customers or the public at large by talking with your manager, using the Code of Business Conduct and Ethics Hotline or by writing a letter. - ------------------------------------------------------------------------------- Jo-Ann's Code illustrates the shared accountability each Team Member has in conducting Jo-Ann business with honesty and integrity. The Code is intended to assist in making ethical and legal choices. If there are questions or situations that are not specifically addressed by the Code, Team Members should bring them to the attention of a manager. If a Team Member becomes aware of a situation in which he/she believes that Jo-Ann's Code has been violated, or that he/she is being pressured or being asked to compromise the Company's values, it is the Team Member's responsibility to communicate this concern through the appropriate channels, as described below. A Team Member will not be disciplined, lose his/her job or be subject to retaliation in response to asking questions or voicing concerns about the Company's ethical or legal obligations, so long as the Team Member is acting in good faith. Good faith does not necessarily mean being correct - but it does imply the belief that the Team Member is providing truthful information. Listed below are the ways a person can ask questions or voice concerns. 1. IN PERSON. - A Team Member's manager is the most immediate resource. He/she may have the information needed or may be able to refer the question to another appropriate source. 2. VIA EMAIL - Jo-Ann has a confidential email account react@jo-annstores.com where a person can send a message with a question or concern. 3. VIA PHONE. The React Hotline (1-800-859-8529) is a confidential number where callers can remain anonymous, if they desire. 4. VIA MAIL. Correspondence should be sent to: Jo-Ann Stores, Inc. 5555 Darrow Road Hudson, OH 44236 Attn: EVP, General Counsel and Secretary, EVP, Human Resources, or VP, Internal Audit and Loss Prevention 2 of 16 In all cases, when a question or concern is raised, all reports are: - Handled promptly, discreetly and professionally. Discussions and inquiries will be kept in confidence to the extent appropriate or permitted by law. - Investigated by people who are not in the chain of supervision over the reporting individual. - Kept on file so that the reporting person can obtain certain follow-up information about how the Company addressed the report or concern. In the event that an investigation is initiated, Team Members are expected to cooperate fully in an investigation and answer any questions truthfully and to the best of their ability. Concealing or covering up an ethical or legal violation is itself a major violation of our Code. If an individual engages in concealing or covering up such violations in the absence of significant, serious, mitigating circumstances, the Team Member will be discharged. Failure to cooperate could be construed as participating in concealment or cover-up activities. 3 of 16 2. CREATE AN OPEN AND PRODUCTIVE WORK ENVIRONMENT. - ------------------------------------------------------------------------------ YOUR ROLE: Treat all people with whom you come in contact in a professional and courteous manner, regardless of their background, status or preferences. If you have experienced or know of any behavior that you believe is a form of harassment or discrimination, report it to your manager, the React Hotline or Human Resources immediately. - ------------------------------------------------------------------------------ All Team Members want and deserve a workplace where they feel respected, satisfied and appreciated. Jo-Ann's policies are designed to ensure that Team Members are treated fairly and with respect, and that Team Members treat others with that same respect. Jo-Ann will hire, evaluate and promote individuals based on skills and performance, and not on unlawful considerations. With this in mind, there are certain behaviors that will not be tolerated. These include harassment, retaliation, violence, intimidation and discrimination of any kind involving race, color, religion, gender, age, national origin, disability, veteran status, medical condition, sexual orientation, marital status or any other protected status under the law. Unwelcome sexual advances or other inappropriate personal conduct are prohibited. Sexual harassment may take many forms, from overt advances to demeaning comments, jokes, language and gestures. Sexual harassment may also occur when someone's words, actions or behavior, either implicitly or explicitly, interferes with work performance or creates an intimidating, hostile or offensive work environment. Finally, if a Team Member has a medical condition or disability and needs to request an adjustment or reasonable accommodation, Jo-Ann will review requests and determine whether a reasonable accommodation can be made in compliance with all obligations under the Americans with Disabilities Act (ADA) and similar state specific laws. If a Team Member experiences a situation that he/she believes is discriminatory, hostile or involves any form of harassment, the Team Member is encouraged to communicate to the individual that such behavior is unwelcome and notify his/her manager immediately. If the Team Member believes that his/her manager is engaged in unwelcome behavior or the Team Member is not comfortable raising concerns with his/her manager, the Team Member should contact the React Hotline at 1-800-859-8529. Please note that all complaints MUST be reported by management to Human Resources and will be investigated promptly and in an impartial and confidential manner. Confidentiality will be maintained to the extent that it allows for a thorough investigation of the complaint. 4 of 16 3. ACT IN THE BEST INTEREST OF THE COMPANY AND AVOID ALL CONFLICTS OF INTEREST. - ------------------------------------------------------------------------------ YOUR ROLE: Do not engage in any activity that could be perceived as putting your own interests ahead of the Company's interest. Advance the Company's interest when presented with an opportunity. - ------------------------------------------------------------------------------ A conflict of interest occurs when an individual's personal interests interfere, or appear to interfere, in any way with the interests of Jo-Ann. As employees of Jo-Ann, Team Members must act in the best interests of the Company and avoid situations that present potential or actual conflicts between their individual interests and the interests of the Company. The following are examples of actions that would constitute a conflict of interest: - - Investing in, or serving as a director of, any company that sells products or services similar to Jo-Ann's, or any company doing or seeking to do business with Jo-Ann, other than relatively small investments in securities of publicly-held companies; - - Working for, or on behalf of, any competitor or supplier to Jo-Ann; - - Borrowing money from companies doing or seeking to do business with Jo-Ann, other than on generally available terms; - - Accepting bribes or kickbacks of any kind; - - Supervising a relative or close personal friend; - - Having a personal relationship with another employee or vendor that affects a Team Members ability to do his/her job or disrupts the workplace; - - Working for another company that conflicts with the duties and responsibilities at Jo-Ann. In addition to the above, listed below are examples of situations which may cause a conflict of interest; please note that this list is not all-inclusive. If Team Members encounter a situation in which they are unsure whether or not an action represents a conflict of interest, they should discuss it with an officer in the Company. - - Placing Company business with relatives, friends, or working on a Company project that will have a direct impact on the financial interest of relatives or friends; - - Encouraging companies dealing with Jo-Ann to buy supplies or services from relatives or friends; - - Hiring a relative or friend; - - Soliciting donations from suppliers, contractors and local merchants; - - Accepting gifts and gratuities from suppliers, contractors, or vendors; - - Accepting fees or honorariums for doing things such as giving lectures, conducting seminars, serving as a director of another company or completing a survey; 5 of 16 - - Participating in the regulatory or other activities of a community or governmental body that have a direct impact on the business of the Company; - - Conducting political activities on Company time or involving the use of any Company resources, including financial contributions. Team Members are expected to act in the best interest of the Company when presented with opportunities as a result of their jobs. This means that Team Members will not use Company property, information and position for personal gain. With respect to products, including sample merchandise that is given to Jo-Ann, materials slated for removal and disposal, product that is to be returned to a vendor, and damaged goods, these products are the property of either Jo-Ann or its vendors. These products should not be handled in any way that contradicts instructions provided to Jo-Ann or its Team Members. 6 of 16 4. RESPECT AND MAINTAIN THE CONFIDENTIALITY OF INFORMATION ENTRUSTED TO YOU BY THE COMPANY AND ITS CUSTOMERS. - ------------------------------------------------------------------------------- YOUR ROLE: All confidential information, including all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed, should be kept secure. The only exception to this is when disclosure is authorized or legally mandated. When the information is no longer needed by Jo-Ann it should be disposed of properly. This practice should be followed during and after your employment with Jo-Ann. - ------------------------------------------------------------------------------- Jo-Ann respects employee privacy and has practices to safeguard the confidentiality of Team Member records. The Company collects, stores, uses and distributes personal information (including salary and benefits data), employee medical information and employee lists, in compliance with all applicable laws. Likewise, our Team Members are required to treat the Company's information with the same respect. Information generated in our business is a valuable Company asset. Protecting this information plays a vital role in our continued growth and ability to compete. Typical of such information, in any form (electronic or hard copy), are merchandise and marketing plans; objectives and strategies; trade secrets; unpublished financial or pricing information; computer programs; employee, customer and supplier lists. Team Members who have access to proprietary and confidential information are obligated to safeguard it from unauthorized access and follow these additional guidelines: - - Do not disclose this information to persons outside Jo-Ann. Exercise caution when discussing Company business in public places where conversations can be overheard, like restaurants or on airplanes. Recognize the potential for eavesdropping on cellular telephones. - - Do not use this information for personal benefit or the benefit of persons outside of Jo-Ann. - - Share this information only with other Team Members as appropriate for them to do their job. Written approval from an officer or the General Counsel is required before confidential or proprietary information can be released outside the Company. In addition, Team Members are not to talk to the media without approval from the Executive Committee. 7 of 16 This obligation, to protect Jo-Ann's proprietary and confidential information, continues even after leaving the Company. 8 of 16 5. CONDUCT ALL BUSINESS WITH TEAM MEMBERS, CUSTOMERS, SUPPLIERS AND COMPETITORS IN A FAIR AND HONEST MANNER. - ------------------------------------------------------------------------------- YOUR ROLE: When dealing with customers, suppliers, competitors and coworkers, you should conduct business in a fair and honest manner. - ------------------------------------------------------------------------------- Team Members should not take advantage of anyone through manipulation, concealment or abuse of privileged information, misrepresentation of material facts or any other unfair activity. Team Members are expected to gather and use information about our competitors in an ethical manner and in compliance with the law. Prohibited, of course, are theft, illegal entry, blackmail and electronic eavesdropping. Employees of competitors or suppliers should not be used as a source of non-public information. Jo-Ann Team Members should not divulge proprietary information about a former employer, and will not be asked to do so. All proprietary or non-public information about our competitors or suppliers should not be used if one suspects that it has been obtained improperly or misdirected in error (such as misdirected faxes). 9 of 16 6. REPORT ALL FINANCIAL INFORMATION ACCURATELY. - ------------------------------------------------------------------------------- YOUR ROLE: Ensure all of your business transactions and records are accurate and filed on a timely basis. - ------------------------------------------------------------------------------- Most Team Members are involved with financial reports of some kind - preparing time sheets, expense reports, approving invoices, signing for receipt of purchased materials or preparing inventory reports. While all Team Members do not need to be familiar with accounting procedures, everyone does need to make sure that all business records are accurate, complete and reliable. This standard also applies to all operating reports or records prepared for internal or external purposes, such as product test results, quality control reports or sales projections. In short, Team Members need to ensure that all of their records are truthful and accurate. False, misleading or incomplete information impairs our ability to make good decisions, undermines trust in the long term and in some cases may be illegal. In addition, no Team Member shall directly or indirectly take any action to fraudulently influence, coerce, manipulate or mislead an accountant engaged in the performance of an audit or review of the financial statements. TEAM MEMBERS WITH FINANCIAL REPORTING RESPONSIBILITIES ARE SUBJECT TO THE FOLLOWING SPECIAL ETHICS OBLIGATIONS. As a public company it is of critical importance that the Company's filings with the Securities and Exchange Commission be accurate and timely. Depending on their position with Jo-Ann, Team Members may be called upon to provide information to assure that the Company's public reports are complete, fair and understandable. Jo-Ann expects all of its personnel to take this responsibility very seriously and to provide prompt and accurate answers to inquiries related to the Company's public disclosure requirements. The Finance Department bears a special responsibility for promoting integrity throughout the organization, with responsibilities to stakeholders both inside and outside Jo-Ann. The Chief Executive Officer and Finance Department personnel have a special role to adhere to these principles themselves and to promote a culture within the Company that ensures the fair and timely reporting of Jo-Ann's financial results and condition. Because of this special role, the Chief Executive Officer and all members of Jo-Ann's Finance Department are bound by the following Financial Officer Code of Ethics. By accepting the Code of Business Conduct, each agrees that he/she will: - - Act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. 10 of 16 - - Provide information that is accurate, complete, objective, relevant, timely and understandable to ensure full, fair, accurate, timely and understandable disclosure in reports and documents that Jo-Ann files with, or submits to, government agencies and in other public communications. - - Comply with rules and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory agencies. - - Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgment to be subordinated. - - Respect the confidentiality of information acquired in the course of one's work, except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of one's work may not be used for personal advantage. - - Share knowledge and maintain skills important and relevant to each stakeholder's needs. - - Proactively promote and be an example of ethical behavior as a responsible partner among peers, in the work environment and in the community. - - Achieve responsible use of and control over all assets and resources employed or entrusted. - - Promptly report to the Vice President of Internal Audit and Loss Prevention any conduct that appears to be in violation of law or business ethics or of any provision of the Code, including any transaction or relationship that reasonably could be expected to give rise to such a conflict. Violations of this Financial Officer Code of Ethics, including failures to report potential violations by others, may result in personnel action, including termination of employment. 11 of 16 7. PROPERLY UTILIZE AND PROTECT ALL COMPANY ASSETS. - ------------------------------------------------------------------------------- YOUR ROLE: Protect the Company's assets, which have been entrusted to you. Use the Company's assets for legitimate business purposes. - ------------------------------------------------------------------------------- Every Team Member is a steward of the Company's assets. Protecting Company assets against loss, theft and misuse is everyone's responsibility. Inventory, equipment, samples, tools and supplies have been acquired solely for the purpose of conducting Company business. They may not be used for personal benefit, sold, loaned, given away or disposed of without proper authorization. Incidental personal use of telephones, email, Internet, fax machines, copy machines, personal computers and similar equipment is generally allowed if there is no significant added cost to the Company, it does not interfere with work duties and is not related to an illegal activity or to any outside business. Company systems should not be used to access, send or download any information that could be insulting or offensive to another person, such as sexually explicit messages, cartoons, jokes, unwelcome propositions, ethnic or racial slurs or any other message that could be viewed as harassment. Team Members should not have any expectation of privacy when using Company assets such as the Internet, email and the telephone. 12 of 16 8. COMPLY WITH ALL LAWS, RULES AND REGULATIONS, INCLUDING INSIDER TRADING LAWS AND INTERNATIONAL LAWS. - ------------------------------------------------------------------------------- YOUR ROLE: Ensure that you are acting in accordance with all laws. Be particularly sensitive to Jo-Ann insider trading regulations. If you are unsure of the laws associated with your business area or function, ask the General Counsel. - ------------------------------------------------------------------------------- All business at Jo-Ann should be conducted in accordance with the appropriate international, national and local laws. RECORD MANAGEMENT Record retention requirements are often based on specific statutory and regulatory requirements that are unique to a particular business operation. These retention requirements apply to all Company documents, including e-mail and other electronic records. Failing to comply with the appropriate requirements can have serious tax or legal repercussions. INSIDER TRADING All Team Members need to be aware that using confidential material information for trading, or tipping others to trade, is both unethical and illegal. Material inside information is any information about a company (Jo-Ann, our suppliers or customers) that has not reached the general marketplace and is likely to impact investors' decisions around whether or not to trade. The term "trade" includes all securities transactions in the open market, and includes transactions in Company plans such as Associate Stock Option Plan, 401(k) Plan and the stock option plan. It is illegal to give confidential material information to anyone, other than in the necessary course of business. Team Members who involve themselves in insider trading (either by personally engaging in trading or by disclosing confidential material information to others) are subject to immediate dismissal and may be prosecuted. ANTITRUST LAWS Antitrust laws, which are also known as competition laws, are designed to ensure a fair and competitive free market system. While Jo-Ann will compete vigorously in the marketplace, we will comply with the applicable antitrust and competition laws wherever we do business. This means that we will compete on the merits of our products, the prices we charge and the customer loyalty we earn. Some of the most serious antitrust offenses occur between competitors, such as agreements to fix or control prices or other terms of sale, to allocate products, territories or markets (including store locations) or to limit the production or sale of products. It is therefore important to avoid discussions with competitors regarding 13 of 16 pricing, terms and conditions, costs, marketing or store opening plans, and any other proprietary or confidential information. Unlawful agreements need not be written or even consist of express commitments. Agreements can be inferred based on "loose talk", informal discussions or the mere exchange of certain information. 14 of 16 If a Team Member believes that a conversation with a competitor enters an inappropriate area, the Team Member should end the conversation at once. The antitrust laws also regulate conduct with suppliers and others. For example, resale price agreements are prohibited and the Robinson-Patman Act prohibits price discrimination by suppliers and knowingly inducing or receiving discriminatory pricing by buyers. INTERNATIONAL BUSINESS LAWS We expect all Team Members to comply with the laws of the countries in which we operate. Team Members who are involved in international activities should know the regulations and regularly consult with the General Counsel to ensure Jo-Ann is compliant. Where U.S. law or Jo-Ann policy differs from local law or customs, Team Members should follow the more restrictive law and policy. FOREIGN CORRUPT PRACTICES ACT (FCPA) The FCPA has two important provisions - (1) accounting and recordkeeping and (2) bribery. The FCPA requires that we keep accurate books and records, and maintain a system of controls to ensure our records fairly reflect transactions and dispositions of assets. This is to prevent "slush funds" and "off-the-books" accounts, which some companies have used to make and conceal questionable payments. The FCPA also makes it illegal to bribe a foreign official in order to obtain or retain business or an improper advantage. A bribe could be a payment, a promise or anything else of value (regardless of the magnitude). A foreign official is an employee of a government outside the U.S. and includes members of the armed forces, employees of state-owned companies and members of a royal family engaged in commercial activities. Officials of public international organizations, such as the World Bank, are also considered foreign officials. FACILITATING PAYMENTS AND THE FCPA Facilitating payments are incidental payments or gratuities paid to foreign officials to expedite performance of a routine governmental action. Some examples of such payments include: obtaining permits, licenses or other documents to do business; processing government paperwork such as visas or work orders; providing police protection or mail service; providing telephone service, power or water supply; and loading or unloading cargo. The term "routine government action" does not include any decision of whether to award new business or continue business. Although these payments are not prohibited by the FCPA, every effort should be made to avoid them. Team Members should obtain approval from the Chief Financial Officer before making any facilitating payment. It is imperative that these payments are correctly recorded and identified in Jo-Ann's records. In addition to facilitating payments, the FCPA has other narrowly defined exceptions to its payment prohibitions. Jo-Ann's General Counsel can answer any questions that Team Members have. 15 of 16 JO-ANN STORES, INC. CODE OF BUSINESS CONDUCT AND ETHICS ACKNOWLEDGMENT FORM I certify that I have received, read and understand Jo-Ann Stores, Inc.'s Code of Business Conduct and Ethics (Code), and will abide by all principles, standards and procedures stated within the Code. I acknowledge that this document is not a contract of employment. Signature: -------------------------------------------------------------------- Print Name: ------------------------------------------------------------------- Date: ------------------------------------------------------------------------- 16 of 16 EX-21 13 l06203aexv21.txt SUBSIDIARIES . . . Exhibit 21 JO-ANN STORES, INC. LIST OF SUBSIDIARIES
STATE OF PERCENT OWNED NAME INCORPORATION REGISTRANT ------------- ------------- Jo-Ann Stores Supply Chain Management, Inc. Ohio 100% FCA of Ohio, Inc. Ohio 100% House of Fabrics, Inc. Delaware 100% Team Jo-Ann, Inc. Ohio 100%
EX-23 14 l06203aexv23.txt EXHIBIT 23 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements of Jo-Ann Stores, Inc. listed below of our report dated March 8, 2004, with respect to the consolidated financial statements and schedule of Jo-Ann Stores, Inc. included in the Annual Report (Form 10-K) for the year ended January 31, 2004. Registration Form Number - ---- ------------ S-4 333-80763 10 3/8% Senior Subordinated Notes Due 2007 S-4 333-105379 Registration of Common Shares S-8 033-60177 1994 Executive Incentive Plan S-8 333-10093 1994 Executive Incentive Plan S-8 333-72445 1998 Incentive Compensation Plan S-8 333-11653 Employees' Savings and Profit-Sharing Plan S-8 033-60179 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 333-10087 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 333-10091 1996 Stock Option Plan for Non-Employee Directors S-8 333-55278 Nonqualified Stock Option Awards to Certain Employees S-8 333-55280 Jo-Ann Stores, Inc. Savings Plan 401(k) /s/ Ernst & Young LLP Cleveland, Ohio April 13, 2004 EX-23.1 15 l06203aexv23w1.txt NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if any part of a registration statement at the time such part becomes effective contains an untrue statement of a material fact or an omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may sue, among others, every accountant who has consented to be named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report or valuation which purports to have been prepared or certified by the accountant. This Form 10-K is incorporated by reference into the following filings (the "Registration Statements") of the Company:
Registration Form Number - ---- ------ S-4 333-80763 10 3/8% Senior Subordinated notes Due 2007 S-8 333-10093 1994 Executive Incentive Plan S-8 33-72445 1998 Incentive Compensation Plan S-8 33-32809 Employee Savings and Profit-Sharing Plan S-8 33-37355 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 33-49690 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 333-10087 1990 Employees Stock Option and Stock Appreciation Rights Plan S-8 333-10091 1996 Stock Option Plan for Non-Employee Directors S-8 333-55278 Nonqualified Stock Option Awards to Certain Employees S-8 333-55280 Jo-Ann Stores, Inc. Savings Plan 401(k)
and, for purposes of determining any liability under the Securities Act, is deemed to be a new registration statement for each Registration Statement into which it is incorporated by reference. On May 29, 2002, the Company dismissed Arthur Andersen LLP ("Andersen") as its independent auditor and appointed Ernst & Young LLP to replace Andersen. As a result of Andersen's liquidation, we have been unable to obtain Andersen's written consent to the incorporation by reference into the Registration Statements of its audit report with respect to our financial statements as of February 2, 2002 and February 3, 2001 and for the years then ended. Under these circumstances, Rule 437a under the Securities Act permits us to file this Form 10-K without a written consent from Andersen. As a result, however, Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Andersen or any omissions of a material fact required to be stated therein. Accordingly, you would be unable to assert a claim against Andersen under Section 11(a) of the Securities Act for any purchases of securities under the Registration Statement made on or after the date of this Form 10-K. To the extent provided in Section 11(b)(3)(C) of the Securities Act, however, other persons who are liable under Section 11(a) of the Securities Act, including the Company's officers and directors, may still rely on Andersen's original audit reports as being made by an expert for purposes of establishing a due diligence defense under Section 11(b) of the Securities Act. EX-24 16 l06203aexv24.txt POWER OF ATTORNEY EXHIBIT 24 DIRECTORS AND OFFICERS POWER OF ATTORNEY Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Jo-Ann Stores, Inc. Commission File No. 1-6695 1934 Act Filings on Form 10-K For Fiscal Year Ended January 31, 2004 Gentlemen: The above Company is the issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 (the "Act"). Each of the persons signing his or her name below confirms, as of the date appearing opposite his or her signature, that Alan Rosskamm, Brian P. Carney, and each of them, are authorized on his or her behalf to sign and to submit to the Securities and Exchange Commission such filings on Form 10-K as are required by the Act. Each person so signing also confirms the authority of Alan Rosskamm, Brian P. Carney, and each of them, to do and perform on his or her behalf, any and all acts and things requisite or necessary to assure compliance by the signing person with the Form 10-K filing requirements. The authority confirmed herein shall remain in effect as to each person signing his or her name below until such time as the Commission shall receive from such person a written communication terminating or modifying the authority.
DATE DATE ---- ---- /s/ ALAN ROSSKAMM April 15, 2004 /s/ PATRICIA MORRISON April 15, 2004 - ------------------------------------------ ------------------- ------------------------------------------ ------------------- ALAN ROSSKAMM PATRICIA MORRISON /s/ BRIAN P. CARNEY April 15, 2004 /s/ FRANK NEWMAN April 15, 2004 - ------------------------------------------ ------------------- ------------------------------------------ ------------------- BRIAN P. CARNEY FRANK NEWMAN /s/ SCOTT COWEN April 15, 2004 /s/ BERYL RAFF April 15, 2004 - ------------------------------------------ ------------------- ------------------------------------------ ------------------- SCOTT COWEN BERYL RAFF /s/ IRA GUMBERG April 15, 2004 /s/ GREGG SEARLE April 15, 2004 - ------------------------------------------ ------------------- ------------------------------------------ ------------------- IRA GUMBERG GREGG SEARLE /s/ TRACEY THOMAS TRAVIS April 15, 2004 ------------------------------------------ ------------------- TRACEY THOMAS TRAVIS
EX-31.1 17 l06203aexv31w1.txt CERTIFICATE EXHIBIT 31.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER I, Alan Rosskamm, certify that: 1) I have reviewed this annual report on Form 10-K of Jo-Ann Stores, Inc. (the "registrant"); 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 15, 2004 /s/ Alan Rosskamm ------------------------------------- By: Alan Rosskamm President and Chief Executive Officer EX-31.2 18 l06203aexv31w2.txt CERTIFICATE EXHIBIT 31.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER I, Brian P. Carney, certify that: 1) I have reviewed this annual report on Form 10-K of Jo-Ann Stores, Inc. (the "registrant"); 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 15, 2004 /s/ Brian P. Carney ---------------------------------------------------- By: Brian P. Carney Executive Vice President and Chief Financial Officer EX-32.1 19 l06203aexv32w1.txt CERTIFICATE EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report of Jo-Ann Stores, Inc. (the "Company") on Form 10-K for the year-ended January 31, 2004, as filed with the Securities and Exchange Commission (the "SEC") on or about the date hereof (the "Report"), each of the undersigned officers of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 15, 2004 /s/ Alan Rosskamm ---------------------------------------------------- Alan Rosskamm, President and Chief Executive Officer /s/ Brian P. Carney ---------------------------------------------------- Brian P. Carney Executive Vice President and Chief Financial Officer A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Auditors
Report of Former Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
Note 1 -- Significant Accounting Policies
	Note 2 -- Share Reclassification
	Note 3 -- Store Closings
	Note 4 -- Income Taxes
	Note 5 -- Financing
	Note 6 -- Capital Stock
	Note 7 -- Stock-Based Compensation Plans
	Note 8 -- Savings Plan and Postretirement Benefits
	Note 9 -- Commitments and Contingencies
	Note 10 -- Leases
	Note 12 -- Consolidating Financial Statements
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
Second Amended and Restated Rights Agreement
Indenture
Registration Rights Agreement
List of Executive Officers
List of Executive Officers
1998 Incentive Compensation Plan
Agreement
Second Amendment to Credit Agreement
Third Amendment to Credit Agreement
Code of Business Conduct and Ethics
Subsidiaries
Exhibit 23
Notice Regarding Consent of Arthur Andersen LLP
Power of Attorney
Certificate
Certificate
Certificate


Ohio (State or other jurisdiction of incorporation or organization)		34-0720629 (I.R.S. Employer Identification No.)

5555 Darrow Road, Hudson, Ohio (Address of principal executive offices)		44236 (Zip Code)


		Name of Each Exchange
Title of Class		on Which Registered

Common Stock, Without Par Value		New York Stock Exchange


						Stores in
Fiscal	Stores		Stores			Operation at		Expanded		Square
Year	Opened		Closed			Year-End		or Relocated		Footage

2000		29		(61	)		1,026		22		15,642
2001		18		(37	)		1,007		9		16,068
2002		12		(60	)		959		10		15,897
2003		3		(43	)		919		6		15,435
2004		19		(46	)		892		—		15,377


Class	Votes For		Votes Against		Abstentions

Class A Common Shares		8,059,261		815,119		15,505
Class B Common Shares		5,152,144		2,265,350		3,126



			Fiscal Year-Ended

			January 31,			February 1,			February 2,
			2004			2003			2002

Principal product line:
	Softlines			63	%		63	%		64	%
	Hardlines and seasonal			37	%		37	%		36	%

		Total		100	%		100	%		100	%


	Traditional		Superstore		Total

Alabama		2		—	2
Alaska		6		—	6
Arizona		13		4	17
Arkansas		1		—	1
California		91		6	97
Colorado		13		—	13
Connecticut		15		2	17
Delaware		3		—	3
Florida		48		9	57
Georgia		8		4	12
Idaho		9		—	9
Illinois		40		2	42
Indiana		26		3	29
Iowa		11		—	11
Kansas		8		1	9
Kentucky		5		—	5
Louisiana		7		—	7
Maine		5		—	5
Maryland		19		3	22
Massachusetts		24		—	24
Michigan		43		12	55
Minnesota		16		6	22
Missouri		12		1	13
Montana		7		—	7
Nebraska		5		—	5
Nevada		4		2	6
New Hampshire		8		—	8
New Jersey		13		—	13
New Mexico		6		—	6
New York		37		7	44
North Carolina		8		—	8
North Dakota		4		—	4
Ohio		56		11	67
Oklahoma		5		—	5
Oregon		26		—	26
Pennsylvania		47		1	48
Rhode Island		2		—	2
South Carolina		2		—	2
South Dakota		2		—	2
Tennessee		2		3	5
Texas		50		4	54
Utah		13		—	13
Vermont		4		—	4
Virginia		22		—	22
Washington		32		5	37
West Virginia		5		—	5
Wisconsin		21		—	21

Total		806		86	892


		Number of
Year Lease Terms Expire		Store Leases

Month-to-month			27
2005			34
2006			25
2007			29
2008			24
2009			26
Thereafter			726

	Total		891


Name	Age		Position

Alan Rosskamm		54	Chairman of the Board, President and Chief Executive Officer
Dave Bolen		52	Executive Vice President, Merchandising, Marketing and Logistics
Brian Carney		43	Executive Vice President, Chief Financial Officer
Michael Edwards		43	Executive Vice President, Operations
Valerie Gentile Sachs		48	Executive Vice President, General Counsel and Secretary
Rosalind Thompson		54	Executive Vice President, Human Resources


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



					Class A				Class B
	Common Shares				Common Stock				Common Stock

	High		Low		High		Low		High		Low

Fiscal 2004:
January 31, 2004	$	26.92	$	18.55	$	31.14	$	30.35	$	27.08	$	26.43
November 1, 2003		—		—		32.01		25.40		27.87		22.24
August 2, 2003		—		—		27.95		19.57		24.84		16.91
May 3, 2003		—		—		26.30		16.75		23.30		14.00

Fiscal 2003:
February 1, 2003		—		—	$	26.85	$	21.81	$	22.85	$	18.19
November 2, 2002		—		—		33.75		23.35		26.69		18.32
August 3, 2002		—		—		29.25		19.15		21.50		14.50
May 4, 2002		—		—		20.34		10.70		17.30		9.15


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations



		Percentage of Net Sales


		Fiscal Year-Ended

		Jan 31, 2004			Feb 1, 2003			Feb 2, 2002

Net sales			100.0	%		100.0	%		100.0	%
Gross margin			46.7	%		46.2	%		44.1	%
Selling, general and administrative expenses			38.4	%		37.7	%		39.7	%
Store pre-opening and closing costs			0.6	%		0.4	%		1.3	%
Depreciation and amortization			2.2	%		2.1	%		2.5	%
Stock option compensation expense			0.3	%		—			—
Debt repurchase and share reclassification expenses			0.3	%		0.1	%		0.1	%

	Operating profit		4.9	%		5.9	%		0.5	%


		Non-cancelable
		Lease			Asset			Other
		Obligations			Impairments			Costs			Total


		(dollars in millions)
Balance at February 3, 2001		$	5.5		$	—		$	3.8		$	9.3
Amounts charged to income			9.6			5.0			3.0			17.6
Utilization:
	Cash		(3.9	)		—			(5.6	)		(9.5	)
	Non-Cash		—			(5.0	)		—			(5.0	)

Balance at February 2, 2002			11.2			—			1.2			12.4
Amounts charged to income			(5.9	)		6.7			0.6			1.4
Utilization:
	Cash		(1.8	)		—			(0.9	)		(2.7	)
	Non-Cash		—			(6.7	)		—			(6.7	)

Balance at February 1, 2003			3.5			—			0.9			4.4
Amounts charged to income			(0.1	)		2.1			1.3			3.3
Utilization:
	Cash		(1.6	)		—			(1.3	)		(2.9	)
	Non-Cash		—			(2.1	)		0.1			(2.0	)

Balance at January 31, 2004		$	1.8		$	—		$	1.0		$	2.8



	Payments Due by Period ⁽¹⁾

			Less than
	Total		1 year		1-3 years		4-5 years		After 5 years

10 3/8 percent senior subordinated notes	$	64.4	$	—	$	—	$	64.4	$	—
Credit facility — revolving facility		9.3		—		9.3		—		—
Credit facility — term loan		40.0		—		40.0		—		—
10 3/8 percent senior subordinated notes interest ⁽²⁾		21.7		6.7		13.4		1.6		—
Letters of credit ⁽³⁾		51.1		51.1		—		—		—
Operating leases ⁽⁴⁾		713.8		124.1		224.6		144.7		220.4

Total Contractual Cash Obligations	$	900.3	$	181.9	$	287.3	$	210.7	$	220.4



	Fiscal 2004												Fiscal 2003												Fiscal 2002

	Qtr 1			Qtr 2			Qtr 3			Qtr 4			Qtr 1			Qtr 2			Qtr 3			Qtr 4			Qtr 1			Qtr 2			Qtr 3			Qtr 4

Net sales	$	374.8		$	359.2		$	447.5		$	552.6		$	372.4		$	353.7		$	430.1		$	525.8		$	328.9		$	330.2		$	413.0		$	498.2
Same-store sales percentage change		2.6	%		2.4	%		4.2	%		4.5	%		13.5	%		7.7	%		6.5	%		6.9	%		(2.0	)%		9.7	%		8.0	%		7.4	%
Gross margin	$	180.5		$	172.6		$	215.1		$	242.4		$	180.8		$	171.6		$	197.4		$	227.7		$	151.1		$	139.2		$	182.6		$	220.2
Gross margin percent to sales		48.2	%		48.1	%		48.1	%		43.9	%		48.5	%		48.5	%		45.9	%		43.3	%		45.9	%		42.2	%		44.2	%		44.2	%
Operating profit (loss)	$	11.6		$	0.7		$	24.1		$	48.2		$	20.4		$	9.9		$	21.4		$	46.8		$	(3.1	)	$	(17.3	)	$	(9.7	)	$	38.7
Operating profit percent to sales		3.1	%		0.2	%		5.4	%		8.7	%		5.5	%		2.8	%		5.0	%		8.9	%		(0.9	)%		(5.2	)%		(2.3	)%		7.8	%
Net income (loss)	$	4.1		$	(2.2	)	$	12.0		$	27.1		$	8.7		$	2.0		$	8.9		$	25.3		$	(6.4	)	$	(16.1	)	$	(11.3	)	$	18.9
Inventory	$	369.1		$	471.6		$	520.3		$	404.6		$	400.1		$	496.2		$	483.4		$	363.1		$	476.7		$	483.0		$	467.1		$	369.0
Net working capital		244.3			305.9			372.0			272.4			250.0			321.4			330.1			265.9			341.9			359.1			333.2			232.8
Long-term debt		124.9			190.5			237.4			113.7			223.5			286.4			276.2			162.9			345.9			375.0			356.0			223.7


	Page

Report of Management		34
Report of Independent Auditors		35
Report of Former Independent Public Accountants		37
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003		38
Consolidated Statements of Operations for each of the three fiscal years in the period ended January 31, 2004		39
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 31, 2004		40
Consolidated Statements of Shareholders’ Equity for each of the three fiscal years in the period ended January 31, 2004		41
Notes to Consolidated Financial Statements		42
Report of Former Independent Public Accountants on the Financial Statement Schedule		66
Schedule II — Valuation and Qualifying Accounts		67


Alan Rosskamm Chairman of the Board, President and Chief Executive Officer		Brian P. Carney Executive Vice President, Chief Financial Officer


									Common					Unamortized									Accumulated
			Net						Stock		Additional			Restricted									Other			Total
			Common			Treasury			Stated		Paid-In			Stock			Treasury			Retained			Comprehen-			Shareholders’
			Shares			Shares			Value		Capital			Awards			Stock			Earnings			sive Loss			Equity


			(Shares in thousands)						(Dollars in millions)
Balance, February 3, 2001				19,612			3,837		$	1.2	$	99.1		$	(1.2	)	$	(38.1	)	$	187.8		$	—		$	248.8
	Net loss			—			—			—		—			—			—			(14.9	)		—			(14.9	)
	Cumulative effect of change in accounting for derivatives, net of $1.0 million tax benefit			—			—			—		—			—			—			—			(1.7	)		(1.7	)
	Change in fair value of derivatives, net of $0.8 million tax benefit			—			—			—		—			—			—			—			(1.3	)		(1.3	)

		Total comprehensive loss																									(17.9	)
	Restricted stock awards activity, net			5			—			—		(0.2	)		0.6			—			—			—			0.4
	Purchase of common stock			(81	)		81			—		—			—			(0.4	)		—			—			(0.4	)
	Issuance of treasury shares			229			(229	)		—		(0.3	)		—			1.2			—			—			0.9
	Issuance of common stock — Associate Stock Ownership Plan			341			—			—		1.0			—			—			—			—			1.0

Balance, February 2, 2002				20,106			3,689			1.2		99.6			(0.6	)		(37.3	)		172.9			(3.0	)		232.8
	Net income			—			—			—		—			—			—			44.9			—			44.9
	Change in fair value of derivatives, net of $0.2 million tax provision			—			—			—		—			—			—			—			0.4			0.4

		Total comprehensive income																									45.3
	Exercise of stock options			844			—			0.1		8.4			—			—			—			—			8.5
	Tax benefit on options exercised			—			—			—		3.6			—			—			—			—			3.6
	Restricted stock awards activity, net			(5	)		—			—		—			0.2			—			—			—			0.2
	Purchase of common stock			(164	)		164			—		—			—			(3.4	)		—			—			(3.4	)
	Issuance of treasury shares			47			(47	)		—		0.6			—			0.3			—			—			0.9
	Issuance of common stock -Associate Stock Ownership Plan			251			—			—		1.5			—			—			—			—			1.5

Balance, February 1, 2003				21,079			3,806			1.3		113.7			(0.4	)		(40.4	)		217.8			(2.6	)		289.4
	Net income			—			—			—		—			—			—			41.0			—			41.0
	Change in fair value of derivatives, net of $0.6 million tax provision			—			—			—		—			—			—			—			1.0			1.0

		Total comprehensive income																									42.0
	Exercise of stock options			418			—			—		4.0			—			—			—			—			4.0
	Tax benefit on equity compensation			—			—			—		2.4			—			—			—			—			2.4
	Stock option compensation			—			—			—		5.7			—			—			—			—			5.7
	Restricted stock awards activity, net			150			—			—		2.8			(2.1	)		—			—			—			0.7
	Purchase of common stock			(75	)		75			—		—			—			(1.6	)		—			—			(1.6	)
	Issuance of treasury shares			106			(106	)		—		0.7			—			0.7			—			—			1.4
	Issuance of common stock — Associate Stock Ownership Plan			150			—			—		2.2			—			—			—			—			2.2

Balance, January 31, 2004				21,828			3,775		$	1.3	$	131.5		$	(2.5	)	$	(41.3	)	$	258.8		$	(1.6	)	$	346.2



	Fiscal Year

	2004			2003

Land and buildings	$	54.9		$	52.9
Furniture, fixtures and equipment		305.3			272.9
Leasehold improvements		66.9			70.2
Construction in progress		8.6			7.2

		435.7			403.2
Less accumulated depreciation and amortization		(232.5	)		(212.9	)

Property, equipment and leasehold improvements, net	$	203.2		$	190.3


	SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections


	FASB Interpretation No. 46, Consolidation of Variable Interest Entities



		Fiscal Year
		Asset/(Liability)

		2004			2003

Current
Deferred tax assets:
	Inventory items	$	14.4		$	15.7
	Employee benefits		1.6			2.4
	Lease obligations		7.9			8.0
	Other		2.5			3.5

			26.4			29.6
Deferred tax liabilities:
	Basis difference in net assets acquired		(1.4	)		(1.4	)

Net current deferred tax asset		$	25.0		$	28.2

Non-current
Deferred tax assets:
	Equity investment	$	2.5		$	2.5
	Other		2.3			0.4
	Valuation allowance		(2.5	)		(2.5	)

			2.3			0.4
Deferred tax liabilities:
	Depreciation		(40.9	)		(36.7	)
	Basis difference in net assets acquired		(0.6	)		(0.6	)
	Other		(0.2	)		(0.3	)

			(41.7	)		(37.6	)

Net non-current deferred tax liability		$	(39.4	)	$	(37.2	)


		Stock			Restricted
		Options			Stock			Total

Available at February 3, 2001									127,570
	Fiscal year 2002 incremental available								656,900
	Granted		(429,443	)		(20,700	)		(450,143	)
	Cancellations		265,329			18,400			283,729

Available at February 2, 2002									618,056
	Fiscal year 2003 incremental available								804,236
	Granted		(204,125	)		—			(204,125	)
	Cancellations		163,189			3,450			166,639

Available at February 1, 2003									1,384,806
	Fiscal year 2004 incremental available								843,162
	Granted		(806,387	)		(11,500	)		(817,887	)
	Cancellations		124,313			3,450			127,763

Available at January 31, 2004									1,537,844



	Common Shares

			Weighted
	Restricted		Average
	Shares		Grant
Fiscal Year	Granted		Price

2004		11,500	$	21.53
2003		—		—
2002		20,700		3.90



Options Outstanding								Options Exercisable

						Weighted
				Weighted		Average				Weighted
		Range of		Average		Remaining				Average
Number		Exercise		Exercise		Contractual		Number		Exercise
Outstanding		Prices		Price		Life		Exercisable		Price

	1,333,513	$	2.40 to $7.75	$	6.58		5.8 years		642,271	$	6.03
	1,168,262		7.99 to 16.80		14.76		5.4 years		544,848		12.66
	576,142		17.65 to 26.66		21.20		5.8 years		302,972		20.99

	3,077,917	$	2.40 to $26.66	$	12.42		5.7 years		1,490,091	$	11.49


	Minimum
Fiscal Year-Ended	Rentals

(Dollars in millions)
2005	$	124.1
2006		117.8
2007		106.8
2008		82.9
2009		61.8
Thereafter		220.4

	$	713.8


		First		Second			Third		Fourth
Fiscal 2004		Quarter		Quarter			Quarter		Quarter

(Dollars in millions, except per share data)
Net sales		$	374.8	$	359.2		$	447.5	$	552.6
Gross margin			180.5		172.6			215.1		242.4
Net income			4.1		(2.2	)		12.0		27.1
Net income per common share:
	Basic	$	0.19	$	(0.10	)	$	0.55	$	1.26
	Diluted		0.19		(0.10	)		0.54		1.22



		Fiscal Year-Ended February 2, 2002

					Guarantor
Consolidating Statements of Operations		Parent			Subsidiaries			Eliminations			Consolidated


		(Dollars in millions)
Net sales		$	862.6		$	1,614.7		$	(907.0	)	$	1,570.3
Cost of sales			528.2			1,256.0			(907.0	)		877.2

	Gross margin		334.4			358.7			—			693.1
Selling, general and administrative expenses			317.1			306.1			—			623.2
Store pre-opening and closing costs			9.0			12.0			—			21.0
Depreciation and amortization			15.3			24.0			—			39.3
Stock option compensation expense			—			—			—			—
Debt repurchase and share reclassification expenses			1.0			—			—			1.0

	Operating profit (loss)		(8.0	)		16.6			—			8.6
Interest expense, net			14.5			18.2			—			32.7

	Loss before income taxes		(22.5	)		(1.6	)		—			(24.1	)
Income tax provision benefit			(8.9	)		(0.3	)		—			(9.2	)

	Loss before equity loss		(13.6	)		(1.3	)		—			(14.9	)
Equity income (loss) from subsidiaries			(1.3	)		—			1.3			—

Net income (loss)		$	(14.9	)	$	(1.3	)	$	1.3		$	(14.9	)



		Fiscal Year-Ended February 2, 2002

					Guarantor
Consolidating Statements of Cash Flows		Parent			Subsidiaries			Eliminations		Consolidated


		(Dollars in millions)
Net cash provided by operating activities:		$	31.4		$	56.8		$	—	$	88.2
Net cash flows used for investing activities:
	Capital expenditures		(9.6	)		(56.9	)		—		(66.5	)

Net cash used for investing activities			(9.6	)		(56.9	)		—		(66.5	)
Net cash flows used for financing activities:
	Proceeds from senior secured credit facility, net		171.6			—			—		171.6
	Repayment of prior senior credit facility		(123.8	)		—			—		(123.8	)
	Net change in revolving credit facility		(69.1	)		—			—		(69.1	)
	Purchase of common stock		(0.4	)		—			—		(0.4	)
	Other, net		3.6			—			—		3.6

Net cash used for financing activities			(18.1	)		—			—		(18.1	)

Net increase (decrease) in cash and cash equivalents			3.7			(0.1	)		—		3.6
Cash and cash equivalents at beginning of year			13.8			3.7			—		17.5

Cash and cash equivalents at end of year		$	17.5		$	3.6		$	—	$	21.1


	Balance at		Charged to		Charged to					Balance at
	Beginning		Costs and		Other					End of
	of Period		Expenses		Accounts		Deductions			Period

January 31, 2004 Closed store reserve	$	4.4	$	3.3	$	—	$	(4.9	)	$	2.8
February 1, 2003 Closed store reserve		12.4		1.4		—		(9.4	)		4.4
February 2, 2002 Closed store reserve		9.3		17.6		—		(14.5	)		12.4


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Item 10.	Directors and Executive Officers of the Registrant


Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Item 13.	Certain Relationships and Related Transactions