-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BzJHGk7y4z2dmPqMX/9DcO2bdSLw+aNzp2uJY0OLKCVnvjgcaO49sB4RrOBSVi7e IaH7oLIwfLL/uc1LjSG7aA== 0000950152-98-000759.txt : 19980209 0000950152-98-000759.hdr.sgml : 19980209 ACCESSION NUMBER: 0000950152-98-000759 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980206 SROS: NONE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: HOUSE OF FABRICS INC/DE/ CENTRAL INDEX KEY: 0000315125 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 953426136 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-14299 FILM NUMBER: 98524011 BUSINESS ADDRESS: STREET 1: 13400 RIVERSIDE DR CITY: SHERMAN OAKS STATE: CA ZIP: 91423 BUSINESS PHONE: 8189957000 MAIL ADDRESS: STREET 1: PO BOX 9110 CITY: VAN NUYS STATE: CA ZIP: 91409-9110 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: FABRI CENTERS OF AMERICA INC CENTRAL INDEX KEY: 0000034151 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 340720629 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 5555 DARROW RD CITY: HUDSON STATE: OH ZIP: 44236 BUSINESS PHONE: 2166562600 MAIL ADDRESS: STREET 1: 5555 DARROW ROAD CITY: HUDSON STATE: OH ZIP: 44236 FORMER COMPANY: FORMER CONFORMED NAME: CLEVELAND FABRIC SHOPS INC DATE OF NAME CHANGE: 19681216 FORMER COMPANY: FORMER CONFORMED NAME: CLEVELAND FABRIC SHOPS INC NUMBER THREE DATE OF NAME CHANGE: 19681216 SC 14D1 1 HOUSE OF FABRICS/FABRI-CENTERS SCHEDULE 14D-1 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-1 TENDER OFFER STATEMENT PURSUANT TO SECTION 14(d)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ HOUSE OF FABRICS, INC. (NAME OF SUBJECT COMPANY [ISSUER]) FCA ACQUISITION CORPORATION FABRI-CENTERS OF AMERICA, INC. (BIDDERS) COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS OF SECURITIES) 441758109 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ ALAN ROSSKAMM FCA ACQUISITION CORPORATION C/O FABRI-CENTERS OF AMERICA, INC. 5555 DARROW ROAD HUDSON, OHIO 44236 TELEPHONE: (216) 656-2600 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF BIDDERS) ------------------------ COPY TO: JAMES R. CARLSON, ESQ. THOMPSON HINE & FLORY LLP 3900 KEY CENTER 127 PUBLIC SQUARE CLEVELAND, OHIO 44114-1216 TELEPHONE: (216) 566-5500 ------------------------ CALCULATION OF FILING FEE
================================================================================== Transaction Valuation* Amount of Filing Fee - ---------------------------------------------------------------------------------- $22,660,277.50 $4,532.06
================================================================================ * For purposes of calculating fee only. This amount assumes the purchase at a purchase price of $4.25 per share of an aggregate of 5,331,830 shares of common stock. The amount of the filing fee, calculated in accordance with Regulation 240.0-11 of the Securities Exchange Act of 1934, as amended, equals 1/50th of one percent of the aggregate of the cash offered by the bidders for the shares of the issuer. [ ]Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: NONE Filing Party: N/A Form or Registration No: N/A Date Filed: N/A
================================================================================ 2 This Schedule 14D-1 Tender Offer Statement (this "Statement") relates to the offer by FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation (the "Parent"), to purchase all of the outstanding shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), at a price of $4.25 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 6, 1998 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). Copies of the Offer to Purchase and the Letter of Transmittal are annexed hereto as Exhibits (a)(2) and (a)(3), respectively. ITEM 1. SECURITY AND SUBJECT COMPANY. (a) The name of the subject company is House of Fabrics, Inc., a Delaware corporation with its principal executive offices at 13400 Riverside Drive, Sherman Oaks, California 91423-2598. (b) The information set forth in the Introduction of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 6 of the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a-d, g) This Statement is being filed on behalf of the Parent and the Purchaser for purposes of Schedule 14D-1. The information set forth in the Introduction, Section 9 and Schedule I of the Offer to Purchase is incorporated herein by reference. (e-f) During the last five years, neither the Parent nor the Purchaser, nor, to the best knowledge of the Parent and the Purchaser, the persons listed in Schedule I of the Offer to Purchase, has been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree, or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a-b) The information set forth in the Introduction, Sections 8, 9 and 11 and Schedule I of the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a-c) The information set forth in Section 10 of the Offer to Purchase is incorporated herein by reference. ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDERS. (a-b) The information set forth in the Introduction and Sections 11, 12 and 13 of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Sections 11, 12 and 13 of the Offer to Purchase is incorporated herein by reference. (d-e) The information set forth in Sections 6, 7, 12 and 13 of the Offer to Purchase is incorporated herein by reference. (f-g) The information set forth in Sections 7, 12 and 13 of the Offer to Purchase is incorporated herein by reference. 2 3 ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) The information set forth in the Introduction, Section 9 and Schedule I of the Offer to Purchase is incorporated herein by reference. (b) The information set forth in the Introduction, Section 9 and Schedule I of the Offer to Purchase is incorporated herein by reference. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES. The information set forth in the Introduction and Sections 9, 11, 12 and 13 of the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth in the Introduction and Sections 11 and 16 of the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS. The information set forth in Section 9 of the Offer to Purchase is incorporated herein by reference. The incorporation by reference herein of the above-referenced financial information does not constitute an admission that such information is material to a decision by a stockholder of the Company whether to sell, tender or hold Shares being sought in the Offer. ITEM 10. ADDITIONAL INFORMATION. (a) The information set forth in Sections 8, 9, 11, 12 and 13 of the Offer to Purchase is incorporated herein by reference. (b-c, e) The information set forth in Sections 13, 14 and 15 of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in Sections 7, 12 and 13 of the Offer to Purchase is incorporated herein by reference. (f) The information set forth in the Offer to Purchase and the Letter of Transmittal is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Press Release, dated February 2, 1998. (a)(2) Offer to Purchase, dated February 6, 1998. (a)(3) Letter of Transmittal. (a)(4) Notice of Guaranteed Delivery. (a)(5) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(7) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(8) Summary Advertisement, dated February 6, 1998. (b)(1) Credit Agreement, dated as of September 30, 1994, among Fabri-Centers of America, Inc., various financial institutions and KeyBank National Association (formerly Society National Bank), as Agent (incorporated by reference to Exhibit 10(a) of Fabri-Centers of America, Inc.'s Current Report on Form 8-K filed on October 17, 1994).
3 4 (b)(2) Amendment No. 1 to Credit Agreement, dated as of June 2, 1997, among Fabri-Centers of America, Inc., various financial institutions and KeyBank National Association (formerly Society National Bank), as Agent (incorporated by reference to Exhibit 10 of Fabri-Centers of America, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 1997). (c) The Agreement and Plan of Merger, dated February 1, 1998, by and among Fabri-Centers of America, Inc., FCA Acquisition Corporation and House of Fabrics, Inc. (d) None. (e) Not applicable. (f) None.
4 5 SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct. Dated: February 6, 1998 FCA ACQUISITION CORPORATION By: /s/ BRIAN P. CARNEY ------------------------------------ Name: Brian P. Carney Title: Executive Vice President and Chief Financial Officer FABRI-CENTERS OF AMERICA, INC. By: /s/ BRIAN P. CARNEY ------------------------------------ Name: Brian P. Carney Title: Executive Vice President and Chief Financial Officer 5 6 EXHIBIT INDEX
EXHIBIT PAGE NUMBER EXHIBIT NAME NUMBER - -------- ----------------------------------------------------------------------------- ------ (a)(1) Press Release, dated February 2, 1998. (a)(2) Offer to Purchase, dated February 6, 1998. (a)(3) Letter of Transmittal. (a)(4) Notice of Guaranteed Delivery. (a)(5) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(7) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(8) Summary Advertisement, dated February 6, 1998. (b)(1) Credit Agreement, dated as of September 30, 1994, among Fabri-Centers of America, Inc., various financial institutions and KeyBank National Association (formerly Society National Bank), as Agent (incorporated by reference to Exhibit 10(a) of Fabri-Centers of America, Inc.'s Current Report on Form 8-K filed on October 17, 1994). (b)(2) Amendment No. 1 to Credit Agreement, dated as of June 2, 1997, among Fabri-Centers of America, Inc., various financial institutions and KeyBank National Association (formerly Society National Bank), as Agent (incorporated by reference to Exhibit 10 of Fabri-Centers of America, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended May 3, 1997). (c) The Agreement and Plan of Merger, dated February 1, 1998, by and among Fabri-Centers of America, Inc., FCA Acquisition Corporation and House of Fabrics, Inc.
6 EX-99.A.1 2 EXHIBIT 99(A)(1) 1 Exhibit (a)(1) [FABRI-CENTERS OF AMERICA, INC. LETTERHEAD] NEWS RELEASE ------------ FOR IMMEDIATE RELEASE - --------------------- CONTACT: Brian P. Carney Investor Relations: Executive Vice President and Naomi Rosenfeld/Carolyn Capaccio Chief Financial Officer Heather Anthony Fabri-Centers of America, Inc. Press: Stacy Berns 330/656-2600 Morgen-Walke Associates, Inc. http://www.joann.com 212/850-5600 HOUSE Donald L. Richey Investor Relations: OF President and Roger Pondel/Michele Feller FABRICS Chief Executive Officer Pondel, Parsons & Wilkinson CONTACT: House of Fabrics 310/207-9300 818/385-2300 FABRI-CENTERS TO ACQUIRE HOUSE OF FABRICS HUDSON, OH, February 2, 1998 -- Fabri-Centers of America, Inc. (NYSE:FCA.A and FCA.B) and House of Fabrics, Inc. (NASDAQ:HFAB) today jointly announced an agreement for Fabri-Centers to acquire House of Fabrics. The two companies have signed a definitive merger agreement under which FCA Acquisition Corporation, a Fabri-Centers subsidiary, will commence a cash tender offer to acquire all of the outstanding shares of House of Fabrics for $4.25 per share. House of Fabrics' Board of Directors has unanimously approved the tender offer and the merger and recommends that House of Fabrics shareholders tender their shares. Following the completion of the tender offer, Fabri-Centers intends to consummate a second step merger in which all remaining House of Fabrics shareholders will also receive the same cash price paid in the tender offer. Excluding one-time costs of integrating the operations of the two companies, Fabri-Centers expects the transaction to have a slightly accretive impact to earnings in the current fiscal year and to be accretive to earnings in subsequent years. Alan Rosskamm, Chairman of the Board and Chief Executive Officer of Fabri-Centers, commented, "We are very excited about the combination of Fabri-Centers and House of Fabrics. -more- 2 -2- This merger represents a win-win opportunity for both companies' shareholders, employees and customers. With Fabri-Centers' financial resources, technological expertise and marketing capability, we can together grow the combined company's customer base and increase our sales potential. House of Fabrics is already a leader in many of its markets. Its real estate base is in very good condition and complements Fabri-Centers' store base well, particularly in West Coast markets where House of Fabrics' stores are concentrated. We will be able to build on that strength as we introduce our broader product line. Among other efficiencies, this combination will allow the combined company to spread costs over a larger base of stores. This will assist us in maintaining competitive prices for our customers." Donald L. Richey, President and Chief Executive Officer of House of Fabrics, added, "Our Board of Directors unanimously concluded that this transaction with Fabri-Centers is in the best interests of House of Fabrics' shareholders and employees. At $4.25 per share in cash, this offering price represents a substantial premium over House of Fabrics' stock price for the recent period before Fabri-Centers commenced its tender offer and provides immediate liquidity to House of Fabrics' shareholders. We look forward to a rapid completion of the transaction and to working with Fabri-Centers to ensure the smoothest transition possible for our customers and employees." House of Fabrics has approximately 6 million shares and eligible options to acquire shares outstanding on a fully diluted basis. The total value of the transaction, including the amount of outstanding secured bank and long-term debt of House of Fabrics, is approximately $100 million. The offer price of $4.25 per share represents a premium of approximately 110% over the last 60 days average trading price and provides immediate liquidity to House of Fabrics shareholders. Fabri-Centers intends to finance the tender offer through a combination of cash on hand and available bank borrowings. The tender offer is conditioned upon the acquisition of a majority of House of Fabrics' shares on a fully diluted basis and the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The complete terms and conditions of the tender offer will be set forth in the offering documents to be filed with the Securities and Exchange Commission later this week. The tender offer is scheduled to expire at midnight (EDT) on March 6, 1998. Fabri-Centers has annual revenues of approximately $970 million and operates 907 fabric and craft stores in 48 states, primarily under the names of Jo-Ann Fabrics and Crafts, Cloth World, New York Fabrics and Jo-Ann etc. House of Fabrics has annual revenues of approximately $240 million and operates 262 fabric and craft stores in 27 states under the names of House of Fabrics, SoFro Fabrics, Fabricland and Fabric King. ### EX-99.A.2 3 EXHIBIT 99(A)(2) 1 EXHIBIT (a)(2) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. BY FCA ACQUISITION CORPORATION A WHOLLY OWNED SUBSIDIARY OF FABRI-CENTERS OF AMERICA, INC. AT $4.25 NET PER SHARE THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN STANDARD TIME, ON FRIDAY, MARCH 6, 1998, UNLESS THE OFFER IS EXTENDED. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, HAS DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS, AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES. The Offer is conditioned upon, among other things, there being validly tendered a number of Shares which, when added to the Shares beneficially owned by the Parent, would represent at least a majority of the Shares outstanding on a fully diluted basis on the date of purchase. The Offer is not conditioned on the receipt of financing. ------------------------------------ IMPORTANT Any stockholder desiring to tender all or any portion of such stockholder's Shares should either (i) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal, have such stockholder's signature thereon guaranteed if required by Instruction 1 to the Letter of Transmittal, mail or deliver the Letter of Transmittal (or such facsimile) and any other required documents to the Depositary and either deliver the certificates for such Shares to the Depositary along with the Letter of Transmittal (or facsimile) or deliver such Shares pursuant to the procedure for book-entry transfer set forth in Section 2 or (ii) request such stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such stockholder. A stockholder having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if such stockholder desires to tender such Shares. If a stockholder desires to tender Shares and such stockholder's certificates for Shares are not immediately available or the procedure for book-entry transfer cannot be completed on a timely basis, or time will not permit all required documents to reach the Depositary prior to the Expiration Date, such stockholder's tender may be effected by following the procedure for guaranteed delivery set forth in Section 2. Questions and requests for assistance may be directed to McDonald & Company Securities, Inc., the Dealer Manager, or to Corporate Investor Communications, Inc., the Information Agent, at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related materials may be obtained from the Information Agent or from brokers, dealers, commercial banks and trust companies. ------------------------------------ The Dealer Manager for the Offer is: MCDONALD & COMPANY SECURITIES, INC. February 6, 1998 2 TABLE OF CONTENTS
PAGE ---- Section 1. Terms of the Offer......................................................... 2 Section 2. Procedures for Tendering Shares............................................ 3 Section 3. Withdrawal Rights.......................................................... 6 Section 4. Acceptance for Payment and Payment......................................... 6 Section 5. Certain Federal Income Tax Consequences.................................... 7 Section 6. Price Range of Shares; Dividends on the Shares............................. 8 Section 7. Effect of the Offer on the Market for the Shares; Exchange Act Registration; Margin Regulations........................................... 8 Section 8. Certain Information Concerning the Company................................. 9 Section 9. Certain Information Concerning the Parent and the Purchaser................ 11 Section 10. Source and Amount of Funds................................................. 14 Section 11. Background of the Offer.................................................... 15 Section 12. Purpose of the Offer; Plans for the Company................................ 18 Section 13. The Merger................................................................. 19 Section 14. Certain Conditions of the Offer............................................ 27 Section 15. Certain Legal Matters...................................................... 29 Section 16. Fees and Expenses.......................................................... 30 Section 17. Miscellaneous.............................................................. 31 SCHEDULE I Directors and Executive Officers of the Parent and the Purchaser.......................... 32
i 3 TO THE HOLDERS OF SHARES OF HOUSE OF FABRICS, INC.: FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation (the "Parent"), hereby offers to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), at a price of $4.25 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares pursuant to the Offer. The Purchaser will pay all charges and expenses of McDonald & Company Securities, Inc. ("McDonald & Company"), as Dealer Manager (in such capacity, the "Dealer Manager"), Harris Trust Company of New York, as Depositary (the "Depositary"), and Corporate Investor Communications, Inc., as Information Agent (the "Information Agent"), incurred in connection with the Offer. See Section 16. The Offer is being made pursuant to an Agreement and Plan of Merger, dated February 1, 1998 (the "Merger Agreement"), among the Purchaser, the Parent and the Company. The Merger Agreement provides, among other things, for the merger of the Purchaser with and into the Company (the "Merger") following the purchase of Shares pursuant to the Offer. In the Merger, each then outstanding Share (other than Shares owned by the Parent or any subsidiary of the Parent, Shares held as treasury shares by the Company, and Shares owned by stockholders who perfect appraisal rights under Delaware law) will be converted into the right to receive $4.25 per Share net in cash. See Section 13. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, HAS DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS, AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES. The Offer is subject to the fulfillment of a number of conditions (the "Offer Conditions"), including, among other things, there being validly tendered a number of Shares which, when added to the Shares beneficially owned by the Parent, constitutes at least a majority of the Shares outstanding on a fully diluted basis on the date of purchase (the "Minimum Condition"). For purposes of this Offer, "on a fully diluted basis" means, as of any date, the number of Shares outstanding, together with Shares that the Company is then required to issue upon exercise of outstanding warrants and employee stock options (assuming all such warrants and options are then exercisable) or pursuant to any other obligation. According to representations made by the Company in the Merger Agreement, as of February 2, 1998, (i) 5,331,830 Shares were issued and outstanding, (ii) 907,758 Shares were reserved for future issuance upon exercise of outstanding employee stock options, and (iii) 376,158 Shares were reserved for future issuance upon exercise of Series B and Series C Warrants. According to the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1997 (the "Company 10-Q"), no Shares were held by the Company in treasury as of October 31, 1997. As of the date of the Offer, the Parent owns 19,200 Shares and Alan Rosskamm, Chairman of the Board, President and Chief Executive Officer of the Parent, owns 100 Shares. See Section 9. Certain other Offer Conditions are described in Section 14. The Purchaser expressly reserves the right, in its sole discretion, to waive any one or more of the Offer Conditions (except that the Purchaser may not, without the consent of the Company, waive the Minimum Condition). See Sections 14 and 15. The Offer is not conditioned on the receipt of financing. THIS OFFER TO PURCHASE AND THE LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 1 4 SECTION 1. TERMS OF THE OFFER Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any extension or amendment), the Purchaser will accept for payment and pay for all Shares validly tendered prior to the Expiration Date. The term "Expiration Date" means 12:00 midnight, Eastern Standard Time, on Friday, March 6, 1998, unless the Purchaser extends the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Purchaser, will expire. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THE SATISFACTION OF THE MINIMUM CONDITION, THE EXPIRATION OR TERMINATION OF ALL WAITING PERIODS IMPOSED BY THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER (THE "HSR ACT") AND THE SATISFACTION OF THE OTHER OFFER CONDITIONS SET FORTH IN SECTION 14. THE OFFER IS NOT CONDITIONED ON THE RECEIPT OF FINANCING. The Merger Agreement provides that, at the Company's request, the Purchaser will extend the Expiration Date from time to time for up to an aggregate of ten business days following the Expiration Date if the Minimum Condition is not fulfilled prior to 12:00 p.m. on the Expiration Date. The Merger Agreement also provides that the Purchaser may, in its discretion, extend the Expiration Date to the extent required by applicable law, if the Minimum Condition or any of the other Offer Conditions are not satisfied, or if less than 90% of the outstanding Shares have been validly tendered and not withdrawn pursuant to the Offer. Extension of the Expiration Date would delay the acceptance for payment of and the payment for any Shares. During any such extension, all Shares previously tendered and not properly withdrawn will remain subject to the Offer and subject to the right of a tendering stockholder to withdraw such stockholder's Shares. See Section 3. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE FOR TENDERED SHARES, WHETHER OR NOT THE PURCHASER EXERCISES ITS RIGHT TO EXTEND THE OFFER. If, by the Expiration Date (including any extension required by the Merger Agreement), any or all of the Offer Conditions have not been satisfied or waived, the Purchaser reserves the right (but will not be obligated), subject to the applicable rules and regulations of the Securities and Exchange Commission (the "Commission"), to (a) terminate the Offer and not accept for payment or pay for any Shares and return all tendered Shares to tendering stockholders, (b) waive all the unsatisfied Offer Conditions and accept for payment and pay for all Shares validly tendered prior to the Expiration Date (except that the Purchaser may not, without the consent of the Company, accept for payment any Shares so tendered unless the Minimum Condition has been satisfied), (c) extend the Offer and, subject to the right of stockholders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is extended, or (d) amend the Offer. The Merger Agreement provides that the Purchaser may not decrease the price payable in the Offer, change the form of consideration payable in the Offer, change the Offer Conditions, impose additional conditions to the Offer, or change any other terms of the Offer in a manner adverse to the holders of the Shares, except that the Purchaser may extend the Expiration Date to the extent required by applicable law, if any of the Offer Conditions are not satisfied, or if less than 90% of the outstanding Shares have been validly tendered and not withdrawn pursuant to the Offer. The rights reserved by the Purchaser in the two preceding paragraphs are in addition to the Purchaser's rights pursuant to Section 14. There can be no assurance that the Purchaser will exercise its right to extend the Offer beyond the period required by the Merger Agreement. Any extension, amendment or termination will be followed as promptly as practicable by public announcement. In the case of an extension, Rule 14e-l(d) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires that the announcement be issued no later than 9:00 a.m., Eastern time, on the next business day after the previously scheduled Expiration Date, or the first opening of The NASDAQ Stock Market ("NASDAQ") on the next business day after the previously scheduled Expiration Date, in accordance with the public announcement requirements of Rule 14d-4(c) under the Exchange Act. Subject to applicable law (including Rules 14d-4(c) and 14d-6(d) under the Exchange Act, which require that any material change in the information published, sent or given to stockholders in connection with the Offer be promptly disseminated to stockholders in a manner reasonably designed to inform stockholders of such 2 5 change), and without limiting the manner in which the Purchaser may choose to make any public announcement, the Purchaser will not have any obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release to the Dow Jones News Service. As used in this Offer to Purchase, "business day" has the meaning set forth in Rule 14d-1 under the Exchange Act. If the Purchaser extends the Offer or if the Purchaser is delayed in its acceptance for payment of or payment (whether before or after its acceptance for payment of Shares) for Shares or it is unable to pay for Shares pursuant to the Offer for any reason, then, without prejudice to the Purchaser's rights under the Offer, the Depositary may retain tendered Shares on behalf of the Purchaser and such Shares may not be withdrawn except to the extent tendering stockholders are entitled to withdrawal rights as described in Section 3. However, the ability of the Purchaser to delay the payment for Shares that the Purchaser has accepted for payment is limited by Rule 14e-1(c) under the Exchange Act, which requires that a bidder pay the consideration offered or return the securities tendered by or on behalf of holders of securities promptly after the termination or withdrawal of such bidder's offer. If the Purchaser makes a material change in the terms of the Offer or the information concerning the Offer or waives a material condition of the Offer, the Purchaser will extend the Offer and disseminate additional tender offer materials to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. The minimum period during which the Offer must remain open following material changes in the terms of the Offer or information concerning the Offer, other than a change in price or a change in the percentage of securities sought, will depend upon the facts and circumstances then existing, including the relative materiality of the changed terms or information. With respect to a change in price or a change in the percentage of securities sought, a minimum period of 10 business days is generally required to allow for adequate dissemination to stockholders and investor response. The Company has provided the Purchaser with the Company's stockholder lists and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. SECTION 2. PROCEDURES FOR TENDERING SHARES Valid Tender. For a stockholder validly to tender Shares pursuant to the Offer, either (a) a properly completed and duly executed Letter of Transmittal (or facsimile thereof), together with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message (as defined below), and any other required documents, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date and either certificates for tendered Shares ("Share Certificates") must be received by the Depositary at one of such addresses or such Shares must be delivered pursuant to the procedures for book-entry transfer set forth below (and a Book-Entry Confirmation (as defined below) received by the Depositary), in each case prior to the Expiration Date, or (b) the tendering stockholder must comply with the guaranteed delivery procedures set forth below. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at The Depository Trust Co. (the "Book-Entry Transfer Facility") for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary's account in accordance with the Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined below), and any other required documents, must, in any case, be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering stockholder must comply with the guaranteed delivery procedures described below. The confirmation 3 6 of a book-entry transfer of Shares into the Depositary's account at the Book-Entry Transfer Facility as described above is referred to herein as a "Book-Entry Confirmation." DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. The term "Agent's Message" means a message transmitted by the Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgment from the participant in the Book-Entry Transfer Facility tendering the Shares that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Purchaser may enforce such agreement against such participant. THE METHOD OF DELIVERY OF SHARE CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. SHARE CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Signature Guarantees. No signature guarantee is required on the Letter of Transmittal if (a) the Letter of Transmittal is signed by the registered holder (which term, for purposes of this Section, includes any participant in the Book-Entry Transfer Facility's system whose name appears on a security position listing as the owner of the Shares) of Shares tendered therewith and such registered holder has not completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions" on the Letter of Transmittal or (b) such Shares are tendered for the account of a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (an "Eligible Institution"). In all other cases, all signatures on the Letter of Transmittal must be guaranteed by an Eligible Institution. See Instructions 1 and 5 to the Letter of Transmittal. If Share Certificates are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made or Share Certificates for Shares not tendered or not accepted for payment are to be returned to a person other than the registered holder of the Share Certificates surrendered, the tendered Share Certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered holders appear on the Share Certificates, with the signatures on the Share Certificates or stock powers guaranteed as described above. See Instructions 1 and 5 to the Letter of Transmittal. Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's Share Certificates are not immediately available or the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Depositary prior to the Expiration Date, such stockholder's tender may be effected if all the following conditions are met: (i) the tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Purchaser, is received by the Depositary, as provided below, prior to the Expiration Date; and (iii) the Share Certificates, representing all tendered Shares, in proper form for transfer (or a Book-Entry Confirmation with respect to all such Shares), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and any other required documents are received by the Depositary within three trading days after the date of execution of such Notice of Guaranteed Delivery. A "trading day" is any day on which the New York Stock Exchange, Inc. is open for business. 4 7 The Notice of Guaranteed Delivery may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (a) Share Certificates for (or a timely Book-Entry Confirmation with respect to) such Shares, (b) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering stockholders may be paid at different times depending upon when Share Certificates or Book-Entry Confirmations with respect to Shares are actually received by the Depositary. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. The Purchaser's acceptance for payment of Shares validly tendered pursuant to the Offer will constitute a binding agreement between the tendering stockholder and the Purchaser upon the terms and subject to the conditions of the Offer. Appointment as Proxy. By executing a Letter of Transmittal as set forth above, a tendering stockholder irrevocably appoints designees of the Purchaser as such stockholder's attorneys-in-fact and proxies in the manner set forth in the Letter of Transmittal, each with full power of substitution, to the full extent of such stockholder's rights with respect to the Shares tendered by such stockholder and accepted for payment by the Purchaser and with respect to any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after February 5, 1998. All such proxies will be irrevocable and considered coupled with an interest in the tendered Shares. Such appointment will be effective when, and only to the extent that, the Purchaser accepts such Shares for payment pursuant to the Offer. Upon such acceptance for payment, all prior powers of attorney, proxies and consents given by such stockholder with respect to such Shares or other securities or rights will, without further action, be revoked and no subsequent powers of attorney, proxies, consents or revocations may be given (and, if given, will not be deemed effective). The designees of the Purchaser will thereby be empowered to exercise all voting and other rights with respect to such Shares and other securities or rights in respect of any annual, special, adjourned or postponed meeting of the Company's stockholders, actions by written consent in lieu of any such meeting or otherwise, as they in their sole discretion deem proper. The Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Purchaser's acceptance for payment of such Shares, the Purchaser must be able to exercise full voting, consent and other rights with respect to such Shares and other securities or rights, including voting at any meeting of stockholders. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding on all parties. The Purchaser reserves the absolute right to reject any or all tenders determined by it not to be in proper form or the acceptance for payment of or payment for which may, in the opinion of the Purchaser's counsel, be unlawful. The Purchaser also reserves the absolute right to waive any defect or irregularity in the tender of any Shares of any particular stockholder whether or not similar defects or irregularities are waived in the case of other stockholders. No tender of Shares will be deemed to have been validly made until all defects or irregularities relating thereto have been cured or waived. None of the Purchaser, the Parent, the Depositary, the Information Agent, the Dealer Manager or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding on all parties. Backup Withholding. In order to avoid "backup withholding" of federal income tax on payments of cash pursuant to the Offer, a stockholder surrendering Shares in the Offer must, unless an exemption applies, provide the Depositary with such stockholder's correct taxpayer identification number ("TIN") on a Substitute Form W-9 and certify under penalties of perjury that such TIN is correct and that such stockholder is not subject to backup withholding. If a stockholder does not provide such stockholder's correct TIN or fails to provide the certifications 5 8 described above, the Internal Revenue Service (the "IRS") may impose a penalty on such stockholder and the payment of cash to such stockholder pursuant to the Offer may be subject to backup withholding of 31% of the amount of such payment. All stockholders surrendering Shares pursuant to the Offer should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal to provide the information and certification necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to the Purchaser and the Depositary). Noncorporate foreign stockholders should complete and sign the main signature form and a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See Instruction 9 to the Letter of Transmittal. SECTION 3. WITHDRAWAL RIGHTS Except as otherwise provided in this Section 3, tenders of Shares pursuant to the Offer are irrevocable. Shares tendered pursuant to the Offer may be withdrawn pursuant to the procedures set forth below at any time prior to the Expiration Date and, unless theretofore accepted for payment by the Purchaser pursuant to the Offer, may also be withdrawn at any time after April 6, 1998. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at its address set forth on the back cover of this Offer to Purchase and must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of the Shares to be withdrawn, if different from the name of the person who tendered the Shares. If Share Certificates have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and, unless such Shares have been tendered by an Eligible Institution, the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution. If Shares have been delivered pursuant to the procedure for book-entry transfer as set forth in Section 2, any notice of withdrawal must also specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with the Book-Entry Transfer Facility's procedures. Withdrawals of tenders of Shares may not be rescinded, and any Shares properly withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 2 at any time prior to the Expiration Date. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding on all parties. None of the Purchaser, the Parent, the Depositary, the Information Agent, the Dealer Manager or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. SECTION 4. ACCEPTANCE FOR PAYMENT AND PAYMENT Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will accept for payment and will pay for all Shares validly tendered promptly after the Expiration Date. All questions as to the satisfaction of such terms and conditions will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding on all parties. See Sections 1 and 14. The Purchaser expressly reserves the right, in its sole discretion, to delay acceptance for payment of or payment for Shares in order to comply in whole or in part with any applicable law, including, without limitation, the HSR Act. See Section 15. Any such delays will be effected in compliance with Rule 14e-l(c) under the Exchange Act (relating to a bidder's obligation to pay for or return tendered securities promptly after the termination or withdrawal of such bidder's offer). In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (a) Share Certificates for (or a timely Book-Entry Confirmation with respect to) such Shares, (b) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and (c) any other documents required by the Letter of Transmittal. The per Share consideration paid to any stockholder pursuant to 6 9 the Offer will be the highest per Share consideration paid to any other stockholder of the same class pursuant to the Offer. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares validly tendered to the Purchaser as, if and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance for payment of such Shares. Payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for validly tendering stockholders for the purpose of receiving payment from the Purchaser and transmitting payment to tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. Upon the deposit of funds with the Depositary for the purpose of making payments to tendering stockholders, the Purchaser's obligation to make such payment shall be satisfied and tendering stockholders must thereafter look solely to the Depositary for payment of amounts owed to them by reason of the acceptance for payment of Shares pursuant to the Offer. The Purchaser will pay any stock transfer taxes with respect to the transfer and sale to it or its order pursuant to the Offer, except as otherwise provided in Instruction 6 of the Letter of Transmittal, as well as any charges and expenses of the Depositary and the Information Agent. If the Purchaser is delayed in its acceptance for payment of or payment for Shares or is unable to accept for payment or pay for Shares pursuant to the Offer for any reason, then, without prejudice to the Purchaser's rights under the Offer (but subject to compliance with Rule 14e-1(c) under the Exchange Act), the Depositary may, nevertheless, on behalf of the Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent tendering stockholders are entitled to exercise, and duly exercise, withdrawal rights as described in Section 3. If any tendered Shares are not purchased pursuant to the Offer for any reason, Share Certificates for any such unpurchased Shares will be returned, without expense to the tendering stockholder (or, in the case of Shares delivered by book-entry transfer of such Shares into the Depositary's account at the Book-Entry Transfer Facility pursuant to the procedure set forth in Section 2, such Shares will be credited to an account maintained at the Book-Entry Transfer Facility), as promptly as practicable after the expiration, termination or withdrawal of the Offer. The Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to the Parent, or to one or more direct or indirect wholly owned subsidiaries of the Parent, the right to purchase Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve the Purchaser of its obligations under the Offer and will in no way prejudice the rights of tendering stockholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. SECTION 5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The receipt of cash pursuant to the Offer or the Merger will be a taxable transaction for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and may also be a taxable transaction under applicable state, local or foreign income or other tax laws. Generally, for federal income tax purposes, a tendering stockholder will recognize gain or loss equal to the difference between the amount of cash received by the stockholder pursuant to the Offer or the Merger and the aggregate tax basis in the Shares tendered by the stockholder and purchased pursuant to the Offer or converted in the Merger, as the case may be. Gain or loss will be calculated separately for each block of Shares tendered and purchased pursuant to the Offer or converted in the Merger, as the case may be. If Shares are held by a stockholder as capital assets, gain or loss recognized by the stockholder will be capital gain or loss, which will be long-term capital gain or loss if the stockholder's holding period for the Shares exceeds one year. In addition, any gain on the sale of Shares by an individual may be taxed at the maximum rate of 20% if, as of the date of sale, the Shares were held by such individual for more than 18 months. THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE WITH RESPECT TO SHARES RECEIVED AS COMPENSATION OR WITH 7 10 RESPECT TO HOLDERS OF SHARES WHO ARE SUBJECT TO SPECIAL TAX TREATMENT UNDER THE CODE, SUCH AS NON-U.S. PERSONS, LIFE INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS AND FINANCIAL INSTITUTIONS, AND MAY NOT APPLY TO A HOLDER OF SHARES IN LIGHT OF INDIVIDUAL CIRCUMSTANCES. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE OFFER AND THE MERGER. SECTION 6. PRICE RANGE OF SHARES; DIVIDENDS ON THE SHARES The Shares are listed on NASDAQ under the symbol HFAB. The following table sets forth the high and low closing sales prices per Share for the last two years as reported on NASDAQ, together with the per Share dividends paid by the Company during the same period of time as reported in publicly available sources. The Shares began trading on August 1, 1996 concurrent with the emergence of the Company from Chapter 11 reorganization. Prices for the common shares of the Company prior to that date are not comparable and, accordingly, are not shown below.
HIGH LOW DIVIDENDS ----- ----- --------- Year Ended January 31, 1997: First quarter........................................ n/a n/a $0.00 Second quarter....................................... n/a n/a 0.00 Third quarter........................................ $5.25 $3.25 0.00 Fourth quarter....................................... 6.00 2.38 0.00 Year Ended January 31, 1998: First quarter........................................ $5.50 $3.50 $0.00 Second quarter....................................... 3.88 2.13 0.00 Third quarter........................................ 2.63 1.88 0.00 Fourth quarter....................................... 3.25 1.69 0.00
On January 30, 1998, the last full trading day prior to the public announcement of the execution of the Merger Agreement and the Purchaser's intention to commence the Offer, the closing sale price for the Shares was $3.19 per Share. On February 5, 1998, the last full trading day before commencement of the Offer, the closing sale price for the Shares was $4.06 per Share. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES. SECTION 7. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; EXCHANGE ACT REGISTRATION; MARGIN REGULATIONS Market for the Shares. The purchase of Shares pursuant to the Offer will reduce the number of holders of Shares and the number of Shares that might otherwise trade publicly and could adversely affect the liquidity and market value of the remaining Shares held by the public. Depending on the number of Shares purchased in the Offer, the Shares may no longer meet the requirements of NASDAQ for continued listing. According to NASDAQ's published guidelines, NASDAQ would consider delisting the Shares if, among other things, (i) the number of Shares publicly held should fall below 200,000, (ii) the number of persons holding Shares should fall below 400 and the number of persons holding at least 100 Shares should fall below 300, or (iii) the aggregate market value of publicly held Shares should fall below $1,000,000. According to the Company's Annual Report on Form 10-K for the year ended January 31, 1997 (the "Company 10-K"), there were approximately 4350 holders of record of Shares as of April 21, 1997. If NASDAQ were to delist the Shares, it is possible that the Shares would trade on another securities exchange or in the over-the-counter market and that price quotations for the Shares would be reported by such exchange or market or through other sources. The extent of the public market for the Shares and availability of such quotations would, 8 11 however, depend upon such factors as the number of holders of Shares, the aggregate market value of the publicly held Shares at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act and other factors. Exchange Act Registration. The Shares are currently registered under the Exchange Act. Registration of the Shares under the Exchange Act may be terminated upon application by the Company to the Commission if the Shares are neither listed on a national securities exchange nor held by 300 or more holders of record. Termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to its stockholders and to the Commission and would make certain provisions of the Exchange Act no longer applicable to the Company, such as the short-swing profit recovery provisions of Section 16(b) of the Exchange Act, the requirement of furnishing a proxy statement pursuant to Section 14(a) of the Exchange Act in connection with stockholders' meetings and the related requirement of furnishing an annual report to stockholders, and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions. Furthermore, the ability of "affiliates" of the Company and persons holding "restricted securities" of the Company to dispose of such securities pursuant to Rule 144 or 144A promulgated under the Securities Act of 1933, as amended, may be impaired or eliminated. The Purchaser intends to seek to cause the Company to apply for termination of registration of the Shares under the Exchange Act as soon after the completion of the Offer as the requirements for such termination are met. If registration of the Shares is not terminated prior to the Merger, then the Shares will be delisted from all stock exchanges and the registration of the Shares under the Exchange Act will be terminated following the consummation of the Merger. Margin Regulations. The Shares are not currently "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of preventing brokers from extending credit on the collateral of the Shares. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that, following the Offer, the Shares would be less likely to constitute "margin securities" for the purposes of the margin regulations of the Federal Reserve Board. SECTION 8. CERTAIN INFORMATION CONCERNING THE COMPANY The Company is a Delaware corporation with its principal offices at 13400 Riverside Drive, Sherman Oaks, California 91423-2598. The Company's principal line of business is operating retail home sewing/craft outlets in the United States. The Company is one of the largest home sewing/craft retailers in the United States, operating 262 Company-owned stores in 27 states as of October 31, 1997. The Company was incorporated in 1946 and has been in retail fabric and notions business since that date. The Company's sales consist of fabrics, sold by the yard and used principally for clothing, home decorating and crafts, sewing notions and accessories, crafts, and sewing machines and related accessories. Needlecrafts and sewing machines are sold in substantially all of the Company's stores. All of the Company's stores located west of the Rocky Mountains are operated under the names "House of Fabrics," "Fabricland" or "Fabric King." Its stores in other states are operated under the name "So-Fro Fabrics" or "House of Fabrics." The Company operates substantially all of its stores in leased premises, principally in neighborhood shopping centers or stand-alone locations, and does not engage in any franchising activity. The Company's stores range in size, generally between 10,000 and 29,000 square feet. The Company has historically purchased finished goods directly from mills and manufacturers and formerly had a facility in South Carolina for processing and warehousing merchandise for distribution to its stores. The Company sold its South Carolina facility in November 1996. Processing and warehousing is currently contracted out to third parties with facilities on the West Coast of the United States and in the Northeastern part of the United States. On November 2, 1994, the Company and four of its former subsidiaries filed separate voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for 9 12 the Central District of California (the "Bankruptcy Court"). On July 10, 1996, the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization (the "Plan") of the Company and its subsidiaries. On July 31, 1996, all conditions required for the effectiveness of the Plan were achieved, and the Plan became effective. In accordance with the Plan, the Company issued the Shares as its newly reorganized common stock (the "New Common Stock"), including shares of the New Common Stock issuable upon resolution of claims. As of October 31, 1997, 5,331,830 shares of the New Common Stock were issued, including 188,079 shares issued upon the exercise of Series A Warrants, pursuant to the Plan. The secured bank group received approximately 257,000 shares (or 5%) of the New Common Stock. Holders of general unsecured claims that were not covered by insurance received approximately 4,776,000 shares (or 93%) of the New Common Stock. Holders of the old common stock of the Company received a pro-rata distribution of approximately 103,000 shares (or 2%) of the New Common Stock (subject to dilution), plus warrants to purchase additional shares of the New Common Stock. A total of 188,079 Series A Warrants were exercised by the deadline of April 29, 1997, out of 257,381 issued. Each warrant exercised was converted into one share of the New Common Stock for a price of $3.02 per share and entitles the holder to a Series B Warrant which may be exercised at a later date for a different price. Warrants not exercised have no further rights. Set forth below is certain selected financial information with respect to the Company excerpted from the information contained in the Company 10-K and the Company 10-Q. Because the assets and liabilities of the Company were restated to reflect their reorganization value upon emergence of the Company from Chapter 11 proceedings, the Company is referred to as "Predecessor Co." for periods prior to August 1, 1996 and "Successor Co." for periods thereafter. In addition, per share data for periods prior to August 1, 1996 have been omitted as these amounts do not reflect the current capital structure of the Company and therefore are not comparable. More comprehensive financial information is included in the Company 10-K, the Company 10-Q and other documents filed by the Company with the Commission, and the following summary is qualified in its entirety by reference to such information. The Company 10-K, the Company 10-Q and such other documents should be available for inspection and copies thereof should be obtainable in the manner set forth below under "Available Information." 10 13 HOUSE OF FABRICS, INC. SELECTED FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED FISCAL YEAR ENDED OCT 31, 1996 JAN 31, 1997 ---------------------------------- ---------------------------------- NINE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS SIX MONTHS FISCAL YEAR ENDED ENDED ENDED ENDED ENDED ENDED -------------------------- OCT 31, 1997 OCT 31, 1996 JULY 31, 1996 JAN 31, 1997 JULY 31, 1996 JAN 31, 1996 JAN 31, 1995 ------------ --------------- ----------------- --------------- ----------------- ------------ ------------ (SUCCESSOR CO.) (PREDECESSOR CO.) (SUCCESSOR CO.) (PREDECESSOR CO.) INCOME STATEMENT DATA: Net sales..... $165,806 $ 69,953 $ 111,355 $ 143,324 $ 111,355 $333,501 $416,276 Income (loss) before extraordinary items....... (10,825) 520 (37,366) 925 (37,366) (70,367) (95,385) Net income (loss)...... (10,825) 520 63,593 925 63,593 (70,367) (95,385) BALANCE SHEET DATA (AT END OF PERIOD): Working capital..... $ 28,387 $ 28,231 N/A $ 38,789 N/A $ 99,149 $179,696 Total assets...... 139,545 159,070 N/A 137,830 N/A 230,554 327,597 Long-term debt........ 551 908 N/A 903 N/A 80 309 Stockholders' equity...... 30,113 39,672 N/A 40,387 N/A (15,343) 55,024 PER COMMON SHARE: Net earnings before extraordinary items....... ($2.05) $0.10 N/A $0.18 N/A N/A N/A Net earnings.... (2.05) 0.10 N/A 0.18 N/A N/A N/A Net earnings -- assuming full dilution.... (2.05) 0.10 N/A 0.18 N/A N/A N/A
Available Information. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, is required to file reports relating to its business, financial condition and other matters. Information as of particular dates concerning the Company's directors and officers, their remuneration, stock options and other matters, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in proxy statements distributed to the Company's stockholders and filed with the Commission. Such reports, proxy statements and other information should be available for inspection at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, DC 20549-1004, and at the following regional offices of the Commission: Midwest Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such information should be obtainable, by mail, upon payment of the Commission's customary charges, by writing to the Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, DC 20549-1004. Such material should also be available on-line through EDGAR, which is located on the Commission's public access site at http://www.sec.gov. Company Information. The information concerning the Company contained in this Offer to Purchase has been supplied by the Company for inclusion herein or has been taken from or based upon publicly available documents on file with the Commission and other publicly available information. Although the Parent and the Purchaser do not have any knowledge that any such information is untrue, neither the Purchaser nor the Parent takes any responsibility for the accuracy or completeness of such information or for any failure by the Company to disclose events that may have occurred and may affect the significance or accuracy of any such information. SECTION 9. CERTAIN INFORMATION CONCERNING THE PARENT AND THE PURCHASER The Purchaser is a newly incorporated Delaware corporation and a wholly owned subsidiary of the Parent which to date has not conducted any business other than in connection with the Offer and the Merger. The Parent is an Ohio corporation. The principal executive offices of the Parent and the Purchaser are located at 5555 Darrow Road, Hudson, Ohio 44236. The Parent is the nation's largest retailer serving the fabric and craft industry. The Parent was incorporated in February 1951; however, the business conducted by its predecessors began in 1943 when the first store was 11 14 opened in Cleveland, Ohio offering fabrics and notions for sale under the name "Cleveland Fabric Shops." The Parent's stores currently do business under the names of "Jo-Ann Fabrics and Crafts," "Jo-Ann etc," "Cloth World" and "New York Fabrics." As of February 1, 1997, the Parent operated 914 stores in 48 states offering a wide variety of competitively priced items, including fashion, decorator, quilting and craft fabrics, notions, patterns, craft components, seasonal merchandise and silk and dried flowers. The Parent had 864 stores in operation during fiscal year 1997, with average sales of $1,021,000 per store. In October 1994, the Parent acquired Cloth World, a division of Brown Group Inc., a chain of fabric stores located primarily in the southern half of the United States, a market not served by the Parent at that time. Throughout fiscal 1996, the Parent converted 302 Cloth World stores to the Jo-Ann Fabrics and Crafts format, adding to these stores a broad selection of craft, floral and seasonal merchandise. The average investment per converted store was approximately $60,000 for leasehold improvements and additional fixtures and $100,000 for incremental inventory. In fiscal 1996, the Parent opened an expanded research and development store in Hudson, Ohio under the name of Jo-Ann etc (experience the creativity). The 45,000 square foot store is about three times larger than the Parent's standard new store format. The etc store offers a significantly more extensive fabric and craft assortment, a wide array of services and numerous merchandise demonstrations and classes. The Company opened six Jo-Ann etc stores in a variety of geographic markets during fiscal 1998. The Parent's stores are located primarily in high-traffic strip shopping centers and average approximately 12,700 square feet. At the end of fiscal year 1997, 90 percent of the Parent's stores were over 9,000 square feet. The Parent owns substantially all of the fixtures in its stores. The Parent believes that it effectively utilizes its selling space and that its equipment is maintained and suitable for its requirements. It is the Parent's practice to transfer fixtures and inventory from closed stores to new or existing stores. During fiscal year 1997, the average investment in each new store was approximately $135,000 for leasehold improvements and additional fixtures. Each of the Parent's stores offers a wide variety of merchandise primarily for customers to make their own clothing and to complete home decorating and craft projects. The stores also feature seasonal and holiday merchandise. The products offered by major category are as follows: fabrics, including a wide assortment of apparel fabrics, quilting, crafting, drapery and upholstery; notions, including cutting implements, trimmings, buttons, threads, ribbons, zippers and sewing accessories such as needles, pins and elastic; craft supplies, including those used for stitchery, stenciling, woodworking, doll making, fabric painting, jewelry making and artificial floral arranging; and seasonal merchandise, including items for Easter, Halloween, Thanksgiving and the Christmas holidays. Set forth below is a summary of certain consolidated financial information with respect to the Parent and its subsidiaries excerpted or derived from the information contained in the Parent's Annual Report on Form 10-K for the year ended February 1, 1997 (the "Parent 10-K"), and the Parent's Quarterly Reports on Form 10-Q for the quarters ended November 1, 1996 and 1997 (the "Parent 10-Qs"). More comprehensive financial information is included in the complete financial statements of the Parent contained in the Parent 10-K and the Parent 10-Qs on file with the Commission, and such financial statements are incorporated herein by reference. 12 15 FABRI-CENTERS OF AMERICA, INC. SELECTED FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THIRTY-NINE WEEKS ENDED FISCAL YEAR ENDED ---------------------- ----------------------------------- NOV 1, OCT 26, FEB 1, JAN 27, JAN 28, 1997 1996 1997 1996 1995 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Net Sales......................... $663,480 $621,480 $928,951 $834,617 $677,279 Income before extraordinary item........................... 10,905 6,615 24,603 17,458 11,734 Net earnings...................... 9,769 6,615 24,603 17,458 11,734 BALANCE SHEET DATA (AT END OF PERIOD): Working capital................... $199,485 $220,538 $177,047 $232,157 $198,247 Total assets...................... 481,003 493,057 429,180 479,648 427,304 Long-term debt.................... 88,500 136,883 72,083 155,483 126,983 Stockholders' equity.............. 215,284 180,252 199,410 180,963 161,719 PER COMMON SHARE: Net earnings before extraordinary items.......................... $0.56 $0.36 $1.30 $0.91 $0.63 Net earnings...................... 0.50 0.36 1.30 0.91 0.63 Net earnings -- assuming full dilution....................... 0.50 0.36 1.26 0.89 0.63
Available Information. The Parent is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports relating to its business, financial condition and other matters. Information as of particular dates concerning the Parent's directors and officers, their remuneration, stock options and other matters, the principal holders of the Parent's securities and any material interest of such persons in transactions with the Parent is required to be disclosed in proxy statements distributed to the Parent's stockholders and filed with the Commission. Such reports, proxy statements and other information should be available for inspection at the Commission and copies thereof should be obtainable from the Commission (and on-line through EDGAR) as set forth with respect to the Company in Section 8. Forward-Looking Statements. Certain statements contained in this Offer to Purchase that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes" and similar expressions as they relate to the Parent, the Purchaser or their respective managements are intended to identify such forward looking statements. The Parent's and the Purchaser's 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, changes in customer demand, changes in trends in the fabric and craft industry, changes in the competitive pricing for products, the impact of competitor store openings and closings, the availability of acceptable store locations, the availability of merchandise and general economic conditions. Beneficial Ownership of Company Securities, Transactions with the Company, etc. As of the date of the Offer, the Parent owns 19,200 Shares, which represents approximately 0.36% of the issued and outstanding Shares of the Company, and Alan Rosskamm owns 100 Shares, which represents less than 0.002% of the issued and outstanding Shares of the Company. The Parent purchased on the open market, through McDonald & Company as its broker, 9,200 Shares on January 22, 1998 at a price of $2.125 per Share and 10,000 Shares on January 27, 1998 at a price of $2.25 per Share. The Parent also holds 10 shares of old common stock of the Company which were not converted into the New Common Stock of the Company (i.e., the Shares) upon the Company's emergence from Chapter 11 reorganization. Except as set forth in this Offer to Purchase, neither the Purchaser, the Parent nor, to the best knowledge of the Purchaser or the Parent, any of the persons listed in Schedule I hereto, or any associate or majority owned subsidiary of such persons, beneficially owns any equity security of the Company, and neither the Purchaser, the Parent nor, to the best knowledge of the Purchaser or the Parent, any of the persons listed in Schedule I hereto, 13 16 any associate or majority owned subsidiary of such persons, or any of their respective directors, executive officers or subsidiaries, has effected any transaction in any equity security of the Company during the past 60 days. Except as set forth in this Offer to Purchase, neither the Purchaser, the Parent nor, to the best knowledge of the Purchaser or the Parent, any of the persons listed in Schedule I hereto has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including, without limitation, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any securities of the Company, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, neither the Purchaser, the Parent nor, to the best knowledge of the Purchaser or the Parent, any of the persons listed in Schedule I hereto has had any transactions with the Company or any of its executive officers, directors or affiliates that would require reporting under the rules of the Commission. Except as set forth in this Offer to Purchase, there have been no contacts, negotiations or transactions between the Purchaser, the Parent or, to the best knowledge of the Purchaser or the Parent, any of the persons listed in Schedule I hereto or any subsidiary of such persons, on the one hand, and the Company or its executive officers, directors or affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, election of directors or a sale or other transfer of a material amount of assets that would require reporting under the rules of the Commission. SECTION 10. SOURCE AND AMOUNT OF FUNDS The total amount of funds required by the Purchaser to purchase all of the Shares pursuant to the Offer and to pay fees and expenses related to the Offer and the Merger is estimated to be approximately $24 million. The Purchaser plans to obtain all funds needed for the Offer and the Merger through a capital contribution from the Parent. The Parent plans to obtain funds for such capital contribution through a combination of cash on hand and borrowings under its existing Credit Agreement, dated as of September 30, 1994, as amended on June 2, 1997, among the Parent, various financial institutions (the "Bank Group") and KeyBank National Association (formerly Society National Bank), as Agent (the "Credit Facility"). The Credit Facility, which is unsecured, provides for revolving credit of up to $200 million for general corporate purposes through May 31, 2001. As of the date of the Offer, there is approximately $10 million of outstanding indebtedness under the Credit Facility. Interest on borrowings under the Credit Facility is payable at an applicable margin over prime, federal funds or LIBOR rates. The applicable margin ranges between 0.25 percent and 1.00 percent, based on the achievement of specified ranges of certain financial covenants. The Credit Facility contains financial covenants which limit the Parent's capital expenditures and defined leverage ratio, as well as require the Parent to maintain a minimum tangible net worth, fixed charge coverage ratio and current funded indebtedness ratio. The Parent has an interest rate cap agreement with one of the banks in the Bank Group which extends to June 24, 1998. The interest rate cap establishes a maximum interest rate payable when the variable rate exceeds a certain rate. The total notional amount under the interest rate cap is $20 million, having a capped LIBOR rate of 7.5 percent. Although no definitive plan or arrangement for repayment of borrowings under the Credit Facility has been made, the Parent anticipates such borrowings will be repaid with internally generated funds (including, if the Merger is accomplished, those of the Company) and from other sources which may include the proceeds of future refinancings. No decision has been made concerning the method the Parent will use to repay the borrowings under the Credit Facility. Such decision will be made based on the Parent's review from time to time of the advisability of particular actions, as well as prevailing interest rates, financial and other economic conditions and such other factors as the Parent may deem appropriate. 14 17 SECTION 11. BACKGROUND OF THE OFFER In the Spring of 1994, the Parent and the Company had extensive discussions about a possible merger of the Company with a wholly owned subsidiary of the Parent. In the transaction discussed at that time, outstanding shares of common stock of the Company would have been converted into the right to receive shares of common stock of the Parent. Prior to the execution of a definitive merger agreement, these discussions terminated. After termination of the discussions with the Company, the Parent pursued an acquisition of substantially all the assets of Cloth World, Inc., a subsidiary of Brown Group, Inc. that operated approximately 342 stores selling craft, home decorating and sewing fabrics and notions, patterns and sewing machines. The Parent entered into a definitive asset acquisition agreement with Cloth World and Brown Group in August 1994 and closed the acquisition in October 1994. In November 1994, the Company and four of its former subsidiaries filed separate voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Proceedings") in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). In the Summer of 1995, the Parent expressed an interest in buying assets of the Company as part of a plan of reorganization in the Bankruptcy Proceedings and asked for information needed to evaluate the Company and its business. In July 1995, the Parent and the Company entered into a confidentiality agreement covering all such information furnished by the Company to the Parent and its advisors. At least two other entities expressed an interest in the Company and executed confidentiality agreements. From December 1995 through March 1996, the Parent held discussions with the Company and certain of its creditors regarding the possible terms of an acquisition by the Parent. In March 1996, the Parent submitted a proposal to purchase, as part of a plan of reorganization of the Company and its subsidiaries in the Bankruptcy Proceedings, substantially all of the assets of the Company and its subsidiaries, other than deferred taxes and tax refunds, the Company's office building and leasehold interests in the Company's warehouse and processing facility in South Carolina, for $118.8 million in cash, subject to significant adjustments for changes in the book value of the assets, but without the assumption of any liabilities other than certain store leases. The Company also received a proposal from another entity. The Company's Board of Directors, after discussion with the representatives of its secured creditors, unsecured creditors committee and the equity holders committee, rejected both proposals as inadequate. On July 10, 1996, the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization of the Company and its subsidiaries (the "Plan"). On July 31, 1996, all conditions required for the effectiveness of the Plan were satisfied. In January 1997, the Company was approached by another entity regarding a possible acquisition of the Company. That entity executed a confidentiality agreement and commenced due diligence. On January 24, 1997, the Company retained Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as its exclusive financial advisor in connection with the Company's evaluation of strategic alternatives, including a possible sale, merger or other business combination. DLJ received a $100,000 retainer fee at the time of its engagement. In the course of the engagement DLJ investigated a number of strategic alternatives including the sale of the Company and the possibility of raising additional equity capital with new investors. The entity that had expressed interest prior to DLJ's engagement ultimately declined to make an offer for the Company after completing its due diligence. That entity did express interest in purchasing specific stores; the Company, however, determined that such a sale was not in the best interests of the Company and discussions with that entity ceased in April, 1997. Other parties contacted by DLJ did not return with proposals the Company wished to pursue. In May 1997, the Company was approached by the Parent regarding the purchase by the Parent of certain of the Company's stores; the Company determined, however, that such a sale was not in the best interests of the Company. In June, 1997, the Company and DLJ mutually determined that DLJ would not continue to be actively involved in the Company's efforts to procure the additional capital it was seeking. 15 18 In August 1997, the Company retained F.M. Roberts & Company, Inc. ("F.M. Roberts") to advise it on financing alternatives and enhancing shareholder value. F.M. Roberts contacted approximately 10 entities that were possible sources of capital financing for the Company or that might be interested in acquiring the Company. On September 26, 1997, Fredric Roberts, President of F.M. Roberts, telephoned Alan Rosskamm, Chairman of the Board, President and Chief Executive Officer of the Parent, to determine whether the Parent was interested in acquiring the Company. On October 24, 1997, Mr. Roberts and Mr. Rosskamm spoke again by telephone. At that time, Mr. Roberts advised Mr. Rosskamm that the Company was continuing to explore the possibility of capital financing and that, if the Parent wished to submit a proposal to acquire the Company, it should do so before the financing was completed. On October 27, 1997, Mr. Rosskamm telephoned Donald L. Richey, President and Chief Executive Officer of the Company, and told him that the Parent was considering an acquisition of the Company and was prepared to move quickly. On October 30, 1997, the Parent and the Company entered into a confidentiality agreement covering information furnished by the Parent to the Company and its advisors in connection with their evaluation of a possible transaction with the Company. On November 26, 1997, Brian P. Carney, Executive Vice President and Chief Financial Officer of the Parent, had a telephone conversation with John E. Labbett, Executive Vice President-Chief Financial Officer of the Company, to request information about the Company and to express an interest in a face-to-face meeting. Following the discussion, Mr. Labbett faxed to Mr. Carney a copy of the Company's third quarter press release, which had been made public that day. On December 2, 1997, Mr. Carney sent to Mr. Labbett a letter requesting additional information and materials relating to the Company. On December 11, 1997, the Company entered into a Commitment Letter with Chiplease, Inc., which provided that Chiplease, Inc. would make an investment of $10 million in the Company through the purchase of common stock, preferred stock and warrants. The Commitment Letter provided that the commitment to invest by Chiplease, Inc. was subject to, among other things, the execution of a mutually satisfactory definitive purchase agreement by January 15, 1998 and the completion by Chiplease, Inc. of such due diligence as it deemed appropriate. The Company and Chiplease, Inc. were unable to agree on the definitive terms of the proposed investment by Chiplease, Inc. and, on January 15, 1998, the Commitment Letter terminated by its terms. On December 16, 1997, Mr. Carney and other representatives of the Company and its financial advisor, McDonald & Company, met in Santa Monica, California, with Mr. Richey, Mr. Labbett, R.N. Hankin, Chairman of the Board of the Company, and representatives of F.M. Roberts to review the information and materials requested by Mr. Carney in his letter of December 2, 1997 to Mr. Labbett. On January 9, 1998, Mr. Carney and Timothy Lemieux, Director of Systems Development of the Parent, participated in a telephone call with Mr. Labbett and representatives of the firm retained by the Company to install point-of-sale equipment. The purpose of the call was to determine the compatibilities of the hardware and software platforms used by the Company and the Parent at their respective stores. On January 9, 1998, Mr. Roberts wrote a letter formally inviting interested parties, including the Parent, to submit a non-binding indication of interest in an acquisition of the Company and specifying the information to be contained in the indication of interest. On January 14, 1998, the Parent's Board of Directors met to discuss the advisability of an acquisition of the Company by the Parent, as well as the terms and conditions of such an acquisition. J.W. Sean Dorsey of McDonald & Company, financial advisor to the Parent, participated in the meeting by conference telephone. A preliminary draft of the Merger Agreement was sent to each of the directors prior to the meeting. At the meeting, the Parent's directors unanimously approved the acquisition on the terms discussed. 16 19 On January 16, 1998, the Parent submitted a non-binding proposal for the acquisition of the Company. The principal terms of that proposal were: (1) a price of $4.10 per share in cash, subject to reduction if the Company's secured lender did not waive the termination fee payable under the Company's existing financing arrangement or the Company's investment bankers did not agree to cap their fees at $1,500,000 in the aggregate, (2) the acquisition to be structured as a tender offer followed by a merger in which non-tendering stockholders of the Company would receive the same cash price as was paid in the tender offer, (3) prompt filing by the Parent and the Company of their Notification and Report Forms under the HSR Act, and (4) an agreement by the Company not to solicit or encourage acquisition proposals from other bidders or to furnish nonpublic information to other bidders. The members of the Company's Board of Directors were informed as to the content of the Parent's non-binding proposal. On January 19, 1998, the Parent submitted to the Company a draft of the Merger Agreement and a Stock Option Agreement, that provided for the grant by the Company to the Parent of an option to purchase Shares comprising 19% of the outstanding Shares prior to exercise of the option (the "Lock-up Option"). On January 20, 1998, the Company's Board of Directors met and reviewed the proposal from the Parent. Mr. Roberts and Richard Boehmer of O'Melveny & Myers LLP, counsel to the Company, discussed the proposal with the Board. The Board concluded that the Company's management, Mr. Roberts and counsel should discuss the proposal further with the Parent and report back to the Board regarding their discussions. Following discussions between Mr. Roberts and Mr. Dorsey, on January 22, 1998, the Parent increased the price to $4.25 per share in cash, removed the provision for a reduction of the price and clarified the extent of the due diligence to be conducted by the Parent prior to the execution of a definitive Merger Agreement. On January 22, 1998, Mr. Richey wrote Mr. Rosskamm and agreed not to engage in discussions with third parties about a merger with the Company until February 6, 1998 or the earlier termination of discussions between the Parent and the Company. On January 27 and 28, 1998, representatives of the Parent met with representatives of the Company, F.M. Roberts and counsel to the Company to negotiate the terms of the Merger Agreement. During the course of those discussions, a number of issues were addressed, including the amount of the Termination Fee requested by the Parent, the proposed Offer Conditions, and the extent of the representations, warranties and covenants to be made by the Company in the Merger Agreement. As a result of these discussions, representatives of the Parent agreed to drop their request for the Lock-up Option, to decrease the amount of the Termination Fee being requested and to eliminate or revise certain of the Company's representations, warranties and covenants. On January 28, 1998, the Company's Board of Directors met. Mr. Roberts and Mr. Boehmer summarized for the Board the negotiations to date with the Parent and discussed open issues, including the extent of the representations and warranties requested by the Parent, the Termination Fee demanded by the Parent and the proposed Offer Conditions. On January 29, 1998, the then current draft of the Merger Agreement was provided to all of the directors of the Company. Also, the Company requested that DLJ review the proposed transaction and, when requested by the Company, to deliver an opinion as to the fairness from a financial point of view of the consideration to be received by the Company stockholders in the proposed transaction. The Company and DLJ then signed a letter agreement confirming DLJ's fee for such an opinion and waiving certain other fees which had been provided for in the agreement the Company had signed with DLJ on January 24, 1997. On January 30, 1998, counsel to the Parent and the Company exchanged comments on a draft of the Merger Agreement and continued to discuss open issues, including the amount of the Termination Fee and wording of the Offer Conditions. On February 1, 1998, the Company's Board of Directors met to consider the proposed transaction with the Parent. Mr. Boehmer reviewed with the Board the proposed terms of the Merger Agreement in detail. The Board continued to be concerned regarding the amount of the proposed Termination Fee and the wording of the Offer Condition regarding the possible divestiture of stores by the Parent. The Board instructed Mr. Roberts to contact the Parent regarding these matters. Mr. Roberts telephoned Mr. Carney, and they agreed on a further reduction in 17 20 the amount of the Termination Fee and on the wording of the Offer Conditions. A revised draft of the Merger Agreement was prepared reflecting the changes. The Company's Board of Directors reconvened later on February 1, 1998. At that meeting, Mr. Boehmer described the terms of the proposed Merger Agreement. Representatives of DLJ joined the meeting and made a presentation to the Company's Board of Directors. After the presentation, DLJ delivered its written opinion that the consideration to be received by the stockholders of the Company pursuant to the Merger Agreement is fair to such stockholders from a financial point of view. The Company's Board of Directors then unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, were fair to the stockholders of the Company, approved the Merger Agreement, and recommend that the Company's stockholders tender their shares of Common Stock pursuant to the Offer and, if applicable, approve the Merger Agreement and the transactions contemplated therein, including the Merger. SECTION 12. PURPOSE OF THE OFFER; PLANS FOR THE COMPANY Purpose. The purpose of the Offer and the Merger is to enable the Parent to acquire control of, and the entire equity interest in, the Company. The Offer, as the first step in the acquisition of the Company, is intended to facilitate the acquisition of all the Shares. The purpose of the Merger is to acquire all Shares not purchased pursuant to the Offer or otherwise. Pursuant to the Merger, each then outstanding Share (other than Shares owned by the Parent or any of its subsidiaries, Shares held as treasury shares by the Company, and Shares owned by stockholders who perfect appraisal rights under Delaware law) will be converted into the right to receive an amount in cash equal to the price per Share paid by the Purchaser pursuant to the Offer. Although it is the Purchaser's intention to consummate the Merger as promptly as practicable, there can be no assurance that the Merger will be consummated or, if consummated, of the timing thereof. In addition to approval by the Company's Board of Directors, which occurred on February 1, 1998, consummation of the Merger will require the affirmative vote of the holders of a majority of the Shares; except that, if the Purchaser purchases 90% or more of the Shares pursuant to the Offer, the Merger could be consummated without the approval of the stockholders through a "short form" merger (described below in Section 13). Plans for the Company. In connection with the Offer and the Merger, the Parent and the Purchaser have reviewed and will continue to analyze, on the basis of available information, various possible business strategies that they might pursue in the event that the Purchaser acquires the Company pursuant to the Offer and the Merger. At present, the Parent expects to close a number of stores in markets currently served by both the Parent and the Company, although exact number or location of the stores to be closed has not yet been determined. The Parent also expects to close the Company's headquarters in Sherman Oaks, California. Some of the headquarters staff will be given an opportunity to relocate to the Parent's headquarters in Hudson, Ohio. The closure of stores and the Company's headquarters will, however, result in a net reduction in the Company's workforce. The Parent expects to provide to those employees of the Company that are retained benefits that are, in the aggregate, substantially comparable to those provided by the Parent to its own employees in similar positions. The Parent has agreed to pay Donald L. Richey, President and Chief Executive Officer of the Company, approximately $210,000 as a "stay on" bonus for Mr. Richey to assist the Parent in assimilating the Company into the Parent's operations. In addition, following completion of the Merger, the Parent may change the dividend policy of the Company in order to meet the cash requirements of the Parent and its subsidiaries, as well as those of the Company. Except as described in this Offer to Purchase, the Parent and the Purchaser have no present plans or proposals that would result in an extraordinary corporate transaction, such as a merger, consolidation, reorganization, liquidation or sale or transfer of a material amount of assets, involving the Company, or any material changes in the Company's present capitalization, employee benefit plans, corporate structure or business or any material changes or reductions in the composition of its management or personnel. Except as so described, the Parent and the Purchaser have no present plans or proposals to establish, terminate, convert or amend employee benefit plans, close any retail store of the Company, change or reduce the workforce of the Company or make any other major changes in its business or policies of employment. 18 21 SECTION 13. THE MERGER The Merger Agreement. The following is a summary of the Merger Agreement. The summary is qualified in its entirety by reference to the Merger Agreement, which has been filed as an exhibit to the Schedule 14D-1 and is incorporated herein by reference. The Tender Offer. Pursuant to the terms of the Merger Agreement, the Purchaser has agreed to, and the Parent has agreed to cause the Purchaser to, offer to purchase each outstanding Share of the Company tendered pursuant to the Offer at a price of $4.25 per share, net to the seller in cash, and to cause the Offer to remain open until the close of business on the twentieth business day after the commencement of the Offer. The obligations of the Purchaser and the Parent to consummate the Offer and to accept for payment and purchase the Shares tendered in the Offer is subject only to the Offer Conditions. At the Company's request, the Purchaser will, and the Parent will cause the Purchaser to, extend the expiration date of the Offer from time to time for up to an aggregate of ten business days following the Expiration Date if the Minimum Condition is not fulfilled prior to 12:00 p.m. on the Expiration Date. The Purchaser will not decrease the price payable in the Offer, change the form of consideration payable in the Offer, reduce the number of Shares subject to the Offer, change the Offer Conditions, impose additional conditions to its obligation to consummate the Offer and to accept for payment and purchase Shares tendered in the Offer, or change any other terms of the Offer in a manner adverse to the stockholders of the Company, except that the Purchaser may extend the Expiration Date to the extent required by applicable law, if any of the Offer Conditions are not satisfied, or if less than 90% of the outstanding Shares have been validly tendered and not withdrawn pursuant to the Offer. The Company has agreed to include in its Tender Offer Solicitation/Recommendation Statement filed with the Commission on Schedule 14D-9 a recommendation by the Company's Board of Directors that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer. The Company's Board of Directors has resolved to recommend that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer and has received an opinion from DLJ that, as of the date of such opinion, the cash consideration to be received by the stockholders of the Company pursuant to the Offer and the Merger is fair to such stockholders from a financial point of view. Board Designees. The Merger Agreement provides that promptly following the purchase by the Purchaser pursuant to the Offer of that number of Shares which, when aggregated with the Shares then owned by the Parent and any of its affiliates, represents at least a majority of the Shares then outstanding on a fully diluted basis, the Company will, if requested by the Purchaser or the Parent, take all actions necessary to cause persons designated by the Purchaser to become directors of the Company so that the total number of directors so designated equals the product, rounded up to the next whole number, of (i) the total number of directors of the Company multiplied by (ii) the ratio of the number of Shares beneficially owned by the Purchaser or its affiliates at the time of such purchase over the number of Shares then outstanding. In furtherance thereof, the Company will take whatever action is necessary, including, but not limited to, amending the Company's bylaws to increase the size of its Board of Directors, or using reasonable efforts to secure the resignation of directors, or both, as is necessary to permit that number of the Purchaser's designees to be elected to the Company's Board of Directors; provided that, prior to the Effective Time (as defined below), the Company's Board of Directors will always have at least two members who are currently directors of the Company, except to the extent that no such individuals wish to be directors ("Continuing Directors"). The Company's obligations to appoint designees to its Board of Directors will be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Parent and the Purchaser will supply to the Company and will be solely responsible for any information with respect to either of them and their nominees, officers, directors, and affiliates required by Section 14(f) and Rule 14f-1. The Company will promptly take all actions required pursuant to Section 14(f) and Rule 14f-1 in order to fulfill these obligations and (provided that the Purchaser shall have provided to the Company on a timely basis all information required to be included in the Information Statement with respect to the Purchaser's designees) will include in the Schedule 14D-9 such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1. Following the election or appointment of the 19 22 Purchaser's designees, any amendment to the Merger Agreement, any termination of the Merger Agreement by the Company, any extension by the Company of the time for the performance of any of the obligations of the Purchaser or the Parent under the Merger Agreement (except as expressly permitted under the Merger Agreement), any recommendation to stockholders or any modification or withdrawal of any such recommendation, any retention of counsel and other advisors in connection with the transactions contemplated by the Merger Agreement, or any waiver of any of the Company's rights under the Merger Agreement will require the concurrence of a majority of the Continuing Directors, unless no individuals who are currently directors of the Company wish to be directors. The Merger. Pursuant to the terms of the Merger Agreement, the Purchaser will be merged with and into the Company in accordance with the Delaware General Corporate Law (the "DGCL"). As a result of the Merger, the separate existence of the Purchaser will cease and the Company will be the surviving corporation (the "Surviving Corporation"). As soon as practicable after satisfaction or waiver of all conditions to the Merger set forth in the Merger Agreement, the parties will cause a certificate of merger to be duly filed with the Delaware Secretary of State. The Merger will become effective when the certificate of merger is so filed (the "Effective Time"). By virtue of the Merger, at the Effective Time: (i) each share of common stock of the Purchaser then issued and outstanding will be converted into one share of common stock of the Surviving Corporation; and (ii) each Share then issued and outstanding, except for Shares held by the Company as treasury shares or owned by the Parent or any subsidiary of the Parent (which Shares will be immediately canceled and no payment will be made with respect thereto), will be converted, by virtue of the Merger and without any action on the part of the holder thereof, into the right to receive, without interest, an amount in cash equal to the price per Share paid in the Offer (the "Merger Consideration"). Subject to the right of stockholders to dissent from the Merger and require appraisal of their Shares pursuant to the DGCL, from and after the Effective Time all Shares will be canceled and retired and cease to exist and each holder of a certificate representing any Shares immediately prior to the Effective Time will thereafter cease to have any rights with respect to such Shares, except the right to receive the Merger Consideration therefor or payment from the Surviving Corporation of the "fair value" of such Shares as determined under Section 262 of the DGCL. Until amended in accordance with applicable law, the certificate of incorporation and bylaws of the Purchaser in effect immediately prior to the Effective Time will be the certificate of incorporation and bylaws of the Surviving Corporation after the consummation of the Merger. Until successors are duly elected or appointed and qualified in accordance with applicable law, from and after the Effective Time, the directors and officers of the Purchaser immediately prior to the Effective Time will be the directors and officers of the Surviving Corporation after the consummation of the Merger. Stock Options; Series B Warrants. At the Effective Time, each outstanding option (a "Company Option") to purchase Shares granted to employees, directors or F.M. Roberts, whether or not exercisable, will be canceled and converted into the right to receive, without interest, an amount in cash (the "Cash Payment") equal to the product of (i) the number of Shares subject to the Company Option and (ii) the excess of (a) the Merger Consideration over (b) the exercise price per share of the Company Option; provided that, with respect to any Person subject to Section 16 of the Exchange Act, any such amount will be paid, without interest, as soon as practicable after the first date payment can be made without liability of such Person under Section 16(b) of the Exchange Act. At the Effective Time, the Parent will cause the Surviving Corporation to assume the performance of the covenants and conditions of the Series B Warrant Agreement (the "Series B Warrant Agreement") and the Series C Warrant Agreement (the "Series C Warrant Agreement"), each executed by and between the Company and American Stock Transfer & Trust Company, as the warrant agent (the "Warrant Agent"), and dated as of July 31, 1996, that was to be performed by the Company under each agreement, by supplemental agreement (the "Supplemental Warrant Agreement"). The Supplemental Warrant Agreement will further provide that each holder of a Series B Warrant will have the right after the Effective Time (a) upon exercise of each Series B Warrant and payment of the Exercise Price (as defined in the Series B Warrant Agreement) in effect immediately prior to the Effective Time, to receive the Merger Consideration and one Series C 20 23 Warrant and (b) upon exercise of each Series C Warrant and payment of the Exercise Price (as defined in the Series C Warrant Agreement) in effect immediately prior to the Effective Time, to receive the Merger Consideration. Representations and Warranties of the Company. In the Merger Agreement, the Company has made customary representations and warranties to the Purchaser and the Parent, including, but not limited to, representations and warranties relating to the following: the organization and qualification of the Company; the authority of the Company to enter into and perform its obligations under the Merger Agreement; required consents and approvals; the capitalization of the Company; filings made by the Company with the Commission; the accuracy of the Company's financial statements; inventory; contracts and commitments; the absence of certain changes or developments since October 31, 1997; litigation; necessary permits; labor and employee benefit matters; taxes; real estate; personal property; intellectual property rights; environmental matters; insurance; indemnification; board approval and recommendation; stockholder approval; opinion of a financial advisor; finders and investment bankers; and state takeover statutes. Representations and Warranties of the Parent and the Purchaser. The Parent and the Purchaser have also made customary representations and warranties in the Merger Agreement, including, but not limited to, representations and warranties relating to the following: the organization and qualification of the Parent and the Purchaser; the authority of each of the Parent and the Purchaser to enter into and perform their obligations under the Merger Agreement; required consents and approvals; filings made by the Parent with the Commission; the accuracy of the Parent's consolidated financial statements; litigation; stockholder approval; availability of sufficient funds to consummate the Offer; the absence of fraudulent conveyances; and finders and investment bankers. Covenants of the Company. In the Merger Agreement, the Company has agreed that, except as contemplated or permitted by the Merger Agreement or specifically disclosed in the schedules thereto, or as otherwise approved in writing by the Parent, from the date of the Merger Agreement until the time that the designees of the Purchaser have been appointed to the Board of Directors of the Company, the Company will conduct its business in the ordinary course consistent with past practice. Throughout this same period of time the Company will not (i) adopt or approve any amendment in its certificate of incorporation or bylaws; (ii) merge, consolidate, or enter into a share exchange with any other individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or any agency or instrumentality thereof (a "Person"), acquire a material amount of capital stock or assets of any other Person, or sell, lease, license, mortgage, pledge or otherwise dispose of any material assets, except for the purchase or sale of merchandise inventory in the ordinary course of business consistent with past practice; (iii) declare, set aside, or pay any dividends or make any distributions in respect of the Shares or redeem, repurchase, or otherwise acquire any Shares; (iv) issue, deliver or sell, or authorize the issuance, delivery or sale of, any capital stock or other securities of the Company, other than upon the exercise of outstanding Company Options or Series B Warrants granted prior to the date hereof, split, combine or reclassify any Shares, or amend the terms of any outstanding voting securities; (v) without the prior written consent of the Parent, which consent shall not be unreasonably withheld or delayed, enter into any new store lease, extend the term of any existing store lease, or enter into certain other contracts or commitments; (vi) except to the extent required by law or by existing written agreements or plans disclosed in Company reports to the Commission or the Company disclosure schedule, increase in any manner the compensation or fringe benefits of any of its directors or officers (other than annual increases, in the ordinary course of business, in the compensation or fringe benefits of officers who are not executive officers), pay any pension or retirement allowance to any such director or officer, become a party to, amend, or commit itself to any pension, retirement, profit-sharing, welfare-benefit plan, or employment agreement with or for the benefit of any such director or officer, grant any severance or termination pay or stay-in-place bonus to any such director or officer, or increase the benefits payable under any existing severance or termination pay or stay-in-place bonus policies; (vii) make any material tax election or settle or compromise any material federal, state, local or foreign tax liability; (viii) change its accounting procedures and practices in any material 21 24 respects, including but not limited to those relating to inventory valuation and reserves, except to the extent require by changes in generally accepted accounting principles; and (ix) agree to do any of the foregoing. In the Merger Agreement, the Company has further agreed that, from the date of the Merger Agreement until the Effective Time, it will not, and will direct and use all reasonable efforts to cause the officers, directors, employees and agents of the Company not to, directly or indirectly, (i) take any action to solicit, to initiate or knowingly to encourage any good faith offer or proposal for (x) a merger or other business combination involving the Company and any Person (other than the Parent, the Purchaser or any subsidiary of either the Parent or the Purchaser), (y) an acquisition by any Person (other than the Parent, the Purchaser or any subsidiary of either the Parent or the Purchaser) of assets or earning power of the Company, in one or more transactions, representing 15% or more of the assets or earning power of the Company, or (z) an acquisition by any Person (other than the Parent, the Purchaser or any subsidiary of either the Parent or the Purchaser) of securities representing 15% or more of the voting power of the Company (any of the events in (x), (y) and (z) being a "Company Acquisition Proposal"), (ii) engage or participate in discussions or negotiations, or enter into agreements, with any Person with respect to a Company Acquisition Proposal, or (iii) in connection with a Company Acquisition Proposal, disclose any nonpublic information relating to the Company or afford access to the properties, books or records of the Company to any Person, except that the Company may take action described in clause (ii) or (iii) if (A) such action is taken in connection with an unsolicited Company Acquisition Proposal, (B) in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, the failure to take such action would not be consistent with the fiduciary duties of the Board of Directors under applicable law, and (C) in the case of the disclosure of nonpublic information relating to the Company in connection with a Company Acquisition Proposal, such information is covered by a confidentiality agreement that provides substantially the same protection to the Company as is afforded by the confidentiality agreement, dated October 30, 1997, between the Parent and the Company (the "Confidentiality Agreement"). The Company will promptly notify the Parent orally and in writing of any Company Acquisition Proposal or any inquiries with respect thereto. Neither the Board of Directors of the Company nor any committee thereof shall (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to the Parent or the Purchaser, the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger or the Merger Agreement, (ii) approve or recommend, or propose publicly to approve or recommend, any Company Acquisition Proposal, or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (in each case, an "Acquisition Agreement") related to any Company Acquisition Proposal, except that, in any case set forth in clause (i), (ii) or (iii) above, prior to the acceptance for payment of Shares pursuant to the Offer, the Board of Directors of the Company may, in response to an unsolicited Company Acquisition Proposal, (A) withdraw or modify its approval or recommendation of the Offer, the Merger or the Merger Agreement or (B) approve or recommend any such Company Acquisition Proposal if, in the case of any action described in clause (A) or (B), in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, the failure to take such action would not be consistent with the fiduciary duties of the Board of Directors under applicable law and, in the case of the actions described in clause (B), concurrently with such approval or recommendation the Company terminates the Merger Agreement and promptly thereafter enters into an Acquisition Agreement with respect to a Company Acquisition Proposal. Merger Meeting; Proxy Statement. The Merger will be consummated as soon as practicable (and in no event later than six months) after the purchase of Shares pursuant to the Offer. If the Purchaser is able to do so under the DGCL, it will consummate the Merger pursuant to the "short form" merger provisions of the DGCL. The Parent will vote, or cause to be voted, all Shares beneficially owned by it in favor of the Merger. If required by the DGCL in order to consummate the Merger, as soon as practicable following the purchase of Shares pursuant to the Offer, the Company will take all action necessary in accordance with the DGCL and with the Company's certificate of incorporation and bylaws to convene a meeting of its stockholders to approve the Merger and adopt the Merger Agreement (the "Merger Meeting"). The Company's Board of Directors will recommend that the Company's stockholders approve the Merger and adopt the Merger Agreement, and will cause the Company to use all reasonable efforts to solicit from the 22 25 stockholders proxies to vote therefor, unless (i) in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, such recommendation would not be consistent with the fiduciary duties of the Board of Directors under applicable law or (ii) the Merger Agreement is terminated in accordance with its terms. The Company will, if required by law for the consummation of the Merger, prepare and file with the Commission preliminary proxy materials relating to the approval of the Merger and the adoption of the Merger Agreement by the Company's stockholders, and will file with the Commission revised preliminary proxy materials, if appropriate, and definitive proxy materials in a timely manner as required by the rules and regulations of the Commission. Except as otherwise provided in clauses (i) and (ii) of this paragraph, the proxy materials relating to the Merger Meeting will include the recommendation of the Company's Board of Directors. Covenants of the Parent and the Purchaser. The Merger Agreement provides that, from and after the Effective Time, the Parent and the Surviving Corporation will jointly and severally indemnify, defend and hold harmless the present and former directors and officers of the Company against all losses, claims, damages and liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, to which any of them was or is a party or is threatened to be made a party by reason of the fact that he or she was or is a director or officer of the Company in respect of acts or omissions occurring at or prior to the Effective Time to the fullest extent that the Company would have been permitted to indemnify such person under applicable law and the certificate of incorporation and bylaws of the Company or any other agreements or commitments in effect on the date of the Merger Agreement. The Parent will use all reasonable efforts to, without any lapse in coverage, either (i) for at least six years after the Effective Time, provide directors' and officers' liability insurance ("D&O Insurance") in respect of acts or omissions occurring at or prior to the Effective Time covering each such Person currently covered by the Company's D&O Insurance policy on terms with respect to coverage and amount no less favorable than those of such policy in effect on the date of the Merger Agreement; provided that the Parent will not be required to pay per annum more than 150% of the last premium (annualized) paid by the Company for such policy prior to the date of the Merger Agreement, (ii) purchase tail insurance in respect of the Company's existing D&O Insurance for six years for a premium not to exceed the present value (discounted at the rate of 10% per annum) of the maximum annual premiums payable under clause (i) above, or (iii) if such D&O Insurance or tail insurance is only available at premiums in excess of the maximum premiums set forth in clauses (i) or (ii), as applicable, then purchase the highest level of D&O Insurance or tail insurance available at such applicable premium. Employee Benefits. The Parent expects that it will provide the employees of the Company with benefits which, in the aggregate, are substantially comparable to the benefits provided from time to time by the Parent to other employees of the Parent or its subsidiaries in similar positions. The Parent agrees in the Merger Agreement that, during the period commencing at the Effective Time and ending on the second anniversary thereof, the benefits provided to such employees will be not less favorable, in the aggregate, than the benefits provided by the Company on the date of the Merger Agreement. The Parent will cause each employee benefit plan of the Parent in which employees of the Company are eligible to participate to take into account, for purposes of eligibility and vesting thereunder, the service of such employees with the Company as if such service were with the Parent, to the same extent that such service was credited under a comparable plan of the Company. The Parent will, and will cause the Surviving Corporation to, honor in accordance with their terms (i) all employee benefit obligations to current and former employees of the Company accrued and vested as of the Effective Time and (ii) to the extent set forth in the Company disclosure schedule, all employee severance plans in existence on the date of the Merger Agreement and all employment or severance agreements entered into prior to the date of the Merger Agreement. Covenants of the Company, the Parent and the Purchaser. Subject to the terms and conditions of the Merger Agreement, the Company, the Parent and the Purchaser agree to use all reasonable efforts to take all actions and to do all things necessary or advisable under applicable laws and regulations to satisfy the conditions to closing and consummate the transactions contemplated by the Merger Agreement as promptly as practicable. The Company and the Parent will each promptly file Notification and Report Forms under the 23 26 HSR Act and respond as promptly as practicable to all requests for additional information or documentation received from the Antitrust Division of the United States Department of Justice (the "Antitrust Division") or the Federal Trade Commission (the "FTC"). Notwithstanding the foregoing, nothing contained in the Merger Agreement will require the Company, the Parent or any of the Parent's subsidiaries (i) to initiate or defend any material pending or threatened litigation to which any governmental or regulatory authority (including the Antitrust Division and the FTC) is a party, (ii) to agree or otherwise become subject to any material limitations on (A) the right of the Parent or the Company, as the Surviving Corporation, effectively to control or operate the business, assets or operations of the Company following the Offer or the Merger, (B) the right of the Parent or the Company, as the Surviving Corporation, to acquire or hold the business, assets or operations of the Company as a result of the Merger, (C) the right of the Purchaser to exercise its rights of ownership of the Shares purchased by it in the Offer, or the right of the Parent to exercise its rights of ownership of the shares of common stock of the Company, as the Surviving Corporation, after consummation of the Merger, including but not limited to the right to vote such shares of common stock on all matters properly presented to the Company's stockholders, or (iii) to agree or otherwise be required to sell or dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of twenty-five (25) stores or more (whether stores of the Company, the Parent or any of the Parent's subsidiaries). Conditions to the Merger. The obligations of the Company, the Parent and the Purchaser to consummate the Merger are subject to the satisfaction of the following conditions: (i) if required by applicable law, the Merger has been approved, and the Merger Agreement has been adopted, by the requisite vote of the Company's stockholders; (ii) the Purchaser has purchased all validly tendered and not properly withdrawn Shares in accordance with the Offer; and (iii) no provision of any applicable domestic law or regulation and no judgment, injunction, order or decree of a court or governmental agency or authority of competent jurisdiction is in effect that has the effect of making the Offer or the Merger illegal or otherwise restrains or prohibits the purchase of Shares pursuant to the Offer or the consummation of the Merger. The obligations of the Parent and the Purchaser to consummate the Merger are subject to compliance by the Company with its obligation to cause persons designated by the Parent to become directors of the Company in accordance with the Merger Agreement. Termination. The Merger Agreement may be terminated and the Offer and the Merger may be abandoned at any time prior to the Effective Time, notwithstanding any prior approval of the Merger and adoption of the Merger Agreement by the Company's stockholders, (i) by the mutual written consent of the Company, the Parent and the Purchaser; (ii) by the Company if the Purchaser has not purchased Shares pursuant to the Offer by May 31, 1998, or by either the Company or the Parent if the Merger has not been consummated by October 31, 1998, provided that such right of termination will not be available to any party that, at the time of termination, is in material breach of its obligations under the Merger Agreement; (iii) by either the Company or the Parent if any applicable domestic law, rule or regulation makes consummation of the Offer or the Merger illegal or if any judgment, injunction, order or decree of a court or governmental agency or authority of competent jurisdiction restrains or prohibits the consummation of the Offer or the Merger and such judgment, injunction, order or decree has become final and nonappealable; (iv) by either the Company or the Parent if the requisite vote of the Company's stockholders approving the Merger and adopting the Merger Agreement has not been obtained at the Merger Meeting; provided that the right to so terminate the Merger Agreement will not be available to (a) the Parent if it has not voted, or caused to be voted, all Shares beneficially owned by it in favor of the Merger, or (b) the Company if it has not taken all action necessary to convene a meeting of its stockholders to approve the Merger and adopt the Merger Agreement; (v) by either the Company or the Parent if the Offer terminates without the purchase of Shares thereunder; provided that the right to so terminate the Merger Agreement shall not be available to (a) the Parent, if the Purchaser has breached its obligations to conduct the Offer in accordance with the terms of the Merger Agreement, or (b) any party whose willful failure to perform any of its obligations under the Merger Agreement results in the failure of any of the Offer Conditions or if the failure of any such Offer Conditions results from facts or circumstances that constitute a material breach of the representations or warranties of such party under the Merger Agreement; (vi) prior to the purchase of Shares by the Purchaser pursuant to the Offer, by the Parent if (a) the Company violates its obligations under the terms of the Merger Agreement 24 27 regarding Company Acquisition Proposals in any material respects and thereafter any Person publicly makes a Company Acquisition Proposal or (b) the Board of Directors of the Company does not publicly recommend in the Schedule 14D-9 that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer and approve the Merger and adopt the Merger Agreement, or if the Board of Directors of the Company withdraws, modifies or changes such recommendation in any manner materially adverse to the Parent; or (vii) by the Company if the Company receives an unsolicited Company Acquisition Proposal that the Board of Directors determines in good faith, after consultation with its legal and financial advisors, is likely to lead to a merger, acquisition, consolidation or similar transaction that is more favorable to the stockholders of the Company than the transactions contemplated by the Merger Agreement; provided that the Company has given the Parent at least five days notice of the material terms of such Company Acquisition Proposal and such termination shall not be effective until the Company has paid the Termination Fee (as defined below), if and to the extent required under the terms of the Merger Agreement. In the event of any such termination of the Merger Agreement and abandonment of the Offer and the Merger, no party to the Merger Agreement (or any of its directors, officers, employees, agents or advisors) will have any liability or further obligation to any other party to the Merger Agreement except (i) for obligations of the Company to pay, under circumstances described below, the Termination Fee and certain expenses of the Parent and the Purchaser, (ii) for obligations arising out of the applicability of the Confidentiality Agreement to information provided pursuant to the Merger Agreement, and (iii) for liability for any breach of covenants or agreements of the Merger Agreement. Fees and Expenses. The Merger Agreement provides that, except as set forth below, all costs and expenses incurred in connection with the Merger Agreement will be paid by the party incurring the costs and expenses. Pursuant to the Merger Agreement, if (i) any Person publicly makes a Company Acquisition Proposal and thereafter the Merger Agreement is terminated by the Company or the Parent because the requisite vote of the Company's stockholders approving the Merger and adopting the Merger Agreement has not been obtained at the Merger Meeting, (ii) any Person publicly makes a Company Acquisition Proposal and thereafter the merger Agreement is terminated by the Company or the Parent because an insufficient number of Shares are tendered pursuant to the Offer, (iii) prior to the Purchase of Shares by the Purchaser pursuant to the Offer, the Merger Agreement is terminated by the Parent because (a) the Company has violated its obligations under the terms of the Merger Agreement regarding Company Acquisition Proposals in any material respects and thereafter any Person publicly makes a Company Acquisition Proposal or (b) the Board of Directors of the Company has not publicly recommended in the Schedule 14D-9 that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer and approve the Merger and adopt the Merger Agreement, or if the Board of Directors of the Company has withdrawn, modified or changed such recommendation in any manner materially adverse to the Parent, or (iv) the Merger Agreement is terminated by the Company because the Company receives an unsolicited Company Acquisition Proposal that the Board of Directors of the Company determines in good faith, after consultation with its legal and financial advisors, is likely to lead to a merger, acquisition, consolidation or similar transaction that is more favorable to the stockholders of the Company than the Merger, then the Company will reimburse the Parent and the Purchaser for all of the reasonable documented out-of-pocket expenses and fees actually incurred by the Parent and the Purchaser in connection with the transactions contemplated by the Merger Agreement prior to the termination of the Merger Agreement, including, without limitation, all reasonable fees and expenses of counsel, financial advisors, accountants and environmental and other experts and consultants to the Parent and the Purchaser ("Transaction Costs"); except that the Company will not be required to reimburse the Parent or the Purchaser for Transaction Costs in excess of $750,000 in the aggregate. Pursuant to the Merger Agreement, if (i) any Person publicly makes a Company Acquisition Proposal, thereafter the Merger Agreement is terminated by the Company or the Parent because the requisite vote of the Company's stockholders approving the Merger and adopting the Merger Agreement has not been obtained at the Merger Meeting, and within 12 months after termination the Company agrees to or 25 28 consummates any Company Acquisition Proposal, (ii) any Person publicly makes a Company Acquisition Proposal, thereafter the merger Agreement is terminated by the Company or the Parent because an insufficient number of Shares are tendered pursuant to the Offer, and within 12 months after termination the Company agrees to or consummates any Company Acquisition Proposal, (iii) prior to the Purchase of Shares by the Purchaser pursuant to the Offer, the Merger Agreement is terminated by the Parent because (a) the Company has violated its obligations under the terms of the Merger Agreement regarding Company Acquisition Proposals in any material respects and thereafter any Person publicly makes a Company Acquisition Proposal or (b) the Board of Directors of the Company has not publicly recommended in the Schedule 14D-9 that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer and approve the Merger and adopt the Merger Agreement, or if the Board of Directors of the Company has withdrawn, modified or changed such recommendation in any manner materially adverse to the Parent, or (iv) the Merger Agreement is terminated by the Company because the Company receives an unsolicited Company Acquisition Proposal that the Board of Directors of the Company determines in good faith, after consultation with its legal and financial advisors, is likely to lead to a merger, acquisition, consolidation or similar transaction that is more favorable to the stockholders of the Company than the Merger, then, in addition to reimbursing the Parent and the Purchase for their Transaction Costs, the Company will pay to the Parent a fee of $750,000 (the "Termination Fee"). If the Parent is required to file suit to seek the Termination Fee, and it ultimately succeeds on the merits, it will be entitled to all expenses, including reasonable attorneys' fees, that it has incurred in enforcing its right to receive the Termination Fee. If the Parent receives a Termination Fee under circumstances in which a Termination Fee is payable, neither the Parent, the Purchaser nor any of their affiliates will assert or pursue in any manner, directly or indirectly, any claim or cause of action against the Company or any of its directors, officers, employees, agents or representatives based in whole or in part upon its or their receipt, consideration, recommendation or approval of a Company Acquisition Proposal, including the Company's exercise of its right of termination of the Merger Agreement upon receipt of certain Company Acquisition Proposals. Waiver and Amendment. Subject to applicable law and the terms of the Merger Agreement, any provision of the Merger Agreement may be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and duly executed and delivered, in the case of an amendment, by each of the parties to the Merger Agreement or, in the case of a waiver, by the party against whom the waiver is to be effective. Required Vote. In general, under Delaware law and the Company's certificate of incorporation, the Merger requires the approval of the Company's Board of Directors and the approval of the holders of a majority of all outstanding Shares. Accordingly, if the Purchaser acquires more than a majority of the outstanding Shares pursuant to the Offer, the Purchaser would have the voting power to approve the Merger without the vote of any other stockholders and could effect the Merger by so voting and by action of the Board of Directors of the Purchaser, the Company's Board of Directors having already approved the Merger on February 1, 1998. This will be the case if the Minimum Condition is satisfied. In the Merger Agreement, the Purchaser has agreed to vote in favor of the Merger all of the Shares purchased pursuant to the Offer. Further, Delaware law provides that, if a parent corporation owns 90% or more of each class of outstanding shares of a subsidiary, the parent corporation may merge the subsidiary into itself, or merge itself into the subsidiary, by action of the board of directors of the parent corporation and without action or vote by the stockholders of either corporation. Accordingly, if the Purchaser owns 90% or more of the outstanding Shares after consummation of the Offer, a "short form" merger could be effected by action of the Purchaser's Board of Directors and without the approval of the Company's stockholders. Dividends and Distributions. The Company has agreed that, from the date of the Merger Agreement until the time that the designees of the Purchaser have been appointed to the Board of Directors of the Company, the Company will not declare, set aside or pay any dividends or make any distributions on the Shares. See Section 13. 26 29 Appraisal Rights. Stockholders do not have appraisal rights as a result of the Offer. However, if the Merger is consummated, stockholders of the Company at the time of the Merger who comply with all statutory requirements and do not vote in favor of the Merger will have the right under the DGCL to demand an appraisal of, and receive payment in cash of the fair value of, their Shares outstanding immediately prior to the Effective Time in accordance with Section 262 of the DGCL. Under the DGCL, stockholders who properly demand appraisal and otherwise comply with the applicable statutory procedures will be entitled to receive a judicial determination of the fair value of their Shares (exclusive of any element of value arising from the accomplishment or expectation of the Merger) and to receive payment of such fair value in cash. Any such judicial determination of the fair value of such Shares could be based upon considerations other than or in addition to the price paid in the Offer and the Merger and the market price of the Shares. In Weinberger v. UOP, Inc., the Delaware Supreme Court stated, among other things, that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in an appraisal proceeding. Stockholders should recognize that the value so determined could be equal to, higher or lower than the price per Share paid pursuant to the Offer or the price per Share to be paid in the Merger. In addition, several decisions by Delaware courts have held that in certain circumstances a controlling stockholder of a corporation involved in a merger has a fiduciary duty to other stockholders that requires the merger to be fair to the other stockholders. In determining whether a merger is fair to minority stockholders, Delaware courts have considered, among other things, the type and amount of the consideration to be received by the stockholders and whether there was fair dealing among the parties. The Delaware Supreme Court stated in Weinberger and Rabkin v. Phillip A. Hunt Chemical Corp. that the remedy ordinarily available to minority stockholders in a cash-out merger is the right to appraisal described above. However, a damages remedy or injunctive relief may be available if a merger is found to be the product of unfairness, including fraud, misrepresentation or other misconduct. THE FOREGOING SUMMARY OF THE RIGHTS OF STOCKHOLDERS DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY STOCKHOLDERS DESIRING TO EXERCISE ANY AVAILABLE APPRAISAL RIGHTS. THE PRESERVATION AND EXERCISE OF APPRAISAL RIGHTS REQUIRE STRICT ADHERENCE TO THE APPLICABLE PROVISIONS OF DELAWARE LAW. "Going Private" Transactions. The Commission has adopted Rule 13e-3 under the Exchange Act which is applicable to certain "going private" transactions and which may under certain circumstances be applicable to the Merger. However, Rule 13e-3 would be inapplicable if (i) the Shares are deregistered under the Exchange Act prior to the Merger or other business combination or (ii) the Merger or other business combination is consummated within one year after the purchase of Shares pursuant to the Offer and the amount paid per Share in the Merger or other business combination is at least equal to the amount paid per Share in the Offer. If applicable, Rule 13e-3 requires, among other things, that certain financial information concerning the fairness of the proposed transaction and the consideration offered to minority stockholders in such transaction be filed with the Commission and disclosed to stockholders prior to the consummation of the transaction. SECTION 14. CERTAIN CONDITIONS OF THE OFFER Notwithstanding any other term or provision of the Offer, the Purchaser will not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to a bidder's obligation to pay for or return tendered shares after the termination or withdrawal of the Offer), to pay for any Shares not theretofore accepted for payment or paid for pursuant to the Offer, if (1) there are not validly tendered and not properly withdrawn prior to the expiration of the Offer that number of Shares which, when aggregated with the Shares then owned by the Parent and any of its affiliates, represents at least a majority of the Shares then outstanding on a fully diluted basis (the "Minimum Condition") or (2) at any time on or after the date of the Merger Agreement and before the acceptance of such Shares for payment any of the following conditions exist: 27 30 (a) Any provision of any applicable domestic law or regulation, or any judgment, injunction, order or decree of a court or governmental agency or authority of competent jurisdiction, is in effect that makes the Offer or the Merger illegal or otherwise, directly or indirectly, prohibits or materially restrains the making of the Offer, the acceptance for payment of, payment for or ownership, directly or indirectly, of some or all of the Shares by the Purchaser or the Parent, makes the foregoing substantially more costly or materially delays the Merger. (b) Any consents, authorizations, orders and approvals of, or filings or registrations with, any governmental commission, board or other regulatory body required in connection with the execution, delivery and performance of the Agreement has not been obtained or made, except (i) the filing of appropriate certificates of merger in accordance with Delaware law and (ii) where the failure to obtain or make any such consent, authorization, order, approval, filing or registration is not reasonably likely to have, individually or in the aggregate, a material adverse effect on the financial condition, results of operations or business of the Company (a "Company Material Adverse Effect"), or on the financial condition, results of operations or business of the Parent and the Purchaser, taken as a whole (a "Parent Material Adverse Effect"), and would not render the Offer or the Merger illegal or provide a reasonable basis to conclude that the parties or their affiliates or any of their respective directors or officers will be subject to the risk of criminal liability. (c) Any requirement that the Parent, the Purchaser or the Company (i) initiate or defend against any material pending or threatened litigation to which any governmental or regulatory authority (including the Antitrust Division and the FTC) is a party, (ii) agree or otherwise become subject to any prohibition or material limitations on (A) the right of the Parent or the Company, as the Surviving Corporation, effectively to control or operate the business, assets or operations of the Company following the Offer or the Merger, (B) the right of the Parent or the Company, as the Surviving Corporation, to acquire or hold the business, assets or operations of the Company as a result of the Merger, (C) the right of the Purchaser to exercise its rights of ownership of the Shares purchased by it in the Offer, or the right of the Parent to exercise its rights of ownership of the Shares of the Company, as the Surviving Corporation, after consummation of the Merger, including but not limited to the right to vote the Shares on all matters properly presented to the Company's stockholders, or (iii) to agree or otherwise be required to sell or dispose of, hold separate (through the establishment of a trust or otherwise) or divest itself of twenty-five (25) stores or more (whether stores of the Company, the Parent or any of the Parent's subsidiaries). (d) Any third party consents required for the consummation of the Offer have not been obtained except where the failure to obtain any such third party consents is not reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect or a Parent Material Adverse Effect. (e) The Company has failed to perform the obligations to be performed by it under the Merger Agreement at or prior to such time or any representations and warranties of the Company contained in the Merger Agreement are not true at such time as if made at and as of such time (unless the representation or warranty is made as of a specified date, in which case such representation or warranty will be true as of such date), except to the extent that the failure to perform such obligations and the untruth of such representations and warranties is not reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect and the Parent has received a certificate signed by an executive officer and by the chief financial officer of the Company to the foregoing effect. For purposes of determining whether this condition has been satisfied, all qualifications in the representations and warranties as to materiality will be disregarded, and all qualifications as to the knowledge of the Company will be deemed to mean the knowledge of the Company at the time such certificate is signed. (f) The Merger Agreement has been terminated in accordance with its terms. The foregoing conditions are for the sole benefit of the Purchaser and the Parent and may be waived by the Purchaser in whole or in part at any time and from time to time in its sole discretion (except that the Purchaser may not, without the consent of the Company, waive the Minimum Condition). The failure by the Purchaser at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and circumstances will not be deemed a waiver with respect to any other 28 31 facts and circumstances and each such right will be deemed an ongoing right that may be asserted at any time and from time to time. SECTION 15. CERTAIN LEGAL MATTERS General. Except as otherwise disclosed herein, based on information furnished by the Company or filed by the Company with the Commission, neither the Purchaser nor the Parent is aware of (i) any license or regulatory permit that appears to be material to the business of the Company, taken as a whole, that might be adversely affected by the acquisition of Shares by the Purchaser pursuant to the Offer or the Merger or (ii) any approval or other action, by any governmental, administrative or regulatory agency or authority, domestic, foreign or supranational, that would be required for the acquisition or ownership of Shares by the Purchaser as contemplated herein. Should any such approval or other action be required, the Purchaser currently contemplates that such approval or action would be sought. Although the Purchaser does not currently intend to delay the acceptance for payment of Shares tendered pursuant to the Offer pending the outcome of any such matter, there can be no assurance that any such approval or action, if needed, would be obtained or would be obtained without substantial conditions or that adverse consequences might not result to the business of the Company, the Purchaser or the Parent or that certain parts of the businesses of the Company, the Purchaser or the Parent might not have to be disposed of in the event that such approvals were not obtained or any other actions were not taken. The Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions. See Section 14. Antitrust. Under the HSR Act, certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division and the FTC and certain waiting period requirements have been satisfied. The Parent filed a Notification and Report Form with respect to the Offer on February 5, 1998, and the Company expects to file a Notification and Report Form with respect to the Offer during the week of February 8, 1998. Under the provisions of the HSR Act applicable to the Offer, the purchase of Shares under the Offer may not be consummated until the expiration of a 15-calendar day waiting period following the filing by the Parent. Accordingly, because the Parent made the filing on February 5, 1998, the waiting period with respect to the Offer will expire at 11:59 p.m., Eastern Standard Time, on February 20, 1998 unless the Parent or the Company receives a request for additional information or material, or the Antitrust Division and the FTC terminate the waiting period prior thereto. If, within such 15-day period, either the Antitrust Division or the FTC requests additional information or material from the Parent or the Company concerning the Offer, the waiting period will be extended and would expire at 11:59 p.m., Eastern Standard Time, on the tenth calendar day after the date of substantial compliance by the Parent or the Company with such request. Only one extension of the waiting period pursuant to a request for additional information is authorized by the HSR Act. Thereafter, such waiting period may be extended only by court order or with the consent of the Parent. The Purchaser will not accept for payment Shares tendered pursuant to the Offer unless and until the waiting period requirements imposed by the HSR Act with respect to the Offer have been satisfied. See Section 14. Private parties and state attorneys general may also bring action under the antitrust laws under certain circumstances. Based upon an examination of publicly available information relating to the businesses in which the Parent and the Company are engaged, the Parent and the Purchaser believe that the acquisition of Shares by the Purchaser will not violate the antitrust laws. Nevertheless, there can be no assurance that a challenge to the Offer or other acquisition of Shares by the Purchaser on antitrust grounds will not be made or, if such a challenge is made, of the result. Certain State Laws; Certificate of Incorporation. Section 203 of the DGCL provides that, except in certain circumstances, a Delaware corporation may not engage in a "business combination" with an "interested" stockholder for three years following the date on which the stockholder became an "interested" stockholder unless, among other things, prior to such date the board of directors of the corporation approved either the "business combination" or the transaction that resulted in the stockholder becoming an "interested" stockholder. If the Minimum Condition is satisfied, the Purchaser will become an "interested" stockholder of the Company when it purchases Shares pursuant to the Offer, and the Merger will be a "business combination." However, the 29 32 Board of Directors of the Company has approved both the Offer and the Merger and, therefore, the Company will not need to wait for three years before completing the Merger. Similarly, Article Ninth of the Company's certificate of incorporation provides that unless the Board of Directors of the Company by a vote of not less than seventy-five percent (75%) of the then authorized number of directors expressly approves the merger between the Company and a "related corporation," the affirmative vote of the holders of not less than seventy-five percent (75%) of the total voting power of all outstanding shares of voting common stock of the Company will be required for the authorization of a merger between the Company and a "related corporation." Since the Purchaser will become a "related corporation" if the Minimum Condition is satisfied, the Merger must comply with Article Ninth of the Company's certificate of incorporation. However, since the Board of Directors has unanimously approved the Merger, the affirmative vote of the holders of not less than seventy-five percent (75%) of the Shares will not be necessary for the consummation of the Merger. A number of other states have adopted laws and regulations applicable to attempts to acquire securities of corporations which are incorporated, or have substantial assets, stockholders, principal executive offices or principal places of business, or whose business operations otherwise have substantial economic effects, in such states. In 1982, the Supreme Court of the United States in Edgar v. MITE Corp. invalidated on constitutional grounds the Illinois Business Takeover Statute, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987, the Supreme Court in CTS Corp. v. Dynamics Corp. of America held that the Indiana Control Share Acquisition Act was constitutional. Such Act, by its terms, is applicable only to corporations that have a substantial number of stockholders in Indiana and are incorporated there. Subsequently, a number of federal courts ruled that various state takeover statutes were unconstitutional insofar as they apply to corporations incorporated outside the state of enactment. The Company conducts business in a number of states throughout the United States, some of which have enacted takeover laws. The Purchaser does not know whether any of these laws will, by their terms, apply to the Offer and has not complied with any such laws. Should any person seek to apply any state takeover law, the Purchaser will take such action as then appears desirable, which may include challenging the validity or applicability of any such statute in appropriate court proceedings. In the event it is asserted that one or more state takeover law is applicable to the Offer and the Merger, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer, the Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, the Purchaser might be unable to accept for payment any Shares tendered pursuant to the Offer or be delayed in continuing or consummating the Offer. In such case, the Purchaser may not be obligated to accept for payment any Shares tendered. See Section 14. SECTION 16. FEES AND EXPENSES McDonald & Company is acting as Dealer Manager in connection with the Offer and serving as exclusive financial advisor to the Parent in connection with the Offer and the Merger. Pursuant to the terms of McDonald & Company's engagement, the Parent has agreed to pay McDonald & Company a fee of $400,000 in connection with the Offer and the Merger. In addition, the Parent has agreed to reimburse McDonald & Company for its reasonable out-of-pocket expenses, including, without limitation, reasonable fees and expenses of its legal counsel, incurred in connection with the Offer and the Merger or otherwise arising out of McDonald & Company's engagement, and has also agreed to indemnify McDonald & Company and certain related parties against certain liabilities and expenses, including, without limitation, certain liabilities under the federal securities laws, arising out of McDonald & Company's engagement. Corporate Investor Communications, Inc. has been retained by the Purchaser as Information Agent in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telex, telegraph and personal interview and may request brokers, dealers and other nominee stockholders to forward material relating to the Offer to beneficial owners of Shares. The Purchaser will pay the Information Agent reasonable and customary compensation for all such services in addition to reimbursing the Information Agent for reasonable out-of-pocket expenses in connection therewith. The Purchaser has agreed to indemnify the 30 33 Information Agent against certain liabilities and expenses in connection with the Offer, including, without limitation, certain liabilities under the federal securities laws. Harris Trust Company of New York has been retained as the Depositary. The Purchaser will pay the Depositary reasonable and customary compensation for its services in connection with the Offer, will reimburse the Depositary for its reasonable out-of-pocket expenses in connection therewith and will indemnify the Depositary against certain liabilities and expenses in connection therewith, including, without limitation, certain liabilities under the federal securities laws. Except as set forth above, neither the Parent nor the Purchaser will pay any fees or commissions to any broker, dealer or other person for soliciting tenders of Shares pursuant to the Offer. Brokers, dealers, commercial banks, trust companies and other nominees will, upon request, be reimbursed by the Parent or the Purchaser for customary clerical and mailing expenses incurred by them in forwarding offering materials to their customers. SECTION 17. MISCELLANEOUS The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. Neither the Purchaser nor the Parent is aware of any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. To the extent the Purchaser or the Parent becomes aware of any state law that would limit the class of offerees in the Offer, the Purchaser will amend the Offer and, depending on the timing of such amendment, if any, will extend the Offer to provide adequate dissemination of such information to such holders of Shares prior to the expiration of the Offer. In any jurisdiction the securities, blue sky or other laws of which require the Offer to be made by a licensed broker or dealer, the Offer is being made on behalf of the Purchaser by the Dealer Manager or one or more registered brokers or dealers licensed under the laws of such jurisdiction. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION ON BEHALF OF THE PURCHASER OR THE PARENT NOT CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THE PURCHASER AND THE PARENT HAVE FILED WITH THE COMMISSION A TENDER OFFER STATEMENT ON SCHEDULE 14D-1 PURSUANT TO RULE 14D-3 UNDER THE EXCHANGE ACT, TOGETHER WITH EXHIBITS, FURNISHING CERTAIN ADDITIONAL INFORMATION WITH RESPECT TO THE OFFER, AND MAY FILE AMENDMENTS THERETO. SUCH SCHEDULE 14D-1 AND ANY AMENDMENTS THERETO, INCLUDING EXHIBITS, MAY BE INSPECTED AND COPIES MAY BE OBTAINED IN THE MANNER SET FORTH IN SECTION 8 WITH RESPECT TO THE COMPANY (EXCEPT THAT SUCH MATERIAL WILL NOT BE AVAILABLE AT THE REGIONAL OFFICES OF THE COMMISSION). FCA ACQUISITION CORPORATION February 6, 1998 31 34 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF THE PARENT AND THE PURCHASER The Parent. Set forth below are the names, business addresses and present principal occupations or employment, and material occupations, positions, offices or employments for the past five years, of each director and executive officer of the Parent. Except as otherwise noted, the business address of each such person is 5555 Darrow Road, Hudson, Ohio 44236, and each such person is a United States citizen. Directors of the Parent are indicated by an asterisk.
PRINCIPAL OCCUPATION OR EMPLOYMENT, NAME 5-YEAR EMPLOYMENT HISTORY - ---------------------------- --------------------------------------------------------------- Alan Rosskamm*.............. Mr. Rosskamm (age 48) currently serves as Chairman of the Board, President and Chief Executive Officer of the Parent. He has served as President since April 1993, Chairman of the Board since July 1992, and Chief Executive Officer for more than five years. Mr. Rosskamm is also currently a member of the Board of Directors of Charming Shoppes Inc., a women's apparel retailer. Mr. Rosskamm has been a Director of the Parent since 1985. Brian P. Carney............. Mr. Carney (age 37) has served as Executive Vice President and Chief Financial Officer of the Parent since October 1997. Prior to joining the Parent, he served as Senior Vice President-Finance, from May 1996 to August 1997, and Vice President and Controller, from June 1992 to May 1996, of Revco D.S., Inc. (previously a public company). David E. Bolen.............. Mr. Bolen (age 46) has served as Executive Vice President-Business Development of the Parent since August 1997. He served as Senior Vice President-General Manager E.T.C. of the Parent from March 1997 to August 1997. Prior to joining the Parent, Mr. Bolen served as Executive Vice President-Operations of Michaels Stores, from July 1994 to August 1996, and as Executive Vice President, Chief Operating Officer and Director of Leewards Creative Crafts, from January 1986 to July 1994. Jane A. Aggers.............. Ms. Aggers (age 49) has served as Executive Vice President-Merchandising, Marketing, Logistics and Inventory Management of the Parent since April 1993. Prior to April 1993, she served as Senior Vice President-General Merchandise Manager of the Parent from May 1990 to April 1993. John W. Hermsen............. Mr. Hermsen (age 51) has served as Executive Vice President-Stores of the Parent since August 1995. Prior to joining the Parent, he served as Executive Vice President-Store Operations and Distribution of Ames Department Stores, Inc., from June 1993 to July 1995, and as Vice President-Stores of Shopko Stores Inc., from May 1986 to June 1993. John Z. Stec................ Mr. Stec (age 73) has served as Senior Vice President-Real Estate of the Parent for more than 5 years. Betty Rosskamm*............. Ms. Rosskamm (age 69) has served as Senior Vice President and Secretary of the Parent for more than five years. Ms. Rosskamm has been a director of the Parent since 1967. Alma Zimmerman*............. Ms. Zimmerman (age 84) has served as Senior Vice President of the Parent for more than five years. Ms. Zimmerman has been a director of the Parent since 1967.
32 35
PRINCIPAL OCCUPATION OR EMPLOYMENT, NAME 5-YEAR EMPLOYMENT HISTORY - ---------------------------- --------------------------------------------------------------- Gregg A. Searle*............ Mr. Searle (age 49) joined the Parent's Board of Directors in 1996. He has served as President and Chief Operating Officer, since November 1996, and Executive Vice President, from August 1993 to February 1996, of Diebold, Incorporated. He also served as Vice President of Diebold, Incorporated and General Manager of InterBold from January 1992 to August 1993. Mr. Searle is also currently a member of the Board of Directors of Diebold, Incorporated. Scott S. Cowen*............. Mr. Cowen (age 51) joined the Parent's Board of Directors in 1987. He has served as Dean of the Weatherhead School of Management and A. J. Weatherhead III Professor of Management at Case Western Reserve University since 1984. Mr. Cowen is also currently a member of the Boards of Directors of American Greetings Corporation, Forest City Enterprises, Inc., Rubbermaid Inc. and Weatherhead Industries. Ira R. Gumberg*............. Mr. Gumberg (age 44) joined the Parent's Board of Directors in 1992. He has served as Chief Executive Officer and President of J.J. Gumberg Co., a real estate management and development company, since 1989. Mr. Gumberg is also currently a member of the Boards of Directors of Mellon Bank, N.A. and J.J. Gumberg Co. Francis A. Newman*.......... Mr. Newman (age 49) joined the Parent's Board of Directors in 1991. He has served as Chairman of the Board, since February 1997, Chief Executive Officer, since February 1996, President, since July 1993, and Chief Operating Officer, from July 1993 to February 1996, of Eckerd Corporation, which operates retail pharmacy stores. Prior to joining Eckerd in July 1993, he served as President and Chief Executive Officer of F & M Distributors for more than five years. Mr. Newman is also currently a member of the Boards of Directors of Eckerd Corporation, AmSouth Bancorporation and Jabil Circuits, Inc.
The Purchaser. The name and position with the Purchaser of each director and executive officer of the Purchaser are set forth below. The business address, present principal occupation or employment, five-year employment history and citizenship of each such person is set forth above.
NAME POSITION WITH THE PURCHASER - ---------------------------- --------------------------------------------------------------- Alan Rosskamm............... Chairman of the Board, Chief Executive Officer and Director Brian P. Carney............. Vice President, Treasurer and Director Betty Rosskamm.............. Vice President, Secretary and Director
33 36 Manually signed facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or such stockholder's broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below. The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Hand/Overnight Delivery: Wall Street Station Receive Window P.O. Box 1023 Wall Street Plaza New York, NY 10268-1023 88 Pine Street, 19th Floor New York, NY 10005
By Facsimile Transmission: (212) 701-7636 For Information Telephone: (212) 701-7624 Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses or telephone numbers set forth below. Additional copies of this Offer to Purchase, the Letter of Transmittal and all other tender offer materials may be obtained from the Information Agent as set forth below and will be furnished promptly at the Purchaser's expense. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: CORPORATE INVESTOR COMMUNICATIONS, INC. 111 Commerce Road - Carlstadt, New Jersey 07072-2586 Banks and Brokers call (800) 346-7885 All others call Toll Free (888) 203-7315 The Dealer Manager for the Offer is: MCDONALD & COMPANY SECURITIES, INC. McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114-2603 (216) 443-2300 EX-99.A.3 4 EXHIBIT 99(A)(3) 1 EXHIBIT (a)(3) LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. PURSUANT TO THE OFFER TO PURCHASE DATED FEBRUARY 6, 1998 BY FCA ACQUISITION CORPORATION A WHOLLY OWNED SUBSIDIARY OF FABRI-CENTERS OF AMERICA, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN STANDARD TIME, ON FRIDAY, MARCH 6, 1998, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Hand/Overnight Delivery: Wall Street Station Receive Window P.O. Box 1023 Wall Street Plaza New York, NY 10268-1023 88 Pine Street, 19th Floor New York, NY 10005
By Facsimile Transmission: (212) 701-7636 For Information Telephone: (212) 701-7624 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU MUST SIGN THIS LETTER OF TRANSMITTAL WHERE INDICATED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 PROVIDED BELOW. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by stockholders either if certificates evidencing Shares (as defined below) are to be forwarded herewith or if delivery of Shares is to be made by book-entry transfer to the Depositary's account at The Depository Trust Co. (the "Book-Entry Transfer Facility") pursuant to the book-entry transfer procedure described in Section 2 of the Offer to Purchase (as defined below). Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Depositary. Stockholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in Section l of the Offer to Purchase) or who cannot complete the procedure for delivery by book-entry transfer on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in Section 2 of the Offer to Purchase. See Instruction 2. 2 [ ] CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution _________________________________________________ Account Number ___________________ Transaction Code Number ___________________ [ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING. PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY: Name(s) of Registered Holder(s) _______________________________________________ Window Ticket No. (if any) ____________________________________________________ Date of Execution of Notice of Guaranteed Delivery ____________________________ Name of Institution which Guaranteed Delivery _________________________________ - -------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - ------------------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) SHARE CERTIFICATE(S) AND SHARE(S) TENDERED APPEAR(S) ON SHARE CERTIFICATE(S)) (ATTACH ADDITIONAL LIST, IF NECESSARY) - -------------------------------------------------------------------------------------------------------------------- TOTAL NUMBER OF SHARE SHARES EVIDENCED NUMBER CERTIFICATE BY SHARE OF SHARES NUMBER(S)* CERTIFICATE(S)* TENDERED** ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- TOTAL SHARES ------------------------------------------------------------------------------------------------------------------ * Need not be completed by stockholders delivering Shares by book-entry transfer. ** Unless otherwise indicated, it will be assumed that all Shares evidenced by each Share Certificate delivered to the Depositary are being tendered hereby. See Instruction 4. ------------------------------------------------------------------------------------------------------------------
3 NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL CAREFULLY. Ladies and Gentlemen: The undersigned hereby tenders to FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation (the "Parent"), the above-described shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), pursuant to the Purchaser's offer to purchase all outstanding Shares, at $4.25 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 6, 1998 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). The undersigned understands that the Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to one or more of its affiliates the right to purchase all or any portion of the Shares tendered pursuant to the Offer. Subject to, and effective upon, acceptance for payment of the Shares tendered herewith, in accordance with the terms of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), the undersigned hereby sells, assigns and transfers to, or upon the order of, the Purchaser all right, title and interest in and to all the Shares that are being tendered hereby and all dividends, distributions (including, without limitation, distributions of additional Shares and other securities) and rights declared, paid or distributed in respect of such Shares on or after February 5, 1998 (collectively, "Distributions"), and irrevocably appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares and all Distributions, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver Share Certificates evidencing such Shares and all Distributions, or transfer ownership of such Shares and all Distributions on the account books maintained by the Book-Entry Transfer Facility, together, in either case, with all accompanying evidences of transfer and authenticity, to or upon the order of the Purchaser, (ii) present such Shares and all Distributions for transfer on the books of the Company, and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares and all Distributions, all in accordance with the terms of the Offer. By executing this Letter of Transmittal, the undersigned irrevocably appoints Alan Rosskamm, Brian P. Carney and Betty Rosskamm of the Purchaser as proxies of the undersigned, each with full power of substitution, to the full extent of the undersigned's rights with respect to the Shares tendered by the undersigned and accepted for payment by the Purchaser (and any and all Distributions). All such proxies shall be considered coupled with an interest in the tendered Shares. This appointment will be effective if, when and only to the extent that the Purchaser accepts such Shares for payment pursuant to the Offer. Upon such acceptance for payment, all prior proxies given by the undersigned with respect to such Shares (and any such other Shares and securities) will, without further action, be revoked, and no subsequent proxies may be given nor any subsequent written consent executed by the undersigned (and, if given or executed, will not be deemed to be effective) with respect thereto. The designees of the Purchaser named above will, with respect to the Shares and other securities for which the appointment is effective, be empowered to exercise all voting and other rights of the undersigned as they in their sole discretion may deem proper at any annual or special meeting of the stockholders of the Company or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise, and the Purchaser reserves the right to require that, in order for Shares or other securities to be deemed validly tendered, immediately upon the Purchaser's acceptance for payment of such Shares, the Purchaser must be able to exercise full voting rights with respect to such Shares or other securities. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and all Distributions, and that when such Shares are accepted for payment by the Purchaser, the Purchaser will acquire good, marketable and unencumbered title thereto and to all Distributions, free and clear of all liens, restrictions, charges and encumbrances, and that none of such Shares and Distributions will be subject to any adverse claim. The undersigned, upon request, shall execute and deliver all additional documents deemed by the Depositary or the Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby and all Distributions. In addition, the undersigned shall remit and transfer promptly to the Depositary for the account of the Purchaser all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and, pending such remittance and transfer or appropriate assurance thereof, the Purchaser shall be entitled to all rights and privileges as owner of each such Distribution and may withhold the entire purchase price of the Shares tendered hereby or deduct from such purchase price the amount or value of such Distribution, as determined by the Purchaser in its sole discretion. 4 No authority herein conferred or agreed to be conferred shall be affected by, and all such authority shall survive, the death or incapacity of the undersigned. All obligations of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as otherwise stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in Section 2 of the Offer to Purchase and in the instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the Offer. The Purchaser's acceptance of such Shares for payment will constitute a binding agreement between the undersigned and the Purchaser upon the terms and subject to the conditions of the Offer, including, without limitation, the undersigned's representation and warranty that the undersigned owns the Shares being tendered. Unless otherwise indicated herein in the box entitled "Special Payment Instructions," please issue the check for the purchase price of all Shares purchased, and return all Share Certificates evidencing Shares not purchased or not tendered, in the name(s) of the registered holder(s) appearing above under "Description of Shares Tendered." Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions," please mail the check for the purchase price of all Shares purchased and all Share Certificates evidencing Shares not tendered or not purchased (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing above under "Description of Shares Tendered." In the event that the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions" are both completed, please issue the check for the purchase price of all Shares purchased and return all Share Certificates evidencing Shares not purchased or not tendered in the name(s) of, and mail such check and Share Certificates to, the person(s) so indicated. The undersigned recognizes that the Purchaser has no obligation, pursuant to the Special Payment Instructions, to transfer any Shares from the name of the registered holder(s) thereof if the Purchaser does not purchase any of the Shares tendered hereby. 5 - ------------------------------------------------------------------------------- SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued in the name of someone other than the undersigned. Issue [ ] Check [ ] Share Certificate(s) to: Name: ---------------------------------------------------- (PRINT) Address: -------------------------------------------------- ------------------------------------------------------------ (ZIP CODE) ------------------------------------------------------------ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE) =============================================================================== SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificate(s) evidencing Shares not tendered or not purchased are to be mailed to someone other than the undersigned or to the undersigned at an address other than that shown under "Description of Shares Tendered." Mail [ ] Check [ ] Share Certificate(s) to: Name: ---------------------------------------------------- (PRINT) Address: -------------------------------------------------- ------------------------------------------------------------ (ZIP CODE) - ------------------------------------------------------------------------------- 6 IMPORTANT STOCKHOLDER(S): SIGN HERE (ALSO PLEASE COMPLETE SUBSTITUTE FORM W-9 INCLUDED HEREIN) X _____________________________________________________________________________ X _____________________________________________________________________________ (SIGNATURE(S) OF HOLDER(S)) Dated: _________________1998 (Must be signed by registered holder(s) exactly as name(s) appear(s) on the Share Certificate(s) or on a security position listing or by a person authorized to become a registered holder by certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information. See Instruction 5.) Name(s):_______________________________________________________________________ _______________________________________________________________________________ (PLEASE PRINT) Capacity (full title): ________________________________________________________ Address: ______________________________________________________________________ _______________________________________________________________________________ (INCLUDE ZIP CODE) Area Code and Telephone No.: __________________________________________________ Taxpayer Identification or Social Security No.: _______________________________ (SEE SUBSTITUTE FORM W-9 INCLUDED HEREIN) GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTIONS 1 AND 5) FOR USE BY FINANCIAL INSTITUTIONS ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW. 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal must be guaranteed by a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or by a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (an "Eligible Institution"), unless (i) this Letter of Transmittal is signed by the registered holder(s) of the Shares (which term, for purposes of this document, shall include any participant in the Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares) tendered hereby and such holder(s) has (have) completed neither the box entitled "Special Payment Instructions" nor the box entitled "Special Delivery Instructions" or (ii) such Shares are tendered for the account of an Eligible Institution. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARE CERTIFICATES. This Letter of Transmittal is to be used either if Share Certificates are to be forwarded herewith or if Shares are to be delivered by book-entry transfer pursuant to the procedure set forth in Section 2 of the Offer to Purchase. Share Certificates evidencing all physically tendered Shares, or a confirmation of a book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility of all Shares delivered by book-entry transfer, in each case together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth at the front hereof prior to the Expiration Date (as defined in Section l of the Offer to Purchase). If Share Certificates are forwarded to the Depositary in multiple deliveries, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. Stockholders whose Share Certificates are not immediately available, who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares pursuant to the guaranteed delivery procedure described in Section 2 of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Purchaser, must be received by the Depositary prior to the Expiration Date; and (iii) the Share Certificates evidencing all physically delivered Shares in proper form for transfer by delivery, or a confirmation of a book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility of all Shares delivered by book-entry transfer, in each case together with a Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees and any other documents required by this Letter of Transmittal, must be received by the Depositary within three New York Stock Exchange, Inc. trading days after the date of execution of such Notice of Guaranteed Delivery, all as described in Section 2 of the Offer to Purchase. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. PLEASE DO NOT ENDORSE YOUR SHARE CERTIFICATES. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. By execution of this Letter of Transmittal (or a facsimile hereof), all tendering stockholders waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein under "Description of Shares Tendered" is inadequate, the Share Certificate numbers, the number of Shares evidenced by such Share Certificates and the number of Shares tendered should be listed on a separate schedule and attached hereto. 4. PARTIAL TENDERS (NOT APPLICABLE TO STOCKHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If fewer than all the Shares evidenced by any Share Certificate delivered to the Depositary herewith are to be tendered hereby, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such cases, new Share Certificate(s) evidencing the remainder of the Shares that were evidenced by the Share Certificates delivered to the Depositary herewith will be sent to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Delivery Instructions," as soon as practicable after the expiration or termination of the Offer. All Shares evidenced by Share Certificates 8 delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Share Certificates evidencing such Shares without alteration, enlargement or any other change whatsoever. If any Share tendered hereby is owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in the names of different holders, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such Shares. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Share Certificates or separate stock powers are required, unless payment is to be made to, or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), in which case, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to the Purchaser of such person's authority so to act must be submitted. 6. STOCK TRANSFER TAXES. Except as otherwise provided in this Instruction 6, the Purchaser will pay all stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price of any Shares purchased is to be made to, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such other person will be deducted from the purchase price of such Shares purchased, unless evidence satisfactory to the Purchaser of the payment of such taxes or exemption therefrom is submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE SHARE CERTIFICATES EVIDENCING THE SHARES TENDERED HEREBY. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the purchase price of any Shares tendered hereby is to be issued, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued, in the name of a person other than the person(s) signing this Letter of Transmittal or if such check or any such Share Certificate is to be sent to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal but at an address other than that shown in the box entitled "Description of Shares Tendered," the appropriate boxes on the reverse of this Letter of Transmittal must be completed. 8. WAIVER OF CONDITIONS. Except as described in the Offer to Purchase, the conditions to the Offer may be waived by the Purchaser in whole or in part at any time and from time to time in its sole discretion. 9. QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Dealer Manager or the Information Agent at their respective addresses or telephone numbers set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. 10. SUBSTITUTE FORM W-9. Each tendering stockholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided under "Important Tax Information" below and to certify, under penalties of perjury, that such number is correct and that such stockholder is not subject to backup withholding of federal income tax. If a tendering stockholder has been notified by the Internal Revenue Service that such stockholder is subject to backup withholding, 9 such stockholder must cross out item (2) of the Certification box of the Substitute Form W-9, unless such stockholder has since been notified by the Internal Revenue Service that such stockholder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering stockholder to 31% federal income tax withholding on the payment of the purchase price of all Shares purchased from such stockholder. If the tendering stockholder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such stockholder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% on all payments of the purchase price to such stockholder until a TIN is provided to the Depositary. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), PROPERLY COMPLETED AND DULY EXECUTED WITH ANY REQUIRED SIGNATURE GUARANTEES, AND SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER, OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE). IMPORTANT TAX INFORMATION Under the federal income tax laws, a stockholder whose tendered Shares are accepted for payment is required by law to provide the Depositary (as payer) with such stockholder's correct TIN on Substitute Form W-9 below. If such stockholder is an individual, the TIN is generally such stockholder's social security number. If the Depositary is not provided with the correct TIN, the stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such stockholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31%. Certain stockholders (including, among others, all corporations and certain foreign individuals) generally are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit a statement, signed under penalties of perjury, attesting to such individual's exempt status. Forms of such statements can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "Guidelines") for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the stockholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a stockholder with respect to Shares purchased pursuant to the Offer, the stockholder is required to notify the Depositary of such stockholder's correct TIN by completing the form below certifying (1) that the TIN provided on Substitute Form W-9 is correct (or that such stockholder is awaiting a TIN) and (2) that the stockholder is not subject to backup withholding because (a) such stockholder is exempt from backup withholding, (b) such stockholder has not been notified by the Internal Revenue Service that such stockholder is subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the Internal Revenue Service has notified such stockholder that such stockholder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The stockholder is required to give the Depositary the social security number or employer identification number of the record holder of the Shares tendered hereby. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for additional guidance on which number to report. If the tendering stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the stockholder should write "Applied For" in the space provided for the TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% of all payments of the purchase price to such stockholder until a TIN is provided to the Depositary. 10 ALL TENDERING STOCKHOLDERS MUST COMPLETE THE FOLLOWING: - ---------------------------------------------------------------------------------------------------------- PAYER'S NAME: HARRIS TRUST COMPANY OF NEW YORK - ---------------------------------------------------------------------------------------------------------- SUBSTITUTE | PART I -- Taxpayer Identification | ------------------------------ FORM W-9 | Number -- For all accounts, enter taxpayer | Social Security Number(s) DEPARTMENT OF THE TREASURY | identification number in the box at right. | OR INTERNAL REVENUE SERVICE | (For most individuals, this is your social | | security number. If you do not have a | ------------------------------ | number, see Obtaining a Number in the | Employer Identification Number | enclosed Guidelines.) Certify by signing and | (if awaiting TIN write | dating below. Note: If the account is in | "Applied For") | more than one name, see the chart in the | | enclosed Guidelines to determine which | | number to give the payer. | |---------------------------------------------------------------------------- PAYER'S REQUEST FOR TAXPAYER | PART II -- For Payees Exempt From Backup Withholding, see the enclosed IDENTIFICATION NUMBER | Guidelines and complete as instructed therein. ("TIN") | CERTIFICATION -- Under penalties of perjury, I certify that: | (1) The number shown on this form is my correct Taxpayer Identification | Number (or I am waiting for a number to be issued to me), and | (2) I am not subject to backup withholding because: (a) I am exempt from | backup withholding, or (b) I have not been notified by the Internal | Revenue Service (the "IRS") that I am subject to backup withholding | as a result of a failure to report all interest or dividends, or (c) | the IRS has notified me that I am no longer subject to backup | withholding. | CERTIFICATE INSTRUCTIONS -- You must cross out item (2) above if you | have been notified by the IRS that you are subject to backup withholding | because of underreporting interest or dividends on your tax return. | However, if after being notified by the IRS that you were subject to | backup withholding you received another notification from the IRS that | you are no longer subject to backup withholding, do not cross out item | (2). (Also see instructions in the enclosed Guidelines.) - ------------------------------------------------------------------------------------------------------
Signature ___________________________ Date ____________ 1998 - ------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR ADDITIONAL DETAILS. 11 The Information Agent for the Offer is: CORPORATE INVESTOR COMMUNICATIONS, INC. 111 Commerce Road - Carlstadt, New Jersey 07072-2586 Banks and Brokers call (800) 346-7885 All others call Toll Free (888) 203-7315 The Dealer Manager for the Offer is: MCDONALD & COMPANY SECURITIES, INC. McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114-2603 (216) 443-2300 February 6, 1998 EX-99.A.4 5 EXHIBIT 99(A)(4) 1 EXHIBIT (a)(4) NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. TO FCA ACQUISITION CORPORATION A WHOLLY OWNED SUBSIDIARY OF FABRI-CENTERS OF AMERICA, INC. (NOT TO BE USED FOR SIGNATURE GUARANTEES) This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Offer (as defined below) if (i) certificates ("Share Certificates") evidencing shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), are not immediately available, (ii) time will not permit all required documents to reach Harris Trust Company of New York, as Depositary (the "Depositary"), prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase (as defined below)), or (iii) the procedure for book-entry transfer cannot be completed on a timely basis. This Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary. See Section 2 of the Offer to Purchase. The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Hand/Overnight Delivery: Wall Street Station Receive Window P.O. Box 1023 Wall Street Plaza New York, NY 10268-1023 88 Pine Street, 19th Floor New York, NY 10005
By Facsimile Transmission: (212) 701-7636 For Information Telephone: (212) 701-7624 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. 2 Ladies and Gentlemen: The undersigned hereby tenders to FCA Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 6, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), receipt of each of which is hereby acknowledged, the number of Shares specified below pursuant to the guaranteed delivery procedures described in Section 2 of the Offer to Purchase. Number of Shares: --------------------------------------------------------------- Certificate No(s). (if available): -------------------------------------------- Check box if Shares will be tendered by book-entry transfer: [ ] Account Number: ----------------------------------------------------------------- Name(s) of Record Holder(s): --------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT) Address(es): -------------------------------------------------------------------- - -------------------------------------------------------------------------------- (INCLUDE ZIP CODE) Company Area Code and Tel. No.: -------------------------------------------- Area Code and Tel. No.: --------------------------------------------------------- Signature(s) -------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: ________________ , 1998 2 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEES) The undersigned, a firm that is a commercial bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program hereby (a) represents that the tender of Shares effected hereby complies with Rule 14e-4 of the Securities Exchange Act of 1934, as amended, and (b) guarantees delivery to the Depositary, at one of its addresses set forth above, of Share Certificates evidencing the Shares tendered hereby in proper form for transfer, or confirmation of book-entry transfer of such Shares into the Depositary's accounts at The Depository Trust Co., in each case with delivery of a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) with any required signature guarantees, or an Agent's Message (as defined in Section 2 of the Offer to Purchase), and any other documents required by the Letter of Transmittal, within three New York Stock Exchange, Inc. trading days after the date of execution of this Notice of Guaranteed Delivery. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal and Share Certificates to the Depositary within the time period shown herein. Failure to do so could result in financial loss to such Eligible Institution. Name of Firm: ------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (ZIP CODE) AUTHORIZED SIGNATURE: --------------------------------------------------------- Name: --------------------------------------------------------------------------- (PLEASE PRINT) Title: -------------------------------------------------------------------------- Area Code and Tel. No.: ------------------------------------------------------ Dated: , 1998 ----------- NOTE: DO NOT SEND SHARE CERTIFICATE(S) WITH THIS NOTICE OF GUARANTEED DELIVERY. SHARE CERTIFICATE(S) SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 3 EX-99.A.5 6 EXHIBIT 99(A)(5) 1 EXHIBIT (a)(5) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. BY FCA ACQUISITION CORPORATION A WHOLLY OWNED SUBSIDIARY OF FABRI-CENTERS OF AMERICA, INC. AT $4.25 NET PER SHARE THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN STANDARD TIME, ON FRIDAY, MARCH 6, 1998, UNLESS THE OFFER IS EXTENDED. February 6, 1998 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation (the "Parent"), to act as Dealer Manager in connection with the Purchaser's offer to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), at a price of $4.25 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 6, 1998 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") enclosed herewith. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED A NUMBER OF SHARES WHICH, WHEN ADDED TO THE SHARES BENEFICIALLY OWNED BY THE PARENT, WOULD REPRESENT AT LEAST A MAJORITY OF THE SHARES OUTSTANDING ON A FULLY DILUTED BASIS ON THE DATE OF PURCHASE. THE OFFER IS NOT CONDITIONED ON THE RECEIPT OF FINANCING. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares registered in your name or in the name of your nominee. For your information and for forwarding to your clients for whom you hold Shares registered in your name or in the name of your nominee, or who hold Shares registered in their own names, we are enclosing the following documents: 1. The Offer to Purchase, dated February 6, 1998; 2. The Letter of Transmittal to be used by holders of Shares in accepting the Offer and tendering Shares; 3. The Notice of Guaranteed Delivery to be used to tender Shares pursuant to the Offer if none of the procedures for tendering Shares set forth in the Offer to Purchase can be completed on a timely basis; 4. A printed form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominees, with space provided for obtaining such clients' instructions with regard to the Offer; 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 6. A return envelope addressed to Harris Trust Company of New York, as the Depositary. 2 Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will purchase, by accepting for payment, and will pay for the Shares validly tendered prior to the Expiration Date (as defined in the Offer to Purchase) promptly after the Expiration Date. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, tendered Shares as, if and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance of such Shares for payment pursuant to the Offer. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (i) Share Certificates or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Co. pursuant to the procedures set forth in Section 2 of the Offer to Purchase, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in Section 2 of the Offer to Purchase), and (iii) any other documents required by the Letter of Transmittal. The Purchaser will not pay any fees or commissions to any broker or dealer or any other person (other than the Dealer Manager, the Information Agent and the Depositary) in connection with the solicitation of tenders of Shares pursuant to the Offer. The Purchaser will, however, upon request, reimburse you for customary mailing and handling expenses incurred by you in forwarding the enclosed materials to your clients. The Purchaser will pay any stock transfer taxes incident to the transfer to it of validly tendered Shares, except as otherwise provided in Instruction 6 of the Letter of Transmittal. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN STANDARD TIME, ON FRIDAY, MARCH 6, 1998, UNLESS THE OFFER IS EXTENDED. In order to take advantage of the Offer, a duly executed and properly completed Letter of Transmittal (or a facsimile thereof), with any required signature guarantees and any other required documents, should be sent to the Depositary, and certificates evidencing the tendered Shares should be delivered or such Shares should be tendered by book-entry transfer, all in accordance with the Instructions set forth in the Letter of Transmittal and the Offer to Purchase. If holders of Shares wish to tender Shares, but it is impracticable for them to forward their Share Certificates or other required documents to the Depositary prior to the Expiration Date or to comply with the procedures for book-entry transfer on a timely basis, a tender may be effected by following the guaranteed delivery procedures specified under Section 2 of the Offer to Purchase. Any inquiries you may have with respect to the Offer should be addressed to Corporate Investor Communications, Inc., the Information Agent, or McDonald & Company Securities Inc., the Dealer Manager, at their respective addresses and telephone numbers set forth on the back cover page of the Offer to Purchase. Additional copies of the enclosed materials may be obtained by calling Corporate Investor Communications, Inc., the Information Agent, at (800) 346-7885 or from brokers, dealers, commercial banks or trust companies. Very truly yours, MCDONALD & COMPANY SECURITIES, INC. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS AN AGENT OF THE PARENT, THE PURCHASER, THE COMPANY, THE DEPOSITARY, THE INFORMATION AGENT OR THE DEALER MANAGER, OR ANY AFFILIATE OF ANY OF THE FOREGOING, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS ENCLOSED AND THE STATEMENTS CONTAINED THEREIN. 2 EX-99.A.6 7 EXHIBIT 99(A)(6) 1 EXHIBIT (a)(6) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. BY FCA ACQUISITION CORPORATION A WHOLLY OWNED SUBSIDIARY OF FABRI-CENTERS OF AMERICA, INC. AT $4.25 NET PER SHARE THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN STANDARD TIME, ON FRIDAY, MARCH 6, 1998, UNLESS THE OFFER IS EXTENDED. February 6, 1998 To Our Clients: Enclosed for your consideration is an Offer to Purchase, dated February 6, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") in connection with the Offer by FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation (the "Parent"), to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), at a price of $4.25 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase. Stockholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required by the Letter of Transmittal to the Depositary prior to the Expiration Date (as defined in the Offer to Purchase) or who cannot complete the procedure for delivery by book-entry transfer to the Depositary's account at the Book-Entry Transfer Facility (as defined in Section 2 of the Offer to Purchase) on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in Section 2 of the Offer to Purchase. See Instruction 2 of the Letter of Transmittal. Delivery of documents to the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures does not constitute delivery to the Depositary. THE MATERIAL IS BEING SENT TO YOU AS THE BENEFICIAL OWNER OF SHARES HELD BY US FOR YOUR ACCOUNT BUT NOT REGISTERED IN YOUR NAME. WE ARE THE HOLDER OF RECORD OF SHARES HELD BY US FOR YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer to Purchase. 2 Your attention is invited to the following: 1. The tender price is $4.25 per Share, net to the seller in cash, without interest thereon. 2. The Offer and withdrawal rights will expire at 12:00 midnight, Eastern Standard Time, on Friday, March 6, 1998, unless the Offer is extended. 3. The Offer is being made for all outstanding Shares. 4. The Offer is conditioned upon, among other things, there being validly tendered a number of Shares which, when added to the Shares beneficially owned by the Parent, would represent at least a majority of the Shares outstanding on a fully diluted basis on the date of purchase. See Section 14 of the Offer to Purchase. 5. The Offer is not conditioned on the receipt of financing. Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares by the Purchaser pursuant to the Offer. The Offer is made solely by the Offer to Purchase and the related Letter of Transmittal. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. Neither the Purchaser nor the Parent is aware of any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. To the extent the Purchaser or the Parent becomes aware of any state law that would limit the class of offerees in the Offer, the Purchaser will amend the Offer and, depending on the timing of such amendment, if any, will extend the Offer to provide adequate dissemination of such information to such holders of Shares prior to the expiration of the Offer. In any jurisdiction the securities, blue sky or other laws of which require the Offer to be made by a licensed broker or dealer, the Offer is being made on behalf of the Purchaser by the Dealer Manager or one or more registered brokers or dealers licensed under the laws of such jurisdiction. If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing and returning to us the instruction form contained in this letter. An envelope in which to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified on the instruction form contained in this letter. Your instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf prior to the expiration of the Offer. 2 3 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated February 6, 1998, and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), in connection with the Offer by FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation, to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation, at a price equal to $4.25 per Share, net to the seller in cash. This will instruct you to tender to the Purchaser the number of Shares indicated below (or, if no number is indicated below, all Shares) held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer to Purchase. Number of Shares to be Tendered*: ----------------------------------------------- Dated: , 1998 ------------ SIGN HERE Signature(s): ------------------------------------------------------------------- Print or Type Name(s): ---------------------------------------------------------- Print or Type Address(es): ------------------------------------------------------ - -------------------------------------------------------------------------------- Area Code and Telephone Number(s): ---------------------------------------------- Taxpayer Identification or Social Security Number(s): --------------------------- - ----------- * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. EX-99.A.7 8 EXHIBIT 99(A)(7) 1 EXHIBIT (a)(7) GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.--Social security numbers and IRS individual taxpayer identification numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer.
- --------------------------------------------------------- GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF -- - --------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals (joint The actual owner account) of the account or, if combined funds, the first individual on the account(1) 3. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 4. a. The usual revocable savings The grantor- trust account (grantor is also trustee(1) trustee) b. So-called trust account that The actual is not a legal or valid trust owner(1) under State law 5. Sole proprietorship account The owner(3) - ---------------------------------------------------------
- --------------------------------------------------------- GIVE THE EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF -- - --------------------------------------------------------- 6. A valid trust, estate, or The legal entity pension trust (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(4) 7. Corporate account The corporation 8. Association, club, religious, The organization charitable, educational or other tax-exempt organization 9. Partnership account The partnership 10. A broker or registered nominee The broker or nominee 11. Account with the Department of The public entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - ---------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. If only one person on a joint account has a social security number, that person's number must be furnished (2) Circle the minor's name and furnish the minor's social security number. (3) You must show your individual name, but you may also enter your business or "doing business as" name. You may use either your social security number or your employer identification number (if you have one). (4) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when more than one name is listed, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 OBTAINING A NUMBER If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, Application for a Social Security Card, Form W-7, Application for IRS Individual Taxpayer Identification Number, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on interest and dividend payments and payments received in broker transactions include the following: - A corporation. - A financial institution. - An organization exempt from tax under section 501(a), or an individual retirement plan. - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization or any agency, or instrumentality thereof. - A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. - A real estate investment trust. - A common trust fund operated by a bank under section 584(a). - An entity registered at all times under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends that generally are exempt from backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Section 404(k) payments made by an ESOP Payments of interest that generally are exempt from backup withholding include the following: - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to nonresident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - Mortgage interest paid to you. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividends, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonments. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A.8 9 EXHIBIT 99(A)(8) 1 Exhibit (a)(8) This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares. The Offer is made solely by the Offer to Purchase, dated February 6, 1998, and the related Letter of Transmittal and any amendments or supplements thereto, and is being made to all holders of Shares. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. Neither the Purchaser nor the Parent is aware of any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. To the extent the Purchaser or the Parent becomes aware of any state law that would limit the class of offerees in the Offer, the Purchaser will amend the Offer and, depending on the timing of such amendment, if any, will extend the Offer to provide adequate dissemination of such information to such holders of Shares prior to the expiration of the Offer. In any jurisdiction the securities, blue sky or other laws of which require the Offer to be made by a licensed broker or dealer, the Offer is being made on behalf of the Purchaser by the Dealer Manager or one or more registered brokers or dealers licensed under the laws of such jurisdiction. NOTICE OF OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF HOUSE OF FABRICS, INC. BY FCA ACQUISITION CORPORATION A WHOLLY OWNED SUBSIDIARY OF FABRI-CENTERS OF AMERICA, INC. AT $4.25 NET PER SHARE FCA Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Fabri-Centers of America, Inc., an Ohio corporation (the "Parent"), is offering to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares"), of House of Fabrics, Inc., a Delaware corporation (the "Company"), at a price of $4.25 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 6, 1998, and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, EASTERN STANDARD TIME, ON FRIDAY, MARCH 6, 1998, UNLESS THE OFFER IS EXTENDED. The Offer is being made pursuant to an Agreement and Plan of Merger, dated February 1, 1998 (the "Merger Agreement"), among the Purchaser, the Parent and the Company. The Merger Agreement provides, among other things, for the merger of the Purchaser with and into the Company (the "Merger") following the purchase of Shares pursuant to the Offer. In the Merger, each outstanding Share (other than Shares owned by the Parent or any subsidiary of the Parent, Shares held as treasury shares by the Company, and Shares owned by stockholders who perfect appraisal rights under Delaware law) will be converted into the right to receive $4.25 per Share net in cash. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, HAS DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS, AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES. The Offer is conditioned upon, among other things, (i) there being validly tendered a number of Shares which, when added to the Shares beneficially owned by the Parent, would represent at least a majority of the Shares outstanding on a fully diluted basis on the date of purchase (the "Minimum Condition"), and (ii) the expiration or termination of all waiting periods imposed by the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder. The Offer is not conditioned on the receipt of financing. If, by the Expiration Date (including any extension required by the Merger Agreement), any or all of the conditions to the Offer have not been satisfied or waived, the Purchaser reserves the right (but will not be obligated), subject to the 2 applicable rules and regulations of the Securities and Exchange Commission, to (a) terminate the Offer and not accept for payment or pay for any Shares and return all tendered Shares to tendering stockholders, (b) waive all the unsatisfied conditions (except that the Purchaser may not waive the Minimum Condition without the consent of the Company) and accept for payment and pay for all Shares validly tendered prior to the Expiration Date, (c) extend the Offer and, subject to the right of stockholders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is extended, or (d) amend the Offer. The Merger Agreement provides that the Purchaser may not decrease the price payable in the Offer, change the form of consideration payable in the Offer, change the conditions to the Offer, impose additional conditions to the Offer, or change any other terms of the Offer in a manner adverse to the holders of the Shares, except that the Purchaser may extend the Expiration Date as set forth in the next paragraph. The Merger Agreement provides that, at the Company's request, the Purchaser will extend the Expiration Date from time to time for up to an aggregate of ten business days following the Expiration Date if the Minimum Condition is not fulfilled prior to 12:00 p.m. on the Expiration Date. In addition, the Merger Agreement provides that the Purchaser may, in its discretion, extend the Expiration Date to the extent required by applicable law, if any of the conditions to the Offer are not satisfied, or if less than 90% of the outstanding Shares have been validly tendered and not withdrawn pursuant to the Offer. The term "Expiration Date" means 12:00 midnight, Eastern Standard Time, on Friday, March 6, 1998, unless the Purchaser extends the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Purchaser, will expire. For purposes of this Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares validly tendered to the Purchaser as, if and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance for payment of such Shares. Payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for validly tendering stockholders for the purpose of receiving payment from the Purchaser and transmitting payment to tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates evidencing such Shares ("Share Certificates") or confirmation of a book-entry transfer of such Shares into the Depositary's account at the Book-Entry Transfer Facility (as defined in the Offer to Purchase); (ii) a properly completed and duly executed Letter of Transmittal (or facsimile thereof), or in the case of a book-entry transfer, an Agent's Message (as defined in the Offer to Purchase); and (iii) any other documents required by the Letter of Transmittal. Accordingly, payment may be made to tendering stockholders at different times if delivery of the Shares and other required documents occur at different times. Except as otherwise provided below, tenders of Shares pursuant to the Offer are irrevocable. Shares tendered pursuant to the Offer may be withdrawn pursuant to the procedures set forth below at any time prior to the Expiration Date and, unless theretofore accepted for payment by the Purchaser pursuant to the Offer, may also be withdrawn at any time after April 6, 1998. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at its address set forth on the back cover of the Offer to Purchase and must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of the Shares to be withdrawn, if different from the name of the person who tendered the Shares. If Share Certificates have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and, unless such Shares have been tendered by an Eligible Institution (as defined in the Offer to Purchase), the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution. If Shares have been delivered pursuant to the procedure for book-entry transfer as set forth in Section 2 of the Offer to Purchase, any notice of withdrawal must also specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with the Book-Entry Transfer Facility's procedures. Withdrawals of tenders of Shares may not be rescinded, and any Shares properly withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 2 of the Offer to Purchase at any time prior to the Expiration Date. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding on all parties. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided the Purchaser with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. THE OFFER TO PURCHASE AND LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 3 Questions and requests for assistance or for additional copies of the Offer to Purchase and the related Letter of Transmittal and other tender offer materials may be directed to the Dealer Manager or the Information Agent at their respective addresses and telephone numbers as set forth below, and copies will be furnished promptly at the Purchaser's expense. No fees or commissions will be paid to brokers, dealers or other persons (other than the Dealer Manager and the Information Agent) for soliciting tenders of Shares pursuant to the Offer. The Information Agent for the Offer is: Corporate Investor Communications, Inc. 111 Commerce Road - Carlstadt, New Jersey 07072-2586 Banks and Brokers call (800) 346-7885 All others call Toll Free (888) 203-7315 The Dealer Manager for the Offer is: MCDONALD & COMPANY SECURITIES, INC. McDonald Investment Center 800 Superior Avenue Cleveland, Ohio 44114-2603 (216) 443-2300 February 6, 1998 EX-99.C 10 EXHIBIT 99(C) 1 Exhibit (c) AGREEMENT AND PLAN OF MERGER DATED AS OF FEBRUARY 1, 1998 AMONG FABRI-CENTERS OF AMERICA, INC. FCA ACQUISITION CORPORATION, AND HOUSE OF FABRICS, INC. 2 TABLE OF CONTENTS ARTICLE I THE TENDER OFFER AND MERGER...................................................1 SECTION 1.01. Tender Offer..................................................................1 SECTION 1.02. The Merger....................................................................4 SECTION 1.03. Conversion of Shares..........................................................5 SECTION 1.04. Surrender and Payment.........................................................6 SECTION 1.05. Company Options; Series B Warrants............................................7 SECTION 1.06. Shares of Dissenting Stockholders.............................................8 ARTICLE II THE SURVIVING CORPORATION; THE PARENT DIRECTORS.....................................................................8 SECTION 2.01. Certificate of Incorporation..................................................8 SECTION 2.02. Bylaws........................................................................8 SECTION 2.03. Directors and Officers........................................................9 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................................9 SECTION 3.01. Corporate Existence and Power.................................................9 SECTION 3.02. Corporate Authorization.......................................................9 SECTION 3.03. Governmental Authorization....................................................9 SECTION 3.04. Certificate of Incorporation and Bylaws......................................10 SECTION 3.05. Non-Contravention............................................................10 SECTION 3.06. Capitalization...............................................................10 SECTION 3.07. Subsidiaries.................................................................11 SECTION 3.08. Company SEC Reports..........................................................12 SECTION 3.09. Financial Statements; No Undisclosed Liabilities.............................12 SECTION 3.10. Inventory....................................................................12 SECTION 3.11. Contracts and Commitments....................................................13 SECTION 3.12. Absence of Certain Changes...................................................14 SECTION 3.13. Litigation...................................................................15 SECTION 3.14. Permits; Compliance..........................................................15 SECTION 3.15. ERISA........................................................................16 SECTION 3.16. Labor........................................................................18 SECTION 3.17. Taxes........................................................................19 SECTION 3.18. Real Estate..................................................................22 SECTION 3.19. Personal Property............................................................23 SECTION 3.20. Intellectual Property Rights.................................................23 SECTION 3.21. Environmental Protection.....................................................24 SECTION 3.22. Insurance....................................................................25 SECTION 3.23. Indemnification..............................................................25 SECTION 3.24. Board Approval and Recommendation............................................26
i 3 SECTION 3.25. Vote Required................................................................26 SECTION 3.26. Opinion of Financial Advisor.................................................26 SECTION 3.27. Finders and Investment Bankers...............................................26 SECTION 3.28. Takeover Statutes; No Shareholder Rights Plan................................26 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB....................................................27 SECTION 4.01. Corporate Existence..........................................................27 SECTION 4.02. Corporate Authorization......................................................27 SECTION 4.03. Governmental Authorization...................................................27 SECTION 4.04. Non-Contravention............................................................28 SECTION 4.05. Parent SEC Reports...........................................................28 SECTION 4.06. Financial Statements; No Undisclosed Liabilities.............................29 SECTION 4.07. Litigation...................................................................29 SECTION 4.08. Vote Required................................................................29 SECTION 4.09. Availability of Funds........................................................30 SECTION 4.10. Fraudulent Conveyance........................................................30 SECTION 4.11. Finders and Investment Bankers...............................................30 ARTICLE V COVENANTS OF THE COMPANY.....................................................30 SECTION 5.01. Conduct of the Company.......................................................30 SECTION 5.02. Access to Information........................................................32 SECTION 5.03. Other Offers.................................................................32 SECTION 5.04. Notices of Certain Events....................................................34 SECTION 5.05. Merger Meeting; Proxy Statement..............................................34 ARTICLE VI COVENANTS OF THE PARENT AND MERGER SUB.......................................35 SECTION 6.01. Director and Officer Liability...............................................35 SECTION 6.02. Merger Meeting...............................................................37 SECTION 6.03. Employee Benefits............................................................37 ARTICLE VII COVENANTS OF THE PARENT, MERGER SUB, AND THE COMPANY......................................................................38 SECTION 7.01. Reasonable Efforts...........................................................38 SECTION 7.02. Certain Filings and Consents.................................................38 SECTION 7.03. Public Announcements.........................................................39 ARTICLE VIII CONDITIONS TO THE MERGER.....................................................39 SECTION 8.01. Conditions to the Obligations of Each Party..................................39 SECTION 8.02. Conditions to the Obligations of the Parent and Merger Sub...................39 ARTICLE IX TERMINATION..................................................................40 SECTION 9.01. Termination..................................................................40
ii 4 SECTION 9.02. Effect of Termination........................................................41 ARTICLE X MISCELLANEOUS................................................................41 SECTION 10.01. Notices......................................................................41 SECTION 10.02. Survival.....................................................................42 SECTION 10.03. Amendments; No Waivers.......................................................43 SECTION 10.04. Fees and Expenses............................................................43 SECTION 10.05. "Knowledge" of the Company...................................................44 SECTION 10.06. Successors and Assigns.......................................................44 SECTION 10.07. Governing Law................................................................44 SECTION 10.08. Counterparts; Effectiveness..................................................45 SECTION 10.09. Entire Agreement.............................................................45 SECTION 10.10. Headings.....................................................................45 SECTION 10.11. Severability.................................................................45 SECTION 10.12. Specific Performance.........................................................45 INDEX OF DEFINED TERMS .............................................................................47 LIST OF SCHEDULES .............................................................................49
iii 5 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of February 1, 1998 (this "Agreement"), is among FABRI-CENTERS OF AMERICA, INC., an Ohio corporation (the "Parent"), FCA ACQUISITION CORPORATION, a Delaware corporation and wholly owned subsidiary of the Parent ("Merger Sub"), and HOUSE OF FABRICS, INC., a Delaware corporation (the "Company"). In consideration of the respective representations, warranties, and agreements set forth herein and in the Stock Option Agreement, the parties agree as follows: ARTICLE I THE TENDER OFFER AND MERGER SECTION 1.01. Tender Offer (a) As promptly as practicable, but in no event later than five business days after the public announcement of the execution of this Agreement, Merger Sub will, and the Parent will cause Merger Sub to, offer to purchase ( the "Offer") each outstanding share of the Common Stock, $0.01 par value (the "Common Stock"), of the Company tendered pursuant to the Offer at a price of $4.25 per share, net to the seller in cash, and to cause the Offer to remain open until the close of business on the twentieth business day after the commencement of the Offer (the "Expiration Date"). The obligations of Merger Sub and the Parent to consummate the Offer and to accept for payment and purchase the Common Stock tendered in the Offer will be subject only to the conditions set forth in Schedule 1.01(a) (Offer Conditions) (the "Offer Conditions"). At the Company's request, Merger Sub will, and the Parent will cause Merger Sub to, extend the expiration date of the Offer from time to time for up to an aggregate of ten business days following the Expiration Date if the condition set forth in clause (1) of the first paragraph of the Offer Conditions is not fulfilled prior to 12:00 p.m. on the Expiration Date. Merger Sub will not, and the Parent will cause Merger Sub not to, decrease the price payable in the Offer, change the form of consideration payable in the Offer, reduce the number of shares of Common Stock subject to the Offer, change the Offer Conditions, impose additional conditions to its obligation to consummate the Offer and to accept for payment and purchase shares of Common Stock tendered in the Offer, or change any other terms of the Offer in a manner adverse to the holders of the Common Stock, except that Merger Sub may extend the Expiration Date to the extent required by applicable law, if any of the Offer Conditions are not satisfied, or if less than 90% of the outstanding shares of Common Stock have been validly tendered and not withdrawn pursuant to the Offer. Subject to the terms and conditions of the Offer and this Agreement, Merger Sub will, and the Parent will cause Merger Sub to, accept for payment, and pay for, all shares of 1 6 Common Stock validly tendered and not withdrawn pursuant to the Offer that Merger Sub becomes obligated to accept for payment, and pay for, pursuant to the Offer promptly after the expiration of the Offer; except that, without the prior written consent of the Company, Merger Sub will not, and the Parent will cause Merger Sub not to, accept for payment, or pay for, any shares of Common Stock so tendered unless the Minimum Condition (as defined in the Offer Conditions) will have been satisfied. (b) On the date of the commencement of the Offer, Merger Sub and the Parent will file with the Securities and Exchange Commission (the "SEC") their Tender Offer Statement on Schedule 14D-1 (together with all supplements or amendments thereto, and including all exhibits, the "Offer Documents"). Merger Sub and the Parent will give the Company and its counsel a reasonable opportunity to review and comment upon the Offer Documents prior to their being filed with the SEC or disseminated to the Company's stockholders. The Parent and Merger Sub agree that the Offer Documents will comply as to form in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, and the Offer Documents, on the date first published, sent, or given to the Company's stockholders, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by the Parent or Merger Sub with respect to information supplied by the Company in writing specifically for inclusion or incorporation by reference in the Offer Documents. The Company agrees that any such information supplied by the Company that is included in the Offer Documents will not, at the time such information is furnished to the Parent, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the Parent, Merger Sub, and the Company will promptly correct any information provided by it for use in the Offer Documents if and to the extent that such information becomes false or misleading in any material respect, and the Parent and Merger Sub will take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to the Company's stockholders, in each case as and to the extent required by the Exchange Act. The Parent and Merger Sub will provide the Company and its counsel any comments the Parent, Merger Sub, or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments. (c) As promptly as practicable, but in no event later than the date on which the Parent notifies the Company that the Offer Documents initially are to be filed with the SEC, the Company will file its Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (together with all supplements or amendments thereto, and including all exhibits, the "Schedule 14D-9"), which will include a recommendation by the Company's Board of Directors that the Company's stockholders 2 7 accept the Offer and tender their Common Stock pursuant to the Offer. The Company agrees that the Schedule 14D-9 will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder and, on the date filed with the SEC and on the date first published, sent, or given to the Company's stockholders, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation or warranty is made by the Company with respect to information supplied by the Parent or Merger Sub in writing specifically for inclusion in the Schedule 14D-9. The Parent and Merger Sub agree that any such information supplied by the Parent and Merger Sub that is included in the Schedule 14D-9 will not, at the time such information is furnished to the Company, contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the Company, the Parent, and Merger Sub will promptly correct any information provided by it for use in the Schedule 14D-9 if and to the extent that such information becomes false or misleading in any material respect, and the Company will take all steps necessary to amend or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or supplemented to be filed with the SEC and disseminated to the Company's stockholders, in each case as and to the extent required by the Exchange Act. The Parent and its counsel will be given reasonable opportunity to review and comment upon the Schedule 14D-9 prior to its filing with the SEC or dissemination to stockholders of the Company. The Company will provide the Parent and its counsel any comments the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments. The Company's Board of Directors has resolved to recommend that the Company's stockholders accept the Offer and tender their Common Stock pursuant to the Offer and has received an opinion from Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") that, as of the date of such opinion, the cash consideration to be received by the stockholders of the Company pursuant to the Offer and the Merger is fair to such stockholders from a financial point of view. (d) If requested by the Parent or Merger Sub, the Company will, promptly following the purchase by Merger Sub pursuant to the Offer of that number of shares of Common Stock which, when aggregated with the shares of Common Stock then owned by the Parent and any of its affiliates, represents at least a majority of the shares of Common Stock then outstanding on a fully diluted basis, take all actions necessary to cause persons designated by Merger Sub to become directors of the Company so that the total number of directors so designated equals the product, rounded up to the next whole number, of (i) the total number of directors of the Company multiplied by (ii) the ratio of the number of shares of Common Stock beneficially owned by Merger Sub or its affiliates to the number of shares of Common Stock then outstanding. In furtherance thereof, the Company will take whatever action is necessary, including but not limited to amending the Company's bylaws, to increase the size of its Board of Directors, or use reasonable efforts 3 8 to secure the resignation of directors, or both, as is necessary to permit that number of Merger Sub's designees to be elected to the Company's Board of Directors; provided that, prior to the Effective Time, the Company's Board of Directors will always have at least two members who are currently directors of the Company, except to the extent that no such individuals wish to be directors ("Continuing Directors"). The Company's obligations to appoint designees to its Board of Directors will be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Parent and Merger Sub will supply to the Company and will be solely responsible for any information with respect to either of them and their nominees, officers, directors, and affiliates required by Section 14(f) and Rule 14f-1. The Company will promptly take all actions required pursuant to Section 14(f) and Rule 14f-1 in order to fulfill its obligations under this Section 1.01 and (provided Merger Sub has furnished the Company on a timely basis with all information required to be included in the Information Statement with respect to Merger Sub's designees) will include in the Schedule 14D-9 such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1. (e) Following the election or appointment of Merger Sub's designees pursuant to Section 1.01(d), any amendment to this Agreement, any termination of this Agreement by the Company, any extension by the Company of the time for the performance of any of the obligations of Merger Sub or the Parent under this Agreement (except as expressly permitted hereunder), any recommendation to stockholders or any modification or withdrawal of any such recommendation, any retention of counsel and other advisors in connection with the transactions contemplated hereby, or any waiver of any of the Company's rights under this Agreement will require the concurrence of a majority of the Continuing Directors, unless no individuals who are currently directors of the Company wish to be directors. In addition, the Continuing Directors will have the right to retain, at the expense of the Company, one separate firm of counsel to represent them in connection with the transactions contemplated hereby. (f) The parties will cooperate with each other, including by furnishing any necessary information and making any filings required by applicable law, to ensure that the matters contemplated by this Section 1.01 are consummated as promptly as practicable. SECTION 1.02. The Merger. (a) Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.02(b)), Merger Sub will be merged with and into the Company in accordance with the Delaware General Corporation Law ("Delaware Law"). As a result of this merger (the "Merger"), the separate existence of Merger Sub will cease and the Company will be the surviving corporation (the "Surviving Corporation"). 4 9 (b) As soon as practicable after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger set forth in Article VIII, the parties will cause a certificate of merger in such form as is required by, and executed in accordance with, Delaware Law to be duly filed with the Secretary of State of the State of Delaware. The Merger will become effective when the certificate of merger is so filed (the "Effective Time"). (c) From and after the Effective Time, the Merger will have the effects specified in Delaware Law. (d) The closing of the Merger (the "Closing") will take place (i) at the offices of Thompson Hine & Flory LLP, 3900 Key Center, 127 Public Square, Cleveland, Ohio 44114-1216, at 10:00 a.m. as soon as practicable (and in no event later than the fifth business day) following the date on which the last to be fulfilled or waived of the conditions set forth in Article VIII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions at the Closing) have been satisfied or waived in accordance with this Agreement or (ii) at such other place and time as the parties may agree. SECTION 1.03. Conversion of Shares. At the Effective Time: (a) Each share of Common Stock of Merger Sub (a share of "Merger Sub Common Stock") issued and outstanding immediately prior to the Effective Time will be converted into one share of Common Stock of the Surviving Corporation. (b) Each share of Common Stock issued and outstanding immediately prior to the Effective Time will, except as otherwise provided in Section 1.03(c), be converted, by virtue of the Merger and without any action on the part of the holder thereof, into the right to receive, without interest, an amount in cash equal to the price per share paid in the Offer (the "Merger Consideration"). Subject to Section 1.06, from and after the Effective Time, all shares of Common Stock, by virtue of the Merger and without any action on the part of the holders thereof, will be canceled, and each holder of a certificate representing any shares of Common Stock immediately prior to the Effective Time (a "Stock Certificate") will thereafter cease to have any rights with respect thereto except the right to receive (i) the Merger Consideration therefor upon the surrender of the Stock Certificate in accordance with Section 1.04 or (ii) payment from the Surviving Corporation of the "fair value" of such shares of Common Stock as determined under Section 262 of the Delaware Law, subject to the conditions set forth therein and in accordance with Section 1.06 of this Agreement. 5 10 (c) Each outstanding share of Common Stock held by the Company as a treasury share or owned by the Parent, Merger Sub, or any other Subsidiary of the Parent immediately prior to the Effective Time will be canceled, and no payment will be made with respect thereto. SECTION 1.04. Surrender and Payment. (a) Prior to the Effective Time, the Parent will appoint a bank or trust company reasonably acceptable to the Company (the "Exchange Agent") for the purpose of exchanging Stock Certificates. The Parent will make available to the Exchange Agent funds in amounts and at the times necessary for the payment of the Merger Consideration in accordance with this Section 1.04 (such cash is referred to as the "Exchange Fund"). (b) Promptly, but in no event more than five business days, after the Effective Time, the Parent will send, or will cause the Exchange Agent to send, to each holder of a Stock Certificate a letter of transmittal and instructions for use in surrendering the Stock Certificates for payment in accordance with this Section 1.04. The agreement with the Exchange Agent will provide that, upon surrender to the Exchange Agent of such Stock Certificates, together with the letter of transmittal, duly executed and completed in accordance with the instructions thereto and such other documents as may be reasonably required by the Exchange Agent, the Exchange Agent will promptly pay to the persons entitled thereto, out of the Exchange Fund, a check in the amount to which such persons are entitled pursuant to Section 1.03(b), after giving effect to any required tax withholdings, and such Stock Certificate will forthwith be canceled. (c) If any cash is to be paid to a Person other than the registered holder of the Stock Certificates surrendered in exchange therefor, it will be a condition to such payment that the Stock Certificates so surrendered be properly endorsed or otherwise in proper form for transfer and that the Person requesting such payment pay to the Exchange Agent any transfer or other taxes required as a result of such issuance or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. For purposes of this Agreement, "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust, or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. (d) At and after the Effective Time, the stock transfer books of the Company will be closed, and there will be no further registration of transfers of shares of Common Stock outstanding prior to the Effective Time. If, at or after the Effective Time, Stock Certificates are presented to the Surviving Corporation, they will be canceled and exchanged in accordance with this Article I. 6 11 (e) Any cash in the Exchange Fund that remains unclaimed by the holders of shares of Common Stock six months after the Effective Time will be returned to the Parent, upon demand, and any such holder who has not surrendered his shares of Common Stock in accordance with this Section 1.04 prior to that time will thereafter look only to the Parent, as a general creditor thereof, to pay the Merger Consideration to which such holder is entitled. Notwithstanding the foregoing, the Parent will not be liable to any holder of shares of Common Stock for any amount paid to a public official pursuant to applicable abandoned property, escheat, or similar laws. (f) If any Stock Certificate is lost, stolen, or destroyed, upon the making of an affidavit of that fact by the Person claiming such Stock Certificate to be lost, stolen, or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond in such reasonable amount as the Parent may direct as indemnity against any claim that may be made against it with respect to such Stock Certificate, the Exchange Agent will pay the Merger Consideration payable in respect of such Stock Certificate pursuant to this Agreement. SECTION 1.05. Company Options; Series B Warrants. (a) At the Effective Time, each outstanding option (a "Company Option") to purchase shares of Common Stock granted to employees, directors, or F.M. Roberts & Co. ("F.M. Roberts"), whether or not exercisable, will be canceled, and in consideration of such cancellation, will be converted into the right to receive, without interest, an amount in cash (the "Cash Payment") equal to the product of (i) the number of shares of Company Stock subject to the Company Option and (ii) the excess of (A) the Merger Consideration over (B) the exercise price per share of the Company Option; provided that, with respect to any Person subject to Section 16 of the Exchange Act, any such amount will be paid, without interest, as soon as practicable after the first date payment can be made without liability of such Person under Section 16(b) of the Exchange Act. The Parent will be entitled to cause the Surviving Corporation to withhold from amounts otherwise payable pursuant to this Section 1.05 any amount required to be withheld under applicable tax laws. (b) At the Effective Time, the Parent will cause the Surviving Corporation to expressly assume the due and punctual performance and observance of each and every covenant and condition of the Series B Warrant Agreement (the "Series B Warrant Agreement") and the Series C Warrant Agreement ("Series C Warrant Agreement"), each executed by and between the Company and American Stock Transfer & Trust Company, as the warrant agent (the "Warrant Agent"), and dated as of July 31, 1996, that was to be performed by the Company under each agreement, by supplemental agreement (the "Supplemental Warrant Agreement") satisfactory in form to the Warrant Agent in the exercise of its reasonable judgment and executed and delivered to the Warrant Agent. The Supplemental Warrant Agreement shall further provide that each holder of a 7 12 Series B Warrant shall have the right after the Effective Time (a) upon exercise of each Series B Warrant and payment of the Exercise Price (as defined in the Series B Warrant Agreement) in effect immediately prior to the Effective Time, to receive the Merger Consideration and one Series C Warrant and (b) upon exercise of each Series C Warrant and payment of the Exercise Price (as defined in the Series C Warrant Agreement) in effect immediately prior to the Effective Time, to receive the Merger Consideration. SECTION 1.06. Shares of Dissenting Stockholders. Notwithstanding anything in this Agreement to the contrary, any outstanding shares of Common Stock held by a person (a "Dissenting Stockholder") who objects to the Merger and complies with all the provisions of Delaware Law concerning the right of holders of shares of Common Stock to dissent from the Merger and require appraisal of their shares will not be converted as described in Section 1.03(b), but will be converted into the right to receive such consideration as may be determined to be due to such Dissenting Stockholder pursuant to Delaware Law. If, after the Effective Time, such Dissenting Stockholder withdraws his demand for appraisal, or fails to perfect or otherwise loses his right to appraisal, in accordance with Delaware Law, his shares of Common Stock will be deemed to have been converted as of the Effective Time into the right to receive the Merger Consideration. The Company will give the Parent (i) prompt notice of any demands for appraisal of shares of Common Stock received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to any such demands. The Company will not, without the prior written consent of the Parent, make any payment with respect to, or settle, offer to settle, or otherwise negotiate, any such demands. ARTICLE II THE SURVIVING CORPORATION; THE PARENT DIRECTORS SECTION 2.01. Certificate of Incorporation. Subject to Section 6.01(a), the certificate of incorporation of Merger Sub in effect immediately prior to the Effective Time will be the certificate of incorporation of the Surviving Corporation after the consummation of the Merger until amended in accordance with applicable law. SECTION 2.02. Bylaws. Subject to Section 6.01(a), the bylaws of Merger Sub in effect immediately prior to the Effective Time will be the bylaws of the Surviving Corporation after the consummation of the Merger until amended in accordance with applicable law. 8 13 SECTION 2.03. Directors and Officers. From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable law, the directors and officers of Merger Sub immediately prior to the Effective Time will be the directors and officers of the Surviving Corporation after the consummation of the Merger. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Parent that: SECTION 3.01. Corporate Existence and Power. The Company is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as now conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where it is required to be so qualified by reason of the character of the property owned or leased by it or the nature of its activities, except where the failure to be so qualified would not have a Company Material Adverse Effect (as defined in the Offer Conditions). SECTION 3.02. Corporate Authorization. The execution and delivery by the Company of this Agreement, the consummation by the Company of the Merger, and the performance by the Company of its other obligations under this Agreement are within the Company's corporate power and authority and, except for any required approval by the Company's stockholders in connection with the consummation of the Merger, have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution, and delivery of this Agreement by the Parent and Merger Sub, constitutes a legal, valid, and binding agreement of the Company. SECTION 3.03. Governmental Authorization. The execution and delivery by the Company of this Agreement, the consummation by the Company of the Merger, and the performance by the Company of its other obligations under this Agreement do not require any consent, approval, authorization, or permit of, other action by, or filing with, any governmental body, agency, official, or authority by the Company other than (i) as set forth on Section 3.03 of the Disclosure 9 14 Schedule delivered by the Company to the Parent concurrently with the execution and delivery of this Agreement (the "Company Disclosure Schedule"), (ii) the filing of appropriate certificates of merger in accordance with Delaware Law, (iii) the filing and delivery of the Schedule 14D-9, (iv) compliance with applicable requirements of the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (v) the filing of the proxy materials referred to in Section 5.05(b), and (vi) any such other action or filing where the failure to take the action or to make the filing is not reasonably likely (A) to prevent or materially to delay the consummation of the Offer or the Merger or (B) to have, individually or in the aggregate, a Company Material Adverse Effect. SECTION 3.04. Certificate of Incorporation and Bylaws. The Company has heretofore furnished to the Parent and Merger Sub complete and correct copies of the certificate of incorporation and the bylaws, in each case as amended or restated as of the date hereof, of the Company. SECTION 3.05. Non-Contravention. The execution and delivery by the Company of this Agreement, the consummation by the Company of the Merger, and the performance by the Company of its other obligations under this Agreement do not and will not (i) contravene or conflict with the certificate of incorporation or bylaws of the Company, (ii) assuming compliance with the matters referred to in Section 3.03, contravene, conflict with, or constitute a violation of any provision of any law, rule, regulation, judgment, injunction, order, or decree binding upon or applicable to the Company, (iii) constitute a default, give rise to a right of termination, cancellation, or acceleration of any right or obligation of the Company, or give rise to a loss of any benefit to which the Company is entitled, under any provision of any agreement or other instrument binding upon the Company or under any license, franchise, permit, or other similar authorization held by the Company, or (iv) result in the creation or imposition of any Lien on any asset of the Company, except as set forth in Section 3.05 of the Company Disclosure Schedule and except for any occurrences or results referred to in clauses (ii), (iii), and (iv) that would not be reasonably likely (A) to prevent or delay consummation of the Offer or the Merger or (B) to have, individually or in the aggregate, a Company Material Adverse Effect. For purposes of this Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest, encumbrance, or other right or interest of another to or in, or adverse claim of any kind in respect of, such asset. SECTION 3.06. Capitalization. (a) The Company has 8,000,000 authorized shares, consisting of 7,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, $.01 par value, of the Company ("Company Preferred Stock"). As of February 2, 1998, (i) 10 15 5,331,830 shares of Common Stock were issued and outstanding, (ii) 907,758 shares of Common Stock were reserved for future issuance upon exercise of outstanding Company Options, and (iii) 376,158 shares of Common Stock were reserved for future issuance upon exercise of Series B Warrants. As of February 2, 1998, no shares of Company Preferred Stock were issued or outstanding. Except as described in this Section 3.06 or in Section 3.06 of the Company Disclosure Schedule, as of the date of this Agreement, no shares of capital stock of the Company are reserved for issuance for any other purpose. Each of the issued and outstanding shares of Common Stock is duly authorized, validly issued, and fully paid and nonassessable and has not been issued in violation of (nor are any of the authorized shares of Common Stock or Company Preferred Stock subject to) any preemptive or similar rights created by statute, the certificate of incorporation or the bylaws of the Company, or any agreement to which the Company is a party or is bound. Each of the outstanding Company Options and Series B Warrants is duly authorized and validly issued. (b) Except for the Company Options and the Series B Warrants as set forth in paragraph (a) of this Section 3.06 or as set forth on Section 3.06 of the Company Disclosure Schedule, there are no options, warrants, or other rights (including registration rights and conversion rights), agreements, arrangements, or commitments to which the Company is a party or bound relating to the issued or unissued capital stock of the Company or obligating the Company to grant, issue, or sell any shares of the capital stock of the Company or other security of the Company. Except as set forth in Section 3.06 of the Company Disclosure Schedule, there are no obligations, contingent or otherwise, of the Company to purchase, redeem, or otherwise acquire any shares of Common Stock or other capital stock of the Company. (c) Section 3.06 of the Company Disclosure Schedule lists, as of the date indicated, the (i) number of shares of Common Stock subject to, and the exercise price of, each outstanding Company Option and (ii) the number of shares of Common Stock subject to, and the exercise price of, each outstanding Series B Warrant. The Company has made available to the Parent and Merger Sub complete and correct copies of the Company Option Plans, all forms of Company Options, and all instruments governing the terms of the Series B Warrants. SECTION 3.07. Subsidiaries. The Company has no Subsidiaries. For purposes of this Agreement, "Subsidiary" of any Person means (i) any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are, directly or indirectly, owned by such Person, and (ii) any partnership of which such Person is a general partner. 11 16 SECTION 3.08. Company SEC Reports. Since July 31, 1996, the Company has filed all material forms, reports, statements, and other documents required to be filed by it with the SEC, including without limitation (a) all Annual Reports on Form 10-K, (b) all Quarterly Reports on Form 10-Q, (c) all proxy statements relating to meetings of stockholders (whether annual or special), (d) all Current Reports on Form 8-K, and (e) all other reports, schedules, registration statements, and other documents required to be filed with the SEC. (All of the documents filed by the Company with the SEC during such period, including all exhibits contained or incorporated by reference in such documents, are collectively referred to as the "Company SEC Reports"). The Company SEC Reports, as amended to date, (i) were prepared in all material respects in accordance with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be, and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. SECTION 3.09. Financial Statements; No Undisclosed Liabilities. The audited financial statements and unaudited interim financial statements (including the related notes and schedules) of the Company included or incorporated by reference in the Company SEC Reports as of dates and for periods after July 31, 1996 (the "Company Financial Statements") were prepared in conformity with AICPA Statement of Position 90-7 and fairly present the financial position of the Company as of the dates indicated and its results of operations and cash flows for the periods then ended in conformity with generally accepted accounting principles, subject, in the case of any unaudited interim financial statements, to normal year-end adjustments, none of which, except as set forth on Section 3.09 of the Company Disclosure Schedule, would be reasonably likely to be, individually or in the aggregate, material in amount. The Company does not have any liabilities, whether accrued, contingent, or otherwise, other than (a) liabilities disclosed in the Company Disclosure Schedule or the Company SEC Reports, (b) liabilities reflected in the balance sheet as of October 31, 1997 included in the Company Financial Statements (the "October 1997 Balance Sheet"), (c) liabilities, ordinary in nature and amount, incurred since October 31, 1997, and (d) liabilities in an aggregate amount that is not material to the Company. SECTION 3.10. Inventory. The procedures used for establishing the count and value of inventory in all physical inventories taken after January 31, 1997, were substantially the same as the procedures used in establishing the count and value of inventory shown in the audited balance sheet of the Company as of January 31, 1997. Between the date of this 12 17 Agreement and the Effective Time, the Company will permit the Parent to take any reasonable steps that it deems to be appropriate in order to test and confirm the valuation of the inventory. SECTION 3.11. Contracts and Commitments. Except as set forth in Section 3.11 of the Company Disclosure Schedule, the Company is not a party to or bound by any oral or written contracts that cannot be terminated by Company on notice of 30 days or less and that: (a) Provides for the purchase of supplies or services that (i) entails the expenditure in any fiscal year of more than $50,000 in the case of supplies other than merchandise or $250,000 in the case of merchandise, (ii) purports to be exclusive as pertains to any product, type of product, or region, or (iii) has a term of more than one year. (b) Limits the right of the Company to compete, to open a store in any territory, or to use any trade names, trademarks, copyrights, logos, or other proprietary rights. (c) Provides for payments to anyone based on the operating results of the Company or any one or more of the stores (other than percentage rents payable to landlords). (d) Warrants goods or services by the Company in a manner that differs materially from the warranty provided by the manufacturer of the goods or the provider of the services. (e) Commits for capital expenditures in excess of $50,000 for any one project or $250,000 for any group of projects. (f) Provides for the borrowing of money by the Company or for the creation of any Lien on any of the assets of the Company. (g) Provides for the expenditure by the Company of an aggregate of more than $50,000, other than contracts for the purchase of supplies or merchandise covered by paragraph (a) and contracts for capital expenditures covered by paragraph (e). To the extent requested by the Parent, the Company has delivered or prior to the Effective Time will deliver to the Parent copies of all written contracts and commitments listed in Section 3.11 of the Company Disclosure Schedule, summaries of all oral contracts and commitments listed in Section 3.11 of the Company Disclosure Schedule, and all 13 18 modifications and supplements thereto (collectively, the "Contracts"). Except as disclosed in Section 3.11 of the Company Disclosure Schedule (i) each of the Contracts is in full force and effect, (ii) the Company and, to the knowledge of the Company, all other parties to the Contracts have, in all material respects, performed their obligations and are not in default under the Contracts, (iii) the Company has not given or received any notice of default under any of the Contracts, (v) no event has occurred or condition exists that, with the giving of notice, the passage of time, or both, would constitute a default by the Company or, to the best knowledge of the Company, any other party under any of the Contracts, and (v) neither the Company nor, to the best knowledge of the Company, any other party has waived, or extended the time for the performance of, any obligations under the Contracts. To the best knowledge of the Company, none of the Contracts is subject to any impending cancellation. SECTION 3.12. Absence of Certain Changes. Except as disclosed in Section 3.12 of the Company Disclosure Schedule, since October 31, 1997, (a) the Company has conducted its business in all material respects in the ordinary course consistent with past practices, (b) there has not been any change or development, or combination of changes or developments, in the business, operations, or financial condition of the Company that are reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect, other than as a result of changes in conditions, including economic or political developments, that are applicable to the retail business and do not have a disproportionate effect on the Company's business relative to the effect of any such change on other entities in the retail business, (c) there has not been any declaration, setting aside, or payment of any dividend or other distribution with respect to the Common Stock or any other capital stock of the Company, or any repurchase, redemption, or other acquisition by the Company of any shares of Common Stock or other capital stock of the Company, (d) there has not been any amendment of any term of any outstanding security of the Company, (e) there has not been any incurrence, assumption, or guarantee by the Company of any indebtedness for borrowed money other than (i) borrowings and letters of credit in the ordinary course of business under the CITBC Financing Agreement not in excess of the amount available under the CITBC Financing Agreement and (ii) indebtedness representing capital lease and installment purchase obligations incurred in connection with the lease or purchase of equipment in the ordinary course of business and in amounts and on terms consistent with past practices, (f) there has not been any creation or assumption by the Company of any Lien on a material amount of assets (including the sale, pledge, or assignment of a material amount of receivables) other than Liens securing the Company's obligations under the CITBC Financing Agreement and Liens securing capital lease and installment purchase obligations incurred in connection with the lease or purchase of equipment in the ordinary course of business, and (g) there has not been any change in any method of accounting or accounting practice by the Company, except for any such change required by reason of a concurrent change in generally accepted accounting principles. Furthermore, except as 14 19 disclosed in Section 3.12 of the Company Disclosure Schedule, or pursuant to agreements, plans, or arrangements disclosed in the Company SEC Reports, since October 31, 1997, there has not been any (i) grant of any severance or termination pay or stay-in-place bonus to any director or officer of the Company, (ii) entering into of any employment, deferred compensation, or other similar agreement (or any amendment to any such existing agreement) with any director or officer of the Company or any of its Subsidiaries, (iii) increase in benefits payable under any existing severance or termination pay or stay-in- place bonus policies or agreements with any director or officer of the Company, or (iv) increase in compensation, bonus, or other benefits payable to directors or officers of the Company, except for normal annual adjustments that are not unusual in nature or amount. SECTION 3.13. Litigation. Except as disclosed in Section 3.13 of the Company Disclosure Schedule, (i) there is no material action, suit, or proceeding pending before, and, to the knowledge of the Company, there is no material pending investigation by, any court or arbitrator or any governmental body, agency, official, or authority against the Company or involving any of their properties, (ii) to the knowledge of the Company, there is no threat of any such material action, suit, or proceeding, and (iii) no judgment, decree, injunction, rule, order, or similar action of any court or arbitrator or any governmental body, agency, official or authority, domestic or foreign, is outstanding against the Company that materially limits the conduct of the business of the Company as currently conducted. For purposes of Section 3.13, an action, suit, proceeding, investigation, judgment, decree, injunction, rule, order, or similar action will be deemed to be "material" if it involves (a) a claim or potential claim of liability in excess of $50,000 that is not covered by insurance or (b) a significant limitation or potential limitation on the conduct of the business of the Company as currently conducted. SECTION 3.14. Permits; Compliance. Except as is disclosed in Section 3.14 of the Company Disclosure Schedule, the Company is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals, and orders necessary to own, lease, and operate its properties and to carry on its business as now being conducted, other than (i) those issued by or otherwise obtained from governmental authorities pursuant to or in connection with any Environmental Law (as hereinafter defined) and (ii) those of which the failure of the Company to be in possession is not, individually or in the aggregate, reasonably likely to have a Company Material Adverse Effect (collectively, the "Company Permits"). Except as set forth in Section 3.14 of the Company Disclosure Schedule, the Company is not in conflict with, or in default or violation of, (a) any federal, state, or foreign law applicable to the Company or by which any of its properties are bound or subject (other than any Environmental Law) or (b) any of the Company Permits, other than conflicts, defaults, or violations that are not, individually 15 20 or in the aggregate, reasonably likely to have a Company Material Adverse Effect. Except as set forth in Section 3.14 of the Company Disclosure Schedule, since July 31, 1996, the Company has not received any notification with respect to possible material conflicts, defaults, or violations of any federal, state, local, or foreign law applicable to the Company or by which any of its properties are bound or subject (other than any Environmental Law) that have not been cured without any further material liability or obligation. SECTION 3.15. ERISA. (a) As used in this Section 3.15, each of the following terms has the indicated meaning: (i) "Affiliate" of any Person means any other Person that, together with such Person, would be treated as a single employer under Section 414(b) or (c) of the Internal Revenue Code of 1986, as amended (the "Code"). (ii) "Company Benefit Arrangement" means each employment, severance, welfare, or other similar contract, arrangement, or policy and each plan or arrangement (written or oral) providing for compensation, benefit, bonus, profit-sharing, stock option, or other stock related rights or other forms of incentive or deferred compensation, that (A) is not a Company Employee Plan, (B) is entered into, maintained, or contributed to, as the case may be, by the Company or any of its Affiliates, and (C) covers any employee or former employee or director or former director of the Company or any such Affiliate. (iii) "Company Employee Plans" means each "employee benefit plan," as defined in Section 3(3) of ERISA that (A) is subject to any provision of ERISA and (B) is maintained, administered, or contributed to by the Company or any Affiliate, or under which the Company or any Affiliate had an obligation to contribute during the last five years, and covers any employee or former employee of the Company or any such Affiliate or under which the Company or any such Affiliate has any material liability. (iv) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (b) The Company has heretofore made available to the Parent, and agrees that it will as soon as practicable after the date of this Agreement furnish the Parent with, copies of all Company Employee Plans (and, if applicable, related trust agreements), all amendments thereto, the most recent Forms 5500 required to be filed with 16 21 respect thereto, Internal Revenue Service determination letters, summary plan descriptions, actuarial reports, and contracts pursuant to which benefits are provided, in each case to the extent applicable. (c) Section 3.15 of the Company Disclosure Schedule identifies each Company Employee Plan that constitutes a "defined benefit plan" as defined in Section 3(35) of ERISA. Except as set forth on Section 3.15 of the Company Disclosure Schedule, no Company Employee Plan constitutes a "multiemployer plan," as defined in Section 3(37) of ERISA, and no Company Employee Plan is maintained in connection with any trust described in Section 501(c)(9) of the Code. Except as set forth on Section 3.15 of the Company Disclosure Schedule, no Company Employee Plan provides retiree medical or retiree life insurance benefits or is subject to Title IV of ERISA. Neither the Company nor any of its Affiliates has incurred any material liability under Title IV of ERISA (excluding liability for premiums payable to the Pension Benefit Guarantee Corporation), including, without limitation, arising in connection with the termination of, or complete or partial withdrawal from, any plan currently or previously covered by Title IV of ERISA, and the Pension Benefit Guarantee Corporation has not instituted proceedings to terminate any such plan nor, to the knowledge of the Company, do any conditions exist that present a material risk of such occurrence. Nothing done or omitted to be done by the Company or, to the knowledge of the Company, by any other Person, and no transaction or holding of any asset under or in connection with any Company Employee Plan by the Company or, to the knowledge of the Company, by any other Person, has made or will make the Company or any officer or director of the Company subject to any material liability under Section 406 of ERISA or for any material tax pursuant to Section 4975 of the Code. With respect to each Company Employee Plan subject to Title IV of ERISA, the Company has made available to the Parent the most recent actuarial report showing the present value of accrued benefits under such plan, based upon the actuarial assumptions used for funding purposes with respect to such plan. No Company Employee Plan or any trust established thereunder that is subject to Section 412 of the Code has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each such plan ended prior to the date hereof; and all contributions required to be made with respect thereto (whether pursuant to the terms of any Company Employee Plan or otherwise) on or prior to the date hereof have been timely made. (d) Each Company Employee Plan that is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period from its adoption to date, each trust forming a part thereof is exempt from tax pursuant to Section 501(a) of the Code, as evidenced by a determination letter issued by the Internal Revenue Service that has not been revoked. Except as set forth in Section 3.15 of the Company Disclosure Schedule, each Company Employee Plan has been maintained in compliance with its terms and with the requirements of all applicable statutes, orders, rules, 17 22 and regulations, except for matters of non-compliance that are not, in the aggregate, reasonably likely to have a Company Material Adverse Effect. (e) Section 3.15 of the Company Disclosure Schedule lists each material Company Benefit Arrangement currently in effect provided to any director, officer, or employee of the Company or any former director, officer, or employee of the Company and sets forth each Company Benefit Arrangement with respect to which benefits will be accelerated or paid as a result of the transactions contemplated by this Agreement. Copies of all written Company Benefit Arrangements and all amendments thereto have heretofore been made available to the Parent, and will promptly be furnished to the Parent upon the Parent's request after the date of this Agreement. Each Company Benefit Arrangement has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules, and regulations that are applicable to such Company Benefit Arrangement, except for matters of non-compliance that are not, in the aggregate, reasonably likely to have a Company Material Adverse Effect. (f) Section 3.15 of the Company Disclosure Schedule sets forth the amount of incentive compensation, in the aggregate, that the Company expects to be payable with respect to the fiscal year ended January 31, 1998 and with respect to the period from that date through the Effective Time (assuming the Effective Time occurs six weeks after the date of this Agreement). (g) Except as set forth in Section 3.15 of the Company Disclosure Schedule, there are no pending, or, to the knowledge of the Company, overtly threatened claims by or on behalf of any Company Employee Plan or Company Benefit Arrangement, by any employee or beneficiary covered under any such plan or arrangement, or otherwise involving any such plan or arrangement (other than claims for benefits in the ordinary course), that are, in the aggregate, reasonably likely to have a Company Material Adverse Effect. SECTION 3.16. Labor. Except as set forth on Section 3.16 of the Company Disclosure Schedule, the Company is not a party to or bound by any collective bargaining agreement respecting its employees, nor is there existing, or to the knowledge of the Company any material threat of, any strike, organized walkout, or other organized work stoppage or labor organizational effort by any employees of the Company. 18 23 SECTION 3.17. Taxes. (a) Except as set forth in Section 3.17 of the Company Disclosure Schedule or in the Company SEC Reports: (i) Each member of the Group has timely filed all material Tax Returns required to be filed by them with any taxing authority with respect to Taxes for all periods heretofore ended, taking into account any extension of time to file granted to or obtained on behalf of the members of the Group, all such Tax Returns, in all material respects, correctly reflected the information required to be shown therein, and each member of the Group has disclosed on its federal income Tax return all positions taken therein that could give rise to a substantial understatement penalty under Section 6662 of the Code; (ii) all material Taxes required to be paid prior to the Effective Time by each member of the Group have been duly and timely paid or will be duly and timely paid by the Effective Time, subject to good faith challenge; (iii) no material deficiency for any amount of Tax is being asserted by a taxing authority against any member of the Group, except for amounts for which the Company has made an adequate reserve as reflected in the Company Financial Statements; (iv) all liability for Taxes of members of the Group that are or will become due or payable with respect to periods covered by the Company Financial Statements have, in all material respects, been paid or adequately reserved for in the Company Financial Statements to the extent required by generally accepted accounting principles consistently applied, and all prepaid Taxes and other Tax assets reflected in the Company Financial Statements have been determined in accordance with generally accepted accounting principles consistently applied; (v) each member of the Group has withheld and paid over all material Taxes required to have been withheld and paid over, and complied, in all material respects, with all information reporting and backup withholding requirements (including maintenance of required records) in connection with amounts paid or owing to any employee, creditor, independent contractor, or other third party; (vi) no member of the Group is liable for any material amount of Taxes arising out of membership or participation in any 19 24 consolidated, affiliated, combined, or unitary group in which they were at any time members, other than the group of which the Company is the common parent; (vii) there are no material Liens for Taxes upon the assets of the Company other than Liens for Taxes not yet due and payable; (viii) there are no outstanding waivers or comparable consents extending the statute of limitations with respect to any material Taxes or Tax Returns of any members of the Group, other than with respect to the Refund Claim referred to in Section 3.17(c); (ix) with respect to any Taxes: (A) no material audits, claims, actions, suits, or proceedings are pending or, to the knowledge of the Company, threatened (other than the Refund Claim referred to in Section 3.17(c)), and (B) to the knowledge of the Company, no material investigations are pending; (x) all federal income Tax returns of members of the Group filed with respect to Tax years ended on or before December 31, 1991 have been examined and closed (except with respect to the Refund Claim) or are income Tax returns with respect to which the applicable period for assessment, after giving effect to extensions or waivers, has expired; (xi) no member of the Group is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, and the Parent is not required to withhold Tax on the purchase of the capital stock of the Company by reason of Section 1445 of the Code (the Company will provide the Parent and Merger Sub with a certificate, signed on the date of this Agreement and satisfying the requirements of Treasury Regulations Section 1.897-2(h) and 1.1445-2(c)(3), to the effect that each member of the Group was not a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code at any time during the five-year period preceding the date hereof); (xii) no member of the Group has entered into any compensatory agreements with respect to the performance of services the payment under which would result in a nondeductible expense to the Group pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code; 20 25 (xiii) there are no requests for rulings or determinations in respect of any Tax pending between any Group member and any taxing authority; (xiv) no member of the Group owns any interest in real property in the State of New York or in any other jurisdiction in which a Tax is imposed on the transfer of a controlling interest in an entity that owns any interest in real property; (xv) the Company is not a party to any material agreement providing for the allocation or sharing of Taxes; and (xvi) there has been no change in the method of accounting utilized by the Company that would require a material adjustment to taxable income under Section 481 of the Code. For purposes of this Agreement, "Taxes" or "Tax" means all federal, state, local, and foreign taxes, levies, and other assessments, including without limitation, all income, excise, property, sales, use, value added, transfer, franchise, profits, withholding, payroll, social security, medicare, or other taxes, including any interest, additions to tax, and penalties applicable thereto; "Tax Return" means any return, declaration, statement, report, estimate, schedule, information return (including information returns or reports with respect to backup withholding and other payments to third parties), and other document (including any related or supporting information) with respect to Taxes; and "Group" means (i) the Company and (ii) any individual, trust, corporation, partnership, or any other entity as to which the Company is liable for Taxes either as a transferee, pursuant to Treasury Regulations Section 1.1502-6, or pursuant to any other provision of federal, territorial, state, local or foreign law or regulations. (b) After the date of this Agreement, the Company will furnish the Parent with copies of all federal and state income or franchise Tax Returns of the Company requested by the Parent. No member of the Group does business in or derives income from any state, local, territorial, or foreign taxing jurisdiction other than those for which all Tax Returns have been furnished to Parent. (c) The Internal Revenue Service is currently examining claims for refund filed by the Company with the Internal Revenue Service as a result of carrybacks of certain net operating losses (the "Refund Claim"). The Company received $22,502,000 in such refunds. The Company has furnished the Parent with a chronology, prepared by Deloitte & Touche LLP, identifying the principal events relating to the Refund Claim, including a description of meetings and summaries of conversations with representatives of the Internal Revenue Service. The Company has made available to the Parent all notices and correspondence between the Internal Revenue Service and the Company regarding the 21 26 Refund Claim, and the Company will provide copies of any such notices and correspondence received after the date hereof. The Company has not received any comparable refund with respect to any state or local Taxes. SECTION 3.18. Real Estate. (a) Section 3.18 of the Company Disclosure Schedule identifies each parcel of real property owned or leased by the Company (the "Company Real Property"). The Company has good, marketable, and indefeasible fee simple title to each property identified as owned by it free and clear of all Liens other than (i) Liens that do not, individually or in the aggregate, materially impair the conduct by the Company of its business thereon or materially detract from the value thereof, (ii) Liens for taxes accrued but not yet payable, and (iii) Liens that secure obligations of the Company under the CITBC Financing Agreement and under the United States National Bank of Oregon promissory note dated July 31, 1996 and related deed of trust ("Permitted Encumbrances"). The Company holds a valid leasehold interest under a lease or sublease covering each property identified as leased by it free and clear of all Liens other than Permitted Encumbrances. (b) Section 3.18 of the Company Disclosure Schedule sets forth a tables that show, with respect to each of the store leases included in the Company Real Property (the "Company Store Leases"), (i) base rent for each fiscal year through 2002 and (ii) lease expiration, options, rent for the current fiscal year, rent during the first option period, and percentage rent. (c) After the execution and delivery of this Agreement, the Company will make available to the Parent a complete, correct, and current copy of each of the Company Store Leases, including any modifications and supplements. Except as set forth in Section 3.18 of the Company Disclosure Schedule, (i) all of the Company Store Leases are in full force and effect, (ii) the Company and, to the knowledge of Company, all other parties to the Company Store Leases have, in all material respects, duly and timely performed their obligations and are not in default under the Company Store Leases, and the Company is not currently withholding any rent due under any of the Company Store Leases, (iii) the Company has not given or received any notice of a material default under any of the Company Store Leases, (iv) no event has occurred or condition exists that, with the giving of notice, the passage of time, or both, would constitute a material default by the Company or, to the knowledge of the Company, any other party under any of the Company Store Leases, (v) neither the Company nor, to the knowledge of the Company, any other party has waived, or extended the time for the performance of, any material obligations under the Company Store Leases, and (vi) to the knowledge of the Company, none of the Company Store Leases is subject to any impending cancellation. 22 27 (d) Except as set forth in Section 3.18 of the Company Disclosure Schedule, no third parties have any rights to use or occupy any of the Company Real Property, whether as tenants, subtenants, holders of easements or licenses, or otherwise. (e) The use of the Company Real Property by the Company in its business as presently and ordinarily conducted conforms with applicable zoning laws, regulations, and permits, except where the failure to conform would not have a Company Material Adverse Effect. In addition, (i) no zoning changes are pending or, to the knowledge of the Company, threatened that would prohibit or make nonconforming the use of any of the Company Real Property as presently and ordinarily used, (ii) no condemnation or eminent domain proceedings are pending or, to the knowledge of the Company, threatened with respect to any of the Company Real Property, and (iii) no landlord or public authority is installing, or, to the knowledge of the Company, planning to install, any material improvements the cost of which might, in full or in part, be assessed against the Company. SECTION 3.19. Personal Property. Except as set forth in 3.19 of the Company Disclosure Schedule, the Company has good and marketable title to all of the material personal property reflected in the October 1997 Balance Sheet (other than personal property sold since that date in the ordinary course of business) free and clear of all Liens other than Permitted Encumbrances. SECTION 3.20. Intellectual Property Rights. (a) Section 3.20 of the Company Disclosure Schedule identifies all Intellectual Property Rights (as defined in Section 3.20(b)) that are owned or licensed by the Company or used in its business. (b) The Company has registered the names "House of Fabrics" and "So-Fro Fabrics." The Company's right to continue to use the names "House of Fabrics," "Fabricland," "Fabric King," and "So-Fro Fabrics" as now used in the Company's business is not subject to any pending, or, to the knowledge of the Company, threatened challenge. To the knowledge of the Company, the Company owns or licenses all other Intellectual Property Rights required to conduct their business as presently and ordinarily conducted. Except for the matters identified in Section 3.20 of the Company Disclosure Schedule, (i) the Company has not been sued, charged in writing with, or named a defendant in, any claim, suit, action, or proceeding involving a material claim of infringement of any Intellectual Property Rights of others that has not been resolved without the imposition of any restrictions on the right of the Company to engage in any activities relating to its business, (ii) to the knowledge of the Company, there is no threatened material claim of infringement by the Company of any Intellectual Property Rights of others, and (iii) to the knowledge of the Company, there is no material continuing 23 28 infringement by others of the Intellectual Property Rights of the Company. Except as set forth in Section 3.20 of the Company Disclosure Schedule, no Intellectual Property Rights of the Company are subject to any outstanding order, judgment, decree, stipulation, or agreement restricting the use thereof by the Company. Except as set forth in Section 3.20 of the Company Disclosure Schedule, the Company has not entered into any agreement to indemnify any other individual or entity against any charge of infringement of any Intellectual Property Right. (b) For purposes of this Agreement, "Intellectual Property Rights" means trade names, trademarks, service marks, and copyrights, registrations thereof or applications therefor, the preferred customer mailing list or lists maintained by the Company, and any other relevant proprietary intellectual property rights. SECTION 3.21. Environmental Protection. (a) Except as set forth in Section 3.21 of the Company Disclosure Schedule, (i) the Company has no material liability arising out of the generation, use, transportation, treatment, storage, release, or disposal of any Hazardous Material (as defined in Section 3.21(b)) in violation of any Environmental Requirement (as defined in Section 3.21(c)), (ii) the Company is in compliance with all applicable Environmental Requirements, except where non-compliance would not result in a material liability to the Company, (iii) no notice, order, decree, notice of violation, or other notice has been received by the Company alleging that the Company is, in any material respect, in violation of any Environmental Requirement, (iv) no notice has been received by the Company of the existence or pendency of any investigation, claim, lawsuit, proceeding, or similar action arising under any Environmental Requirement, and (v) the Company has all material permits, licenses, and other authorization required by applicable Environmental Requirements, and the Company is, in all material respects, in compliance with the terms of those permits. (b) For the purposes of this Agreement, a "Hazardous Material" is any material or substance that is defined or listed in, or otherwise classified pursuant to, any applicable Environmental Requirement as a hazardous substance, hazardous material, hazardous waste, toxic substance or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, radioactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", including, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum and drilling fluids, and produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas, or geothermal energy. (c) For the purposes of this Agreement, an "Environmental Requirement" is any law, statute, code, act, ordinance, order, judgment, decree, injunction, rule, regulation, permit, license, authorization, direction, or requirement of any 24 29 government, department, commission, board, court, authority, agency, official, or officer relating to (i) the generation, use, storage, transportation, or disposal of any Hazardous Material or (ii) the protection of the environment, land use, or the safety, health, and welfare of human, animal, or plant life, including, without limitation, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Hazardous Materials Transportation Act and the Toxic Substances Control Act, each as amended or supplemented to date, and any analogous local, state, or federal statute and any regulations promulgated pursuant thereto. SECTION 3.22. Insurance. Section 3.22 of the Company Disclosure Schedule lists, and the Company has made available to the Parent or its representatives for review current and complete copies of, all insurance policies, binders, and surety and fidelity bonds relating to the Company (including, without limitation, all policies or binders of casualty, general liability, and workers' compensation), all of which are currently in effect. All premiums and other amounts due and payable under each such policy, binder, and bond have been paid. The Company is not in default with respect to any material provision contained in any such policy, binder, or bond and has not failed to give any notice of or present any material claim thereunder as required under the terms thereof. Except as set forth on Section 3.22 of the Company Disclosure Schedule, the Company has not received any written notice of cancellation or non-renewal of any such policy, binder, or bond. Except as set forth on Section 3.22 of the Company Disclosure Schedule, the Company has not received any written notice from any of its insurance carriers that any insurance premiums paid by it will be materially increased in the future as a result of the claims experience of the Company. Except as set forth on Section 3.22 of the Company Disclosure Schedule, adequate reserves have been established for all claims under any such policy, binder, and bond as to which the insurer has denied coverage. SECTION 3.23. Indemnification. Except as set forth in the certificate of incorporation and bylaws of the Company or as disclosed in Section 3.23 of the Company Disclosure Schedule, (a) the Company is not a party to any indemnification agreement with any of its present or former directors, officers, employees, agents, or other persons who serve in any similar capacity with the Company or any other enterprise at the request of the Company, and (b) to the knowledge of the Company, there are no material pending claims or material overt threats of claims for which any such person would be entitled to indemnification under Section 6.01 if such provisions were deemed to be in effect. 25 30 SECTION 3.24. Board Approval and Recommendation. Prior to the execution of this Agreement, the Board of Directors of the Company, at a meeting duly called and held, unanimously (a) determined that this Agreement and the transactions contemplated hereby, including the Merger and the Offer, are fair to the stockholders of the Company, (b) approved this Agreement and the transactions contemplated hereby, and (c) recommended that the Company's stockholders tender their shares of Common Stock pursuant to the Offer and, if applicable, approve this Agreement and the transactions contemplated herein, including the Merger. SECTION 3.25. Vote Required. The only vote of the holders of any class or series of capital stock of the Company necessary to approve the Merger is the affirmative vote of the holders of a majority of the outstanding shares of Common Stock. No provision of the Company's Certificate of Incorporation or Bylaws, or of any other instrument binding on the Company, would required the vote of the holders of any class or series of capital stock of the Company to approve the Merger if, at the Effective Time, Merger Sub owns at least 90% of the shares of Common Stock outstanding at the Effective Time. There is no vote of the holders of any class or series of capital stock of the Company necessary in order for Merger Sub to commence and consummate the Offer. SECTION 3.26. Opinion of Financial Advisor. The Company has received the opinion of DLJ to the effect that, as of the date of such opinion, the consideration to be received by the stockholders of the Company pursuant to the Offer and the Merger is fair to such stockholders from a financial point of view. SECTION 3.27. Finders and Investment Bankers. Except for F.M. Roberts and DLJ, no investment banker, broker, finder, or other similar intermediary has been retained by or is authorized to act on behalf of the Company who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. The Company has provided the Company with a copy of the engagement letters, as amended to date, with each such intermediary. The fees of these intermediaries will be paid by the Company. SECTION 3.28. Takeover Statutes; No Shareholder Rights Plan. The Board of Directors of the Company has expressly approved the acquisition of shares of Common Stock by Merger Sub pursuant to the Offer and the 26 31 Merger for purposes of Section 203 of the Delaware Law. The Company does not have a shareholder rights plan (or "poison pill"). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB The Parent and Merger Sub jointly and severally represent and warrant to the Company that: SECTION 4.01. Corporate Existence. The Parent and Merger Sub are corporations duly incorporated, validly existing, and in good standing under the laws of the State of Ohio and Delaware, respectively. SECTION 4.02. Corporate Authorization. The execution and delivery by the Parent and Merger Sub of this Agreement, the purchase by Merger Sub of shares of Common Stock pursuant to the Offer, the consummation of the Merger by the Parent and Merger Sub, and the performance by the Parent and Merger Sub of their other obligations under this Agreement are within their respective corporate powers and authority and have been duly authorized by all necessary corporate action on the part of the Parent and Merger Sub, respectively. This Agreement has been duly executed and delivered by the Parent and Merger Sub and, assuming the due authorization, execution, and delivery hereof by the Company, constitutes a legal, valid, and binding agreement of the Parent and Merger Sub. SECTION 4.03. Governmental Authorization. The execution and delivery by the Parent and Merger Sub of this Agreement, the purchase of shares of Common Stock by Merger Sub pursuant to the Offer, and the consummation of the Merger, and the performance by the Parent and Merger Sub of their other obligations under this Agreement do not require any consent, approval, authorization, or permit of, other action by, or filing with, any governmental body, agency, official, or authority other than (i) as set forth on Section 4.03 of the Disclosure Schedule delivered by the Parent to the Company concurrently with the execution and delivery of this Agreement (the "Parent Disclosure Schedule"), (ii) the filing of appropriate certificates of merger in accordance with Delaware Law, (iii) the filing and delivery of the Offer Documents, (iv) compliance with applicable requirements of the HSR Act, and (v) the filing of the proxy materials referred to in Section 5.05(b), except where the failure of any 27 32 such action to be taken or filing to be made is not reasonably likely to prevent or delay consummation of the Offer or the Merger. SECTION 4.04. Non-Contravention. The execution and delivery by the Parent and Merger Sub of this Agreement, the purchase by Merger Sub of the shares of Common Stock pursuant to the Offer, the consummation of the Merger, and the performance by the Parent and Merger Sub of their other obligations under this Agreement do not and will not (i) contravene or conflict with the articles of incorporation or code of regulations of the Parent or the certificate of incorporation or bylaws of Merger Sub, (ii) assuming compliance with the matters referred to in Section 4.03, contravene, conflict with, or constitute a violation of any provision of any material law, rule, regulation, judgment, injunction, order, or decree binding upon or applicable to the Parent, Merger Sub, or any of their Subsidiaries, (iii) constitute a material default, give rise to a right of termination, cancellation, or acceleration of any material right or obligation of the Parent, Merger Sub, or any of their Subsidiaries, or give rise to a loss of any material benefit to which the Parent, Merger Sub, or any of their Subsidiaries is entitled, or is reasonably likely to prevent or delay consummation of the Offer or the Merger, under any provision of any agreement or other instrument binding upon the Parent, Merger Sub, or any of their Subsidiaries or any license, franchise, permit, or other similar authorization held by the Parent, Merger Sub, or any of their Subsidiaries, or (iv) result in the creation or imposition of any material Lien on any asset of the Parent, Merger Sub, or any of their Subsidiaries. SECTION 4.05. Parent SEC Reports. Since July 31, 1996, the Parent has, in all material respects, filed all forms, reports, statements, and other documents required to be filed by it with the SEC, including without limitation (a) all Annual Reports on Form 10-K, (b) all Quarterly Reports on Form 10-Q, (c) all proxy statements relating to meetings of stockholders (whether annual or special), (d) all Current Reports on Form 8-K, and (e) all other reports, schedules, registration statements, or other documents required to be filed with the SEC. (All of the documents filed by the Parent with the SEC during such period, including all exhibits contained or incorporated by reference in such documents, are collectively referred to as the "Parent SEC Reports"). The Parent SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 28 33 SECTION 4.06. Financial Statements; No Undisclosed Liabilities. The audited consolidated financial statements and unaudited consolidated interim financial statements (including the related notes and schedules) of the Parent and its consolidated Subsidiaries included or incorporated by reference in the Parent SEC Reports (the "Parent Financial Statements") were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods reflected therein (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Parent and its consolidated Subsidiaries as of the dates thereof and their consolidated results of operations and cash flows for the periods then ended, subject, in the case of any unaudited interim financial statements, to normal year-end adjustments, none of which would be reasonably likely to be, individually or in the aggregate, material in amount. Neither the Parent, Merger Sub, nor any of their Subsidiaries has any liabilities, whether accrued, contingent, or otherwise, other than (a) liabilities disclosed in Section 4.06 of the Parent Disclosure Schedule or the Parent SEC Reports, (b) liabilities for which the Parent has made adequate reserves as reflected in the balance sheet as of November 1, 1997 included in the Parent Financial Statements, (c) liabilities, ordinary in nature and amount, incurred since November 1, 1997, and (d) liabilities in an aggregate amount that is not material to the Parent, Merger Sub, and their Subsidiaries, taken as a whole. SECTION 4.07. Litigation. There are no material actions, suits, or proceedings pending before, or, to the knowledge of the Parent, any pending investigation by, any court or arbitrator or any governmental body, agency, official, or authority against the Parent or any of its Subsidiaries, or involving any of their properties, that seek to restrain or prohibit the consummation of the Offer or the Merger or is reasonably likely to result in a Parent Material Adverse Effect. To the knowledge of the Parent, there is no material threat of any such action, suit, or proceeding. SECTION 4.08. Vote Required. No vote of the holders of any class or series of capital stock of the Parent is necessary to approve the purchase of shares of Common Stock pursuant to the Offer or the consummation of the Merger. The Merger has been approved by the affirmative vote of the holder of all of the outstanding shares of Merger Sub Common Stock, and no other vote of the holders of any class or series of capital stock of Merger Sub is necessary in order for Merger Sub to commence and consummate the Offer and to consummate the Merger. 29 34 SECTION 4.09. Availability of Funds. The Parent and Merger Sub have available to them, and will maintain the availability of, sufficient funds to enable them to consummate the transactions contemplated by this Agreement. SECTION 4.10. Fraudulent Conveyance. Assuming the accuracy of the representations and warranties of the Company in this Agreement, the Parent has no reason to believe that the financing to be provided to the Parent to effect the Offer and the Merger will cause (i) the fair salable value of the Surviving Corporation's assets to be less than the total amount of its existing liabilities, (ii) the fair salable value of the assets of the Surviving Corporation to be less than the amount that will be required to pay its probable liabilities on its existing debts as they mature, (iii) the Surviving Corporation not to be able to pay its existing debts as they mature, or (iv) the Surviving Corporation to have an unreasonably small capital with which to engage in its business. SECTION 4.11. Finders and Investment Bankers. Except for McDonald & Company Securities, Inc., no investment banker, broker, finder, or other similar intermediary has been retained by or is authorized to act on behalf of the Parent or Merger Sub who might be entitled to any fee or commission in connection with the transactions contemplated by this Agreement. The fees of McDonald & Company Securities, Inc. will be paid by the Parent. ARTICLE V COVENANTS OF THE COMPANY The Company agrees that: SECTION 5.01. Conduct of the Company. Except as expressly contemplated or permitted by this Agreement or approved in writing by the Parent, from the date of this Agreement until the time that the designees of Merger Sub have been appointed to the Board of Directors of the Company in accordance with Section 1.01(d), the Company will conduct its business in the ordinary course consistent with past practice. Subject to the foregoing exceptions, from the date hereof until the time that the designees of Merger Sub have been appointed to the Board of Directors of the Company: 30 35 (a) the Company will not adopt or approve any amendment to its certificate of incorporation or bylaws; (b) the Company will not merge, consolidate, or enter into a share exchange with any other Person, acquire a material amount of capital stock or assets of any other Person, or sell, lease, license, mortgage, pledge, or otherwise dispose of a material amount of assets to any other Person, except for the purchase or sale of merchandise inventory in the ordinary course of business consistent with past practice; (c) the Company will not declare, set aside, or pay any dividends, make any distributions in respect of shares of Common Stock or other capital stock of the Company, or redeem, repurchase, or otherwise acquire any shares of Common Stock or other capital stock of the Company; (d) the Company will not (i) issue, deliver, or sell, or authorize the issuance, delivery, or sale of, any Common Stock or other capital stock of the Company, other than the issuance of shares of Common Stock upon the exercise of Company Options or Series B Warrants granted prior to the date hereof, (ii) split, combine, or reclassify any shares of Common Stock, or (iii) amend the terms of any outstanding voting securities; (e) the Company will not, without the prior written consent of the Parent, which consent will not be unreasonably withheld or delayed, enter into any new store lease, extend the term of any existing store lease, or make any commitment or enter into any contract or agreement that, if it were in existence on the date hereof, would be required to be disclosed in Section 3.11 of the Company Disclosure Schedule; (f) except to the extent required by law or by existing written agreements or plans disclosed in the Company SEC Reports or in the Company Disclosure Schedule, the Company will not increase in any manner the compensation or fringe benefits of any of its directors or officers (other than annual increases, in the ordinary course of business consistent with past practices, in the compensation or fringe benefits of any officers who are not executive officers), pay any pension or retirement allowance to any such directors or officers, become a party to, amend, or commit itself to any pension, retirement, profit-sharing, welfare benefit plan, or employment agreement with or for the benefit of any such director or officer, grant any severance or termination pay or stay-in- place bonus to any such director or officer, or increase the benefits payable under any existing severance or termination pay or stay-in-place bonus policies; (g) the Company will not make any material Tax election or settle or compromise any material federal, state, local, or foreign Tax liability (including the Refund Claim); 31 36 (h) the Company will not change its accounting procedures and practices in any material respects, including but not limited to those relating to inventory valuation and reserves, except to the extent required by changes in generally accepted accounting principles; and (i) the Company will not agree to do any of the foregoing. SECTION 5.02. Access to Information. From the date hereof until the Effective Time or earlier termination of this Agreement, the Company will, upon reasonable notice, give the Parent, its counsel, financial advisors, auditors, and other authorized representatives reasonable access during regular business hours to the offices, properties, books, and records of the Company, and will furnish to the Parent, its counsel, financial advisors, auditors, and other authorized representatives such financial and operating data and other information as they may reasonably request, for the purpose of evaluating the financial condition, results of operations, business, and properties of the Company, and will instruct the Company's employees, counsel, and financial advisors to cooperate with the Parent in its evaluation. All information provided to, or obtained by, the Parent or Merger Sub in connection with the transactions contemplated hereby will be "Evaluation Material" for purposes of the confidentiality agreement, dated October 30, 1997, between the Parent and the Company (the "Confidentiality Agreement"). SECTION 5.03. Other Offers. (a) From the date hereof until the Effective Time or the earlier termination of this Agreement, the Company will not, and will direct and use all reasonable efforts to cause the directors, officers, employees, and agents of the Company not to, directly or indirectly, (i) take any action to solicit, to initiate, or knowingly to encourage any Company Acquisition Proposal (as defined below), (ii) engage or participate in discussions or negotiations, or enter into agreements, with any Person with respect to a Company Acquisition Proposal, or (iii) in connection with a Company Acquisition Proposal, disclose any nonpublic information relating to the Company or afford access to the properties, books, or records of the Company to any Person, except that the Company may take action described in clause (ii) or (iii) if (A) such action is taken in connection with an unsolicited Company Acquisition Proposal, (B) in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, the failure to take such action would not be consistent with the fiduciary duties of the Board of Directors under applicable law, and (C) in the case of the disclosure of nonpublic information relating to the Company in connection with a Company Acquisition Proposal, such information is covered by a confidentiality agreement that provides substantially the same protection to the Company as is afforded by the Confidentiality Agreement. The Company will promptly notify the Parent orally and in writing of any Company Acquisition Proposal 32 37 or any inquiries with respect thereto. Any such written notification will include the identity of the Person making such inquiry or Company Acquisition Proposal and a description of the material terms of such Company Acquisition Proposal (or the nature of the inquiry) and will indicate whether the Company is providing or intends to provide the person making the Company Acquisition Proposal with access to nonpublic information relating to the Company or any of its Subsidiaries. For purposes of this Agreement, "Company Acquisition Proposal" means any good faith offer or proposal for (x) a merger or other business combination involving the Company and any Person (other than the Parent, Merger Sub, or any other Subsidiary of either the Parent or Merger Sub), (y) an acquisition by any Person (other than the Parent, Merger Sub, or any other Subsidiary of either the Parent or Merger Sub) of assets or earning power of the Company, in one or more transactions, representing 15% or more of the consolidated assets or earning power of the Company, or (z) an acquisition by any Person (other than the Parent, Merger Sub, or any other Subsidiary of either the Parent or Merger Sub) of securities representing 15% or more of the voting power of the Company. (b) Except as set forth in this Section 5.03(b), neither the Board of Directors of the Company nor any committee thereof will (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to the Parent or Merger Sub, the approval or recommendation by such Board of Directors or such committee of the Offer, the Merger, or this Agreement, (ii) approve or recommend, or propose publicly to approve or recommend, any Company Acquisition Proposal, or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement, or other similar agreement (in each case, an "Acquisition Agreement") related to any Company Acquisition Proposal, except that, in any case set forth in clause (i), (ii), or (iii) above, prior to the acceptance for payment of shares of Common Stock pursuant to the Offer, the Board of Directors of the Company may, in response to an unsolicited Company Acquisition Proposal, (A) withdraw or modify its approval or recommendation of the Offer, the Merger, or this Agreement or (B) approve or recommend any such Company Acquisition Proposal if, in the case of any action described in clause (A) or (B), in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, the failure to take such action would not be consistent with the fiduciary duties of the Board of Directors under applicable law and, in the case of the actions described in clause (B), concurrently with such approval or recommendation the Company terminates this Agreement and promptly thereafter enters into an Acquisition Agreement with respect to a Company Acquisition Proposal. (c) Nothing contained in this Agreement will prohibit the Company from taking and disclosing to its stockholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or from making any disclosure to the Company's stockholders if, in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, failure so to disclose would be inconsistent with applicable law; provided that, neither the Company nor its 33 38 Board of Directors nor any committee thereof will, except as permitted by Section 5.03(b), withdraw or modify, or propose to withdraw or modify, its position with respect to the Offer, the Merger, or this Agreement or approve or recommend, or propose to approve or recommend, a Company Acquisition Proposal. SECTION 5.04. Notices of Certain Events. The Company will promptly notify the Parent of: (i) any notice or other communication from any Person alleging that the consent of any third party (other than consents listed in Section 3.03, 3.05, or 3.18 of the Company Disclosure Schedule) is or may be required in connection with the transactions contemplated by this Agreement; (ii) any material notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; (iii) any action, suit, claim, or proceeding commenced against, or, to the knowledge of the Company, any material threat of an action, suit, claim, or proceeding made against, or any pending investigation of, the Company that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.13 or that relate to the transactions contemplated by this Agreement; and (iv) the receipt by the Company subsequent to the date of this Agreement of any notice of, or other communication relating to, a material default, or an event that, with the giving of notice, the lapse of time, or both would become a material default, under any Contract. SECTION 5.05. Merger Meeting; Proxy Statement. (a) If required by Delaware Law in order to consummate the Merger, as soon as practicable following the purchase of shares of Common Stock pursuant to the Offer, the Company will take all action necessary in accordance with Delaware Law and with the Company's certificate of incorporation and bylaws to convene a meeting of its stockholders to approve the Merger and adopt this Agreement (the "Merger Meeting"). The Company's Board of Directors will recommend that the Company's stockholders approve the Merger and adopt this Agreement, and will cause the Company to use all reasonable efforts to solicit from the stockholders proxies to vote therefor, unless (i) in the good faith judgment of the Board of Directors of the Company, after consultation with outside counsel, such recommendation would not be consistent with the fiduciary duties of 34 39 the Board of Directors under applicable law or (ii) this Agreement is terminated in accordance with Article IX. (b) The Company will, if required by law for the consummation of the Merger, prepare and file with the SEC preliminary proxy materials relating to the approval of the Merger and the adoption of this Agreement by the Company's stockholders, and will file with the SEC revised preliminary proxy materials, if appropriate, and definitive proxy materials in a timely manner as required by the rules and regulations of the SEC. Subject to the last sentence of Section 5.05(a), the proxy materials relating to the Merger Meeting will include the recommendation of the Company's Board of Directors. SECTION 5.06. Information Systems. From the date hereof until the Effective Time, the Company will provide the Parent with all information regarding the Company's information systems (including hardware, operating systems, applications, database layouts, and related source code and documentation) requested by the Parent that is reasonably available to the Company. To the extent practicable, without disrupting the operation of the Company's business, the Company will permit the Parent to test the Company's information systems, including tests relating to the conversion of the Company's operating systems, applications, and databases to the Parent's information systems. ARTICLE VI COVENANTS OF THE PARENT AND MERGER SUB The Parent and Merger Sub agree that: SECTION 6.01. Director and Officer Liability. (a) The certificate of incorporation and the bylaws of the Surviving Corporation will contain the provisions with respect to exculpation from liability and indemnification set forth in the certificate of incorporation and bylaws of the Company as of the date hereof, which provisions (together with all provisions regarding indemnification or exculpation from liability contained in any agreements or commitments of the Company) will not be amended, repealed, or otherwise modified in any manner that would adversely affect the rights thereunder of individuals who at the Effective Time were present or former directors, officers, employees, or agents of the Company, unless such modification is required by law. (b) From and after the Effective Time, the Parent and the Surviving Corporation will, jointly and severally, indemnify, defend, and hold harmless the present and former directors and officers of the Company against all losses, claims, 35 40 damages, and liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding, or investigation, whether civil, criminal, administrative, or investigative, to which any of them was or is a party or is threatened to be made a party by reason of the fact that he or she was or is a director or officer of the Company in respect of acts or omissions occurring at or prior to the Effective Time to the fullest extent that the Company would have been permitted to indemnify such Person under applicable law and the certificate of incorporation and bylaws of the Company or any other agreements or commitments in effect on the date hereof. The Parent will use all reasonable efforts to, without any lapse in coverage, either (i) for at least six years after the Effective Time, provide officers' and directors' liability insurance ("D&O Insurance") in respect of acts or omissions occurring at or prior to the Effective Time covering each such Person currently covered by the Company's D&O Insurance policy on terms with respect to coverage and amount no less favorable than those of such policy in effect on the date hereof; provided that, in no event will the Parent be required to pay per annum more than 150% of the last premium (annualized) paid by the Company for such policy prior to the date hereof, (ii) purchase tail insurance in respect of the Company's existing D&O Insurance for six years for a premium not to exceed the present value (discounted at the rate of 10% per annum) of the maximum annual premiums payable under clause (i) above, or (iii) if such D&O Insurance or tail insurance is only available at premiums in excess of the maximum premiums set forth in clauses (i) or (ii), as applicable, then purchase the highest level of D&O Insurance or tail insurance available for such maximum premium. (c) Any Person who is entitled to indemnification under Section 6.01(b) (an "Indemnified Party") wishing to claim such indemnification, upon learning of any such claim, action, suit, proceeding, or investigation, will promptly notify the Parent thereof, but failure to notify the Parent will not relieve the Parent of liability except to the extent the Parent is materially and adversely affected thereby. In the event of any such claim, action, suit, proceeding, or investigation (whether arising before or after the Effective Time), (i) the Parent or the Surviving Corporation will have the right to assume the defense, and the Parent will not be liable to any of the Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by them in connection with the defense, except that, if the Parent or the Surviving Corporation elects not to assume the defense or counsel for the Indemnified Parties advises that, in such counsel's reasonable judgment, there are issues that constitute conflicts of interest between the Parent or the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and the Parent or the Surviving Corporation will pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided that, the Parent will be obligated pursuant to this paragraph (c) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties will cooperate in the defense of any such matter, and (iii) the Parent will not be liable for any settlement effected without its prior written consent; and provided further that, the Parent will not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction ultimately 36 41 determines, and such determination becomes final and nonappealable, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. (d) If the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and is not the continuing or surviving Person in the consolidation or merger or (ii) transfers all or substantially all of its assets to any Person, then and in each such case, proper provisions will be made so that the successors and assigns of the Surviving Corporation will assume all of the obligations of the Surviving Corporation under this Article VI. (e) The provisions of this Article VI are intended to be for the benefit of, and will be enforceable by, each of the present and former directors, officers, employees, and agents, their heirs and their representatives. SECTION 6.02. Merger Meeting. The Merger will be consummated as soon as practicable (and in no event later than six months) after the purchase of shares of Common Stock pursuant to the Offer. If Merger Sub is able to do so under Delaware Law, it will consummate the Merger pursuant to the "short form" merger provisions of Delaware Law. The Parent will vote, or cause to be voted, all shares of Common Stock beneficially owned by it in favor of the Merger. SECTION 6.03. Employee Benefits. The Parent expects that it will provide the employees of the Company with benefits which, in the aggregate, are substantially comparable to the benefits provided from time to time by the Parent to other employees of the Parent or its Subsidiaries in similar positions. The Parent agrees that, during the period commencing at the Effective Time and ending on the second anniversary thereof, the benefits provided to such employees will be not less favorable, in the aggregate, than the benefits provided by the Company on the date of this Agreement. The Parent will cause each employee benefit plan of the Parent in which employees of the Company are eligible to participate to take into account, for purposes of eligibility and vesting, the service of such employees with the Company as if such service were with the Parent, to the same extent that such service was credited under a comparable plan of the Company. The Parent will, and will cause the Surviving Corporation to, honor in accordance with their terms, (i) all employee benefit obligations to current and former employees of the Company accrued and vested as of the Effective Time and (ii) to the extent set forth in Section 3.15 of the Company Disclosure Schedule, all employee severance plans in existence on the date hereof and all employment or severance agreements entered into prior to the date hereof. 37 42 ARTICLE VII COVENANTS OF THE PARENT, MERGER SUB, AND THE COMPANY The Parent, Merger Sub, and the Company agree that: SECTION 7.01. Reasonable Efforts. Subject to the terms and conditions of this Agreement, each party will use its all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or advisable under applicable laws and regulations to satisfy the conditions to closing and consummate the transactions contemplated by this Agreement as promptly as practicable. SECTION 7.02. Certain Filings and Consents. The Company and the Parent will cooperate with one another (a) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official, or authority is required, or any actions, consents, approvals, or waivers are required to be obtained from parties to any Contracts ("Third Party Consents"), in connection with the transactions contemplated by this Agreement and (b) in attempting to take all such actions, to make all such filings, and to obtain all such consents, approvals, and waivers. The Company and the Parent will each promptly file Notification and Report Forms under the HSR Act and respond as promptly as practicable to all requests for additional information or documentation received from the Antitrust Division of the United States Department of Justice or the Federal Trade Commission. Notwithstanding the foregoing, nothing contained in this Agreement will require the Company, the Parent, or and of the Parent's Subsidiaries (i) to initiate or defend any material pending or threatened litigation to which any governmental or regulatory authority (including the Antitrust Division of the Justice Department and the Federal Trade Commission) is a party, (ii) to agree or otherwise become subject to any material limitations on (A) the right of the Parent or the Company, as the Surviving Corporation, effectively to control or operate the business, assets, or operations of the Company following the Offer or the Merger, (B) the right of the Parent or the Company, as the Surviving Corporation, to acquire or hold the business, assets, or operations of the Company as a result of the Merger, (C) the right of Merger Sub to exercise its rights of ownership of the Common Stock purchased by it in the Offer, or the right of the Parent to exercise its rights of ownership of the Common Stock of the Company, as the Surviving Corporation, after consummation of the Merger, including but not limited to the right to vote the Common Stock on all matters properly presented to the Company's stockholders, or (iii) to agree or otherwise be required to sell or dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of twenty-five (25) stores or more (whether stores of the Company, the Parent, or any of the Parent's Subsidiaries). 38 43 SECTION 7.03. Public Announcements. The Parent and the Company will consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated by it and, except as may be required by applicable law or any listing agreement with the New York Stock Exchange, Inc. or The NASDAQ Stock Market, Inc., will not issue any such press release or make any such public statement prior to such consultation. The Company will not issue any press release or make any public statement that might constitute the commencement of the Offer without the prior written consent of the Parent. ARTICLE VIII CONDITIONS TO THE MERGER SECTION 8.01. Conditions to the Obligations of Each Party. The obligations of the Company, the Parent, and Merger Sub to consummate the Merger are subject to the satisfaction of the following conditions: (a) if required by applicable law, the Merger has been approved, and this Agreement has been adopted, by the requisite vote of the Company's stockholders; (b) Merger Sub has purchased all shares of Common Stock that are validly tendered and not properly withdrawn in accordance with the Offer; and (c) no provision of any applicable domestic law or regulation, and no judgment, injunction, order, or decree of a court or governmental agency or authority of competent jurisdiction, that has the effect of making the Offer or the Merger illegal or otherwise restrains or prohibits the purchase of shares of Common Stock pursuant to the Offer or the consummation of the Merger is in effect. SECTION 8.02. Conditions to the Obligations of the Parent and Merger Sub. The obligations of the Parent and Merger Sub to consummate the Merger are subject to the compliance by the Company with its obligations under Section 1.01(d). 39 44 ARTICLE IX TERMINATION SECTION 9.01. Termination. This Agreement may be terminated, and the Offer and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of the Merger and adoption of this Agreement by the Company's stockholders): (a) by mutual written consent of the Company, the Parent, and Merger Sub; (b) by the Company if Merger Sub has not purchased shares of Common Stock pursuant to the Offer by May 31, 1998, or by either the Company or the Parent if the Merger has not been consummated by October 31, 1998, provided that the right to terminate this Agreement under this clause (b) will not be available to any party that, at the time of termination, is in material breach of its obligations under this Agreement; (c) by either the Company or the Parent if any applicable domestic law, rule, or regulation makes consummation of the Offer or the Merger illegal or if any judgment, injunction, order, or decree of a court or governmental agency or authority of competent jurisdiction restrains or prohibits the consummation of the Offer or the Merger, and such judgment, injunction, order, or decree has become final and nonappealable; (d) by either the Company or the Parent if the stockholder approval referred to in Section 8.01(a) has not been obtained at the Merger Meeting; provided that, the right to terminate this Agreement pursuant to this Section 9.01(d) will not be available (i) to the Company if it has not performed its obligations under Section 5.05 or (ii) to the Parent if it has not performed its obligations under the last sentence of Section 6.02; (e) by either the Company or the Parent if the Offer terminates without the purchase of shares of Common Stock thereunder; provided that, the right to terminate this Agreement pursuant to this Section 9.01(e) will not be available (i) to the Parent, if Merger Sub has breached its obligations under Section 1.01(a), or (ii) to any party whose willful failure to perform any of its obligations under this Agreement results in the failure of any of the Offer Conditions or if the failure of any such Offer Conditions results from facts or circumstances that constitute a material breach of the representations or warranties of such party under this Agreement; 40 45 (f) prior to the purchase of shares of Common Stock by Merger Sub pursuant to the Offer, by the Parent if (i) the Company violates its obligations under Section 5.03 in any material respects and thereafter any Person publicly makes a Company Acquisition Proposal or (ii) the Board of Directors of the Company does not publicly recommend in the Schedule 14D-9 that the Company's stockholders accept the Offer and tender their shares of Common Stock pursuant to the Offer and approve the Merger and adopt the Agreement, or if the Board of Directors of the Company withdraws, modifies, or changes such recommendation in any manner materially adverse to the Parent; or (g) by the Company if the Company receives an unsolicited Company Acquisition Proposal that the Board of Directors of the Company determines in good faith, after consultation with its legal and financial advisors, is likely to lead to a merger, acquisition, consolidation, or similar transaction that is more favorable to the stockholders of the Company than the transactions contemplated by this Agreement; provided that the Company has given the Parent at least five days notice of the material terms of such Company Acquisition Proposal and such termination will not be effective until the Company has paid the Termination Fee, if and to the extent required under Section 10.04(b), to the Parent either by delivery of a certified or bank check payable to the Parent or by wire transfer to an account designated in writing by the Parent, at the Company's option. SECTION 9.02. Effect of Termination. If this Agreement is terminated and the Offer and the Merger are abandoned pursuant to Section 9.01, no party to this Agreement (or any of its directors, officers, employees, agents, or advisors) will have any liability or further obligation to any other party except (a) that the agreements contained in Section 10.04, in the last sentence of Section 5.02, and in the Confidentiality Agreement will survive the termination hereof and (b) that nothing herein will relieve any party from liability for any breach of the covenants, representations, or warranties made by it in this Agreement. ARTICLE X MISCELLANEOUS SECTION 10.01. Notices. All notices, requests, and other communications to any party hereunder will be in writing (including telecopy) and will be given, 41 46 if to the Parent or Merger Sub, to: Fabri-Centers of America, Inc. 5555 Darrow Road Hudson, OH 44236 Attention: Mr. Brian P. Carney Executive Vice President and Chief Financial Officer Fax: (330) 463-6675 with a copy to: Thompson Hine & Flory LLP 3900 Key Tower 127 Public Square Cleveland, OH 44114-1216 Attention: James R. Carlson Fax: (216) 566-5800 if to the Company, to: House of Fabrics, Inc. 13400 Riverside Drive Sherman Oaks, CA 91423-2598 Attention: Mr. Donald L. Richey President and Chief Executive Officer Fax: (818) 385-2390 with a copy to: O'Melveny & Myers LLP 400 South Hope Street Los Angeles, CA 90071-2899 Attention: Richard A Boehmer, Esq. Fax: (213) 669-6407 or to such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties. Each such notice, request, or other communication will be effective upon receipt. SECTION 10.02. Survival. None of the representations and warranties, agreements, and other provisions contained in this Agreement or in any certificate or other writing delivered 42 47 pursuant to this Agreement, other than Article I and Sections 6.01, 6.03, and 10.04, will survive the Effective Time. SECTION 10.03. Amendments; No Waivers. (a) Subject to the applicable provisions of Delaware Law and Section 1.01(e) of this Agreement, any provision of this Agreement may be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and duly executed and delivered, in the case of an amendment, by the Company, the Parent, and Merger Sub or, in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power, or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. SECTION 10.04. Fees and Expenses. (a) Subject to paragraph (b) of this Section, all costs and expenses incurred in connection with this Agreement will be paid by the party incurring the costs and expenses. (b) If (i) any Person publicly makes a Company Acquisition Proposal and thereafter this Agreement is terminated pursuant to Section 9.01(d), (ii) any Person publicly makes a Company Acquisition Proposal and thereafter this Agreement is terminated pursuant to Section 9.01(e) because an insufficient number of shares of Common Stock are tendered in the Offer, (iii) this Agreement is terminated by the Parent pursuant to Section 9.01(f), or (iv) this Agreement is terminated by the Company pursuant to Section 9.01(g), then the Company will reimburse the Parent and Merger Sub for all of their reasonable documented out-of-pocket expenses and fees actually incurred by the Parent in connection with the transactions contemplated by this Agreement prior to the termination of this Agreement, including, without limitation, all reasonable fees and expenses of counsel, financial advisors, accountants, and environmental and other experts and consultants to the Parent and Merger Sub ("Transaction Costs"); except that, the Company will not be required to reimburse the Parent or Merger Sub for Transaction Costs in excess of $750,000 in the aggregate. Notwithstanding the preceding paragraph, if (i) any Person publicly makes a Company Acquisition Proposal and thereafter this Agreement is terminated pursuant to Section 9.01(d) and within 12 months after termination the Company agrees to or consummates any Company Acquisition Proposal, (ii) any Person publicly makes a Company Acquisition Proposal and thereafter this Agreement is terminated pursuant to 43 48 Section 9.01(e) because an insufficient number of shares of Common Stock are tendered in the Offer and within 12 months after termination the Company agrees to or consummates any Company Acquisition Proposal, (iii) this Agreement is terminated by the Parent pursuant to Section 9.01(f), or (iv) this Agreement is terminated by the Company pursuant to Section 9.01(g), then, in addition to reimbursing the Parent and Merger Sub for their Transaction Costs, the Company will pay to the Parent a fee of $750,000 ("Termination Fee"). The Termination Fee will be payable by delivery of immediately available funds at the time of termination, in the case of termination under clause (iii) or (iv) of the preceding sentence, or immediately prior to the earlier of the agreement with respect to, or the consummation of, the Company Acquisition Proposal, in the case of termination under clause (i) or (ii). If the Parent is required to file suit to seek the Termination Fee, and it ultimately succeeds on the merits, it will be entitled to all expenses, including reasonable attorneys' fees, that it has incurred in enforcing its rights under this Section 10.04. (c) If the Parent receives a Termination Fee under circumstances in which a Termination Fee is payable, neither the Parent, Merger Sub, nor any of their affiliates will assert or pursue in any manner, directly or indirectly, any claim or cause of action against the Company or any of its directors, officers, employees, agents, or representatives based in whole or in part upon its or their receipt, consideration, recommendation, or approval of a Company Acquisition Proposal, including the Company's exercise of its right of termination of this Agreement under Section 9.01(g). SECTION 10.05. "Knowledge" of the Company. For purposes of this Agreement, unless otherwise expressly provided where the term is used, "knowledge" of the Company will be deemed to mean the actual knowledge of any director or executive officer of the Company. SECTION 10.06. Successors and Assigns. The provisions of this Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate, or otherwise transfer any of its rights or obligations under this Agreement without the written consent of the other parties. SECTION 10.07. Governing Law. The interpretation, validity, and enforceability of this Agreement will be governed by the law of the State of Ohio without regard to principles of conflict of laws that would apply the laws of any other jurisdiction. 44 49 SECTION 10.08. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which will be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement will become effective when each party has received counterparts hereof signed by all of the other parties. SECTION 10.09. Entire Agreement. This Agreement, the Company Disclosure Schedule, the Parent Disclosure Schedule, and the Confidentiality Agreement constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements, both written and oral, among the parties with respect to the subject matter of this Agreement. No representation, warranty, or inducement not set forth herein has been made or relied upon by any party. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties any rights or remedies, except that the provisions of Article I are intended for the benefit of the Company's stockholders and holders of Company Options and Series B Warrants, and the provisions of Section 6.01 and 6.03 are intended for the benefit of present and former directors, officers, employees, and agents of the Company. SECTION 10.10. Headings. The headings contained in this Agreement are for reference purposes only and will not in any way affect the meaning or interpretation of this Agreement. SECTION 10.11. Severability. If any term or other provision of this Agreement is invalid, illegal, or unenforceable, all other provisions of this Agreement will remain in full force and effect so long as the economic and legal substance of the transactions contemplated hereby is not affected. SECTION 10.12. Specific Performance. Except as set forth in Section 10.04(c), the parties agree that irreparable damage would occur if any of the provisions of this Agreement is not performed in accordance with the terms hereof and that the parties will be entitled to specific performance of the terms hereof in addition to any other remedies at law or in equity. 45 50 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. FABRI-CENTERS OF AMERICA, INC. By: /s/ Brian P. Carney -------------------------------------------- Name: Brian P. Carney Title: Executive Vice President and Chief Financial Officer FCA ACQUISITION CORPORATION By: /s/ Brian P. Carney -------------------------------------------- Name: Brian P. Carney Title: Executive Vice President and Chief Financial Officer HOUSE OF FABRICS, INC. By: /s/ Donald L. Richey ------------------------------------------- Name: Donald L. Richey Title: President and Chief Executive Officer 46 51 INDEX OF DEFINED TERMS
Page No. -------- Acquisition Agreement......................................................33 Affiliate..................................................................16 Agreement...................................................................1 Cash Payment................................................................7 Closing.....................................................................5 Code.......................................................................16 Common Stock................................................................1 Company.....................................................................1 Company Acquisition Proposal...............................................33 Company Benefit Arrangement................................................16 Company Disclosure Schedule................................................10 Company Employee Plans.....................................................16 Company Financial Statements...............................................12 Company Material Adverse Effect............................................50 Company Option..............................................................7 Company Permits............................................................15 Company Preferred Stock....................................................10 Company Real Property......................................................22 Company SEC Reports........................................................12 Company Store Leases.......................................................22 Confidentiality Agreement..................................................32 Continuing Directors........................................................4 Contracts..................................................................14 D&O Insurance..............................................................36 Delaware Law................................................................4 Dissenting Stockholder......................................................8 DLJ.........................................................................3 Effective Time..............................................................5 Environmental Requirement..................................................24 ERISA......................................................................16 Exchange Act................................................................2 Exchange Agent..............................................................6 Exchange Fund...............................................................6 Expiration Date.............................................................1 F.M. Roberts................................................................7 Hazardous Material.........................................................24 HSR Act....................................................................10 Indemnified Party..........................................................36 Intellectual Property Rights...............................................24 knowledge..................................................................44
47 52 Lien.......................................................................10 Merger......................................................................4 Merger Consideration........................................................5 Merger Meeting.............................................................34 Merger Sub..................................................................1 Merger Sub Common Stock.....................................................5 Minimum Condition..........................................................50 October 1997 Balance Sheet.................................................12 Offer.......................................................................1 Offer Conditions............................................................1 Offer Documents.............................................................2 Parent......................................................................1 Parent Disclosure Schedule.................................................27 Parent Financial Statements................................................29 Parent Material Adverse Effect.............................................50 Parent SEC Reports.........................................................28 Permitted Encumbrances.....................................................22 Person......................................................................6 Refund Claim...............................................................21 Schedule 14D-9..............................................................2 SEC.........................................................................2 Securities Act.............................................................12 Series B Warrant Agreement..................................................7 Series C Warrant Agreement..................................................7 Stock Certificate...........................................................5 Subsidiary.................................................................11 Supplemental Warrant Agreement..............................................7 Surviving Corporation.......................................................4 Tax........................................................................21 Tax Return.................................................................21 Termination Fee............................................................44 Third Party Consents.......................................................38 Transaction Costs..........................................................43 Warrant Agent...............................................................7
48 53 LIST OF SCHEDULES Schedule Designation - -------- ----------- 1.01(a) Offer Conditions 49 54 SCHEDULE 1.01(a) OFFER CONDITIONS Merger Sub will not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Merger Sub's obligation to pay for or return tendered shares after the termination or withdrawal of the Offer), to pay for any shares of Common Stock not theretofore accepted for payment or paid for pursuant to the Offer, if (1) there are not validly tendered and not properly withdrawn prior to the expiration of the Offer that number of shares of Common Stock which, when aggregated with the shares of Common Stock then owned by the Parent and any of its affiliates, represents at least a majority of the shares of Common Stock then outstanding on a fully diluted basis (the "Minimum Condition") or (2) at any time on or after the date of the Agreement and at or before the time that any shares of Common Stock are accepted for payment any of the following conditions exist: (a) Any provision of any applicable domestic law or regulation, or any judgment, injunction, order, or decree of a court or governmental agency or authority of competent jurisdiction, is in effect that makes the Offer or the Merger illegal or otherwise, directly or indirectly, prohibits or materially restrains the making of the Offer, the acceptance for payment of, payment for, or ownership, directly or indirectly, of some or all of the shares of Common Stock by Merger Sub or the Parent, makes the foregoing substantially more costly, or materially delays the Merger. (b) Any consents, authorizations, orders, and approvals of, or filings or registrations with, any governmental commission, board, or other regulatory body required in connection with the execution, delivery, and performance of the Agreement has not been obtained or made, except (i) the filing of appropriate certificates of merger in accordance with Delaware Law, and (ii) where the failure to obtain or make any such consent, authorization, order, approval, filing, or registration is not reasonably likely to have, individually or in the aggregate, a material adverse effect on the financial condition, results of operations, or business of the Company (a "Company Material Adverse Effect"), or on the financial condition, results of operations, or business of the Parent and Merger Sub, taken as a whole (a "Parent Material Adverse Effect"), and would not render the Offer or the Merger illegal or provide a reasonable basis to conclude that the parties or their affiliates or any of their respective directors or officers will be subject to the risk of criminal liability. (c) Any requirement that the Parent, Merger Sub, or the Company (i) initiate or defend against any material pending or threatened litigation to which any governmental or regulatory authority (including the Antitrust Division of the Justice Department and the Federal Trade Commission) is a party, (ii) agree or otherwise become 50 55 subject to any prohibition or material limitations on (A) the right of the Parent or the Company, as the Surviving Corporation, effectively to control or operate the business, assets, or operations of the Company following the Offer or the Merger, (B) the right of the Parent or the Company, as the Surviving Corporation, to acquire or hold the business, assets, or operations of the Company as a result of the Merger, (C) the right of Merger Sub to exercise its rights of ownership of the Common Stock purchased by it in the Offer, or the right of the Parent to exercise its rights of ownership of the Common Stock of the Company, as the Surviving Corporation, after consummation of the Merger, including but not limited to the right to vote the Common Stock on all matters properly presented to the Company's stockholders, or (iii) agree or otherwise be required requires the sale or disposition, the holding separate (through the establishment of a trust or otherwise), or the divestiture of twenty-five (25) stores or more (whether stores of the Company, the Parent, or any of the Parent's Subsidiaries). (d) Any Third Party Consents required for the consummation of the Offer have not been obtained except where the failure to obtain any such Third Party Consents is not reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect or a Parent Material Adverse Effect. (e) The Company has failed to perform the obligations to be performed by it under the Agreement at or prior to such time or any representations and warranties of the Company contained in the Agreement are not true at such time as if made at and as of such time (unless the representation or warranty is made as of a specified date, in which case such representation or warranty will be true as of such date), except to the extent that the failure to perform such obligations and the untruth of such representations and warranties is not reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect and the Parent has received a certificate signed by an executive officer and by the chief financial officer of the Company to the foregoing effect. For purposes of determining whether this condition has been satisfied, all qualifications in the representations and warranties as to materiality will be disregarded, and all qualifications as to the knowledge of the Company will be deemed to mean the knowledge of the Company at the time such certificate is signed. (f) The Agreement has been terminated in accordance with its terms. 51 -----END PRIVACY-ENHANCED MESSAGE-----