<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-1943604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
5931 CAMPUS CIRCLE DRIVE
IRVING, TEXAS 75063
P.O. BOX 619566
DFW, TEXAS 75261-9566
(214) 714-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
R. DON MORRIS
5931 CAMPUS CIRCLE DRIVE
IRVING, TEXAS 75063
(214) 714-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
CHARLES D. MAGUIRE, JR. KENNETH L. STEWART
JACKSON & WALKER, L.L.P. FULBRIGHT & JAWORSKI L.L.P.
901 Main Street 2200 Ross Avenue
Suite 6000 Suite 2800
Dallas, Texas 75202 Dallas, Texas 75201
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.10
per share.................... 2,875,000 $39.625 $113,921,880 $39,283.41
<FN>
(1) Includes 375,000 shares to cover the Underwriters' over-allotment option.
(2) In accordance with Rule 457(c), based upon the average of the high and low
sales price of the Registrant's Common Stock on the Nasdaq National Market
on May 10, 1994.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 13, 1994
2,500,000 Shares
[logo]
Common Stock
($.10 par value)
--------------
ALL OF THE SHARES OF COMMON STOCK, $.10 PAR VALUE ("COMMON STOCK"), OF MICHAELS
STORES, INC. ("MICHAELS" OR THE "COMPANY") OFFERED HEREBY ARE BEING SOLD BY
THE COMPANY. OF THE 2,500,000 SHARES OF COMMON STOCK BEING OFFERED,
SHARES ARE INITIALLY BEING OFFERED IN THE UNITED STATES AND CANADA
(THE "U.S. SHARES") BY THE U.S. UNDERWRITERS (THE "U.S. OFFERING") AND
SHARES ARE INITIALLY BEING CONCURRENTLY OFFERED OUTSIDE THE
UNITED STATES AND CANADA (THE "INTERNATIONAL SHARES") BY THE
MANAGERS (THE "INTERNATIONAL OFFERING" AND, TOGETHER WITH
THE U.S. OFFERING, THE "COMMON STOCK OFFERING"). THE
OFFERING PRICE AND UNDERWRITING DISCOUNTS OF THE
U.S. OFFERING AND THE INTERNATIONAL OFFERING ARE
IDENTICAL. ON MAY 12, 1994, THE REPORTED
CLOSING PRICE OF THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET WAS $40 PER
SHARE.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
---------------- ---------------- ----------------
<S> <C> <C> <C>
PER SHARE............................................. $ $ $
TOTAL(2).............................................. $ $ $
</TABLE>
(1) BEFORE DEDUCTION OF EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$ .
(2) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AND THE MANAGERS AN OPTION,
EXERCISABLE BY CS FIRST BOSTON CORPORATION FOR 30 DAYS FROM THE DATE OF THIS
PROSPECTUS, FOR THE U.S. UNDERWRITERS AND THE MANAGERS TO PURCHASE A MAXIMUM
OF 375,000 ADDITIONAL SHARES TO COVER OVER-ALLOTMENTS OF SHARES. IF THE
OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ ,
UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $ , AND PROCEEDS TO
COMPANY WILL BE $ .
--------------
THE U.S. SHARES ARE OFFERED BY THE SEVERAL U.S. UNDERWRITERS WHEN, AS AND IF
ISSUED BY THE COMPANY, DELIVERED TO AND ACCEPTED BY THE U.S. UNDERWRITERS AND
SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT
THE U.S. SHARES WILL BE READY FOR DELIVERY ON OR ABOUT , 1994.
CS First Boston Robertson, Stephens & Company
THE DATE OF THIS PROSPECTUS IS , 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, CS FIRST BOSTON CORPORATION ON BEHALF OF
THE U.S. UNDERWRITERS AND THE MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS
MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING,
CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. (SEE
"UNDERWRITING.")
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission may be
inspected and copied at the office of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
This Prospectus does not contain all of the information set forth in the
Registration Statement on Form S-3 and exhibits thereto (collectively, the
"Registration Statement") that the Company filed with the Commission in
connection with the sale of the securities offered hereby under the Securities
Act of 1933, as amended (the "Securities Act"), to which Registration Statement
reference is hereby made. Copies of such Registration Statement are available
from the Commission. The terms "Michaels" and the "Company" when used herein
shall mean Michaels Stores, Inc.
The Company's principal executive offices are located at 5931 Campus Circle
Drive, Irving, Texas, and its mailing address is P.O. Box 619566, DFW, Texas
75261-9566 and the Company's telephone number is (214) 714-7000.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed with the Commission by the Company
and are incorporated herein by reference and made a part hereof as of their
respective dates: (i) Annual Report on Form 10-K for the year ended January 30,
1994; and (ii) Registration Statement on Form 8-A (No. 0-11822), effective as of
September 11, 1991 and any amendments filed thereto.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Common Stock Offering shall be deemed to be incorporated
by reference herein and to be a part hereof from the date of filing thereof. Any
statement contained herein or in a document incorporated or deemed incorporated
by reference herein shall be deemed to be modified or superseded for all
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference in this Prospectus
(other than exhibits and schedules thereto, unless such exhibits or schedules
are specifically incorporated by reference into the information that this
Prospectus incorporates). Written or telephonic requests for copies should be
directed to Michaels' principal office: Michaels Stores, Inc., P.O. Box 619566,
DFW, Texas 75261-9566, Attention: Investor Relations (telephone: (214)
714-7100).
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS INTENDED TO HIGHLIGHT CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE
STATEMENT OF ALL MATERIAL INFORMATION IN THIS PROSPECTUS AND IS QUALIFIED IN ITS
ENTIRETY BY THE MORE DETAILED INFORMATION HEREIN AND IN THE DOCUMENTS
INCORPORATED BY REFERENCE. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED
IN THIS PROSPECTUS ASSUMES THAT THE U.S. UNDERWRITERS' AND THE MANAGERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
Michaels Stores, Inc. ("Michaels" or the "Company") is the nation's leading
retailer of arts, crafts and decorative items. Michaels stores offer a wide
selection of competitively priced items, including general crafts, wearable art,
silk and dried flowers, picture framing materials and services, art and hobby
supplies, and party, seasonal and holiday merchandise. The Company's stores
average approximately 15,500 square feet of selling space and offer an
assortment of over 30,000 stock keeping units ("SKUs"). Michaels' merchandising
strategy is to provide a broad selection of products in an appealing store
environment with superior customer service, including in-store "how-to"
demonstrations, project samples displayed throughout the store and instructional
classes for adults and children.
Michaels currently operates 261 stores in 33 states and Canada. As a result
of the recently announced acquisition of Leewards Creative Crafts, Inc. (the
"Leewards Acquisition"), the Company intends to add 76 store locations after the
closing of certain overlapping stores. On a pro forma basis for the Leewards
Acquisition, Michaels' sales for the fiscal year ended January 30, 1994 would
have been approximately $811 million. In addition to the Leewards stores and the
25 stores acquired earlier this year, Michaels currently anticipates opening
approximately 50 new store locations in 1994, of which 16 have been opened.
Assuming the consummation of the Leewards Acquisition, the Company intends to
add approximately 50 to 60 new stores during 1995.
Over the past five fiscal years, the Company's sales have grown from $290
million to $620 million. This sales growth resulted from increases in comparable
store sales in each year since 1989 and an increase in the Company's store
locations from 122 to 220 at the end of the most recent fiscal year. In
addition, operating income over the past five fiscal years has increased from
$15 million to $41 million.
RECENT ACQUISITIONS
On May 10, 1994, Michaels announced that it had signed a definitive merger
agreement for the acquisition of Leewards Creative Crafts, Inc. ("Leewards"), an
Illinois-based arts and crafts retailer with approximately 100 stores located
primarily in the midwestern and northeastern United States. The merger agreement
provides for an aggregate merger consideration not to exceed 1,550,000 shares of
Michaels Common Stock, subject to certain downward adjustments. Upon
consummation of the Leewards Acquisition, Michaels will also repay an estimated
$50 million of Leewards' indebtedness. The Leewards Acquisition will establish
Michaels' presence in a number of new markets, including the northeastern United
States, a market in which Michaels does not currently have a significant
presence, and significantly expand its presence in several existing markets.
Following the Leewards Acquisition, Michaels expects to close approximately 20
Leewards stores and four Michaels stores due to overlapping locations.
Consummation of the acquisition is subject to customary conditions to closing,
including the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("Hart-Scott-Rodino"),
there having occurred no material adverse changes in the condition (financial or
otherwise), operations, assets or liabilities of Michaels or Leewards and
approval of the merger by Leewards' shareholders. See "Recent Developments" and
"Leewards Acquisition."
In February 1994, the Company acquired Treasure House Stores, Inc.
("Treasure House"), a chain of nine arts and crafts stores operating primarily
in the Seattle market, for 280,000 shares of Michaels Common Stock. In April
1994, the Company acquired the affiliated arts and crafts store chains of Oregon
Craft & Floral Supply Co. ("Oregon Craft & Floral"), with eight stores located
4
<PAGE>
primarily in the Portland, Oregon area, and H&H Craft & Floral Supply Co. ("H&H
Craft & Floral"), with eight stores located in southern California, for a total
of 455,000 shares of Michaels Common Stock. All of these acquired stores will be
converted to the Michaels format with grand openings scheduled for May through
August of this year. The Company believes that these acquisitions have
significantly increased its presence in Oregon and Washington and further
strengthened its position in southern California. See "Recent Developments."
INTEGRATION OF LEEWARDS
The Company has designed a ten-week transition plan to reconfigure the
Leewards stores to be more consistent with the merchandising strategy of
Michaels. In order to minimize disruption to the Company's business, this plan
will be implemented by the Leewards field organization under the supervision of
Michaels' management using detailed plans developed by Michaels. Key aspects of
this plan include:
- Revising and enhancing the product mix to correlate to Michaels'
merchandising strategy;
- Converting merchandise ordering and management information systems;
- Eliminating redundant overhead;
- Retraining employees to provide the level of customer service found in
Michaels stores and to improve operational efficiencies; and
- Closing approximately 20 Leewards and four Michaels store locations to
eliminate overlapping stores.
The continuing 80 Leewards stores will be converted to the Michaels store
format beginning with a four-week phase to eliminate incompatible merchandise.
The second phase will involve the arrival of new merchandise and the
reformatting of the stores to the Michaels prototype. This will be accomplished
department by department, with the stores remaining open for business throughout
the process. The Company anticipates completing the plan prior to the busy
fall/Christmas selling season. See "Leewards Acquisition -- Integration of
Leewards."
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
U.S. Offering......................... shares
International Offering................ shares
Total............................. shares
Common Stock to be Outstanding:
After the Common Stock Offering(1).... shares
After the Common Stock Offering and
the Leewards Acquisition............. shares
Use of Proceeds......................... Retirement of an estimated $50 million of
outstanding indebtedness of Leewards, and to fund
planned new store expansion, working capital
requirements, future acquisitions and other
general corporate purposes. If the Leewards
Acquisition is not consummated, all proceeds will
be used to fund planned new store expansion,
working capital requirements, future acquisitions
and other general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol........... MIKE
<FN>
- ------------------------
(1) Does not include shares issuable upon consummation of the Leewards
Acquisition. See "Leewards Acquisition."
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT STORE DATA AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR (1)
-----------------------------------------------------------------------
1993
---------------------
PRO
1989 1990 1991 1992 ACTUAL FORMA(2)
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales...................... $ 289,754 $ 362,028 $410,899 $ 493,159 $ 619,688 $810,824
Operating income............... 14,900 20,694 25,643 34,263 41,356 44,622
Weighted average shares
outstanding assuming full
dilution...................... 10,645 10,229 12,411 16,853 19,809 21,260
Earnings per common share
assuming full dilution........ $ 0.00 $ 0.57 $ 0.87(3) $ 1.21 $ 1.52 $ 1.40
STORE DATA:
Stores open at period
end........................... 122 137 140 168 220 319(4)
Average sales per square foot
(5)........................... $ 193 $ 203 $ 213 $ 226 $ 218 $ 201
Comparable store sales
increase (6).................. 6% 9% 9% 7% 3% 3%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30, 1994
-------------------------------------------
PRO FORMA
ACTUAL AS ADJUSTED(7) AS ADJUSTED(8)
----------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $ 181,816 $ $
Total assets...................................................... 397,830
Total long-term debt.............................................. 97,750
Shareholders' equity.............................................. 185,415
<FN>
- ------------------------
(1) The Company operates on a 52/53 week fiscal year ending on the Sunday
closest to January 31. For example, references to "fiscal 1993" mean the
fiscal year ended January 30, 1994. Fiscal 1990 included 53 weeks; all
other fiscal years set forth above included 52 weeks.
(2) On a pro forma basis to reflect the consummation of the Leewards
Acquisition. See "Pro Forma Combined Financial Information." Does not
reflect the acquisitions of Treasure House, Oregon Craft & Floral or H&H
Craft & Floral as such acquisitions were not material in the aggregate.
(3) Before extraordinary item of $3.8 million, or $0.31 per common and common
equivalent share, relating to the redemption premium paid for the early
retirement of the Company's 12.75% Senior Subordinated Notes, which had an
effective interest rate of 15.8%, and the accelerated amortization of
related debt issuance costs.
(4) Includes Leewards stores and Michaels stores open at period end.
(5) Calculated for stores open the entire period and based on selling square
footage.
(6) The increase for fiscal 1990 was calculated on a comparable 52-week
period.
(7) As adjusted for the Common Stock Offering.
(8) As adjusted for the Common Stock Offering and the Leewards Acquisition.
</TABLE>
6
<PAGE>
RECENT DEVELOPMENTS
On May 10, 1994, the Company announced that it had signed a definitive
merger agreement for the acquisition of Leewards, an Illinois-based arts and
crafts retailer with approximately 100 stores located primarily in the
midwestern and northeastern United States. Consummation of the acquisition is
subject to customary conditions to closing, including the expiration or
termination of the waiting period under Hart-Scott-Rodino, there having occurred
no material adverse changes in the condition (financial or otherwise),
operations, assets or liabilities of Michaels or Leewards and approval of the
merger by Leewards' shareholders. The merger agreement provides for the Leewards
shareholders to receive 1,550,000 shares of Michaels Common Stock. The aggregate
consideration is (i) subject to certain downward adjustments and (ii) payable,
in part, in cash in lieu of shares with respect to the net value of outstanding
options to purchase Leewards common stock. The Company estimates that these
adjustments will reduce the shares of Michaels Common Stock issuable by 98,500
shares. The transaction is expected to close on or before July 31, 1994. The
Leewards shareholders have agreed they will not dispose of the shares of Common
Stock they acquire in connection with the Leewards Acquisition for a period of
at least 120 days from the date of this Prospectus. Under certain circumstances,
the Leewards shareholders may receive a portion of the acquisition consideration
in cash. See "Leewards Acquisition," "Pro Forma Combined Financial Information,"
and "Underwriting."
In February 1994, the Company acquired Treasure House, a chain of nine arts
and crafts stores operating primarily in the Seattle market, for 280,000 shares
of Michaels Common Stock. In April 1994, the Company acquired the affiliated
arts and crafts store chains of Oregon Craft & Floral, with eight stores located
primarily in the Portland, Oregon area, and H&H Craft & Floral, with eight
stores located in southern California, for a total of 455,000 shares of Michaels
Common Stock. All of these acquired stores will be converted to the Michaels
format with grand openings scheduled for May through August of this year. The
Company believes that these acquisitions have significantly increased its
presence in Oregon and Washington and further strengthened the Company's
position in southern California.
THE COMPANY
OVERVIEW
Michaels is the nation's leading retailer of arts, crafts and decorative
items. Michaels stores offer a wide selection of competitively priced items,
including general crafts, wearable art, silk and dried flowers, picture framing
materials and services, art and hobby supplies, and party, seasonal and holiday
merchandise. Michaels' merchandising strategy is to provide a broad selection of
products in an appealing store environment with superior customer service,
including in-store "how-to" demonstrations, project samples displayed throughout
the store and instructional classes for adults and children. The Company's
primary customers are women aged 25 to 54 with above average median household
incomes, and the Company believes that repeat customers account for a
substantial portion of its sales. The average sale is approximately $13.75.
Michaels currently operates 261 stores in 33 states and Canada. As a result
of the Leewards Acquisition, the Company intends to add 76 store locations after
the closing of certain overlapping stores. On a pro forma basis for the Leewards
Acquisition, Michaels' sales for fiscal 1993 would have been approximately $811
million. See "Leewards Acquisition."
NEW STORE EXPANSION
In addition to the Leewards stores and the 25 stores acquired earlier this
year, Michaels currently anticipates opening approximately 50 new stores in the
United States and Canada during fiscal 1994, of which 16 have been opened. At
present, the Company intends to add 50 to 60 new stores during fiscal 1995
assuming consummation of the Leewards Acquisition; otherwise, fiscal 1995 store
growth is expected to be between 80 and 100 new stores. Michaels' expansion
strategy is to give priority to adding stores in existing markets or clustering
stores in new markets in order to enhance economies of
7
<PAGE>
scale associated with advertising, distribution, field supervision and other
regional expenses. Management believes that few of its existing markets are
saturated, and that many attractive new markets are available to the Company for
expansion. The anticipated development of Michaels stores in 1995 and the rate
at which stores are developed thereafter will depend upon a number of factors,
including the success of existing Michaels stores and the stores to be added
pursuant to the Leewards Acquisition, the availability of suitable store sites,
the availability of suitable acquisition candidates and the ability to hire and
train qualified managers. The Company intends to continue to review acquisition
opportunities in existing and new markets. The Company has no arrangements or
understandings pending with respect to any acquisitions other than Leewards.
In October 1993, the Company opened its first Michaels Craft and Floral
Warehouse store ("CFW") using a newly-developed "warehouse superstore" format.
It is anticipated that each store following the CFW format will occupy
approximately 30,000 to 40,000 square feet of selling space, carry a wider
selection of certain categories of merchandise than the typical store, and
generally offer merchandise at "everyday" discounted retail prices. To achieve a
lower cost structure than a typical Michaels store, the Company's CFW format is
premised on reduced occupancy expenses per square foot and less extensive
advertising programs. In addition, the CFW format utilizes new computer systems
that provide full point-of-sale scanning and automated receiving of merchandise,
and eliminates the retail price marking of individual products. The Company
plans to open four or five additional CFW stores during 1994, and may accelerate
the opening of such stores in the future if the format continues to be favorably
received by consumers.
MERCHANDISING
Michaels' merchandising strategy is to provide a broad selection of products
in an appealing store environment with superior customer service. The commitment
to customer service is evidenced through in-store "how-to" demonstrations,
project samples displayed throughout each store, and instructional classes for
adults and children. The typical Michaels store offers an assortment of over
30,000 SKUs. In general, each store offers products from ten departments. Nine
of the departments offer essentially the same type of merchandise throughout the
year, although the products may vary from season to season. The merchandise
offered by these nine departments includes general craft materials, wearable
art, silk and dried flowers, picture framing materials and services, fine art
materials, hobby items, party items, needle craft items and ribbon.
In addition to these nine departments, the Company regularly features
seasonal merchandise. Seasonal merchandise is ordered for several holidays,
including Valentine's Day, Easter, Mother's Day, Halloween and Thanksgiving, in
addition to the Christmas season. For example, seasonal merchandise for the
Christmas season includes trees, wreaths, candles, lights and ornaments.
Included in seasonal merchandise is promotional merchandise that is offered with
the intention of generating customer traffic.
The following table shows sales by the largest departments as a percentage
of total sales for fiscal 1993:
<TABLE>
<CAPTION>
DEPARTMENT PERCENTAGE OF SALES
- ------------------------------------------------------------------------------------- ---------------------
<S> <C>
General craft materials and wearable art............................................. 21%
Silk and dried flowers and plants.................................................... 21
Picture framing...................................................................... 15
Seasonal and promotional items....................................................... 14
Fine art materials................................................................... 11
Hobby, party, needlecraft and ribbon................................................. 18
---
Total.............................................................................. 100%
---
---
</TABLE>
8
<PAGE>
CUSTOMER SERVICE
Michaels believes that customer service is critically important to its
merchandising strategy. Many of the craft supplies sold in Michaels stores can
be assembled into unique end-products with an appropriate amount of guidance and
direction. Michaels has hundreds of displays in every store in an effort to
stimulate new project ideas, and supplies project sheets with detailed
instructions on how to assemble the products. In addition, many sales associates
are craft enthusiasts with the experience to help customers with ideas and
instructions. The Company also offers free demonstrations and inexpensive
classes in stores as a means of promoting new craft ideas. Michaels believes
that the in-store "how-to" demonstrations, instructional classes, knowledgeable
sales associates, and customer focus groups have allowed the Company to better
understand and serve its customers. In addition, the Company measures its
customer service in each store at least four times a year through a "mystery
shopper" program.
PURCHASING AND DISTRIBUTION
The Company's purchasing strategy is to negotiate directly with its vendors
in order to take advantage of volume purchasing discounts and improve control
over product mix and inventory. For certain substantial product lines, the
Company negotiates directly with a number of major manufacturers to shorten the
distribution chain. Although this requires an increased inventory investment in
the warehouse, it results in substantial savings and allows the Company to
develop products specifically formulated to Michaels' design and quality
standards. Approximately 90% of the merchandise is acquired from vendors on the
Company's "approved list." Of this merchandise, approximately one-half is
received by the stores from the Company's distribution centers and one-half is
received directly from vendors. In addition, each store has the flexibility to
purchase approximately 10% of its merchandise directly from local vendors, which
allows the store managers to tailor the products offered in their stores to
local tastes and trends. All store purchases are monitored by district and
regional managers.
The Company currently operates three distribution centers which supply the
stores with certain merchandise, including substantially all seasonal and
promotional items. The Company's distribution centers are located in Irving,
Texas, Buena Park, California, and Lexington, Kentucky. The Company also
operates a bulk warehouse in Phoenix, Arizona, which allows the Company to store
bulk purchases of seasonal and promotional merchandise prior to distribution.
Michaels stores receive deliveries from the distribution centers generally once
a week.
Substantially all of the products sold in Michaels stores are manufactured
in the United States, the Far East and Mexico. Goods manufactured in the Far
East generally require long lead times and are ordered four to six months in
advance of delivery. Such products are either imported directly by the Company
or acquired from distributors based in the United States. In all cases,
purchases are denominated in U.S. dollars (or Canadian dollars for purchases of
certain items delivered directly to stores in Canada).
ADVERTISING
The Company believes that its advertising promotes craft and hobby project
ideas among its customers. Traditionally, the Company has focused on circular
and newspaper advertising. The Company has found circular advertising, primarily
as an insert to newspapers but also through direct mail or on display within its
stores, to be the most effective medium of advertising. Such circulars advertise
numerous products in order to emphasize the wide selection of products available
at Michaels stores. The Company believes that advertising efficiencies
associated with the clustering of its stores in its markets together with its
ability to advertise through circulars and newspapers approximately once a week
in each of its markets provides the Company with an advantage over its smaller
competitors.
The Company has generally limited television advertising to network
television in those major markets in which it had clusters of stores or in which
it was adding new stores. Beginning with the 1994 fall/Christmas season, the
Company expects to implement a marketing program coordinating national cable
television, including The Discovery Channel-TM-, Lifetime Television, and USA
Network-R-,
9
<PAGE>
and circular advertisements together with project booklets, in-store
demonstrations, and new point-of-sale techniques. A substantial portion of the
$4 million cost of this new marketing program will be underwritten by Michaels'
vendors. Michaels intends to allocate a portion of its network television budget
to this program.
STORE OPERATIONS
The Company's 261 stores (before the Leewards Acquisition) average
approximately 15,500 square feet of selling space, although newer stores average
approximately 17,000 square feet of selling space. Net sales for fiscal 1993
averaged approximately $3.2 million per store (for stores open the entire fiscal
year) and $218 per square foot of selling space. Store sites are selected based
upon meeting certain economic, demographic and traffic criteria and upon the
Company's strategy of clustering stores in markets where certain operating
efficiencies can be achieved. The Michaels stores currently in operation are
located primarily in strip shopping centers in areas with easy access and ample
parking.
Michaels has developed a standardized procedure which enables the Company to
efficiently open new stores and integrate them into its information and
distribution systems. The Company develops the floor plan and inventory layout,
and organizes the advertising and promotions in connection with the opening of
each new store. In addition, Michaels maintains an experienced store opening
staff to provide new store personnel with in-store training. Michaels generally
opens new stores during the period from February through October because new
store personnel require significant in-store training prior to the first
Christmas selling season for each such store.
Costs for opening stores at particular locations depend upon the type of
building and general cost levels in the area. In fiscal 1993, the average net
cost to the Company of opening a new store was approximately $535,000 per store,
which included leasehold improvements, furniture, fixtures and equipment, and
pre-opening expenses. The Company used more existing real estate, versus
build-to-suit locations, in fiscal 1993 resulting in an average cost of opening
a new store that was $160,000 higher than historical levels due to the increased
level of leasehold improvements. This increase was offset, in part, by lower
rent rates. The initial inventory investment associated with each new store in
fiscal 1993 was approximately $320,000 to $740,000 depending on the time of year
in which the store was opened. The initial inventory investment in new stores is
offset, in part, by extended vendor terms and allowances.
INVENTORY CONTROL/MANAGEMENT INFORMATION SYSTEMS
Michaels' management information systems include automated point-of-sale,
merchandising, distribution and financial applications. All orders from the
stores to the Company's distribution centers are processed electronically to
ensure timely delivery of distribution center sourced inventory. The Company's
point-of-sale system captures sales information by department. Due to the large
number of inexpensive items in the stores, the non-fashion nature of the
merchandise, and the long lead times involved for ordering seasonal goods (up to
nine months), the Company does not currently capture item-level sales
information, inventory or margin electronically in all stores. Sales trend
tracking combines item level point-of-sale scanning data from the CFW store with
point-of-sale department-level sales from all other stores, weekly test counts
of certain SKUs in 40 selected stores, and regular communication from store
managers through the district and regional managers. Inventory and margins are
monitored on a perpetual basis in the distribution centers and in the stores via
physical inventories at least quarterly in groups of 30 to 40 stores and a
year-end complete physical count in most stores. The Company believes that these
procedures and automated systems, together with its other control processes,
allow Michaels to effectively manage and monitor its inventory levels and margin
performance.
COMPETITION
Michaels is the largest nationwide retailer dedicated to serving the arts
and crafts marketplace. The specialty arts, crafts and decorative item retail
business is highly competitive. Michaels competes primarily with regional and
local merchants that tend to specialize in particular aspects of arts and
10
<PAGE>
crafts, other nationwide retailers of craft items and related merchandise, and
mass merchandisers that typically dedicate a portion of their selling space to a
limited selection of arts, crafts, picture framing and seasonal products. The
Company believes that its stores compete based on price, quality and variety of
merchandise assortment, and customer service, such as instructional
demonstrations. Michaels believes the combination of its broad selection of
products, emphasis on customer service, loyal customer base, and capacity to
advertise frequently in all of its markets provides the Company with a
competitive advantage.
LEEWARDS ACQUISITION
PROPOSED ACQUISITION
On May 10, 1994 the Company announced that it had signed a definitive merger
agreement for the acquisition of Leewards, an Illinois-based arts and crafts
retailer with approximately 100 stores located primarily in the midwestern and
northeastern United States. The Leewards stores, which average approximately
14,000 square feet of selling space, are similar in both size and type of
location to the average Michaels store. The Company believes that the Leewards
Acquisition provides it with an opportunity to accelerate its nationwide
expansion strategy in the fragmented arts and crafts retailing industry. The
Leewards Acquisition will establish Michaels' presence in a number of new
markets, particularly in the northeastern United States, including Pennsylvania,
Massachusetts, and New Jersey, and significantly expand its presence in several
existing markets, including northern California, Illinois, Florida, Michigan,
Missouri, Minnesota and New York. Following the Leewards Acquisition, Michaels
expects to close approximately 20 Leewards stores and four Michaels stores due
to overlapping locations.
In connection with the Leewards Acquisition, Michaels has designed a plan
that is intended to increase the sales and profitability of the Leewards stores.
The plan includes reconfiguring the layout and staffing of the acquired stores
and increasing the average inventory level at the Leewards stores to be more
consistent with Michaels' fundamental merchandising strategy of providing a
broad selection of products through separate in-store departments with a
commitment to superior customer service. The Company believes that the Leewards
stores will also benefit from the addition of art supplies and party goods
departments, the strengthening of its custom floral and custom framing services,
extensive in-store promotional activities and the implementation of Michaels'
targeted advertising strategies. In addition, Michaels expects the Leewards
stores to benefit from Michaels' centralized purchasing and nationwide
distribution network. Michaels also believes that it will realize cost savings
through the elimination of duplicate corporate overhead in connection with the
acquisition, and that it will benefit from increased purchasing power with its
suppliers.
For the fiscal year ended January 1994, the average sales of the Leewards
stores open for the full fiscal year were $2.1 million compared to the average
sales for Michaels stores open for the full year during the same period of $3.2
million. The average profitability per Leewards store has also historically
trailed the average profitability of Michaels stores. However, Michaels believes
that the Leewards Acquisition provides the Company with many attractive retail
store locations, and that Michaels' plan to convert the Leewards stores to the
Michaels format and to implement Michaels' merchandising strategies will result
in increased sales and profitability in the acquired stores. No assurance can be
given that sales volumes or profitability at the former Leewards locations can
be improved, and, if such sales volumes and profitability are not increased, the
Leewards Acquisition may have a negative effect on Michaels' future earnings.
The merger agreement provides for an aggregate merger consideration not to
exceed 1,550,000 shares of Michaels Common Stock. The aggregate consideration is
(i) subject to certain downward adjustments and (ii) payable, in part, in cash
in lieu of shares with respect to the net value of outstanding options to
purchase Leewards common stock. The Company estimates that these adjustments
will reduce the shares of Michaels Common Stock issuable by 98,500 shares. Upon
consummation of the Leewards Acquisition, Michaels will also repay the
indebtedness under Leewards' bank
11
<PAGE>
credit facility and subordinated notes, expected to total $50 million at
closing. The merger agreement also provides for the Leewards stockholders, under
certain circumstances, to receive cash in lieu of up to 750,000 shares of Common
Stock, depending upon the net proceeds per share from the Common Stock Offering.
If the Leewards stockholders receive cash in lieu of shares, the Company may
increase the number of shares to be sold in the Common Stock Offering in order
to provide additional cash proceeds to fund this cash portion of the Leewards
Acquisition. Consummation of the Leewards Acquisition is subject to customary
conditions to closing, including the expiration or termination of the waiting
period under Hart-Scott-Rodino, there having occurred no material adverse
changes in the condition (financial or otherwise), operations, assets or
liabilities of Michaels or Leewards and approval of the merger by Leewards'
shareholders (including termination of certain Leewards stockholders agreements
and warrants). The transaction is expected to close on or before July 31, 1994.
See "Pro Forma Combined Financial Information."
INTEGRATION OF LEEWARDS
The Company has designed a ten-week transition plan to reconfigure the
Leewards stores to be more consistent with the merchandising strategy of
Michaels. In order to minimize disruption to the Company's business, this plan
will be implemented by the Leewards field organization under the supervision of
Michaels' management using detailed plans developed by Michaels. Key aspects of
this plan include:
- Revising and enhancing the product mix to correlate to Michaels'
merchandising strategy;
- Converting merchandise ordering and management information systems;
- Eliminating redundant overhead;
- Retraining employees to provide the level of customer service found in
Michaels stores and to improve operational efficiencies; and
- Closing approximately 20 Leewards and four Michaels store locations to
eliminate overlapping stores.
The remaining 80 Leewards stores will be converted to the Michaels store
format beginning with a four-week phase to eliminate incompatible merchandise.
The second phase will involve the arrival of new merchandise and the
reformatting of the stores to the Michaels prototype. This will be accomplished
department by department, with the stores remaining open for business throughout
the process. The reformatting of the Leewards stores will include the addition
of art supplies and party goods departments, the strengthening of the custom
floral and custom framing services and the expansion of other departmental
assortments to correlate with Michaels' standard store format. Michaels'
merchandise ordering systems will be installed during this time and other
in-store systems will be converted to Michaels systems. It will not be necessary
to replace the cash registers in the acquired stores, as the existing hardware
platforms of Michaels and Leewards are compatible. Other store-based computer
hardware systems will be replaced or upgraded to be consistent with Michaels'
hardware platforms. Upon completion of the store conversion plan, Leewards'
distribution facilities will be closed as Michaels' existing distribution
facilities have adequate capacity to service the remaining Leewards stores. The
Company anticipates completing the plan prior to the busy fall/Christmas selling
season.
During the last year, the Company increased its upper level management
capabilities by adding a Vice President -- Store Operations, Vice President --
Store Development and Corporate Operations, Vice President -- Information
Systems and Vice President -- Real Estate. In addition, the Company expects to
retain a number of the field managers from the Leewards organization to
supplement the Company's existing field management. During the conversion
process the Leewards field organization will be strengthened by an increase in
district and regional management to provide close supervision throughout the
conversion process. The Company believes that these additions to its management
12
<PAGE>
structure, together with the additional Michaels field management that has been
trained to implement the Company's 1994 growth plan, will provide Michaels with
sufficient management capabilities to absorb the 80 Leewards stores in addition
to the approximately 40 to 50 new stores to be opened and 25 stores already
acquired by Michaels during 1994. The Company believes this process will permit
the conversion of the Leewards stores without disruption of the existing
Michaels field management or operations during the busy fall/Christmas selling
season. After the conversion and integration of the Leewards stores is complete,
the entire Michaels field organization will be reorganized with permanent
assignments based on the combined entities.
Although the Company has not previously completed an acquisition of similar
size to the Leewards Acquisition, the Company believes that its substantial
experience in opening new stores and recent experience in incorporating acquired
stores into the Michaels format and systems will facilitate the integration of
the Leewards stores into the Company's existing structure.
USE OF PROCEEDS
The net proceeds from the Common Stock Offering are estimated to be
approximately $ million ($ million assuming the over-allotment option is
exercised in full), assuming a public offering price of $ per share after
deducting the estimated underwriting discounts and commissions and offering
expenses. The Company intends to use an estimated $50 million of the net
proceeds for the repayment of Leewards' outstanding indebtedness at the time of
closing of the acquisition consisting of (i) an estimated $32 million under
Leewards' existing credit facility due August 19, 1994 with a current interest
rate of 8.5% and (ii) approximately $18 million for the retirement of Leewards'
outstanding 13.5% Senior Subordinated Notes due 2000. See "Leewards
Acquisition." The remaining net proceeds will be used by the Company to fund
planned new store expansion and working capital requirements (including
purchasing of new inventory for the continuing Leewards stores), and for other
general corporate purposes. In addition to the Leewards Acquisition, the Company
may also use a portion of the proceeds from the Common Stock Offering to take
advantage of future acquisition opportunities, although the Company has no
present commitments, agreements or understandings with respect to any such
acquisitions. If the Leewards Acquisition is not consummated, all proceeds from
the Common Stock Offering will be used to fund planned new store expansion,
working capital requirements and future acquisitions and for other general
corporate purposes. Pending the use of such proceeds for the above purposes, the
net proceeds initially will be invested in short-term interest bearing
securities or mutual funds which invest in such securities.
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
January 30, 1994, (ii) the capitalization as adjusted for the issuance of the
shares of Common Stock being offered hereby, and (iii) the capitalization as
adjusted for the issuance of the shares of Common Stock being offered hereby and
on a pro forma basis for the Leewards Acquisition. See "Use of Proceeds."
<TABLE>
<CAPTION>
JANUARY 30, 1994 (1)
-------------------------------------------
PRO FORMA
AS ADJUSTED AS ADJUSTED
ACTUAL (2) (3)
----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term bank debt................................................ $ 13,000 $ $
----------- -------------- --------------
----------- -------------- --------------
Convertible subordinated notes...................................... $ 97,750 $ $
Shareholders' equity:
Common stock, $0.10 par value, 50,000,000 shares authorized,
16,697,357 shares issued and outstanding, shares issued
and outstanding as adjusted and shares issued and
outstanding pro forma as adjusted................................ 1,670
Additional paid-in capital........................................ 107,168
Retained earnings................................................. 76,577
----------- -------------- --------------
Total shareholders' equity........................................ 185,415
----------- -------------- --------------
Total capitalization................................................ $ 283,165 $ $
----------- -------------- --------------
----------- -------------- --------------
<FN>
- ------------------------
(1) The table does not include information regarding the acquisitions of
Treasure House, Oregon Craft & Floral or H&H Craft & Floral, as such
acquisitions were not material, in the aggregate.
(2) As adjusted to reflect the receipt by the Company of $ in net
proceeds from the Common Stock offered hereby at an assumed offering price
of $ , after deducting the estimated underwriting discounts and
commissions and offering expenses.
(3) As adjusted to reflect the receipt by the Company of $ in net
proceeds from the Common Stock offered hereby at an assumed offering price
of $ after deducting the estimated underwriting discounts and
commissions and offering expenses, and on a pro forma basis to reflect the
consummation of the Leewards Acquisition and the repayment of
approximately $ million of Leewards' indebtedness.
</TABLE>
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock of Michaels is quoted through the Nasdaq National Market
under the symbol "MIKE." The following table sets forth, for the periods
indicated, the high and low sales prices per share of the Common Stock, as
reported by the Nasdaq National Market through May 12, 1994.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED JANUARY 31, 1993:
First Quarter.................................................................. $26 $19
Second Quarter................................................................. 23 1/2 16 1/2
Third Quarter.................................................................. 29 3/4 20 1/2
Fourth Quarter................................................................. 34 3/4 24 5/8
FISCAL YEAR ENDED JANUARY 30, 1994:
First Quarter.................................................................. $34 $26 1/4
Second Quarter................................................................. 33 25 1/4
Third Quarter.................................................................. 39 26 3/8
Fourth Quarter................................................................. 36 1/2 31 7/8
FISCAL YEAR ENDED JANUARY 29, 1995:
First Quarter.................................................................. $44 3/4 $31
Second Quarter (through May 12, 1994).......................................... 46 1/2 35 3/4
</TABLE>
On May 12, 1994, the last reported sale price of the Common Stock as
reported by the Nasdaq National Market was $40 per share.
Michaels has never paid dividends on its Common Stock. The Company's current
policy is to retain earnings for use in the Company's business and the financing
of its growth. However, such policy is subject to the discretion of the Board of
Directors.
15
<PAGE>
SELECTED FINANCIAL AND STORE DATA
The selected financial data presented below are derived from the financial
statements of the Company for the five fiscal years ended January 30, 1994 which
were audited by Ernst & Young, independent auditors. The data should be read in
conjunction with the financial statements and the related notes incorporated by
reference in this Prospectus. Certain amounts in prior years have been
reclassified to conform with the presentation for the current year. The
following unaudited pro forma statement of income data has been prepared as if
the Leewards Acquisition occurred at the beginning of fiscal year 1993. The
following unaudited pro forma combined balance sheet data has been prepared as
if the Leewards Acquisition occurred on January 30, 1994. The unaudited pro
forma financial data does not purport to represent the financial position or
results of operations which would have occurred had such transactions been
consummated on the dates indicated or the Company's financial position or
results of operations for any future date or period. These unaudited pro forma
financial data should be read in conjunction with the historical financial
statements of the Company and Leewards.
<TABLE>
<CAPTION>
FISCAL YEAR (1)
---------------------------------------------------------------------------
1993
---------------------------
1989 1990 1991 1992 ACTUAL PRO FORMA(2)
--------- --------- --------- --------- --------- ---------------
(IN THOUSANDS, EXCEPT STORE DATA AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................ $ 289,754 $ 362,028 $ 410,899 $ 493,159 $ 619,688 $ 810,824
Cost of sales and occupancy
expense......................... 195,864 246,656 274,375 323,577 403,869 532,604
Selling, general and
administrative expense.......... 78,990 94,678 110,881 135,319 174,463 233,598
--------- --------- --------- --------- --------- ---------------
Operating income................. 14,900 20,694 25,643 34,263 41,356 44,622
Interest expense................. 9,896 9,739 6,971 263 6,378 8,042
Other (income) and expense,
net............................. 4,444 1,213 913 538 (7,666) (7,031)
--------- --------- --------- --------- --------- ---------------
Income before income taxes and
extraordinary item.............. 560 9,742 17,759 33,462 42,644 43,611
Provision for income taxes....... 547 3,887 7,020 13,084 16,357 17,415
--------- --------- --------- --------- --------- ---------------
Income before extraordinary
item............................ 13 5,855 10,739 20,378 26,287 26,196
Extraordinary item(3)............ -- -- 3,843 -- -- --
--------- --------- --------- --------- --------- ---------------
Net income....................... $ 13 $ 5,855 $ 6,896 $ 20,378 $ 26,287 $ 26,196
--------- --------- --------- --------- --------- ---------------
--------- --------- --------- --------- --------- ---------------
Earnings per common share
assuming full dilution.......... $ 0.00 $ 0.57 $ 0.87 $ 1.21 $ 1.52 $ 1.40
Weighted average shares
outstanding assuming full
dilution........................ 10,645 10,229 12,411 16,853 19,809 21,260
STORE DATA:
Stores added during period(4).... 18 17 4 28 54 73
Stores closed during period...... 2 2 1 -- 2 7
Stores open at period end........ 122 137 140 168 220 319(5)
Average sales per square
foot(6)......................... $ 193 $ 203 $ 213 $ 226 $ 218 $ 201
Comparable store sales
increase(7)..................... 6% 9% 9% 7% 3% 3%
OTHER DATA:
Depreciation and amortization.... $ 7,492 $ 8,050 $ 9,228 $ 10,160 $ 12,490 $ 17,928
Additions to property and
equipment(8).................... 9,484 6,812 5,505 19,796 46,816 56,486
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents........ $ 1,238 $ 108 $ 27,356 $ 42,075 $ 867 $ 1,608
Marketable and other
securities(9)................... -- -- -- 81,633 67,956 67,956
Merchandise inventories.......... 86,435 79,329 89,348 118,300 206,185 252,505
Property and equipment, net...... 30,592 30,684 28,950 40,515 75,872 90,930
Total assets..................... 150,817 144,238 180,913 322,099 397,830 545,409
Total current liabilities........ 33,453 40,492 51,087 65,559 109,196 199,442
Working capital.................. 58,680 44,080 74,786 104,462 181,816 156,401
Total long-term debt............. 73,168 52,983 -- 97,750 97,750 97,750
Shareholders' equity............. 40,377 46,615 126,299 155,277 185,415 242,748
<FN>
- ------------------------------
(1) The Company operates on a 52/53 week fiscal year ending on the Sunday
closest to January 31. For example, references to "fiscal 1993" mean the
fiscal year ended January 30, 1994. Fiscal 1990 included 53 weeks; all
other fiscal years set forth above included 52 weeks.
(2) On a pro forma basis to reflect the consummation of the Leewards
Acquisition. See "Pro Forma Combined Financial Information." Does not
reflect the acquisitions of Treasure House, Oregon Craft & Floral or H&H
Craft & Floral, as such acquisitions were not material in the aggregate.
(3) Extraordinary item relates to the redemption premium paid for the early
retirement of the Company's 12.75% Senior Subordinated Notes, which had an
effective interest rate of 15.8%, and the accelerated amortization of
related debt issuance costs.
(4) Includes stores added pursuant to acquisitions.
(5) Includes Michaels and Leewards stores open at period end.
(6) Calculated for stores open the entire period and based on selling square
footage.
(7) The increase for fiscal 1990 was calculated on a comparable 52-week period.
(8) Exclusive of acquisitions.
(9) Reported in fiscal 1992 as Long-term investment portfolio.
</TABLE>
16
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma combined statement of income of the
Company for the year ended January 30, 1994 has been prepared as if the Leewards
Acquisition, which will be accounted for by the purchase method of accounting,
occurred on February 1, 1993, the beginning of fiscal year 1993. The
accompanying unaudited pro forma combined balance sheet of the Company as of
January 30, 1994 has been prepared as if the Leewards Acquisition occurred on
that date.
The historical financial information of the Company and Leewards has been
derived from the respective historical financial statements incorporated by
reference or included herein. Certain amounts in the statement of operations of
Leewards for fiscal year 1993 included in the pro forma combined statement of
income have been reclassified to conform to the method of presentation used by
Michaels. The pro forma adjustments are preliminary and are based upon available
information and assumptions that management of the Company believes are
reasonable. The unaudited pro forma combined financial statements do not purport
to represent the financial position or results of operations which would have
occurred had such transactions been consummated on the dates indicated or the
Company's financial position or results of operations for any future date or
period. These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements of the Company and
Leewards.
17
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales.................................................. $ 619,688 $ 191,136 $ 810,824
Cost of sales and occupancy expense........................ 403,869 130,638 $ (1,903)(A) 532,604
Selling, general and administrative expense................ 174,463 57,000 443(B) 233,598
1,692(C)
----------- ----------- ------------- -----------
Operating income........................................... 41,356 3,498 (232) 44,622
Interest expense........................................... 6,378 3,439 (1,775)(D) 8,042
Other (income) and expense, net............................ (7,666) 635 (7,031)
----------- ----------- ------------- -----------
Income before income taxes................................. 42,644 (576) 1,543 43,611
Provision for income taxes................................. 16,357 (236) 1,294(E) 17,415
----------- ----------- ------------- -----------
Net income................................................. $ 26,287 $ (340) $ 249 $ 26,196
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Earnings per common and common equivalent share............ $ 1.53 $ 1.40
Earnings per common share -- assuming full dilution........ $ 1.52 $ 1.40
Weighted average common and common equivalent shares....... 17,231 1,451 18,682
Weighted average shares assuming full dilution............. 19,809 1,451 21,260
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
18
<PAGE>
PRO FORMA COMBINED BALANCE SHEET INFORMATION
JANUARY 30, 1994
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO
PRO FORMA FORMA
MICHAELS LEEWARDS ADJUSTMENTS TOTAL
----------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents.................................... $ 867 $ 2,946 $ (2,205)(F) $ 1,608
Marketable and other securities......................... 67,956 -- 67,956
Merchandise inventories................................. 206,185 53,090 (6,770)(G) 252,505
Prepaid expenses and other.............................. 16,004 5,270 (2,000)(G) 33,774
14,500(G)
----------- --------- ------------ -----------
Total current assets.................................. 291,012 61,306 3,525 355,843
----------- --------- ------------ -----------
Property and equipment, net............................... 75,872 18,945 (3,887)(G) 90,930
Costs in excess of net assets of acquired operations,
net...................................................... 23,503 -- 67,690(G) 91,193
Other assets.............................................. 7,443 6,517 (6,517)(G) 7,443
----------- --------- ------------ -----------
$ 397,830 $ 86,768 $ 60,811 $ 545,409
----------- --------- ------------ -----------
----------- --------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 42,309 $ 15,157 $ 57,466
Short-term bank debt.................................... 13,000 15,525 $ 16,961(H) 45,486
Subordinated debentures................................. 16,961 (16,961)(H) --
Income taxes payable.................................... 7,866 -- 1,038(G) 8,904
Accrued liabilities and other........................... 46,021 13,563 3,624(F) 87,586
24,378(G)
----------- --------- ------------ -----------
Total current liabilities............................. 109,196 61,206 29,040 199,442
----------- --------- ------------ -----------
Convertible subordinated notes............................ 97,750 97,750
Deferred income taxes and other........................... 5,469 3,195 (3,195)(G) 5,469
----------- --------- ------------ -----------
Total long-term liabilities........................... 103,219 3,195 (3,195) 103,219
----------- --------- ------------ -----------
212,415 64,401 25,845 302,661
----------- --------- ------------ -----------
Redeemable preferred stock................................ -- 29,583 (29,583)(G) --
Shareholders' equity:
Common stock............................................ 1,670 2 (2)(G) 1,815
145(F)
Additional paid-in capital.............................. 107,168 733 (733)(G) 164,356
57,188(F)
Retained earnings....................................... 76,577 (7,951) 7,951(G) 76,577
----------- --------- ------------ -----------
Total shareholders' equity............................ 185,415 (7,216) 64,549 242,748
----------- --------- ------------ -----------
$ 397,830 $ 86,768 $ 60,811 $ 545,409
----------- --------- ------------ -----------
----------- --------- ------------ -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
19
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Adjustments to the pro forma combined statement of income to reflect the
consummation of the Leewards Acquisition as of February 1, 1993 are as follows:
(A) To eliminate nonrecurring costs, primarily rental and related
occupancy costs, associated with the Leewards distribution center. Upon
consummation of the Leewards Acquisition and completion of the conversion of
the Leewards stores, the Leewards distribution center is to be closed.
(B) To adjust selling, general and administrative expense to (i) expense
pre-opening costs deferred by Leewards consistent with the Company's
accounting policy whereby pre-opening costs are expensed in the fiscal year
in which the store opens and (ii) to eliminate nonrecurring costs, primarily
salaries and related benefits, associated with reductions of Leewards
personnel and other costs.
(C) To amortize costs in excess of net assets acquired over a 40-year
period on a straight-line basis.
(D) To reduce the interest expense on the Leewards indebtedness
consisting of approximately $17 million of subordinated debentures and $11.5
million of average short-term borrowings from their stated rates of 13.5%
and 7.75%, respectively, to 4.9%, which rate approximates the Company's
incremental borrowing rate for fiscal year 1993. In connection with the
Leewards Acquisition, the Leewards subordinated debentures and short-term
borrowings are required to be repaid.
(E) To reflect the tax effects applicable to the above entries,
exclusive of the amortization of costs in excess of net assets acquired, at
a 40% effective tax rate.
Adjustments to the pro forma balance sheet to reflect the consummation
of the Leewards Acquisition as of January 30, 1994 are as follows:
(F) To record the costs of the Leewards Acquisition
<TABLE>
<C> <S> <C> <C>
1. Cash consideration to be paid $ 2,205
2. Shares to be issued in connection with the
Leewards Acquisition (1,451,468 shares at
an assumed price of $39.50 per share) 57,333
3. Liabilities incurred by Leewards in
connection with the Leewards Acquisition
by Michaels $ 2,374
4. Transaction costs 1,250 3,624
--------- ---------
Total acquisition costs $ 63,162
---------
---------
</TABLE>
(G) To adjust the carrying values of the net assets acquired to
estimated fair value as of January 30, 1994 and to accrue various
liabilities assumed in connection with the Leewards Acquisition
<TABLE>
<C> <S> <C> <C>
1. Write-down inventories to liquidate
incompatible merchandise of Leewards $ 6,770
2. Write-off deferred pre-opening costs to
conform Leeward's accounting policy to
that of Michaels 2,000
3. Write-off tradenames and other deferred
costs of Leewards 6,517
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<C> <S> <C> <C>
4. Accrue costs of closing certain Leewards'
stores, corporate office and warehouse
including lease termination costs,
severance pay and other costs $ 20,971
5. Accrue costs associated with the changeover
of stores from the Leewards format to the
Michaels format 3,407 24,378
---------
6. Write-off of the carrying values of
leasehold improvements related to
facilities to be closed and other
adjustments to state other property and
equipment at estimated fair value 3,887
7. Record deferred tax assets related to the
above adjustments (14,500)
8. Eliminate deferred tax liabilities of
Leewards at the Leewards Acquisition date (3,195)
9. Record income tax liabilities assumed by
Michaels in connection with the Leewards
Acquisition related primarily to the
termination of the LIFO method of
inventory valuation for tax reporting
purposes, net of the tax benefits related
to certain transaction costs 1,038
10. Eliminate redeemable preferred stock and
common stockholders' deficit of Leewards
as of the Leewards Acquisition date (22,367)
---------
Excess of fair value of liabilities over
net
assets acquired 4,528
Total acquisition costs 63,162
---------
Costs in excess of the net assets acquired $ 67,690
---------
---------
</TABLE>
(H) To reflect additional borrowings on Michaels' credit facility to
fund the required repayment of the Leewards subordinated notes in connection
with the Leewards Acquisition.
21
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Michaels is authorized to issue 50,000,000 shares of Common Stock, par value
$0.10 per share, and 2,000,000 shares of Preferred Stock, par value $0.10 per
share. As of , 1994, shares of Common Stock have been issued,
are outstanding and no shares are held in treasury, and no shares of
Preferred Stock have been issued. The outstanding shares of Common Stock are,
and the shares offered hereby will be, when issued, fully paid and
nonassessable.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders. Shares of Common Stock do not have
cumulative voting rights, which means that the holders of a majority of the
shares voting for the election of the Board of Directors can elect all members
of the Board of Directors. Upon any liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to receive pro rata all of the
assets of the Company available for distribution to shareholders, subject to any
prior rights of holders of any outstanding Preferred Stock. Shareholders do not
have any preemptive rights to subscribe for or purchase any stock, obligations,
warrants or other securities of the Company.
Holders of record of shares of Common Stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds of the
Company legally available therefor. Michaels has never paid dividends on its
Common Stock. The Company's present policy is to retain earnings for the
foreseeable future for use in the Company's business and the financing of its
growth. However, such policy is subject to the discretion of the Board of
Directors.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue Preferred Stock
in one or more series and to fix the voting rights, liquidation preferences,
dividend rates, conversion rights, redemption rights and terms, including
sinking fund provisions, and certain other rights and preferences. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of the Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company.
CERTAIN SPECIAL FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain special United States
federal income and estate tax considerations relevant to non-United States
holders of the Common Stock, but does not purport to be a complete analysis of
all the potential tax considerations relating thereto.
As used herein, "non-United States holder" means a corporation, individual
or partnership that is, as to the United States, a foreign corporation, a
nonresident alien individual or a foreign partnership, and any estate or trust
if such estate or trust is not subject to United States taxation on income from
sources without the United States that is not effectively connected with the
conduct of a trade or business within the United States.
This discussion is based upon the Code, Treasury Regulations, IRS rulings
and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. This discussion
does not purport to deal with all aspects of federal income and estate taxation
that may be relevant to a particular non-United States holder's decision to
purchase the Common Stock.
ALL PROSPECTIVE NON-UNITED STATES HOLDERS OF THE COMMON STOCK ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
COMMON STOCK.
22
<PAGE>
DIVIDENDS
Dividends paid to a non-United States holder of the Common Stock will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. Currently,
dividends paid to an address in a foreign country are presumed to be paid to a
resident of such country in determining the applicability of a treaty for such
purposes. However, proposed Treasury Regulations which have not been finally
adopted would require non-United States holders to satisfy certain certification
and other requirements to obtain the benefit of any applicable income tax treaty
providing for a lower rate of withholding tax on dividends.
Except as may be otherwise provided in an applicable income tax treaty, a
non-United States holder will be taxed at ordinary federal income tax rates (on
a net income basis) on dividends that are effectively connected with the conduct
of a trade or business of such non-United States holder within the United States
and might not be subject to the withholding tax described above. If such
non-United States holder is a foreign corporation, it may also be subject to a
United States branch profits tax at a 30% rate or such lower rate as may be
specified by any applicable income tax treaty. Non-United States holders must
comply with certain certification and disclosure requirements to claim treaty
benefits or an exemption from withholding tax under the foregoing rules.
DISPOSITION OF COMMON STOCK
Non-United States holders generally will not be subject to United States
federal income tax in respect of gain recognized on a disposition of the Common
Stock unless (i) the gain is effectively connected with a trade or business
conducted by the non-United States holder within the United States (in which
case the branch profits tax described under "Dividends" above may also apply if
the holder is a foreign corporation), (ii) in the case of a non-United States
holder who is a nonresident alien individual and holds the Common Stock as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of the disposition and either the income from the
disposition is attributable to an office or other fixed place of business
maintained by the holder in the United States or the holder has a "tax home" in
the United States (within the meaning of the Code), or (iii) the Company is or
has been a "United States real property holding corporation" and certain other
requirements are met. The Company does not believe it has been or is currently,
and does not anticipate becoming, a United States real property holding
corporation.
FEDERAL ESTATE TAXES
Common Stock that is owned or treated as being owned by a non-United States
holder (as determined for United States federal estate tax purposes) at the time
of death will be included in such holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
United States information reporting requirements and 31% backup withholding
tax generally will not apply to dividends paid on the Common Stock if the
dividends are subject to either the 30% withholding tax or such lower rate as
may be specified by an applicable income tax treaty, or are exempt from such
withholding tax under the rules discussed above relating to dividends that are
effectively connected with the conduct of a trade or business of such holder
within the United States, or are paid to a non-United States holder at an
address outside the United States provided that the holder certifies to its
non-United States status on the appropriate form and the payer has no actual
knowledge that the holder is a United States person. As a general matter,
information reporting and backup withholding will also not apply to a payment of
the proceeds of a sale effected outside the United States of Common Stock by a
foreign office of a foreign broker. However, information reporting requirements
(but under current proposed Treasury regulations not backup withholding) will
apply to a payment of the proceeds of a sale effected outside the United States
of Common Stock by a foreign office of a broker that (i) is a United States
person, (ii) is a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, or (iii) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States
23
<PAGE>
shareholders) with respect to the United States, unless the broker has
documentary evidence in its records that the holder is a non-United States
holder and certain conditions are met, or the holder otherwise establishes an
exemption. Payment by a United States office of a broker of the proceeds of a
sale of Common Stock is subject to both backup withholding and information
reporting unless the holder certifies to the payor in the manner required as to
its non-United States status under penalties of perjury or otherwise establishes
an exemption.
A non-United States holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing an appropriate claim for
refund with the IRS.
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1994 (the "U.S. Underwriting Agreement"), the
underwriters named below (the "U.S. Underwriters"), for whom CS First Boston
Corporation and Robertson, Stephens & Company, L.P. are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company the following respective numbers of U.S. Shares:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
CS First Boston Corporation................................................................
Robertson, Stephens & Company, L.P.........................................................
-----------
Total..................................................................................
-----------
-----------
</TABLE>
The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters are subject to certain conditions precedent and that the U.S.
Underwriters will be obligated to purchase all of the U.S. Shares being offered
hereby if any are purchased.
The Company has been advised by the Representatives that the U.S.
Underwriters propose to offer the U.S. Shares in the United States and Canada to
the public initially at the public offering price set forth on the cover page of
this Prospectus and, through the Representatives, to certain dealers at such
price less a concession of $ per share; and that the Underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers.
The Company has entered into a Subscription Agreement (the "Subscription
Agreement") with the Managers of the International Offering (the "Managers")
providing for the concurrent offer and sale of the International Shares outside
the United States and Canada. The closing of the U.S. Offering is a condition to
the closing of the International Offering and vice versa.
The Company has granted to the U.S. Underwriters and the Managers an option,
exercisable by CS First Boston Corporation, expiring at the close of business on
the 30th day after the date of the
24
<PAGE>
initial public offering of the Common Stock offered hereby, to purchase up to
375,000 additional shares at the public offering price, less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. The U.S. Underwriters and the Managers may exercise such option only
to cover over-allotments in the sale of the shares of Common Stock offered
hereby. To the extent that this option to purchase is exercised, each U.S.
Underwriter and each Manager will become obligated, subject to certain
conditions, to purchase approximately the same percentage of optional shares
being sold to the U.S. Underwriters and the Managers as the number of U.S.
Shares set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of U.S. Shares in such table and as the number set
forth next to such Manager's name in the corresponding table in the prospectus
relating to the International Offering bears to the total number of shares in
such table.
In connection with the Common Stock Offering, CS First Boston Corporation
and certain of the Underwriters and selling group members (if any) and their
respective affiliates may engage in passive market making transactions in the
Common Stock on the Nasdaq Stock Market in accordance with Rule 10b-6A under the
Exchange Act during a period before commencement of offers or sales of the
Common Stock offered hereby. The passive market making transactions must comply
with applicable volume and price limits and be identified as such.
The public offering price, the aggregate underwriting discounts and
commissions per share and per share concession and discount to dealers for the
U.S. Offering and the concurrent International Offering will be identical.
Pursuant to an Agreement between the U.S. Underwriters and the Managers (the
"Agreement Between") relating to the Common Stock Offering, changes in the
public offering price, concession and discount to dealers will be made only upon
the mutual agreement of CS First Boston Corporation, as representative of the
U.S. Underwriters, and CS First Boston Limited ("CSFBL"), on behalf of the
Managers.
Pursuant to the Agreement Between, each of the U.S. Underwriters has agreed
that, as part of the distribution of the U.S. Shares and subject to certain
exceptions, (a) it is not purchasing any shares of Common Stock for the account
of anyone other than a U.S. or Canadian Person (as defined below) and (b) it has
not offered or sold, and will not offer to sell, directly or indirectly, any
shares of Common Stock or distribute any prospectus relating to the Common Stock
to any person outside the United States or Canada or to anyone other than a U.S.
or Canadian Person nor to any dealer who does not so agree. Each of the Managers
has agreed or will agree that, as part of the distribution of the International
Shares and subject to certain exceptions, (i) it is not purchasing any shares of
Common Stock for the account of any U.S. or Canadian Person and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any shares
of Common Stock or distribute any prospectus relating to the Common Stock in the
United States or Canada or to any U.S. or Canadian Person nor to any dealer who
does not so agree. The foregoing limitations do not apply to stabilization
transactions or to transactions between the U.S. Underwriters and the Managers
pursuant to the Agreement Between. As used herein, "United States" means the
United States of America (including the States and the District of Columbia),
its territories, possessions and other areas subject to its jurisdiction,
"Canada" means Canada, its provinces, territories, possessions and other areas
subject to its jurisdiction, and "U.S. or Canadian Person" means a citizen or
resident of the United States or Canada, or a corporation, partnership or other
entity created or organized in or under the laws of the United States or Canada
(other than a foreign branch of such an entity) or an estate or trust the income
of which is subject to United States or Canadian federal income taxation,
regardless of its source of income, and includes any United States or Canadian
branch of a non-U.S. or non-Canadian Person.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the Managers of such number of shares of Common Stock as may be
mutually agreed upon. The price of any shares so sold will be the initial public
offering price, less such amount as may be mutually agreed upon by CS First
Boston Corporation, as representative of the U.S. Underwriters, and CSFBL, on
behalf of the Managers, but not exceeding the selling concession applicable to
such shares. To the extent there are sales between the U.S. Underwriters and the
Managers pursuant to the Agreement Between, the number of shares of Common Stock
initially available for sale by the U.S. Underwriters
25
<PAGE>
or by the Managers may be more or less than the amount appearing on the cover
page of this Prospectus. Neither the U.S. Underwriters nor the Managers are
obligated to purchase from the other any unsold shares of Common Stock.
Each Manager has represented and agreed that (i) it has not offered or sold
and will not offer or sell in the United Kingdom, by means of any document any
Shares other than to persons whose ordinary business is to buy or sell shares or
debentures, whether as principal or agent, or in circumstances which do not
constitute an offer to the public within the meaning of the Companies Act of
1985 of the United Kingdom, (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act of 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom and (iii) it has only issued or passed on, and will only
issue or pass on, in the United Kingdom any document received by it in
connection with the issue of the Shares to a person who is of a kind described
in Article 9(3) of the Financial Services Act of 1986 (Investment
Advertisements) (Exemptions) Order 1988 or is a person to whom any document may
otherwise lawfully be issued or passed on.
The Company and all of its directors and executive officers have agreed not
to offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any additional shares of its
Common Stock or securities convertible or exchangeable into or exercisable for
any shares of its Common Stock without the prior written consent of CS First
Boston Corporation for a period of 90 days after the date of the initial public
offering of the Common Stock other than (a) issuances and sales by the Company
of Common Stock in accordance with the terms of certain of the Company's benefit
plans and (b) issuances of Common Stock by the Company upon the conversion of
securities or the exercise of warrants outstanding at the date of this
Prospectus. The stockholders of Leewards have agreed, with respect to shares of
Common Stock to be acquired by them in the Leewards Acquisition, to not effect a
public distribution of any shares of Common Stock or rights to acquire shares of
Common Stock for a period of 120 days after the date of this Prospectus without
the prior written consent of CS First Boston Corporation.
The Company has agreed to indemnify the U.S. Underwriters and the Managers
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments that the U.S. Underwriters and the Managers
may be required to make in respect thereof.
Certain of the U.S. Underwriters and Managers and their affiliates have from
time to time performed, and continue to perform, various investment banking and
commercial banking services for the Company, for which customary compensation
has been received.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase
26
<PAGE>
such Common Stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent, and (iii) such purchaser has reviewed the text
under "Resale Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. Federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #88/5, a copy of which may be obtained from the Company. Only one such
report must be filed in respect of Common Stock acquired on the same date and
under the same prospectus exemption.
LEGAL MATTERS
The validity of the Common Stock offered hereby and the issuance thereof
have been passed upon for the Company by Jackson & Walker, L.L.P., Dallas, Texas
and for the Underwriters by Fulbright & Jaworski L.L.P. Dallas, Texas. Michael
C. French, a partner in Jackson & Walker, L.L.P., is a director of the Company.
EXPERTS
The consolidated financial statements of Michaels Stores, Inc. appearing or
incorporated by reference in the Company's Annual Report on Form 10-K for the
year ended January 30, 1994, have been audited by Ernst & Young, independent
auditors, as set forth in their report thereon incorporated by reference therein
and incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Leewards Creative Crafts, Inc. at January 30,
1994 and January 31, 1993, and for each of the years ended January 30, 1994, and
January 31, 1993 appearing elsewhere herein have been audited by Deloitte &
Touche, independent auditors, as set forth in their report thereon appearing
elsewhere herein, which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the Agreement and Plan of Merger whereby
Leewards Creative Crafts, Inc. will become a subsidiary of Michaels Stores,
Inc., and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
27
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
INDEX TO FINANCIALS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT AUDITOR'S REPORT............................................................................... F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993:
Balance Sheets........................................................................................... F-4
Statements of Operations................................................................................. F-6
Statements of Redeemable Preferred Stock and Common Stockholders' Equity................................. F-7
Statements of Cash Flows................................................................................. F-8
Notes to Financial Statements............................................................................ F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Leewards Creative Crafts, Inc.
Elgin, Illinois
We have audited the accompanying balance sheets of Leewards Creative Crafts,
Inc. as of January 30, 1994 and January 31, 1993 and the related statements of
operations, of redeemable preferred stock and common stockholders' equity, and
of cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Leewards Creative Crafts, Inc. as of January
30, 1994 and January 31, 1993 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 11, the Company has entered into an Agreement and Plan
of Merger (the "Agreement") whereby it will become a wholly owned subsidiary of
Michaels Stores, Inc. ("Michaels"). The Agreement also provides that
simultaneously with the merger closing, Michaels shall cause the Company to
repay its long-term debt.
DELOITTE & TOUCHE
March 4, 1994
(May 11, 1994 as to Note 11)
F-2
<PAGE>
(This page has been left blank intentionally.)
F-3
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
BALANCE SHEETS
JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 2,946 $ 2,619
Accounts receivable, net of allowance for doubtful accounts:
1994 -- $2; 1993 -- $3......................................................................... 1,372 654
Merchandise inventories......................................................................... 53,090 37,530
Prepaid expenses and other current assets....................................................... 3,898 2,745
Deferred income taxes........................................................................... 343 495
--------- ---------
Total current assets........................................................................ 61,649 44,043
PROPERTY AND EQUIPMENT:
Land............................................................................................ 732 733
Buildings and improvements...................................................................... 987 972
Leasehold improvements.......................................................................... 6,918 5,169
Machinery and equipment......................................................................... 20,822 13,860
Construction in progress........................................................................ 84 20
--------- ---------
29,543 20,754
Less accumulated depreciation and amortization.................................................. 10,598 8,631
--------- ---------
Property and equipment -- net............................................................... 18,945 12,123
OTHER ASSETS:
Trade name, less accumulated amortization:
1994 -- $871; 1993 -- $719..................................................................... 5,188 5,340
Other intangibles, less accumulated amortization:
1994 -- $11,557; 1993 -- $11,113............................................................... 596 1,040
Deferred financing costs, less accumulated amortization:
1994 -- $2,687; 1993 -- $2,299................................................................. 656 892
Notes receivable................................................................................ 70
Miscellaneous assets............................................................................ 7 7
--------- ---------
Total other assets.......................................................................... 6,517 7,279
--------- ---------
TOTAL............................................................................................. $ 87,111 $ 63,445
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
BALANCE SHEETS
JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
--------- ---------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable................................................................................ $ 15,157 $ 9,147
Accrued expenses................................................................................ 12,851 11,193
Taxes other than income taxes................................................................... 712 798
Current maturities of long-term debt............................................................ 17,602 7,348
Long-term debt classified as current (Note 4)................................................... 14,884
Income taxes payable............................................................................ 1,098
--------- ---------
Total current liabilities................................................................... 61,206 29,584
LONG-TERM DEBT.................................................................................... 16,961
DEFERRED INCOME TAXES............................................................................. 3,538 3,926
--------- ---------
Total liabilities........................................................................... 64,744 50,471
COMMITMENTS AND CONTINGENCIES (Note 10)
REDEEMABLE PREFERRED STOCK:
Class A Cumulative Exchangeable Senior Preferred Stock, $0.01 par value; shares authorized: 1994
-- 4,000; 1993 -- 2,135; shares outstanding: 1994 -- 2,349; 1993 -- 2,135...................... 10 9
Class B Cumulative Exchangeable Senior Preferred Stock, $0.01 par value; shares authorized: 1994
-- 4,700; 1993 -- 2,514; shares outstanding: 1994 -- 2,765; 1993 -- 2,514...................... 11 10
Exchangeable Preferred Stock, $0.01 par value; shares authorized: 1994 -- 800,000; 1993 --
393,472; shares outstanding: 1994 -- 427,322; 1993 -- 393,472.................................. 325 255
Class C Senior Convertible Preferred Stock, $0.01 par value; 562,500 shares authorized: 549,629
shares outstanding............................................................................. 5 5
Class D Senior Convertible Preferred Stock, $0.01 par value; shares authorized: 1994 -- 194,050;
shares outstanding, 194,035.................................................................... 2
Class E Senior Convertible Preferred Stock, $0.01 par value; shares authorized and outstanding:
1994 -- 129,712................................................................................ 1
Undesignated Preferred Stock, $0.01 par value; shares authorized and outstanding: 1994 --
1,605,038; 1993 -- 2,039,379; 0 shares issued..................................................
Additional paid-in capital...................................................................... 29,229 18,579
--------- ---------
Total redeemable preferred stock............................................................ 29,583 18,858
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value; shares authorized: 1994 -- 4,000,000; 1993 -- 2,800,000; shares
outstanding: 78,281............................................................................ 1 1
Class B Common Stock, $0.01 par value; shares authorized: 1994 -- 300,000; 1993 -- 200,000;
shares outstanding: 73,275..................................................................... 1 1
Class C Common Stock, $0.01 par value; shares authorized: 1994 -- 600,000; 0 shares issued......
Additional paid-in capital...................................................................... 733 746
Deficit......................................................................................... (7,951) (6,632)
--------- ---------
Common stockholders' deficiency............................................................. (7,216) (5,884)
--------- ---------
TOTAL............................................................................................. $ 87,111 $ 63,445
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
NET SALES............................................................................... $ 190,261 $ 169,014
COST OF SALES........................................................................... 99,093 86,431
----------- -----------
91,168 82,583
OPERATING EXPENSES:
Selling and delivery.................................................................. 76,219 63,845
General and administrative............................................................ 6,900 5,754
Amortization of deferred pre-opening expenses......................................... 1,387 1,092
Depreciation and amortization......................................................... 3,549 3,431
----------- -----------
88,055 74,122
----------- -----------
OPERATING EARNINGS...................................................................... 3,113 8,461
OTHER INCOME (EXPENSE):
Restructuring expenses (Notes 1, 4 and 6)............................................. (24) (1,632)
Gain (loss) on assets disposal........................................................ (226) 503
Interest income....................................................................... 22
Interest expense:
Related parties..................................................................... (2,285) (2,137)
Other............................................................................... (1,154) (1,759)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....................................................... (576) 3,458
INCOME TAXES
Currently payable..................................................................... 93 1,159
Deferred income taxes (benefit)....................................................... (329) 394
----------- -----------
(236) 1,553
----------- -----------
NET INCOME (LOSS)....................................................................... $ (340) $ 1,905
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
---------------------------------------------------------------------------------------
EXCHANGEABLE
EXCHANGEABLE EXCHANGEABLE PREFERRED CONVERTIBLE CONVERTIBLE CONVERTIBLE
CLASS A CLASS B STOCK CLASS C CLASS D CLASS E
------------- ------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 2, 1992............... $ 439 $ 759 $ 371
Amortization of issuance fees.........
Class A, Class B and exchangeable
preferred dividends accrued.......... 330 390 447
Sale of Class C preferred stock....... $ 30
Sale of common stock..................
Repurchase and cancellation of
outstanding shares...................
Paid-in-kind dividend................. (760) (1,139) (563)
Reverse split-common stock and Class C
preferred............................ (25)
Repurchase options....................
Net income............................
------ ------------- ------ -----
BALANCE, JANUARY 31, 1993............... 9 10 255 5
Amortization of issuance fees.........
Class A, Class B and Exchangeable
preferred dividends accrued.......... 215 252 408
Sale of Class D preferred stock....... $ 2
Sale of Class E preferred stock....... $ 1
Paid-in-kind dividend, May 1, 1993.... (338)
Repurchase options....................
Paid-in-kind dividend, January 15,
1994................................. (214) (251)
Net loss..............................
-- --
------ ------------- ------ -----
BALANCE, JANUARY 30, 1994............... $ 10 $ 11 $ 325 $ 5 $ 2 $ 1
-- --
-- --
------ ------------- ------ -----
------ ------------- ------ -----
<CAPTION>
COMMON STOCKHOLDERS' EQUITY
------------------------------------------
ADDITIONAL ADDITIONAL
PAID-IN COMMON CLASS B PAID-IN
CAPITAL STOCK COMMON CAPITAL DEFICIT
---------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 2, 1992............... $ 5,890 $ 5 $ 5 $ 1,190 $ (7,314)
Amortization of issuance fees......... 56 (56)
Class A, Class B and exchangeable
preferred dividends accrued.......... (1,167)
Sale of Class C preferred stock....... 10,146
Sale of common stock.................. 100
Repurchase and cancellation of
outstanding shares................... (1) (527)
Paid-in-kind dividend................. 2,462
Reverse split-common stock and Class C
preferred............................ 25 (3) (4) 7
Repurchase options.................... (24)
Net income............................ 1,905
-- --
---------- ----------- --------
BALANCE, JANUARY 31, 1993............... 18,579 1 1 746 (6,632)
Amortization of issuance fees......... 104 (104)
Class A, Class B and Exchangeable
preferred dividends accrued.......... (875)
Sale of Class D preferred stock....... 5,840
Sale of Class E preferred stock....... 3,903
Paid-in-kind dividend, May 1, 1993.... 338
Repurchase options.................... (13)
Paid-in-kind dividend, January 15,
1994................................. 465
Net loss.............................. (340)
-- --
---------- ----------- --------
BALANCE, JANUARY 30, 1994............... $ 29,229 $ 1 $ 1 $ 733 $ (7,951)
-- --
-- --
---------- ----------- --------
---------- ----------- --------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
(IN 000'S)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (340) $ 1,905
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization........................... 3,549 3,290
Deferred income taxes................................... (236) 503
Loss (gain) on disposal of fixed assets................. 226 (503)
Changes in:
Accounts receivable................................... (718) 521
Merchandise inventories............................... (15,560) 6,969
Prepaid expenses and other current assets............. (1,153) 1,303
Accounts payable...................................... 6,010 (11,952)
Accrued expenses and other liabilities................ 4 (448)
Taxes other than income............................... (86) (46)
Notes receivable...................................... (70) 88
Miscellaneous assets.................................. (1)
-------- --------
Net cash flows from operating activities............ (8,374) 1,629
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (9,670) (1,141)
Proceeds from sale of property............................ 57 1,503
-------- --------
Net cash flows from investing activities............ (9,613) 362
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing fees paid for restructuring revolving and term
credit agreements........................................ (152) (433)
Proceeds from issuance of stock........................... 9,746 10,276
Repurchase of stock....................................... (13) (551)
Issuance of subordinated debt accrual notes............... 2,077
Net borrowings (repayments) under revolving credit
agreement................................................ 8,177 (13,934)
Increase in checks outstanding............................ 556 474
-------- --------
Net cash flows from financing activities............ 18,314 (2,091)
-------- --------
NET INCREASE (DECREASE) IN CASH............................. 327 (100)
CASH AND CASH EQUIVALENTS -- Beginning of year.............. 2,619 2,719
-------- --------
CASH AND CASH EQUIVALENTS -- End of year.................... $ 2,946 $ 2,619
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest:
Related parties......................................... $ 2,290 $
-------- --------
-------- --------
Other................................................... $ 1,130 $ 1,804
-------- --------
-------- --------
Cash paid during the year for income taxes................ $ 1,103 $ 188
-------- --------
-------- --------
</TABLE>
See notes to financial statements.
F-8
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
1. SUMMARY OF ACCOUNTING POLICIES:
OPERATIONS AND RESTRUCTURING
The Company engages in the retail sale of craft and home decor products. The
Company maintained the following number of Company-operated and franchised
stores at:
<TABLE>
<CAPTION>
COMPANY-
OPERATED FRANCHISES TOTAL
--------------- --------------- -----
<S> <C> <C> <C>
January 30, 1994....................................................... 99 3 102
January 31, 1993....................................................... 85 2 87
</TABLE>
During the year ended January 31, 1993, the Company effected a restructuring
of its debt (Note 4), capital structure (Note 6) and ongoing operations. Costs
associated with these efforts, other than those directly associated with the
debt and capital restructurings, are included in restructuring expenses. Such
expenses include store closing, severance and other costs incurred in connection
with these efforts.
FISCAL YEAR-END -- The Company's fiscal year-end is the Sunday closest to
January 31.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash; amounts
due from major credit card companies, which are collected within 1 to 2 days
after date of sale; and highly liquid investments which, at time of purchase,
have maturities of three months or less.
MERCHANDISE INVENTORIES -- Merchandise inventories are stated at the lower
of last-in, first-out (LIFO) cost or market. During the year ended January 31,
1993, LIFO inventories were reduced from levels at the beginning of the year.
These reductions resulted in liquidation of LIFO inventory quantities carried at
the lower costs prevailing in the prior year as compared with the cost of the
current year's purchases. At January 30, 1994 and January 31, 1993, inventory
was valued at market which was lower than LIFO cost.
PRE-OPENING COSTS -- Pre-opening costs incurred for the opening of retail
locations are deferred and amortized over 12 months, commencing in the month
after the location opens. Unamortized deferred pre-opening costs included in
prepaid expenses were $2,208,000 and $97,000 at January 30, 1994 and January 31,
1993, respectively.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the respective assets, which are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................. 25-30 years
Leasehold improvements...................... Shorter of lease term or 10 years
Machinery and equipment..................... 3-10 years
</TABLE>
INTANGIBLE ASSETS -- Intangible assets, primarily the trade name, and
favorable lease agreements, are reported net of accumulated amortization. The
assets are being amortized on a straight-line basis over their useful lives
which range from 3 to 40 years.
INCOME TAXES -- The Company adopted SFAS No. 109, "Accounting for Income
Taxes," in the year ended January 31, 1993 and, accordingly, computes deferred
taxes using the liability method. Deferred tax assets and liabilities are
recorded based on differences between the financial statements and income tax
basis of assets and liabilities and the tax rate in effect when these
differences are expected to reverse.
F-9
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
2. ACCRUED EXPENSES
Accrued expenses include the following (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Outstanding checks................................................... $ 4,895 $ 4,339
Accrued payroll...................................................... 2,396 2,970
Other................................................................ 5,560 3,884
--------------- ---------------
Total................................................................ $ 12,851 $ 11,193
--------------- ---------------
--------------- ---------------
</TABLE>
3. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Current:
Federal............................................................ $ 829
State.............................................................. $ 93 330
------ -------
93 1,159
------ -------
Deferred:
Federal............................................................ (273) 310
State.............................................................. (56) 84
------ -------
(329) 394
------ -------
Total provision (benefit) for income taxes........................... $ (236) $ 1,553
------ -------
------ -------
</TABLE>
Provision for deferred taxes results from temporary differences in the
recognition of revenue and expense for financial statement and tax purposes.
Temporary differences arise principally from the following (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Amortization of intangibles.......................................... $ (203) $ (285)
Deferred store pre-opening costs..................................... 708 (321)
Accrued liabilities.................................................. (294) 137
Inventory capitalization............................................. (416) 205
Inventory reserves................................................... 127 118
Depreciation......................................................... 343 183
State taxes and effect of changes in state tax rates................. 70 109
Alternative minimum tax.............................................. (47) 171
Net operating loss................................................... (667)
Other................................................................ 50 77
------ ------
Total................................................................ $ (329) $ 394)
------ ------
------ ------
</TABLE>
The difference between the statutory federal income tax rate and the
effective tax rate is as follows:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
------------- -------------
<S> <C> <C>
Statutory federal income tax rate.......................................... (34.0)% 34.0%
State taxes, net of federal benefit........................................ (6.9) 6.1
Deferred tax adjustment.................................................... 4.8
----- -----
Effective income tax rate.................................................. 40.9% 44.9%
----- -----
----- -----
</TABLE>
F-10
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
3. INCOME TAXES (CONTINUED)
At January 30, 1994 and January 31, 1993, the components of the deferred
income tax liability and asset were as follows (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax liability:
Intangibles.............................................................. $ 2,368 $ 2,558
Property and equipment................................................... 1,894 1,487
Other, net............................................................... (54) (119)
Net operating loss carryforward.......................................... (670)
----------- -----------
Total.................................................................. $ 3,538 $ 3,926
----------- -----------
----------- -----------
Deferred tax asset:
Inventory................................................................ $ 337
Accrued expenses......................................................... 860 $ 487
Prepaid expenses......................................................... (1,129) (184)
AMT credit carryforward.................................................. 218 91
Other -- net............................................................. 57 101
----------- -----------
Total.................................................................. $ 343 $ 495
----------- -----------
----------- -----------
</TABLE>
At January 30, 1994, the Company has $218,000 of AMT credits available for
carryforward to future years and an NOL carryforward of $1,635,000 which expires
in 2009.
4. LONG-TERM DEBT
Long-term debt consists of (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Revolving and term loan(a)................................................. $ 15,525 $ 7,348
Subordinated debentures(b),(c)............................................. 16,961 16,961
----------- -----------
Total long-term debt (See Note 11)......................................... 32,486 24,309
Less current maturities.................................................... (32,486) (7,348)
----------- -----------
Total.................................................................... $ $ 16,961
----------- -----------
----------- -----------
</TABLE>
(a) In August 1988, the Company entered into a secured revolving credit and
term loan agreement (the "agreement") which enabled the Company to borrow up to
a maximum of $25,000,000. On June 13, 1990, the Company restructured the
agreement to provide for additional borrowings up to $32,000,000 through August
19, 1993. On April 2, 1993 the borrowing limit was reduced to $29,920,000.
Borrowings outstanding under the agreement are (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Revolving loans............................................................ $ 14,067 $ 4,235
Term loan.................................................................. 1,458 3,113
----------- -----------
Total.................................................................... $ 15,525 $ 7,348
----------- -----------
----------- -----------
</TABLE>
The borrowings under the agreement are collateralized by the assets of the
Company. Interest is payable monthly based on the rate of interest publicly
announced by Citibank in New York, New York as Citibank's "base rate" ("Base
Rate"). In the year ended January 30, 1994, the interest rate was
F-11
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
4. LONG-TERM DEBT (CONTINUED)
Base Rate plus 2% for the period from February 1, 1993 to April 2, 1993 and Base
Rate plus 1.75% for the period from April 3, 1993 to January 30, 1994. During
the prior year ended January 31, 1993, the interest rate was Base Rate plus 5%
for the period from February 3, 1992 to June 22, 1992 and Base Rate plus 2% for
the period from June 23, 1992 to January 31, 1993. In the year ended January 30,
1994, the interest rate fluctuated between 7.75% and 8.0% and was 7.75% at
year-end; in the prior year, the rate fluctuated between 8.0% and 11.5% and was
8.0% at year-end.
Under the revolving credit loan, as restructured, the full availability of
this credit line is contingent on the cost of collateralized inventory, less
certain adjustments. Commitment fees on the revolving loan are one-half of one
percent of the average daily unused portion of the total facility, payable
monthly.
The term loan, as restructured, requires quarterly principal payments of
$413,750 and the balance on August 19, 1994.
The Company is in the preliminary stages of negotiating a new and expanded
credit facility.
In consideration for expanding the credit facility, the Company paid a
one-time fee of $200,000 and issued warrants to Citicorp to purchase 3,250
shares of Class B Common Stock, par value $0.01 per share, subject to adjustment
under certain antidilution provisions. The warrants are exercisable from the
date of issuance at $141.65 per share and expire the later of June 13, 1995 or
upon full payment of the credit facility.
The agreement has covenants providing for mandatory prepayment provisions
and requiring the Company to meet specified financial ratios and income tests.
Such tests include, but are not limited to, net worth and earnings before
interest, depreciation and taxes. The covenants impose limitations on, among
other things, the amount of capital expenditures for each year, creating or
incurring liens, and selling assets or granting guarantees, and prohibit
declaring or paying dividends on common stock unless specifically permitted
under the terms of the agreement. The Company has received waivers for all
events of noncompliance with such covenants during the fiscal year ended January
31, 1993. The Company was not in compliance with all covenants at January 30,
1994. Accordingly, at that date, all amounts outstanding under the agreement are
due on demand (See Note 11).
(b) In August 1988, the Company sold $14,884,000 of subordinated debentures
to a related party. Interest is payable semi-annually at 13.5%. Annual principal
payments of $3,742,000 begin May 15, 1997 and the remaining balance is due May
15, 2000. Included in interest expense are $2,285,000 and $2,137,000 for the
years ended January 30, 1994 and January 31, 1993, respectively, for the
indebtedness.
The debentures contain covenants, including limitations on indebtedness,
liens, and the incurrence of other subordinated indebtedness, and restrict
payments such as dividends on common stock. The Company has received waivers for
all events of noncompliance with such covenants during the fiscal year ended
January 31, 1993. At January 30, 1994, because of cross default provisions with
respect to the agreement referred to in (a) above, all amounts outstanding at
that date under the subordinated debentures also are due on demand and have been
classified as currently payable (See Note 11).
(c) RESTRUCTURING -- On June 22, 1992, the subordinated debentures were
restructured and amended to provide, among other things, for the interest
payments due on May 15 and November 15, 1992 to be made in the form of
additional promissory notes ("accrual notes") in the principal amount of the
interest payable at each date. The accrual notes will bear interest at 13.5% per
annum, payable semi-annually, and $1,038,000 is due on March 15, 1994 with the
balance due on November 15, 1994.
F-12
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
4. LONG-TERM DEBT (CONTINUED)
In addition, an acquirer of the Class C Senior Convertible Stock (Note 6)
acquired $5,000,000 of the subordinated debentures.
Scheduled principal maturities of long-term debt classified as current for
fiscal years subsequent to January 30, 1994 are as follows (in 000's):
<TABLE>
<CAPTION>
YEARS ENDED
- -------------------------------------------------------------------------------------------
<S> <C>
February 1, 1998........................................................................... $ 3,742
January 31, 1999........................................................................... 3,742
Thereafter................................................................................. 7,400
---------
Total...................................................................................... $ 14,884
---------
---------
</TABLE>
Unamortized deferred financing costs of $656,000 and $892,000 at January 30,
1994 and January 31, 1993, respectively, consist of professional and commitment
fees incurred in connection with the Company's revolving and term loan facility
and subordinated debentures. Such costs are being amortized on a straight-line
basis over the terms of the related debt.
5. PENSION PLAN
The Company has a defined benefit pension plan for its hourly workers with
benefits based on a fixed dollar rate per year of service. The plan assets are
invested primarily in short-term bonds and in equity securities. The Company's
funding policy is to contribute annually the minimum amount required by the
applicable Internal Revenue Code regulation. In April 1992, as part of a series
of cost reductions, the Company froze the hourly pension plan. As a result,
there will be no new entrants to the plan and no additional benefits accruing to
current participants beyond those earned as of the date the plan was frozen.
The following presents the funded status of the plan (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Estimated accumulated benefit obligation, including vested benefits......... $ 2,076 $ 1,866
----------- -----------
----------- -----------
Estimated accumulated vested obligation....................................... $ 1,857 $ 1,709
----------- -----------
----------- -----------
Projected benefit obligation.................................................. $ (2,076) $ (1,866)
Plan assets at market value................................................... 2,084 2,012
----------- -----------
Plan assets in excess of projected benefit obligation......................... 8 146
Unrecognized prior service cost............................................... 13 16
Unrecognized net gain......................................................... (75) (234)
----------- -----------
Accrued pension cost.......................................................... $ (54) $ (72)
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
5. PENSION PLAN (CONTINUED)
Pension expense includes the following components (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
------------ ------------
<S> <C> <C>
Interest cost on projected benefit obligation................................ $ 143 $ 142
Actual return on assets..................................................... (151) (102)
Net amortization and deferral............................................... (9) (59)
------ ------
Net periodic pension income................................................. $ (17) $ (19)
------ ------
------ ------
Actuarial assumptions:
Discount rate............................................................... 7.25% 8.0%
Asset rate of return........................................................ 8.0% 8.0%
</TABLE>
The Company has a trusteed profit-sharing plan, providing employees a
deferred compensation (401(k)) provision and Company matching provision. Under
the plan, eligible employees are permitted to contribute up to 15% of gross
compensation into the plan, and the Company will match each employee
contribution up to 4% of gross compensation at a rate established by the Board
of Directors.
The Company and its employees made the following contributions to the plan
during the years ended (in 000's):
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
------------- -------------
<S> <C> <C>
Employee contributions........................................................ $ 752 $ 672
Company matching contributions................................................ 141 117
----- -----
Total profit-sharing contributions............................................ $ 893 $ 789
----- -----
----- -----
</TABLE>
6. REDEEMABLE PREFERRED AND COMMON STOCK
a. EXCHANGEABLE PREFERRED STOCK -- Each share of Exchangeable Preferred
Stock is exchangeable for subordinated debentures due May 2, 2003 at the option
of the Company, but, if not exchanged, must be redeemed at that date or upon
sale of the Company, if earlier. The exchange rate and redemption price is
$10.00 per share.
b. CLASS A AND CLASS B CUMULATIVE EXCHANGEABLE SENIOR PREFERRED STOCK -- On
June 13, 1990, the Company authorized and issued 1,375 shares each of Class A
and Class B 30% Cumulative Exchangeable Senior Preferred Stock, $0.01 par value
per share, for $1,000 per share. Each share of Class A and Class B preferred
stock is, at the option of the Company, exchangeable for subordinated debentures
due May 2, 2003, but if not exchanged, must be redeemed on that date or upon
sale of the Company, if earlier. The exchange rate and redemption price is
$1,000 per share.
On June 22, 1992, the terms of the preferred stock were amended to reduce
the annual dividend rate on the Class A and Class B Cumulative Exchangeable
Senior Preferred Stock to 10% annually ($100 per share) from 30% annually ($300
per share), payable on January 15, and to reduce the dividend rate on the
Exchangeable Preferred Stock to 10% annually ($1.00 per share) from 14% annually
($1.40 per share), payable on May 1. All dividends in arrears as of June 22,
1992 on the preferred shares were paid in kind in lieu of cash payments. For so
long as the Class C, Class D, and Class E Preferred Stock is outstanding, future
dividends on the Class A and Class B Cumulative Exchangeable Senior Preferred
Stock and Exchangeable Preferred Stock must be paid in kind.
F-14
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
6. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
Accrued and undeclared dividends at January 30, 1994 and January 31, 1993
were as follows (in 000's):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Class A Cumulative Exchangeable Senior Preferred Stock.................................. $ 10 $ 9
Class B Cumulative Exchangeable Senior Preferred Stock.................................. 11 10
Exchangeable Preferred Stock............................................................ 321 251
</TABLE>
Such accrued and undeclared dividends have been added to the carrying values
of the stock to which they accrue.
Issuance fees totalling approximately $287,000 related to the Redeemable
Preferred Stock were deducted from the related paid-in capital at the time of
issuance of these shares. Such fees are being amortized over the period ending
May 2, 2003.
c. CLASS C SENIOR CONVERTIBLE PREFERRED STOCK -- On June 22, 1992, the
Company issued 549,629 shares of Class C Senior Convertible Preferred Stock
("Class C Preferred Stock"), par value $0.01 per share, for $10,561,700. The
Class C Preferred Stock is convertible into common stock at the option of the
holder on a one-for-one basis. If unconverted, the Class C Preferred Stock must
be redeemed on June 15, 1999 or upon sale of the Company, if earlier. The
initial redemption price is $19.22 per share, increasing 10.0% per annum.
Issuance fees totalling approximately $386,000 related to the Class C Senior
Convertible Preferred Stock were deducted from the related paid-in capital at
the time of issuance of these shares. Such fees are being amortized over the
period ending June 15, 1999.
d. CLASS D AND CLASS E SENIOR CONVERTIBLE PREFERRED STOCK -- On May 28,
1993, the Company issued 194,035 and 129,712 shares of Class D and Class E
Senior Convertible Stock, respectively ("Class D and Class E Preferred Stock"),
par value $0.01 per share, for $6,000,000 and $4,010,000, respectively. The
Class D and Class E Preferred Stock is convertible into common stock at the
option of the holder on a one-for-one basis. If unconverted, the Class D and
Class E Preferred Stock must be redeemed on June 15, 1999 or upon sale of the
Company, if earlier. The initial redemption price is $30.92 per share,
increasing 10.0% per annum.
Issuance fees totalling approximately $158,000 and $106,000, respectively,
related to the Class D and Class E Preferred Stock, were deducted from the
related paid-in capital at the time of issuance of these shares. Such fees are
being amortized over the period ending June 15, 1999.
The Class C, Class D and Class E Preferred Stock rank pari passu and are
senior to the Exchangeable Preferred Stock and Class A and Class B Cumulative
Exchangeable Senior Preferred Stock.
e. COMMON STOCK -- Common stockholders have voting rights. Class B Common
Stock is non-voting and convertible into common stock at the option of the
stockholder at a conversion rate of 4.88884 shares of common stock for each
share of Class B Common Stock. Class C Common Stock is nonvoting and convertible
into common stock at the option of the stockholder at a conversion rate of 1
share of common stock for each share of Class C Common Stock.
7. STOCK SPLIT
On September 18, 1992, the Company amended and restated its charter which,
among other things, reduced the number of preferred shares authorized for
issuance to 3,000,000 and reduced the number of common shares authorized for
issuance to 3,000,000. In addition, a reverse stock split of the Company's
common stock, Class B Common Stock, and Class C Senior Convertible Preferred
F-15
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
7. STOCK SPLIT (CONTINUED)
Stock was accomplished, whereby one share was issued to replace each 5.333332
shares outstanding at the date of the split. All share and per share data, for
the year ended January 31, 1993, has been restated to reflect this split.
8. STOCK OPTIONS (ALL DATA REFLECTS THE STOCK SPLIT DESCRIBED IN NOTE 7)
In January 1989, the Company adopted a compensatory stock option plan (the
"1989 Plan"). Under the 1989 Plan, the Company granted restricted stock options
to purchase 41,759 shares of common stock at an exercise price of $2.00 or
$19.22 per share to key executives and employees. The right to exercise a stock
option was contingent upon the Company's achieving a cumulative earnings level
within four years of the date of the Plan or upon length of service. Options are
exercisable within ten years of the date of the grant. In addition, in June and
December 1992, the Company granted certain key executives 71,875 restricted
stock options at an exercise price of $19.22. The right to exercise these
options is contingent upon the Company's achieving a cumulative earnings target
through January 29, 1995. Options are exercisable within ten years of date of
the grant. In August 1993, the Company adopted an additional compensatory stock
option plan (the "1993 Plan"). Under the 1993 Plan, the Company granted
restricted options to purchase 58,500 shares of common stock at an exercise
price of $19.22 or $30.92 per share to key executives, directors and employees.
The right to exercise these options is contingent upon the Company's achieving a
cumulative earnings target through January 29, 1995. Options are exercisable
within ten years of the date of grant.
The following summarizes activity in the plans for the years ended:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Shares authorized.................................................... 172,134 113,634
--------------- ---------------
Outstanding shares granted, beginning of year........................ 111,258 50,000
Shares granted....................................................... 39,300 79,475
Shares canceled...................................................... (7,204) (18,217)
--------------- ---------------
Outstanding shares granted, end of year.............................. 143,354 111,258
--------------- ---------------
Shares available for grant........................................... 28,780 2,376
--------------- ---------------
--------------- ---------------
</TABLE>
Options for approximately 45,770 and 43,237 shares of common stock are
vested at January 30, 1994 and Janaury 31, 1993, respectively.
9. LEASES
The Company leases certain store premises and computer equipment. Certain
leases contain renewal options. The store leases generally provide that the
Company shall pay for property taxes, insurance and common area maintenance.
Future minimum rentals required under noncancelable operating leases which
have an original term of more than one year are as follows at January 30, 1994
(in 000's):
<TABLE>
<CAPTION>
YEAR ENDED
- ---------------------------------------------------------------------------------
<S> <C>
January 29, 1995................................................................. $ 18,146
January 28, 1996................................................................. 17,252
February 2, 1997................................................................. 15,822
February 1, 1998................................................................. 14,131
January 31, 1999................................................................. 11,701
Thereafter....................................................................... 40,542
-----------
Total............................................................................ $ 117,594
-----------
-----------
</TABLE>
F-16
<PAGE>
LEEWARDS CREATIVE CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 30, 1994 AND JANUARY 31, 1993
9. LEASES (CONTINUED)
Rental expense for operating leases was $15,882,000 and $13,547,000 for the
years ended January 30, 1994 and January 31, 1993, respectively.
Certain store leases have percentage rent lease provisions. Percentage rent
paid totalled $258,000 and $182,000 for the years ended January 30, 1994 and
January 31, 1993, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of claims encountered in the normal
course of business. Management believes, based on advice of counsel, that the
ultimate outcome of all these matters will have no material adverse effect on
the Company.
The Company had arranged for letters of credit totalling $343,000 and
$153,000 as of January 30, 1994 and January 31, 1993, respectively, to secure
inventory purchases.
11. SUBSEQUENT EVENT
On May 10, 1994, the Company entered into an Agreement and Plan of Merger
(the "Agreement") whereby it will merge with a subsidiary of Michaels Stores,
Inc. ("Michaels") and thereby become a wholly owned subsidiary of Michaels. The
merger is expected to close in July, 1994. The Agreement also provides that
simultaneously with the closing, Michaels shall cause the Company to repay its
long-term debt.
F-17
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES PERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Available Information..........................
Incorporation of Certain Documents by
Reference.....................................
Prospectus Summary.............................
Recent Developments............................
The Company....................................
Leewards Acquisition...........................
Use of Proceeds................................
Capitalization.................................
Price Range of Common Stock and Dividends......
Selected Financial and Store Data..............
Pro Forma Combined Financial Information.......
Description of Capital Stock...................
Certain Special Federal Tax Considerations For
Non-United States Holders.....................
Underwriting...................................
Notice to Canadian Residents...................
Legal Matters..................................
Experts........................................
Index to Financial Statements..................
</TABLE>
MICHAELS LOGO
The Arts & Crafts Store
2,500,000 Shares
Common Stock
($.10 par value)
PROSPECTUS
CS First Boston
Robertson, Stephens & Company
- ---------------------------------
- ---------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the issuance and
distribution of the Common Stock covered by this Registration Statement, all of
which will be paid by Michaels Stores, Inc. (the "Registrant"), are as follows:
<TABLE>
<S> <C>
Printing, Shipping and Engraving Expenses.............................. $ *
Accounting Fees and Expenses........................................... *
Legal Fees and Expenses of Qualification under State Securities Laws... *
Legal Fees and Expenses................................................ *
Transfer Agent and Registrar Fees and Expenses......................... *
SEC Registration Fee................................................... $39,283.41
NASD filing fee........................................................ *
Miscellaneous.......................................................... *
----------
Total................................................................ $
----------
----------
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers or former directors or officers and to
purchase insurance with respect to liability arising out of their capacity or
status as directors and officers. Such law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's certificate of incorporation, bylaws, any agreement or otherwise.
Reference is made to Article Nine of the Registrant's Restated Certificate
of Incorporation, as amended, Exhibit 4.1 of this Registration Statement, which
provides for indemnification of directors and officers.
Reference is made to Article IX of the Registrant's Bylaws, Exhibit 4.2 to
this Registration Statement, which provides for indemnification of directors and
officers.
In addition, the Registrant has entered into Indemnity Agreements with
certain of its directors and executive officers.
The Registrant has procured insurance that purports (i) to insure it against
certain costs of indemnification that may be incurred by it pursuant to the
provisions referred to above or otherwise and (ii) to insure the directors and
officers of the Registrant against certain liabilities incurred by them in the
discharge of their functions as directors and officers except for liabilities
arising from their own malfeasance.
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as a part of this Registration
Statement on Form S-3, including those incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1 -- Underwriting Agreement.(1)
2.1 -- Agreement and Plan of Merger among Michaels Stores, Inc. LWA Acquisition Corporation and Leewards
Creative Crafts, Inc.(2)
2.2 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores, Inc., Treasure House
Stores, Inc. and the stockholders of Treasure House Stores, Inc.(3)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
2.3 -- Amendment No. 1 to Stock Purchase Agreement.(3)
2.4 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other
parties listed therein.(2)
2.5 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc.
and the other parties listed therein.(2)
4.1 -- Restated Certificate of Incorporation of Michaels Stores, Inc.(4)
4.2 -- Bylaws of Michaels Stores, Inc. as amended and restated.(5)
4.3 -- Form of Common Stock Certificate.(5)
4.4 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and
Peoples Restaurants, Inc., including form of Warrant.(6)
4.5 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between The First Dallas
Group, Ltd. and Michaels Stores, Inc.(6)
4.6 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas
Investments -- Michaels I, Ltd. and Michaels Stores, Inc.(6)
4.7 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985 between First Dallas
Investments -- Michaels I, Ltd., The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr. and
Michaels Stores, Inc.(5)
4.8 -- Amendment to Common Stock and Warrant Agreement dated September 1, 1992 between Michaels Stores, Inc.,
The Andrew David Sparrow Wyly Trust, Charles J. Wyly, Jr., The Martha Caroline Wyly Trust, The Charles
Joseph Wyly, III Trust, The Emily Ann Wyly Trust, The Jennifer Lynn Wyly Trust, Donald R. Miller, Jr.,
Evan A. Wyly, The Laurie Louise Wyly Trust, The Lisa Lynn Wyly Trust, The Sam Wyly and Rosemary Wyly
Children's Trust No. 1 of 1965 fbo Kelly Wyly and Tallulah, Ltd.(4)
4.9 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and NationsBank of Texas, N.A.,
as Trustee, including the form of 4 3/4%/6 3/4% Step-up Convertible Subordinated Note, included
therein.(6)
5 -- Opinion of Jackson & Walker.(1)
8 -- None.
12 -- None.
15 -- None.
23.1 -- Consent of Ernst & Young.(2)
23.2 -- Consent of Deloitte & Touche.(2)
23.3 -- Consent of Jackson & Walker (to be included in the opinion of Jackson & Walker, L.L.P. to be filed as
Exhibit 5.1 to this Registration Statement).
24 -- Power of Attorney (such power of attorney appears on Page II-4 of the Registration Statement).
25 -- None.
26 -- None.
27 -- None.
28 -- None.
<FN>
- ------------------------
(1) To be filed by amendment.
(2) Filed herewith.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
(3) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-3 (No. 33-52311) and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-54726) and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1994 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1993 and incorporated herein by
reference.
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
a part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below authorizes Jack E. Bush, R. Don
Morris and Mark V. Beasley, and each of them, each of whom may act without
joinder of the others, to execute in the name of each such person who is then an
officer or director of the Registrant and to file any amendments to this
Registration Statement necessary or advisable to enable the Registrant to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in respect thereof, in
connection with the registration of the securities which are the subject of this
Registration Statement, which amendments may make such changes in the
Registration Statement as such attorney may deem appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irving, State of Texas on the 12th day of May, 1994.
MICHAELS STORES, INC.
By: _________/s/ JACK E. BUSH_________
Jack E. Bush
PRESIDENT, CHIEF OPERATING OFFICER AND
DIRECTOR
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
<S> <C> <C>
/s/ SAM WYLY Chairman of the Board of Directors and May 12, 1994
Sam Wyly Chief Executive Officer (Principal
Executive Officer)
/s/ CHARLES J. WYLY, JR. Vice Chairman of the Board of Directors May 12, 1994
Charles J. Wyly, Jr.
/s/ JACK E. BUSH President, Chief Operating Officer and May 12, 1994
Jack E. Bush Director
/s/ WILLIAM O. HUNT Director May 12, 1994
William O. Hunt
Director
Richard E. Hanlon
Director
F. Jay Taylor
/s/ MICHAEL C. FRENCH Director May 12, 1994
Michael C. French
/s/ EVAN C. WYLY Director May 12, 1994
Evan C. Wyly
/s/ DONALD R. MILLER, JR. Vice President -- Market Development, May 12, 1994
Donald R. Miller, Jr. and Director
/s/ R. DON MORRIS Executive Vice President and Chief May 12, 1994
R. Don Morris Financial Officer (Principal Financial
and Accounting Offier)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ----------- --------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
1 -- Underwriting Agreement.(1)
2.1 -- Agreement and Plan of Merger among Michaels Stores, Inc. LWA Acquisition Corporation and
Leewards Creative Crafts, Inc.(2)
2.2 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores, Inc.,
Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc.(3)
2.3 -- Amendment No. 1 to Stock Purchase Agreement.(3)
2.4 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and
the other parties listed therein.(2)
2.5 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels
Stores, Inc. and the other parties listed therein.(2)
4.1 -- Restated Certificate of Incorporation of Michaels Stores, Inc.(4)
4.2 -- Bylaws of Michaels Stores, Inc. as amended and restated.(5)
4.3 -- Form of Common Stock Certificate.(5)
4.4 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores,
Inc. and Peoples Restaurants, Inc., including form of Warrant.(6)
4.5 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between The
First Dallas Group, Ltd. and Michaels Stores, Inc.(6)
4.6 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between
First Dallas Investments -- Michaels I, Ltd. and Michaels Stores, Inc.(6)
4.7 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985 between
First Dallas Investments -- Michaels I, Ltd., The First Dallas Group, Ltd., Sam Wyly,
Charles J. Wyly, Jr. and Michaels Stores, Inc.(5)
4.8 -- Amendment to Common Stock and Warrant Agreement dated September 1, 1992 between Michaels
Stores, Inc., The Andrew David Sparrow Wyly Trust, Charles J. Wyly, Jr., The Martha
Caroline Wyly Trust, The Charles Joseph Wyly, III Trust, The Emily Ann Wyly Trust, The
Jennifer Lynn Wyly Trust, Donald R. Miller, Jr., Evan A. Wyly, The Laurie Louise Wyly
Trust, The Lisa Lynn Wyly Trust, The Sam Wyly and Rosemary Wyly Children's Trust No. 1 of
1965 fbo Kelly Wyly and Tallulah, Ltd.(4)
4.9 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and NationsBank of
Texas, N.A., as Trustee, including the form of 4 3/4%/6 3/4% Step-up Convertible
Subordinated Note, included therein.(6)
5 -- Opinion of Jackson & Walker.(1)
8 -- None.
12 -- None.
15 -- None.
23.1 -- Consent of Ernst & Young.(2)
23.2 -- Consent of Deloitte & Touche.(2)
23.3 -- Consent of Jackson & Walker (to be included in the opinion of Jackson & Walker, L.L.P. to
be filed as Exhibit 5.1 to this Registration Statement).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ----------- --------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
24 -- Power of Attorney (such power of attorney appears on Page II-4 of the Registration
Statement).
25 -- None.
26 -- None.
27 -- None.
28 -- None.
<FN>
- ------------------------
(1) To be filed by amendment.
(2) Filed herewith.
(3) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-3 (No. 33-52311) and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-54726) and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1994 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1993 and incorporated herein by
reference.
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 10, 1994
BETWEEN
MICHAELS STORES, INC.,
LWA ACQUISITION CORPORATION
AND
LEEWARDS CREATIVE CRAFTS, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
Definition
Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . 1
ARTICLE II.
The Merger
Section 2.01. The Merger . . . . . . . . . . . . . . . . . . . . 13
Section 2.02. The Closing . . . . . . . . . . . . . . . . . . . 13
Section 2.03. Effective Time . . . . . . . . . . . . . . . . . . 14
Section 2.04. Certificate of Incorporation of Surviving
Corporation . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.05. Bylaws . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.06. Directors of the Surviving Corporation . . . . . . 14
Section 2.07. Officers of the Surviving Corporation . . . . . . 14
Section 2.08. Aggregate Merger Consideration . . . . . . . . . . 14
Section 2.09. Conversion of Leewards Shares . . . . . . . . . . 15
Section 2.10. Exchange of Certificates Representing Leewards
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2.11. Adjustment of Number of Shares . . . . . . . . . . 23
Section 2.12. Dissenters' Rights. . . . . . . . . . . . . . . . 23
Section 2.13. Subsequent Actions. . . . . . . . . . . . . . . . 24
Section 2.14. Escrow. . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE III.
Representations and Warranties of Leewards
Section 3.01. Organization and Good Standing; Qualification. . . 24
Section 3.02. Capitalization . . . . . . . . . . . . . . . . . . 25
Section 3.03. Corporate Records . . . . . . . . . . . . . . . . 25
Section 3.04. Authorization and Validity . . . . . . . . . . . . 26
Section 3.05. No Violation . . . . . . . . . . . . . . . . . . . 26
Section 3.06. Consents . . . . . . . . . . . . . . . . . . . . . 26
Section 3.07. Financial Statements . . . . . . . . . . . . . . . 26
Section 3.08. Liabilities and Obligations . . . . . . . . . . . 27
Section 3.09. Employee Matters . . . . . . . . . . . . . . . . . 27
Section 3.10. Employee Benefit Plans . . . . . . . . . . . . . . 28
Section 3.11. Absence of Certain Changes . . . . . . . . . . . . 30
Section 3.12. Title; Leased Assets . . . . . . . . . . . . . . . 31
Section 3.13. Commitments . . . . . . . . . . . . . . . . . . . 32
Section 3.14. Insurance . . . . . . . . . . . . . . . . . . . . 34
Section 3.15. Patents, Trademarks, Service Marks and Copyrights 34
Section 3.16. Trade Secrets and Customer Lists . . . . . . . . . 35
Section 3.17. Taxes . . . . . . . . . . . . . . . . . . . . . . 35
Section 3.18. Compliance with Laws . . . . . . . . . . . . . . . 36
Section 3.19. Finder's Fee . . . . . . . . . . . . . . . . . . . 36
Section 3.20. Litigation . . . . . . . . . . . . . . . . . . . . 36
Section 3.21. Accuracy of Information Furnished . . . . . . . . 36
Section 3.22. Condition of Fixed Assets . . . . . . . . . . . . 37
<PAGE>
Section 3.23. Inventory . . . . . . . . . . . . . . . . . . . . 37
Section 3.24. Books of Account . . . . . . . . . . . . . . . . . 37
Section 3.25. Corporate Name . . . . . . . . . . . . . . . . . . 37
Section 3.26. Distributions . . . . . . . . . . . . . . . . . . 37
Section 3.27. Banking Relations . . . . . . . . . . . . . . . . 37
Section 3.28. Ownership Interests of Interested Persons . . . . 38
Section 3.29. Environmental Matters . . . . . . . . . . . . . . 38
Section 3.30. Certain Payments . . . . . . . . . . . . . . . . . 38
ARTICLE IV.
Representations and Warranties of Michaels and Newco
Section 4.01. Organization and Good Standing . . . . . . . . . . 39
Section 4.02. Authorization and Validity . . . . . . . . . . . . 39
Section 4.03. No Violation . . . . . . . . . . . . . . . . . . . 39
Section 4.04. Consents . . . . . . . . . . . . . . . . . . . . . 39
Section 4.05. Acquisition for Investment . . . . . . . . . . . . 40
Section 4.06. Finder's Fee . . . . . . . . . . . . . . . . . . . 40
Section 4.07. Capital Stock . . . . . . . . . . . . . . . . . . 40
Section 4.08. Regulatory Filing; Accuracy of Information
Furnished; No Material Adverse Change . . . . . . . . . . . 40
Section 4.09. Litigation . . . . . . . . . . . . . . . . . . . . 40
ARTICLE V.
Covenants of Leewards
Section 5.01. Consummation of Agreement . . . . . . . . . . . . 41
Section 5.02. Stockholders Meeting . . . . . . . . . . . . . . . 41
Section 5.03. Business Operations . . . . . . . . . . . . . . . 41
Section 5.04. Access . . . . . . . . . . . . . . . . . . . . . . 41
Section 5.05. Notification of Certain Matters . . . . . . . . . 41
Section 5.06. Approvals of Third Parties . . . . . . . . . . . . 42
Section 5.07. Employee Matters . . . . . . . . . . . . . . . . . 42
Section 5.08. Borrowings; Contracts . . . . . . . . . . . . . . 43
Section 5.09. Changes in Inventory . . . . . . . . . . . . . . . 43
Section 5.10. Capital Assets; Payments of Liabilities . . . . . 43
Section 5.11. Mortgages, Liens and Guaranties . . . . . . . . . 44
Section 5.12. Acquisition Proposals . . . . . . . . . . . . . . 44
Section 5.13. Capital Stock; Corporate Documents . . . . . . . . 45
Section 5.14. Waiver of Senior Debt Default . . . . . . . . . . 45
Section 5.15. Filing of Tax Return . . . . . . . . . . . . . . . 45
Section 5.16. Monthly Financial Statements . . . . . . . . . . . 45
ARTICLE VI.
Covenants of Michaels and Newco
Section 6.01. Consummation of Agreement . . . . . . . . . . . . 46
Section 6.02. Approvals of Third Parties . . . . . . . . . . . . 46
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ARTICLE VII.
Conditions Precedent of Michaels and Newco
Section 7.01. Representations and Warranties . . . . . . . . . . 46
Section 7.02. Covenants and Conditions . . . . . . . . . . . . . 46
Section 7.03. Legal Opinion . . . . . . . . . . . . . . . . . . 46
Section 7.04. Proceedings . . . . . . . . . . . . . . . . . . . 47
Section 7.05. No Material Adverse Change . . . . . . . . . . . . 47
Section 7.06. Government Approvals . . . . . . . . . . . . . . . 47
Section 7.07. Closing Deliveries . . . . . . . . . . . . . . . . 47
Section 7.08. Stockholder Approval . . . . . . . . . . . . . . . 47
Section 7.09. Audit . . . . . . . . . . . . . . . . . . . . . . 47
Section 7.10. Termination of Warrant . . . . . . . . . . . . . . 47
Section 7.11. Termination of Shareholder Agreement and Related
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE VIII.
Conditions Precedent of Leewards
Section 8.01. Representations and Warranties . . . . . . . . . . 48
Section 8.02. Covenants and Conditions . . . . . . . . . . . . . 48
Section 8.03. Legal Opinion . . . . . . . . . . . . . . . . . . 48
Section 8.04. Proceedings . . . . . . . . . . . . . . . . . . . 48
Section 8.05. No Material Adverse Change. . . . . . . . . . . . 48
Section 8.06. H-S-R Act. . . . . . . . . . . . . . . . . . . . . 48
Section 8.07. Closing Deliveries. . . . . . . . . . . . . . . . 49
Section 8.08. Michaels Common Stock . . . . . . . . . . . . . . 49
Section 8.09. Payment of Senior Debt and Senior Subordinated
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 8.10. Stockholder Approval . . . . . . . . . . . . . . . 49
ARTICLE IX.
Closing Deliveries
Section 9.01. Deliveries of Leewards . . . . . . . . . . . . . . 49
Section 9.02. Deliveries of Michaels and Newco . . . . . . . . . 50
ARTICLE X.
Certain Other Matters
Section 10.01. Registration Statement . . . . . . . . . . . . . 51
Section 10.02. Restrictions under Registration Statement . . . . 53
Section 10.03. Piggy-Back Registration . . . . . . . . . . . . . 55
Section 10.04. Tax Treatment . . . . . . . . . . . . . . . . . . 56
Section 10.05. D & O Insurance . . . . . . . . . . . . . . . . . 56
ARTICLE XI.
Remedies
Section 11.01. Indemnification . . . . . . . . . . . . . . . . . 56
Section 11.02. Waiver . . . . . . . . . . . . . . . . . . . . . 58
Section 11.03. Remedies Not Exclusive . . . . . . . . . . . . . 58
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Section 11.04. Costs, Expenses and Legal Fees . . . . . . . . . 58
ARTICLE XII.
Termination
Section 12.01. Termination . . . . . . . . . . . . . . . . . . . 59
Section 12.02. Effect of Termination . . . . . . . . . . . . . . 60
ARTICLE XIII.
Miscellaneous
Section 13.01. Amendment . . . . . . . . . . . . . . . . . . . . 61
Section 13.02. Assignment . . . . . . . . . . . . . . . . . . . 61
Section 13.03. Parties In Interest; No Third Party
Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . 61
Section 13.04. Entire Agreement . . . . . . . . . . . . . . . . 61
Section 13.05. Governing Law . . . . . . . . . . . . . . . . . . 62
Section 13.06. Captions . . . . . . . . . . . . . . . . . . . . 62
Section 13.07. Gender and Number . . . . . . . . . . . . . . . . 62
Section 13.08. Reference to Agreement . . . . . . . . . . . . . 62
Section 13.09. Confidentiality; Publicity and Disclosures . . . 62
Section 13.10. Notice . . . . . . . . . . . . . . . . . . . . . 62
Section 13.11. Choice of Forum . . . . . . . . . . . . . . . . . 63
Section 13.12. Service of Process . . . . . . . . . . . . . . . 64
Section 13.13. Counterparts . . . . . . . . . . . . . . . . . . 64
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of May 10,
1994 among Leewards Creative Crafts, Inc., a Delaware corporation ("Leewards"),
Michaels Stores, Inc., a Delaware corporation ("Michaels"), and LWA Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of Michaels
("Newco");
W I T N E S S E T H :
WHEREAS, the Boards of Directors of each of Michaels, Leewards and Newco
have deemed it advisable and in the best interests of each such corporation and
its respective stockholders to cause the merger of Newco with and into Leewards
upon the terms and conditions set forth herein and in accordance with the
Delaware General Corporation Law; and
WHEREAS, it is intended that for federal income tax purposes the Merger
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended, although the actual tax effect of the
transaction is not a condition to the consummation thereof; and
WHEREAS, the Boards of Directors of Leewards and Newco have directed that
this Agreement be submitted to the stockholders of each of Leewards and Newco
for their approval, and Michaels as sole stockholder of Newco has approved this
Agreement by written consent; and
NOW, THEREFORE, in consideration of the mutual representations, warranties
and covenants herein contained, and on the terms and subject to the conditions
herein set forth, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01. DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Acquiring Party" shall have the meaning set forth in Section
12.02(b).
(b) "Acquisition Proposal" shall have the meaning set forth in Section
5.12.
(c) "Adjusted Value Per Common Equivalent" means the quotient obtained by
dividing (i) the Adjusted Value to Common Equivalents by (ii) the Fully Diluted
Number of Shares.
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(d) "Adjusted Value to Common Equivalents" means (i) the Aggregate Initial
Value minus (ii) the Montgomery Fee minus (iii) one-half of the MONY Prepayment
Fee minus (iv) the Citicorp Repurchase Price (if the Warrant Put Option is
exercised prior to the Closing) minus (v) the Class A Preferred Redemption Value
minus (vi) the Class B Preferred Redemption Value minus (vii) the Exchangeable
Preferred Redemption Value minus (viii) the Class C Preferred Redemption Value
minus (ix) the Class D Preferred Redemption Value minus (x) the Class E
Preferred Redemption Value minus (xi) Transaction Expenses plus (xii) the
Aggregate Option and Warrant Value.
(e) "Affiliate" of a person shall mean any person that controls, is
controlled by or is under common control with such person, within the meaning of
the Securities Act and the rules and regulations thereunder.
(f) "Aggregate Initial Value" means the sum of (i) the product of (A) the
remainder of (x) 1,550,000 minus (y) the number of Cash Shares, if applicable,
multiplied by (B) the Five Day Average plus (ii) the Cash Proceeds, if
applicable.
(g) "Aggregate Option and Warrant Value" means (i) the amount of
consideration paid upon exercise of the Options prior to the Closing plus (ii)
the amount of consideration that would be payable upon exercise of the
Management Options and Non-Management Options with respect to those Options that
are not exercised prior to the Closing plus (iii) if the Warrant Put Option is
not exercised prior to the Closing, the amount of consideration that would be
payable upon exercise of the Warrant.
(h) "Audited Financial Statements" shall have the meaning set forth in
Section 3.07.
(i) "best knowledge", "have no knowledge of", or "do not know of" and
similar phrases shall mean (i) in the case of a natural person, the particular
fact was known, or not known, as the context requires, to such person after
reasonable investigation and inquiry by such person, and (ii) in the case of an
entity, the particular fact was known, or not known, as the context requires, to
any director or executive officer of such entity after reasonable investigation
and inquiry by the principal executive officers of such entity.
(j) "Cash Compensation" shall have the meaning set forth in Section
3.09(a).
(k) "Cash Offering" means the firm commitment underwritten offering of
Michaels Common Stock described in Section 2.08(b) hereof if such offering is
closed on or prior to the Closing.
(l) "Cash Proceeds" means the Net Proceeds Per Share multiplied by the
number of Cash Shares.
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(m) "Cash Shares" means the shares of Michaels Common Stock sold in the
Cash Offering pursuant to Section 2.08(b) which causes the reduction of the
aggregate number of shares of Michaels Common Stock to be issued in connection
with the Merger.
(n) "Certificate" shall have the meaning set forth in Section 2.09(d).
(o) "Citicorp Repurchase Price" means the repurchase price which may be
paid by Leewards pursuant to the terms of the Warrant or the amount paid by
Leewards in connection with the repurchase or cancellation of the Warrant
(except pursuant to Section 2.09 of this Agreement).
(p) "Class A Preferred Cash Redemption Value Per Share" means (i) the
Class A Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Cash Allocation.
(q) "Class A Preferred Redemption Value" means the product obtained by
multiplying (i) the Class A Preferred Redemption Value Per Share by (ii) the
number of shares of Class A Preferred Stock which are outstanding immediately
prior to the Closing.
(r) "Class A Preferred Redemption Value Per Share" means the redemption
price of a share of Class A Preferred Stock which is outstanding immediately
prior to the Closing, which redemption price is determined as of the Closing
pursuant to the Certificate of Incorporation of Leewards.
(s) "Class A Preferred Stock" means Leewards' Class A Cumulative
Exchangeable Senior Preferred Stock, par value $.01 per share.
(t) "Class A Preferred Stock Redemption Value Per Share" means (i) the
Class A Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Stock Allocation.
(u) "Class B Common Stock" means Leewards' Class B Common Stock, par value
$.01 per share.
(v) "Class B Conversion Ratio" means the ratio obtained by dividing (i)
the number of shares of Leewards Common Stock into which each share of Class B
Common Stock is convertible pursuant to the Certificate of Incorporation of
Leewards immediately prior to the Closing by (ii) one.
(w) "Class B Preferred Cash Redemption Value Per Share" means (i) the
Class B Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Cash Allocation.
(x) "Class B Preferred Redemption Value" means the product obtained by
multiplying (i) the Class B Preferred Redemption Value Per Share by (ii) the
number of shares of Class B Preferred Stock which are outstanding immediately
prior to the Closing.
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<PAGE>
(y) "Class B Preferred Redemption Value Per Share" means the redemption
price of a share of Class B Preferred Stock which is outstanding immediately
prior to the Closing, which redemption price is determined as of the Closing
pursuant to the Certificate of Incorporation of Leewards.
(z) "Class B Preferred Stock" means Leewards' Class B Cumulative
Exchangeable Senior Preferred Stock, par value $.01 per share.
(aa) "Class B Preferred Stock Redemption Value Per Share" means (i) the
Class B Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Stock Allocation.
(ab) "Class C Common Stock" means Leewards' Class C Common Stock, par value
$.01 per share.
(ac) "Class C Conversion Election" shall have the meaning set forth in
Section 2.09 hereof.
(ad) "Class C Preferred Cash Redemption Value Per Share" means (i) the
Class C Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Cash Allocation.
(ae) "Class C Preferred Redemption Value" means the product obtained by
multiplying (i) the Class C Preferred Redemption Value Per Share by (ii) the
number of shares of Class C Preferred Stock for which the Class C Redemption
Election has been made.
(af) "Class C Preferred Redemption Value Per Share" means the redemption
price of a share of Class C Preferred Stock which is outstanding immediately
prior to the Closing, which redemption price is determined as of the Closing
pursuant to the Certificate of Incorporation of Leewards.
(ag) "Class C Preferred Stock" means Leeward's Class C Senior Convertible
Preferred Stock, par value $.01 per share.
(ah) "Class C Preferred Stock Redemption Value Per Share" means (i) the
Class C Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Stock Allocation.
(ai) "Class C Redemption Election" shall have the meaning set forth in
Section 2.09 hereof.
(aj) "Class D Conversion Election" shall have the meaning set forth in
Section 2.09 hereof.
(ak) "Class D Preferred Cash Redemption Value Per Share" means (i) the
Class D Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Cash Allocation.
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<PAGE>
(al) "Class D Preferred Redemption Value" means the product obtained by
multiplying (i) the Class D Preferred Redemption Value Per Share by (ii) the
number of shares of Class D Preferred Stock for which the Class D Redemption
Election has been made.
(am) "Class D Preferred Redemption Value Per Share" means the redemption
price of a share of Class D Preferred Stock which is outstanding immediately
prior to the Closing, which redemption price is determined as of the Closing
pursuant to the Certificate of Incorporation of Leewards.
(an) "Class D Preferred Stock" means Leewards' Class D Senior Convertible
Preferred Stock, par value $.01 per share.
(ao) "Class D Preferred Stock Redemption Value Per Share" means (i) the
Class D Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Stock Allocation.
(ap) "Class D Redemption Election" shall have the meaning set forth in
Section 2.09 hereof.
(aq) "Class E Conversion Election" shall have the meaning set forth in
Section 2.09 hereof.
(ar) "Class E Preferred Cash Redemption Value Per Share" means (i) the
Class E Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Cash Allocation.
(as) "Class E Preferred Redemption Value" means the product obtained by
multiplying (i) the Class E Preferred Redemption Value Per Share by (ii) the
number of shares of Class E Preferred Stock for which the Class E Redemption
Election has been made.
(at) "Class E Preferred Redemption Value Per Share" means the redemption
price of a share of Class E Preferred Stock which is outstanding immediately
prior to the Closing, which redemption price is determined as of the Closing
pursuant to the Certificate of Incorporation of Leewards.
(au) "Class E Preferred Stock" means Leewards' Class E Senior Convertible
Preferred Stock, par value $.01 per share.
(av) "Class E Preferred Stock Redemption Value Per Share" means (i) the
Class E Preferred Redemption Value Per Share multiplied by (ii) the Pro Rata
Stock Allocation.
(aw) "Class E Redemption Election" shall have the meaning set forth in
Section 2.09 hereof.
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<PAGE>
(ax) "Closing" shall mean the closing of the transactions contemplated by
this Agreement, which shall occur at 10:00 a.m., local time, on the Closing Date
in the offices of Jackson & Walker, L.L.P., Suite 6000, 901 Main Street, Dallas,
Texas 75202, or at such other time and place as shall be mutually agreed in
writing by the parties hereto.
(ay) "Closing Date" shall have the meaning set forth in Section 2.02.
(az) "Closing Date Cash Value Per Eligible Common Equivalent" means the
product of (i) the Closing Date Value Per Eligible Common Equivalent multiplied
by (ii) the Pro Rata Cash Allocation.
(ba) "Closing Date Stock Value Per Eligible Common Equivalent" means the
product of (i) the Closing Date Value Per Eligible Common Equivalent multiplied
by (ii) the Pro Rata Stock Allocation.
(bb) "Closing Date Value Per Eligible Common Equivalent" means the
remainder of (i) the Adjusted Value Per Common Equivalent minus (ii) the Escrow
Adjustment Per Eligible Common Equivalent.
(bc) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(bd) "Commitments" shall have the meaning set forth in Section 3.13(a).
(be) "Compensation Plans" shall have the meaning set forth in Section
3.09(b).
(bf) "Confidentiality Agreement" means that certain Confidentiality
Agreement dated as of January 28, 1994 between Michaels and Leewards.
(bg) "Controlled Group" means a controlled group (within the meaning of
Section 412(N)(6)(B) of the Code) in which Leewards is a member.
(bh) "Credit Agreement" shall mean that certain Restated and Amended
Credit Agreement dated as of June 13, 1990, as amended, by and among Leewards,
Citicorp North America, Inc. (as agent) and the financial institutions named
therein.
(bi) "Damages" shall have the meaning set forth in Section 10.01(c).
(bj) "Delay Notice" shall have the meaning set forth in Section 10.02.
(bk) "Delay Period" shall have the meaning set forth in Section 10.02.
(bl) "DGCL" shall mean the General Corporation Law of the State of
Delaware.
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<PAGE>
(bm) "Disclosure Schedule" means the disclosure schedule prepared by
Leewards delivered to Michaels pursuant to this Agreement.
(bn) "Dissenting Shareholders" shall have the meaning set forth in Section
2.09(a).
(bo) "Effective Time" shall have the meaning set forth in Section 2.03.
(bp) "Eligible Common Equivalents" means the (i) the outstanding shares of
Leewards Common Stock immediately prior to the Closing, (ii) the shares of
Leewards Common Stock into which the outstanding number of shares of Class B
Common Stock immediately prior to the Closing are convertible, (iii) the shares
of Leewards Common Stock into which the shares of Class C Preferred Stock with
respect to which a Class C Conversion Election has been made are convertible,
(iv) the shares of Leewards Common Stock into which the shares of Class C Common
Stock issuable upon conversion of the shares of Class D Preferred Stock with
respect to which a Class D Conversion Election has been made are convertible,
regardless of any restrictions on such conversion, (v) the shares of Leewards
Common Stock into which the shares of Class E Preferred Stock with respect to
which a Class E Conversion Election has been made are convertible and (vi) with
respect to Management Options not exercised prior to the Closing, the shares of
Leewards Common Stock issuable upon exercise of such Management Options as of
the Closing.
(bq) "Employee Benefit Plans" shall have the meaning set forth in Section
3.10(a).
(br) "Employee Policies and Procedures" shall have the meaning set forth
in Section 3.09(d).
(bs) "Employment Agreements" shall have the meaning set forth in Section
3.09(c).
(bt) "Environmental Laws" means any federal, state or local laws, rules or
regulations pertaining to protection of human health or the pollution or
protection of the environment including without limitation (i) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C.
Sections 9601 ET SEQ.), as amended from time to time (including without
limitation as amended pursuant to the Superfund Amendments and Reauthorization
Act of 1986), and regulations promulgated thereunder, (ii) the Resource
Conservation and Recovery Act of 1976 (42 U.S.C. Sections 901 ET SEQ.), as
amended from time to time, and regulations promulgated thereunder and (iii)
those relating to asbestos or polychlorinated biphenyls.
(bu) "ERISA" shall have the meaning set forth in Section 3.10(a).
(bv) "Escrow Adjustment Per Eligible Common Equivalent" means the quotient
obtained by dividing (i) the Escrow Deposit Amount by (ii) the number of
Eligible Common Equivalents.
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(bw) "Escrow Agent" shall have the meaning set forth in Section 2.14.
(bx) "Escrow Agreement" shall have the meaning set forth in Section 2.14.
(by) "Escrow Deposit Amount" means $3,500,000.
(bz) "Escrowed Shares" shall have the meaning set forth in Section 2.14.
(ca) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(cb) "Exchange Agent" shall have the meaning set forth in Section
2.10(a).
(cc) "Exchange Fund" shall have the meaning set forth in Section 2.10(a).
(cd) "Exchangeable Preferred Cash Redemption Value Per Share" means (i)
the Exchangeable Preferred Redemption Value Per Share multiplied by (ii) the Pro
Rata Cash Allocation.
(ce) "Exchangeable Preferred Redemption Value" means the product obtained
by multiplying (i) the Exchangeable Preferred Redemption Value Per Share by (ii)
the number of shares of Exchangeable Preferred Stock which are outstanding
immediately prior to the Closing.
(cf) "Exchangeable Preferred Redemption Value Per Share" means the
redemption price of a share of Exchangeable Preferred Stock which is outstanding
immediately prior to the Closing, which redemption price is determined as of the
Closing pursuant to the Certificate of Incorporation of Leewards.
(cg) "Exchangeable Preferred Stock" means Leewards' Exchangeable
Preferred Stock, par value $.01 per share.
(ch) "Exchangeable Preferred Stock Redemption Value Per Share" means (i)
the Exchangeable Preferred Redemption Value Per Share multiplied by (ii) the Pro
Rata Stock Allocation.
(ci) "Expiration Date" shall have the meaning set forth in Section 5.15.
(cj) "Financial Statements" shall have the meaning set forth in Section
3.07.
(ck) "Five Day Average" means the average of the closing prices of the
Michaels Common Stock on the NASDAQ-NMS for the five consecutive trading days
ending on the second trading day preceding the Closing Date.
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(cl) "Franchise Agreements" means those certain Leewards Standard
Franchise Agreements by and between Leewards and (i) David Godfrey and Angela
Godfrey, dated December 1, 1987, with respect to the store in Henrietta, New
York, (ii) David Godfrey and Angela Godfrey, undated, with respect to the store
in Greece, New York, and (iii) Denel Corporation, dated November 24, 1987, with
respect to the store in Holland, Ohio.
(cm) "Fully Diluted Number of Shares" means the sum of (i) the number of
outstanding shares of Leewards Common Stock immediately prior to the Closing
plus (ii) the number of shares of Leewards Common Stock into which the
outstanding number of shares of Class B Common Stock immediately prior to the
Closing are convertible plus (iii) the number of shares of Leewards Common Stock
into which the outstanding number of shares of Class C Preferred Stock with
respect to which a Class C Conversion Election has been made are convertible
plus (iv) the number of shares of Leewards Common Stock into which the shares of
Class C Common Stock issuable upon conversion of the shares of Class D Preferred
Stock with respect to which a Class D Conversion Election has been made are
convertible, regardless of any restrictions on such conversion, plus (v) the
number of shares of Leewards Common Stock into which the shares of Class E
Preferred Stock with respect to which a Class E Conversion Election has been
made are convertible plus (vi) with respect to Options not exercised prior to
the Closing, the number of shares of Leewards Common Stock into which the
Management Options and the Non-Management Options are exercisable plus (vii) if
the Warrant Put Option is not exercised prior to the Closing, the number of
shares of Leewards Common Stock issuable upon conversion of the shares of Class
B Common Stock into which the Warrant is exercisable. The Fully Diluted Number
of Shares shall not include (i) any number of shares of Leewards Common Stock
issuable upon conversion of shares of Class C Preferred Stock with respect to
which a Class C Redemption Election has been made, shares of Class D Preferred
Stock with respect to which a Class D Redemption Election has been made or
shares of Class E Preferred Stock with respect to which a Class E Redemption
Election has been made, (ii) any number of shares of Leewards Common Stock for
Options which are not Management Options or Non-Management Options as of the
Closing and (iii) any number of shares of Leewards Common Stock issuable upon
exercise of the Warrant if the Warrant Put Option is exercised.
(cn) "GAAP" shall have the meaning set forth in Section 3.07.
(co) "H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
(cp) "Leewards Balance Sheet Date" shall have the meaning set forth in
Section 3.07.
(cq) "Leewards Capital Stock" means, collectively, the Leewards Common
Stock, Class B Common Stock, Class C Common Stock, Exchangeable Preferred Stock,
Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock, Class
D Preferred Stock and Class E Preferred Stock.
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(cr) "Leewards Common Stock" means Leewards' Common Stock, par value $.01
per share.
(cs) "Leewards Shares" means the issued and outstanding shares of
Leewards Capital Stock.
(ct) "Lock Up Period" shall have the meaning set forth in Section
10.02(b).
(cu) "Management Options" means those Options issued pursuant to the
agreements specified in subsections (iii), (iv) and (v) of the definition of
"Options" herein for which the Closing Date Value Per Eligible Common Equivalent
exceeds the Option Exercise Price for such Options.
(cv) "Material Adverse Change" shall mean, as regards to Leewards or
Michaels, as applicable, a material adverse change in the condition (financial
or otherwise), operations, assets or liabilities, of such entity and its
subsidiaries, if any, taken as a whole.
(cw) "Material Adverse Effect" shall mean, as regards to Leewards or
Michaels, as applicable, a material adverse effect on the condition (financial
or otherwise), operations, assets or liabilities of such entity and its
subsidiaries, if any, taken as a whole.
(cx) "Merger" shall have the meaning set forth in Section 2.01.
(cy) "Merger Consideration" shall have the meaning set forth in Section
2.09(a).
(cz) "Michaels Common Stock" means the Common Stock, par value $.10 per
share, of Michaels.
(da) "Michaels Group" shall have the meaning set forth in Section
2.09(a).
(db) "Michaels Transaction Expenses" shall have the meaning set forth in
Section 12.02(b).
(dc) "Montgomery Fee" means the fees and expenses payable by Leewards to
Montgomery Securities in connection with the transactions contemplated by this
Agreement, including, without limitation, the compensation paid by or to be paid
by Leewards to Montgomery Securities pursuant to that certain letter agreement
dated January 25, 1994, as amended.
(dd) "MONY Prepayment Fee" means the prepayment premium required
pursuant to the terms of that certain Purchase Agreement, by and among Leewards
and the purchasers set forth therein with respect to the Senior Subordinated
Notes, as amended.
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(de) "NASDAQ-NMS" means the National Association of Securities Dealers
Automatic Quotation - National Market System.
(df) "Net Proceeds Per Share" means the public offering price per share
in the Cash Offering minus the underwriting discount per share.
(dg) "Non-Management Options" means those Options issued pursuant to the
plans and agreements specified in subsections (i) and (ii) of the definition of
"Options" herein for which the Adjusted Value Per Common Equivalent exceeds the
Option Exercise Price for such Options.
(dh) "Option Agreements" means the agreements between Leewards and each
holder of the Options.
(di) "Option Exercise Price" means, with respect to each Option which is
not exercised prior to the Closing, the consideration which would be payable
upon the exercise of such Option.
(dj) "Options" means those certain options to purchase Leewards Common
Stock issued pursuant to (i) the 1989 Stock Bonus/Option Plan of Leewards, as
amended, (ii) the 1993 Stock Option Plan of Leewards, as amended, (iii)
Management Option Agreement between Leewards and John A. Popple, as amended,
(iv) Management Option Agreement between Leewards and David E. Bolen, as
amended, and (v) Management Option Agreement between Leewards and Jon Browne, as
amended.
(dk) "ordinary course of business" means the usual and customary way in
which Leewards has conducted its business in the past.
(dl) "Personal Property" shall have the meaning set forth in Section
3.12(b).
(dm) "Piggy-Back Registration" shall have the meaning set forth in
Section 10.03(a).
(dn) "Proprietary Rights" shall have the meaning set forth in Section
3.15(a).
(do) "Pro Rata Cash Allocation" means, if the Cash Offering occurs, the
ratio obtained by dividing (i) the Net Proceeds by (ii) the Adjusted Value to
Common Equivalents plus the Class A Preferred Redemption Value, plus the Class B
Preferred Redemption Value, plus the Exchangeable Preferred Redemption Value,
plus the Class C Preferred Redemption Value, plus the Class D Preferred
Redemption Value, plus the Class E Preferred Redemption Value, minus the
Aggregate Option and Warrant Value, minus the amounts payable with respect to
the Non-Management Options, the Management Options and the Warrant pursuant to
Section 2.09(a).
(dp) "Pro Rata Stock Allocation" means the remainder of (i) one minus
(ii) the Pro Rata Cash Allocation.
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(dq) "Prospectus" shall have the meaning set forth in Section 10.01(f).
(dr) "Real Property" shall have the meaning set forth in Section
3.12(a).
(ds) "Registrable Securities" means the Michaels Common Stock issued to
the Stockholders pursuant to this Agreement, the Michaels Common Stock
distributed to the Stockholders pursuant to the Escrow Agreement and any shares
of Michaels Common Stock issued by Michaels in respect thereof pursuant to any
stock dividend, stock split or other similar recapitalization on or with respect
to the shares of Michaels Common Stock issued pursuant to this Agreement or
distributed to the Stockholders pursuant to the Escrow Agreement or other
Registrable Securities.
(dt) "Registration Statement" shall have the meaning set forth in
Section 10.01.
(du) "Reports" means Michaels' Annual Report on Form 10-K for the fiscal
year ended January 30, 1994 and all other documents filed subsequent to January
30, 1994 under the Exchange Act, each in the form (excluding exhibits) filed
with the SEC.
(dv) "Returns" shall have the meaning set forth in Section 3.17.
(dw) "Sale Period" shall have the meaning set forth in Section 10.02.
(dx) "Schedule [ # ]" - references to a Schedule herein shall mean a
reference to the applicable section of the Disclosure Schedule of Leewards.
(dy) "SEC" means the Securities and Exchange Commission.
(dz) "Securities Act" shall mean the Securities Act of 1933, as amended.
(ea) "Senior Debt" means the indebtedness of Leewards under the Credit
Agreement.
(eb) "Senior Subordinated Notes" means those certain 13.5% Senior
Subordinated Notes due 2000 in the original principal amount of $14,884,000, as
amended, and the notes issued in lieu of the cash payment of interest due
thereunder.
(ec) "Stockholder" means each holder of Leewards Shares and
"Stockholders" means all holders of Leewards Shares.
(ed) "Surviving Corporation" shall have the meaning set forth in
Section 2.01.
(ee) "Transaction Expenses" means the legal and accounting expenses in
excess of $500,000 incurred by Leewards in connection with the negotiation and
execution of this Agreement and the closing of the Merger. Transaction
Expenses shall not include legal and
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accounting expenses (i) of individuals employed by Leewards (including the
officers of Leewards) or (ii) incurred by Leewards in connection with
assisting Michaels or Newco with any equity or debt financing undertaken
by Michaels or Newco or in connection with any matter other than those
matters specified in the previous sentence.
(ef) "Unaudited Financial Statements" shall have the meaning set forth
in Section 3.07.
(eg) "Warrant" means that certain Warrant To Purchase Class B Common
Stock of Leewards issued to Citicorp North America, Inc., as amended and
modified.
(eh) "Warrant Exercise Price" means the consideration which would be
payable upon exercise of the Warrant.
(ei) "Warrant Put Option" means the option of the holder of the Warrant
to require Leewards to purchase the Warrant from such holder pursuant to the
terms of the Warrant or any other arrangement pursuant to which the Warrant is
to be repurchased or terminated (other than this Agreement).
ARTICLE II.
THE MERGER
SECTION 2.01. THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time, Newco shall be merged with and into Leewards
in accordance with this Agreement and the separate corporate existence of Newco
shall thereupon cease (the "Merger") and the Merger is intended to be a reverse
triangular merger and "tax-free reorganization" pursuant to Section 368(a) of
the Code. Leewards shall be the surviving corporation in the Merger (in such
capacity, hereinafter referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the state of its incorporation, and the
separate corporate existence of Leewards with all its rights,privileges,
powers, immunities, purposes and franchises shall continue unaffected by the
Merger, except as set forth herein. The Merger shall have the effects
specified in the DGCL.
SECTION 2.02. THE CLOSING. The Closing shall take place (a) on the
earlier of (i) July 31, 1994, or (ii) ten days (or the next succeeding business
day if such tenth day is not a business day) after the closing of the
underwritten offering of Michaels Common Stock contemplated in Section 2.08(b);
provided, in each case that the conditions set forth in Articles VII and VIII
hereof shall be fulfilled or waived in accordance with this Agreement; provided,
further, that if the conditions set forth in Sections 7.06 and 8.06 have not
been fulfilled on or before the date otherwise determined pursuant to this
clause (a), the Closing shall take place two business days after such conditions
are fulfilled or (b) at such other time and/or on such other date as Leewards
and Michaels may agree in writing, subject, in all cases, to Article XII. The
date on which the Closing occurs is hereinafter referred to as the "Closing
Date."
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SECTION 2.03. EFFECTIVE TIME. If all the conditions to the Merger set
forth in Articles VII and VIII shall have been fulfilled or waived in accordance
herewith and this Agreement shall not have been terminated in accordance with
Article XII, the parties hereto shall cause to be properly executed and filed on
the Closing Date a Certificate of Merger meeting the requirements of Section 251
of the DGCL. The Merger shall become effective at the time of the filing of
such document with the Secretary of State of the State of Delaware in accordance
with such laws or at such later time which the parties hereto have theretofore
agreed upon and designated in such filing as the effective time of the Merger
(the "Effective Time").
SECTION 2.04. CERTIFICATE OF INCORPORATION OF SURVIVING CORPORATION.
Effective at the Effective Time, the Certificate of Incorporation of Leewards
shall be the Certificate of Incorporation of the Surviving Corporation, as
amended as reflected on EXHIBIT 2.04.
SECTION 2.05. BYLAWS OF SURVIVING CORPORATION. The Bylaws of Newco in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Corporation, until duly amended in accordance with their terms.
SECTION 2.06. DIRECTORS OF THE SURVIVING CORPORATION. The directors of
Newco immediately prior to the Effective Time shall, from and after the
Effective Time, be and become directors of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws.
SECTION 2.07. OFFICERS OF THE SURVIVING CORPORATION. The officers of
Newco immediately prior to the Effective Time shall, from and after the
Effective Time, be and become the officers of the Surviving Corporation until
their earlier death, resignation or removal.
SECTION 2.08. AGGREGATE MERGER CONSIDERATION.
(a) The total number of shares of Michaels Common Stock to be issued in
connection with the Merger as set forth in Section 2.09 below (including the
shares to be deposited in escrow pursuant to Section 2.14) shall not exceed
1,550,000 shares of Michaels Common Stock. The total number of shares of
Michaels Common Stock to be issued shall equal 1,550,000 shares less a number of
shares of Michaels Common Stock equal to (x) the sum of (i) the Montgomery Fee
plus (ii) the Citicorp Repurchase Price (if the Warrant Put Option is exercised)
plus (iii) one-half of the MONY Prepayment Fee plus (iv) all cash paid to
holders of the Options or the Warrant (if the Warrant Put Option is not
exercised) pursuant to Section 2.09(a) plus (v) the Transaction Expenses, such
sum divided by (y) the Five Day Average.
(b) If Michaels consummates an underwritten offering of Michaels Common
Stock on or before the Closing Date resulting in either (i) Net Proceeds Per
Share of at least $42.00, the total number of shares of Michaels Common Stock to
be issued in connection with the Merger as calculated pursuant to Section
2.08(a) shall be reduced by an amount equal to 25%
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of the total number of shares sold in such offering (excluding the
underwriters' over-allotment option) (not to exceed 750,000 shares) and,
in lieu thereof, cash equal to the Cash Proceeds shall be distributed in
connection with the Merger or (ii) Net Proceeds Per Share of at least
$39.00, the total number of shares of Michaels Common Stock to be issued in
connection with the Merger as calculated pursuant to Section 2.08(a) shall
be reduced by an amount equal to 25% of the total number of shares sold
in such offering (excluding the underwriters' over-allotment option) (not
to exceed 500,000 shares) and, in lieu thereof, cash equal to Cash Proceeds
shall be distributed in connection with the Merger. The determination of
whether (i) or (ii) above applies to the underwritten offering shall be
determined by notice from Leewards to Michaels on or before June 5, 1994. If
Leewards fails to provide notice on or before June 5, 1994, it shall be deemed
to elect (ii) above.
SECTION 2.09. CONVERSION OF LEEWARDS SHARES. The manner of converting
shares of Leewards and Newco in the Merger shall be as follows:
(a) Subject to Section 2.14, at the Effective Time, each Leewards Share
issued and outstanding as of the Effective Time (other than any Leewards Shares
owned by Michaels, Newco or any other subsidiary of Michaels (the "Michaels
Group")), and Leewards Shares which are held by stockholders ("Dissenting
Shareholders") exercising appraisal rights pursuant to Section 262 of the DGCL,
and Leewards Capital Stock held in Leewards' treasury), shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive shares of validly issued, fully paid and
nonassessable shares of Michaels Common Stock and the cash, if any, to
be included in the aggregate merger consideration pursuant to Section 2.08(b)
(the "Merger Consideration") in the following manner:
(i) If the Cash Offering does not occur:
(A) The holders of shares of Class C Preferred Stock shall have
the right to elect to receive for such shares of Class C Preferred
Stock either (x) the number of shares of Michaels Common Stock
determined pursuant to Section 2.09(a)(iii)(G) (the election pursuant
to this clause (x) is referred to herein as the "Class C Redemption
Election") or (y) the number of shares of Michaels Common Stock
determined pursuant to Section 2.09(a)(iii)(F) hereof (the election
pursuant to this clause (y) is referred to herein as the "Class C
Conversion Election"). Each holder of shares of Class C Preferred
Stock shall elect the Class C Redemption Election or the Class C
Conversion Election by written notice to Leewards delivered on or
before the Closing.
(B) The holders of shares of Class D Preferred Stock shall have
the right to elect to receive for such shares of Class D Preferred
Stock either (x) the number of shares of Michaels Common Stock
determined pursuant to Section 2.09(a)(iii)(I) (the election pursuant
to this clause (x) is referred to herein as the "Class D Redemption
Election") or (y) the number of shares of Michaels
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Common Stock determined pursuant to Section 2.09(a)(iii)(H) hereof
(the election pursuant to this clause (y) is referred to herein as
the "Class D Conversion Election"). Each holder of shares of Class
D Preferred Stock shall elect the Class D Redemption Election or the
Class D Conversion Election by written notice to Leewards delivered
on or before the Closing.
(C) The holders of shares of Class E Preferred Stock shall have
the right to elect to receive for such shares of Class E Preferred
Stock either (x) the number of shares of Michaels Common Stock
determined pursuant to Section 2.09(a)(iii)(K) (the election pursuant
to this clause (x) is referred to herein as the "Class E Redemption
Election") or (y) the number of shares of Michaels Common Stock
determined pursuant to Section 2.09(a)(iii)(J) hereof (the election
referred to in this clause (y) is referred to herein as the "Class E
Conversion Election"). Each holder of shares of Class E Preferred
Stock shall election the Class E Redemption Election or the Class E
Conversion Election by written notice delivered to Leewards on or
before the Closing.
(ii) If the Cash Offering occurs:
(A) The holders of shares of Class C Preferred Stock shall have
the right to elect to receive for such shares of Class C Preferred
Stock either (x) the consideration determined pursuant to Section
2.09(a)(iv)(G) (the election pursuant to this clause (x) is referred
to herein as the "Class C Redemption Election") or (y) the
consideration determined pursuant to Section 2.09(a)(iv)(F) hereof
(the election pursuant to this clause (y) is referred to herein as the
"Class C Conversion Election"). Each holder of shares of Class C
Preferred Stock shall elect the Class C Redemption Election or the
Class C Conversion Election by written notice to Leewards delivered on
or before the Closing.
(B) The holders of shares of Class D Preferred Stock shall have
the right to elect to receive for such shares of Class D Preferred
Stock either (x) the consideration determined pursuant to Section
2.09(a)(iv)(I) (the election pursuant to this clause (x) is referred
to herein as the "Class D Redemption Election") or (y) the
consideration determined pursuant to Section 2.09(a)(iv)(H) hereof
(the election pursuant to this clause (y) is referred to herein as the
"Class D Conversion Election"). Each holder of shares of Class D
Preferred Stock shall elect the Class D Redemption Election or the
Class D Conversion Election by written notice to Leewards delivered on
or before the Closing.
(C) The holders of shares of Class E Preferred Stock shall have
the right to elect to receive for such shares of Class E Preferred
Stock either (x) the consideration determined pursuant to Section
2.09(a)(iv)(K) (the election pursuant to this clause (x) is referred
to herein as the "Class E Redemption
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Election") or (y) the consideration determined pursuant to Section
2.09(a)(iv)(J) hereof (the election pursuant to this clause (y) is
referred to herein as the "Class E Conversion Election"). Each
holder of shares of Class E Preferred Stock shall elect the Class E
Redemption Election or the Class E Conversion Election by written
notice delivered to Leewards on or before the Closing.
(iii) If the Cash Offering does not occur:
(A) Each share of Leewards Common Stock and Class C Common Stock
shall be converted into that number of shares of Michaels Common Stock
equal to the quotient obtained by dividing (x) the Closing Date Value
Per Eligible Common Equivalent by (y) the Five Day Average.
(B) Each share of Class B Common Stock shall be converted into
that number of shares of Michaels Common Stock equal to the quotient
obtained by dividing (x) the product of the Closing Date Value Per
Eligible Common Equivalent multiplied by the Class B Conversion Ratio
by (y) the Five Day Average.
(C) Each share of Class A Preferred Stock shall be converted
into that number of shares of Michaels Common Stock equal to the
quotient obtained by dividing (x) the Class A Preferred Redemption
Value Per Share by (y) the Five Day Average.
(D) Each share of Class B Preferred Stock shall be converted
into that number of shares of Michaels Common Stock equal to the
quotient obtained by dividing (x) the Class B Preferred Redemption
Value Per Share by (y) the Five Day Average.
(E) Each share of Exchangeable Preferred Stock shall be
converted into that number of shares of Michaels Common Stock equal to
the quotient obtained by dividing (x) the Exchangeable Preferred
Redemption Value Per Share by (y) the Five Day Average.
(F) Each share of Class C Preferred Stock for which a Class C
Conversion Election is made shall be converted into that number of
shares of Michaels Common Stock equal to the quotient obtained by
dividing (x) the Closing Date Value Per Eligible Common Equivalent by
(y) the Five Day Average.
(G) Each share of Class C Preferred Stock for which a Class C
Redemption Election is made shall be converted into that number of
shares of
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Michaels Common Stock equal to the quotient obtained by dividing (x)
the Class C Preferred Redemption Value Per Share by (y) the Five Day
Average.
(H) Each share of Class D Preferred Stock for which a Class D
Conversion Election is made shall be converted into that number of
shares of Michaels Common Stock equal to the quotient obtained by
dividing (x) the Closing Date Value Per Eligible Common Equivalent by
(y) the Five Day Average.
(I) Each share of Class D Preferred Stock for which a Class D
Redemption Election is made shall be converted into that number of
shares of Michaels Common Stock equal to the quotient obtained by
dividing (x) the Class D Preferred Redemption Value Per Share by (y)
the Five Day Average.
(J) Each share of Class E Preferred Stock for which a Class E
Conversion Election is made shall be converted into that number of
shares of Michaels Common Stock equal to the quotient obtained by
dividing (x) the Closing Date Value Per Eligible Common Equivalent by
(y) the Five Day Average.
(K) Each share of Class E Preferred Stock for which a Class E
Redemption Election is made shall be converted into that number of
shares of Michaels Common Stock equal to the quotient obtained by
dividing (x) the Class E Preferred Redemption Value Per Share by (y)
the Five Day Average.
(iv) If the Cash Offering occurs:
(A) Each share of Leewards Common Stock and Class C Common Stock
shall be converted into the right to receive: (x) that number of
shares of Michaels Common Stock equal to the quotient obtained by
dividing (I) the Closing Date Stock Value Per Eligible Common
Equivalent by (II) the Five Day Average and (y) cash in an amount
equal to the Closing Date Cash Value Per Eligible Common Equivalent.
(B) Each share of Class B Common Stock shall be converted into
the right to receive: (x) that number of shares of Michaels Common
Stock equal to the quotient obtained by dividing (I) the product of
the Closing Date Value Per Eligible Common Equivalent multiplied by
the Class B Conversion Ratio by (II) the Five Day Average and (y) cash
in an amount equal to the product of (I) the Closing Date Cash Value
Per Eligible Common Equivalent multiplied by (II) the Class B
Conversion Ratio.
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(C) Each share of Class A Preferred Stock shall be converted
into the right to receive: (x) that number of shares of Michaels
Common Stock equal to the quotient obtained by dividing (I) the Class
A Preferred Stock Redemption Value Per Share by (II) the Five Day
Average and (y) cash in an amount equal to the Class A Preferred Cash
Redemption Value Per Share.
(D) Each share of Class B Preferred Stock shall be converted
into the right to receive: (x) that number of shares of Michaels
Common Stock equal to the quotient obtained by dividing (I) the Class
B Preferred Stock Redemption Value Per Share by (II) the Five Day
Average and (y) cash in an amount equal to the Class B Preferred Cash
Redemption Value Per Share.
(E) Each share of Exchangeable Preferred Stock shall be
converted into the right to receive: (x) that number of shares of
Michaels Common Stock equal to the quotient obtained by dividing (I)
the Exchangeable Preferred Stock Redemption Value Per Share by (II)
the Five Day Average and (y) cash in an amount equal to the
Exchangeable Preferred Cash Redemption Value Per Share.
(F) Each share of Class C Preferred Stock for which a Class C
Conversion Election is made shall be converted into the right to
receive: (x) that number of shares of Michaels Common Stock equal to
the quotient obtained by dividing (I) the Closing Date Value Per
Eligible Common Equivalent by (II) the Five Day Average and (y) cash
in an amount equal to the Closing Date Cash Value Per Common
Equivalent.
(G) Each share of Class C Preferred Stock for which a Class C
Redemption Election is made shall be converted into the right to
receive: (x) that number of shares of Michaels Common Stock equal to
the quotient obtained by dividing (I) the Class C Preferred Stock
Redemption Value Per Share by (II) the Five Day Average and (y) cash
in an amount equal to the Class C Preferred Cash Redemption Value Per
Share.
(H) Each share of Class D Preferred Stock for which a Class D
Conversion Election is made shall be converted into the right to
receive: (x) that number of shares of Michaels Common Stock equal to
the quotient obtained by dividing (I) the Closing Date Value Per
Eligible Common Equivalent by (II) the Five Day Average and (y) cash
in an amount equal to the Closing Date Cash Value Per Common
Equivalent.
(I) Each share of Class D Preferred Stock for which a Class D
Redemption Election is made shall be converted into the right to
receive: (x) that number of shares of Michaels Common Stock equal to
the quotient obtained
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by dividing (I) the Class D Preferred Stock Redemption Value Per
Share by (II) the Five Day Average and (y) cash in an amount equal
to the Class D Preferred Cash Redemption Value Per Share.
(J) Each share of Class E Preferred Stock for which a Class E
Conversion Election is made shall be converted into the right to
receive: (x) that number of shares of Michaels Common Stock equal to
the quotient obtained by dividing (I) the Closing Date Value Per
Eligible Common Equivalent by (II) the Five Day Average and (y) cash
in an amount equal to the Closing Date Cash Value Per Eligible Common
Equivalent.
(K) Each share of Class E Preferred Stock for which a Class E
Redemption Election is made shall be converted into the right to
receive: (x) that number of shares of Michaels Common Stock equal to
the quotient obtained by dividing (I) the Class E Preferred Stock
Redemption Value Per Share by (II) the Five Day Average and (y) cash
in an amount equal to the Class E Preferred Cash Redemption Value Per
Share.
(v) Each Non-Management Option for a share of Leewards Common Stock
which is not exercised prior to the Closing, whether or not such Non-
Management Option was exercisable at or prior to the Closing, shall be
converted into the right to receive from Michaels an amount in cash equal
to the remainder of (A) the Adjusted Value Per Common Equivalent minus (B)
the Option Exercise Price for such Option.
(vi) Each Management Option for a share of Leewards Common Stock which
is not exercised prior to the Closing shall be converted into the right to
receive from Michaels an amount in cash equal to the remainder of (A) the
Closing Date Value Per Eligible Common Equivalent minus (B) the Option
Exercise Price for such Option.
(vii) If the Warrant Put Option is not exercised prior to the
Closing, the Warrant shall be converted into the right to receive from
Michaels an amount in cash equal to the product of (A) the remainder of (1)
the Adjusted Value Per Common Equivalent multiplied by the Class B
Conversion Ratio minus (2) the Warrant Exercise Price, multiplied by (B)
the number of shares of Class B Common Stock then issuable upon exercise of
the Warrant in its entirety.
(viii) Options which are neither Management Options nor Non-
Management Options as of the Closing shall be cancelled.
(b) At the Effective Time, as a result of the Merger and without any
action on the part of the holder thereof, all Leewards Shares issued and
outstanding at the Effective Time shall cease to be outstanding and shall be
cancelled and retired and shall cease to exist, and each holder of a certificate
(a "Certificate") representing any such Leewards Shares shall thereafter
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cease to have any rights with respect to such Leewards Shares, except the
right to receive, without interest, the Merger Consideration and cash for
fractional interests of the Michaels Common Stock in accordance with Section
2.09(a) upon the surrender of such Certificate, or the right of Dissenting
Shareholders to receive "fair value" pursuant to Section 2.09(d).
(c) Each Leewards Share issued and outstanding at the Effective Time and
owned by any of the Michaels Group, and each Leewards Share held in Leewards'
treasury at the Effective Time, by virtue of the Merger and without any action
on the part of the holder
thereof, shall cease to be outstanding and shall be cancelled and retired
without payment of any consideration therefor and shall cease to exist.
(d) Each Leewards Share issued and outstanding at the Effective Time and
held by Dissenting Shareholders, by virtue of the Merger and without action on
the part of the holder thereof, shall cease to be outstanding and shall be
cancelled and retired and shall cease to exist, and each Dissenting Shareholder
shall thereafter cease to have any rights with respect to such Leewards Shares,
except the right, if any, to receive payment from the Surviving Corporation of
the "fair value" of such Leewards Shares as determined in accordance with the
DGCL.
(e) At the Effective Time, each share of Common Stock, par value $0.01 per
share, of Newco issued and outstanding as of the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into one share of validly issued, fully paid and nonassessable share
of Leewards Common Stock.
SECTION 2.10. EXCHANGE OF CERTIFICATES REPRESENTING LEEWARDS SHARES.
(a) As of the Effective Time, Michaels shall deposit, or shall cause to be
deposited, at the expense of Michaels and with an exchange agent selected by
Michaels, which shall be the transfer agent for Michaels Common Stock (the
"Exchange Agent"), for the benefit of the holders of Leewards Shares and for
exchange in accordance with this Article II, certificates representing the
aggregate number of shares of Michaels Common Stock computed in accordance with
Section 2.08(a) and cash, if required pursuant to Section 2.08(b), in order to
permit the Exchange Agent to make deliveries pursuant to Section 2.09 hereof
(such certificates for shares of Michaels Common Stock, together with the amount
of any dividends or distributions with respect thereto, and the cash, if any,
being hereinafter referred to as the "Exchange Fund") in exchange for
outstanding Leewards Shares.
(b) Promptly after the Effective Time, Michaels shall cause the Exchange
Agent to mail to each person who was, at the Effective Time, a holder of record
(other than any of the Michaels Group or any Dissenting Shareholder) of a
Certificate or Certificates (i) a letter of transmittal which shall specify that
delivery shall be effected, and the risk of loss and title to the Certificates
shall pass, upon (and only upon) delivery of the Certificates to the Exchange
Agent, and which shall be in such form and have such other provisions as
Michaels may reasonably specify, and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for
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certificates representing Michaels Common Stock and cash, if any. Upon
surrender to the Exchange Agent of a Certificate for cancellation together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto to the Exchange Agent's reasonable satisfaction,
the holder of such Certificate shall receive in exchange therefor a certificate
representing that number of shares of Michaels Common Stock and unpaid
dividends and distributions, if any, and cash, if any, which such holder has
the right to receive in respect of the Certificate surrendered pursuant to
the provisions of this Article II, after giving effect to any required tax
withholdings, and the Certificate so surrendered shall forthwith be cancelled.
No interest will be paid or accrued on the amount payable upon surrender of
Certificates. In the event of a transfer of ownership of Leewards Shares that
is not registered in the transfer records of Leewards, a certificate
representing the proper number of shares of Michaels Common Stock may be issued
and cash, if any, distributed to such a transferee if the Certificate
representing such Leewards Shares is presented to the Exchange Agent,
accompanied by all documents reasonably required by Michaels or the Transfer
Agent to evidence and effect such transfer of Leewards Shares and to evidence
that any applicable stock transfer taxes have been paid.
(c) Notwithstanding any other provisions of this Agreement, no dividends
or other distributions on Michaels Common Stock, if any is declared, shall be
paid with respect to any Leewards Shares or other securities represented by a
Certificate until such Certificate is surrendered for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of certificates representing
shares of Michaels Common Stock issued in exchange therefor, without interest,
(i) at the time of such surrender, the amount of dividends or other
distributions, if any, with a record date after the Effective Time theretofore
payable with respect to such shares of Michaels Common Stock and not paid, less
the amount of any withholding taxes that may be required thereon, (ii) at the
appropriate payment date, the amount of dividends or other distributions, if
any, with a record date after the Effective Time but prior to surrender thereof
and a payment date subsequent to surrender thereof payable with respect to such
shares of Michaels Common Stock, less the amount of any withholding taxes which
may be required thereon, and (iii) the cash portion of the Merger Consideration,
if any.
(d) At or after the Effective Time, there shall be no transfers on the
stock transfer books of Leewards of Leewards Shares that were issued and
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for certificates for shares of Michaels Common Stock in
accordance with the procedures set forth in this Article II.
(e) Notwithstanding Section 2.09 or any other provision of this Section
2.10, no fractional shares of Michaels Common Stock will be issued and any
holder of Leewards Shares entitled hereunder to receive a fractional share of
Michaels Common Stock but for this Section 2.10(e) will be entitled hereunder to
receive a cash payment in lieu thereof reflecting such
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holder's proportionate interest in a share of Michaels Common Stock multiplied
by the Five Day Average.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Michaels Common Stock) that is unclaimed
by the former stockholders of Leewards during the one year period after the
Effective Time shall be delivered to the Surviving Corporation. Any former
stockholders of Leewards who have not
theretofore complied with this Article II shall thereafter look to the Surviving
Corporation only as general creditors for payment of their shares of Michaels
Common Stock, and cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of Michaels Common Stock, if any, deliverable in respect
of each Leewards Share such stockholder holds as determined pursuant to this
Agreement, in each case without any interest thereon.
(g) None of Leewards, Michaels, the Surviving Corporation, Newco, the
Exchange Agent or any other person shall be liable to any former holder of
Leewards Shares for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Michaels
with respect to any person or entity that is not an institutional investor, the
posting by such person of a bond in such reasonable amount as Michaels may
direct as indemnity against any claim that may be made against it with respect
to such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate shares of Michaels Common Stock and cash in lieu
of fractional shares, and unpaid dividends and distributions on shares of
Michaels Common Stock, if any, as provided in Section 2.10(c), deliverable in
respect thereof pursuant to this Agreement.
SECTION 2.11. ADJUSTMENT OF NUMBER OF SHARES. In the event that between
the date of this Agreement and the Effective Time, Michaels or Leewards changes
the number of shares of Michaels Common Stock or Leewards Capital Stock,
respectively, issued and outstanding as a result of a stock split, reverse stock
split, stock dividend, recapitalization or other similar transaction, the
computations involving Michaels Common Stock shall be appropriately adjusted.
SECTION 2.12. DISSENTERS' RIGHTS. Any Dissenting Shareholder who shall
be entitled to "fair value" of his Leewards Shares as provided in Section 262 of
the DGCL shall not be entitled to the Merger Consideration, unless and until the
holder thereof shall have failed to perfect or shall have effectively withdrawn
or lost his dissenter's rights with respect to the Merger under the DGCL and
shall be entitled to receive from Michaels only the payment to the extent
provided for in connection with Section 262 of the DGCL with respect to such
Leewards Shares. If any Dissenting Shareholder shall fail to perfect or shall
have effectively withdrawn his dissenter's rights, the Leewards Shares held by
such Dissenting Shareholder shall thereupon by treated as though such Leewards
Shares had been converted into the Merger Consideration
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pursuant to Section 2.09 and such Dissenting Shareholder shall thereupon have
the exchange rights provided under Section 2.10.
SECTION 2.13. SUBSEQUENT ACTIONS. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or
confirm of record or otherwise in the Surviving Corporation its right, title or
interest in, to or under any of the rights, properties or assets of either of
Leewards or Newco acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger, or otherwise to carry out this
Agreement, and to effect the cancellation of all outstanding Leewards Shares in
return for the consideration set forth in this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of Leewards, each Stockholder and Newco or
otherwise, to carry out all such deeds, bills of sale, assignments and
assurances, and to take and do, in the name and on behalf of Leewards and Newco
or otherwise, all such other actions and things as may be necessary or desirable
to vest, perfect or confirm any and all right, title and interest in, to and
under such rights, properties or assets in the Surviving Corporation or
otherwise to carry out this Agreement.
SECTION 2.14. ESCROW. In addition to the shares issuable, and cash
payable at the Closing pursuant to Section 2.09, if any, at the Effective Time,
Michaels shall deposit in escrow a number of shares of Michaels Common Stock
equal to the Escrow Deposit Amount divided by the Five Day Average (the
"Escrowed Shares"), pursuant to the terms of an Escrow Agreement (the "Escrow
Agreement") in the form attached hereto as EXHIBIT 2.14, to be entered into
among certain Stockholders, Michaels and Society National Bank, as escrow agent
(the "Escrow Agent"). The Escrowed Shares shall be issued in the name of the
Escrow Agent, as escrow agent. The Escrowed Shares shall be released from
escrow, after provision for any Damages for which Michaels may be entitled to be
indemnified pursuant to Article XI, in accordance with the terms of the Escrow
Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF LEEWARDS
Leewards represents and warrants that the following are true and correct as
of the date hereof:
SECTION 3.01. ORGANIZATION AND GOOD STANDING; QUALIFICATION. Leewards is
a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own the
properties it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. Leewards is duly qualified to do business
and is in good standing in all jurisdictions where the nature of its business
makes such
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qualification necessary, which jurisdictions are listed in SCHEDULE 3.01,
except where the failure to be qualified or licensed would not have a Material
Adverse Effect. Except as set forth on SCHEDULE 3.01, Leewards does not own,
directly or indirectly, any of the capital stock of any other corporation or
any equity, profit sharing, or participation interest in any corporation,
partnership, joint venture or other entity.
SECTION 3.02. CAPITALIZATION. The authorized capital stock of Leewards as
of the date of this Agreement consists of (a) 4,000,000 shares of Leewards
Common Stock, of which 78,281 shares are issued and outstanding, (b) 300,000
shares of Class B Common Stock, of which 73,275 shares are issued and
outstanding, (c) 600,000 shares of Class C Common Stock, of which no shares are
issued or outstanding and (d) 3,300,000 shares Preferred Stock, of which (i)
800,000 shares are designated Exchangeable Preferred Stock, of which 470,053.45
shares are issued and outstanding, (ii) 4,000 shares are designated Class A
Preferred Stock, of which 2,348.8 shares are issued and outstanding, (iii) 4,700
shares are designated Class B Preferred Stock, of which 2,765.8 shares are
issued and outstanding, (iv) 562,500 shares are designated Class C Preferred
Stock, of which 549,629 shares are issued and outstanding, (v) 194,035 shares
are designated Class D Preferred Stock, all of which shares are issued and
outstanding, and (vi) 129,712 shares are designated Class E Preferred Stock, all
of which shares are issued and outstanding. The Stockholders own of record all
of the issued and outstanding Leewards Capital Stock, free and clear of all
security interests, liens, adverse claims, encumbrances, voting trusts, voting
agreements, proxies and shareholders' agreements, in the respective amounts set
forth in SCHEDULE 3.02, except to the extent disclosed on SCHEDULE 3.02. All
shares of Leewards Capital Stock are legally and validly issued, fully paid and
nonassessable. Other than Leewards Capital Stock reserved for issuance upon
conversion or exercise of the Class B Common Stock, the Class C Common Stock,
the Class C Preferred Stock, the Class D Preferred Stock, the Class E Preferred
Stock, the Warrant and the Options and except as set forth in Schedule 3.02,
there exist no options, warrants, subscriptions or other rights to purchase, or
securities convertible into or exchangeable for, any of the authorized or
outstanding securities of Leewards. SCHEDULE 3.02 sets forth a list of the
holders of the Options and the Warrant and a description of their exercise
prices, and expiration dates. No shares of capital stock are owned by Leewards
in treasury. No shares of capital stock of Leewards have been issued or
transferred of record in violation of the preemptive rights, rights of first
refusal or similar rights of any Stockholders in any agreement to which Leewards
is a party. Leewards has no bonds, debentures, notes or other obligations the
holders of which have the right to vote (or are convertible into or exercisable
for securities having the right to vote) with the Stockholders on any matter.
SECTION 3.03. CORPORATE RECORDS. The copies of the Certificate of
Incorporation and Bylaws, and all amendments thereto, of Leewards that have been
delivered or made available to Michaels or its representatives or agents are
true, correct and complete copies thereof, as in effect on the date hereof. The
minute books of Leewards, copies of which have been delivered or made available
to Michaels or its representatives or agents, contain minutes of the meetings
of, and accurate consents to actions taken without meetings by, the Board of
Directors (and any committees thereof) and the stockholders of Leewards since
its formation, which adequately
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reflect material corporate transactions except where the failure to so reflect
such transactions would not have a Material Adverse Effect.
SECTION 3.04. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by Leewards of this Agreement and the consummation of the
transactions contemplated hereby have been, and the execution, delivery and
performance by Leewards of the other agreements contemplated hereby to which
Leewards is a party and the consummation of the transactions contemplated
thereby, have been or will be as of the Closing Date, duly authorized by the
Board of Directors of Leewards. This Agreement has been, and each other
agreement contemplated hereby has been or will be as of the Closing Date, duly
executed and delivered by Leewards, and this Agreement constitutes, and such
other agreements constitute or will constitute, legal, valid and binding
obligations of Leewards enforceable against Leewards in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency
or similar laws affecting creditors' rights generally or the availability of
equitable remedies.
SECTION 3.05. NO VIOLATION. Except as set forth in SCHEDULE 3.05, neither
the execution, delivery or performance of this Agreement or the other agreements
contemplated hereby nor the consummation of the transactions contemplated hereby
or thereby will conflict with, or result in a violation or breach of the terms,
conditions or provisions of, or constitute a default under, (i) the Certificate
of Incorporation or Bylaws of Leewards, (ii) any agreement, indenture or other
instrument under which Leewards is bound or to which any of the assets of
Leewards are subject, or result in the creation or imposition of any security
interest, lien, charge or encumbrance upon any of the assets of any of Leewards
or (iii) violate or conflict with any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or
body, which, in the case of clauses (ii) and (iii), would have a Material
Adverse Effect.
SECTION 3.06. CONSENTS. Except as may be required under the H-S-R Act or
as set forth in SCHEDULE 3.06, no consent, authorization, approval, permit or
license of, or filing with, any governmental or public body or authority, any
lender or lessor or any other person or entity is required to authorize, or is
required in connection with, the execution, delivery and performance of this
Agreement or the agreements contemplated hereby on the part of Leewards, except
where the failure to obtain such consent, authorization, approval, permit or
license, or to make such filing, would not have a Material Adverse Effect.
SECTION 3.07. FINANCIAL STATEMENTS. Leewards has furnished to Michaels
(i) a draft of the audited balance sheet of Leewards as at January 30, 1994, and
related statements of income and cash flows for the fiscal year then ended,
including the notes thereto (the "Audited Financial Statements"), (ii) the
unaudited balance sheet of the Company as at May 1, 1994 (the "Leewards Balance
Sheet Date"), and related unaudited statements of income and cash flows for the
three fiscal months then ended (the "Unaudited Financial Statements"; the
Audited Financial Statements and the Unaudited Financial Statements are
collectively referred to as the "Financial Statements") and (iii) a projected
balance sheet as of, and projection of cash flows through, July
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31, 1994. The Financial Statements are in accordance with the books and
records of Leewards, have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis and fairly
present the financial condition and the results of operations as of the dates
for the periods indicated, except that the Unaudited Financial Statements do
not contain footnotes and that the Unaudited Financial Statements characterize
the Senior Subordinated Notes as long-term debt.
SECTION 3.08. LIABILITIES AND OBLIGATIONS. Except as set forth in
SCHEDULE 3.08, the Financial Statements reflect all current liabilities of
Leewards, accrued, contingent or otherwise (known or unknown and asserted or
unasserted) that are required to be reflected in Financial Statements in
accordance with GAAP, and any material liability or obligation of Leewards that
will become due as a result of the consummation of the Merger that would be
required to be reflected in a balance sheet of Leewards as of the Closing Date
in accordance with GAAP immediately after the Merger (including, without
limitation, severance obligations, debt repayment obligations and similar
liabilities which will become due but excluding liabilities which will become
due under real property leases). Except as set forth in the Financial
Statements or SCHEDULE 3.08, Leewards is not liable upon or with respect to, or
obligated in any other way to provide funds in respect of or to guarantee or
assume in any manner, any debt, obligation or dividend of any other person,
corporation, association, partnership, joint venture, trust or other entity, and
Leewards does not know of any valid basis for the assertion against Leewards, of
any other claim or liability of any nature, which debt, obligation, dividend,
claim or liability would have a Material Adverse Effect.
SECTION 3.09. EMPLOYEE MATTERS.
(a) CASH COMPENSATION. Leewards has delivered or made available to
Michaels or its representatives (i) a list of the names, titles and cash
compensation, including without limitation, wages, salaries, bonuses
(discretionary and formula) and other cash compensation ("Cash Compensation") of
all employees of Leewards for the calendar year ended December 31, 1993 and (ii)
a list of (x) except for pay raises effected in the ordinary course of business
as of February 1, 1994 and May 1, 1994, all increases in Cash Compensation of
employees of Leewards during the current fiscal year and (y) any promised
increases in Cash Compensation of employees of Leewards that have not yet been
effected.
(b) COMPENSATION PLANS. SCHEDULE 3.09(b) contains a complete and accurate
list of all material compensation plans or arrangements (the "Compensation
Plans") sponsored by Leewards or to which Leewards contributes on behalf of its
employees, other than Employee Benefit Plans listed in SCHEDULE 3.10(a). The
Compensation Plans include without limitation plans, arrangements or practices
that provide for severance pay, deferred compensation, incentive, bonus or
performance awards, and stock ownership or stock options. Leewards has provided
or made available to Michaels or its representatives or agents a copy of each
written Compensation Plan.
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(c) EMPLOYMENT AGREEMENTS. Except as set forth in SCHEDULE 3.09(c) and in
the Option Agreements, Leewards is not a party to any employment agreement
("Employment Agreements") with respect to any of its employees except for oral
"at will" employment agreements. Employment Agreements include without
limitation employee leasing agreements, employee services agreements and
noncompetition agreements.
(d) EMPLOYEE POLICIES AND PROCEDURES. SCHEDULE 3.09(d) contains a
complete and accurate list of all material written employee manuals, policies,
procedures and work-related rules that currently apply to employees of Leewards
(the "Employee Policies and Procedures"). Leewards has provided or made
available to Michaels or its representatives or agents a copy of all written
Employee Policies and Procedures. To the knowledge of Leewards, there are no
unwritten Employee Policies and Procedures except as would not have a Material
Adverse Effect.
(e) UNWRITTEN AMENDMENTS. To the knowledge of Leewards, no unwritten
amendments have been made, whether by oral communication, pattern of conduct or
otherwise, with respect to any Compensation Plans or Employee Policies and
Procedures.
(f) UNIONS. Leewards has never been a party to any agreement with any
union, labor organization or collective bargaining unit. No employees of
Leewards are represented by any union, labor organization or collective
bargaining unit in connection with their employment with Leewards. To the best
knowledge of Leewards, none of the employees of Leewards has threatened to
organize or join a union, labor organization or collective bargaining unit.
SECTION 3.10. EMPLOYEE BENEFIT PLANS.
(a) IDENTIFICATION. SCHEDULE 3.10(a) contains a complete and accurate
list of all material employee benefit plans (the "Employee Benefit Plans")
(within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) sponsored by Leewards or to which Leewards
contributes on behalf of its employees and all Employee Benefit Plans previously
sponsored or contributed to on behalf of its employees within the three years
preceding the date hereof. Leewards has provided or made available to Michaels
or its representatives or agents copies of all plan documents, determination
letters, pending determination letter applications, trust instruments, insurance
contracts, administrative services contracts, annual reports, actuarial
valuations, summary plan descriptions and summaries of material modifications
that constitute a part of or are incident to the administration of the Employee
Benefit Plans. To the knowledge of Leewards, no unwritten amendment exists with
respect to any Employee Benefit Plan.
(b) EXAMINATIONS. No Employee Benefit Plan is currently the subject of an
audit or enforcement action or, to the knowledge of Leewards, any investigation
or other similar proceeding, conducted by any state or federal agency.
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(c) PROHIBITED TRANSACTIONS. To the knowledge of Leewards, no non-exempt
prohibited transactions (within the meaning of Section 4975 of the Code) have
occurred with respect to any Employee Benefit Plan which would have a Material
Adverse Effect.
(d) CLAIMS AND LITIGATION. No pending, or to the knowledge of Leewards
threatened, claims, suits or other proceedings exist with respect to any
Employee Benefit Plan other than normal benefit claims filed by participants or
beneficiaries which could have a Material Adverse Effect.
(e) QUALIFICATION. Leewards has received any required favorable
determination letter or ruling from the Internal Revenue Service for each of the
Employee Benefit Plans intended to be qualified within the meaning of Section
401(a) of the Code and/or tax-exempt within the meaning of Section 501(a) of the
Code. No proceedings are pending or to the knowledge of Leewards have been
threatened that could result in the revocation of any such favorable
determination letter or ruling.
(f) FUNDING STATUS. Leewards has provided or made available to Michaels
or its representatives or agents a complete and accurate copy of the most recent
audit with respect to any Employee Benefit Plan or any Employee Benefit Plan
sponsored by any member of a Controlled Group. With respect to each Employee
Benefit Plan subject to Title IV of ERISA, the assets of each such plan are at
least equal in value to the present value of accrued benefits determined on an
ongoing basis as of the date hereof and based on the actuarial methods and
assumptions set forth in the actuarial valuation for the plan year ending in
1993, except where the failure to have such value would not have a Material
Adverse Effect. With respect to each Employee Benefit Plan described in Section
501(c)(9) of the Code, the assets of each such plan are at least equal in value
to the present value of accrued benefits as of the date hereof and based on the
actuarial methods and assumptions set forth in the actuarial valuation for the
plan year ending in 1993, except where the failure to have such value would not
have a Material Adverse Effect.
(g) EXCISE TAXES. Neither Leewards nor any member of a Controlled Group
has any liability to pay excise taxes with respect to any Employee Benefit Plan
under applicable provisions of the Code or ERISA, except for such a liability as
would not have a Material Adverse Effect.
(h) MULTIEMPLOYER PLANS. Neither Leewards nor any member of a Controlled
Group is or within the past five years has been obligated to contribute to a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(i) PBGC. To the knowledge of Leewards, no facts or circumstances exist
that would result in the imposition of liability against Michaels by the Pension
Benefit Guaranty Corporation as a result of any act or omission by Leewards or
any member of a Controlled Group which liability would have a Material Adverse
Effect. To the knowledge of Leewards,
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no reportable event (within the meaning of Section 4043 of ERISA) for
which the notice requirement has not been waived has occurred with respect to
any Employee Benefit Plan subject to the requirements of Title IV of ERISA which
event would have a Material Adverse Effect.
(j) MEDICAL AND DENTAL CARE CLAIMS. Leewards has made available or
provided to Michaels or its representatives or agents a complete and accurate
list of all material claims made (without identifying specific individuals)
under any medical or dental care plan or commitment offered by Leewards to its
employees involving hospitalization, medical or dental care claims that have
exceeded $50,000 for an individual during Leewards' current fiscal year or the
fiscal year preceding the date hereof.
(k) RETIREES. Leewards has no obligation or commitment to provide
medical, dental or life insurance benefits to or on behalf of any of its
employees after they retire or any of its former employees who have retired
except as may be required pursuant to the continuation of coverage provisions of
Section 4980B of the Code and the applicable provisions of ERISA.
SECTION 3.11. ABSENCE OF CERTAIN CHANGES. Except as set forth in
SCHEDULE 3.11, since the Leewards Balance Sheet Date and through the date
hereof, Leewards has not
(a) suffered any Material Adverse Change, whether or not caused by any
deliberate act or omission of Leewards or any Stockholder;
(b) contracted for the purchase of any capital assets (excluding
inventory) having a cost in excess of $100,000 or paid any capital expenditures
in excess of $100,000;
(c) incurred any indebtedness for borrowed money, or issued or sold any
debt securities, except for borrowings under revolving credit loans in the
ordinary course of business which, in the aggregate, has not exceeded
$32,000,000;
(d) incurred or discharged any material liabilities or obligations except
in the ordinary course of business;
(e) prepaid any amount on any indebtedness for borrowed money prior to the
due date, forgiven or cancelled any material debts or claims or released or
waived any material rights or claims, except for payments required pursuant to
the terms of the Senior Subordinated Notes and under revolving credit loans in
the ordinary course of business;
(f) mortgaged, pledged or subjected to any security interest, lien, lease
or other encumbrance any of its properties or assets;
(g) suffered any damage or destruction to or loss of any assets (whether
or not covered by insurance) that has had or would have a Material Adverse
Effect;
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(h) acquired or disposed of any assets with a value in excess of $100,000
except in the ordinary course of business;
(i) written up or written down the carrying value of any of its assets
except in the ordinary course of business;
(j) changed the costing system or depreciation methods of accounting for
its assets;
(k) waived any material rights or forgiven any material claims;
(l) lost or terminated any employee, customer or supplier, the loss or
termination of which would have a Material Adverse Effect;
(m) increased the compensation of any director, officer, key employee or
consultant except for compensation increases in the ordinary course of business
consistent with past practice effected May 1, 1994;
(n) made any payments to or loaned any money to any person or entity
referred to in Section 3.28 other than compensation, travel advances and expense
reimbursements in the ordinary course of business;
(o) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of its capital stock or
securities or any rights to acquire such capital stock or securities, or agreed
to change the terms and conditions of any such capital stock, securities or
rights;
(p) entered into any other agreement or Commitment not made in the
ordinary course of business and that is material to the condition (financial or
otherwise), operations, assets or liabilities of Leewards, or modified or
amended in any material respect the terms of any such existing agreement or
Commitment, except in the ordinary course of business; or
(q) entered into, adopted or amended any Employee Benefit Plan.
SECTION 3.12. TITLE; LEASED ASSETS.
(a) REAL PROPERTY. A description of all fee simple interests in real
property owned by Leewards (collectively, the "Real Property") is set forth in
SCHEDULE 3.12(a). Except as set forth in SCHEDULE 3.12(a), Leewards has fee
simple title to all the Real Property. The Real Property and the leased real
property referred to in Section 3.13(a) constitute the only real property used
in the conduct of Leewards' business. Upon consummation of the transactions
contemplated hereby and assuming payment in full of the Senior Debt at the
Closing, such interest in the Real Property shall be, on the Closing Date, free
and clear of all material liens,
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claims and encumbrances except for encumbrances disclosed on title insurance
policies with respect to such Real Property.
(b) PERSONAL PROPERTY. Except as set forth in SCHEDULE 3.12(b), Leewards
has good title to all the personal property owned by Leewards (the "Personal
Property"). The Personal Property and the leased personal property referred to
in Section 3.13(a) constitute the only material personal property used in the
conduct of Leewards' business. Upon consummation of the transactions
contemplated hereby and assuming payment in full of the Senior Debt at the
Closing, such interest in the Personal Property shall be, on the Closing Date,
free and clear of all material security interests, liens, claims and
encumbrances.
(c) RIGHT TO USE ASSETS. Leewards owns, leases or otherwise possesses the
right to use all assets used in the conduct of its business, except where the
failure to have such right would not have a Material Adverse Effect.
SECTION 3.13. COMMITMENTS.
(a) COMMITMENTS; DEFAULTS. Except as set forth in SCHEDULE 3.13 or
otherwise disclosed pursuant to this Agreement, Leewards has not entered into,
nor are the assets of Leewards bound by, whether or not in writing, any of the
following (collectively "Commitments"):
(i) deed of trust, mortgage or other security agreement;
(ii) guaranty or suretyship, indemnification or contribution
agreement or performance bond;
(iii) debt instrument, loan agreement or other obligation
relating to indebtedness for borrowed money or money lent or to be
lent to another;
(iv) written agreement with dealers or sales or commission
agents, public relations or advertising agencies, accountants or
attorneys providing for total payments in excess of $100,000 outside
of the ordinary course of business;
(v) lease of real property, or personal property providing for
total payments in excess of $50,000 annually, whether as lessor,
lessee, sublessor or sublessee;
(vi) agreement relating to any material matter or transaction in
which an interest is held by a Stockholder or any Affiliate of
Leewards;
(vii) any agreement for the acquisition of services,
supplies, equipment, inventory, fixtures or other property providing
for total payments in excess of
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$100,000 in the aggregate, except for purchase orders for inventory and
supplies in ordinary course;
(viii) powers of attorney;
(ix) contracts containing noncompetition covenants by which
Leewards is bound;
(x) any other contract or arrangement that involves an
unperformed commitment in excess of $100,000 (excluding leases of real
or personal property);
(xi) agreement relating to any material matter or transaction in
which an interest is held by any person or entity referred to in
Section 3.28 other than arrangements for directors' fees, the
Employment Agreements and the Option Agreements;
(xii) agreement providing for the purchase from a supplier of all
or substantially all of the requirements of Leewards of a particular
product or service; or
(xiii) any other agreement or commitment not made in the
ordinary course of business and that is material to the condition
(financial or otherwise), operations, assets or liabilities of
Leewards.
True, correct and complete copies of the written Commitments, and true, correct
and complete written descriptions of the oral Commitments, have heretofore been
delivered or made available to Michaels or its representatives or agents.
Except as set forth in SCHEDULE 3.13 and except for defaults, events of default
or penalties which would not, individually or in the aggregate, have a Material
Adverse Effect, there are no existing defaults, events of default or events,
occurrences, acts or omissions that, with the giving of notice or lapse of time
or both, would constitute defaults by Leewards or to the knowledge of Leewards
any other party to a Commitment, and no material penalties have been incurred
nor are amendments pending, with respect to the Commitments. No defenses,
off-sets or counterclaims have been asserted or, to the best knowledge of
Leewards, may be made by any party thereto, nor has Leewards waived any rights
thereunder, except as described in SCHEDULE 3.13 and except for those which
would not have a Material Adverse Effect. Leewards has not received written
notice of any material default with respect to any Commitment which if asserted
and not waived would have a Material Adverse Effect.
(b) NO CANCELLATION OR TERMINATION OF COMMITMENT. Except as contemplated
hereby, as of the date hereof, (i) Leewards has not received written notice of
any plan or intention of any other party to any Commitment to exercise any right
to cancel or terminate any Commitment; and (ii) Leewards does not currently
contemplate, and has no reason to believe
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any other person or entity currently contemplates, any amendment or change to
any Commitment, in either of (i) or (ii), which cancellation, termination,
amendment or change would have a Material Adverse Effect.
SECTION 3.14. INSURANCE. Leewards has provided or made available to
Michaels or its representatives or agents a complete and accurate list of all
insurance policies of Leewards. All of such policies are valid and enforceable
policies and issued by insurers of recognized responsibility except where the
failure to be enforceable would not have a Material Adverse Effect.
SECTION 3.15. PATENTS, TRADEMARKS, SERVICE MARKS AND COPYRIGHTS.
(a) OWNERSHIP. Except as set forth in SCHEDULE 3.15, Leewards owns all
patents, trademarks, service marks and copyrights, if any, necessary to conduct
its business, without conflict with the rights of others. Set forth in SCHEDULE
3.15 is a true and correct list of the following ("Proprietary Rights"):
(i) all material trademarks, trade-names, service marks and
other trade designations, including common law rights, registrations
and applications therefor, and all patents, copyrights and
applications currently owned, in whole or in part, by Leewards, and
all licenses, royalties, assignments and other similar agreements
relating to the foregoing to which Leewards is a party (including
expiration date if applicable); and
(ii) all agreements relating to technology, know-how or processes
material to the operation of its business that Leewards is licensed or
authorized to use by others, or which it licenses or authorizes others
to use.
(b) CONFLICTING RIGHTS OF THIRD PARTIES. Except as set forth in SCHEDULE
3.15, Leewards has the sole and exclusive right to use the Proprietary Rights
(except with respect to commercially available licensed software) without
infringing or violating the rights of any third parties in any material respect.
To the knowledge of Leewards, no claim has been asserted by any person to the
ownership of or right to use any Proprietary Right, and neither Leewards nor any
Stockholder knows of any valid basis for any such claim, except as set forth in
SCHEDULE 3.15. Except as set forth in SCHEDULE 3.15, each of the Proprietary
Rights is valid, has not been cancelled, abandoned or otherwise terminated and,
if applicable, has been duly issued or filed.
(c) CLAIMS OF OTHER PERSONS. Leewards does not know of any claim that any
product, activity or operation of Leewards infringes upon or has resulted in the
infringement of, any proprietary right of any other person, corporation or other
entity; and no proceedings have been instituted, are pending or to the knowledge
of Leewards are threatened that challenge the rights of Leewards with respect
thereto which would have a Material Adverse Effect. Except
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as set forth on SCHEDULE 3.15(C), Leewards is not bound by any agreement of
indemnification for any Proprietary Right as to any property manufactured,
used or sold by Leewards.
SECTION 3.16. TRADE SECRETS AND CUSTOMER LISTS. Leewards has the right
to use, free and clear of any claims or rights of others except claims or rights
specifically set forth in SCHEDULE 3.16 or other claims which would not have a
Material Adverse Effect, all material trade secrets and customer lists required
for the marketing of all merchandise and services presently sold or marketed by
it. To the knowledge of Leewards, Leewards is not using or in any way making
use of any confidential information or trade secrets of any third party,
including without limitation any past or present employee of Leewards, except
with such third party's consent.
SECTION 3.17. TAXES.
(a) FILING OF TAX RETURNS. Except as set forth in SCHEDULE 3.17(A),
Leewards has duly filed with the appropriate governmental agencies all federal,
and all state, income, excise, corporate, franchise, property, sales, use,
payroll, withholding and other tax returns (including information returns) and
reports required to be filed by the United States or any state or any political
subdivision thereof or any foreign jurisdiction (the "Returns") when due except
where the failure to file state, local or foreign returns which would not have a
Material Adverse Effect. The Returns are complete and accurate in all material
respects and properly reflect in all material respects the taxes of Leewards for
the periods covered thereby.
(b) PAYMENT OF TAXES. Leewards has paid all taxes, penalties, additions
to tax assessments and interest that were shown to be due on such Returns and
has properly accrued on its books and records for all of the same that have not
yet become due in accordance with GAAP. Leewards is not delinquent in the
payment of any tax, penalty, addition to tax assessment or governmental charge
which would have a Material Adverse Effect.
(c) NO PENDING DEFICIENCIES, DELINQUENCIES, ASSESSMENTS OR AUDITS. No tax
deficiency or delinquency has been asserted against Leewards which would have
a Material Adverse Effect. There is no unpaid assessment, proposal for
additional taxes, penalties, addition to tax, deficiency or delinquency in the
payment of any of the taxes of Leewards that has been asserted by any taxing
authority which would have a Material Adverse Effect. Except as set forth in
SCHEDULE 3.17(C), there is no taxing authority audit of Leewards (other than
state use or sales tax audits) pending or to the knowledge of Leewards
threatened, and the results of any completed audits are properly reflected in
the Financial Statements in accordance with GAAP.
(d) NO EXTENSION OF LIMITATION PERIOD. Except as set forth in SCHEDULE
3.17(D), Leewards has not granted an extension to any taxing authority of the
limitation period during which any tax liability may be assessed or collected.
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(e) FOREIGN PERSON. No withholding will be required pursuant to Section
1445(b)(2) of the Code as a result of the effectiveness of the Merger.
(f) SAFE HARBOR LEASE. None of the assets of Leewards constitutes
property that Leewards, Michaels, or any Affiliate of Michaels, will be required
to treat as being owned by another person pursuant to the "Safe Harbor Lease"
provisions of Section 168(f)(8) of the Code prior to repeal by the Tax Equity
and Fiscal Responsibility Act of 1982.
(g) TAX EXEMPT ENTITY. None of the assets of Leewards are or will be
subject to a lease to a "tax exempt entity" as such term is defined in
Section 168(h)(2) of the Code.
(h) COLLAPSIBLE CORPORATION. Leewards has not at any time consented to
have the provisions of Section 341(f)(2) of the Code apply to it.
SECTION 3.18. COMPLIANCE WITH LAWS. Except as set forth in
SCHEDULE 3.18, Leewards has complied with all applicable laws, regulations and
licensing requirements and has filed with the proper authorities all necessary
statements and reports, including those laws, regulations and licensing
requirements with respect to, and filings with proper authorities relating to,
tax matters, Employee Benefit Plans, and labor matters, except where the failure
to so comply or file would not have a Material Adverse Effect. Except as set
forth in SCHEDULE 3.18, Leewards possesses all necessary licenses, franchises,
permits and governmental authorizations to conduct its business as now
conducted, except where the failure to possess such licenses, franchises,
permits or authorizations would not have a Material Adverse Effect.
SECTION 3.19. FINDER'S FEE. Except as set forth on SCHEDULE 3.19,
Leewards has not incurred any obligation for any finder's, broker's or agent's
fee in connection with the transactions contemplated hereby.
SECTION 3.20. LITIGATION. Except as described in SCHEDULE 3.20, there
are no legal actions or administrative proceedings or investigations pending,
or to the best knowledge of Leewards threatened, against Leewards or any of the
assets or operations of Leewards that would have a Material Adverse Effect.
Leewards is not (i) subject to any continuing court or administrative order,
writ, injunction or decree applicable specifically to Leewards or to its
business, assets, operations or employees or (ii) in default with respect to
any such order, writ, injunction or decree which, in the case of either clauses
(i) or (ii), would have a Material Adverse Effect.
SECTION 3.21. ACCURACY OF INFORMATION FURNISHED. All information
furnished to Michaels by Leewards hereby or in the Disclosure Schedule of
Leewards is true, correct and complete in all material respects. To the
knowledge of Leewards, such information states in all material respects all
facts required to be stated herein or therein or necessary to make the
statements herein or therein, in light of the circumstances under which such
statements are made, true, correct and complete in all material respects.
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SECTION 3.22. CONDITION OF FIXED ASSETS. Except as set forth in SCHEDULE
3.22, all of the plants, structures and equipment reflected in the Financial
Statements and used by Leewards in its business are in satisfactory condition
and repair for their intended use in the ordinary course of business and conform
in all material respects with all applicable ordinances, regulations and other
laws, except where the failure to be in such condition or to so conform would
not have a Material Adverse Effect.
SECTION 3.23. INVENTORY. Inventories are valued on the books and records
of Leewards at the lower of cost (determined by the LIFO method of accounting)
or market in accordance with GAAP, and consistent with past practices.
Leewards' outstanding purchase commitments for merchandise are not in excess of
normal requirements based on Leewards' historical business needs and present
market conditions and, taken as a whole, are not at prices in excess of market
prices, which excesses would have a Material Adverse Effect. To the knowledge
of Leewards, Leewards' outstanding purchase commitments are consistent with the
types and quantities of inventories appropriate, taken as a whole, to conduct
its business consistently with past practices.
SECTION 3.24. BOOKS OF ACCOUNT. The books of account of Leewards have
been kept accurately in the ordinary course of business, the transactions
entered therein represent bona fide transactions and the revenues, expenses,
assets and liabilities of such Leewards been properly recorded in such books.
SECTION 3.25. CORPORATE NAME. There are no actions, suits or proceedings
pending, or to the best knowledge of Leewards threatened, against Leewards that
would result in any material respect in any impairment of the right of Leewards
to use the name "Leewards Creative Crafts." Except as set forth on SCHEDULE
3.25, the use of the name "Leewards Creative Crafts" does not infringe in any
material respect the rights of any third party nor is it confusingly similar in
any material respect with the corporate name of any third party. After the
Closing, no person or business entity other than Leewards, its franchisees
and Michaels will be authorized by Leewards, directly or indirectly, to use the
name "Leewards Creative Crafts" or any name confusingly similar thereto.
SECTION 3.26. DISTRIBUTIONS. Except as described on SCHEDULE 3.26 and
except for stock dividends on the Exchangeable Preferred Stock declared and/or
distributed in accordance with its terms, no distribution, payment or dividend
of any kind has been declared or paid by Leewards on any of its capital stock
since the Leewards Balance Sheet Date.
SECTION 3.27. BANKING RELATIONS. Set forth in SCHEDULE 3.27 is a
complete and accurate list of all arrangements that Leewards has with any bank
or other financial institution, indicating with respect to each relationship the
type of arrangement maintained (such as checking account, borrowing
arrangements, safe deposit box, etc.) and the person or persons authorized in
respect thereof.
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SECTION 3.28. OWNERSHIP INTERESTS OF INTERESTED PERSONS. Except as set
forth in SCHEDULE 3.28, no executive officer or director of Leewards, or their
respective spouses, children or Affiliates, or, to the knowledge of Leewards,
any stockholder of Leewards, owns directly or indirectly, on an individual or
joint basis, any material interest in, or serves as an officer or director of,
any supplier of Leewards or any organization that is a party to a Commitment
(other than the beneficial ownership of up to 3% of any class of securities
registered under Section 12 of the Exchange Act).
SECTION 3.29. ENVIRONMENTAL MATTERS.
(a) ENVIRONMENTAL LAWS. Except as set forth in Schedule 3.29, neither
Leewards nor any of its assets or facilities are currently in violation of, or
subject to any pending or, to the knowledge of Leewards threatened,
investigation or inquiry by any governmental authority or to any remedial
obligations under, any Environmental Laws which would have a Material Adverse
Effect, and this representation and warranty with respect to violations of
Environmental Laws would continue to be true and correct following disclosure to
the applicable governmental authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the assets and operations of Leewards.
(b) USE OF ASSETS AND FACILITIES. Except as set forth in SCHEDULE 3.29,
the assets and facilities of Leewards have never been used or occupied in a
manner that would be in violation of any of the Environmental Laws which would
have a Material Adverse Effect.
(c) PERMITS. Except as set forth in SCHEDULE 3.29, Leewards has not
obtained, is not required to obtain, and has no knowledge of any reason Michaels
will be required to obtain, any permits, licenses or similar authorizations to
construct, occupy, operate or use any buildings, improvements, fixtures and
equipment owned or leased by Leewards by reason of any Environmental Laws
which, if not obtained, would have a Material Adverse Effect.
(d) SUPERFUND LIST. Except as set forth in SCHEDULE 3.29, none of the
assets or facilities owned or leased by Leewards are (i) on any federal or
state "Superfund" list or (ii) subject to any environmentally related liens
which would have a Material Adverse Effect.
SECTION 3.30. CERTAIN PAYMENTS. Leewards has not, and to the best
knowledge of Leewards no director, officer or employee of Leewards has, paid or
caused to be paid, directly or indirectly, in connection with the business of
Leewards:
(a) to any government or agency thereof or any agent of any supplier or
customer any bribe, kick-back or other similar illegal payment; or
(b) any illegal contribution to any political party or candidate (other
than from personal funds of directors, officers or employees not reimbursed by
their respective employers or as otherwise permitted by applicable law).
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF MICHAELS AND NEWCO
Michaels and Newco, jointly and severally, represent and warrant that the
following are true and correct as of the date hereof and will be true and
correct through the Closing Date as if made on that date:
SECTION 4.01. ORGANIZATION AND GOOD STANDING. Each of Michaels and Newco
is a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own the properties
it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
SECTION 4.02. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by each of Michaels and Newco of this Agreement and the other
agreements contemplated hereby, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by Michaels and
Newco. This Agreement and each other agreement contemplated hereby have been or
will be as of the Closing Date duly executed and delivered by each of Michaels
and Newco and constitute or will constitute legal, valid and binding obligations
of Michaels and Newco, enforceable against Michaels and Newco in accordance with
their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally or the
availability of equitable remedies.
SECTION 4.03. NO VIOLATION. Neither the execution, delivery or
performance of this Agreement or the other agreements contemplated hereby nor
the consummation of the transactions contemplated hereby or thereby will (i)
conflict with, or result in a violation or breach of the terms, conditions and
provisions of, or constitute a default under, the Certificate of Incorporation
or Bylaws of Michaels or Newco, (ii) any agreement, indenture or other
instrument under which either of them is bound or (iii) violate or conflict with
any judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
Michaels or Newco or the properties or assets of Michaels or Newco, which, in
the case of clauses (ii) and (iii) would have a Material Adverse Effect.
SECTION 4.04. CONSENTS. Except as may be required under the H-S-R Act, no
consent, authorization, approval, permit or license of, or filing with, any
governmental or public body or authority, any lender or any other person or
entity is required to authorize, or is required in connection with, the
execution, delivery and performance of this Agreement or the agreements
contemplated hereby on the part of Michaels or Newco.
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SECTION 4.05. ACQUISITION FOR INVESTMENT. Michaels is acquiring the
Leewards Shares for investment and not with a view to any public resale or other
distribution thereof, or any interest therein, in violation of the Securities
Act or any applicable state securities laws.
SECTION 4.06. FINDER'S FEE. Neither Michaels nor Newco has incurred any
obligation for any finder's, broker's or agent's fee in connection with the
transactions contemplated hereby except those for which neither Leewards nor any
Stockholder shall have any liability.
SECTION 4.07. CAPITAL STOCK. All of the outstanding shares of common
stock of Newco are or will be as of the Closing Date validly issued, fully paid
and nonassessable. The issuance and delivery by Michaels of shares of Michaels
Common Stock in connection with the Merger have been duly and validly
authorized by all necessary corporate action on the part of Michaels. The
shares of Michaels Common Stock to be issued in connection with the Merger,
when issued in accordance with the terms of this Agreement, will be validly
issued, fully paid and nonassessable, free and clear of all liens and
encumbrances.
SECTION 4.08. REGULATORY FILING; ACCURACY OF INFORMATION FURNISHED; NO
MATERIAL ADVERSE CHANGE. Michaels has filed and will continue to file in a
timely manner all required filings with the SEC, including without limitation
all reports on Form 10-K, 10-Q, Form 8-K and proxy and information statements.
As of their respective dates, the Reports did not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made therein, in light of the circumstances under which such
statements were made, not misleading. Since January 30, 1994 and through the
date hereof, Michaels has not suffered a Material Adverse Change, whether or
not caused by any deliberate act or omission of Michaels or Newco.
SECTION 4.09. LITIGATION. Except as disclosed in the Reports, there are
no legal actions or administrative proceedings or investigations pending, or to
the best knowledge of Michaels threatened (i) which is reasonably likely to
have a material adverse effect on the ability of Michaels to perform its
obligations under this Agreement or (ii) which seeks to enjoin the consummation
of the transactions contemplated hereby. Neither Michaels nor any of its
Affiliates is subject to any outstanding orders, judgments or decrees which
would be reasonably likely to have a material adverse effect on the ability of
Michaels to perform its obligations under this Agreement.
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ARTICLE V.
COVENANTS OF LEEWARDS
Leewards agrees that between the date hereof and the Closing:
SECTION 5.01. CONSUMMATION OF AGREEMENT. Subject to Leewards' right to
terminate this Agreement under Article XII, Leewards shall use its reasonable
best efforts to cause the consummation of the transactions contemplated hereby
in accordance with their terms and conditions and take all corporate and other
action necessary to approve the Merger, including, without limitation, using its
reasonable best efforts to obtain all amendments and modifications necessary to
Leewards' certificate of incorporation, and the terms of the Leewards Capital
Stock, the Options and the Warrant in order to effect the Merger in the manner
set forth in this Agreement.
SECTION 5.02. STOCKHOLDERS MEETING. Leewards will take, in accordance
with applicable law and its Certificate of Incorporation and Bylaws, all action
necessary to convene a meeting of stockholders of Leewards as promptly as
practicable after the date of this Agreement to consider and vote upon (a) the
adoption and approval of this Agreement and the Merger and (b) the ratification
of the Option Agreements with John A. Popple, David E. Bolen and Jon Browne
(provided, however, the affirmative vote of the stockholders on the ratification
of the Option Agreements is not a condition precedent to the Closing and is not
required to enforce the terms and conditions of the Option Agreements). Such
meeting will be held on or before June 5, 1994. Subject to fiduciary
requirements of applicable law, the Board of Directors of Leewards shall
recommend such adoption and approval and Leewards shall take all lawful action
to solicit such approval by its stockholders.
SECTION 5.03. BUSINESS OPERATIONS. Leewards shall operate its business in
the ordinary course. Leewards shall use its reasonable best efforts to preserve
the business of Leewards intact, to retain its present customers, suppliers and
key employees so that they will be available to the Surviving Corporation after
the Closing.
SECTION 5.04. ACCESS. Subject to the terms of the Confidentiality
Agreement, Leewards shall permit Michaels and its authorized representatives
(including underwriters and representatives of underwriters if Michaels proposes
an underwritten offering of Michaels Common Stock at any time after the date of
this Agreement) at reasonable times full access to, and make available for
inspection, all of the assets and business of Leewards, including its employees
and suppliers, and permit Michaels and its authorized representatives to inspect
and make copies of all documents, records and information with respect to the
affairs of Leewards as Michaels and its representatives may reasonably request.
SECTION 5.05. NOTIFICATION OF CERTAIN MATTERS. Leewards shall promptly
inform Michaels in writing of (a) any notice of, or other communication relating
to, a default or event
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that, with notice or lapse of time or both, would become a default, received
by Leewards subsequent to the date of this Agreement and prior to the
Effective Time under any Commitment which would have a Material Adverse
Effect; (b) any occurrence that would constitute a Material Adverse
Change, (c) the receipt of any demand or other notice by any Stockholder to
exercise appraisal rights, and (d) any other event or condition that would
permit Michaels to terminate this Agreement pursuant to Section 12.01(b). In
the event of any such notice that would give rise to a right to terminate this
Agreement pursuant to Section 12.01(b), unless Michaels or Newco so terminates
this Agreement within twenty-one (21) days after receipt of notice thereof,
Michaels and Newco shall be deemed to have waived any cause of action against
Leewards hereunder by reason of the event described in such notice and any right
to terminate this Agreement as a result thereof. The Disclosure Schedule and
this Agreement shall be deemed appropriately amended to reflect the contents of
such notice.
SECTION 5.06. APPROVALS OF THIRD PARTIES. Leewards shall use its
reasonable best efforts to secure or assist Michaels' efforts to secure, as soon
as practicable after the date hereof, all consents set forth in SCHEDULE 3.06,
including without limitation all necessary approvals, consents or filings
required under the H-S-R Act.
SECTION 5.07. EMPLOYEE MATTERS. Leewards shall not, without the prior
written approval of Michaels, except as required by law:
(a) increase the Cash Compensation of any employee of Leewards, except for
employee raises in the ordinary course of business consistent with practices not
to exceed 5% in the aggregate or 10% as to any individual and except for a
retention bonus program for employees to be agreed upon by Leewards and
Michaels;
(b) adopt, amend or terminate any Compensation Plan;
(c) adopt, amend or terminate any Employment Agreement except
amendments to waive bonus payments and an amendment to the Employment
Agreement with Jon Browne to provide for "Good Reason" termination and
severance provisions which parallel those provisions in the Employment
Agreements of John A. Popple and David E. Bolen;
(d) adopt, amend or terminate any Employee Policies and Procedures;
(e) adopt, amend or terminate any Employee Benefit Plan except for
amendments which are advisable or necessary to comply with the Code;
(f) take any action that could materially deplete the assets of any
Employee Benefit Plan, other than payment of benefits in the ordinary course to
participants and beneficiaries;
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(g) fail to pay any premium or contribution due or with respect to any
Employee Benefit Plan;
(h) fail to file any return or report with respect to any Employee Benefit
Plan;
(i) institute or dismiss, or settle under terms that would have a Material
Adverse Effect, any employment litigation; or
(j) enter into, modify, amend or terminate any agreement with any union,
labor organization or collective bargaining unit.
SECTION 5.08. BORROWINGS; CONTRACTS. Except with Michaels' prior written
consent, Leewards shall not waive any material right or cancel any material
contract, debt or claim nor will it assume, enter into or incur, as applicable,
any material contract, lease, license, obligation, indebtedness, commitment,
purchase or sale except (a) in the ordinary course of business and, in the case
of the issuance of any indebtedness, in amounts, in the aggregate, not to exceed
$32,000,000; provided, however, Leewards may modify agreements relating to the
Senior Debt to provide for a seasonal overadvance or to modify the borrowing
base definition so long as the aggregate amount of the revolving loan and
seasonal overadvance under the Senior Debt does not exceed $32,000,000 and (b)
Leewards may renew its existing insurance policies upon terms and conditions
substantially similar to those in effect on the date hereof, or may substitute
therefor a policy or policies of an insurer with at least equal rating having
substantially similar terms and conditions.
SECTION 5.09. CHANGES IN INVENTORY. Leewards shall not alter the physical
contents or character of its inventory or the mixture of products in its
inventory so as to affect the nature of Leewards' business in any material
respect or result in a material change in the total dollar valuation thereof.
Leewards will consult with senior officers of Michaels before placing any
seasonal orders.
SECTION 5.10. CAPITAL ASSETS; PAYMENTS OF LIABILITIES. Leewards shall
not, without the prior written approval of Michaels (a) except in connection
with new store openings previously disclosed to Michaels or its representatives
or agents, acquire or dispose of any capital asset having an initial cost of
$100,000 or more, or acquire or dispose of any capital asset outside of the
ordinary course of business or (b) discharge or satisfy any lien or encumbrance
or pay or perform any material obligation or liability other than (i)
liabilities and obligations reflected in the Financial Statements, (ii) current
liabilities and obligations incurred in the usual and ordinary course of
business since the Leewards Balance Sheet Date or (iii) payments in respect of
revolving credit loans in the ordinary course and, in either case (i) or (ii)
above, only as required by the express terms of the agreement or other
instrument pursuant to which the liability or obligation was incurred.
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SECTION 5.11. MORTGAGES, LIENS AND GUARANTIES. Leewards shall not,
without the prior written approval of Michaels, enter into or assume any
mortgage, pledge, conditional sale or other title retention agreement, permit
any security interest, lien or encumbrance of any kind to attach to any of its
material assets, whether now owned or hereafter acquired, or guarantee or
otherwise become contingently liable for any obligation of another, except
obligations arising by reason of endorsement for collection and other similar
transactions in the ordinary course of business, or make any capital
contribution or investment in any corporation, business or other person.
SECTION 5.12. ACQUISITION PROPOSALS. Leewards agrees (a) that neither it
nor any of its respective officers and directors shall, and it shall direct and
use its reasonable best efforts to cause its employees, agents and
representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its Stockholders) with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, Leewards (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal;
(b) that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and each will take the necessary steps to
inform the individuals or entities referred to in the first sentence hereof of
the obligations undertaken in this Section 5.12; and (c) that it will notify
Michaels immediately if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that nothing
contained in this Section 5.12 shall prohibit the Board of Directors of
Leewards from furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
proposal to acquire Leewards pursuant to a merger, consolidation, share
exchange, business combination or other similar transaction, if, and only to
the extent that, (A) the Board of Directors of Leewards, after consultation
with and based upon the written advice of independent legal counsel,
determines in good faith that such action is required for the Board of
Directors of Leewards to comply with its fiduciary duties to stockholders
imposed by the DGCL, (B) prior to furnishing such information to, or entering
into discussions or negotiations with, such person or entity, Leewards
provides written notice to Michaels to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity, (C) prior to furnishing such information to such person or entity,
Leewards receives from such person or entity an executed confidentiality
agreement with terms no less favorable to Leewards and those contained in the
Confidentiality Agreement, and (D) Leewards keeps Michaels informed, on a
current basis, of the status of any such discussions or negotiations.
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SECTION 5.13. CAPITAL STOCK; CORPORATE DOCUMENTS. Except for stock
dividends payable with respect to the Exchangeable Preferred Stock in accordance
with its terms, Leewards shall not, without the prior written approval of
Michaels,
(a) (i) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its capital stock, (ii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
(iii) amend the terms of repurchase, redeem or otherwise acquire any of its
capital stock;
(b) except for the issuance of capital stock of Leewards upon
exercise of the Options and the Warrants in accordance with their terms,
authorize for issuance, issue, sell, deliver or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise) any stock of any class or any
other equity securities, or amend in any respect any of the terms of any such
equity securities outstanding on the date hereof; or
(c) amend or propose to amend its certificate of incorporation or
bylaws.
Notwithstanding the provisions of this Section 5.13 to the contrary, Leewards
may amend its certificate of incorporation and the terms of the Leewards Capital
Stock, the Warrant and the Options in order to permit the transactions
contemplated by this Agreement and effect the Merger in accordance with the
terms of this Agreement.
SECTION 5.14. WAIVER OF SENIOR DEBT DEFAULT. Leewards shall use its
reasonable efforts to obtain, as promptly as is practicable, a waiver with
respect to the existing defaults under the Credit Agreement and the Senior
Subordinated Notes.
SECTION 5.15. FILING OF TAX RETURN. Leewards shall not file its federal
corporate income tax return for the fiscal year ended January 30, 1994 without
first consulting with the Chief Financial Officer of Michaels.
SECTION 5.16. MONTHLY FINANCIAL STATEMENTS. Leewards shall provide to
Michaels, within 20 days of the end of each fiscal month, an unaudited balance
sheet and related statements of income and cash flows for the period then ended.
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ARTICLE VI.
COVENANTS OF MICHAELS AND NEWCO
Michaels and Newco jointly and severally agree that between the date hereof
and the Closing:
SECTION 6.01. CONSUMMATION OF AGREEMENT. Subject to the rights of
Michaels and Newco to terminate this Agreement under Article XII, Michaels and
Newco shall use their reasonable best efforts to cause the consummation of the
transactions contemplated hereby in accordance with their terms and conditions
and take all corporate and other action necessary to approve the Merger.
SECTION 6.02. APPROVALS OF THIRD PARTIES. Michaels and Newco will use
their reasonable best efforts to secure or assist Leewards' efforts to secure,
as soon as practicable after the date hereof, all consents set forth in SCHEDULE
3.06, including without limitation all necessary approvals, consents and filings
under the H-S-R Act.
ARTICLE VII.
CONDITIONS PRECEDENT OF MICHAELS AND NEWCO
Except as may be waived in writing by Michaels and Newco, the obligations
of Michaels and Newco hereunder are subject to the fulfillment at or prior to
the Closing Date of each of the following conditions:
SECTION 7.01. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Leewards contained herein, as modified by the operation of
Section 5.05, shall have been true and correct in all material respects when
initially made and shall be true and correct in all material respects as of
the Closing Date except for changes contemplated or permitted hereby. If any
representations and warranties of Leewards are not true and correct (but not
in a material respect) but the cumulative effect of the inaccuracy of the
representations and warranties is a Material Adverse Effect on Leewards, then
this condition shall not have been fulfilled.
SECTION 7.02. COVENANTS AND CONDITIONS. Leewards shall have performed and
complied, in all material respects, with all covenants and conditions required
by this Agreement to be performed and complied with by it prior to the Closing
Date.
SECTION 7.03. LEGAL OPINION. Counsel to Leewards shall have delivered to
Michaels its opinion, dated as of the Closing Date, in form and substance
reasonably satisfactory to Michaels, to the effect set forth in EXHIBIT 7.03.
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SECTION 7.04. PROCEEDINGS. No action, proceeding or order by any court or
governmental body or agency shall have been asserted, instituted or entered to
restrain or prohibit the carrying out of the transactions contemplated hereby,
nor shall any such action, proceeding or order have been threatened (provided
there is a reasonable basis therefor).
SECTION 7.05. NO MATERIAL ADVERSE CHANGE. No Material Adverse Change, or
changes which when taken together would constitute a Material Adverse Change,
shall have occurred with respect to Leewards since the Leewards Balance Sheet
Date (except as provided in Section 5.05), whether or not such change shall have
been caused by the deliberate act or omission of Leewards.
SECTION 7.06. GOVERNMENT APPROVALS. The waiting period applicable to the
consummation of the Merger under the H-S-R Act shall have expired or been
terminated.
SECTION 7.07. CLOSING DELIVERIES. Michaels shall have received all
documents, duly executed in form reasonably satisfactory to Michaels and its
counsel, referred to in Section 9.01.
SECTION 7.08. STOCKHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby including, but not limited to, the Merger, shall have been
approved and adopted by the requisite vote of the stockholders of Leewards in
accordance with the laws of the State of Delaware and the Certificate of
Incorporation and Bylaws of Leewards, and stockholders holding Leewards Shares
representing in the aggregate the right to receive 10% or more of the Michaels
Common Stock issuable upon effectiveness of the Merger shall not have exercised
dissenters' rights.
SECTION 7.09. AUDIT. Michaels shall have received the final Audited
Financial Statements, including a signed copy of the auditors' report with
respect thereto, which, except for footnotes, shall not have changed in any
adverse respect from the draft previously delivered by Leewards to Michaels.
SECTION 7.10. TERMINATION OF WARRANT. Michaels shall have received
evidence reasonably satisfactory to it that the Warrant has been cancelled,
redeemed or terminated on or prior to the Closing Date or that the holder of
the Warrant has agreed to accept the consideration provided pursuant to Section
2.09.
SECTION 7.11. TERMINATION OF SHAREHOLDER AGREEMENT AND RELATED AGREEMENTS.
Michaels shall have received evidence reasonably satisfactory to it that (a) the
Amended and Restated Stockholders' Agreement, dated as of June 22, 1992, by and
among Leewards and its stockholders, certain officers and key employees, as
amended, and (b) any and all agreements providing securities registration rights
to Leewards stockholders, shall each have been cancelled or terminated on or
prior to the Closing Date.
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ARTICLE VIII.
CONDITIONS PRECEDENT OF LEEWARDS
Except as may be waived in writing by Leewards, the obligations of Leewards
hereunder are subject to fulfillment at or prior to the Closing Date of each of
the following conditions:
SECTION 8.01. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Michaels and Newco contained herein, individually and in the
aggregate, shall have been true and correct in all material respects when
initially made and shall be true and correct in all material respects as of the
Closing Date. If any representations and warranties of Michaels are not true
and correct (but not in a material respect) but the cumulative effect of the
inaccuracy of the representations and warranties is a Material Adverse Effect on
Michaels, then this condition shall not have been fulfilled.
SECTION 8.02. COVENANTS AND CONDITIONS. Michaels and Newco shall have
performed and complied, in all material respects, with all covenants and
conditions required by this Agreement to be performed and complied with by them
prior to the Closing Date.
SECTION 8.03. LEGAL OPINION.
(a) LEGAL OPINION TO LEEWARDS. Counsel to Michaels and Newco shall have
delivered to Leewards its opinion, dated as of the Closing Date, in form and
substance reasonably satisfactory to Leewards, to the effect set forth in
EXHIBIT 8.03(A).
(b) LEGAL OPINION TO STOCKHOLDERS. Counsel to Michaels shall have
delivered to the Stockholders its opinion, dated as of the Closing Date, in form
and substance reasonably satisfactory to Leewards, to the effect set forth in
EXHIBIT 8.03(B).
SECTION 8.04. PROCEEDINGS. No action, proceeding or order by any court or
governmental body or agency shall have been asserted, instituted or entered to
restrain or prohibit the carrying out of the transactions contemplated hereby,
nor shall any such action, proceeding or order have been threatened (provided
there is a reasonable basis therefor).
SECTION 8.05. NO MATERIAL ADVERSE CHANGE. No Material Adverse Change, or
changes which if taken together would constitute Material Adverse Change, shall
have occurred with respect to Michaels since the date of this Agreement;
provided, however, a decrease in the trading price of Michaels Common Stock
shall not, by itself, be deemed to constitute a material adverse change with
respect to Michaels.
SECTION 8.06. H-S-R ACT. The waiting period applicable to the
consummation of the Merger under the H-S-R Act shall have expired or been
terminated.
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SECTION 8.07. CLOSING DELIVERIES. Leewards shall have received all
documents, duly executed in form reasonably satisfactory to Leewards and its
counsel, referred to in Section 9.02.
SECTION 8.08. MICHAELS COMMON STOCK. The Michaels Common Stock shall be
quoted on NASDAQ-NMS or listed on the New York Stock Exchange.
SECTION 8.09. PAYMENT OF SENIOR DEBT AND SENIOR SUBORDINATED NOTES.
Simultaneously with the Closing, Michaels shall cause Leewards to repay the
Senior Debt and the Senior Subordinated Notes, including without limitation
providing Leewards with sufficient funds to repay the Senior Debt and the Senior
Subordinated Notes.
SECTION 8.10. STOCKHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby including, but not limited to, the Merger, shall have been
approved and adopted by the requisite vote of the stockholders of Leewards in
accordance with the laws of the State of Delaware and the Certificate of
Incorporation and Bylaws of Leewards.
ARTICLE IX.
CLOSING DELIVERIES
SECTION 9.01. DELIVERIES OF LEEWARDS. At the Closing, Leewards shall
deliver to Michaels the following, all of which shall be in a form reasonably
satisfactory to counsel to Michaels:
(a) a copy of resolutions of the Board of Directors of Leewards
authorizing the execution, delivery and performance of this Agreement and all
related documents and agreements and consummation of the Merger, certified on
behalf of Leewards by the Secretary of Leewards, and a copy of resolutions of
the stockholders of Leewards approving this Agreement and the Merger certified
on behalf of Leewards by the Secretary of Leewards, as being true and correct
copies of the originals thereof subject to no modifications or amendments;
(b) a certificate of Leewards executed by the President of Leewards, dated
the Closing Date, as to (i) the truth and correctness in all material respects
of the representations and warranties of Leewards, as modified by the operation
of Section 5.05, contained herein on and as of the Closing Date except for
changes permitted or contemplated hereby and (ii) the cumulative effect of any
inaccuracies in the representations and warranties has not resulted in a
Material Adverse Effect;
(c) a certificate of Leewards executed by the President of Leewards dated
the Closing Date, (i) as to the performance of and compliance by Leewards with
all covenants contained in Article V in all material respects on and as of the
Closing Date and (ii) certifying that all
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conditions precedent of Leewards to the Closing have been satisfied or waived
executed by the Secretary of Leewards;
(d) a certificate of Leewards executed by the Secretary of Leewards
certifying as to the incumbency of the directors and officers of Leewards and as
to the signatures of such officers who have executed documents delivered at the
Closing on behalf of Leewards;
(e) a certificate, dated within 10 days of the Closing Date, of the
Secretary of State of the state of incorporation of Leewards establishing that
it is in existence, has paid all franchise or similar taxes, if any, and, if
applicable, otherwise is in good standing to transact business in its state of
incorporation;
(f) certificates, dated within 10 days of the Closing Date, of the
Secretaries of State of the states in which Leewards is qualified to do
business, to the effect that it is qualified to do business and, if applicable,
is in good standing as a foreign corporation in each of such states;
(g) an executed Certificate of Merger necessary to effect the Merger
referred to in Section 2.03;
(h) if reasonably deemed necessary by legal counsel to Michaels, a
nonforeign affidavit, as such affidavit is referred to in Section 1445(b)(2) of
the Code, of each Stockholder, signed under a penalty of perjury and dated as of
the Closing Date, to the effect that such Stockholder is a United States citizen
(and thus not a foreign person) and providing such Stockholders' United States
taxpayer identification number;
(i) executed Investment Representation Letters from each of the
Stockholders in the form attached hereto as EXHIBIT 9.01(I);
(j) executed Escrow Agreement from certain of the Stockholders in the form
attached as EXHIBIT 2.14; and
(k) such other instrument or instruments of transfer as shall be necessary
or appropriate, as Michaels or its counsel shall reasonably request, to carry
out and effect the purpose and intent of this Agreement.
SECTION 9.02. DELIVERIES OF MICHAELS AND NEWCO. At the Closing, Michaels
and Newco shall deliver to Leewards:
(a) a copy of the resolutions of the Boards of Directors of Michaels and
Newco authorizing the execution, delivery and performance of this Agreement, and
all related documents and agreements, certified by the Secretary of that
corporation as being true and correct copies of the originals thereof subject to
no modifications or amendments;
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(b) a certificate of an officer of each of Michaels and Newco dated the
Closing Date as to (i) the truth and correctness in all material respects of the
representations and warranties, individually and in the aggregate, of Michaels
and Newco contained herein on and as of the Closing Date and (ii) the cumulative
effect of any inaccuracies in the representations and warranties has not
resulted in a Material Adverse Effect;
(c) a certificate of an officer of each of Michaels and Newco dated the
Closing Date, (i) as to the performance and compliance by Michaels and Newco
with all covenants contained herein in all material respects on and as of the
Closing Date and (ii) certifying that all conditions precedent of Michaels and
Newco to the Closing have been satisfied or waived;
(d) a certificate of the Secretary of each of Michaels and Newco
certifying as to the incumbency of the officers of Michaels and Newco who have
executed documents delivered at the Closing on behalf of Michaels and Newco; and
(e) certificates, dated within 10 days of the Closing Date, of the
Secretary of State of Delaware establishing that Michaels and Newco are in
existence and are in good standing in such state.
ARTICLE X.
CERTAIN OTHER MATTERS
SECTION 10.01. REGISTRATION STATEMENT. As promptly as practicable after
the Closing, Michaels shall file a Registration Statement on an appropriate form
(the "Registration Statement") with the SEC and to register, as promptly as
practicable, the resale from time to time in the open market of the Registrable
Securities. Michaels shall use its reasonable best efforts to cause the
Registration Statement to be declared effective by the SEC as soon as
practicable after the Closing Date (but no later than forty-five (45) days after
the Closing Date). The Stockholders may sell the Registrable Securities subject
to the restrictions set forth in Section 10.02. In accomplishing the foregoing
registration, the following procedures shall be utilized:
(a) STOCKHOLDER INFORMATION. Leewards and each Stockholder shall use
their reasonable best efforts to cause the Stockholders to furnish to Michaels
in writing requested information required for inclusion in the Registration
Statement, including a description of the proposed plans of distribution. If
any Stockholder fails to provide such information, Michaels shall not be
obligated to include such Stockholder or its Registrable Securities in the
Registration Statement until the Stockholder provides such information;
provided, that Michaels shall only be obligated to include such Stockholder or
its Registrable Securities in the Registration Statement if such Stockholder
agrees to reimburse Michaels for its additional costs incurred in
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so doing; including, without limitation, additional fees and expenses of
accountants, and fees and expenses of counsel.
(b) EXPENSES. All expenses incurred by Michaels in complying herewith
(except as set forth in Section 10.01(a)), including without limitation all
registration and filing fees, printing expenses, and fees and disbursements of
counsel and accountants for Michaels, are herein called "registration expenses"
and all underwriting discounts, taxes and selling commissions applicable to the
sales and all fees and disbursements of separate counsel for any Stockholder are
herein called "selling expenses." Except as otherwise specifically provided
herein, Michaels shall pay all of the registration expenses incurred in
connection with the Registration Statement and the registration statement filed
pursuant to Section 10.03 and each Stockholder shall bear its own selling
expenses, except that Michaels shall pay the reasonable fees of one law firm
selected by holders of a majority of the Registrable Securities to represent the
Stockholders in connection with the Registration Statement, which law firm shall
be acceptable to Michaels in its sole discretion. Michaels agrees that the law
firm of Hopkins & Sutter is acceptable to it.
(c) MICHAELS INDEMNIFICATION. Michaels shall indemnify and hold harmless
each Stockholder, its directors, officers, employees and agents, each
underwriter (within the meaning of the Securities Act) who may purchase from or
sell for any Stockholder any Registrable Securities, each broker and any other
person acting on behalf of such Stockholder and each person, if any, who
controls such Stockholder, underwriter, broker or person within the meaning of
the Securities Act, from and against any and all losses, claims, obligations,
demands, assessments, penalties, costs, damages, liabilities and expenses
(including reasonable attorneys' fees and other expenses for investigation and
defense with respect to the foregoing) (collectively "Damages"), joint or
several, to which any of the foregoing persons may be or become subject insofar
as such Damages arise out of or are based on any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any prospectus forming a part thereof, or any amendment or supplement thereto,
or arise out of or are based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such Damages are caused by
any untrue statement or omission based upon information furnished in writing to
Michaels by such Stockholder, underwriter, broker or person expressly for use
therein.
(d) STOCKHOLDER INDEMNIFICATION. Each Stockholder, severally but not
jointly, shall indemnify Michaels, its directors, each officer signing the
Registration Statement and each person, if any, who controls Michaels within the
meaning of the Securities Act, from and against any and all Damages to which any
of the foregoing persons may become subject insofar as such Damages arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or in the prospectus forming a part
thereof, or any amendment or supplement thereto, or arise out of or are based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make any statements therein not misleading,
but only insofar as such Damages are caused by any untrue statement or alleged
untrue statement or omission or alleged omission based upon written
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information furnished to Michaels by such Stockholder or underwriter, broker
or person engaged by such Stockholder or acting on such Stockholder's behalf
expressly for use therein; provided that any such Stockholder's liability
shall be limited to the amount of the proceeds from the sale by such
Stockholder of Registrable Securities under the Registration Statement.
(e) BLUE SKY REGISTRATION. Upon any Stockholder's request, Michaels shall
use its reasonable best efforts to register or qualify the Registrable
Securities being issued under this Agreement under applicable securities
statutes of the states in which such Stockholder intends to sell such
Registrable Securities, at the expense of Michaels provided that for such
purpose Michaels shall not be required to qualify as a dealer in securities,
qualify to do business in any jurisdiction where Michaels is not at the time so
qualified or to execute a general consent to service of process in any
jurisdiction (other than for actions arising out of the offer or sale of the
Registrable Securities).
(f) EFFECTIVENESS OF REGISTRATION STATEMENT. Michaels will cause the
Registration Statement to remain effective and to file with the SEC such
amendments and supplements as may be necessary to keep the prospectus included
in the Registration Statement (the "Prospectus") current and in compliance in
all material respects with the Securities Act and the rules and regulations of
the SEC promulgated thereunder until the sooner to occur of the following
events: the expiration of the 36 month period following the Closing Date or the
sale of all the Registrable Securities covered by the Registration Statement.
(g) COPIES OF REGISTRATION STATEMENT AND PROSPECTUS. Michaels will
furnish to each Stockholder a conformed copy of the Registration Statement as
declared effective by the SEC and each post-effective amendment thereto,
including financial statements and all exhibits and reports incorporated therein
by reference, and such number of copies of the final Prospectus and each post-
effective amendment or supplement thereto as such Stockholder may reasonably
request.
(h) QUOTATION ON NASDAQ-NMS. Michaels will cause all Registrable
Securities to be qualified for quotation on the NASDAQ-NMS and qualified for
listing on each securities exchange on which similar securities of Michaels are
then listed.
(i) ELIGIBILITY TO USE FORM S-3. Michaels represents and warrants to the
Stockholders that it is eligible to use Form S-3 for the registration of the
sale of the Registrable Securities by the Stockholders and agrees that it will
take all actions that may reasonably be necessary to maintain such eligibility
for so long as Michaels is obligated to register the Registrable Securities or
keep the Registration Statement effective.
SECTION 10.02. RESTRICTIONS UNDER REGISTRATION STATEMENT.
(a) DELAY PERIOD. In connection with the disposition of the Registrable
Securities under the Registration Statement, in order for the Stockholders to
dispose of Registrable
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Securities with a prospectus that is a part of the Registration Statement, the
Stockholders must give Michaels written notice of their intention to sell any
of the Registrable Securities at least two (2) but not more than twenty (20)
business days prior to the date of the proposed sale(s), which notice shall
include the number of shares proposed to be disposed, whether the shares are
to be sold in an underwritten offering and the time period during the
forty-five (45) business days following the date of such notice during which
the shares may be disposed (the "Sale Period"), and the Stockholders agree
that, during each Sale Period, they shall not deliver any prospectus that is a
part of the Registration Statement in connection with any disposition of the
Registrable Securities during any period of time when, but only so long as,
Michaels, after receipt of the notice set forth above, notifies the
Stockholders (a "Delay Notice") that Michaels is in possession of material
non-public information that, in the exercise of its reasonable judgment based
on the written advice of its counsel, would be required to be disclosed in the
Registration Statement (or any amendment, or post-effective amendment thereto),
which material information may relate, including, without limitation, to a
financing project or a pending acquisition, merger or other material corporate
transaction to which Michaels is or is expected to be a party; provided that
Michaels shall advise the Stockholders in writing as soon as any such delay is
no longer applicable; provided further that (i) the Stockholders shall only be
prevented from disposing of Registrable Securities with a prospectus under the
Registration Statement for up to 90 consecutive days (a "Delay Period")
following the receipt of a Delay Notice, (ii) any two Delay Periods must be at
least 45 days apart during which time the Stockholders shall be permitted to
dispose of the Registrable Securities with a prospectus under the Registration
Statement and (iii) Michaels shall not have the right to deliver more than two
Delay Notices in any 365-day period. Michaels shall not impose a Delay Period
within 45 days of the end of a Lock Up Period (as hereinafter defined).
(b) LOCK UP. In addition to the restrictions in paragraph (a) above, in
the event that, at any time (i) before the Closing Date Michaels consummates an
underwritten offering of Michaels Common Stock or (ii) during the 12 month
period commencing on the Closing Date Michaels proposes to commence or completes
an underwritten offering of Michaels Common Stock, then the Stockholders
receiving the Registrable Securities in the Merger shall agree to execute an
agreement, having substantially the same terms and provisions as the managing
underwriter of such offering requires to the effect that the Stockholders will
not effect a public distribution of any Registrable Securities (except as set
forth in Section 10.03(a)) for the period set forth therein whether or not such
holder participates in the offering; provided such period shall not, in the case
of an offering described in (i) above, exceed 120 days from the later of (a) the
Closing Date or (b) the effective date of the registration statement or, in the
case of an offering described in (ii) above, exceed 90 days from the effective
date of the registration statement (the "Lock Up Period"). The holders of the
Registrable Securities shall not be subject to more than one Lock Up Period.
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SECTION 10.03. PIGGY-BACK REGISTRATION.
(a) REGISTRATION. If Michaels proposes to file a registration statement
under the Securities Act with respect to an underwritten offering by Michaels of
Michaels Common Stock for its own account or for the account of other holders of
Michaels Common Stock (other than a registration statement on Forms S-4 or S-8
or a registration statement relating to convertible debt securities requiring
that the underlying Michaels Common Stock be registered, or a registration
statement filed in connection with an exchange offer or an offering of
securities solely to Michaels' existing stockholders) at any time within 12
months of the Closing Date, then Michaels shall in each case give written notice
of such proposed filing to the Stockholders at least 15 days prior to the
anticipated filing date, and such notice shall offer such holders the
opportunity to register shares of Registrable Securities as each such holder may
request (a "Piggy-Back Registration"). Michaels shall permit the holders of
Registrable Securities requested in writing within fifteen (15) days after the
notice given by Michaels to be included in the registration for such offering
toinclude such securities in such offering on the same terms and conditions as
the Michaels Common Stock offered therein. Notwithstanding the foregoing, if
the managing underwriter or underwriters of such offering delivers an opinion
to the holders of Registrable Securities that the total amount of Michaels
Common Stock which they or Michaels or any other persons or entities intend to
include in such offering is sufficiently large to materially and adversely
affect the success of such offering, then the amount of Michaels Common Stock
to be offered for the accounts of holders of Registrable Securities shall be
reduced pro rata with respect to each holder to the extent necessary to reduce
the total amount of Michaels Common Stock to be included in such offering to
the amount recommended by such managing underwriter or underwriters; PROVIDED,
HOWEVER, that the holders of Registrable Securities will be permitted to
include not less than 25% of the total number of shares of Michaels Common
Stock included in the underwritten offering (excluding the underwriters'
over-allotment option). This Section 10.03(a) shall terminate and be of no
further force and effect upon the closing of an underwritten offering in which
the holders of Registrable Securities have been provided the opportunity to
sell their securities, whether or not any of such holders actually participate
in the offering.
(b) EXECUTION OF UNDERWRITING AGREEMENT. No holder of Registrable
Securities may participate in any underwritten registration hereunder unless
such holder (i) agrees to sell such holder's securities on the basis provided in
any underwriting arrangements approved by the persons entitled hereunder to
approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements.
(c) TRANSFERABILITY. The registration rights provided to the holders of
Registrable Securities under this Section 10.03 may be transferred to any other
person or entity but only in connection with the transfer of the underlying
Registrable Securities.
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SECTION 10.04. TAX TREATMENT. Michaels will not, and will not permit the
Surviving Corporation to, make an election under Section 338 of the Code with
respect to the Merger.
SECTION 10.05. D & O INSURANCE. The Surviving Corporation shall maintain,
and Michaels shall cause the Surviving Corporation to maintain, Leewards'
existing officers' and directors' liability insurance, if available, for a
period of not less than three (3) years after the Effective Time; PROVIDED, the
Surviving Corporation may substitute therefor policies of insurers with at least
equal rating with substantially equivalent coverage containing terms and
conditions which are substantially equivalent to such existing policy.
ARTICLE XI.
REMEDIES
SECTION 11.01. INDEMNIFICATION.
(a) INDEMNIFICATION FROM ESCROWED SHARES. Subject to the terms and
conditions of this Article, and limited in all cases to the Escrowed Shares held
by the Escrow Agent pursuant to the Escrow Agreement, Michaels shall be
indemnified and held harmless from and against:
(i) all Damages incurred by Michaels by reason of or resulting from a
breach of any representation, warranty or covenant of Leewards contained herein,
or any certificate delivered hereunder, or in any agreement executed in
connection with the transactions contemplated hereby;
(ii) one-half of all (A) Damages incurred by Leewards or Michaels by
reason of or resulting from any defaults, events of default or events,
occurrences, acts or omissions that, with the giving of notice or lapse of time
or both, would constitute defaults by Leewards under any real property leases
existing on or before the Closing Date, except for any such defaults, events of
default, events, occurrences, acts or omissions that are disclosed on the
Disclosure Schedule, (B) out-of-pocket costs and expenses incurred by either
Leewards or Michaels (and, if incurred before the Closing Date, agreed to by
Leewards and Michaels) (x) in excess of $5,833,882 to terminate the leases with
respect to 21 Leewards store locations, and (y) to obtain any consents of
landlords (as reasonably determined by Michaels) as a result of the Merger
because of lease provisions relating to radius clauses, change-in-control
provisions, non-assignment clauses or similar lease terms which are violated as
a result of the Merger or the ownership and the combined operation of the stores
by Michaels or Leewards immediately after the Merger and (c) Damages incurred by
Leewards or Michaels relating to the termination of a lease or the vacating of a
store location by a Leewards franchisee (excluding, however, Damages incurred as
part of an agreement between Michaels and/or Leewards, on the one hand, and a
franchisee, on the other hand, to terminate the Franchise Agreement or the
franchise relationship);
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(iii) all Damages incurred by Leewards or Michaels by reason of or
resulting from any and all claims, demands, causes of action, suits or judgments
of in any kind whatsoever that any Stockholder, director or officer assert
against Leewards relating to events occurring on or before the Closing Date,
excluding rights of any director or officer to be indemnified by Leewards
pursuant to Section 145 of the DGCL and the related provisions of Leewards'
Certificate of Incorporation and Bylaws and under existing indemnification and
severance agreements, policies or arrangements or compensation pursuant to
existing compensation arrangements or Employee Benefit Plans;
(iv) all Damages incurred by Leewards or Michaels after the date
hereof by reason of or resulting from the assets and facilities of Leewards
(except for the Real Property consisting of the corporate
headquarters/distribution facility of Leewards located in Elgin, Illinois which
is covered in Section 11.01(a)(viii) below) presently being in violation of any
Environmental Laws (excluding the costs of any environmental audits or
investigations) that are not disclosed in the Disclosure Schedules to the extent
that the Damages incurred with respect to such facilities or any one store
location exceeds $2,500 at such location and the remediation costs incurred are
reasonable; provided, however, to the extent that (A) a lease agreement provides
Leewards with indemnity from the landlord with respect to violations of
Environmental Laws, Leewards will first pursue its rights under the indemnity,
(B) a lease agreement provides Leewards with indemnity from the landlord with
respect to violations of Environmental Laws and a contractual right of offset,
Leewards will first pursue its rights under the offset, and (C) neither
Leewards, Michaels nor their affiliates will report existing violations of
Environmental Laws to governmental authorities unless it is obligated by law to
do so.
(v) all Damages incurred by Leewards or Michaels after the Closing
Date by reason of or resulting from the pending investigation being conducted by
the SEC with respect to the termination of Leewards initial public offering in
1991;
(vi) two-thirds of all Damages incurred by Leewards or Michaels after
the Closing Date by reason of or resulting from the pending litigation styled
HEIDER V. LEEWARDS CREATIVE CRAFTS, INC., ET. AL., No. LKA 89 0003 (Circuit
Court, Kane County, Illinois filed May 8, 1989);
(vii) one-half of all Damages incurred by Leewards or Michaels by
reason of or resulting from a dispute between Michaels and/or Leewards, on the
one hand, and a franchisee of Leewards on the other hand, if after settlement of
such dispute the franchisee remains a Leewards franchisee; and
(viii) all Damages incurred by Leewards or Michaels after the date
hereof by reason of or resulting from the Real Property consisting of the
corporate headquarters/distribution facility of Leewards located in Elgin,
Illinois, presently being in violation of any Environmental Laws (including the
reasonable costs of any environmental audits or investigations which the parties
acknowledge will be undertaken in the near future under the
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supervision of Leewards and Michaels and reasonable remediation costs);
provided, however, neither Leewards, Michaels nor their affiliates will report
existing violations of Environmental Laws to governmental authorities unless
it is obligated by law to do so.
(b) INDEMNIFICATION LIMITATIONS. Notwithstanding the provisions of
Section 11.01(a), (i) Michaels shall not be entitled to such indemnification
unless, and only to the extent that, the aggregate amount of all Damages
incurred by Leewards or Michaels shall exceed $150,000 in the aggregate and
(ii) no claim for Damages under Section 11.01(a) shall be made more than one
(1) year after the Closing Date. For purposes of calculating whether the
Damages incurred by Michaels or Leewards exceed the $150,000 threshold, the
portion of Damages for which Michaels and Leewards are not to be indemnified
under Sections 11.01(a)(ii), (vi) and (vii) (i.e., one-half or one-third of
those Damages) shall not be included. The representations and warranties
contained herein shall survive the Closing and all statements contained in any
certificate, delivered by or on behalf of Leewards, Newco or Michaels pursuant
to this Agreement shall be deemed to have been representations and warranties
by Leewards, Newco or Michaels, as the case may be, and, notwithstanding any
provision in this Agreement to the contrary, shall survive the Closing until
the first anniversary of the Closing Date.
SECTION 11.02. WAIVER. No waiver by any party of any default or breach by
another party of any representation, warranty, covenant or condition contained
in this Agreement, any exhibit or any document, instrument or certificate
contemplated hereby shall be deemed to be a waiver of any subsequent default or
breach by such party of the same or any other representation, warranty, covenant
or condition. No act, delay, omission or course of dealing on the part of any
party in exercising any right, power or remedy under this Agreement or at law or
in equity shall operate as a waiver thereof or otherwise prejudice any of such
party's rights, powers and remedies. All remedies, whether at law or in equity,
shall be cumulative and the election of any one or more shall not constitute a
waiver of the right to pursue other available remedies.
SECTION 11.03. REMEDIES NOT EXCLUSIVE. Subject to the limitations
contained herein, including without limitation the limitations in Section
11.01(a) and (b), the remedies provided in this Agreement shall not be exclusive
of any other rights or remedies available to one party against the other, either
at law or in equity.
SECTION 11.04. COSTS, EXPENSES AND LEGAL FEES. Except as otherwise
expressly provided herein, whether or not the transactions contemplated hereby
are consummated, each party hereto shall bear its own costs and expenses
(including attorneys' fees), except that each party hereto agrees to pay the
costs and expenses (including reasonable attorneys' fees and expenses) incurred
by the other parties in successfully (i) enforcing any of the terms of this
Agreement or (ii) proving that another party breached any of the terms of this
Agreement.
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ARTICLE XII.
TERMINATION
SECTION 12.01. TERMINATION. This Agreement may be terminated and the
Merger may be abandoned, before or after approval by the stockholders of Newco
or Leewards, by action of the Board of Directors of Michaels, Newco or Leewards,
as the case may be:
(a) at any time prior to the Closing Date by mutual agreement of all
parties;
(b) at any time prior to the Closing Date by Michaels or Newco if any
representation or warranty of Leewards contained in this Agreement, the
cumulative effect of any inaccuracies in the representations and warranties
results in a Material Adverse Effect on Leewards or in any certificate or other
document executed and delivered by Leewards pursuant to this Agreement is or
becomes untrue or breached in any material respect or if Leewards fails to
comply in any material respect with any covenant contained herein, and any such
misrepresentation, noncompliance or breach is not cured, waived or eliminated
within 10 days after receipt by Michaels of written notice thereof;
(c) at any time prior to the Closing Date by Leewards if any
representation or warranty of Michaels contained in this Agreement or in any
certificate or other document executed and delivered by Michaels pursuant to
this Agreement is or becomes untrue or breached in any material respect, the
cumulative effect of any inaccuracies in the representations and warranties
results in a Material Adverse Effect on Michaels or if Michaels fails to comply
in any material respect with any covenant contained herein, and any such
misrepresentation, noncompliance or breach is not cured, waived or eliminated
within 10 days after receipt by Leewards of written notice thereof;
(d) at the Closing Date by Michaels if any of the conditions stated in
Article VII have not been satisfied;
(e) at the Closing Date by Leewards if any of the conditions stated in
Article VIII have not been satisfied;
(f) by Michaels or Leewards if the Merger shall not have been consummated
by August 31, 1994;
(g) by Leewards if it receives an Acquisition Proposal; or
(h) at any time prior to the Closing Date by Michaels if the condition set
forth in Section 7.08 has not been satisfied before June 6, 1994.
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SECTION 12.02. EFFECT OF TERMINATION.
(a) In the event this Agreement is terminated pursuant to Sections 12.01
(b) or (c) above, Michaels and Newco, and Leewards shall each be entitled to
pursue, exercise and enforce any and all remedies, rights, powers and privileges
available at law or in equity.
(b) In the event that any person shall have made an Acquisition Proposal
for Leewards and thereafter this Agreement is terminated by Leewards pursuant to
Section 12.01(g), then Leewards, if requested by Michaels, shall, subject to the
provisions set forth below, promptly, but in no event later than two days after
the date of such request, pay Michaels a fee of $1,500,000 plus all of Michaels'
out-of-pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, experts and consultants, but excluding investment bankers)
incurred by Michaels in connection with or related to the authorization,
preparation, negotiation, execution and performance of this Agreement and the
related agreements, the preparation, printing and filing of the Registration
Statement and all other matters related to the closing of the transactions
contemplated herein ("Michaels Transaction Expenses") not to exceed $750,000,
which amount shall be payable by wire transfer of same day funds; provided,
however, that no fee shall be payable to Michaels pursuant to this paragraph (b)
unless and until, within twelve (12) months following the date of the
termination of this Agreement, (i) any person (other than Michaels) (an
"Acquiring Party") has acquired, by purchase, merger, consolidation, sale,
assignment, lease, transfer or otherwise, in one transaction or any related
series of transactions, a majority of the voting power of the outstanding
securities of Leewards or 50% or more of the assets of Leewards, (ii) there has
been consummated a consolidation, merger or similar transaction between Leewards
and an Acquiring Party in which stockholders of Leewards immediately prior to
such consolidation, merger or similar transaction do not own securities
representing at least 50% of the outstanding voting power of the surviving
entity (or, if applicable, any entity in control of such Acquiring Party) of
such consolidation, merger or similar transaction immediately following the
consummation thereof, or (iii) an Acquiring Party, or any "group" (as such term
is defined under Section 13(d) of the Exchange Act) acquires beneficial
ownership or the right to acquire beneficial ownership of 50% of the outstanding
voting power of Leewards, whether by tender offer, exchange offer or otherwise.
Leewards acknowledges that the agreements contained in this paragraph are an
integral part of the transactions contemplated in this Agreement, and that,
without these agreements, Michaels and Newco would not enter into this
Agreement; accordingly, if Leewards fails to promptly pay the amount due
pursuant to this paragraph, and, in order to obtain such payment, Michaels or
Newco commences a suit which results in a judgment against Leewards for the fee
set forth in this paragraph (b), Leewards shall pay to Michaels or Newco its
costs and expenses (including attorneys' fees) in connection with such suit,
together with interest on the amount of the fee at the prime rate of
NationsBank, Texas, N.A. in effect on the date such payment was required to be
made.
(c) In the event this Agreement is terminated pursuant to Section 12.01(h)
because the condition precedent set forth in Section 7.08 has not been
fulfilled, Leewards, if requested
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by Michaels, shall, promptly, but in no event later than two days after such
request, pay Michaels the Michaels' Transaction Expenses not to exceed
$750,000 which amount shall be payable by wire transfer of same day funds.
(d) In the event (i) Michaels has commenced an underwritten offering of
Michaels Common Stock and (ii) this Agreement is subsequently terminated by
Michaels, Michaels agrees to reimburse Leewards for out-of-pocket expenses
incurred by Leeward, and payable to Deloitte & Touche in connection with and
directly related to such underwritten offering, such expenses not to exceed
$45,000.
ARTICLE XIII.
MISCELLANEOUS
SECTION 13.01. AMENDMENT. This Agreement may be amended, modified or
supplemented only by an instrument in writing executed by all the parties
hereto; provided that, following the Effective Time, no amendment shall be made
without the written consent of Stockholders then holding at least 51% of the
Registrable Securities still held by such Stockholders if such amendment would
adversely affect the Stockholders' rights under Article X hereof.
SECTION 13.02. ASSIGNMENT. Except as otherwise provided herein, neither
this Agreement nor any right created hereby or in any agreement entered into in
connection with the transactions contemplated hereby shall be assignable by any
party hereto, except by Michaels or Newco to an affiliate of Michaels; provided
that (i) in case of any such assignment, the assigning party shall not be
released from its obligations hereunder and (ii) Michaels shall not have the
right to assign its obligations under Sections 10.01 through 10.04.
SECTION 13.03. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. Except
as otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto. Except for
Article X, neither this Agreement nor any other agreement contemplated hereby
shall be deemed to confer upon any person not a party hereto or thereto any
rights or remedies hereunder or thereunder.
SECTION 13.04. ENTIRE AGREEMENT. This Agreement and the agreements
contemplated hereby, and the Confidentiality Agreement, constitute the entire
agreement of the parties regarding the subject matter hereof, and supersede all
prior agreements and understandings, both written and oral, among the parties,
or any of them, with respect to the subject matter hereof. Matters disclosed
in any Schedule to this Agreement shall be deemed to be disclosed with respect
to all Sections of this Agreement.
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SECTION 13.05. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING
CONFLICTS OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT
SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS.
SECTION 13.06. CAPTIONS. The captions in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions hereof.
SECTION 13.07. GENDER AND NUMBER. When the context requires, the gender
of all words used herein shall include the masculine, feminine and neuter and
the number of all words shall include the singular and plural.
SECTION 13.08. REFERENCE TO AGREEMENT. Use of the words "herein",
"hereof", "hereto" and the like in this Agreement shall be construed as
references to this Agreement as a whole and not to any particular Article,
Section or provision of this Agreement, unless otherwise noted.
SECTION 13.09. CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. Each party
shall continue to be bound by the terms of the Confidentiality Agreement and
keep this Agreement and its terms confidential, and shall make no press release
or public disclosure, either written or oral, regarding the transactions
contemplated by this Agreement without the prior knowledge and consent of the
other parties hereto; provided, however, notwithstanding the foregoing or the
terms of the Confidentiality Agreement to the contrary, neither this Section
13.10 nor the Confidentiality Agreement shall prohibit any disclosure (i) by
press release, filing or otherwise that Michaels has determined in its good
faith judgment to be required by federal securities laws or the rules of the
National Association of Securities Dealers, (ii) to attorneys, accountants,
investment bankers or other agents of the parties assisting the parties in
connection with the transactions contemplated by this Agreement and (iii) by
Michaels in connection with obtaining financing for the transactions
contemplated by this Agreement and conducting an examination of the operations
and assets of Leewards. In the event that the transactions contemplated hereby
are not consummated for any reason whatsoever, the parties hereto agree not to
disclose or use any confidential information they may have concerning the
affairs of the other parties, except for information that is required by law to
be disclosed. Confidential information includes, but is not limited to:
financial records, surveys, reports, plans, proposals, financial information,
information relating to personnel, contracts, stock ownership, liabilities and
litigation; provided that should the transactions contemplated hereby not be
consummated, nothing contained in this Section shall be construed to prohibit
the parties hereto from operating businesses in competition with each other.
SECTION 13.10. NOTICE. Any notice or communication hereunder or in any
agreement entered into in connection with the transactions contemplated hereby
must be in writing and
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given by overnight courier, depositing the same in the United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person.
Such notice shall be deemed received on the date on which it is received if
sent by overnight courier or hand-delivered or on the third business day
following the date on which it is so mailed. For purposes of notice, the
addresses of the parties shall be:
If to Michaels Michaels Stores, Inc.
or to Newco: 5931 Campus Circle Drive
Irving, Texas 75063
Attn: Kristen L. Magnuson
with a copy to: Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attn: Charles D. Maguire, Jr.
If to Leewards: Leewards Creative Crafts, Inc.
1200 St. Charles Street
Elgin, Illinois 60120
Attn: Jon H. Browne
with a copy to: Hopkins & Sutter
Three First National Plaza
Suite 4100
Chicago, Illinois 60602
Attn: Kenneth W. Miller
In the event that the Closing shall occur, the addresses of the Stockholders
shall be the last known addresses thereof as reflected in the stock records of
Michaels. Any party may change its address for notice by written notice given
to the other parties in accordance with this Section.
SECTION 13.11. CHOICE OF FORUM. The parties hereto agree that should any
suit, action or proceeding arising out of this Agreement be instituted by any
party hereto (other than a suit, action or proceeding to enforce or realize
upon any final court judgment arising out of this Agreement), such suit,
action or proceeding shall be instituted only in a federal court in Dallas
County, Texas. Each of the parties hereto consents to the IN PERSONAM
jurisdiction of any federal court in Dallas County, Texas and waives any
objection to the venue of any such suit, action or proceeding. The parties
hereto recognize that courts outside Dallas County, Texas may also have
jurisdiction over suits, actions or proceedings arising out of this Agreement,
and in the event that any party hereto shall institute a proceeding involving
this Agreement in a jurisdiction outside Dallas County, Texas, the party
instituting such proceeding shall indemnify any other party hereto for any
losses and expenses that may result from the breach of the foregoing covenant
to institute such proceeding only in a federal court in Dallas County, Texas,
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including without limitation any additional expenses incurred as a result of
litigating in another jurisdiction, such as reasonable fees and expenses of
local counsel and travel and lodging expenses for parties, witnesses, experts
and support personnel.
SECTION 13.12. SERVICE OF PROCESS. Service of any and all process that
may be served on any party hereto in any suit, action or proceeding arising out
of this Agreement may be made in the manner and to the address set forth in
Section 13.12 and service thus made shall be taken and held to be valid personal
service upon such party by any party hereto on whose behalf such service is
made.
SECTION 13.13. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
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MICHAELS
MICHAELS STORES, INC.
By:__________________________________________
Its:_________________________________________
NEWCO
LWA ACQUISITION CORPORATION
By:__________________________________________
Its:_________________________________________
LEEWARDS
LEEWARDS CREATIVE CRAFTS, INC.
By:__________________________________________
Its:_________________________________________
329235.10/D
<PAGE>
EXHIBIT 2.4
Agreement and Plan of Merger
<PAGE>
AGREEMENT AND PLAN OF MERGER
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I.
Definition
Section 1.01. Definitions..................................... 1
ARTICLE II.
The Merger
Section 2.01. TheMerger....................................... 6
Section 2.02. The Closing..................................... 6
Section 2.03. Effective Time.................................. 6
Section 2.04. Charter of Surviving Corporation................ 7
Section 2.05. Bylaws.......................................... 7
Section 2.06. Directors of the Surviving Corporation.......... 7
Section 2.07. Officers of the Surviving Corporation........... 7
Section 2.08. Conversion of Shares............................ 7
Section 2.09. Exchange of Certificates Representing Shares.... 9
Section 2.10. Adjustment of Exchange Ratios................... 11
Section 2.11. Dissenters' Rights.............................. 11
Section 2.12. Subsequent Actions.............................. 11
ARTICLE III.
Representations and Warranties of the Targets and the Shareholder Group
Section 3.01. Organization and Good Standing; Qualification... 12
Section 3.02. Capitalization.................................. 12
Section 3.03. Corporate Records............................... 12
Section 3.04. Authorization and Validity...................... 13
Section 3.05. No Violation.................................... 13
Section 3.06. Consents........................................ 13
Section 3.07. Financial Statements............................ 13
Section 3.08. Liabilities and Obligations..................... 14
Section 3.09. Employee Matters................................ 14
Section 3.10. Employee Benefit Plans.......................... 16
Section 3.11. Absence of Certain Changes...................... 17
Section 3.12. Title; Leased Assets............................ 19
Section 3.13. Commitments..................................... 20
Section 3.14. Adverse Agreements.............................. 22
Section 3.15. Insurance....................................... 22
Section 3.16. Patents, Trademarks, Service Marks and
Copyrights.................................... 22
Section 3.17. Trade Secrets and Customer Lists................ 23
Section 3.18. Taxes........................................... 24
Section 3.19. Compliance with Laws............................ 25
Section 3.20. Finder's Fee.................................... 25
Section 3.21. Litigation...................................... 25
Section 3.22. Accuracy of Information Furnished............... 26
Section 3.23. Condition of Fixed Assets....................... 26
Section 3.24. Inventory....................................... 26
<PAGE>
Section 3.25. Books of Account................................ 26
Section 3.26. Corporate Name.................................. 26
Section 3.27. Distributions and Repurchases................... 27
Section 3.28. Suppliers....................................... 27
Section 3.29. Banking Relations............................... 27
Section 3.30. Ownership Interests of Interested Persons....... 27
Section 3.31. Investments in Competitors...................... 27
Section 3.32. Environmental Matters........................... 27
Section 3.33. Certain Payments................................ 28
Section 3.34. Solvency of Targets............................. 28
ARTICLE IV.
Representations, Warranties and Covenants of the Shareholder Group
Section 4.01. Ownership of Shares............................. 28
Section 4.02. Shareholders' Capacity.......................... 29
Section 4.03. Investment Representations...................... 29
Section 4.04. Personal Holding Company; Control of Related
Businesses.................................... 29
Section 4.05. Ownership of Michaels Common Stock.............. 30
Section 4.06. Transfers of Target Common Stock................ 30
ARTICLE V.
Representations and Warranties of Michaels
Section 5.01. Organization and Good Standing.................. 30
Section 5.02. Authorization and Validity...................... 30
Section 5.03. No Violation.................................... 30
Section 5.04. Finder's Fee.................................... 31
Section 5.05. Capital Stock................................... 31
Section 5.06. Accuracy of Information Furnished............... 31
Section 5.07. Eligibility to use Registration Statement on
Form S-3...................................... 31
Section 5.08. Trading Through NASDAQ-NMS...................... 31
Section 5.09. Enforcement Actions............................. 31
ARTICLE VI.
Covenants
Section 6.01. Consummation of Agreement; Meetings of
Stockholders.................................. 32
Section 6.02. Business Operations............................. 32
Section 6.03. Access.......................................... 32
Section 6.04. Notification of Certain Matters................. 32
Section 6.05. Approvals of Third Parties...................... 33
Section 6.06. Employee Matters................................ 33
Section 6.07. Employee Benefit Plans.......................... 33
Section 6.08. Contracts....................................... 34
Section 6.09. Changes in Inventory............................ 34
Section 6.10. Capital Assets; Payments of Liabilities......... 34
Section 6.11. Mortgages, Liens and Guaranties................. 34
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Section 6.12. No Negotiation with Others...................... 34
Section 6.13. Distributions and Repurchases................... 35
Section 6.14. Requirements to Effect Mergers.................. 35
Section 6.15. Voting of Shares; Irrevocable Proxy............. 35
Section 6.16. Accounting Treatment............................ 36
Section 6.17. Accounts Payable................................ 36
Section 6.18. Combined Financial Statements................... 36
ARTICLE VII.
Michaels' Covenants
Section 7.01. Consummation of Agreement....................... 36
Section 7.02. Requirements to Effect Merger................... 36
Section 7.03. Registration Statement.......................... 36
Section 7.04. Publicly Available Information.................. 38
ARTICLE VIII.
Covenants of Michaels, the Shareholder Group and Targets
Section 8.01. Filing; Other Action............................ 38
Section 8.02. Legal Conditions to Merger...................... 39
Section 8.03. Agreements by Shareholders of the Targets....... 39
ARTICLE IX.
Michaels' Conditions Precedent
Section 9.01. Representations and Warranties.................. 39
Section 9.02. Covenants and Conditions........................ 39
Section 9.03. Legal Opinion................................... 40
Section 9.04. Proceedings..................................... 40
Section 9.05. No Material Adverse Change...................... 40
Section 9.06. Accounting Treatment............................ 40
Section 9.07. Government Approvals and Required Consents...... 40
Section 9.08. Due Diligence Review............................ 40
Section 9.09. Closing Deliveries.............................. 40
Section 9.10. Shareholder Approval............................ 40
Section 9.11. Pre-Closing Sales............................... 40
Section 9.12. Warehouse Operations............................ 41
Section 9.13. Affiliated Leases............................... 41
Section 9.14. Salem Store..................................... 41
Section 9.15. Beaverton Party Store........................... 41
Section 9.16. Orange Lease.................................... 42
Section 9.17. Release of Guaranties........................... 42
Section 9.18. Conversion of Partnership Interest.............. 42
Section 9.19. Termination of Shareholder Agreements........... 42
ARTICLE X.
Targets' and the Shareholder Group's Conditions Precedent
Section 10.01. Representations and Warranties................. 42
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Section 10.02. Covenants and Conditions....................... 43
Section 10.03. Proceedings.................................... 43
Section 10.04. Material Adverse Change........................ 43
ARTICLE XI.
Closing Deliveries
Section 11.01. Deliveries of the Targets and the Shareholder.. 43
Section 11.02. Deliveries of Michaels......................... 45
ARTICLE XII.
Post Closing Matters
Section 12.01. Further Instruments of Transfer................ 46
Section 12.02. Registration; Re-Sale of Michaels
Stock Consideration........................... 46
Section 12.03. Right of Rescission............................ 47
Section 12.04. Certificates Issued Without Restrictive Legend. 47
Section 12.05. News Releases.................................. 47
Section 12.06. Customer List.................................. 48
ARTICLE XIII.
Remedies
Section 13.01. Indemnification by the Shareholder Group....... 48
Section 13.02. Indemnification by Michaels.................... 49
Section 13.03. Conditions of Indemnification.................. 49
Section 13.04. Waiver......................................... 50
Section 13.05. Remedies Not Exclusive......................... 51
Section 13.06. Offset......................................... 51
Section 13.07. Costs, Expenses and Legal Fees................. 51
Section 13.08. Specific Performance........................... 51
Section 13.09. Tax Effect of Indemnification.................. 51
Section 13.10. Indemnification Limitations.................... 52
ARTICLE XIV.
Termination
Section 14.01. Termination.................................... 52
Section 14.02. Effect of Termination.......................... 53
ARTICLE XV.
Miscellaneous
Section 15.01. Amendment...................................... 53
Section 15.02. Assignment..................................... 53
Section 15.03. Parties In Interest; No Third Party
Beneficiaries ................................ 53
Section 15.04. Entire Agreement............................... 53
Section 15.05. Severability................................... 53
Section 15.06. Survival of Representations, Warranties
and Covenants................................ 54
Section 15.07. Governing Law.................................. 54
Section 15.08. Captions....................................... 54
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Section 15.09. Gender and Number.............................. 54
Section 15.10. Reference to Agreement......................... 54
Section 15.11. Confidentiality; Publicity and Disclosures..... 54
Section 15.12. Notice......................................... 55
Section 15.13. Choice of Forum................................ 55
Section 15.14. Service of Process............................. 56
Section 15.15. Counterparts................................... 56
</TABLE>
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SCHEDULES AND EXHIBITS
Schedule A -- Targets
Schedule B -- Newcos
Exhibit 2.01 -- The Mergers
Exhibit 2.08 -- Conversion of Shares
Exhibit 3.01 -- Foreign Qualification
Exhibit 3.02 -- Capitalization
Exhibit 3.06 -- Consents
Exhibit 3.08 -- Liabilities and Obligations
Exhibit 3.09(a) -- Cash Compensation
Exhibit 3.09(b) -- Compensation Plans
Exhibit 3.09(c) -- Employment Agreements
Exhibit 3.09(d) -- Employee Policies and Procedures
Exhibit 3.10(a) -- Employee Benefit Plans
Exhibit 3.10(g) -- Funding Status
Exhibit 3.10(k) -- Medical and Dental Care Claims
Exhibit 3.11 -- Absence of Certain Changes
Exhibit 3.12(a) -- Real Property
Exhibit 3.12(b) -- Personal Property
Exhibit 3.12(c) -- Leases
Exhibit 3.12(d) -- Right to Use Assets
Exhibit 3.13 -- Commitments
Exhibit 3.15 -- Insurance
Exhibit 3.16 -- Patents, Trademarks, Service Marks and Copyrights
Exhibit 3.17 -- Trade Secrets and Customer Lists
Exhibit 3.19 -- Compliance with Laws
Exhibit 3.21 -- Litigation
Exhibit 3.26 -- Corporate Name
Exhibit 3.27 -- Distributions and Repurchases
Exhibit 3.28 -- Suppliers
Exhibit 3.29 -- Banking Relationship
Exhibit 3.30 -- Ownership Interests of Interested Persons
Exhibit 3.31 -- Investments in Competitors
Exhibit 4.01 -- Shareholder Group Ownership of Shares
Exhibit 4.03 -- Stock Certificate Legends
Exhibit 4.04 -- Control of Related Business
Exhibit 4.05 -- Ownership of Michaels Common Stock
Exhibit 4.06 -- Transfers of Common Stock
Exhibit 8.03 -- Shareholder Letters
Exhibit 9.03 -- Legal Opinion of Counsel to Targets
Exhibit 11.01(j) -- Noncompetition and Confidentiality Agreement
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of March
_____, 1994 among each of the corporations listed on Schedule A attached hereto
(each a "Target" and all collectively referred to as the "Targets"), each person
listed on the signature pages attached hereto (all collectively referred to as
the "Shareholder Group"), Michaels Stores, Inc., a Delaware corporation
("Michaels"), and each of the corporations listed on Schedule B attached hereto
(each a wholly owned subsidiary of Michaels and referred to herein as "Newco"
and all collectively referred to as "Newcos");
W I T N E S S E T H :
WHEREAS, the Boards of Directors of each of the Targets, Newcos and
Michaels have determined that a business combination among the Targets and
Newcos is in the best interests of their respective companies and stockholders,
presents an opportunity for their respective companies to achieve long-term
strategic objectives and, accordingly, have agreed to effect the Mergers (as
hereinafter defined) upon the terms and subject to the conditions set forth
herein; and
WHEREAS, it is intended that for federal income tax purposes, the Mergers
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended, and for financial accounting purposes
shall be accounted for as a "pooling of interests"; and
WHEREAS, the Boards of Directors of each of the Targets and each of the
Newcos have directed that this Agreement be submitted to the stockholders of
each of the Targets and each of the Newcos for their approval, and Michaels as
sole stockholder of each of the Newcos has approved this Agreement by written
consent; and
WHEREAS, each member of the Shareholder Group owning or controlling a
majority of the shares of each of the Targets has approved the Mergers, agreed
to vote his shares of capital stock in each of the Targets in favor of the
Mergers and joins in this Agreement;
NOW, THEREFORE, in consideration of the mutual representations, warranties
and covenants herein contained, and on the terms and subject to the conditions
herein set forth, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01. DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth below:
<PAGE>
(a) "Adjusted Michaels Shares" shall have the meaning set forth in
Section 2.08.
(b) "Affiliate" shall have the meaning set forth in Section 8.03.
(c) "Affiliated Lease" shall mean each of (i) that certain lease
agreement, undated, by and between Ross, Ross & Rogers Building Partnership, as
landlord, and Target 1, as Tenant with respect to the store located at 4401 N.E.
122nd Avenue, Portland, Oregon 97230; (ii) the Beaverton Craft & Floral Lease;
(iii) that certain lease agreement, dated June 1, 1992, by and between Bend
Building Partnership, as landlord, and Target 7, as tenant, with respect to the
store located at 63350 N. Highway 97, Bend, Oregon 97701; (iv) that certain
lease agreement, dated June 1, 1992, by and between Michael J. and Lucille
Habif, as landlord, and Target 17, as tenant, with respect to the store located
at 12091 Harbor Blvd., Garden Grove, California; and (v) that certain lease
agreement, dated April 12, 1991, by and between Fresno Building Venture Group,
as landlord, and Target 14, as tenant, with respect to the store located at 3053
East Shields Avenue, Fresno, California.
(d) "Beaverton Craft & Floral Lease" shall mean that certain lease
agreement, dated June 4, 1993, by and between Beaverton Building Venture Group,
as landlord, and Target 2, as tenant, with respect to the store located at 4955
S.W. Western Avenue, Beaverton, Oregon 97005.
(e) "Beaverton Party Depot Lease" shall mean that certain lease
agreement, dated September 12, 1985, by and between Hudson Investment Company,
as landlord and Target 18, as tenant, with respect to the store located at 8620
S.W. Hall Blvd., Beaverton, Oregon 97005.
(f) "best knowledge", "have no knowledge of", or "do not know of" and
similar phrases shall mean (i) in the case of a natural person, the particular
fact was known, or not known, as the context requires, to such person after
diligent investigation and inquiry by such person, and (ii) in the case of an
entity, the particular fact was known, or not known, as the context requires, to
any director or officer of such entity or store manager or assistant store
manager working for such entity after diligent investigation and inquiry by the
principal executive officers of such entity.
(g) "Cash Compensation" shall have the meaning set forth in Section
3.09(a).
(h) "CERCLA" shall have the meaning set forth in Section 3.32(a).
(i) "Certificate" shall have the meaning set forth in Section 2.08(b).
(j) "CGCL" shall have the meaning set forth in Section 2.01.
(k) "Charter" shall mean, with respect to a corporation, its Certificate
or Articles of Incorporation, as applicable.
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(l) "Closing" shall mean the closing of the transactions contemplated by
this Agreement, which shall occur at 10:00 a.m., local time, on the Closing Date
in the offices of Jackson & Walker, L.L.P., Suite 6000, 901 Main Street, Dallas,
Texas 75202, or at such other time and place as shall be mutually agreed in
writing by the parties hereto.
(m) "Closing Date" shall have the meaning set forth in Section 2.02.
(n) "Code" shall mean the Internal Revenue Code of 1986.
(o) "Commitments" shall have the meaning set forth in Section 3.13(a).
(p) "Compensation Plans" shall have the meaning set forth in Section
3.09(b).
(q) "Combined Balance Sheet" shall have the meaning set forth in Section
3.07.
(r) "Combined Statement of Income" shall have the meaning set forth in
Section 3.07.
(s) "Controlled Group" shall have the meaning set forth in Section
3.10(g).
(t) "Damages" shall have the meaning set forth in Section 7.05(c).
(u) "Dissenting Shareholders" shall have the meaning set forth in
Section 2.08(a).
(v) "Effective Time" shall have the meaning set forth in Section 2.03.
(w) "Employee Benefit Plans" shall have the meaning set forth in Section
3.10(a).
(x) "Employee Policies and Procedures" shall have the meaning set forth
in Section 3.09(d).
(y) "Employment Agreements" shall have the meaning set forth in Section
3.09(c).
(z) "Environmental Laws" shall have the meaning set forth in Section
3.32(a).
(aa) "ERISA" shall have the meaning set forth in Section 3.10(a).
(ab) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(ac) "Exchange Agent" shall have the meaning set forth in Section
2.09(a).
(ad) "Exchange Fund" shall have the meaning set forth in Section 2.09(a).
(ae) "Exchange Ratios" shall have the meaning set forth in Section
2.08(a).
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<PAGE>
(af) "Expiration Date" shall have the meaning set forth in Section 6.16.
(ag) "Financial Statements" shall have the meaning set forth in Section
3.07.
(ah) "Fixed Assets" shall have the meaning set forth in Section 3.23.
(ai) "indemnifying party" shall have the meaning set forth in Section
13.03.
(aj) "Merger" shall have the meaning set forth in Section 2.01.
(ak) "Michaels Common Stock" shall mean the common stock, par value $.10
per share, of Michaels.
(al) "Michaels Group" shall have the meaning set forth in Section
2.08(a).
(am) "NASDAQ-NMS" shall have the meaning set forth in Section 2.09(e).
(an) "OBCA" shall have the meaning set forth in Section 2.01.
(ao) "Orange Lease" shall mean that certain sublease agreement, dated
September 22, 1975, by and between K-Mart Corporation, as landlord, and Target
16, as tenant, as amended, with respect to the store located at 1855 N. Tustin
Street, Orange, California.
(ap) "ordinary course of business" means the usual and customary way in
which the Targets have conducted their respective businesses in the past.
(aq) "party to be indemnified" shall have the meaning set forth in
Section 13.03.
(ar) "Personal Property" shall have the meaning set forth in Section
3.12(b).
(as) "Proprietary Rights" shall have the meaning set forth in Section
3.16(a).
(at) "RCRA" shall have the meaning set forth in Section 3.32(a).
(au) "Real Property" shall have the meaning set forth in Section 3.12(a).
(av) "Registration Statement" shall have the meaning set forth in Section
7.05.
(aw) "Reports" shall have the meaning set forth in Section 4.03.
(ax) "Rule 145" shall have the meaning set forth in Section 8.03.
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<PAGE>
(ay) "Salem Lease" shall mean that certain lease agreement, dated March
7, 1989, by and between BA Properties c/o Ted Durant and Associates, Inc., as
landlord, and Target 4, as tenant, as amended, with respect to the store located
at 3610-3928 Center Street, N.E., Salem, Oregon.
(az) "Securities Act" shall mean the Securities Act of 1933, as amended.
(ba) "Shareholder Group" shall have the meaning set forth in the preamble
to this Agreement.
(bb) "Shareholders" shall mean all of the shareholders of the Targets.
(bc) "Shares" shall have the meaning set forth in Section 2.08(a).
(bd) "Surviving Corporation" shall have the meaning set forth in Section
2.01.
(be) "Targets" shall have the meaning set forth in the preamble to this
Agreement.
(bf) "Target 1" shall mean Oregon Craft & Floral Supply Co., Inc., an
Oregon corporation.
(bg) "Target 2" shall mean Oregon Craft & Floral Supply Co. II, Inc., an
Oregon corporation.
(bh) "Target 4" shall mean Oregon Craft & Floral Supply Co. IV, Inc., an
Oregon corporation.
(bi) "Target 7" shall mean Oregon Craft & Floral Supply Co. VII, Inc., an
Oregon corporation.
(bj) "Target 10" shall mean Habif & Ross Enterprises, Inc., a California
corporation.
(bk) "Target 11" shall mean Riverside Craft & Floral Supply Co., Inc., a
California corporation.
(bl) "Target 12" shall mean San Diego Craft & Floral Supply Co., Inc., a
California corporation.
(bm) "Target 13" shall mean Mission Viejo Craft & Floral, Inc., a
California corporation.
(bn) "Target 14" shall mean H.F.C.S., Inc., a California corporation.
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(bo) "Target 16" shall mean Orange Craft & Floral Supply Co., Inc., a
California corporation.
(bp) "Target 17" shall mean H & H Craft and Floral Supply Co., #9, Inc.,
a California corporation.
(bq) "Target 18" shall mean Party Depot Inc., an Oregon corporation.
(br) "Warehouse Lease" shall mean that certain lease agreement, dated
September 1, 1991, by and between Whitaker Building Partnership d/b/a Whitaker
Holding Company, as landlord and Target 1, as tenant, with respect to the Main
Building and Building 3 located at 12545 N.E. Whitaker Way, Portland, Oregon
97230.
(bs) "WBCA" shall have the meaning set forth in Section 2.01.
ARTICLE II.
THE MERGER
SECTION 2.01. THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 2.03), each Newco shall
be merged with and into one of the Targets in accordance with this Agreement and
as set forth in Exhibit 2.01 and the separate corporate existence of each Newco
shall thereupon cease (each a "Merger" and collectively, the "Mergers") and
these Mergers are intended to be reverse triangular mergers and "tax-free
reorganizations" pursuant to Section 368(a)(2)(E) of the Code; provided,
however, the actual tax effect of the transactions contemplated by this
Agreement is not a condition precedent to the Closing. Each of the Targets
shall be the surviving corporation in each Merger (each sometimes hereinafter
referred to as the "Surviving Corporation") and shall continue to be governed by
the laws of the state of their respective incorporation, and the separate
corporate existence of each Target with all its rights, privileges, powers,
immunities, purposes and franchises shall continue unaffected by each Merger,
except as set forth herein. Each Merger shall have the effects specified in the
California General Corporation Law ("CGCL"), the Oregon Business Corporation Act
(the "OBCA") and the Washington Business Corporation Act (the "WBCA"), as
appropriate.
SECTION 2.02. THE CLOSING. The Closing shall take place on March 31,
1994 or at such other time and place and/or on such other date as the Targets
and Michaels may agree. The date on which the Closing occurs is hereafter
referred to as the "Closing Date."
SECTION 2.03. EFFECTIVE TIME. If all the conditions to each Merger set
forth in Article IX shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated in accordance with Article
XIV, the parties hereto shall cause the following documents to be properly
executed and filed on the Closing Date (i) an Officers Certificate and a copy of
this Agreement meeting the requirements of Section 1103 of the CGCL, (ii)
Articles
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<PAGE>
of Merger meeting the requirements of Section 60.494 of the OBCA and (iii)
Articles of Merger meeting the requirements of Section 23B.11.050 of the WBCA.
Each Merger shall become effective at the time of the filing of all of such
documents with the appropriate state officials in accordance with such laws or
at such later time which the parties hereto have theretofore agreed upon and
designated in such filings as the effective time of the Merger (the "Effective
Time").
SECTION 2.04. CHARTER OF SURVIVING CORPORATION. Effective at the
Effective Time, the Charter of each Target party to a Merger shall be the
Charter of the corresponding Surviving Corporation.
SECTION 2.05. BYLAWS OF SURVIVING CORPORATION. The Bylaws of each
Target in effect immediately prior to the Effective Time shall be the Bylaws of
the corresponding Surviving Corporation, until duly amended in accordance with
their terms.
SECTION 2.06. DIRECTORS OF THE SURVIVING CORPORATION. The persons who
are directors of each Newco immediately prior to the Effective Time shall, from
and after the Effective Time, be and become directors of the corresponding
Surviving Corporation until their successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Charter and Bylaws.
SECTION 2.07. OFFICERS OF THE SURVIVING CORPORATION. The officers of
each Newco shall continue as officers of the corresponding Surviving Corporation
until their resignation or removal.
SECTION 2.08. CONVERSION OF SHARES. The manner of converting shares of
the Targets and Newco in the Merger shall be as follows:
(a) At the Effective Time, each share of the common stock of each of the
Targets issued and outstanding immediately prior to the Effective Time (as more
specifically described on Exhibit 2.08 attached hereto, the "Shares") (other
than Shares owned by Michaels, the Newcos or any other subsidiary of Michaels
(the "Michaels Group")), and Shares which are held by shareholders ("Dissenting
Shareholders") exercising appraisal rights pursuant to Section 1301 of the CGCL,
Section 60.554(1) of the OBCA or Section 23B.13.020(1) of the WBCA, and the
common stock of any Target held in its respective treasury), shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into the right to receive such number of shares of Michaels Common
Stock as set forth on Exhibit 2.08 attached hereto based on the respective
exchange ratios set forth therein (collectively, the "Exchange Ratios"). The
total number of shares of Michaels Common Stock to be issued as a result of this
Agreement is 521,739 shares, such number of shares to be reduced by that number
of shares of Michaels Common Stock equal to the following sum divided by $34.50
(i) the amount by which the accounts payable (including amounts due to financial
institutions under credit facilities of the Targets but excluding intercompany
accounts payable) of the Targets (other than those accounts payable of Target
18) as of January 31, 1994 exceed $4,000,000 plus (ii) the amounts due to
Michael Habif and Cam Kines under promissory notes issued by certain of the
Targets, plus (iii)
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<PAGE>
an agreed upon amount arising out of inventory valuation, plus (iv)
$100,000 if the Orange Lease is not extended as contemplated by Section 9.16,
plus (v) the amounts due under debentures issued by certain of the Targets to
the Shareholders, also as listed on Exhibit 2.08 (the "Adjusted Michaels
Shares"). The Adjusted Michaels Shares are also subject to adjustments to
reflect the payment in cash for rights to receive fractional shares and payments
made to Dissenting Shareholders. The Adjusted Michaels Shares shall be
increased based upon the following procedure: (A) Michaels shall make a
calculation assuming the distribution of the Adjusted Michaels Shares based upon
the Exchange Ratios and the other information set forth on Exhibit 2.08; (B)
Michaels shall determine from that calculation the number of shares of Michaels
Common Stock that would have been received by any of the Targets by reason of
such Target's ownership of Shares of another Target; and (C) the Adjusted
Michaels Shares shall be increased by that number of shares of Michaels Common
Stock necessary to distribute to the holders of Shares of Targets (who are not
themselves Targets), in the aggregate, the Adjusted Michaels Shares.
(b) As a result of the Merger and without any action on the part of the
holder thereof, all Shares shall cease to be outstanding and shall be cancelled
and retired and shall cease to exist, and each holder of a certificate (a
"Certificate") representing any Shares shall thereafter cease to have any rights
with respect to such Shares, except the right to receive, without interest, the
Michaels Common Stock and cash for fractional interests of the Michaels Common
Stock in accordance with Section 2.08(a) upon the surrender of such Certificate,
or the right of Dissenting Shareholders to receive "fair cash value" pursuant to
Section 2.08(d).
(c) Each Share issued and outstanding at the Effective Time and owned by
any of the Michaels Group, and each share of common stock of any Target held in
the treasury of such Target at the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof, shall cease to be
outstanding and shall be cancelled and retired without payment of any
consideration therefor and shall cease to exist.
(d) Each Share issued and outstanding and held by Dissenting
Shareholders, by virtue of the Merger and without action on the part of the
holder thereof, shall cease to be outstanding and shall be cancelled and retired
and shall cease to exist, and each Dissenting Shareholder shall thereafter cease
to have any rights with respect to such Shares, except the right, if any, to
receive payment from the Surviving Corporation of the "fair cash value" of such
Shares as determined in accordance with Section 1301 of the CGCL, Section
60.554(1) of the OBCA and Section 23B.13.020(1) of the WBCA.
(e) At the Effective Time, each share of Common Stock, par value $0.01
per share, of each Newco issued and outstanding immediately prior to the
Effective Time shall remain outstanding and shall represent validly issued,
fully paid and nonassessable shares of Common Stock of the corresponding
Surviving Corporation.
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SECTION 2.09. EXCHANGE OF CERTIFICATES REPRESENTING SHARES.
(a) As of the Effective Time, Michaels shall make available, or shall
cause to be made available, at the expense of Michaels and with an exchange
agent selected by Michaels, which shall be Michaels' Transfer Agent (the
"Exchange Agent"), for the benefit of the holders of Shares and for exchange in
accordance with this Article II and in the amounts set forth in Exhibit 2.08,
certificates representing a sufficient number of shares of Michaels Common Stock
necessary for the Exchange Agent to make deliveries pursuant to Section 2.08
hereof (such certificates for shares of Michaels Common Stock, together with the
amount of any dividends or distributions with respect thereto, being hereinafter
referred to as the "Exchange Fund") in exchange for outstanding Shares.
(b) Promptly after the Effective Time, Michaels shall cause the Exchange
Agent to mail to each person who was, at the Effective Time, a holder of record
(other than any of the Michaels Group, any Dissenting Shareholder or any Target)
of a certificate or certificates evidencing ownership of Shares (i) a letter of
transmittal which shall specify that delivery shall be effected, and the risk of
loss and title to the Certificates shall pass, upon (and only upon) delivery of
the Certificates to the Exchange Agent, and which shall be in such form and have
such other provisions as Michaels may reasonably specify, and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing Michaels Common Stock. Upon surrender to the Exchange
Agent of a Certificate for cancellation together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of shares of Michaels Common
Stock and unpaid dividends and distributions, if any, which such holder has the
right to receive in respect of the Certificate surrendered pursuant to the
provisions of this Article II, after giving effect to any required tax
withholdings, and the Certificate so surrendered shall forthwith be cancelled.
No interest will be paid or accrued on the amount payable upon surrender of
Certificates. In the event of a transfer of ownership of Shares that is not
registered in the transfer records of a Target, a certificate representing the
proper number of shares of Michaels Common Stock may be issued to such a
transferee if the Certificate representing such Shares is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer of Shares and to evidence that any applicable stock transfer taxes
have been paid. As an alternative to the above described procedure, Certificates
presented at Closing together with completed letters of transmittal shall be
promptly exchanged for certificates representing the appropriate number of
shares of Michaels Common Stock.
(c) Notwithstanding any other provisions of this Agreement, no dividends
on Michaels Common Stock shall be paid with respect to any Shares or other
securities represented by a Certificate until such Certificate is surrendered
for exchange as provided herein and unless Michaels declares a dividend.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the holder of certificates representing
shares of Michaels Common Stock issued in exchange therefor, without interest,
(i) at the time of such
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surrender, the amount of dividends or other distributions, if any, with a record
date after the Effective Time theretofore payable with respect to such shares of
Michaels Common Stock and not paid, less the amount of any withholding taxes
that may be required thereon, and (ii) at the appropriate payment date, the
amount of dividends or other distributions, if any, with a record date after the
Effective Time but prior to surrender thereof and a payment date subsequent to
surrender thereof payable with respect to such shares of Michaels Common Stock,
less the amount of any withholding taxes which may be required thereon.
(d) At or after the Effective Time, there shall be no transfers on the
stock transfer books of any of the Targets of Shares that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be cancelled
and exchanged for certificates for shares of Michaels Common Stock in accordance
with the procedures set forth in this Article II. Certificates surrendered for
exchange by any one holder of Shares shall not be exchanged until Michaels has
received a Shareholder's Letter from such holder of Shares as provided in
Section 8.03.
(e) Notwithstanding Section 2.08 or any other provision of this Section
2.09, no fractional shares of Michaels Common Stock will be issued and any
holder of Shares entitled hereunder to receive a fractional share of Michaels
Common Stock but for this Section 2.09(e) will be entitled hereunder to receive
no such fractional share of Michaels Common Stock but a cash payment in lieu
thereof reflecting such holder's proportionate interest in a share of Michaels
Common Stock multiplied by the closing sale price for Michaels Common Stock
quoted through the National Association of Securities Dealers Automatic
Quotation - National Market System ("NASDAQ-NMS") on the last trading day
preceding the Closing Date.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Michaels Common Stock) that is unclaimed
by the former stockholders of the Targets during the one year period after the
Effective Time shall be delivered to Michaels. Any former stockholders of the
Targets who have not theretofore complied with this Article II shall thereafter
look to Michaels only as general creditors for payment of their shares of
Michaels Common Stock, and cash in lieu of fractional shares, and unpaid
dividends and distributions on shares of Michaels Common Stock, deliverable in
respect of each Share such stockholder holds as determined pursuant to this
Agreement, in each case without any interest thereon.
(g) None of the Targets, Michaels, the Surviving Corporation, Newco,
the Exchange Agent or any other person shall be liable to any former holder of
Shares for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Michaels,
the posting by such person of a bond in such reasonable amount as Michaels may
direct as indemnity against any claim that may be made against it with respect
to such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or
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destroyed Certificate shares of Michaels Common Stock and cash in lieu
of fractional shares, and unpaid dividends and distributions on shares of
Michaels Common Stock as provided in Section 2.09(c), deliverable in respect
thereof pursuant to this Agreement.
SECTION 2.10. ADJUSTMENT OF EXCHANGE RATIOS. In the event that between
the date of this Agreement and the Effective Time, Michaels or any of the
Targets changes the number of shares of Michaels Common Stock or Shares,
respectively, issued and outstanding as a result of a stock split, reverse stock
split, stock dividend, recapitalization or other similar transaction, the
Exchange Ratios and the corresponding amounts set forth in Exhibit 2.08 shall be
appropriately adjusted.
SECTION 2.11. DISSENTERS' RIGHTS. Any Dissenting Shareholder who shall
be entitled to "fair cash value" of his Shares as provided in Section 1301 of
the CGCL, Section 60.554(1) of the OBCA or 23B.13.020(1) of the WBCA, shall not
be entitled to Michaels Common Stock, unless and until the holder thereof shall
have failed to perfect or shall have effectively withdrawn or lost his
dissenter's rights with respect to the Merger(s) under the CGCL, OBCA or WBCA,
as applicable, and shall be entitled to receive from Michaels only the payment
to the extent provided for in connection with Section 1301 of the CGCL, Section
60.554(1) of the OBCA or Section 23B.13.020(1) of the WBCA, as applicable, with
respect to such Shares. If any Dissenting Shareholder shall fail to perfect or
shall have effectively withdrawn his dissenter's rights, the Shares held by such
Dissenting Shareholder shall thereupon by treated as though such Shares had been
converted into Michaels Common Stock pursuant to Section 2.08 and such
Dissenting Shareholder shall thereupon have the exchange rights provided under
Section 2.09.
SECTION 2.12. SUBSEQUENT ACTIONS. If, at any time after the Effective
Time, any of the Surviving Corporations shall consider or be advised that any
deeds, bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in
such Surviving Corporation its right, title or interest in, to or under any of
the rights, properties or assets of any of the Targets or Newco acquired or to
be acquired by such Surviving Corporation as a result of, or in connection with,
the Mergers or otherwise to carry out this Agreement, and to effect the
cancellation of all outstanding Shares in return for the consideration set forth
in this Agreement, the officers and directors of such Surviving Corporation
shall be authorized to execute and deliver, in the name and on behalf of each of
the Targets, each member of the Shareholder Group and each of the Newcos or
otherwise, to carry out all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of the Targets
and Newcos or otherwise, all such other actions and things as may be necessary
or desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties or assets in such Surviving Corporation
or otherwise to carry out this Agreement.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE TARGETS AND THE SHAREHOLDER GROUP
Each Target and each member of the Shareholder Group, jointly and
severally, represent and warrant that the following are true and correct as of
the date hereof and will be true and correct through the Closing Date as if made
on that date:
SECTION 3.01. ORGANIZATION AND GOOD STANDING; QUALIFICATION. Each
Target is a corporation duly organized, validly existing and, if applicable, in
good standing under the laws of its state of incorporation, with all requisite
corporate power and authority to carry on the business in which it is
engaged, to own the properties it owns, to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. Each Target is duly
qualified and licensed to do business and is in good standing in all
jurisdictions where the nature of its business makes such qualification
necessary, which jurisdictions are listed in Exhibit 3.01, except where the
failure to be qualified or licensed would not have a material adverse effect on
the business operations or financial condition of such Target. None of the
Targets has any assets, employees or offices in any state other than the states
listed in Exhibit 3.01. Except as otherwise indicated on Exhibit 3.01, none of
the Targets owns, directly or indirectly, any of the capital stock of any other
corporation or any equity, profit sharing, participation or other interest in
any corporation, partnership, joint venture or other entity.
SECTION 3.02. CAPITALIZATION. The authorized, issued and outstanding
capital stock of each Target, and the record and beneficial holders of all
issued and outstanding capital stock of each Target, are set forth in Exhibit
3.02. The Shareholder Group, and, to the best knowledge of the Targets and the
Shareholder Group, the other shareholders listed on Exhibit 3.02 own all such
capital stock, free and clear of all security interests, liens, adverse claims,
encumbrances, equities, proxies and shareholders' agreements, except to the
extent disclosed on Exhibit 3.02. Each outstanding share of each Target's
capital stock has been legally and validly issued and is fully paid and
nonassessable. There exist no options, warrants, subscriptions or other rights
to purchase, or securities convertible into or exchangeable for, any of the
authorized or outstanding securities of any of the Targets which have been
issued by the Targets. To the best knowledge of the Targets and the Shareholder
Group, there exist no options, warrants or other rights to purchase any of the
outstanding securities of any of the Targets issued by any of the other
shareholders. Except as set forth in Exhibit 3.02, no shares of capital stock
of any of the Targets are owned by such Target in treasury. No shares of
capital stock of any of the Targets have been issued or disposed of in violation
of the preemptive rights of any of the Shareholders.
SECTION 3.03. CORPORATE RECORDS. The copies of the Charter and all
amendments thereto and the Bylaws of each Target that have been delivered or
made available to Michaels are true, correct and complete copies thereof, as in
effect on the date hereof. The minute books of each Target, copies of which
have been or will be delivered or made available to Michaels, contain accurate
minutes of all meetings of, and accurate consents to all actions taken without
meetings
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by, the Board of Directors (and any committees thereof) and the shareholders
of the respective Targets since the formation of the respective Targets,
except for the lack of minutes or consents approving, authorizing or
describing actions taken by the Board of Directors (and any committees
thereof) and the shareholders of a Target, which would not be material to
the properties, business or financial condition of such Target.
SECTION 3.04. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by each Target of this Agreement and the other agreements
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by the Board of Directors of each
Target and will be duly authorized by their respective shareholders. This
Agreement and each other agreement contemplated hereby have been or will be as
of the Closing Date duly executed and delivered by each Target and each member
of the Shareholder Group and constitute or will constitute legal, valid and
binding obligations of each Target and each member of the Shareholder Group,
enforceable against each Target and each member of the Shareholder Group in
accordance with their respective terms, except as may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors' rights generally or
the availability of equitable remedies.
SECTION 3.05. NO VIOLATION. Neither the execution, delivery or
performance of this Agreement or the other agreements contemplated hereby nor
the consummation of the transactions contemplated hereby or thereby will (i)
conflict with, or result in a violation or breach of the terms, conditions or
provisions of, or constitute a default under, the Certificate or Articles of
Incorporation or Bylaws of any of the Targets or any agreement, indenture or
other instrument under which any of the Targets is bound or to which any of the
assets of any of the Targets are subject, or result in the creation or
imposition of any security interest, lien, charge or encumbrance upon any of the
assets of any of the Targets or (ii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body. Each Target has complied with all
laws, regulations and licensing requirements and have filed with the proper
authorities all necessary statements and reports.
SECTION 3.06. CONSENTS. Except as set forth in Exhibit 3.06, no
consent, authorization, approval, permit or license of, or filing with, any
governmental or public body or authority, any lender or lessor or any other
person or entity is required to authorize, or is required in connection with,
the execution, delivery and performance of this Agreement or the agreements
contemplated hereby on the part of any of the Targets or any member of the
Shareholder Group.
SECTION 3.07. FINANCIAL STATEMENTS. Each Target has furnished to
Michaels such Target's balance sheet and related statements of income, retained
earnings and cash flows for such Target's prior two full fiscal years,
(collectively, the "Financial Statements"). In addition, the Targets will
furnish to Michaels a balance sheet (the "Combined Balance Sheet") and a
combined statement of income and retained earnings (the "Combined Statement of
Income") dated as of and for the twelve months ending January 31, 1994 that will
be prepared on a combined basis (combining all of the Targets) as required
pursuant to Section 6.18 hereof. The
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Combined Balance Sheet and the Combined Statement of Income will be compiled by
the accounting firm of Shannon & Associates and such firm will have determined
that each of the Combined Balance Sheet and the Combined Statement of Income
have been prepared in accordance with the accounting principles described
therein. The Financial Statements are, and the Combined Balance Sheet and the
Combined Statement of Income on the Closing Date will be, true, correct and
complete, in accordance with the books and records of the respective Targets,
fairly present the financial condition and results of operations of the Targets
as of the dates and for the periods indicated and have been or will be prepared
in conformity with the accounting principles described therein and on a
consistent basis with prior periods.
SECTION 3.08. LIABILITIES AND OBLIGATIONS. Except as set forth in
Exhibit 3.08, the Financial Statements reflect all material liabilities of each
of the Targets, accrued, contingent or otherwise (known or unknown and asserted
or unasserted), arising out of transactions effected or events occurring on or
prior to the date hereof. All reserves shown in the Financial Statements are
appropriate, reasonable and sufficient to provide for losses thereby
contemplated. Except as set forth in the Financial Statements and Exhibit 3.08,
none of the Targets are liable upon or with respect to, or obligated in any
other way to provide funds in respect of or to guarantee or assume in any
manner, any debt, obligation or dividend of any person, corporation,
association, partnership, joint venture, trust or other entity, and neither any
Target nor any member of the Shareholder Group knows of any basis for the
assertion of any other claims or liabilities of any nature or in any amount.
SECTION 3.09. EMPLOYEE MATTERS.
(a) CASH COMPENSATION. Exhibit 3.09(a) contains a complete and
accurate list of the names, titles and cash compensation, including without
limitation wages, salaries, bonuses (discretionary and formula) and other cash
compensation (the "Cash Compensation") of all employees of the Targets who meet
both of the following criteria (i) are currently compensated at a rate in excess
of $50,000 per year and (ii) who earned in excess of such amount during the
respective Target's last completed fiscal year. In addition, Exhibit 3.09(a)
contains a complete and accurate description of (x) all increases in Cash
Compensation of employees of each Target during the current and immediately
preceding fiscal years of the respective Target and (y) any promised increases
in Cash Compensation of employees of any of the Targets that have not yet been
effected.
(b) COMPENSATION PLANS. Exhibit 3.09(b) contains a complete and
accurate list of all compensation plans, arrangements or practices (the
"Compensation Plans") sponsored by any of the Targets or to which any of the
Targets contributes on behalf of its employees, other than Employee Benefit
Plans listed in Exhibit 3.10(a). The Compensation Plans include without
limitation plans, arrangements or practices that provide for severance pay,
deferred compensation, incentive, bonus or performance awards, and stock
ownership or stock options. The Targets have provided Michaels a copy of each
written Compensation Plan and a written description of each
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unwritten Compensation Plan. Each of the Compensation Plans can be terminated
or amended at will upon reasonable notice to the employees by the respective
Target.
(c) EMPLOYMENT AGREEMENTS. Except as set forth in Exhibit 3.09(c),
none of the Targets is a party to any employment agreement other than unwritten
agreements regarding employment at will which are immediately terminable
("Employment Agreements") with respect to any of its employees. Employment
Agreements include without limitation employee leasing agreements, employee
services agreements and noncompetition agreements.
(d) EMPLOYEE POLICIES AND PROCEDURES. Exhibit 3.09(d) contains a
complete and accurate list of all employee manuals, policies, procedures and
work-related rules (the "Employee Policies and Procedures") that apply to
employees of any of the Targets. Each Target has provided Michaels a copy of
all written Employee Policies and Procedures and a written description of all
unwritten Employee Policies and Procedures. Each of the Employee Policies and
Procedures can be amended or terminated at will by the respective Target.
(e) UNWRITTEN AMENDMENTS. No unwritten amendments have been made,
whether by oral communication, pattern of conduct or otherwise, with respect to
any Compensation Plans or Employee Policies and Procedures.
(f) LABOR COMPLIANCE. Each Target has been and is in compliance with
all laws, rules, regulations and ordinances respecting employment and employment
practices, terms and conditions of employment and wages and hours except where
the failure to so comply would not have a material adverse effect on the
properties, business or financial condition of any Target, and no Target is
liable for any arrears of wages or penalties for failure to comply with any of
the foregoing. None of the Targets has engaged in any unfair labor practice or
discriminated on the basis of race, color, religion, sex, national origin, age,
disability or handicap in its employment conditions or practices. There are no
(i) unfair labor practice charges or complaints or racial, color, religious,
sex, national origin, age, disability or handicap discrimination charges or
complaints pending or, to the knowledge of the Targets or any member of the
Shareholder Group, threatened against any of the Targets before any federal,
state or local court, board, department, commission or agency (nor does any
basis therefor exist) or (ii) existing or threatened labor strikes, disputes,
grievances, controversies or other labor troubles affecting any of the Targets,
(nor does any basis therefor exist).
(g) UNIONS. None of the Targets has ever been a party to any
agreement with any union, labor organization or collective bargaining unit. No
employees of any of the Targets are represented by any union, labor organization
or collective bargaining unit. To the best knowledge of each Target and each
member of the Shareholder Group, none of the employees of any Target has
threatened to, nor has any intention to, organize or join a union, labor
organization or collective bargaining unit.
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(h) ALIENS. All employees of each Target are citizens of, or are
authorized in accordance with federal immigration laws to be employed in, the
United States.
SECTION 3.10. EMPLOYEE BENEFIT PLANS.
(a) IDENTIFICATION. Exhibit 3.10(a) contains a complete and accurate
list of all employee benefit plans (the "Employee Benefit Plans") (within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) sponsored by any of the Targets or to which any of the
Targets contributes on behalf of its respective employees and all Employee
Benefit Plans previously sponsored or contributed to on behalf of its respective
employees within the three years preceding the date hereof. Each Target has
provided Michaels with copies of all plan documents, determination letters,
pending determination letter applications, trust instruments, insurance
contracts, administrative services contracts, annual reports, actuarial
valuations, summary plan descriptions, summaries of material modifications,
administrative forms and other documents that constitute a part of or are
incident to the administration of the Employee Benefit Plans. In addition, each
Target has provided Michaels a written description of all existing practices
engaged in by any of the Targets that constitute Employee Benefit Plans. Except
as set forth in Exhibit 3.10(a) each of the Employee Benefit Plans can be
terminated or amended at will by the respective Target. No unwritten amendment
exists with respect to any Employee Benefit Plan.
(b) ADMINISTRATION. Each Employee Benefit Plan has been administered
and maintained in compliance with all laws, rules and regulations.
(c) EXAMINATIONS. No Employee Benefit Plan is currently the subject
of an audit, investigation, enforcement action or other similar proceeding
conducted by any state or federal agency.
(d) PROHIBITED TRANSACTIONS. No prohibited transactions (within the
meaning of Section 4975 of the Code) have occurred with respect to any Employee
Benefit Plan.
(e) CLAIMS AND LITIGATION. No threatened or pending claims, suits or
other proceedings exist with respect to any Employee Benefit Plan other than
normal benefit claims filed by participants or beneficiaries.
(f) QUALIFICATION. Each Target has received a favorable determination
letter or ruling from the Internal Revenue Service for each of such Target's
Employee Benefit Plan intended to be qualified within the meaning of Section
401(a) of the Code and/or tax-exempt within the meaning of Section 501(a) of the
Code. No proceedings exist or have been threatened that could result in the
revocation of any such favorable determination letter or ruling.
(g) FUNDING STATUS. No accumulated funding deficiency (within the
meaning of Section 412 of the Code), whether waived or unwaived, exists with
respect to any Employee
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Benefit Plan or any plan sponsored by any member of a controlled group (within
the meaning of Section 412(n)(6)(B) of the Code) in which any of the Targets is
a member (a "Controlled Group"). With respect to each Employee Benefit Plan
subject to Title IV of ERISA, the assets of each such plan are at least equal in
value to the present value of accrued benefits determined on an ongoing basis as
of the date hereof. With respect to each Employee Benefit Plan described in
Section 501(c)(9) of the Code, the assets of each such plan are at least equal
in value to the present value of accrued benefits as of the date hereof.
Exhibit 3.10(g) contains a complete and accurate statement of all actuarial
assumptions applied to determine the present value of accrued benefits under all
Employee Benefit Plans subject to actuarial assumptions.
(h) EXCISE TAXES. None of the Targets nor any member of a Controlled
Group has any liability to pay excise taxes with respect to any Employee Benefit
Plan under applicable provisions of the Code or ERISA.
(i) MULTIEMPLOYER PLANS. None of the Targets nor any member of a
Controlled Group is or ever has been obligated to contribute to a multiemployer
plan within the meaning of Section 3(37) of ERISA.
(j) PBGC. No facts or circumstances exist that would result in the
imposition of liability against Michaels by the Pension Benefit Guaranty
Corporation as a result of any act or omission by any of the Targets or any
member of a Controlled Group. No reportable event (within the meaning of
Section 4043 of ERISA) for which the notice requirement has not been waived has
occurred with respect to any Employee Benefit Plan subject to the requirements
of Title IV of ERISA.
(k) MEDICAL AND DENTAL CARE CLAIMS. Exhibit 3.10(k) contains a
complete and accurate list of all claims made (without identifying specific
individuals) under any medical or dental care plan or commitment offered by any
of the Targets to its employees involving hospitalization, medical or dental
care claims that have exceeded $10,000 for an individual during any of the
Target's current fiscal year or any of the three fiscal years preceding the date
hereof.
(l) RETIREES. No Target has any obligation or commitment to provide
medical, dental or life insurance benefits to or on behalf of any of its
employees who may retire or any of its former employees who have retired from
employment with such Target except as may be required pursuant to the
continuation of coverage provisions of Section 4980B of the Code and the
applicable provisions of ERISA.
SECTION 3.11. ABSENCE OF CERTAIN CHANGES. Except as set forth in
Exhibit 3.11, since January 31, 1994, none of the Targets has
(a) suffered any material adverse change, whether or not caused by any
deliberate act or omission of any Target, in its respective condition (financial
or otherwise), operations, assets, liabilities, business or prospects;
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(b) contracted for the purchase of any capital assets having a cost in
excess of $10,000 or paid any capital expenditures in excess of $10,000;
(c) incurred any indebtedness for borrowed money, except in the ordinary
course of business, or issued or sold any debt securities;
(d) incurred or discharged any liabilities or obligations except in the
ordinary course of business;
(e) paid any amount on any indebtedness prior to the due date, forgiven
or cancelled any debts or claims or released or waived any rights or claims
except for amounts which, in the aggregate, are not material to such Target;
(f) mortgaged, pledged or subjected to any security interest, lien,
lease or other charge or encumbrance any of its properties or assets;
(g) suffered any damage or destruction to or loss of any assets (whether
or not covered by insurance) that has materially and adversely affected, or
would materially and adversely affect, its business;
(h) acquired or disposed of any assets except in the ordinary course of
business;
(i) written up or written down the carrying value of any of its assets;
(j) changed the costing system or depreciation methods of accounting for
its assets;
(k) waived any material rights or forgiven any material claims;
(l) lost or terminated any employee, customer or supplier, the loss or
termination of which has materially and adversely affected, or would materially
and adversely affect, its business or assets;
(m) increased the compensation of any director, officer, key employee or
consultant except in the ordinary course of business and consistent with past
practice;
(n) increased the compensation of any employee except in the ordinary
course of business;
(o) made any payments to or loaned any money to any person or entity
referred to in Section 3.31;
(p) formed or acquired or disposed of any interest in any corporation,
partnership, joint venture or other entity except for acquisition of interests
in other Targets;
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(q) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of its capital stock or
securities or any rights to acquire such capital stock or securities, or agreed
to change the terms and conditions of any such stock, securities or rights;
(r) entered into any agreement with any person or group, or modified or
amended in any material respect the terms of any such existing agreement except
in the ordinary course of business;
(s) entered into, adopted or amended any Employee Benefit Plan; or
(t) entered into any other commitment or transaction or experienced any
other event that is material to this Agreement or to any of the other agreements
and documents executed or to be executed pursuant to this Agreement or to the
transactions contemplated hereby or thereby, or that has materially and
adversely affected, or would materially and adversely affect, the condition
(financial or otherwise), operations, assets, liabilities, business or prospects
of any of the Targets.
SECTION 3.12. TITLE; LEASED ASSETS.
(a) REAL PROPERTY. A description of the only interests in real
property owned by the Targets (collectively, the "Real Property") is set forth
in Exhibit 3.12(a). Except as set forth in Exhibit 3.12(a), the Targets have
good, valid and indefeasible title to all the Real Property. The Real Property
and the leased real property referred to in Section 3.12(c) constitute the only
real property used in the conduct of the Targets' businesses. Upon consummation
of the transactions contemplated hereby, such interest in the Real Property
shall be, on the Closing Date, free and clear of all liens, claims and
encumbrances other than those described in Exhibit 3.12(a).
(b) PERSONAL PROPERTY. Except as set forth in Exhibit 3.12(b), the
Targets have good, valid and marketable title to all the personal property owned
by the Targets (the "Personal Property"). The Personal Property and the leased
personal property referred to in Section 3.12(c) constitute the only personal
property used in the conduct of the Targets' businesses. Upon consummation of
the transactions contemplated hereby, such interest in the Personal Property
shall be, on the Closing Date, free and clear of all security interests, liens,
claims and encumbrances other than those described in Exhibit 3.12(b).
(c) LEASES. A list and brief description of all leases of real and
personal property to which any of the Targets are a party, either as lessor or
lessee, is set forth in Exhibit 3.12(c). All such leases are valid and
enforceable in accordance with their respective terms except as may be limited
by applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally or the availability of equitable remedies.
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(d) RIGHT TO USE ASSETS. Except for those assets acquired since the
date of the Combined Balance Sheet, which are listed in Exhibit 3.12(d), all
tangible assets used in the conduct of the Targets' businesses are reflected in
the Financial Statements in a manner that is in conformity with generally
accepted accounting principles applied on a consistent basis with prior periods.
Each Target owns, leases or otherwise possesses a transferable right to use all
assets used in the conduct of its respective business, which will not be
impaired by the consummation of the transactions contemplated hereby.
SECTION 3.13. COMMITMENTS.
(a) COMMITMENTS; DEFAULTS. Except as set forth in Exhibit 3.13 or as
specifically reflected in the Financial Statements, none of the Targets have
entered into, nor are any of the Shares bound by, nor are the assets or the
business of any of the Targets bound by, whether or not in writing, any of the
following (collectively "Commitments"):
(i) partnership or joint venture agreement;
(ii) deed of trust, mortgage or other security agreement;
(iii) guaranty or suretyship, indemnification or contribution
agreement or performance bond;
(iv) employment, consulting or compensation agreement or
arrangement, including the election or retention in office of any director
or officer;
(v) labor or collective bargaining agreement;
(vi) debt instrument, loan agreement or other obligation relating
to indebtedness for borrowed money or money lent or to be lent to another;
(vii) deed or other document evidencing an interest in or contract
to purchase or sell real property (except as set forth in Exhibit
3.12(c));
(viii) agreement with dealers or sales or commission agents, public
relations or advertising agencies, accountants or attorneys;
(ix) lease of real or personal property, whether as lessor, lessee,
sublessor or sublessee;
(x) agreement between (i) any Target and (ii) any other Target or
the shareholder of any Target;
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(xi) agreement relating to any material matter or transaction in
which an interest is held by a person or entity that is an affiliate of
any Target (other than previously executed, fully performed agreements
with no continuing obligation or liability of the Targets);
(xii) any agreement (other than previously executed, fully
performed agreements with no continuing obligation or liability of the
Targets) for the acquisition of services, supplies, equipment, inventory,
fixtures or other property involving more than $25,000 in the aggregate
(other than purchase orders for inventory, which purchase orders have been
provided to Michaels);
(xiii) powers of attorney;
(xiv) contracts containing noncompetition covenants (except as set
forth in Exhibit 3.09(c));
(xv) any other contract or arrangement that involves either an
unperformed commitment in excess of $25,000 or that terminates more than
30 days after the date hereof (except as set forth in Exhibit 3.12(c));
(xvi) agreement relating to any material matter or transaction in
which an interest is held by any person or entity referred to in Section
3.31 (other than previously executed, fully performed agreements with no
continuing obligation or liability of the Targets);
(xvii) agreement providing for the purchase from a supplier of all
or substantially all of the requirements of any Target of a particular
product or service; or
(xviii) any other agreement or commitment not made in the ordinary
course of business or that is material to the business or financial
condition of any Target (other than previously executed, fully performed
agreements with no continuing obligation or liability of the Targets).
True, correct and complete copies of the written Commitments, and true, correct
and complete written descriptions of the oral Commitments, have heretofore been
delivered, been made available or will be made available to Michaels prior to
the Closing. Except as set forth in Exhibit 3.13, there are, with respect to
the Targets, and to the best knowledge of the Targets and each member of the
Shareholder Group with respect to third parties, no existing defaults, events of
default or events, occurrences, acts or omissions that, with the giving of
notice or lapse of time or both, would constitute defaults by any Target, and no
penalties have been incurred nor are amendments pending, with respect to the
Commitments, except as described in Exhibit 3.13. The Commitments are in full
force and effect and are valid and enforceable obligations of the Targets, and
to the best knowledge of the Targets and each member of the Shareholder Group,
of the
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other parties thereto in accordance with their respective terms, and no
defenses, off-sets or counterclaims have been asserted or, to the best
knowledge of each Target and each member of the Shareholder Group, may be
made by any party thereto, nor has any Target waived any rights thereunder,
except as described in Exhibit 3.13. No Target has received notice of any
default with respect to any Commitment.
(b) NO CANCELLATION OR TERMINATION OF COMMITMENT. Except as
contemplated hereby, (i) no member of the Shareholder Group nor any Target has
received notice of any plan or intention of any other party to any Commitment to
exercise any right to cancel or terminate any Commitment or agreement, and no
member of the Shareholder Group nor any Target knows of any fact that would
justify the exercise of such a right; (ii) no member of the Shareholder Group
nor any Target currently contemplates, or has reason to believe any other person
or entity currently contemplates, any amendment or change to any Commitment; and
(iii) except as listed in Exhibit 3.13, none of the customers or suppliers of
any Target has refused, or communicated that it will or may refuse, to purchase
or supply goods or services, as the case may be, or has communicated that it
will or may substantially reduce the amounts of goods or services that it is
willing to purchase from, or sell to, such Target.
SECTION 3.14. ADVERSE AGREEMENTS. None of the Targets is a party to
any agreement or instrument or subject to any charter or other corporate
restriction or any judgment, order, writ, injunction, decree, rule or regulation
that adversely affects, or would in the future adversely affect, the condition
(financial or otherwise), operations, assets, liabilities, business or prospects
of any Target.
SECTION 3.15. INSURANCE. Each Target carries property, liability,
workers' compensation and such other types of insurance as is customary in the
industry. A list and brief description of all insurance policies of each Target
are set forth in Exhibit 3.15. All of such policies are valid and enforceable
policies, issued by insurers of recognized responsibility in amounts and against
such risks and losses as is customary in the industry. Such insurance shall be
outstanding and duly in force without interruption up to and including the
Closing Date. True, complete and correct copies of all such policies have been
provided to Michaels on or prior to the date hereof.
SECTION 3.16. PATENTS, TRADEMARKS, SERVICE MARKS AND COPYRIGHTS.
(a) OWNERSHIP. Except as set forth in Exhibit 3.16 each Target owns
all patents, trademarks, service marks and copyrights, if any, necessary to
conduct its respective business, without conflict with the rights of others.
Set forth in Exhibit 3.16 is a true and correct description of the following
("Proprietary Rights"):
(i) all trademarks, trade-names, service marks and other trade
designations, including common law rights, registrations and applications
therefor, and all patents, copyrights and applications currently owned, in
whole or in part, by any Target with respect to such Target's business,
and all licenses, royalties,
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assignments and other similar agreements relating to the foregoing to
which any Target is a party (including expiration date if applicable); and
(ii) all agreements relating to technology, know-how or processes
that any Target is licensed or authorized to use by others, or which it
licenses or authorizes others to use.
(b) CONFLICTING RIGHTS OF THIRD PARTIES. The Targets have the sole
and exclusive right to use the Proprietary Rights without infringing or
violating the rights of any third parties. No consent of third parties will be
required for the use thereof by Michaels upon consummation of the transactions
contemplated hereby and the Proprietary Rights are freely transferable. No
claim has been asserted by any person to the ownership of or right to use any
Proprietary Right, and no member of the Shareholder Group nor any Target knows
of any valid basis for any such claim. Each of the Proprietary Rights is valid
and subsisting, has not been cancelled, abandoned or otherwise terminated and,
if applicable, has been duly issued or filed.
(c) CLAIMS OF OTHER PERSONS. No member of the Shareholder Group nor
any Target has any knowledge of any claim that, or inquiry as to whether, any
product, activity or operation of any Target infringes upon or involves, or has
resulted in the infringement of, any proprietary right of any other person,
corporation or other entity; and no proceedings have been instituted, are
pending or are threatened that challenge the rights of any Target with respect
thereto. No Target has given and no Target is bound by any agreement of
indemnification for any Proprietary Right as to any property manufactured, used
or sold by any Target except as set forth in Exhibit 3.16.
SECTION 3.17. TRADE SECRETS AND CUSTOMER LISTS. Each Target has the
right to use, free and clear of any claims or rights of others except claims or
rights specifically set forth in Exhibit 3.17, all trade secrets, customer lists
and proprietary information required for the marketing of all merchandise and
services formerly or presently sold or marketed by such Target. None of the
Targets are using nor in any way making use of any confidential information or
trade secrets of any third party, including without limitation any past or
present employee of any Target, except with such third party's consent as
indicated on Exhibit 3.17.
SECTION 3.18. TAXES.
(a) FILING OF TAX RETURNS. Each Target has duly and timely filed with
the appropriate governmental agencies all income, excise, corporate, franchise,
property, sales, use, payroll, withholding and other tax returns (including
information returns) and reports required to be filed by the United States or
any state or any political subdivision thereof or any foreign jurisdiction. All
such tax returns or reports are complete and accurate and properly reflect the
taxes of such Target for the periods covered thereby.
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(b) PAYMENT OF TAXES. Each Target has paid all taxes, penalties and
interest that have become due with respect to any returns that it has filed and
any assessments of which it is aware, and has properly accrued on its books and
records for all of the same that have not yet become due. None of the Targets
are delinquent in the payment of any tax, assessment or governmental charge.
(c) NO PENDING DEFICIENCIES, DELINQUENCIES, ASSESSMENTS OR AUDITS. No
tax deficiency or delinquency has been asserted against any Target. There is no
unpaid assessment, proposal for additional taxes, deficiency or delinquency in
the payment of any of the taxes of any Target that could be asserted by any
taxing authority. There is no taxing authority audit of any Target pending or
threatened, and the results of any completed audits are properly reflected in
the Financial Statements. None of the Targets have violated any federal, state,
local or foreign tax law.
(d) NO EXTENSION OF LIMITATION PERIOD. None of the Targets have
granted an extension to any taxing authority of the limitation period during
which any tax liability may be assessed or collected.
(e) ALL WITHHOLDING REQUIREMENTS SATISFIED. All monies required to be
withheld by any Target and paid to governmental agencies for all income, social
security, unemployment insurance, sales, excise, use, and other taxes have been
collected or withheld and paid to the respective governmental agencies.
(f) STATE UNEMPLOYMENT TAXES. In respect of their most recently
completed reporting periods, the Targets have paid state unemployment taxes to
the States of California, Oregon and Washington at the applicable rates of the
wages paid by the respective Targets during such period that are subject to such
respective taxes. No member of the Shareholder Group nor any Target knows or
has reason to know of any increase or proposed increase, or facts that would
lead to an increase, in the rate of such state unemployment taxes for any period
in the future.
(g) TAX LIABILITY IN FINANCIAL STATEMENTS. The liabilities (including
deferred taxes) shown in the Financial Statements for taxes, interest and
penalties are and will be adequate accruals and have been and will be accrued in
a manner consistent with the past practices and take into account net operating
losses, investment credits and other carryovers for periods ended prior to the
Closing Date.
(h) FOREIGN PERSON. No member of the Shareholder Group, no Target nor
any shareholder of a Target is a foreign person, as such term is referred to in
Section 1445(b)(2) of the Code.
(i) SAFE HARBOR LEASE. None of the assets of the Targets constitute
property that such Target, Michaels, or any affiliate of Michaels, will be
required to treat as being owned by
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another person pursuant to the "Safe Harbor Lease" provisions of Section
168(f)(8) of the Code prior to repeal by the Tax Equity and Fiscal
Responsibility Act of 1982.
(j) TAX EXEMPT ENTITY. None of the assets of the Targets are or will
be subject to a lease to a "tax exempt entity" as such term is defined in
Section 168(h)(2) of the Code.
(k) COLLAPSIBLE CORPORATION. None of the Targets have at any time
consented, and the Shareholder Group will not permit any of the Targets to
elect, to have the provisions of Section 341(f)(2) of the Code apply to it.
(l) ASSETS EXCLUDE STOCK. The assets of the Targets do not include
(i) stock of a corporation having voting power equal to 80% or more of the total
voting power of the stock of such corporation or (ii) stock of a corporation
having a value equal to 80% or more of the total value of the stock of such
corporation.
SECTION 3.19. COMPLIANCE WITH LAWS. Each Target has complied with all
laws, regulations and licensing requirements and has filed with the proper
authorities all necessary statements and reports except where the failure to so
comply or file would not have a material adverse effect on the properties,
business or financial condition of such Target. There are no existing
violations by any Target of any federal, state or local law or regulation that
could affect the property or business of any Target. Each Target possesses all
necessary licenses, franchises, permits and governmental authorizations to
conduct its respective business as now conducted, all of which are listed in
Exhibit 3.19.
SECTION 3.20. FINDER'S FEE. No member of the Shareholder Group nor any
Target has incurred any obligation for any finder's, broker's or agent's fee in
connection with the transactions contemplated hereby.
SECTION 3.21. LITIGATION. Except as described in Exhibit 3.21, there
are no legal actions or administrative proceedings or investigations instituted,
or to the best knowledge of the Targets or any member of the Shareholder Group,
threatened, against or affecting, or that could affect, any Target, any of the
assets of any Target, or the business of any Target. No member of the
Shareholder Group nor any Target is (i) subject to any continuing court or
administrative order, writ, injunction or decree applicable specifically to any
Target or to its respective business, assets, operations or employees or (ii) in
default with respect to any such order, writ, injunction or decree. No member
of the Shareholder Group nor any Target knows of any basis for any such action,
proceeding or investigation.
SECTION 3.22. ACCURACY OF INFORMATION FURNISHED. All information
furnished to Michaels by any member of the Shareholder Group or any Target
hereby or in connection with the transactions contemplated hereby is true,
correct and complete in all material respects. Such information states all
facts required to be stated therein or necessary to make the statements
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therein, in light of the circumstances under which such statements are made,
true, correct and complete in all material respects.
SECTION 3.23. CONDITION OF FIXED ASSETS. All of the plants, structures
and equipment reflected in the Financial Statements (the "Fixed Assets") and
used by any of the Targets in its respective business are in good condition and
repair for their intended use in the ordinary course of business and conform in
all material respects with all applicable ordinances, regulations and other laws
and there are no known latent defects therein.
SECTION 3.24. INVENTORY. All of the inventory owned or used by the
Targets is in good, current, standard and merchantable condition and is not
obsolete or defective except for obsolete inventory which, in the aggregate,
does not exceed $425,000 at retail. Inventories are valued on the books and
records of each Target at the lower of cost (determined by the retail method of
accounting) or market. Purchase commitments for merchandise are not in excess
of normal requirements and, taken as a whole, are not at prices in excess of
market prices. Each Target presently has, at the Closing Date will have, and
all outstanding purchase commitments are consistent with, the types and
quantities of inventories appropriate, taken as a whole, to conduct its
respective business consistently with past practices.
SECTION 3.25. BOOKS OF ACCOUNT. The books of account of each Target
have been kept accurately in the ordinary course of business, the transactions
entered therein represent bona fide transactions and the revenues, expenses,
assets and liabilities of such Target have been properly recorded in such books.
SECTION 3.26. CORPORATE NAME. There are no actions, suits or
proceedings pending, or to the best knowledge of each member of the Shareholder
Group and the Targets threatened, against or affecting any Target that could
result in any impairment of the right of any Target to use the names "H&H Craft
& Floral Supply Co." and "Oregon Craft & Floral Supply Co." The use of the
names "H&H Craft & Floral Supply Co." and "Oregon Craft & Floral Supply Co."
does not infringe the rights of any third party nor are they confusingly similar
with the corporate name of any third party. Except as set forth in Exhibit 3.26
after the Closing Date, no person or business entity other than the Newcos and
Michaels will be authorized by Targets or the Shareholder Group, directly or
indirectly, to use the names "H&H Craft & Floral Supply Co." and "Oregon Craft &
Floral Supply Co." or any name confusingly similar thereto.
SECTION 3.27. DISTRIBUTIONS AND REPURCHASES. Except as described on
Exhibit 3.27, no distribution, payment or dividend of any kind has been declared
or paid by any Target on any of its capital stock at any time. No repurchase of
any of any Target's capital stock has been approved, effected or is pending, or
is contemplated by the Board of Directors of such Target.
SECTION 3.28. SUPPLIERS. Set forth in Exhibit 3.28 is a complete and
accurate list of the 5 largest respective suppliers of each Target in terms of
dollar volume of transactions of such
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Target for each of the last three fiscal years and the current fiscal year to
date, showing, with respect to each, the name, address and aggregate dollar
volume of purchases from such supplier.
SECTION 3.29. BANKING RELATIONS. Set forth in Exhibit 3.29 is a
complete and accurate list of all respective arrangements that any Target has
with any bank or other financial institution, indicating with respect to each
relationship the type of arrangement maintained (such as checking account,
borrowing arrangements, safe deposit box, etc.) and the person or persons
authorized in respect thereof.
SECTION 3.30. OWNERSHIP INTERESTS OF INTERESTED PERSONS. Except as set
forth in Exhibit 3.30, no officer, supervisory employee, director or shareholder
of any Target, or their respective spouses or children, owns directly or
indirectly, on an individual or joint basis, any material interest in, or serves
as an officer or director of, any customer or supplier of any Target, or any
organization that has a material contract or arrangement with any Target.
SECTION 3.31. INVESTMENTS IN COMPETITORS. No member of the Shareholder
Group, no Target nor any shareholder of any Target owns directly or indirectly
any interests or has any investment in any corporation (other than another
Target), business or other person that is a competitor of any Target.
SECTION 3.32. ENVIRONMENTAL MATTERS.
(a) ENVIRONMENTAL LAWS. No Target nor any Target's assets are
currently in violation of, or subject to any existing, pending or threatened
investigation or inquiry by any governmental authority or to any remedial
obligations under, any laws or regulations pertaining to health or the
environment (hereinafter sometimes collectively called "Environmental Laws"),
including without limitation (i) the Comprehensive Environmental Response,
Group 43 from time to time ("CERCLA") (including without limitation as amended
pursuant to the Superfund Amendments and Reauthorization Act of 1986), and
regulations promulgated under CERCLA, (ii) the Resource Conservation and
Recovery Act of SEQ.), as amended 1976 (42 U.S.C. Sections 6901 ET SEQ.), as
amended from time regulations promulgated thereunder, (iii) statutes, rules or
regulations, whether federal, state or local, relating to asbestos or
polychlorinated biphenyls, and (iv) the provisions contained in any similar
state statutes or regulations relating to environmental matters applicable to
any Target, and this representation and warranty would continue to be true and
correct following disclosure to the applicable governmental authorities of all
relevant facts, conditions and circumstances, if any, pertaining to the assets
and operations of any of the Targets.
(b) USE OF ASSETS. The assets of the Targets have never been used in
a manner that would be in violation of any of the Environmental Laws, including
without limitation CERCLA, RCRA and any similar state statutes or regulations
relating to environmental matters applicable to any Target.
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(c) PERMITS. No Target has obtained, no Target is required to obtain,
and no member of the Shareholder Group nor any Target has any knowledge of any
reason Michaels or any Target will be required to obtain, any permits, licenses
or similar authorizations to construct, occupy, operate or use any buildings,
improvements, fixtures and equipment owned or leased by any Target by reason of
any Environmental Laws.
(d) SUPERFUND LIST. None of the assets owned or leased by any Target
are on any federal or state "Superfund" list or subject to any environmentally
related liens.
SECTION 3.33. CERTAIN PAYMENTS. No member of the Shareholder Group nor
any Target nor any director, officer or employee of any Target has paid or
caused to be paid, directly or indirectly, in connection with the business of
any Target:
(a) to any government or agency thereof or any agent of any supplier or
customer any bribe, kick-back or other similar payment; or
(b) any contribution to any political party or candidate (other than
from personal funds of directors, officers or employees not reimbursed by their
respective employers or as otherwise permitted by applicable law).
SECTION 3.34. SOLVENCY OF TARGETS. The fair market value of the assets
of each of the Targets will exceed the sum of such respective Target's
liabilities, plus the amount of liabilities, if any, to which the assets of such
respective Target are subject.
ARTICLE IV.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SHAREHOLDER GROUP
Each member of the Shareholder Group jointly and severally represents and
warrants that the following are true and correct as of the date hereof and will
be true and correct through the Closing Date as if made on that date and agrees
as follows:
SECTION 4.01. OWNERSHIP OF SHARES. Except as set forth in Exhibit
4.01, each member of the Shareholder Group owns, beneficially and of record,
good and marketable title to the Shares of the Targets shown opposite his name
in Exhibit 4.01, and, as of the Closing Date, will own such shares free and
clear of all security interests, liens, adverse claims, encumbrances, equities,
proxies, options or shareholders' agreements.
SECTION 4.02. SHAREHOLDERS' CAPACITY. Each member of the Shareholder
Group has legal capacity to enter into and perform this Agreement.
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SECTION 4.03. INVESTMENT REPRESENTATIONS. The Michaels Common Stock to
be acquired by each member of the Shareholder Group is being acquired by each of
them for his, her or its own account, for investment and not with a view to, or
for resale in connection with, any distribution and no other person has or will
have any rights to acquire any beneficial interest therein. Each member of the
Shareholder Group fully understands and agrees that he, she or it must bear the
economic risk of the acquisition of the Michaels Common Stock acquired by him,
her or it for an indefinite period of time because the Michaels Common Stock has
not been registered under the Securities Act or under the securities laws of any
state or other jurisdiction and, therefore, cannot be resold, pledged, assigned
or otherwise disposed of unless the Michaels Common Stock is subsequently
registered for sale under the Securities Act and the applicable securities laws
of such states or unless an exemption from registration is available. Each
member of the Shareholder Group has received a copy of the Michaels Annual
Report on Form 10-K for the fiscal year ended January 31, 1993 and all other
documents filed subsequent to January 31, 1993 under Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act (including without limitation, its Form 10-Q for
the quarters ended May 2, August 1 and October 31, 1993 and its Proxy Statement
dated April 29, 1993), each in the form (excluding exhibits) filed with the SEC
(collectively the "Reports"). Each member of the Shareholder Group agrees that
(i) a restrictive legend in the form attached hereto as Exhibit 4.03 will be
placed on each certificate representing the Michaels Common Stock delivered to
him and a notation shall be made in the appropriate records of Michaels
indicating that such shares are subject to restrictions on transfer, and (ii)
each member of the Shareholder Group has received and reviewed this Agreement
and the Reports and other documents referred to herein and has been given the
opportunity to obtain any additional information or documents and to ask
questions and receive answers about such documents. Each member of the
Shareholder Group has carefully reviewed and fully understands the nature and
risks of, and other considerations relating to, the issuance of the Michaels
Common Stock pursuant to this Agreement. Each member of the Shareholder Group
has received only the Reports and the documents attached as exhibits hereto and
the other documents that Michaels may have provided at the specific request of
any member of the Shareholder Group, and has received no other literature from
Michaels. Except as set forth in this Agreement and the exhibits hereto, no
representations or warranties have been made to any member of the Shareholder
Group or any other Shareholder by Michaels or by any person acting on behalf of
Michaels with respect to the business or financial condition of Michaels.
SECTION 4.04. PERSONAL HOLDING COMPANY; CONTROL OF RELATED BUSINESSES.
No member of the Shareholder Group owns the Shares (which are set forth opposite
his, her or its name on Exhibit 2.08), directly or indirectly, beneficially or
of record, through a personal holding company. Except as set forth in Exhibit
4.04, no member of the Shareholder Group controls another business that is in
the same or similar line of business as the Targets or that has or is engaged in
transactions with the Targets except transactions in the ordinary course of
business.
SECTION 4.05. OWNERSHIP OF MICHAELS COMMON STOCK. Except as set forth
in Exhibit 4.05, no member of the Shareholder Group,
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and to the best knowledge of the Shareholder Group, no other Shareholder
directly or indirectly, beneficially or of record, owns or has any ownership
interest in Michaels Common Stock or any securities convertible into Michaels
Common Stock.
SECTION 4.06. TRANSFERS OF TARGET COMMON STOCK. Set forth in Exhibit
4.06 is a list of all transfers or other transactions involving common stock of
the Targets since March 1, 1991. All transfers of common stock of the Targets
have been made for valid business reasons and not in anticipation or
contemplation of the consummation of the transactions contemplated by this
Agreement.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF MICHAELS
Michaels represents and warrants that the following are true and correct
as of the date hereof and will be true and correct through the Closing Date as
if made on that date:
SECTION 5.01. ORGANIZATION AND GOOD STANDING. Michaels is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own the properties
it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
SECTION 5.02. AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by Michaels of this Agreement and the other agreements contemplated
hereby, and the consummation of the transactions contemplated hereby and
thereby, have been duly authorized by Michaels. This Agreement and each other
agreement contemplated hereby have been or will be as of the Closing Date duly
executed and delivered by Michaels and constitute or will constitute legal,
valid and binding obligations of Michaels, enforceable against Michaels in
accordance with their respective terms, except as may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors' rights generally or
the availability of equitable remedies.
SECTION 5.03. NO VIOLATION. Neither the execution, delivery or
performance of this Agreement or the other agreements contemplated hereby nor
the consummation of the transactions contemplated hereby or thereby will (i)
conflict with, or result in a violation or breach of the terms, conditions and
provisions of, or constitute a default under, the Certificate of Incorporation
or Bylaws of Michaels or any agreement, indenture or other instrument under
which Michaels is bound or (ii) violate or conflict with any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over Michaels or the properties or
assets of Michaels.
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SECTION 5.04. FINDER'S FEE. Michaels has not incurred any obligation
for any finder's, broker's or agent's fee in connection with the transactions
contemplated hereby except those for which neither the Targets nor the
Shareholder Group shall have any liability.
SECTION 5.05. CAPITAL STOCK. All of the outstanding shares of common
stock of each Newco are or will be as of the Closing Date validly issued, fully
paid and nonassessable and are or will be as of the Closing Date owned directly
by Michaels, free and clear of all liens, claims and encumbrances. The issuance
and delivery by Michaels of shares of Michaels Common Stock in connection with
the Merger have been duly and validly authorized by all necessary corporate
action on the part of Michaels. The shares of Michaels Common Stock to be
issued in connection with the Merger, when issued in accordance with the terms
of this Agreement, will be validly issued, fully paid and nonassessable.
SECTION 5.06. ACCURACY OF INFORMATION FURNISHED. All written
information concerning Michaels and furnished to the Shareholders in connection
with the transactions contemplated hereby including, without limitation the
Reports, is true, correct and complete in all material respects as of the
respective dates of such information. Such information states all facts
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, true, correct
and complete in all material respects.
SECTION 5.07. ELIGIBILITY TO USE REGISTRATION STATEMENT ON FORM S-3.
Michaels meets the eligibility requirements for the use of registration
statements on Form S-3 for transactions involving secondary offerings.
SECTION 5.08. TRADING THROUGH NASDAQ-NMS. When the Registration
Statement (as hereafter defined) is declared effective by the SEC, the Michaels
Common Stock to be issued pursuant to this Agreement will be eligible for
trading through the NASDAQ-NMS subject to the restrictions on trading contained
in this Agreement and the Shareholders' Letters and the restrictions contained
in federal and state securities laws.
SECTION 5.09. ENFORCEMENT ACTIONS. Michaels is not the subject of any
enforcement action pending, or to the best of its knowledge, threatened, before
or by the SEC or any state securities agency.
ARTICLE VI.
SHAREHOLDER GROUP'S AND TARGETS' COVENANTS
Each Target and each member of the Shareholder Group jointly and severally
agree that between the date hereof and the Closing:
SECTION 6.01. CONSUMMATION OF AGREEMENT; MEETINGS OF STOCKHOLDERS.
Each Target and each member of the Shareholder Group shall use their best
efforts to cause the consummation of the transactions contemplated hereby in
accordance with their terms and conditions. Each
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Target and each member of the Shareholder Group will take all action necessary
in accordance with applicable law and the Certificate or Articles of
Incorporation and Bylaws of each Target to convene a meeting of each Target's
stockholders as promptly as practicable to consider and vote upon the approval
of this Agreement. The Boards of Directors of each Target shall recommend
approval of the Merger and shall take all lawful action to solicit such
approval. Each member of the Shareholder Group agrees to vote his Shares in
favor of the Merger.
SECTION 6.02. BUSINESS OPERATIONS. Each Target shall operate its
respective business in the ordinary course and will not introduce any new method
of management or operation. Each Target and each member of the Shareholder
Group shall use their best efforts to preserve the business of each Target
intact, to retain its present customers and suppliers so that they will be
available to the Surviving Corporation after the Closing. No Target nor any
member of the Shareholder Group shall take any action that could adversely
affect the condition (financial or otherwise), operations, assets, liabilities,
business or prospects of any Target without the prior written consent of
Michaels or take or fail to take any action that would cause or
permit the representations made in Article III to be inaccurate at the time of
Closing or preclude any Target or any member of the Shareholder Group from
making such representations and warranties at the Closing.
SECTION 6.03. ACCESS. Each Target and each member of the Shareholder
Group shall permit Michaels and its authorized representatives full access to,
and make available for inspection, all of the assets and business of each
Target, including its employees, customers and suppliers, and permit Michaels
and its authorized representatives to inspect and make copies of all documents,
records and information with respect to the affairs of each Target as Michaels
and its representatives may request, all for the sole purpose of permitting
Michaels to become familiar with the business and assets and liabilities of each
Target.
SECTION 6.04. NOTIFICATION OF CERTAIN MATTERS. Each Target and each
member of the Shareholder Group shall promptly inform Michaels in writing of (a)
any notice of, or other communication relating to, a default or event that, with
notice or lapse of time or both, would become a default, received by any of the
Targets, subsequent to the date of this Agreement and prior to the Effective
Time, under any Commitment material to its financial condition, properties,
business or results of operations and to which it is subject; (b) any material
adverse change in the condition (financial or otherwise), operations, assets,
liabilities, business or prospects of any Target, and (c) the receipt of any
demand or other notice by any Shareholder to exercise appraisal rights.
Notwithstanding the disclosure to Michaels of any such material adverse change,
no Target nor any member of the Shareholder Group shall be relieved of any
liability for, nor shall the providing of such information by any Target or any
member of the Shareholder Group to Michaels be deemed a waiver by Michaels of,
the breach of any representation or warranty of any Target or any member of the
Shareholder Group contained in this Agreement.
SECTION 6.05. APPROVALS OF THIRD PARTIES. Each Target and each member
of the Shareholder Group shall use their best efforts to secure, as soon as
practicable after the date
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hereof, all necessary approvals and consents of third parties to the
consummation of the transactions contemplated hereby including without
limitation all necessary approvals and consents required under any real
property leases.
SECTION 6.06. EMPLOYEE MATTERS. No Target shall, without the prior
written approval of Michaels, except as required by law:
(i) increase the Cash Compensation of any employee of any Target;
(ii) adopt, amend or terminate any Compensation Plan;
(iii) adopt, amend or terminate any Employment Agreement;
(iv) adopt, amend or terminate any Employee Policies and
Procedures;
(v) institute, settle or dismiss any employment litigation;
(vi) enter into, modify, amend or terminate any agreement with any
union, labor organization or collective bargaining unit; or
(vii) take or fail to take any action with respect to any past or
present employee of any Target that would adversely affect the business of
any Target.
SECTION 6.07. EMPLOYEE BENEFIT PLANS. No Target shall, without the
prior written approval of Michaels, except as required by law:
(a) adopt or amend any Employee Benefit Plan; provided, however, the
Targets may terminate all existing Employee Benefit Plans;
(b) take any action that would deplete the assets of any Employee
Benefit Plan, other than payment of benefits in the ordinary course to
participants and beneficiaries;
(c) fail to pay any premium or contribution due or with respect to any
Employee Benefit Plan;
(d) fail to file any return or report with respect to any Employee
Benefit Plan; or
(e) take or fail to take any action that would adversely affect any
Employee Benefit Plan.
SECTION 6.08. CONTRACTS. Except with Michaels' prior written consent,
no Target shall waive any right or cancel any contract, debt or claim nor will
it assume or enter into any
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contract, lease, license, obligation, indebtedness, commitment, purchase or sale
except in the ordinary course of business.
SECTION 6.09. CHANGES IN INVENTORY. Except in the ordinary course of
business consistent with past practice, no Target shall alter the physical
contents or character of its inventory or the mixture of products in its
inventory so as to affect the nature of any Target's business or result in a
change in the total dollar valuation thereof. Each Target will consult with
officers of Michaels before placing any seasonal orders.
SECTION 6.10. CAPITAL ASSETS; PAYMENTS OF LIABILITIES. No Target
shall, without the prior written approval of Michaels or as otherwise
contemplated by this Agreement (i) acquire or dispose of any capital asset
having an initial cost of $10,000 or more, or acquire or dispose of any capital
asset outside of the ordinary course of business or (ii) discharge or satisfy
any lien or encumbrance or pay or perform any obligation or liability other than
(a) liabilities and obligations reflected in the Financial Statements or (b)
current liabilities and obligations incurred in the usual and ordinary course of
business of such Target since the date of the Combined Balance Sheet and, in
either case (a) or (b) above, only as required by the express terms of the
agreement or other instrument pursuant to which the liability or obligation was
incurred.
SECTION 6.11. MORTGAGES, LIENS AND GUARANTIES. No Target shall,
without the prior written approval of Michaels, enter into or assume any
mortgage, pledge, conditional sale or other title retention agreement, permit
any security interest, lien, encumbrance or claim of any kind to attach to any
of its assets, whether now owned or hereafter acquired, or guarantee or
otherwise become contingently liable for any obligation of another, except
obligations arising by reason of endorsement for collection and other similar
transactions in the ordinary course of business, or make any capital
contribution or investment in any corporation, business or other person.
SECTION 6.12. NO NEGOTIATION WITH OTHERS. No member of the Shareholder
Group nor any Target shall solicit or participate in negotiations with (and each
member of the Shareholder Group and each Target shall use their best efforts to
prevent any affiliate, shareholder, director, officer, employee or other
representative or agent of any Target from negotiating with, soliciting or
participating in negotiations with) any third party with respect to the sale of
the business of any Target or any transaction inconsistent with those
contemplated hereby.
SECTION 6.13. DISTRIBUTIONS AND REPURCHASES. No distribution, payment
or dividend of any kind will be declared or paid by any Target, nor will any
repurchase of any of any Target's capital stock be approved or effected.
SECTION 6.14. REQUIREMENTS TO EFFECT MERGERS. The Targets and each
member of the Shareholder Group shall use their best efforts to take, or cause
to be taken, all actions necessary to effect the Mergers under applicable law,
including without limitation the filing with the appropriate government
officials all necessary documents in form approved by counsel for the parties to
this Agreement.
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SECTION 6.15. VOTING OF SHARES; IRREVOCABLE PROXY. Each member of the
Shareholder Group agrees that until the earlier of (i) the Effective Time or
(ii) the termination of the Agreement (the earliest of such dates being
hereinafter referred to as the "Expiration Date"), each such member of the
Shareholder Group shall vote all Shares owned by the member of the Shareholder
Group at any meeting of the stockholders of any Target (whether annual or
special and whether or not an adjourned or postponed meeting), or, if
applicable, take action by written consent (x) for adoption of the Agreement, as
hereby amended, and in favor of the Mergers and any other transactions
contemplated by the Agreement, and (y) against any action, omission or agreement
which would impede or interfere with, or have the effect of discouraging, the
Mergers, including, without limitation, any acquisition proposal other than the
Mergers. Any such vote shall be cast or consent shall be given in accordance
with such procedures relating thereto as shall ensure that it is duly counted
for purposes of determining that a quorum is present and for purposes of
recording the results of such vote or consent. In the event that any member of
the Shareholder Group shall fail to comply with the provisions of this Section
6.15 (as determined by Michaels in its reasonable discretion), such member of
the Shareholder Group hereby agrees that such failure shall result, without any
further action by the Shareholder Group, in the irrevocable appointment of
Michaels, until termination of this Agreement, as its attorney and proxy
pursuant to the provisions of applicable corporate law, with full power of
substitution, to vote and otherwise act (by written consent or otherwise) with
respect to the Stock which the member of the Shareholder Group is entitled to
vote at any meeting of stockholders of a Target (whether annual or special and
whether or not an adjourned or postponed meeting) or consent in lieu of any such
meeting or otherwise, on the matters and in the manner specified in this Section
6.15. EACH MEMBER OF THE SHAREHOLDER GROUP ACKNOWLEDGES THAT THIS PROXY IS
COUPLED WITH AN INTEREST, AND CONSTITUTES, AMONG OTHER THINGS, AN INDUCEMENT FOR
MICHAELS TO ENTER INTO THIS AGREEMENT, IS IRREVOCABLE AND SHALL NOT BE
TERMINATED BY OPERATION OF LAW UPON THE OCCURRENCE OF ANY EVENT, INCLUDING,
WITHOUT LIMITATION, THE DEATH OR INCAPACITY OF THE SHAREHOLDER. Notwithstanding
any provision contained in such proxy, such proxy shall terminate upon the
Expiration Date.
SECTION 6.16. ACCOUNTING TREATMENT. No Target nor any member of the
Shareholder Group shall take any action, or fail to take any action, which, in
the reasonable judgment of the independent auditors of Michaels, shall
disqualify the transactions contemplated by this Agreement for "pooling of
interests" accounting treatment (determined in accordance with generally
accepted accounting principles).
SECTION 6.17. ACCOUNTS PAYABLE. Three days prior to the Closing Date
each Target shall provide Michaels with a current list of accounts payable,
amounts drawn under its lines of credit, bank loans or similar credit
facilities, and accrued interest due on such borrowings which list shall
represent a good faith estimate of the amounts due and payable.
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SECTION 6.18. COMBINED FINANCIAL STATEMENTS. On or before March 17,
1994 the Targets shall deliver to Michaels the Combined Balance Sheet and the
Combined Statement of Income.
ARTICLE VII.
MICHAELS' COVENANTS
Michaels agrees that between the date hereof and the Closing:
SECTION 7.01. CONSUMMATION OF AGREEMENT. Subject to Michaels' rights
to terminate this Agreement (including, without limitation its right to
terminate pursuant to Section 14.01(d)), Michaels shall use its best efforts to
cause the consummation of the transactions contemplated hereby in accordance
with their terms and conditions and take all corporate and other action
necessary to approve the Mergers.
SECTION 7.02. REQUIREMENTS TO EFFECT MERGER. Michaels will use its
best efforts to take, or cause to be taken, all actions necessary to effect the
Mergers under applicable law, including without limitation the filing with the
appropriate government officials all necessary documents in form approved by
counsel for the parties to this Agreement.
SECTION 7.03. REGISTRATION STATEMENT. As soon as practicable after the
execution of this Agreement, Michaels shall use reasonable efforts to file a
Registration Statement on Form S-3 (the "Registration Statement") with the SEC
and to register, as promptly as is practicable, the sale by the Shareholders of
the Michaels Common Stock issued pursuant to this Agreement from time to time in
the open market. Michaels shall maintain the effectiveness of such Registration
Statement until the later of two years from the Closing Date or until all such
shares may be sold pursuant to the terms of Rule 144 promulgated under the
Securities Act and not be subject to the volume resale limitations contained in
Rule 144(e). The Shareholders may sell the Michaels Common Stock subject to the
restrictions set forth in Section 12.02 and the restrictions contained in the
Shareholder's Letters attached as Exhibit 8.03. In accomplishing the foregoing
registration, the following procedures shall be utilized:
(a) SHAREHOLDER INFORMATION. The Targets and each member of the
Shareholder Group shall use their best efforts to cause the Shareholders to
furnish to Michaels in writing appropriate information required for inclusion in
the Registration Statement, including a description of the proposed plans of
distribution, and any other matters in connection therewith as Michaels may
reasonably request in writing. If any Shareholder fails to provide such
information, Michaels shall not be obligated to include such Shareholder or his,
hers or its shares of Michaels Common Stock in the Registration Statement.
(b) EXPENSES. All expenses incurred by Michaels in complying
herewith, including without limitation all registration and filing fees,
printing expenses, and fees and disbursements
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of counsel and accountants for Michaels, are herein called "registration
expenses" and all underwriting discounts, taxes and selling commissions
applicable to the sales and all fees and disbursements of separate counsel for
any Shareholder are herein called "selling expenses." Except as otherwise
specifically provided herein, in any registration pursuant to this Section 7.05,
Michaels shall pay all of the registration expenses incurred in connection
therewith and each Shareholder shall bear his own selling expenses.
(c) MICHAELS INDEMNIFICATION. Michaels hereby agrees to indemnify and
hold harmless each Shareholder, each underwriter (within the meaning of the
Securities Act) who may purchase from or sell for any Shareholder any of the
Michaels Common Stock each broker and any other person acting on behalf of such
Shareholder, from and against any and all losses, claims, obligations, demands,
assessments, penalties, costs, damages, liabilities and expenses (including
attorneys' fees and other expenses for investigation and defense with respect to
the foregoing) (collectively "Damages"), joint or several, to which any of the
foregoing persons may be or become subject insofar as such Damages arise out of
or are based on any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any prospectus forming a part
thereof, or any amendment or supplement thereto, or arise out of or are based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such Damages are caused by any such untrue statement or
omission based upon information furnished in writing to Michaels by any such
Shareholder, underwriter, broker or person expressly for use therein. The
foregoing indemnification will also be for the benefit of each person, if any,
who controls such Shareholder, underwriter, broker or person within the meaning
of the Securities Act.
(d) SHAREHOLDER INDEMNIFICATION. The Targets and the Shareholder
Group shall use their best efforts to cause each Shareholder to execute a
document at Closing evidencing his, her or its agreement to, jointly and
severally, indemnify Michaels, its directors, each officer signing the
Registration Statement and each person, if any, who controls Michaels within the
meaning of the Securities Act, from and against any and all Damages to which any
of the foregoing persons may become subject insofar as such Damages arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or in the prospectus forming a part
thereof, or any amendment or supplement thereto, or arise out of or are based
upon any omission or alleged omission to state therein a material fact required
to be stated therein not misleading, but only insofar as such Damages are caused
by any untrue statement or alleged untrue statement or omission or alleged
omission based upon written information furnished to Michaels by any such
Shareholder or underwriter, broker or person engaged by such Shareholder or
acting on such Shareholder's behalf expressly for use therein. If any
Shareholder fails to provide such information, Michaels shall not be obligated
to subsequently include such Shareholder or his, hers or its shares of Michaels
Common Stock in the Registration Statement until the Shareholder provides such
information; provided, that Michaels shall only be obligated to include such
Shareholder or his, her or its shares of Michaels Common Stock in the
Registration Statement if such Shareholder agrees to reimburse Michaels
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for its additional costs incurred in so doing; including, without limitation,
additional registration fees, fees and expenses of accountants, and fees and
expenses of counsel.
(e) BLUE SKY REGISTRATION. If the Shareholders reasonably request,
Michaels shall use reasonable efforts to register or qualify the Michaels Common
Stock being issued under this Agreement, under applicable state securities
statutes, at the expense of Michaels provided that for such purpose Michaels
shall not be required to qualify as a dealer in securities, qualify to do
business in any jurisdiction where Michaels is not at the time so qualified or
to execute a general consent to service of process in any jurisdiction (other
than for actions arising out of the offer or sale of the Michaels Common Stock).
SECTION 7.04. PUBLICLY AVAILABLE INFORMATION. Michaels shall deliver
to James N. Ross and Robert T. Rogers, on behalf of and for the benefit of the
Shareholders, (i) copies of all documents filed by Michaels with the SEC and
which are publicly available and (ii) copies of all news releases distributed by
Michaels.
ARTICLE VIII.
COVENANTS OF MICHAELS, THE SHAREHOLDER GROUP AND TARGETS
SECTION 8.01. FILING; OTHER ACTION. Subject to the terms and
conditions herein provided, each member of the Shareholder Group, each Target
and Michaels shall use all reasonable efforts to cooperate with one another in
(a) determining which filings are required to be made prior to the Effective
Time with, and which consents, approvals, permits or authorizations are required
to be obtained prior to the Effective Time from, governmental or regulatory
authorities of the United States and the several states in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, and (b) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations. Subject
to the terms and conditions herein provided, each Target, each member of the
Shareholder Group and Michaels shall use all reasonable efforts to take, or
cause to be taken, all other action and do, or cause to be done, all of the
things, necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and/or directors of Michaels,
Newco and the Targets shall take all such necessary action.
SECTION 8.02. LEGAL CONDITIONS TO MERGER. Each party shall, and shall
cause each of its subsidiaries to, use its best efforts to take or cause to be
taken, all actions necessary to comply promptly with all legal requirements that
may be imposed on such party or its subsidiaries with respect to the Merger and
subject to the terms and conditions set forth in this Agreement, to consummate
the transactions contemplated by this Agreement. Each party will promptly
cooperate with and furnish information to each other party in connection with
any such
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restrictions suffered by, or requirement imposed upon, it or any of its
subsidiaries in connection with the foregoing.
SECTION 8.03. AGREEMENTS BY SHAREHOLDERS OF THE TARGETS. The Targets
shall use all reasonable efforts to deliver or cause to be delivered to
Michaels, prior to the Effective Time, from each of the Shareholders,
Shareholder's Letters in the form attached hereto as Exhibit 8.03. Michaels and
Newco shall be entitled to place legends as specified in such Shareholder's
Letters on the certificate evidencing any Michaels Common Stock to be received
by such Shareholders pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for Michaels Common
Stock, consistent with the terms of such Shareholder's Letters and this
Agreement.
ARTICLE IX.
MICHAELS' CONDITIONS PRECEDENT
Except as may be waived in writing by Michaels, the obligations of
Michaels hereunder are subject to the fulfillment at or prior to the Closing
Date of each of the following conditions:
SECTION 9.01. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each member of the Shareholder Group and each Target contained
herein shall have been true and correct in all respects when initially made and
shall be true and correct in all respects as of the Closing Date; and Michaels
shall have received a certificate of each Target's President, and of each member
of the Shareholder Group, dated as of the Closing Date, to the foregoing effect.
SECTION 9.02. COVENANTS AND CONDITIONS. Each Target and each member of
the Shareholder Group shall have performed and complied with all covenants and
conditions required by this Agreement to be performed and complied with by such
Target or such member of the Shareholder Group prior to the Closing Date; and
Michaels shall have received a certificate of each Target's President, and of
the Shareholder Group, dated as of the Closing Date, to the foregoing effect.
SECTION 9.03. LEGAL OPINION. Counsel to the Targets shall have
delivered to Michaels their opinions, dated as of the Closing Date, in form and
substance satisfactory to counsel for Michaels, to the effect set forth in
Exhibit 9.03.
SECTION 9.04. PROCEEDINGS. No action, proceeding or order by any court
or governmental body or agency shall have been threatened orally or in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
SECTION 9.05. NO MATERIAL ADVERSE CHANGE. No material adverse change
in the condition (financial or otherwise), operations, assets, liabilities,
business or prospects of any Target shall have occurred since the date of the
most recent balance sheet included in the
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Financial Statements, whether or not such change shall have been caused by the
deliberate act or omission of any Target or any member of the Shareholder Group.
SECTION 9.06. ACCOUNTING TREATMENT. Michaels shall have received
assurances, satisfactory to Michaels in its sole discretion, that the
transactions contemplated by this Agreement shall qualify for the "pooling of
interest" accounting treatment (as determined in accordance with generally
accepted accounting principles).
SECTION 9.07. GOVERNMENT APPROVALS AND REQUIRED CONSENTS. Michaels
shall have obtained all necessary government and other third-party approvals and
consents.
SECTION 9.08. DUE DILIGENCE REVIEW. By the Closing Date, Michaels and
its advisors shall have completed a due diligence review of the business,
operations, assets, facilities, books, records, legal affairs, financial
statements (projected and historical) of each Target and the condition of the
Targets and their respective businesses, the results of which shall be
satisfactory to Michaels in its sole discretion. Such review shall include
without limitation an examination of the results of a physical inventory of the
assets of each Target. The cost of such physical inventory shall be borne by
Michaels.
SECTION 9.09. CLOSING DELIVERIES. Michaels shall have received all
documents, duly executed in form satisfactory to Michaels and its counsel,
referred to in Section 11.01.
SECTION 9.10. SHAREHOLDER APPROVAL. This Agreement and the
transactions contemplated hereby including, but not limited to, the Mergers,
shall have been approved and adopted by the requisite vote of the shareholders
of each Target in accordance with the laws of such Target's respective state of
incorporation.
SECTION 9.11. PRE-CLOSING SALES. All trucks and vans of the Targets
may be sold at no less than the book value thereof and the proceeds of such
sales shall be retained by the Targets. All automobiles may be transferred by
the Targets subject to the existing indebtedness thereon.
SECTION 9.12. WAREHOUSE OPERATIONS. In order to facilitate the
elimination of facilities which are duplicative of those of Michaels, Target 1
shall cause the termination of the Warehouse Lease and shall transfer and assign
the furniture, fixtures and equipment owned by Target 1 at such location to the
landlord under the Warehouse Lease, who shall indemnify and hold harmless Target
1 from and against any and all Damages with respect to the Warehouse Lease and
with respect to operations at the warehouse from and after the Closing Date.
Target 1 shall obtain from the landlord under the Warehouse Lease an agreement
to permit Michaels to keep the inventory located at the warehouse for a period
of 90 days. Target 1 shall terminate its employees employed at the warehouse,
some of which employees may be immediately hired by the landlord under the
Warehouse Lease, who shall assume all liabilities with respect to all the
terminated employees and shall indemnify and hold harmless Michaels and the
Targets from and against any and all Damages with respect to the termination by
Target 1 of such employees.
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Target 1 shall reimburse the landlord under the Warehouse Lease for such
Target's allocable share of all direct, out-of-pocket expenses incurred by
reason of and directly attributable to the inventory remaining in the warehouse
(e.g. labor costs, utility costs, rent in the amount of $5,000.00 per month,
freight costs, etc.), but shall not be required to reimburse the landlord under
the Warehouse Lease for any fixed costs (e.g. insurance, taxes, any additional
rent in excess of the above referenced $5,000.00 per month, maintenance, etc.).
SECTION 9.13. AFFILIATED LEASES. With respect to each Affiliated
Lease, Target 1 (with respect to its store location only), Target 2, Target 7,
Target 14 and Target 17 shall have obtained an amended lease agreement with
their respective landlords on terms acceptable to Michaels.
SECTION 9.14. SALEM STORE. In order to facilitate the elimination of
facilities which are duplicative of those of Michaels, Target 4 shall transfer
and assign the Salem Lease and the furniture, fixtures and equipment owned by
Target 4 at such location to a third party reasonably acceptable to Michaels,
which third party shall indemnify and hold harmless Target 4 and Michaels from
and against any and all Damages with respect to the Salem Lease with respect to
operations therein from and after the Closing Date. Target 4 shall use
reasonable efforts to obtain from the landlord under the Salem Lease a novation
of such lease releasing Target 4 from any further liability under the Salem
Lease. Target 4 shall terminate its employees at such store which employees may
be immediately hired by the third party acquiring the Salem Lease. Such third
party shall assume all liabilities with respect to all the terminated employees
and shall indemnify and hold harmless Michaels and the Targets from and against
any and all Damages with respect to the termination by Target 4 of such
employees.
SECTION 9.15. BEAVERTON PARTY STORE. In order to facilitate the
elimination of facilities which are duplicative of those of Michaels, Target 18
shall transfer and assign the Beaverton Party Depot Lease and the furniture,
fixtures, equipment, inventory, accounts payable and any and all right to the
corporate name "Party Depot Inc." owned or owed by Target 18 at or with respect
to such location to a third party reasonably acceptable to Michaels, which third
party shall indemnify and hold harmless Target 18 and Michaels from and against
any and all Damages with respect to the Beaverton Party Depot Lease and the
accounts payable. Target 18 shall use reasonable efforts to obtain from the
landlord under the Beaverton Party Depot Lease, a novation of such lease
releasing Target 18 from any further liability under the Beaverton Party Depot
Lease. Target 18 shall terminate its employees at such store, some of which
employees may be immediately hired by the third party acquiring the Beaverton
Party Depot Lease. Such third party shall assume all liabilities with respect
to all the terminated employees and shall indemnify and hold harmless Michaels
and the Targets from and against any and all Damages with respect to the
termination by Target 18 of such employees. Prior to the Closing Date, Target
18 shall change its corporate name to a name dissimilar from "Party Depot Inc."
which name shall be acceptable to Michaels.
SECTION 9.16. ORANGE LEASE. Target 16 shall have obtained an extension
of the Orange Lease providing for fair market rental payments and otherwise on
terms acceptable to Michaels;
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provided however, that the failure by Target 16 to obtain such extension shall
not operate as a failed condition precedent but shall reduce the total number of
shares of Michaels Common Stock to be issued pursuant to Section 2.08(a).
SECTION 9.17. RELEASE OF GUARANTIES. Target 1, Target 2, Target 7 and
Target 14 shall obtain a release of the guaranties with respect to the loans
incurred by the landlords of their respective stores and more specifically set
forth in Exhibit 3.08. Further, Target 1, Target 2, Target 7 and Target 14
shall obtain from the obligors (and partners thereof) of such loans an indemnity
in form and substance satisfactory to Michaels from and against any liability
with respect to such guaranties.
SECTION 9.18. CONVERSION OF PARTNERSHIP INTEREST. Target 2 shall
convert its partnership interest in the Beaverton Building Venture Group into
pre-paid rent with respect to the Beaverton Craft & Floral Lease, such pre-paid
rent to be amortized over the remaining term of such lease, all of which shall
be on terms acceptable to Michaels.
SECTION 9.19. TERMINATION OF SHAREHOLDER AGREEMENTS. The Targets shall
have terminated all existing shareholder agreements.
ARTICLE X.
TARGETS' AND THE SHAREHOLDER GROUP'S CONDITIONS PRECEDENT
Except as may be waived in writing by each Target and each member of the
Shareholder Group, the obligations of each Target and each member of the
Shareholder Group hereunder are subject to fulfillment at or prior to the
Closing Date of each of the following conditions:
SECTION 10.01. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Michaels contained herein shall be true and correct in all
respects as of the Closing Date; and Michaels shall have delivered to the
Targets a certificate of Michaels' President, dated as of the Closing Date, to
the foregoing effect.
SECTION 10.02. COVENANTS AND CONDITIONS. Michaels shall have performed
and complied in all material respects with all covenants and conditions required
by this Agreement to be performed and complied with by it prior to the Closing
Date; and Michaels shall have delivered to the Targets a certificate of
Michaels' President, dated as of the Closing Date, to the foregoing effect.
SECTION 10.03. PROCEEDINGS. No action, proceeding or order by any
court or governmental body or agency shall have been threatened in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
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SECTION 10.04. MATERIAL ADVERSE CHANGE. No material adverse change in
the condition (financial or otherwise), operations, assets, liabilities,
business or prospects of Michaels shall have occurred since the date of this
Agreement; provided, however, a decrease in the trading price of Michaels Common
Stock shall not be deemed to constitute a material adverse change in the
conditions, operations, assets, liabilities, business or prospects of Michaels.
ARTICLE XI.
CLOSING DELIVERIES
SECTION 11.01. DELIVERIES OF THE TARGETS AND THE SHAREHOLDER GROUP. At
the Closing, the Targets and the Shareholder Group shall deliver to Michaels the
following, all of which shall be in a form satisfactory to counsel to Michaels:
(a) a copy of resolutions of the Board of Directors and Shareholders of
each Target authorizing the execution, delivery and performance of this
Agreement and all related documents and agreements and consummation of the
Mergers, each certified by the Secretary of that corporation as being true and
correct copies of the originals thereof subject to no modifications or
amendments;
(b) a certificate of the President of each Target, and each member of
the Shareholder Group, dated the Closing Date, as to the truth and correctness
of the representations and warranties of each Target and each member of the
Shareholder Group contained herein on and as of the Closing Date;
(c) a certificate of the President of each Target, and each member of
the Shareholder Group, dated the Closing Date, (i) as to the performance of and
compliance by each Target and each member of the Shareholder Group with all
covenants contained herein on and as of the Closing Date and (ii) certifying
that all conditions precedent of the Targets and the Shareholder Group to the
Closing have been satisfied;
(d) a certificate of the Secretary of each Target certifying as to the
incumbency of the directors and officers of such Target and as to the signatures
of such directors and officers who have executed documents delivered at the
Closing on behalf of such Target;
(e) a certificate, dated within 20 days of the Closing Date, of the
Secretary of State of the respective states of incorporation for each Target
establishing that such respective Target is in existence, has paid all franchise
or similar taxes, if any, and, if applicable, otherwise is in good standing to
transact business in its state of incorporation;
(f) certificates, dated within 20 days of the Closing Date, of the
Secretaries of State of the states in which each respective Target is qualified
to do business, to the effect that such
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Target is qualified to do business and, if applicable, is in good standing as a
foreign corporation in each of such states;
(g) an opinion of Powers, McCulloch & Bennett and Cooksey, Howard,
Martin & Toolen, counsel to the Targets dated as of the Closing Date, pursuant
to Section 9.03;
(h) all authorizations, consents, approvals, permits and licenses
referenced in Section 3.06, including, without limitation, all consents required
under the Real Property Leases;
(i) the resignations of the directors and officers of each Target as
requested by Michaels;
(j) an executed Noncompetition and Confidentiality Agreement between
Michaels and each member of the Shareholder Group, Robert T. Rogers, Sheila O.
Rogers, L. Marilyn Ross, Nelson M. Ross and Stephen Isom in the form attached as
Exhibit 11.01(j);
(k) executed Certificates and/or Articles of Merger necessary to effect
the Mergers referred to in Section 2.03;
(l) a nonforeign affidavit, as such affidavit is referred to in Section
1445(b)(2) of the Code, of each member of the Shareholder Group and each other
Shareholder taking receipt of Michaels Common Stock at Closing, signed under a
penalty of perjury and dated as of the Closing Date, to the effect that such
Shareholder is a United States citizen (and thus not a foreign person) and
providing such Shareholders' United States taxpayer identification number;
(m) executed amended Affiliated Leases referred to in Section 9.13;
(n) executed documents in form satisfactory to counsel to Michaels
pursuant to which (i) each member of the Shareholder Group, (ii) each other
Shareholder taking receipt of Michaels Common Stock at Closing, (iii) each
officer of each Target, (iv) Michael Habif and (v) Cam Kines releases,
relinquishes, waives and discharges any and all claims, demands, causes of
action, suits, judgments or Damages in any kind whatsoever, whether known or
unknown, that such Shareholder or officer may have against any of the Targets as
of the Closing Date, for any reason whatsoever, including without limitation
claims by such Shareholder or officer against any of the Targets with respect to
dividends, repayments of loans, violation of preemptive rights, or payment of
salaries or other compensation or in any way arising out of or in connection
with his or her employment with any of the Targets, the cessation of such
employment, his status as an officer, director or shareholder of any of the
Targets or otherwise; the Shareholder will agree not to file any claim, suit,
civil action, complaint, arbitration or administrative action in any city, state
or federal court or agency or arbitration tribunal with respect to any such
claim, demand, cause of action, suit, judgment, controversy or Damage;
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(o) Shareholder's Letters in the form attached as Exhibits 8.03 executed
by each Shareholder taking receipt of Michaels Common Stock at Closing;
(p) executed documents in form satisfactory to counsel to Michaels
pursuant to which each Shareholder taking receipt of Michaels Common Stock at
Closing agrees to indemnify Michaels as set forth in Section 7.03(d); and
(q) executed documents in form satisfactory to counsel to Michaels
pursuant to which the third party transferees of the Warehouse Lease, the Salem
Lease and the Beaverton Lease indemnify Michaels and Targets 1, 4 and 18,
respectively, with respect to the occupation of such locations after the Closing
Date;
(r) executed copies of the Orange Lease, as extended pursuant to Section
9.16;
(s) documents evidencing the release of guaranties and indemnities
referred to in Section 9.17;
(t) documents evidencing that the interest of Target 2 in Beaverton
Building Group has been exchanged for pre-paid rent as contemplated by Section
9.18; and
(u) such other instrument or instruments of transfer prepared by
Michaels as shall be necessary or appropriate, as Michaels or its counsel shall
reasonably request, to carry out and effect the purpose and intent of this
Agreement.
SECTION 11.02. DELIVERIES OF MICHAELS. At the Closing, Michaels shall
deliver to the Targets:
(a) a copy of the resolutions of the Board of Directors of Michaels and
each Newco authorizing the execution, delivery and performance of this
Agreement, and all related documents and agreements, each certified by Michaels'
Secretary as being true and correct copies of the originals thereof subject to
no modifications or amendments in form and substance satisfactory to James N.
Ross;
(b) a certificate of an officer of Michaels and each Newco,
respectively, dated the Closing Date, as to the truth and correctness of the
representations and warranties of Michaels and each Newco contained herein on
and as of the Closing Date in form and substance satisfactory to James N. Ross;
(c) a certificate of an officer of Michaels and each Newco,
respectively, dated the Closing Date, (i) as to the performance and compliance
by Michaels and each Newco with all covenants contained herein on and as of the
Closing Date and (ii) certifying that all conditions precedent of Michaels to
the Closing have been satisfied;
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(d) a certificate of the Secretary of Michaels certifying as to the
incumbency of the directors and officers of Michaels who have executed documents
delivered at the Closing on behalf of Michaels; and
(e) a certificate, dated within 20 days of the Closing Date, of the
Secretary of State of Michaels' and each Newco's state of incorporation,
establishing that Michaels and each Newco is in existence, has paid all state
taxes and, if applicable, otherwise is in good standing to transact business in
such state.
ARTICLE XII.
POST CLOSING MATTERS
SECTION 12.01. FURTHER INSTRUMENTS OF TRANSFER. Following the Closing,
at the request of Michaels, the Shareholder Group and the Targets shall deliver
any further instruments of transfer and take all reasonable action as may be
necessary or appropriate to (i) vest in Michaels good and marketable title to
the assets of the Targets that are personal property and good and indefeasible
title to the assets of the Targets that are real property and (ii) transfer to
Michaels all licenses and permits necessary for the operation of such Assets.
SECTION 12.02. REGISTRATION; RE-SALE OF MICHAELS STOCK CONSIDERATION.
As set forth in Section 7.03, Michaels shall use reasonable efforts to file the
Registration Statement with the SEC registering the sale of the Michaels Common
Stock by the Shareholders from time to time in the open market. In connection
with the disposition of the Michaels Common Stock under the Registration
Statement, in order for the Shareholders to dispose of Michaels Common Stock
with a prospectus that is a part of the Registration Statement, the Shareholders
must give Michaels written notice of their intention to sell any of the Michaels
Common Stock at least two (2) but not more than twenty (20) business days prior
to the date of the proposed sale(s), which notice shall include the number of
shares proposed to be disposed, whether the shares are to be sold in an
underwritten offering and the time period during the forty-five (45) business
days following the date of such notice during which the shares may be disposed
(the "Sale Period"), and the Shareholders agree that, during each Sale Period,
they shall not deliver any prospectus that is a part of the Registration
Statement in connection with any disposition of the Michaels Common Stock during
any period of time when, but only so long as, Michaels, after receipt of the
notice set forth above, notifies the Shareholders (a "Delay Notice") that
Michaels is in possession of material non-public information that, in the
exercise of its reasonable judgment based on the advice of its counsel, would be
required to be disclosed in the Registration Statement (or any amendment, or
post-effective amendment thereto) in order to comply with SEC requirements,
which material information may relate, including, without limitation, to a
financing project or a pending acquisition, merger or other material corporate
reorganization to which Michaels is or is expected to be a party; provided that
Michaels shall advise the Shareholders in writing as soon as any such delay is
no longer applicable; provided further that the Shareholders shall only be
prevented from disposing of Michaels Common Stock with a prospectus under the
Registration
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Statement for up to 90 consecutive days (a "Delay Period") following the receipt
of a Delay Notice and any two Delay Periods must be at least 30 days apart
during which time the Shareholders shall be permitted to dispose of the Michaels
Common Stock with a prospectus under the Registration Statement.
SECTION 12.03. RIGHT OF RESCISSION. If any Shareholder takes any
action, or fails to take any action, which action or failure to act results in a
breach of terms of the Shareholder's Letter (whether or not such Shareholder has
executed a Shareholder's Letter), and Michaels shall have been advised by its
independent auditors that, as a result of such breach, there exists a reasonable
likelihood that the transactions contemplated by this Agreement shall not
qualify for the "pooling of interests" accounting treatment (in accordance with
generally accepted accounting principles), then Michaels shall have the right,
upon five (5) days written notice, to rescind the transactions contemplated by
this Agreement and the parties agree to take, and the Shareholder Group, jointly
and severally, agrees to be responsible for all of Michaels' and the Targets'
expenses related to, any and all action necessary in order to return the parties
to their respective positions prior to the consummation of the transactions
contemplated by this Agreement, such amount to be net of any benefit received by
Michaels.
SECTION 12.04. CERTIFICATES ISSUED WITHOUT RESTRICTIVE LEGEND. If
shares of Michaels Common Stock delivered pursuant to this Agreement are sold,
transferred or otherwise disposed of pursuant to the Registration Statement and
in accordance with the terms of the Shareholder's Letters, Michaels agrees to
direct its transfer agent to issue a certificate or certificates evidencing
Michaels Common Stock to the transferee(s) thereof without a restrictive legend.
SECTION 12.05. NEWS RELEASES. Until such date as the Shareholders are
permitted to sell shares of Michaels Common Stock pursuant to the terms of the
Shareholder's Letter, Michaels shall deliver to James N. Ross and Robert T.
Rogers, on behalf of and for the benefit of the Shareholders, copies of all news
releases distributed by Michaels.
SECTION 12.06. CUSTOMER LIST. So long as he is in compliance with the
terms of his Noncompetition and Confidentiality Agreement, to be executed at the
Closing of the transactions contemplated by this Agreement, and subject to the
terms thereof, James N. Ross shall have a royalty free, non-assignable (other
than to an entity controlled by Ross) license to use the customer list of the
Targets as in effect on the Closing Date. Michaels shall be under no duty to
update the customer list or to provide James N. Ross with access to customer
lists of Michaels or the Targets subsequent to the Closing Date.
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ARTICLE XIII.
REMEDIES
SECTION 13.01. INDEMNIFICATION BY THE SHAREHOLDER GROUP. Subject to
the terms and conditions of this Article, each member of the Shareholder Group,
jointly and severally, agrees to indemnify, defend and hold Michaels and its
directors, officers, employees, agents, attorneys and affiliates harmless from
and against all Damages asserted against or incurred by such indemnitees by
reason of or resulting from:
(a) a breach of any representation, warranty or covenant of the
Shareholder Group or any Target contained herein, in any exhibit, schedule,
certificate or financial statement delivered hereunder, or in any agreement
executed in connection with the transactions contemplated hereby;
(b) any product liability or breach of warranty claims relating to
products sold by any Target prior to or on the Closing Date, and all general
liability claims arising out of or relating to occurrences of any nature
relating to any of the Targets' businesses prior to the Closing Date, whether
any such claims are asserted prior to, on or after the Closing Date;
(c) any obligation or liability arising out of transactions or events
occurring before Closing under or related to any Employee Benefit Plan or the
termination thereof;
(d) any tax filing or return or payment made, or position taken, by any
Target prior to Closing that any governmental authority challenges and that
results in an assertion of Damages against Michaels, or the Targets subject to
the reserves set forth in the Financial Statement;
(e) any liability (including, without limitation, severance obligations
if any) incurred by Michaels or any of the Targets related to the termination of
employees by Target 1, Target 4 and Target 18 working at the warehouse facility
and the subsequent hiring by a third party as contemplated by Sections 9.12,
9.14 and 9.15 of this Agreement;
(f) any liability arising out of or related to the use of the name
"Party Depot" by any of the Targets prior to the Closing Date; and
(g) any liability arising out of the leases assigned to third parties by
Targets 1, 4 and 18 pursuant to Sections 9.12, 9.14 and 9.15 for events
occurring after the Closing Date.
THE FOREGOING INDEMNIFICATION APPLIES, WITHOUT LIMITATION, TO THE
VIOLATION ON OR BEFORE THE CLOSING DATE OF ANY ENVIRONMENTAL LAW IN EFFECT ON OR
BEFORE THE CLOSING DATE AND ANY AND ALL MATTERS ARISING OUT OF ANY ACT,
OMISSION, EVENT OR CIRCUMSTANCE EXISTING OR OCCURRING ON OR PRIOR TO THE CLOSING
DATE (INCLUDING WITHOUT LIMITATION THE PRESENCE ON THE REAL PROPERTY OR RELEASE
FROM THE REAL PROPERTY OF HAZARDOUS SUBSTANCES OR SOLID WASTE DISPOSED OF OR
OTHERWISE RELEASED PRIOR TO THE CLOSING DATE), REGARDLESS OF WHETHER THE ACT,
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OMISSION, EVENT OR CIRCUMSTANCE CONSTITUTED A VIOLATION OF ANY ENVIRONMENTAL LAW
AT THE TIME OF ITS EXISTENCE OR OCCURRENCE; PROVIDED THAT SUCH INDEMNITY SHALL
NOT APPLY WITH RESPECT TO MATTERS CAUSED BY OR ARISING OUT OF THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF MICHAELS. THE TERMS "HAZARDOUS SUBSTANCE"
AND "RELEASE" SHALL HAVE THE MEANINGS SPECIFIED IN CERCLA, AND THE TERMS "SOLID
WASTE" AND "DISPOSED" SHALL HAVE THE MEANINGS SPECIFIED IN RCRA; PROVIDED THAT
TO THE EXTENT THE LAWS OF THE STATE OF CALIFORNIA, OREGON OR WASHINGTON
ESTABLISH A MEANING FOR "HAZARDOUS SUBSTANCE," "RELEASE," "SOLID WASTE" OR
"DISPOSED" THAT IS BROADER THAN THAT SPECIFIED IN EITHER CERCLA OR RCRA, SUCH
BROADER MEANING SHALL APPLY. THE PROVISIONS OF THIS PARAGRAPH SHALL SURVIVE THE
CLOSING AND SHALL CONTINUE INDEFINITELY THEREAFTER IN FULL FORCE AND EFFECT.
SECTION 13.02. INDEMNIFICATION BY MICHAELS. Subject to the terms and
conditions of this Article, Michaels hereby agrees to indemnify, defend and hold
the Targets and the Shareholder Group and the Targets' respective directors,
officers, agents, attorneys and affiliates harmless from and against all Damages
asserted against or incurred by any of such indemnitees by reason of or
resulting from a breach by Michaels of any representation, warranty or covenant
of Michaels contained herein or in any exhibit, schedule or certificate
delivered hereunder, or in any agreement executed in connection with the
transactions contemplated hereby.
SECTION 13.03. CONDITIONS OF INDEMNIFICATION. The respective
obligations and liabilities of the Shareholder Group and Michaels (the
"indemnifying party") to the other or to any Target (the "party to be
indemnified") under Sections 13.01 and 13.02 with respect to claims resulting
from the assertion of liability by third parties shall be subject to the
following terms and conditions:
(a) Within 20 days (or such earlier time as might be required to avoid
prejudicing the indemnifying party's position) after receipt of notice of
commencement of any action evidenced by service of process or other legal
pleading, the party to be indemnified shall give the indemnifying party written
notice thereof together with a copy of such claim, process or other legal
pleading, and the indemnifying party shall have the right to undertake the
defense thereof by representatives of its own choosing and at its own expense;
provided that the party to be indemnified may participate in the defense with
counsel of its own choice, the fees and expenses of which counsel shall be paid
by the party to be indemnified unless (i) the indemnifying party has agreed to
pay such fees and expenses, (ii) the indemnifying party has failed to assume the
defense of such action or (iii) the named parties to any such action (including
any impleaded parties) include both the indemnifying party and the party to be
indemnified and the party to be indemnified has been advised by counsel that
there may be one or more legal defenses available to it that are different from
or additional to those available to the indemnifying party (in which case, if
the party to be indemnified informs the indemnifying party in writing that it
elects to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the party to be indemnified, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
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out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at any
time for the party to be indemnified, which firm shall be designated in writing
by the party to be indemnified).
(b) In the event that the indemnifying party, by the 30th day after
receipt of notice of any such claim (or, if earlier, by the 10th day preceding
the day on which an answer or other pleading must be served in order to prevent
judgment by default in favor of the person asserting such claim), does not elect
to defend against such claim, the party to be indemnified will (upon further
notice to the indemnifying party) have the right to undertake the defense,
compromise or settlement of such claim on behalf of and for the account and risk
of the indemnifying party and at the indemnifying party's expense, subject to
the right of the indemnifying party to assume the defense of such claims at any
time prior to settlement, compromise or final determination thereof.
(c) Notwithstanding the foregoing, the indemnifying party shall not
settle any claim without the consent of the party to be indemnified unless such
settlement involves only the payment of money and the claimant provides to the
party to be indemnified a release from all liability in respect of such claim.
If the settlement of the claim involves more than the payment of money, the
indemnifying party shall not settle the claim without the prior consent of the
party to be indemnified.
(d) The party to be indemnified and the indemnifying party will each
cooperate with all reasonable requests of the other.
SECTION 13.04. WAIVER. No waiver by any party of any default or breach
by another party of any representation, warranty, covenant or condition
contained in this Agreement, any exhibit or any document, instrument or
certificate contemplated hereby shall be deemed to be a waiver of any subsequent
default or breach by such party of the same or any other representation,
warranty, covenant or condition. No act, delay, omission or course of dealing
on the part of any party in exercising any right, power or remedy under this
Agreement or at law or in equity shall operate as a waiver thereof or otherwise
prejudice any of such party's rights, powers and remedies. All remedies,
whether at law or in equity, shall be cumulative and the election of any one or
more shall not constitute a waiver of the right to pursue other available
remedies.
SECTION 13.05. REMEDIES NOT EXCLUSIVE. The remedies provided in this
Agreement shall not be exclusive of any other rights or remedies available to
one party against the other, either at law or in equity.
SECTION 13.06. OFFSET. Any and all amounts owing or to be paid by
Michaels to any Target or any member of the Shareholder Group, hereunder or
otherwise, shall be subject to offset and reduction PRO TANTO by any amounts
that may be owing at any time by any member of the Shareholder Group or any
Target to Michaels in respect of any failure or breach of any representation,
warranty or covenant of any member of the Shareholder Group or any Target under
or in connection with this Agreement or any other agreement with Michaels or any
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transaction contemplated hereby or thereby, as reasonably determined by
Michaels. If Michaels determines that such offset is appropriate, notice shall
be given to the Shareholder Group and the Targets of such determination at least
10 days prior to the due date of the payment to be reduced. If the conditions
upon which the reduction is based are cured by the Shareholder Group or any
Target prior to such due date, as determined by Michaels, the amount of such
payment shall not be so reduced.
SECTION 13.07. COSTS, EXPENSES AND LEGAL FEES. Subject to the
provisions of Section 15.13, whether or not the transactions contemplated hereby
are consummated, each party hereto shall bear its own costs and expenses
(including attorneys' fees), except that each party hereto agrees to pay the
costs and expenses (including reasonable attorneys' fees and expenses) incurred
by the other parties in successfully (i) enforcing any of the terms of this
Agreement or (ii) proving that another party breached any of the terms of this
Agreement; notwithstanding the foregoing, all costs and expenses otherwise to be
paid by a Target pursuant to (i) or (ii) above shall instead be paid by, and be
the obligation of, the Shareholder Group. Michaels acknowledges that all
professional fees incurred by the Targets in connection with the negotiation,
preparation and execution of this Agreement and other documents pertaining to
the Mergers will be paid ratably by the Targets; provided however, the expenses
paid by the Targets shall not exceed $75,000.
SECTION 13.08. SPECIFIC PERFORMANCE. Each Target and each member of
the Shareholder Group acknowledge that a refusal by the Shareholder Group or any
Target to consummate the transactions contemplated hereby will cause irreparable
harm to Michaels, for which there may be no adequate remedy at law and for which
the ascertainment of damages would be difficult. Therefore, Michaels shall be
entitled, in addition to, and without having to prove the inadequacy of, other
remedies at law, to specific performance of this Agreement, as well as
injunctive relief (without being required to post bond or other security).
SECTION 13.09. TAX EFFECT OF INDEMNIFICATION. Notwithstanding any term
or provision of this Agreement to the contrary, any indemnity payments owed by
one party to another party to this Agreement shall be reduced by any tax
benefits to the party claiming indemnity hereunder and increased by any tax
detriments to the party claiming indemnity hereunder.
SECTION 13.10. INDEMNIFICATION LIMITATIONS. Notwithstanding the
provisions of Section 13.01, the Shareholder Group shall not be required to
indemnify Michaels (i) for Damages in excess of the market value on the last
trading day before the Closing Date of all of the shares received by all the
Shareholders at the Closing and (ii) unless the claim for indemnification is
brought within the time limit set forth in Section 15.06. The total amount of
any indemnity payments owed by one party to another party to this Agreement
shall be reduced by the net proceeds received by the party to be indemnified
with respect to any insurance policies or recovery from third parties. The
preceding sentence shall not, however, impose a duty on any party to this
Agreement to first pursue its remedies under insurance policies or against third
parties in lieu of indemnification under this Agreement.
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ARTICLE XIV.
TERMINATION
SECTION 14.01. TERMINATION. This Agreement may be terminated:
(a) at any time prior to the Closing Date by mutual agreement of all
parties;
(b) at any time prior to the Closing Date by Michaels and each Newco if
any representation or warranty of any Target or any member of the Shareholder
Group contained in this Agreement or in any certificate or other document
executed and delivered by any Target or any member of the Shareholder Group
pursuant to this Agreement is or becomes untrue or breached in any material
respect or if any Target or any member of the Shareholder Group fails to comply
in any material respect with any covenant contained herein, and any such
misrepresentation, noncompliance or breach is not cured, waived or eliminated
within 10 days after receipt of written notice thereof.
(c) at any time prior to the Closing Date by any Target or any member of
the Shareholder Group if any representation or warranty of Michaels contained in
this Agreement or in any certificate or other document executed and delivered by
Michaels pursuant to this Agreement is or becomes untrue or breached in any
material respect or if Michaels fails to comply in any material respect with any
covenant contained herein, and any such misrepresentation, noncompliance or
breach is not cured, waived or eliminated within 10 days;
(d) at any time prior to or on the Closing Date by Michaels if the
results of the due diligence review described in Section 9.08 are unsatisfactory
to Michaels in its sole discretion;
(e) at the Closing Date by Michaels if the conditions stated in Article
IX have not been satisfied;
(f) at the Closing Date by any Target or any member of the Shareholder
Group if the conditions stated in Article X have not been satisfied;
(g) by Michaels or by any of the Targets if the Merger shall not have
been consummated by March 31, 1994.
SECTION 14.02. EFFECT OF TERMINATION. In the event this Agreement is
terminated pursuant to Sections 14.01 (b), (c), (e) or (f) above, Michaels and
each Newco, the Shareholder Group and the Targets shall each be entitled to
pursue, exercise and enforce any and all remedies, rights, powers and privileges
available at law or in equity. In the event of a termination of this Agreement
under the provisions of this Article, a party not then in material breach of
this Agreement shall stand fully released and discharged of any and all
obligations under this Agreement.
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ARTICLE XV.
MISCELLANEOUS
SECTION 15.01. AMENDMENT. This Agreement may be amended, modified or
supplemented only by an instrument in writing executed by all the parties
hereto.
SECTION 15.02. ASSIGNMENT. Neither this Agreement nor any right
created hereby or in any agreement entered into in connection with the
transactions contemplated hereby shall be assignable by any party hereto, except
by Michaels to an affiliate of Michaels.
SECTION 15.03. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES.
Except as otherwise provided herein, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto. Neither this
Agreement nor any other agreement contemplated hereby shall be deemed to confer
upon any person not a party hereto or thereto any rights or remedies hereunder
or thereunder.
SECTION 15.04. ENTIRE AGREEMENT. This Agreement and the agreements
contemplated hereby constitute the entire agreement of the parties regarding the
subject matter hereof, and supersede all prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
SECTION 15.05. SEVERABILITY. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provision shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
SECTION 15.06. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations, warranties and covenants contained herein shall survive the
Closing and all statements contained in any certificate, exhibit or other
instrument delivered by or on behalf of any member of the Shareholder Group, any
Target or Michaels pursuant to this Agreement shall be deemed to have been
representations and warranties by each member of the Shareholder Group, such
Target or Michaels, as the case may be, and, notwithstanding any provision in
this Agreement to the contrary, shall survive the Closing for a period ending on
the date of first issuance of Michaels audited financial statements for the
fiscal year ending on or about January 27, 1995.
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SECTION 15.07. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING
CONFLICTS OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT
SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS.
SECTION 15.08. CAPTIONS. The captions in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions hereof.
SECTION 15.09. GENDER AND NUMBER. When the context requires, the
gender of all words used herein shall include the masculine, feminine and neuter
and the number of all words shall include the singular and plural.
SECTION 15.10. REFERENCE TO AGREEMENT. Use of the words "herein",
"hereof", "hereto" and the like in this Agreement shall be construed as
references to this Agreement as a whole and not to any particular Article,
Section or provision of this Agreement, unless otherwise noted.
SECTION 15.11. CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. Each party
shall keep this Agreement and its terms confidential, and shall make no press
release or public disclosure, either written or oral, regarding the transactions
contemplated by this Agreement without the prior knowledge and consent of the
other parties hereto; provided that the foregoing shall not prohibit any
disclosure (i) by press release, filing or otherwise that Michaels has
determined in its good faith judgment to be required by federal securities laws
or the rules of the National Association of Securities Dealers, (ii) to
attorneys, accountants, investment bankers or other agents of the parties
assisting the parties in connection with the transactions contemplated by this
Agreement and (iii) by Michaels in connection with obtaining financing for the
transactions contemplated by this Agreement and conducting an examination of the
operations and assets of the Targets; provided that Michaels shall reasonably
promptly provide notice of any release made under Section 15.11(i) to the
Shareholder Group. In the event that the transactions contemplated hereby are
not consummated for any reason whatsoever, the parties hereto agree not to
disclose or use any confidential information they may have concerning the
affairs of the other parties, except for information that is required by law to
be disclosed. Confidential information includes, but is not limited to:
financial records, surveys, reports, plans, proposals, financial information,
information relating to personnel, contracts, stock ownership, liabilities and
litigation; provided that should the transactions contemplated hereby not be
consummated, nothing contained in this Section shall be construed to prohibit
the parties hereto from operating businesses in competition with each other.
SECTION 15.12. NOTICE. Any notice or communication hereunder or in any
agreement entered into in connection with the transactions contemplated hereby
must be in writing and given by depositing the same in the United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same
-54-
<PAGE>
in person. Such notice shall be deemed received on the date on which it is
hand-delivered or on the third business day following the date on which it is so
mailed. For purposes of notice, the addresses of the parties shall be:
If to Michaels Michaels Stores, Inc.
or to a Newco: 5931 Campus Circle Drive
Irving, Texas 75063
Attn: Kristen L. Magnuson
with a copy to: Jackson & Walker, L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attn: Charles D. Maguire, Jr.
If to a Target James N. Ross
or a member of 9757 SE 172nd Street
the Shareholder Boring, Oregon 97009
Group:
with a copy to: Steven R. Bennett
Powers, McCulloch & Bennett
1300 SW Fifth Avenue, Suite 3000
Portland, Oregon 97201
Any party may change its address for notice by written notice given to the other
parties in accordance with this Section.
SECTION 15.13. CHOICE OF FORUM. The parties hereto agree that should
any suit, action or proceeding arising out of this Agreement be instituted by
any party hereto (other than a suit, action or proceeding to enforce or realize
upon any final court judgment arising out of this Agreement), such suit, action
or proceeding shall be instituted only in a state or federal court in Dallas
County, Texas. Each of the parties hereto consents to the IN PERSONAM
jurisdiction of any state or federal court in Dallas County, Texas and waives
any objection to the venue of any such suit, action or proceeding. The parties
hereto recognize that courts outside Dallas County, Texas may also have
jurisdiction over suits, actions or proceedings arising out of this Agreement,
and in the event that any party hereto shall institute a proceeding involving
this Agreement in a jurisdiction outside Dallas County, Texas, the party
instituting such proceeding shall indemnify any other party hereto for any
losses and expenses that may result from the breach of the foregoing covenant to
institute such proceeding only in a state or federal court in Dallas County,
Texas, including without limitation any additional expenses incurred as a result
of litigating in another jurisdiction, such as reasonable fees and expenses of
local counsel and travel and lodging expenses for parties, witnesses, experts
and support personnel.
-55-
<PAGE>
SECTION 15.14. SERVICE OF PROCESS. Service of any and all process that
may be served on any party hereto in any suit, action or proceeding arising out
of this Agreement may be made in the manner and to the address set forth in
Section 15.12 and service thus made shall be taken and held to be valid personal
service upon such party by any party hereto on whose behalf such service is
made.
SECTION 15.15. COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same instrument.
-56-
<PAGE>
MICHAELS
MICHAELS STORES, INC.,
a Delaware corporation
By:
------------------------------------
Its:
-----------------------------------
NEWCO 1
OCFS ACQUISITION CO. #1,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 2
OCFS ACQUISITION CO. #2,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 3
OCFS ACQUISITION CO. #3,
an Oregon Corporation
By:
------------------------------------
Its:
------------------------------------
<PAGE>
NEWCO 4
OCFS ACQUISITION CO. #4,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 5
OCFS ACQUISITION CO. #5,
a Washington corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 6
OCFS ACQUISITION CO. #6,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 7
OCFS ACQUISITION CO. #7,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
<PAGE>
NEWCO 8
OCFS ACQUISITION CO. #8,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 9
OCFS ACQUISITION CO. #9,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 10
OCFS ACQUISITION CO. #10,
a California corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 11
OCFS ACQUISITION CO. #11,
a California corporation
By:
------------------------------------
Its:
------------------------------------
<PAGE>
NEWCO 12
OCFS ACQUISITION CO. #12,
a California corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 13
OCFS ACQUISITION CO. #13,
a California corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 14
OCFS ACQUISITION CO. #14,
a California corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 15
OCFS ACQUISITION CO. #15,
a California corporation
By:
------------------------------------
Its:
------------------------------------
<PAGE>
NEWCO 16
OCFS ACQUISITION CO. #16,
a California corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 17
OCFS ACQUISITION CO. #17,
a California corporation
By:
------------------------------------
Its:
------------------------------------
NEWCO 18
OCFS ACQUISITION CO. #18,
an Oregon corporation
By:
------------------------------------
Its:
------------------------------------
<PAGE>
TARGET 1
OREGON CRAFT & FLORAL SUPPLY CO.,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 2
OREGON CRAFT & FLORAL SUPPLY CO. II,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 3
OREGON CRAFT & FLORAL SUPPLY CO. III,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 4
OREGON CRAFT & FLORAL SUPPLY CO. IV,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
TARGET 5
OREGON CRAFT & FLORAL SUPPLY CO. V,
INC., a Washington corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 6
OREGON CRAFT & FLORAL SUPPLY CO. VI,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 7
OREGON CRAFT & FLORAL SUPPLY CO. VII,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
TARGET 8
OREGON CRAFT & FLORAL SUPPLY CO. VIII,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 9
OREGON CRAFT & FLORAL SUPPLY CO. IX,
INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 10
HABIF & ROSS ENTERPRISES, INC.,
a California corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 11
RIVERSIDE CRAFT & FLORAL SUPPLY CO.,
INC., a California corporation
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
TARGET 12
SAN DIEGO CRAFT & FLORAL SUPPLY CO.,
INC., a California corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 13
MISSION VIEJO CRAFT & FLORAL, INC.,
a California corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 14
H.F.C.S., INC.
a California corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 15
SAN LEANDRO CRAFT & FLORAL SUPPLY
CO., INC., a California corporation
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
TARGET 16
ORANGE CRAFT & FLORAL SUPPLY CO.,
INC., a California corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 17
H & H CRAFT & FLORAL SUPPLY CO.
#9, INC., a California corporation
By:
------------------------------------
Its:
-----------------------------------
TARGET 18
D P NUMBER 18, INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
<PAGE>
SHAREHOLDER GROUP
____________________________________________
James N. Ross
ROBERT T. AND SHEILA O. ROGERS, CO-TRUSTEES
UDT DATED JUNE 12, 1985
By:_________________________________________
Robert T. Rogers, Trustee
By:_________________________________________
Sheila O. Rogers, Trustee
NELSON M. ROSS, JR. AND L. MARILYN ROSS,
TRUSTEES UNDER THE ROSS LIVING TRUST DATED
JANUARY 29, 1991
By:_________________________________________
Nelson M. Ross, Jr., Trustee
By:_________________________________________
L. Marilyn Ross, Trustee
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
STATE OF FISCAL YEAR
NAME OF CORPORATION INCORPORATION END
- ------------------- ------------- ---
<S> <C> <C>
Oregon Craft & Floral Supply Co., Inc. ("Target 1") Oregon 6/30
Oregon Craft & Floral Supply Co. II, Inc. ("Target 2") Oregon 6/30
Oregon Craft & Floral Supply Co. III, Inc. ("Target 3") Oregon 7/31
Oregon Craft & Floral Supply Co. IV, Inc. ("Target 4") Oregon 7/31
Oregon Craft & Floral Supply Co. V., Inc. ("Target 5") Washington 7/31
Oregon Craft & Floral Supply Co. VI, Inc. ("Target 6") Oregon 2/28
Oregon Craft & Floral Supply Co. VII, Inc. ("Target 7") Oregon 4/30
Oregon Craft & Floral Supply Co. VIII, Inc. ("Target 8") Oregon 8/31
Oregon Craft & Floral Supply Co. IX, Inc. ("Target 9") Oregon 8/31
Habif & Ross Enterprises, Inc. ("Target 10") California 4/30
Riverside Craft & Floral Supply Co., Inc. ("Target 11") California 3/31
San Diego Craft & Floral Supply Co., Inc. ("Target 12") California 5/31
Mission Viejo Craft & Floral, Inc. ("Target 13") California 6/30
H.F.C.S., Inc. ("Target 14") California 1/31
San Leandro Craft & Floral Supply Co., Inc. ("Target 15") California 4/30
Orange Craft & Floral Supply Co., Inc. ("Target 16") California 2/28
H & H Craft & Floral Supply Co. #9, Inc. ("Target 17") California 1/31
Party Depot Inc. ("Target 18") Oregon
</TABLE>
<PAGE>
SCHEDULE B
NAME OF CORPORATION STATE OF INCORPORATION
OCFS Acquisition Co. #1 ("Newco 1") Oregon
OCFS Acquisition Co. #2 ("Newco 2") Oregon
OCFS Acquisition Co. #3 ("Newco 3") Oregon
OCFS Acquisition Co. #4 ("Newco 4") Oregon
OCFS Acquisition Co. #5 ("Newco 5") Washington
OCFS Acquisition Co. #6 ("Newco 6") Oregon
OCFS Acquisition Co. #7 ("Newco 7") Oregon
OCFS Acquisition Co. #8 ("Newco 8") Oregon
OCFS Acquisition Co. #9 ("Newco 9") Oregon
OCFS Acquisition Co. #10 ("Newco 10") California
OCFS Acquisition Co. #11 ("Newco 11") California
OCFS Acquisition Co. #12 ("Newco 12") California
OCFS Acquisition Co. #13 ("Newco 13") California
OCFS Acquisition Co. #14 ("Newco 14") California
OCFS Acquisition Co. #15 ("Newco 15") California
OCFS Acquisition Co. #16 ("Newco 16") California
OCFS Acquisition Co. #17 ("Newco 17") California
OCFS Acquisition Co. #18 ("Newco 18") Oregon
<PAGE>
EXHIBIT 2.01
SURVIVING
TARGET NEWCO CORPORATION
------ ----- -----------
Target 1 Newco 1 Target 1
Target 2 Newco 2 Target 2
Target 3 Newco 3 Target 3
Target 4 Newco 4 Target 4
Target 5 Newco 5 Target 5
Target 6 Newco 6 Target 6
Target 7 Newco 7 Target 7
Target 8 Newco 8 Target 8
Target 9 Newco 9 Target 9
Target 10 Newco 10 Target 10
Target 11 Newco 11 Target 11
Target 12 Newco 12 Target 12
Target 13 Newco 13 Target 13
Target 14 Newco 14 Target 14
Target 15 Newco 15 Target 15
Target 16 Newco 16 Target 16
Target 17 Newco 17 Target 17
Target 18 Newco 18 Target 18
<PAGE>
EXHIBIT 2.5
Amendment No. 1 to
Agreement and Plan of Merger
<PAGE>
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to Agreement and Plan of Merger (this "Amendment"),
dated as of March 31, 1994 among each of the corporations listed on Schedule A
attached hereto (each a "Target" and all collectively referred to as the
"Targets"), each person listed on the signature pages attached hereto (all
collectively referred to as the "Shareholder Group"), Michaels Stores, Inc., a
Delaware corporation ("Michaels"), and each of the corporations listed on
Schedule B attached hereto (each a wholly owned subsidiary of Michaels and
referred to herein as "Newco" and all collectively referred to as "Newcos");
WITNESSETH:
WHEREAS, the Targets, the Shareholder Group, Michaels and the Newcos
entered into that certain Agreement and Plan of Merger, dated as of March 3,
1994 (the "Agreement"); and
WHEREAS, the Targets, the Shareholder Group, Michaels and the Newcos desire
to modify and amend the terms of the Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual representations, warranties
and covenants herein contained, and on the terms and subject to the conditions
herein set forth, the parties hereby agree as follows:
1. DEFINITIONS. As used in this Amendment, all capitalized terms not
otherwise defined herein shall have the meanings attributed to such terms in the
Agreement.
2. AMENDMENT OF SECTION 2.02. The first sentence of Section 2.02 is
amended in its entirety to read as follows:
The parties expect that the Closing shall take place on
April 15, 1994, but in no event shall the Closing shall take
place after April 30, 1994, and the Closing shall take place
at the offices of Jackson & Walker, L.L.P., 901 Main Street,
Suite 6000, Dallas, Texas 75202 or at such other time and
place and/or on such other date as the Shareholder Group and
Michaels may agree.
3. AMENDMENT TO SECTION 14.01. Subsection (g) of Section 14.01 shall be
modified in its entirety to read as follows:
(g) by Michaels or by any of the Targets if the Merger
shall not have been consummated by April 30, 1994.
<PAGE>
4. AMENDMENT TO SIGNATURE PAGE. The signature block under the heading
"TARGET 18" is modified in its entirety to read as follows:
PARTY DEPOT INC.
5. AMENDMENT. This Amendment may be amended, modified or supplemented
only by an instrument in writing executed by all the parties hereto.
6. EFFECT OF AMENDMENT. Except as otherwise provided herein, the
representations, warranties, covenants, terms and conditions of this Amendment
and the Agreement shall remain unchanged and in full force and effect.
7. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE
STATE OF TEXAS. THE PARTIES AGREE THAT THIS AMENDMENT SHALL BE PERFORMABLE IN
DALLAS COUNTY, TEXAS.
8. CAPTIONS. The captions in this Amendment are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
9. COUNTERPARTS. This Amendment may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
2
<PAGE>
MICHAELS
-------------
MICHAELS STORES, INC.,
a Delaware corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 1
------------
OCFS ACQUISITION CO. #1,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 2
------------
OCFS ACQUISITION CO. #2,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 3
------------
OCFS ACQUISITION CO. #3,
an Oregon Corporation
By:
------------------------------------------
Its:
-----------------------------------------
3
<PAGE>
NEWCO 4
------------
OCFS ACQUISITION CO. #4,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 5
------------
OCFS ACQUISITION CO. #5,
a Washington corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 6
------------
OCFS ACQUISITION CO. #6,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 7
------------
OCFS ACQUISITION CO. #7,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
4
<PAGE>
NEWCO 8
------------
OCFS ACQUISITION CO. #8,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 9
------------
OCFS ACQUISITION CO. #9,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 10
-------------
OCFS ACQUISITION CO. #10,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 11
-------------
OCFS ACQUISITION CO. #11,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
5
<PAGE>
NEWCO 12
-------------
OCFS ACQUISITION CO. #12,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 13
-------------
OCFS ACQUISITION CO. #13,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 14
-------------
OCFS ACQUISITION CO. #14,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 15
-------------
OCFS ACQUISITION CO. #15,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
6
<PAGE>
NEWCO 16
-------------
OCFS ACQUISITION CO. #16,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 17
-------------
OCFS ACQUISITION CO. #17,
a California corporation
By:
------------------------------------------
Its:
-----------------------------------------
NEWCO 18
-------------
OCFS ACQUISITION CO. #18,
an Oregon corporation
By:
------------------------------------------
Its:
-----------------------------------------
7
<PAGE>
TARGET 1
--------
OREGON CRAFT & FLORAL SUPPLY CO.,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 2
--------
OREGON CRAFT & FLORAL SUPPLY CO. II,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 3
--------
OREGON CRAFT & FLORAL SUPPLY CO. III,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 4
--------
OREGON CRAFT & FLORAL SUPPLY CO. IV,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
8
<PAGE>
TARGET 5
--------
OREGON CRAFT & FLORAL SUPPLY CO. V,
INC., a Washington corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 6
--------
OREGON CRAFT & FLORAL SUPPLY CO. VI,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 7
--------
OREGON CRAFT & FLORAL SUPPLY CO. VII,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 8
--------
OREGON CRAFT & FLORAL SUPPLY CO. VIII,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
9
<PAGE>
TARGET 9
--------
OREGON CRAFT & FLORAL SUPPLY CO. IX,
INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 10
---------
HABIF & ROSS ENTERPRISES, INC.,
a California corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 11
---------
RIVERSIDE CRAFT & FLORAL SUPPLY CO.,
INC., a California corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 12
---------
SAN DIEGO CRAFT & FLORAL SUPPLY CO.,
INC., a California corporation
By:
-----------------------------------
Its:
-----------------------------------
10
<PAGE>
TARGET 13
---------
MISSION VIEJO CRAFT & FLORAL, INC.,
a California corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 14
---------
H.F.C.S., INC.
a California corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 15
---------
SAN LEANDRO CRAFT & FLORAL SUPPLY
CO., INC., a California corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 16
---------
ORANGE CRAFT & FLORAL SUPPLY CO.,
INC., a California corporation
By:
-----------------------------------
Its:
-----------------------------------
11
<PAGE>
TARGET 17
---------
H & H CRAFT & FLORAL SUPPLY CO.
#9, INC., a California corporation
By:
-----------------------------------
Its:
-----------------------------------
TARGET 18
---------
PARTY DEPOT INC., an Oregon corporation
By:
-----------------------------------
Its:
-----------------------------------
12
<PAGE>
SHAREHOLDER GROUP
-----------------
--------------------------------------------
James N. Ross
ROBERT T. AND SHEILA O. ROGERS, CO-TRUSTEES UDT
DATED JUNE 12, 1985
By:
-----------------------------------------
Robert T. Rogers, Trustee
By:
-----------------------------------------
Sheila O. Rogers, Trustee
NELSON M. ROSS, JR. AND L. MARILYN ROSS, TRUSTEES
UNDER THE ROSS LIVING TRUST DATED JANUARY 29, 1991
By:
-----------------------------------------
Nelson M. Ross, Jr., Trustee
By:
-----------------------------------------
L. Marilyn Ross, Trustee
13
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
State of Fiscal Year
Name of Corporation Incorporation End
- ------------------- ------------- ---
<S> <C> <C>
Oregon Craft & Floral Supply Co., Inc. ("Target 1") Oregon 6/30
Oregon Craft & Floral Supply Co. II, Inc. ("Target 2") Oregon 6/30
Oregon Craft & Floral Supply Co. III, Inc. ("Target 3") Oregon 7/31
Oregon Craft & Floral Supply Co. IV, Inc. ("Target 4") Oregon 7/31
Oregon Craft & Floral Supply Co. V., Inc. ("Target 5") Washington 7/31
Oregon Craft & Floral Supply Co. VI, Inc. ("Target 6") Oregon 2/28
Oregon Craft & Floral Supply Co. VII, Inc. ("Target 7") Oregon 4/30
Oregon Craft & Floral Supply Co. VIII, Inc. ("Target 8") Oregon 8/31
Oregon Craft & Floral Supply Co. IX, Inc. ("Target 9") Oregon 8/31
Habif & Ross Enterprises, Inc. ("Target 10") California 4/30
Riverside Craft & Floral Supply Co., Inc. ("Target 11") California 3/31
San Diego Craft & Floral Supply Co., Inc. ("Target 12") California 5/31
Mission Viejo Craft & Floral, Inc. ("Target 13") California 6/30
H.F.C.S., Inc. ("Target 14") California 1/31
San Leandro Craft & Floral Supply Co., Inc. ("Target 15") California 4/30
Orange Craft & Floral Supply Co., Inc. ("Target 16") California 2/28
H & H Craft & Floral Supply Co. #9, Inc. ("Target 17") California 1/31
Party Depot Inc. ("Target 18") Oregon
</TABLE>
14
<PAGE>
SCHEDULE B
Name of Corporation State of Incorporation
------------------- ----------------------
OCFS Acquisition Co. #1 ("Newco 1") Oregon
OCFS Acquisition Co. #2 ("Newco 2") Oregon
OCFS Acquisition Co. #3 ("Newco 3") Oregon
OCFS Acquisition Co. #4 ("Newco 4") Oregon
OCFS Acquisition Co. #5 ("Newco 5") Washington
OCFS Acquisition Co. #6 ("Newco 6") Oregon
OCFS Acquisition Co. #7 ("Newco 7") Oregon
OCFS Acquisition Co. #8 ("Newco 8") Oregon
OCFS Acquisition Co. #9 ("Newco 9") Oregon
OCFS Acquisition Co. #10 ("Newco 10") California
OCFS Acquisition Co. #11 ("Newco 11") California
OCFS Acquisition Co. #12 ("Newco 12") California
OCFS Acquisition Co. #13 ("Newco 13") California
OCFS Acquisition Co. #14 ("Newco 14") California
OCFS Acquisition Co. #15 ("Newco 15") California
OCFS Acquisition Co. #16 ("Newco 16") California
OCFS Acquisition Co. #17 ("Newco 17") California
OCFS Acquisition Co. #18 ("Newco 18") Oregon
15
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial and Store Data" and "Experts" in the Registration Statement (Form S-3)
and related Prospectus of Michaels Stores, Inc. for the registration of
2,500,000 shares of its common stock and to the incorporation by reference
therein of our reports dated February 28, 1994, with respect to the consolidated
financial statements and schedules of Michaels Stores, Inc. included or
incorporated by reference in its Annual Report (Form 10-K) for the year ended
January 30, 1994 filed with the Securities and Exchange Commission.
ERNST & YOUNG
Dallas, Texas
May 12, 1994
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Michaels Stores, Inc.
on Form S-3 of our report dated March 4, 1994 (May 11, 1994 as to Note 11) on
the audit of the financial statements of Leewards Creative Crafts, Inc. (the
"Company") as of and for the years ended January 30, 1994 and January 31,
1993, which expresses an unqualified opinion and includes an explanatory
paragraph relating to the Agreement and Plan of Merger whereby the Company
will become a subsidiary of Michaels Stores, Inc., appearing in the
prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
prospectus.
Deloitte & Touche
Chicago, Illinois
May 13, 1994