<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996.
REGISTRATION NO. 333-03331
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
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> <C>
DELAWARE 75-1943604
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
</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. Michael Rouleau
Chief Executive Officer
Michaels Stores, Inc.
5931 Campus Circle Drive
Irving, Texas 75063
P.O. Box 619566
DFW, Texas 75261-9566
(214) 714-7000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
Mark V. Minton, Esq. Vincent Pagano, Jr., Esq.
Jones, Day, Reavis & Pogue Simpson Thacher & Bartlett
2001 Ross Avenue 425 Lexington Avenue
Suite 2300 New York, New York 10017-3954
Dallas, Texas 75201 (212) 455-2000
(214) 220-3939
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT 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 SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 11, 1996
$125,000,000
[LOGO]
% Senior Notes Due 2006
INTEREST PAYABLE AND DUE , 2006
----------------
THE % SENIOR NOTES DUE 2006 (THE "NOTES") ARE BEING OFFERED PURSUANT TO THIS
PROSPECTUS (THE "OFFERING") BY MICHAELS STORES, INC. ("MICHAELS" OR THE
"COMPANY") AND WILL MATURE ON , 2006. THE NOTES ARE NOT REDEEMABLE
PRIOR TO , 2001, EXCEPT THAT, UNTIL , 1999, THE COMPANY
MAY REDEEM, AT ITS OPTION, UP TO AN AGGREGATE OF $25 MILLION PRINCIPAL AMOUNT
OF THE NOTES AT THE REDEMPTION PRICE SET FORTH HEREIN, PLUS ACCRUED INTEREST
TO THE DATE OF REDEMPTION, WITH THE NET PROCEEDS OF ONE OR MORE EQUITY
OFFERINGS (AS DEFINED HEREIN), IF AT LEAST $100 MILLION AGGREGATE PRINCIPAL
AMOUNT OF THE NOTES REMAINS OUTSTANDING AFTER EACH SUCH REDEMPTION. ON OR
AFTER , 2001, THE NOTES ARE REDEEMABLE AT THE OPTION OF THE
COMPANY, IN WHOLE OR IN PART, AT THE REDEMPTION PRICES SET FORTH HEREIN,
PLUS ACCRUED INTEREST TO THE DATE OF REDEMPTION. UPON A CHANGE OF
CONTROL (AS DEFINED HEREIN), EACH HOLDER OF NOTES MAY REQUIRE THE
COMPANY TO REPURCHASE ANY OR ALL OUTSTANDING NOTES OWNED BY SUCH
HOLDER AT 101% OF THE PRINCIPAL AMOUNT THEREOF, PLUS ACCRUED INTEREST
TO THE DATE OF REPURCHASE. SEE "DESCRIPTION OF THE NOTES".
THE NOTES WILL BE UNSECURED OBLIGATIONS OF THE COMPANY AND WILL RANK PARI PASSU
IN RIGHT OF PAYMENT WITH ALL EXISTING AND FUTURE SENIOR INDEBTEDNESS (AS
DEFINED HEREIN) OF THE COMPANY AND SENIOR TO ALL EXISTING AND FUTURE
SUBORDINATED INDEBTEDNESS OF THE COMPANY. THE NOTES WILL BE EFFECTIVELY
SUBORDINATED TO ALL EXISTING AND FUTURE SECURED INDEBTEDNESS OF THE COMPANY
AND ALL EXISTING AND FUTURE INDEBTEDNESS OF ANY SUBSIDIARY OF THE COMPANY.
AT APRIL 28, 1996, AFTER GIVING EFFECT TO THE OFFERING AND THE
APPLICATION OF THE NET PROCEEDS THEREOF, THE COMPANY AND ITS
SUBSIDIARIES WOULD HAVE HAD $231.0 MILLION OF INDEBTEDNESS OUTSTANDING,
OF WHICH $9.1 MILLION WOULD HAVE REPRESENTED SECURED INDEBTEDNESS AND
$96.9 MILLION WOULD HAVE REPRESENTED SUBORDINATED INDEBTEDNESS. AT
APRIL 28, 1996, SUBSIDIARIES OF THE COMPANY HAD NO INDEBTEDNESS
OUTSTANDING. THE COMPANY HAS HAD NEGOTIATIONS WITH THE
ADMINISTRATIVE LENDER UNDER ITS CURRENT CREDIT AGREEMENT (THE
"CREDIT AGREEMENT") TO REDUCE THE AMOUNT OF THE FACILITY FROM A
MAXIMUM OF $200 MILLION TO A MAXIMUM OF $100 MILLION. SEE
"DESCRIPTION OF CERTAIN INDEBTEDNESS -- PROPOSED MODIFICATIONS
TO THE CREDIT AGREEMENT".
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NOTES, AND THE COMPANY DOES NOT
INTEND TO APPLY FOR LISTING
OF THE NOTES ON ANY SECURITIES EXCHANGE OR FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET.
SETTLEMENT OF THE NOTES WILL BE MADE IN IMMEDIATELY AVAILABLE FUNDS. THE NOTES
WILL TRADE IN THE SAME-DAY FUNDS SETTLEMENT SYSTEM OF THE DEPOSITORY TRUST
COMPANY (THE "DEPOSITARY"), AND, TO THE EXTENT THAT SECONDARY MARKET TRADING
ACTIVITY IN THE NOTES IS EFFECTED THROUGH THE FACILITIES OF THE
DEPOSITARY, SUCH TRADES WILL BE SETTLED IN IMMEDIATELY AVAILABLE FUNDS.
ALL PAYMENTS OF PRINCIPAL AND INTEREST WILL BE MADE BY THE COMPANY
IN IMMEDIATELY AVAILABLE FUNDS.
----------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN
INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 12
HEREIN.
-------------
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 THE
PUBLIC (1) COMMISSIONS COMPANY (1)(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER NOTE.............................................. % % %
TOTAL................................................. $ $ $
</TABLE>
(1) PLUS ACCRUED INTEREST, IF ANY, FROM , 1996.
(2) BEFORE DEDUCTION OF EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
----------------
THE NOTES ARE OFFERED BY THE SEVERAL UNDERWRITERS WHEN, AS AND IF ISSUED BY
THE COMPANY, DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THEIR
RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
NOTES WILL BE MADE IN BOOK-ENTRY FORM THROUGH THE FACILITIES OF THE DEPOSITORY
TRUST COMPANY ON OR ABOUT , 1996 AGAINST PAYMENT IN IMMEDIATELY
AVAILABLE FUNDS.
CS First Boston
Salomon Brothers Inc
NationsBanc Capital Markets, Inc.
Robertson, Stephens & Company
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
Inside the front cover of the document is a map of the United States and two
Canadian provinces, with the Company's Michaels store locations and distribution
center locations highlighted. Below the map is a montage showing various
products the Company offers, surrounding the Company's logo. An enlarged version
of the same montage appears on the inside of the back cover.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE NOTES PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7,
AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K (File No. 0-11822) for the year
ended January 28, 1996 as amended by the Company's Form 10-K/A (Amendment No. 1)
to such Annual Report, and the Company's Quarterly Report on Form 10-Q for the
quarter ended April 28, 1996, each of which has been filed with the Securities
and Exchange Commission (the "Commission") by the Company, are incorporated
herein by reference and made a part hereof.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes to be made hereunder shall be deemed to be incorporated
herein by reference and made a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be 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 therein or in any other subsequently filed document that
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 herein by reference (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into the information that this Prospectus incorporates). Written or
telephonic requests for copies should be directed to the General Counsel of the
Company at 5931 Campus Circle Drive, Irving, Texas 75063 (telephone: (214)
714-7000).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with 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. The Company's Common Stock is
listed on the Nasdaq National Market. Copies of such reports and other
information can also be inspected at the offices of the Nasdaq National Market,
1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus contains summaries, believed to be accurate in all material
respects, of certain terms of certain agreements, but reference is made to the
actual agreements (copies of which will be made available upon request to the
Company or the Underwriters) for complete information with respect thereto and
all such summaries are qualified in their entirety by this reference. Any such
request and request for agreement summarized herein should be directed to the
General Counsel of the Company at 5931 Campus Circle Drive, Irving, Texas 75063
(telephone: (214) 714-7000).
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE,
ALL REFERENCES TO "MICHAELS" OR THE "COMPANY" SHALL MEAN MICHAELS STORES, INC.
AND ITS CONSOLIDATED SUBSIDIARIES. ALL REFERENCES TO FISCAL YEARS IN THIS
PROSPECTUS REFER TO THE FISCAL YEAR ENDING ON THE SUNDAY CLOSEST TO JANUARY 31,
WHICH CONSISTS OF 52 WEEKS FOR ALL YEARS. FOR EXAMPLE, REFERENCES TO "FISCAL
1995" MEAN THE FISCAL YEAR ENDED JANUARY 28, 1996. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL
RESULTS AND EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS" HEREIN.
THE COMPANY
GENERAL
With $1.3 billion in fiscal 1995 sales, the Company is the nation's largest
retailer dedicated to serving the arts, crafts and decorative items marketplace.
The Company's Michaels stores offer a wide selection of competitively priced
items, including general crafts, home decor items, picture framing materials and
services, art and hobby supplies, party supplies, silk and dried flowers,
wearable art and seasonal and holiday merchandise. Since March 1995, when the
Company acquired Aaron Brothers Holdings, Inc. ("Aaron Brothers"), the Company
has also operated the Aaron Brothers specialty framing and art supply stores
located primarily in California. During fiscal 1995, Aaron Brothers contributed
sales of $54 million. The Company's primary customers are women aged 25-54 with
above average median household incomes, and the Company believes that repeat
customers account for a substantial portion of its sales. The Company operates
448 Michaels stores and 68 Aaron Brothers stores in 45 states, Puerto Rico and
Canada.
The Company's Michaels stores average approximately 16,000 square feet of
selling space and offer an assortment of approximately 44,000 stock keeping
units ("SKUs") in a typical store during the course of a year (including
seasonal product), of which approximately 31,000 SKUs are planogrammed SKUs
offered at all times. For fiscal 1995, the average sales of the Company's
Michaels stores open for the full fiscal year were $3.0 million. The average
sale in the Company's Michaels stores has increased annually from approximately
$12.00 in fiscal 1991 to $14.44 in fiscal 1995, due in part to increased sales
of custom framing, custom floral arrangements and home decor items.
The U.S. arts, crafts and decorative items retailing industry, which is
estimated by trade publications to have exceeded $10.8 billion in sales in
fiscal 1995, has increased in size each year since 1990 when industry sales
totaled $6.0 billion. The industry is highly fragmented, and Michaels is the
only nationwide independent arts and crafts retailer. Management believes that
there are only a few independent retailers with arts and crafts sales that
exceed $200 million annually, and that the Company's arts and crafts sales are
more than three times as large as those of its largest direct competitor. The
Company believes that its significant size relative to its competitors provides
it with several advantages, including (i) superior purchasing power, (ii)
critical mass to support a cost efficient nationwide distribution network, and
(iii) the financial resources to support a national advertising campaign and
significant ongoing capital investment in information technology.
Beginning in 1992, Michaels embarked upon an aggressive growth strategy in
order to capitalize on an opportunity to become the national market leader in a
highly fragmented industry. This growth strategy resulted in the addition of
over 300 new Michaels stores from fiscal 1991 through fiscal 1995 (of which 108
were added through acquisitions) and the acquisition of 68 Aaron Brothers stores
in fiscal 1995. Over the past five fiscal years, the Company's sales have grown
from approximately $410 million to approximately $1.3 billion, driven by
increases in comparable store sales in addition to the rapid increase in the
Company's number of store locations. Furthermore, from fiscal 1991 to fiscal
1994, the Company's EBITDA increased
2
<PAGE>
from $34.9 million to $85.5 million. In fiscal 1995, EBITDA (calculated as
operating income plus depreciation and amortization) declined to $15.9 million,
principally due to $64.4 million of unusual costs and expenses primarily related
to the retail markdown of inventories recorded in order to streamline the
inventory assortment throughout the entire chain and improve the Company's
return on invested capital.
Having achieved its objective of becoming the only national retailer in the
arts, crafts and decorative items industry, the Company recognized that it had
attained the critical mass to invest significantly in its information systems
and to achieve improved operating efficiencies in distribution and inventory
management. During the second quarter of fiscal 1995, the Company's management
had conducted a critical analysis of the composition of the Company's
merchandise assortment and the velocity of turnover of individual SKUs and
vendor lines included in each category of merchandise. The Company then
implemented a program (the "SKU Reduction Program") designed to reduce the
amount of the Company's capital allocated to store inventories. The SKU
Reduction Program was implemented by setting new levels of the appropriate
number of SKUs to be included in the various merchandise categories and by
eliminating slower turning and less profitable product lines without impairing
the stores' overall broad selection of more popular merchandise.
By the end of fiscal 1995, substantially all of the inventory identified for
liquidation had been sold, the number of SKUs had been reduced by approximately
15% to the current level of 44,000 SKUs and the inventory per Michaels store had
been reduced by 19% from the end of fiscal 1994. Substantially all of the
proceeds from the inventory liquidation were used to reduce the Company's
outstanding bank debt. The Company believes that operating at lower inventory
levels as a result of the SKU Reduction Program will result in an increase in
inventory turns, providing higher returns on invested capital and improved cash
flow that will further strengthen the Company's balance sheet.
BUSINESS STRATEGIES
The Company believes it is well positioned to continue to solidify its
position as the dominant nationwide arts, crafts and decorative items retailer
while increasing its return on invested capital through its business strategies
of (i) offering a broad selection of products in an appealing store environment
that emphasizes superior customer service, (ii) effectively managing its
investment in inventory through centralized purchasing and distribution combined
with significant investment in management information systems, and (iii)
continuing to expand its nationwide presence.
MERCHANDISING STRATEGY
The Company's Michaels store merchandising strategy is to provide a broad
selection of products in an appealing store environment which emphasizes
superior customer service. Each Michaels store is organized into multiple
departments that offer a year-round assortment of general crafts, home decor
items, picture framing materials and services, art and hobby supplies, party
supplies, silk and dried flowers, wearable art, needlecrafts and ribbon. In
addition, the Company's Michaels stores regularly feature seasonal merchandise,
particularly for major holidays such as Valentine's Day, Easter, Mother's Day,
Halloween and Thanksgiving, in addition to the Christmas season. In its Aaron
Brothers stores, the Company's strategy is to provide competitively priced
superior custom framing services and selection.
The Company believes that customer service is critical to its merchandising
strategy. Many of the craft supplies sold in the Company's Michaels stores can
be assembled into unique end-products with an appropriate amount of guidance and
direction. Accordingly, the Company has displays in every Michaels store in an
effort to stimulate and promote new project ideas, and supplies project sheets
with detailed instructions on how to assemble the products. In addition, many
Michaels sales associates are craft enthusiasts who are able 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.
3
<PAGE>
PURCHASING, DISTRIBUTION AND INVENTORY MANAGEMENT STRATEGY
After a period of aggressive store growth, much of which took place through
acquisitions, the Company is now seeking to enhance its competitive position by
actively pursuing improvements throughout its supply chain. These improvements
are intended to minimize the investment in inventory necessary to support the
Company's sales growth objectives, optimize its stores' in-stock position, and
improve the cost-effectiveness of the delivery of goods from its vendors to its
stores.
Centralized purchasing and distribution are important components of
Michaels' strategy to manage its stores' inventories and reduce its supply chain
costs. The Company's purchasing strategy is to negotiate centrally with its
vendors in order to take advantage of volume purchasing discounts and improve
control over product mix and inventory. The Company believes its distribution
network, which includes four regional distribution centers, is a competitive
advantage which enhances the Company's ability to maintain a high in-stock
position in its stores while balancing its overall inventory position. The
Company intends to further increase the flow of goods through its distribution
centers and decrease reliance on less efficient deliveries from vendors direct
to stores.
The data that the Company is obtaining from its new point-of-sale ("POS")
system is also an integral component of the inventory management process. The
Company expects the POS system, which is presently installed in more than 280
stores, to be installed in substantially all Michaels stores by the end of July
1996 as a result of the Company's decision to accelerate its POS system rollout
and to implement item-level scanning for the majority of the Company's product.
The Company believes that the extent of its investment in POS technology is
unique in the arts and crafts industry, and that this initiative is likely to
provide it with a competitive advantage in the future. The Company believes the
information obtained from item-level scanning through the new POS system will
enhance efficiencies by enabling it to identify important trends to assist it in
managing its inventory by facilitating the elimination of less profitable SKUs,
increasing the in-stock level of more popular SKUs, assisting in the analysis of
product margins, and generating data for advertising cost/benefit evaluations.
The Company believes that the POS system will also allow it to provide better
customer service by increasing the speed and accuracy of register check out,
enabling the more rapid restocking of items, and providing for the seamless
repricing of sale items. The Company believes that the POS system, combined with
other store-level inventory controls and management incentive plans linked to
inventory goals, will enable it to more effectively control its investment in
inventories. The Company is financing the new POS system through a $25 million
capital lease program.
STORE EXPANSION STRATEGY
Having achieved its objective of becoming the largest and only national
retailer in the arts, crafts and decorative items industry, the Company has
shifted its focus towards achieving improved operational efficiencies, resulting
in higher returns on its invested capital. Accordingly, after having grown both
sales and store locations (excluding Aaron Brothers) at compounded annual rates
of 32% and 33%, respectively, over the past four fiscal years, Michaels has
moderated its internal store growth target. During fiscal 1996, the Company
currently anticipates opening only 12 to 15 new Michaels stores and five to ten
new Aaron Brothers stores. The slower new store growth in fiscal 1996 will allow
the Company to invest its resources to complete its POS system rollout, expand
its distribution capacity and enhance its inventory management systems. The
Company currently anticipates opening approximately 50 to 55 new Michaels stores
during fiscal 1997 and anticipates that its internal growth rate over the long
term will be approximately 12% to 15%.
The arts, crafts and decorative items market remains highly fragmented, and
the Company believes that significant growth opportunities will continue to be
available to it as a result of market expansion and consolidation. While there
can be no assurance that these opportunities will arise or continue, the Company
presently believes that market conditions will permit it to sustain its
long-term growth goal of 12% to 15% during the foreseeable future. Moreover, the
Company believes that few of its existing markets are saturated. Accordingly,
the Company's current expansion strategy is to give priority to adding stores in
existing markets in order to enhance economies of scale associated with
advertising, distribution, field supervision,
4
<PAGE>
and other regional expenses. The Company intends to continue to review
acquisition opportunities in existing and new markets, but has no arrangements
or understandings pending with respect to any acquisitions.
THE REFINANCING
The offering of the Notes is part of a broader refinancing plan (the
"Refinancing") designed to increase the Company's financial flexibility by
diversifying its sources of capital and extending the maturities of its
currently outstanding debt, thereby reducing the Company's reliance on bank debt
to fund its longer term capital requirements. The sources of capital for the
Refinancing include the offering of the Notes and the private placement in April
1996 of 2,000,000 shares of Common Stock for aggregate proceeds of $25 million
(the "Private Placement"). The Private Placement consisted of three private
transactions with three separate entities owned by independent trusts of which
family members of Sam Wyly, Chairman of the Company, and Charles J. Wyly, Jr.,
Vice Chairman of the Company, are beneficiaries. Michaels has had negotiations
with the administrative lender under the Credit Agreement to reduce the amount
of the facility from a maximum of $200 million to a maximum of $100 million and
to modify certain covenants. Following the Refinancing, Michaels expects to use
the borrowings available under the modified Credit Agreement primarily to
finance seasonal working capital requirements.
5
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
Securities Offered............ $125,000,000 principal amount of % Senior Notes due 2006
(the "Notes").
<S> <C>
Maturity Date................. , 2006.
Interest Payment Dates........ and of each year, commencing ,
1996.
Optional Redemption........... The Notes are not redeemable prior to , 2001,
except that until , 1999, the Company may
redeem, at its option, up to an aggregate of $25 million
principal amount of the Notes at the redemption price set
forth herein, plus accrued interest to the date of
redemption, with the net proceeds of one or more Equity
Offerings (as defined herein), if at least $100 million
aggregate principal amount of the Notes remain outstanding
after each such redemption. On or after , 2001,
the Notes are redeemable at the option of the Company, in
whole or in part, at the redemption prices set forth
herein, plus accrued interest to the date of redemption.
See "Description of the Notes -- Optional Redemption".
Ranking....................... The Notes will be unsecured obligations of the Company and
will rank PARI PASSU in right of payment with all existing
and future Senior Indebtedness (as defined herein) of the
Company and senior to all existing and future subordinated
indebtedness of the Company. The Notes will be effectively
subordinated to all existing and future secured
indebtedness of the Company and all existing and future
indebtedness of any subsidiary of the Company. At April 28,
1996, after giving effect to the Offering and the
application of net proceeds thereof, the Company and its
subsidiaries would have had $231.0 million of indebtedness
outstanding, $9.1 million of which would have represented
secured indebtedness and $96.9 million of which would have
represented subordinated indebtedness. At April 28, 1996,
subsidiaries of the Company had no indebtedness
outstanding. See "Description of the Notes -- Ranking".
Restrictive Covenants......... The Indenture under which the Notes will be issued (the
"Indenture") will contain certain covenants pertaining to
the Company and its Restricted Subsidiaries (as defined
herein), including but not limited to covenants with
respect to the following matters: (i) limitations on
indebtedness; (ii) limitations on restricted payments such
as dividends, repurchases of the Company's or subsidiaries'
stock, repurchases of subordinated obligations, and
investments; (iii) limitations on restrictions on
distributions from subsidiaries; (iv) limitations on sales
of assets and of stock of subsidiaries; (v) limitations on
transactions with affiliates; (vi) limitations on liens;
(vii) limitations on sale/leaseback transactions; and
(viii) limitations on mergers, consolidations and transfers
of all or substantially all assets. However, all of these
covenants are subject to a number of important
qualifications and exceptions. On the Issue Date (as
defined herein), the term
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Restricted Subsidiaries will include all of the Company's
subsidiaries other than Aaron Brothers and Michaels of
Canada, Inc. See "Description of the Notes -- Certain
Covenants".
Change of Control............. Upon a Change of Control (as defined herein), each holder
of Notes may require the Company to repurchase any or all
outstanding Notes owned by such holder at 101% of the
principal amount thereof, plus accrued interest to the date
of repurchase. See "Description of the Notes -- Change of
Control".
Use of Proceeds............... The Company intends to use a significant portion of the net
proceeds to reduce indebtedness under the Credit Agreement,
and intends to use the balance of the net proceeds to fund
a portion of the cost of store renovations, the cost of
developing new stores in fiscal 1996 and for general
corporate purposes. See "Use of Proceeds".
</TABLE>
RISK FACTORS
Prospective purchasers of the Notes should carefully consider the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus before making any investment in the Notes.
7
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth certain financial and operating data of the
Company and its subsidiaries and is qualified by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIRST
FISCAL YEAR (A) QUARTER (B)
------------------------------------------------------------- -----------
1991 1992 1993 1994 1995 1995
----------- ----------- ----------- ----------- --------- -----------
(DOLLARS IN MILLIONS, EXCEPT AS INDICATED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales (c)......................................... $ 410.9 $ 493.2 $ 619.7 $ 994.6 $ 1,294.9 $ 265.5
Gross profit (d)(e)................................... 136.5 169.6 215.8 349.8 358.3 93.5
Operating income (loss) (e)(f)........................ 25.6 34.3 41.4 64.0 (15.0) 15.4
Interest expense...................................... 7.0 0.3 6.4 9.1 16.8 3.3
Net income (loss) (e)(f).............................. 6.9 20.4 26.3 35.6 (20.4) 7.6
BALANCE SHEET INFORMATION (AT END OF PERIOD):
Working capital (g)................................... $ 74.8 $ 104.5 $ 181.8 $ 232.4 $ 229.0 $ 270.1
Inventory............................................. 89.3 118.3 206.2 375.1 366.1 407.4
Total assets.......................................... 180.9 322.1 397.8 686.0 739.8 756.0
Total debt (h)........................................ 0.2 97.9 97.8 138.1 188.7 226.2
Shareholders' equity.................................. 126.3 155.3 185.4 355.9 336.0 364.3
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges (e)(i)(j).......... 2.1x 4.7x 3.4x 3.1x -- 2.3x
Depreciation and amortization......................... 9.2 10.2 12.5 21.5 30.9 7.6
Capital expenditures (k).............................. 5.5 19.8 46.8 68.1 54.9 11.9
Pro forma interest expense (l)........................ 21.8
Pro forma ratio of earnings to fixed charges
(e)(j)(m)............................................ --
EBITDA (e)(n)......................................... $ 34.9 $ 44.4 $ 53.8 $ 85.5 $ 15.9 $ 23.0
Ratio of EBITDA to interest expense (e)(o)............ 5.0 x 168.9 x 8.4 x 9.4 x -- 6.9x
Ratio of EBITDA to pro forma interest expense
(e)(o)............................................... --
OPERATING DATA:
Percentage increase in total net sales................ 14 % 20 % 26 % 61 % 30% 66%
Percentage increase (decrease) in total comparable
store sales (p)...................................... 9 % 7 % 3 % 7 % 3% 9%
Gross profit as percent of sales (e).................. 33.2 % 34.4 % 34.8 % 35.2 % 27.7% 35.2%
EBITDA as percent of sales (e)........................ 8.5 % 9.0 % 8.7 % 8.6 % 1.2% 8.7%
Number of stores:
Open at beginning of period......................... 137 140 168 220 380 380
Acquired during period (q)(r)....................... 0 4 0 104 0 0
Opened during period................................ 4 24 54 61 64 15
Closed or sold during period (s).................... 1 0 2 5 2 0
Open at end of period............................... 140 168 220 380 442 395
Inventory per Michaels store at end of period
($000s).............................................. $ 638 $ 704 $ 937 $ 987 $ 804 $ 1,009
<CAPTION>
1996
-----------
<S> <C>
INCOME STATEMENT DATA:
Net sales (c)......................................... $ 301.9
Gross profit (d)(e)................................... 96.8
Operating income (loss) (e)(f)........................ 7.8
Interest expense...................................... 3.7
Net income (loss) (e)(f).............................. 2.7
BALANCE SHEET INFORMATION (AT END OF PERIOD):
Working capital (g)................................... $ 243.9
Inventory............................................. 377.1
Total assets.......................................... 757.2
Total debt (h)........................................ 179.5
Shareholders' equity.................................. 363.9
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges (e)(i)(j).......... 1.4 x
Depreciation and amortization......................... 8.8
Capital expenditures (k).............................. 7.8
Pro forma interest expense (l)........................ 4.9
Pro forma ratio of earnings to fixed charges
(e)(j)(m)............................................ 1.3 x
EBITDA (e)(n)......................................... $ 16.6
Ratio of EBITDA to interest expense (e)(o)............ 4.5 x
Ratio of EBITDA to pro forma interest expense
(e)(o)............................................... 3.4 x
OPERATING DATA:
Percentage increase in total net sales................ 14 %
Percentage increase (decrease) in total comparable
store sales (p)...................................... (1 )%
Gross profit as percent of sales (e).................. 32.1 %
EBITDA as percent of sales (e)........................ 5.5 %
Number of stores:
Open at beginning of period......................... 442
Acquired during period (q)(r)....................... 0
Opened during period................................ 5
Closed or sold during period (s).................... 1
Open at end of period............................... 446
Inventory per Michaels store at end of period
($000s).............................................. $ 816
</TABLE>
Footnotes on next page.
8
<PAGE>
- ------------------------------
(a) The Company operates on a 52/53 week fiscal year ending on the Sunday
closest to January 31. For example, references to "fiscal 1995" mean the
fiscal year ended January 28, 1996. All fiscal years set forth above
included 52 weeks.
(b) Thirteen week periods ended April 30, 1995 and April 28, 1996, respectively.
(c) Net sales represents gross sales less returns.
(d) Gross profit represents net sales less cost of sales and occupancy expense.
(e) Includes effect of a pre-tax charge of $64.4 million in fiscal 1995 for
unusual costs and expenses primarily associated with the SKU Reduction
Program, which charge reduced gross profit by $57.5 million, EBITDA
(calculated as operating income plus depreciation and amortization) and
operating income by $62.4 million, and net income by $41.9 million in fiscal
1995.
(f) Includes effect of certain store closing and conversion costs of $7.1
million in fiscal 1994 relating to the acquisition of Leewards Creative
Crafts, Inc., which charge reduced operating income by $7.1 million and net
income by $4.4 million in fiscal 1994.
(g) Working capital represents current assets less current liabilities.
(h) Total debt includes bank debt, the Subordinated Notes (as defined herein)
and capital lease obligations.
(i) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes for such period plus fixed
charges deducted in calculating income (loss) for such period. Fixed charges
consist of interest incurred, amortization of deferred financing fees and an
amount representing the interest factor included in rental expenses.
(j) Earnings were insufficient to cover fixed charges in fiscal 1995. The
deficiency for fiscal 1995 was $34.8 million. On a pro forma basis for
fiscal 1995, the deficiency would have been $39.8 million.
(k) Capital expenditures includes acquisitions of property and equipment
excluding assets acquired pursuant to acquisitions and additions to property
and equipment financed via capital leases.
(l) Pro forma interest expense reflects the offering of the Notes assuming the
application of proceeds as described in "Use of Proceeds" as if the same had
occurred on January 30, 1995 and giving effect to the net increase in
interest expense resulting from the issuance of the Notes at an assumed
interest rate of 10.5% from January 30, 1995. The actual interest rate on
the Notes may be higher or lower than this rate. A 0.125% change in the
interest rate would change pro forma interest expense by $156,250 for the
year ended January 28, 1996.
(m) Pro forma fixed charges reflects the offering of the Notes assuming the
application of proceeds as described in the "Use of Proceeds" as if the same
had occurred on January 30, 1995 and giving effect to the net increase in
interest expense resulting from the issuance of the Notes at an assumed
interest rate of 10.5% from January 30, 1995.
(n) EBITDA is calculated as operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be considered
by an investor as an alternative to net income, as an indicator of the
operating performance of the Company, or as an alternative to cash flow as a
measure of liquidity. Under the terms of the indenture relating to the Notes
(the "Indenture"), EBITDA for any period is calculated as the sum of
consolidated net income plus the following to the extent deducted in
calculating such consolidated net income: (i) income tax expense, (ii)
consolidated interest expense, (iii) depreciation expense, (iv) amortization
expense, and (v) all other non-cash items reducing consolidated net income
(excluding any non-cash items to the extent they represent an accrual of, or
reserve for, cash disbursements for any subsequent period), less all
non-cash items increasing such consolidated net income in each case for such
period. See "Description of the Notes -- Certain Definitions". Using this
definition, EBITDA would have been $34.0, $43.9, $61.5, $87.8, $12.9, $23.2,
and $16.9 million, for the 1991-1995 fiscal years and the 1995 and 1996
first fiscal quarters, respectively.
(o) EBITDA (calculated as operating income plus depreciation and amortization)
was insufficient to cover interest expense in fiscal 1995. The deficiency
for fiscal 1995 was $959,000. On a pro forma basis for fiscal 1995, the
deficiency would have been $6.0 million. Using the definition of EBITDA
contained within the Indenture, EBITDA was insufficient to cover interest
expense in fiscal 1995. The deficiency in fiscal 1995 was $3.9 million. On a
pro forma basis for fiscal 1995, the deficiency would have been $8.9
million.
(p) New stores are generally included in the calculation of comparable store
sales for the first full month following the one-year anniversary of the
completion of the grand opening sales period, which is generally the
thirteenth or fourteenth month after the store opening. The sales amounts
for each store included in the calculation represent the sales for the same
number of months for each period compared.
(q) Excludes the 68 Aaron Brothers stores acquired in 1995.
(r) Net of 19 stores acquired in fiscal 1994 that the Company closed as
contemplated at the time of acquisition.
(s) Includes Michaels stores closed in fiscal 1994 due to the acquisition of a
new store in the same general market area, but excludes 19 acquired stores
that the Company closed as contemplated at the time of acquisition.
9
<PAGE>
RECENT DEVELOPMENTS AND 1996 OUTLOOK
CERTAIN STATEMENTS CONTAINED IN THIS SECTION WHICH ARE NOT HISTORICAL FACTS
ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING,
BUT NOT LIMITED TO, CUSTOMER DEMAND AND TRENDS IN THE ARTS, CRAFTS, AND
DECORATIVE ITEMS INDUSTRY, RELATED INVENTORY RISKS DUE TO SHIFTS IN CUSTOMER
DEMAND, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF COMPETITORS' LOCATIONS
AND PRICING, THE AVAILABILITY OF ACCEPTABLE REAL ESTATE LOCATIONS FOR NEW
STORES, DIFFICULTIES WITH RESPECT TO NEW TECHNOLOGIES SUCH AS POINT-OF-SALE
SYSTEMS, SUPPLY CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF FINANCING EFFORTS
AND OTHER RISKS DETAILED UNDER "RISK FACTORS" HEREIN.
NEW CHIEF EXECUTIVE OFFICER
On April 2, 1996 the Company announced the selection of R. Michael Rouleau
as Chief Executive Officer of the Company. Mr. Rouleau had most recently served
as Executive Vice President of Store Operations for Lowe's Companies, Inc. since
May 1992, and additionally as President of Lowe's Contractor Yard Division since
February 1995. Prior to joining Lowe's, Mr. Rouleau was a co-founder and
President of Office Warehouse which was sold and subsequently merged into
OfficeMax. Mr. Rouleau spent over 20 years with Dayton Hudson Corporation, where
he was one of the original 23 employees that started its Target Stores Division,
later becoming Executive Vice President of Marketing and Distribution. Douglas
B. Sullivan, who succeeded Jack Bush as President of the Company in August 1995,
will continue as President and Chief Operating Officer of the Company.
FIRST QUARTER RESULTS
Net sales in the first quarter of fiscal 1996 (ended April 28, 1996)
increased $36.3 million, or 14%, over the first quarter of fiscal 1995 (ended
April 30, 1995). The results for the first quarter of fiscal 1996 included sales
from 51 Michaels stores (net of 3 closures) that were opened and 68 Aaron
Brothers stores that were acquired during the twelve month period ended April
28, 1996. During the first quarter, sales of the new and acquired stores
accounted for an increase of $41.1 million. Comparable store sales declined one
percent in the first quarter of fiscal 1996 compared to the first quarter of
fiscal 1995.
Cost of sales and occupancy expense as a percentage of net sales for the
first quarter of fiscal 1996 increased by 3.1% compared to the first quarter of
fiscal 1995 which management believes was due primarily to promotional markdowns
of spring, Easter and wearable art merchandise and increased distribution and
occupancy costs. Promotional markdowns were required largely due to overbuying
of seasonal merchandise in fiscal 1995 prior to the Company's decision to slow
down its store expansion program. Distribution costs as a percentage of net
sales increased primarily due to less efficient utilization of shipping
capacity. Management believes that transportation costs will be more effectively
leveraged in the future as the Company moves a greater percentage of the
Company's merchandise inventories into its regional distribution centers in
order to reduce direct-to-store shipments. The increase in occupancy costs
resulted from a high proportion of newer stores having a relatively low sales
base available to absorb fixed occupancy costs.
Selling, general and administrative expense as a percentage of net sales
increased by 0.1% in the first quarter of fiscal 1996 compared to the first
quarter of 1995 primarily due to advertising expense which was spread over a
lower sales base than planned, partially offset by a cash settlement payment
(net of associated legal expense).
Cash flow from operations of $1.6 million was generated during the first
quarter of fiscal 1996 compared to negative $53.6 million of cash flow from
operations generated during the first quarter of fiscal 1995. This was achieved
primarily through an improvement in inventory management which resulted in a
reduction in total inventories of 7% and in inventories per store of 19%
compared to the end of the first quarter of fiscal 1995. Indebtedness
outstanding under the Credit Agreement at the end of the first quarter of fiscal
1996 was $73.5 million versus $129.0 million at the end of the first quarter of
fiscal 1995, reflecting both the reduced level of inventories and the $25
million of proceeds from the Private Placement.
1996 OUTLOOK
During the first six months of fiscal 1996, the Company is focusing on
certain projects to improve store operations with the implementation of a
standardized operating format. This temporary shift in focus will divert store
labor from more traditional selling activities. Consequently, comparable store
sales growth
10
<PAGE>
during the first six months of fiscal 1996 is expected to compare unfavorably to
the first six months of fiscal 1995 (a period including promotional activity
that contributed to a 9% comparable store sales increase). However, despite the
comparable store sales decline in the first quarter of fiscal 1996 and
additional comparable store sales declines which the Company expects to occur in
some individual months during the remainder of the year, the Company expects to
achieve comparable store sales increases for fiscal 1996 taken as a whole as the
benefits from the standardization program and other initiatives are realized.
The Company expects that operating results will continue to be negatively
impacted by several factors in the second quarter of fiscal 1996. In connection
with the reduction in merchandise assortment, the Company is relaying all stores
with new planograms. As a result of the relaying of the stores, together with
the accelerated rollout of the POS system, the Company expects to experience
disruption in its stores and increased labor costs. Further, it is expected that
the reduced inventory assortment in the Michaels stores will not attain optimal
presentation and in-stock position until September 1996, the date by which the
Company expects substantially all of the planograms to have been reset to a
chainwide format. While the favorable effects of the Company's initiatives to
improve profitability will not become apparent in the Company's operating
results until the second half of fiscal 1996, the Company expects cash flow from
operations to be favorably affected throughout the year and to be higher in
fiscal 1996 than in recent years.
11
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE NOTES
OFFERED HEREBY.
HIGH LEVERAGE; ABILITY TO SERVICE OUTSTANDING OBLIGATIONS. The Company is,
and after completion of the Offering and the application of the net proceeds
thereof will continue to be, highly leveraged. At April 28, 1996, after giving
effect to the Offering and the application of the net proceeds thereof, the
Company's total debt (including current maturities) would have been $231.0
million, and its total common shareholders' equity would have been $363.9
million, resulting in a total capitalization of $594.9 million and total debt as
a percentage of total capitalization of 38.8%. The Company's operating results
have been and will continue to be affected by significant fixed charges related
to its indebtedness and other obligations. The Company's fixed charges in fiscal
1995, after giving effect to the Offering and the application of the net
proceeds thereof, would have exceeded its earnings in that year by $39.8
million.
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the Notes and the
approximately $96.9 million of currently outstanding subordinated indebtedness
represented by the Company's 4 3/4%/6 3/4% Convertible Subordinated Notes due
2003 (the "Subordinated Notes")) and to pay all rental obligations under
noncancellable leases will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond its control. The Company believes that
amounts available under the Credit Agreement, as reduced, together with cash
from operations, will enable the Company to fund its current liquidity and
capital expenditure requirements, including scheduled payments of interest on
the Notes and other indebtedness of the Company and rental payments under its
noncancellable operating leases. However, there can be no assurance that the
Company's business will generate sufficient cash flow from operations or that
future borrowings will be available under the Credit Agreement in an amount
sufficient to enable the Company to service its indebtedness and pay its rental
obligations under noncancellable leases, including the Notes, or make
anticipated capital expenditures. As the Company's Subordinated Notes mature
prior to the maturity of the Notes, the Company will be required to retire or
refinance that indebtedness before repaying the Notes. Similarly, the Company
may need to refinance all or a portion of the principal of the Notes or other
indebtedness (including the Subordinated Notes) on or prior to maturity of the
Notes, and there can be no assurance that the Company will be able to effect any
such refinancings on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
The Credit Agreement contains significant financial and operating covenants,
including, among other things, requirements that the Company maintain certain
financial ratios and restrictions on the ability of the Company to incur
indebtedness, to make capital expenditures, to create or permit liens, to pay
dividends or to take certain other corporate actions. On March 4, 1996, the
Credit Agreement was amended to provide, among other things, for a waiver of the
fixed charges coverage ratio for the fourth quarter of 1995. There can be no
assurance that the Company will be able to obtain such a waiver in the future,
if needed. A breach of one or more of certain covenants under the Credit
Agreement could result in acceleration of the Company's payment obligations
thereunder.
Any or all of the restrictions, limitations or contingencies under the
Credit Agreement, the Notes, and the Subordinated Notes, as well as the
Company's leverage, could adversely affect the Company's ability to obtain
additional financing in the future, to make capital expenditures, to effect
store expansions, to make acquisitions, to take advantage of business
opportunities that may arise, and to withstand adverse general economic and
retailing industry conditions and increased competitive pressures. Retail
suppliers monitor carefully the financial performance of retail companies such
as the Company, and may eliminate favorable payment terms quickly upon learning
of actual or perceived deterioration in the financial condition or results of
operation of a retail company.
SKU REDUCTION PROGRAM; OPERATING LOSS. During fiscal 1995, the Company
implemented the SKU Reduction Program and incurred approximately $64.4 million
of unusual costs and expenses primarily related thereto, which are described
under "Management's Discussion and Analysis of Financial Condition
12
<PAGE>
and Results of Operations -- General". While the SKU Reduction Program was
designed to reduce the amount of capital invested in inventory without impairing
the stores' overall broad assortment of merchandise, there can be no assurance
that the SKU reduction and the relaying of the stores' planograms will not
adversely affect customer demand. Moreover, there can be no assurance that the
lower capital investment and higher returns expected to be achieved from the SKU
Reduction Program will be attained in fiscal 1996 or thereafter. There can be no
assurance that the Company will not further review its merchandise assortment
and incur further charges related thereto.
DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES. The Company's performance is
subject to financial, economic and other factors, some of which are beyond its
control. The ability of the Company to make principal and interest payments on
the Notes will be dependent on the Company's future performance. For the fiscal
year ended January 28, 1996, the Company's earnings were insufficient to cover
fixed charges. This deficiency for fiscal 1995 was $34.8 million. On a pro forma
basis, this deficiency for fiscal 1995 would have been $39.8 million. See Notes
(i), (j) and (m) to "Selected Financial and Operating Data". In addition, the
Company's EBITDA (defined as operating income plus depreciation and
amortization) was insufficient to cover interest expense in fiscal 1995 by
$959,000. On a pro forma basis, this deficiency for fiscal 1995 would have been
$6.0 million. See Notes (l), (n), and (o) to "Selected Financial and Operating
Data." Because the Company's current debt service requirements are substantial,
continued losses or a material deterioration in the Company's results of
operations could create difficulty in meeting debt service requirements.
SHIFT IN FOCUS AND MODERATED GROWTH. The financial results of the Company
in recent years have been significantly affected by the rapid expansion of the
Company through both new store openings and acquisitions. However, in August of
1995, the Company announced a shift in focus from sales growth towards realizing
higher returns on its invested capital. The Company's investment of resources to
implement its new focus by completing the POS system rollout, expanding its
distribution capacities and enhancing its inventory management systems has
caused the Company to moderate its internal store growth rate. During fiscal
1996, the Company expects to open 12-15 Michaels stores and five to ten Aaron
Brothers stores. While the Company currently expects to open 50-55 new Michaels
stores in fiscal 1997 and expects internal store growth over the long term to be
approximately 12%-15%, there can be no assuance that such growth rates in 1997
and thereafter can be achieved.
BUSINESS FACTORS; ECONOMIC AND COMPETITIVE CONDITIONS. The Company's
operations may be affected adversely by general economic conditions and events
which result in reduced customer spending in the arts and crafts market
generally and the geographic markets served by its stores. In 1995, sales
throughout the retail industry were generally soft and did not meet sales and
profit expectations. The retailing industry is and will continue to be intensely
competitive. The Company will face increasing competition not only with other
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, but also with numerous
other types of specialty craft formats, including specialty stores, general
merchandise stores, off-price and discount stores, as well as small family
operated businesses. The Company could also face significant competition in
attaining acceptable real estate locations for new stores, adequate supplies of
product, and acquisitions of other stores. The Company believes that many mass
merchandisers may have substantially greater financial resources than the
Company. See "Business -- Competition".
SEASONAL FLUCTUATIONS. The Company's quarterly results of operations may
fluctuate significantly as the result of retail consumers' purchasing patterns,
and, to a lesser extent, the timing of the opening of, and the amount of net
sales contributed by, new stores and the timing of costs associated with the
selection, leasing, construction and opening of new stores, as well as seasonal
factors, product introductions and changes in product mix. The Company's
business is seasonal, with sales and earnings being relatively lower during the
first and second fiscal quarters than in the third and fourth fiscal quarters,
with the highest quarter in terms of sales and profitability being the fourth
quarter. Historically, the fourth quarter, which includes the Christmas selling
season, has accounted for approximately 37% of the Company's sales and
(excluding 1995) approximately 55% of its operating income. In addition,
excluding the effects of new store openings, the Company's inventories and
related short-term financing needs have been seasonal, with the greatest
requirements occurring during its second and third fiscal quarters. The
Company's operating results may
13
<PAGE>
also be affected by changes in economic conditions in the markets where its
stores are located, as well as by weather and other natural conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
IMPLEMENTATION/INTEGRATION OF MANAGEMENT INFORMATION SYSTEMS. Michaels is
in the process of implementing a new POS system which management believes will
assist the Company in tracking its sales and margins more effectively. As of May
22, 1996, the POS system was operating in more than 280 Michaels stores and is
expected to be implemented in substantially all stores by the end of July 1996.
The Company will then be able to capture item-level sales information in all of
its stores. The Company's future success may be dependent to a significant
degree upon the implementation, accuracy and proper utilization of the POS
system and its other management information systems. For example, the Company's
ability to manage its inventories, and to price its products appropriately,
depends upon the quality and utilization of the information generated by its
management information systems. The failure of the Company's management
information systems to adapt to business needs resulting from, among other
things, expansion of its store base, introduction of new products and the
further development of its various businesses, could have a material adverse
effect on the Company. See "Business -- Purchasing, Distribution and Inventory
Management" and "-- Investment in Information Technology".
LITIGATION. The Company and certain of its directors and officers are
defendants in an action filed by certain security holders of the Company seeking
class action status and alleging that misstatements and omissions by defendants
relating to projected and historical operating results, inventory (including
matters related to the pre-tax charge of $64.4 million in fiscal 1995 for
unusual costs and expenses primarily associated with the SKU Reduction Program)
and other matters involving future plans, resulted in an inflation of the price
of the Company's Common Stock. The Company is also a defendant from time to time
in lawsuits incidental to its business. Based on currently available
information, the Company believes that resolution of all known contingencies,
including the security holder litigation and other litigation described under
"Business - Legal Proceedings", would not have a material adverse impact on the
Company's financial statements. However, there can be no assurance that future
costs would not be material to results of operations of the Company for a
particular future period. In addition, the Company's estimates of future costs
are subject to change as events evolve and additional information becomes
available during the course of litigation. See "Business -- Legal Proceedings".
UNRESTRICTED SUBSIDIARIES. The Company has designated Aaron Brothers and
Michaels of Canada, Inc. as Unrestricted Subsidiaries (as defined herein). As
such, the Company will be subject to various restrictions limiting its
investments in those subsidiaries. Moreover, the Company will not be restricted
from selling or transferring those subsidiaries or their assets and will not be
required to apply the proceeds from those transactions to the Notes. Similarly,
the Company will be permitted, but will have no obligation, to distribute the
capital stock of Aaron Brothers to the Company's stockholders. See "Description
of the Notes".
CHINA TRADE RELATIONS. A significant portion of the Company's store
inventory is manufactured in the People's Republic of China (the "PRC"). In
fiscal 1995, the Company made payments of $171 million to vendors for goods
sourced directly from the PRC or which the Company reasonably believes were
manufactured in the PRC and sold to distributors in the United States, such
amount representing approximately 21% of total purchases for fiscal 1995. The
PRC's exports to the U.S., which include silk floral products, have, since 1980,
received the same preferential tariff treatment accorded goods from countries
granted "most favored nation" status. However, preferential tariff treatment for
countries with nonmarket economies, including the PRC, is granted one year at a
time, and such treatment is renewed only upon the President's recommendation to
Congress. Congress may override the President's recommendation with a joint
resolution to bar the extension of preferential treatment. The annual renewal of
the PRC's most favored nation treatment has been a contentious political issue
for several years. The current renewal extends through June 1996 and President
Clinton has recommended that it be extended through June 1997. As a result of
continued political pressures, prospects for renewal of the PRC's preferential
treatment after June 1996 are uncertain. Were the PRC to lose most favored
nation treatment, the import duty on goods manufactured in
14
<PAGE>
the PRC and entering the U.S. would increase dramatically. According to U.S.
Commerce Department statistics, currently about three-quarters of the artificial
floral products imported in the U.S. come from the PRC.
Additionally, U.S. international trade law directs the U.S. Trade
Representative ("USTR") to designate those countries that deny adequate and
effective intellectual property rights or fair and equitable market access to
U.S. firms that rely on intellectual property. From the countries designated,
the USTR is to identify as "priority" those foreign countries where the lack of
intellectual property rights protection is most egregious and has the greatest
adverse impact on U.S. firms. The PRC was recently identified as the only such
priority foreign country. The USTR has investigated and/or held discussions and
negotiations with the PRC repeatedly over the past several years regarding the
PRC's trade practices, including the PRC's failure to provide agreed upon
protection of U.S. intellectual property rights. The USTR is authorized to take
retaliatory action, including the imposition of retaliatory tariffs and import
restraints on goods from priority foreign countries, if such countries do not
respond to USTR investigations by entering into good faith negotiations or by
evidencing significant progress in protecting intellectual property rights.
The Company cannot predict the likelihood, potential magnitude or effect of
trade retaliation that might arise from the ongoing discussions and negotiations
or result from similar investigations in the future. Trade retaliation in the
form of increased tariffs or quotas, or both, against products that are
manufactured in the PRC and sold by the Company now or in the future could
increase the cost of such products to the Company. In the event of a substantial
increase in tariff rates on imported products purchased by the Company, the
Company has not determined in advance what action, if any, it will take. There
can be no assurance that any actions the Company may take would allow the
Company to prevent its results of operations from being affected adversely.
CHANGE OF CONTROL. The terms of the Notes require the Company, in the event
of a change of control, to make an offer to repurchase the Notes at 101% of the
principal amount thereof, plus accrued interest to the date of repurchase. The
terms of the Company's Subordinated Notes have a similar requirement. Certain
events constituting a change of control may be an event of default under the
Credit Agreement or other indebtedness of the Company that may be incurred in
the future. Moreover, the exercise by the holders of the Notes or the
Subordinated Notes of their right to require the Company to repurchase the Notes
or Subordinated Notes may cause a default under the Credit Agreement or other
indebtedness of the Company, even if the change of control does not. Finally,
there can be no assurance that the Company will have the financial resources
necessary to repurchase the Notes and the Subordinated Notes upon a change of
control.
LACK OF PUBLIC MARKET FOR THE NOTES. There is no existing trading market
for the Notes, and there can be no assurance regarding the future development of
a market for the Notes or the ability of holders of the Notes to sell their
Notes or the price at which such holders may be able to sell their Notes. If
such a market were to develop, the Notes could trade at prices that may be
higher or lower than the initial offering price depending on many factors,
including prevailing interest rates, the Company's operating results and the
market for similar securities. The Underwriters have advised the Company that
they currently intend to make a market in the Notes. The Underwriters are not
obligated to do so, however, and any market-making with respect to the Notes may
be discontinued at any time without notice. Therefore, there can be no assurance
as to the liquidity of any trading market for the Notes or that an active market
for the Notes will develop. The Company does not intend to apply for listing or
quotation of the Notes on any securities exchange or stock market.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions may have an adverse effect
on holders of the Notes.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $121.5 million (the "Net Proceeds"). The Company intends to use up
to the full amount of the Net Proceeds to reduce the indebtedness under the
Credit Agreement, and intends to use the balance, if any, of the Net Proceeds to
fund a portion of the cost of store renovations, the cost of developing new
stores in fiscal 1996 and for general corporate purposes. Pending the use of
such proceeds for the above purposes, the Company intends to invest such
proceeds in investment-grade, interest-bearing instruments or in investment
companies that invest principally in such investments. The Company's outstanding
revolving bank debt at June 7, 1996 was $129.1 million with a current interest
rate of 7.42%. The Company's Credit Agreement expires in June 1998. The
Company's bank debt is with a syndicate of banks that includes NationsBank of
Texas, N.A., which acts as administrative lender for the banks thereunder. See
"Underwriting".
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April
28, 1996, and as adjusted for the sale of the Notes being offered hereby and the
application of the net proceeds therefrom. See "Use of Proceeds" and the
financial statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 28, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents..................................................................... $ 7,910 $ 55,925
---------- -----------
---------- -----------
Debt:
Credit Agreement (a)................................................................... $ 73,500 --
% Senior Notes due 2006.............................................................. -- $ 125,000
Subordinated Notes due 2003 (b)........................................................ 96,940 96,940
Capitalized lease obligations (c)...................................................... 9,059 9,059
---------- -----------
Total debt........................................................................... 179,499 230,999
---------- -----------
Shareholders' equity:
Common Stock........................................................................... 2,351 2,351
Additional paid-in capital............................................................. 268,136 268,136
Retained earnings...................................................................... 93,417 93,417
---------- -----------
Total shareholders' equity........................................................... 363,904 363,904
---------- -----------
Total capitalization............................................................... $ 543,403 $ 594,903
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
(a) The Credit Agreement provides for revolving loans and letters of credit in
a principal amount not to exceed the lesser of $200 million or 50% of
eligible inventories. Amounts outstanding under the Credit Agreement bear
interest at a Eurodollar rate plus 150 basis points and/or at the prime
rate (a blended rate of 7.16% at April 28, 1996). The Credit Agreement
expires in June 1998.
(b) The Subordinated Notes due 2003 have an effective interest rate of 6.38%.
The Subordinated Notes are redeemable at the option of the Company at
redemption price ranges beginning at 104.14% and declining to 100.00%. The
Subordinated Notes are convertible into the Company's Common Stock at any
time, at a conversion price of $38 per share.
(c) Capitalized lease obligations are primarily related to the Company's
financing of the new POS system for its stores. The implicit interest rate
under the lease is approximately 8%. The Company expects its capitalized
lease obligations to increase to $25 million by July 1996 as the Company
completes its chainwide POS system roll-out.
17
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data presented below for the five fiscal years ended
January 28, 1996 are derived from the consolidated financial statements of the
Company which were audited by Ernst & Young LLP, independent auditors. The
financial data for the three month periods ended April 28, 1996 and April 30,
1995 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. The data should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and consolidated financial statements and
the related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIRST
FISCAL YEAR (A) QUARTER (B)
------------------------------------------------------------- -----------
1991 1992 1993 1994 1995 1995
----------- ----------- ----------- ----------- --------- -----------
(DOLLARS IN MILLIONS, EXCEPT AS INDICATED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales (c)......................................... $ 410.9 $ 493.2 $ 619.7 $ 994.6 $ 1,294.9 $ 265.5
Gross profit (d)(e)................................... 136.5 169.6 215.8 349.8 358.3 93.5
Operating income (loss) (e)(f)........................ 25.6 34.3 41.4 64.0 (15.0) 15.4
Interest expense...................................... 7.0 0.3 6.4 9.1 16.8 3.3
Net income (loss) (e)(f).............................. 6.9 20.4 26.3 35.6 (20.4) 7.6
BALANCE SHEET INFORMATION (AT END OF PERIOD):
Working capital (g)................................... $ 74.8 $ 104.5 $ 181.8 $ 232.4 $ 229.0 $ 270.1
Inventory............................................. 89.3 118.3 206.2 375.1 366.1 407.4
Total assets.......................................... 180.9 322.1 397.8 686.0 739.8 756.0
Total debt (h)........................................ 0.2 97.9 97.8 138.1 188.7 226.2
Shareholders' equity.................................. 126.3 155.3 185.4 355.9 336.0 364.3
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges (e)(i)(j).......... 2.1x 4.7x 3.4x 3.1x -- 2.3x
Depreciation and amortization......................... 9.2 10.2 12.5 21.5 30.9 7.6
Capital expenditures (k).............................. 5.5 19.8 46.8 68.1 54.9 11.9
Pro forma interest expense (l)........................ 21.8
Pro forma ratio of earnings to fixed charges
(e)(j)(m)............................................ --
EBITDA (e)(n)......................................... $ 34.9 $ 44.4 $ 53.8 $ 85.5 $ 15.9 $ 23.0
Ratio of EBITDA to interest expense (e)(o)............ 5.0 x 168.9 x 8.4 x 9.4 x -- 6.9x
Ratio of EBITDA to pro forma interest expense
(e)(o)............................................... --
OPERATING DATA:
Percentage increase in total net sales................ 14 % 20 % 26 % 61 % 30% 66%
Percentage increase (decrease) in total comparable
store sales (p)...................................... 9 % 7 % 3 % 7 % 3% 9%
Gross profit as percent of sales (e).................. 33.2 % 34.4 % 34.8 % 35.2 % 27.7% 35.2%
EBITDA as percent of sales (e)........................ 8.5 % 9.0 % 8.7 % 8.6 % 1.2% 8.7%
Number of stores:
Open at beginning of period......................... 137 140 168 220 380 380
Acquired during period (q)(r)....................... 0 4 0 104 0 0
Opened during period................................ 4 24 54 61 64 15
Closed or sold during period (s).................... 1 0 2 5 2 0
Open at end of period............................... 140 168 220 380 442 395
Inventory per Michaels store at end of period
($000s).............................................. $ 638 $ 704 $ 937 $ 987 $ 804 $ 1,009
<CAPTION>
1996
-----------
<S> <C>
INCOME STATEMENT DATA:
Net sales (c)......................................... $ 301.9
Gross profit (d)(e)................................... 96.8
Operating income (loss) (e)(f)........................ 7.8
Interest expense...................................... 3.7
Net income (loss) (e)(f).............................. 2.7
BALANCE SHEET INFORMATION (AT END OF PERIOD):
Working capital (g)................................... $ 243.9
Inventory............................................. 377.1
Total assets.......................................... 757.2
Total debt (h)........................................ 179.5
Shareholders' equity.................................. 363.9
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges (e)(i)(j).......... 1.4 x
Depreciation and amortization......................... 8.8
Capital expenditures (k).............................. 7.8
Pro forma interest expense (l)........................ 4.9
Pro forma ratio of earnings to fixed charges
(e)(j)(m)............................................ 1.3 x
EBITDA (e)(n)......................................... $ 16.6
Ratio of EBITDA to interest expense (e)(o)............ 4.5 x
Ratio of EBITDA to pro forma interest expense
(e)(o)............................................... 3.4 x
OPERATING DATA:
Percentage increase in total net sales................ 14 %
Percentage increase (decrease) in total comparable
store sales (p)...................................... (1 )%
Gross profit as percent of sales (e).................. 32.1 %
EBITDA as percent of sales (e)........................ 5.5 %
Number of stores:
Open at beginning of period......................... 442
Acquired during period (q)(r)....................... 0
Opened during period................................ 5
Closed or sold during period (s).................... 1
Open at end of period............................... 446
Inventory per Michaels store at end of period
($000s).............................................. $ 816
</TABLE>
Footnotes on next page.
18
<PAGE>
- ------------------------
(a) The Company operates on a 52/53 week fiscal year ending on the Sunday
closest to January 31. For example, references to "fiscal 1995" mean the
fiscal year ended January 28, 1996. All fiscal years set forth above
included 52 weeks.
(b) Thirteen week periods ended April 30, 1995 and April 28, 1996, respectively.
(c) Net sales represents gross sales less returns.
(d) Gross profit represents net sales less cost of sales and occupancy expense.
(e) Includes effect of a pre-tax charge of $64.4 million in fiscal 1995 for
unusual costs and expenses primarily associated with the SKU Reduction
Program, which charge reduced gross profit by $57.5 million, EBITDA
(calculated as operating income plus depreciation and amortization) and
operating income by $62.4 million, and net income by $41.9 million in fiscal
1995.
(f) Includes effect of certain store closing and conversion costs of $7.1
million in fiscal 1994 relating to the acquisition of Leewards Creative
Crafts, Inc., which charge reduced operating income by $7.1 million and net
income by $4.4 million in fiscal 1994.
(g) Working capital represents current assets less current liabilities.
(h) Total debt includes bank debt, the Subordinated Notes (as defined herein)
and capital lease obligations.
(i) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes for such period plus fixed
charges deducted in calculating income (loss) for such period. Fixed charges
consist of interest incurred, amortization of deferred financing fees and an
amount representing the interest factor included in rental expenses.
(j) Earnings were insufficient to cover fixed charges in fiscal 1995. The
deficiency for fiscal 1995 was $34.8 million. On a pro forma basis for
fiscal 1995, the deficiency would have been $39.8 million.
(k) Capital expenditures includes acquisitions of property and equipment
excluding assets acquired pursuant to acquisitions and additions to property
and equipment financed via capital leases.
(l) Pro forma interest expense reflects the offering of the Notes assuming the
application of proceeds as described in "Use of Proceeds" as if the same had
occurred on January 30, 1995 and giving effect to the net increase in
interest expense resulting from the issuance of the Notes at an assumed
interest rate of 10.5% from January 30, 1995. The actual interest rate on
the Notes may be higher or lower than this rate. A 0.125% change in the
interest rate would change pro forma interest expense by $156,250 for the
year ended January 28, 1996.
(m) Pro forma fixed charges reflects the offering of the Notes assuming the
application of proceeds as described in the "Use of Proceeds" as if the same
had occurred on January 30, 1995 and giving effect to the net increase in
interest expense resulting from the issuance of the Notes at an assumed
interest rate of 10.5% from January 30, 1995.
(n) EBITDA is calculated as operating income plus depreciation and amortization.
EBITDA is presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be considered
by an investor as an alternative to net income, as an indicator of the
operating performance of the Company, or as an alternative to cash flow as a
measure of liquidity. Under the terms of the indenture relating to the Notes
(the "Indenture"), EBITDA for any period is calculated as the sum of
consolidated net income plus the following to the extent deducted in
calculating such consolidated net income: (i) income tax expense, (ii)
consolidated interest expense, (iii) depreciation expense, (iv) amortization
expense, and (v) all other non-cash items reducing consolidated net income
(excluding any non-cash items to the extent thay represent an accural of, or
reserve for, cash disbursements for any subsequent period), less all
non-cash items increasing such consolidated net income in each case for such
period. See "Description of the Notes -- Certain Definitions". Using this
definition, EBITDA would have been $34.0, $43.9, $61.5, $87.8, $12.9, $23.2,
and $16.9 million, for the 1991-1995 fiscal years and the 1995 and 1996
first fiscal quarters, respectively.
(o) EBITDA (calculated as operating income plus depreciation and amortization)
was insufficient to cover interest expense in fiscal 1995. The deficiency
for fiscal 1995 was $959,000. On a pro forma basis for fiscal 1995, the
deficiency would have been $6.0 million. Using the definition of EBITDA
contained within the Indenture, EBITDA was insufficient to cover interest
expense in fiscal 1995. The deficiency in fiscal 1995 was $3.9 million. On a
pro forma basis for fiscal 1995, the deficiency would have been $8.9
million.
(p) New stores are generally included in the calculation of comparable store
sales for the first full month following the one-year anniversary of the
completion of the grand opening sales period, which is generally the
thirteenth or fourteenth month after the store opening. The sales amounts
for each store included in the calculation represent the sales for the same
number of months for each period compared.
(q) Excludes the 68 Aaron Brothers stores acquired in 1995.
(r) Net of 19 stores acquired in fiscal 1994 that the Company closed as
contemplated at the time of acquisition.
(s) Includes Michaels stores closed in fiscal 1994 due to the acquisition of a
new store in the same general market area, but excludes 19 acquired stores
that the Company closed as contemplated at the time of acquisition.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED HEREIN AND ELSEWHERE IN THIS PROSPECTUS WHICH
ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, CUSTOMER DEMAND AND TRENDS IN THE
ARTS, CRAFTS AND DECORATIVE ITEMS INDUSTRY, RELATED INVENTORY RISKS DUE TO
SHIFTS IN CUSTOMER DEMAND, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF
COMPETITORS' LOCATIONS AND PRICING, THE AVAILABILITY OF ACCEPTABLE REAL ESTATE
LOCATIONS FOR NEW STORES, DIFFICULTIES WITH RESPECT TO NEW TECHNOLOGIES SUCH AS
POINT-OF-SALE SYSTEMS, SUPPLY CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF
FINANCING EFFORTS, THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES AND OTHER
RISKS DETAILED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The financial results of the Company in recent years have been significantly
affected by the rapid expansion of the Company through both new store openings
and acquisitions. In fiscal 1993, 1994 and 1995, the Company added 54, 184 and
64 stores, respectively, before considering store closures of 2, 24 and 2,
respectively. During these periods, the Company obtained a substantial portion
of its sales increases from stores added during, or subsequent to, the prior
comparable period and thus not yet included in comparable store sales
comparisons. During these periods, sales from these newer stores accounted for
approximately 88%, 93% and 96%, respectively, of aggregate sales increases. The
Company anticipates that future growth will be more moderate than in the past as
it continues to focus on return on investment, inventory control, productivity
enhancements and improved cash flow. The Company intends to add approximately 12
to 15 Michaels stores and five to ten Aaron Brothers stores in fiscal 1996, of
which five Michaels stores have been opened as of April 28, 1996.
In fiscal 1994, the Company added 184 Michaels stores in part due to
acquisitions. In February 1994, the Company acquired Treasure House Stores,
Inc., a chain of nine arts and crafts stores operating primarily in the Seattle
market, for 280,000 shares of the Company's Common Stock. In April 1994, the
Company acquired the affiliated arts and crafts stores of Oregon Craft & Floral
Supply Co., with eight stores located primarily in the Portland, Oregon area,
and H&H Craft & Floral Supply Co., with eight stores located in southern
California, for a total of 455,000 shares of the Company's Common Stock. In July
1994, Michaels acquired Leewards Creative Crafts, Inc. ("Leewards"), an Illinois
based arts and crafts retailer which operated 98 stores located primarily in the
midwestern and northeastern United States. The acquisition consideration
consisted of approximately $7.9 million in cash and 1,195,140 shares of the
Company's Common Stock. Upon consummation of the acquisition of Leewards, the
Company also repaid approximately $39.6 million of Leewards' indebtedness.
Nineteen of these acquired stores were closed and all remaining stores were
converted to the Michaels format.
In March 1995, the Company acquired Aaron Brothers, which currently operates
a chain of 68 specialty framing and art supply stores located primarily in
California. The acquisition consideration of $25.0 million consisted of $5.3
million in cash and the assumption of $19.7 million in bank debt. Shortly after
consummation of the acquisition, the Company repaid Aaron Brothers' bank debt.
Having achieved its objective of becoming the largest retailer in the arts,
crafts and decorative items industry, the Company recognized that it had the
critical mass to achieve improved operating efficiencies resulting in higher
returns on its invested capital. Toward that end, on August 23, 1995, the
Company announced a shift in its focus from sales growth towards realizing
higher returns on its invested capital. During the second quarter of fiscal
1995, the Company's management conducted a critical analysis of the composition
of the Company's merchandise assortment and the velocity of turnover of
individual SKUs and vendor lines included in each category of merchandise. The
Company then implemented the SKU Reduction Program which was designed to reduce
the amount of the Company's capital allocated to store inventories by
approximately 5% on a per-store basis by year-end 1995 compared to year-end
1994. The SKU Reduction Program was implemented by setting new levels of the
appropriate number of SKUs to be included in the various merchandise categories
and by eliminating slower turning and less profitable product lines without
impairing the stores' overall broad selection of more popular merchandise.
20
<PAGE>
In connection with promotional activity during the second quarter of fiscal
1995, the Company had begun to identify SKUs to be included in clearance sales
in June and July 1995. Concurrently with the analysis which led to the SKU
Reduction Program, the Company also identified additional SKUs, including
various seasonal SKUs, for clearance or elimination. The Company identified a
total of approximately 7,500 SKUs for elimination in the SKU Reduction Program.
Substantially all of the inventory identified for liquidation has been sold. As
a result of the SKU Reduction Program, the Company now offers an assortment of
approximately 44,000 SKUs in the typical Michaels store during the course of a
year (including seasonal product), of which approximately 31,000 SKUs are
planogrammed SKUs offered at all times. Moreover, the Company's inventory per
Michaels stores at the end of fiscal 1995 was approximately $804,000 per store,
which represents a 19% decrease versus the end of fiscal 1994.
Of the $64.4 million of unusual costs and expenses incurred by the Company
in the fiscal quarter ended July 30, 1995, $58.7 million was directly
attributable to the SKU Reduction Program, of which $57.5 million consisted
entirely of inventory cost associated with retail markdowns of inventory
liquidated during the quarter and on hand at July 30, 1995, and $1.2 million
consisted of payroll and related expenses. The methodology used by the Company
to determine the $57.5 million adjustment was to identify items (SKUs) to be
eliminated from inventory; to estimate the retail selling prices which would
result in selling the items in the near term; to estimate the amount of such
items in inventory at the Company's stores and distribution centers; and to
apply the reduced selling prices to the Company's retail inventory calculations
at July 30, 1995. The Company believes that operating at lower inventory levels
as a result of the SKU Reduction Program will result in an increase in inventory
turns, providing improved cash flow and higher returns on invested capital.
Management believes that this improved cash flow, combined with lower inventory
financing requirements will also result in the strengthening of the Company's
balance sheet.
RESULTS OF OPERATIONS
The following table shows the percentage of net sales that each item in the
Consolidated Statements of Operations represents. This table should be read in
conjunction with the following discussion and with the Company's Consolidated
Financial Statements, including the related notes.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales................................................................................ 100.0% 100.0% 100.0%
Cost of sales and occupancy expense...................................................... 65.2 64.9 72.3
--------- --------- ---------
Gross profit............................................................................. 34.8 35.1 27.7
Selling, general and administrative expense.............................................. 28.1 28.0 28.9
Store closing and conversion costs....................................................... 0.0 0.7 0.0
--------- --------- ---------
Operating income (loss).................................................................. 6.7 6.4 (1.2)
Interest expense......................................................................... 1.0 0.9 1.3
Other expense (income), net.............................................................. (1.2) (0.2) 0.2
--------- --------- ---------
Income (loss) before income taxes........................................................ 6.9 5.7 (2.7)
Provision (benefit) for income taxes..................................................... 2.7 2.1 (1.1)
--------- --------- ---------
Net income (loss)........................................................................ 4.2% 3.6% (1.6)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In the discussion below, all percentages given for expense items (excluding
taxes) are calculated as a percentage of net sales for the applicable year.
FOR FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in fiscal 1995 (ended January 28, 1996) increased $300.3 million,
or 30%, over fiscal 1994 (ended January 29, 1995). The results for fiscal 1995
included sales from 62 Michaels stores (net of 2 closures) that were opened
during the year. During fiscal 1995, sales of the newer stores accounted for
$287.3 million of the increase. Comparable store sales increased three percent
in fiscal 1995 compared to the prior year.
21
<PAGE>
Cost of sales and occupancy expense for fiscal 1995 increased by 7.4%
compared to fiscal 1994 due primarily to reduced margin on merchandise
associated with the SKU Reduction Program. Other contributing factors included
the Company's aggressive promotional strategy during the Christmas holiday sales
period and an increase in occupancy expense as a percentage of sales. Occupancy
expense increased primarily due to the inclusion of the results of operations of
the Aaron Brothers stores, which had higher occupancy expense as a percentage of
sales than the typical Michaels store, and to the impact of fixed occupancy
expense in certain of the Company's more mature stores that encountered sales
declines.
Selling, general and administrative expense increased by 0.9% in fiscal 1995
from fiscal 1994. A significant portion of the increase ($4.9 million or 0.4% of
sales) can be attributed to the one-time charge taken in the second quarter of
fiscal 1995 of $2.5 million to cover certain retirement costs of the Company's
former President and Chief Operating Officer, $1.2 million of costs related to
the SKU Reduction Program, and $1.2 million of various other changes of
estimates not directly related to the SKU Reduction Program. The balance of the
increase was primarily due to increased store depreciation due to the Company's
continued investment in its new POS system.
Interest expense for fiscal 1995 was $16.8 million compared to $9.1 million
in fiscal 1994. The increase was due to higher bank borrowings to acquire Aaron
Brothers and to finance new stores, investment in POS equipment, and seasonal
inventory growth.
Other expense was $3.0 million in fiscal 1995 compared to other income of
$2.2 million in fiscal 1994. The net expense in fiscal 1995 ($2.0 million of
which was considered an unusual loss and is included in the $64.4 million of
unusual costs and expenses incurred in the quarter) was due principally to
investment losses sustained as the Company liquidated its remaining investment
portfolio, compared to net investment income earned in the prior year.
The effective tax rate changed to a 41.4% benefit rate in fiscal 1995 from a
37.6% provision rate in fiscal 1994 due principally to the interrelated effects
in 1995 of increased goodwill amortization and the level of the Company's
pre-tax loss.
FOR FISCAL 1994 COMPARED TO FISCAL 1993
Net sales in fiscal 1994 increased $374.9 million, or 60%, over fiscal 1993
(ended January 30, 1994). The results for fiscal 1994 included sales from 160
Michaels stores (net of 24 closures) that were opened or acquired during the
year. During fiscal 1994, sales of the newer stores accounted for $348.6 million
of the increase. Comparable store sales increased seven percent in fiscal 1994
compared to the prior year.
Cost of sales and occupancy expense for fiscal 1994 decreased by 0.3%
compared to fiscal 1993 due primarily to increases in sales of higher margin
custom framing and floral services, an improvement in the gross margin achieved
on seasonal merchandise sales and greater margin contributions from new and
acquired stores, due principally to new store volume discounts from vendors.
This improvement in gross margin was partially offset by an increase in
occupancy expenses driven by the Company's shift to new stores with higher
average selling square footage than existing stores, coupled with the Company's
expansion into states with higher occupancy costs such as New York,
Massachusetts and Connecticut.
Selling, general and administrative expense decreased by 0.1% in fiscal 1994
from fiscal 1993. The decrease was due primarily to continued leveraging of the
Company's general and administrative expenditures over a larger revenue base.
Interest expense for fiscal 1994 was $9.1 million compared to $6.4 million
in fiscal 1993. The increase was due to higher bank borrowings coupled with
higher interest rates than in 1993.
Other income (net of expense) was $2.2 million in fiscal 1994 compared to
$7.7 million in fiscal 1993. This decrease from fiscal 1993 was due to a decline
in the Company's average investment portfolio, which was used to fund the store
expansion program.
22
<PAGE>
The effective tax rate was reduced to 37.6% in fiscal 1994 from a 38.4% in
fiscal 1993 primarily due to the Company's participation in tax advantaged
programs, partially offset by increases in non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital needs are driven primarily by the seasonal
build in inventory to support higher sales in the third and fourth quarters, and
to a lesser extent to fund the Company's growth in new stores and systems
improvements. Net cash provided by operating activities for fiscal 1995 was $9.2
million as compared to net cash used by operating activities of $38.3 million
for fiscal 1994. Net cash provided by operating activities during fiscal 1995
increased primarily due to the SKU Reduction Program. Proceeds from the SKU
Reduction Program were used to pay down bank debt.
Capital expenditures (excluding acquisitions) during fiscal 1995 were $54.9
million, incurred primarily for the opening of 64 new Michaels stores and the
remodeling, relocation or expansion of approximately 27 existing Michaels
stores, and to a lesser extent the opening of a new distribution facility and
certain computer system enhancements.
The Company plans to spend approximately $60 million to $65 million on
capital expenditures during fiscal 1996. The Company plans to add only 12 to 15
Michaels stores, at a cost of approximately $300,000 to $400,000 per store, and
five to ten Aaron Brothers stores, at a cost of approximately $135,000 per
store. These costs include furniture, fixtures, and equipment. In addition, the
initial inventory investment associated with the typical new Michaels store
ranges from approximately $450,000 to $650,000 depending on the store size,
operating format and time of year opened. The inventory invested in the typical
new Aaron Brothers store ranges from $120,000 to $135,000. The initial inventory
investment in new Michaels stores is offset, in part, by extended vendor terms
and allowances. The Company expects that capital expenditures related to new
store openings will be approximately $6 million in fiscal 1996. In addition to
new store opening costs and expenses, the Company expects to spend an additional
$28 million to $30 million on POS and merchandising systems, approximately $12
million on store relocations and remodeling, $7 million on the relocation of the
Company's Texas distribution center, and $7 million to $10 million on the
relocation of the Company's corporate offices and various other projects.
The Company's new POS system, which has been installed in more than 280
Michaels stores as of May 22, 1996 and which the Company believes will be in
place in substantially all Michaels stores by the end of July 1996, is being
financed primarily through a $25 million capital lease program with IBM Credit
Corporation at an interest rate of approximately 8%.
At January 28, 1996, the Company had working capital of $229.0 million,
compared to $232.4 million at January 29, 1995. The Company's Credit Agreement
presently provides for an unsecured line of credit, and the issuance of letters
of credit, in an aggregate amount not to exceed $200 million. As of January 28,
1996 the Company had $95.7 million in available unused borrowing capacity under
the Credit Agreement. In April 1996, the Company completed the Private Placement
resulting in proceeds to the Company of $25 million. The Company used these
proceeds to further reduce its borrowings under the Credit Agreement.
The Company has had negotiations with the administrative lender under the
Credit Agreement to reduce the amount of the facility from a maximum of $200
million to a maximum of $100 million and to modify certain covenants. The
Company expects that after the modification, the Credit Agreement will be used
primarily to finance seasonal working capital requirements.
Michaels believes that its available cash, funds generated by operations,
the proceeds from the Offering, the IBM Credit Corporation capital lease
financing and funds available under the Credit Agreement should be sufficient to
finance its continuing operations and sustain current growth plans. The Company
believes that it can finance an annual store expansion of 12% to 15% (on a store
square footage basis) from internally generated cash flow.
23
<PAGE>
SEASONALITY AND INFLATION
The Company's business is seasonal in nature with higher sales in the third
and fourth fiscal quarters. Historically, the fourth quarter, which includes the
Christmas selling season, has accounted for approximately 37% of the Company's
sales and (excluding fiscal 1995) approximately 55% of its operating income.
The following table sets forth selected unaudited quarterly operating
results for the Company's nine most recent quarterly periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FISCAL 1994:
Net sales.................................................... $ 159,798 $ 174,204 $ 283,069 $ 377,492
Cost of sales and occupancy expense.......................... 103,511 111,237 187,566 242,423
Operating income (a)......................................... 9,071 3,076 14,827 37,062
Net income (a)............................................... 4,967 713 7,813 22,154
FISCAL 1995:
Net sales.................................................... $ 265,547 $ 259,910 $ 312,696 $ 456,733
Cost of sales and occupancy expense.......................... 172,043 230,133 208,736 325,625
Operating income (loss) (b).................................. 15,420 (54,973) 12,921 11,586
Net income (loss) (b)........................................ 7,557 (33,124) 3,006 2,144
FISCAL 1996:
Net sales.................................................... $ 301,875
Cost of sales and occupancy expense.......................... 205,067
Operating income............................................. 7,838
Net income................................................... 2,725
</TABLE>
- ------------------------------
(a) After certain store closing and conversion costs of $7.1 million, which
charge reduced operating income by $7.1 million and net income by $4.4
million in the second quarter of fiscal 1994.
(b) Includes effect of a pre-tax charge of $64.4 million for unusual costs and
expenses primarily associated with the SKU Reduction Program, which charge
reduced operating income by $62.4 million and net income by $41.9 million
in the second quarter of fiscal 1995.
Management considers the effect of inflation on fiscal 1995 results and its
projected effect on fiscal 1996 financial results to be nominal.
24
<PAGE>
BUSINESS
GENERAL
With approximately $1.3 billion in sales, the Company is the nation's
largest retailer dedicated to serving the arts, crafts and decorative items
marketplace. The Company's Michaels stores offer a wide selection of
competitively priced items, including general crafts, home decor items, picture
framing materials and services, art and hobby supplies, party supplies, silk and
dried flowers, wearable art, needlecrafts, ribbon and seasonal and holiday
merchandise. The Company's primary customers in its stores are women aged 25-54
with above average median household incomes, and the Company believes that
repeat customers account for a substantial portion of its sales. The average
sale in the Company's Michaels stores has increased annually from approximately
$12.00 in fiscal 1991 to $14.44 in fiscal 1995, due in part to increased sales
of custom framing, custom floral arrangements and home decor items.
In March 1995, the Company acquired Aaron Brothers, a chain of specialty
framing and art supply stores operating primarily in California that management
believes both complements the Michaels store concept and further strengthens the
Company's position in Southern California. The Company's Aaron Brothers stores
offer professional custom framing services, photo frames, and a full line of
ready made frames as well as a wide selection of art supplies. During fiscal
1995, Aaron Brothers generated sales of $53.9 million. The average sale in the
Company's Aaron Brothers stores is approximately $23.94.
The Company operates 448 Michaels stores and 68 Aaron Brothers stores in 45
states, Puerto Rico and Canada. The Company's Michaels stores average
approximately 16,000 square feet of selling space and offer an assortment of
approximately 44,000 SKUs in a typical store during the course of a year
(including seasonal product), of which approximately 31,000 SKUs are
planogrammed SKUs offered at all times. The Company's Aaron Brothers stores
average approximately 6,700 square feet of selling space and offer an assortment
of approximately 6,500 SKUs. For fiscal 1995, the average sales of the Company's
Michaels and Aaron Brothers stores open for the full fiscal year were $3.0
million and $0.9 million, respectively.
The Company believes it is well positioned to continue to solidify its
position as the dominant nationwide specialty arts, crafts and decorative items
retailer while increasing its return on invested capital through its business
strategies of (i) offering a broad selection of products in an appealing store
environment that emphasizes superior customer service, (ii) effectively managing
its investment in inventory through centralized purchasing and distribution
combined with significant investment in management information systems, and
(iii) continuing to expand its nationwide presence.
MERCHANDISING AND MARKETING
The Company's Michaels store merchandising strategy is to provide a broad
selection of products in an appealing store environment which emphasizes
superior customer service.
PRODUCT SELECTION
In general, each Michaels store offers products from a number of
departments. Most 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 the major departments is as follows:
- General craft materials, including those for stenciling, doll
making, jewelry making, woodworking, wall decor, tole painting
(a technique for painting on wood), and plaster;
- Items for personalizing home decor, including vases,
containers, baskets, candles, potpourri, accent furniture,
lamps, candleholders and gifts;
- Picture framing materials and services, including ready-made
frames and custom framing, mat boards, glass, backing materials
and related supplies, framed art and photo albums;
- Fine art materials, representing a number of major brand lines
and including items such as pastels, water colors, oil paints,
acrylics, easels, brushes, paper and canvas;
25
<PAGE>
- Hobby items, including finished doll houses and miniature
furniture, wooden and plastic model kits and related supplies,
and paint-by-number kits;
- Party needs, including paper party goods, gift wrap, candy
making and cake decorating supplies, invitations, greeting
cards, balloons and candy;
- Needlecraft items, including stitchery supplies, hand-knitting
yarns, needles, canvas and related supplies for needlepoint,
embroidery and cross stitching, knitting, crochet, rug making
kits, and quilts and afghans, which are sold separately or in
kits;
- Silk flowers, dried flowers and artificial plants sold
separately or in ready-made and custom floral arrangements, all
accessories needed for floral arranging, wedding millinery, and
other floral items such as wreaths;
- Wearable art, including adult's and children's garments, fabric
paints, embellishments, jewels and sequins, transfers and
appliques;
- Ribbon, including satins, laces, florals and other styles sold
both in bolts and by the yard.
In addition to the basic departments described above, the Company regularly
features seasonal merchandise. Seasonal merchandise is ordered for several
holiday periods, 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.
The Company is adding a home decor do-it-yourself fabric program in
approximately 40 Michaels stores which complements the Company's core strategy.
In addition, Michaels has successfully added a new wedding invitation business
and a wedding equipment rental business.
The following table shows Michaels' sales by department as a percentage of
total sales for fiscal 1993, 1994 and 1995:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
DEPARTMENT 1993 1994 1995
- --------------------------------------------------------------------------------------------- ----- ----- -----
(PERCENT OF SALES)
<S> <C> <C> <C>
Silk and dried flowers and plants............................................................ 21% 22% 22%
General craft materials and wearable art..................................................... 21 20 17
Picture framing.............................................................................. 15 15 16
Home decor, seasonal and promotional items................................................... 14 14 15
Fine art materials........................................................................... 11 10 11
Hobby, party, needlecraft, ribbon and all other.............................................. 18 19 19
--- --- ---
Total...................................................................................... 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
During the Christmas selling season, up to 25% of floor and shelf space in a
typical store is devoted to Christmas crafts, Christmas decorating and gift
making merchandise. Because of the project-oriented nature of these products,
the Company's peak Christmas selling season extends from October through
December. Accordingly, a fully developed seasonal merchandising program,
including inventory, merchandise layout and instructional ideas, is implemented
in each Michaels store beginning in July of each year. This program requires
additional inventory accumulation so that each store is fully stocked during the
peak season. Sales of all merchandise typically increase during the Christmas
selling season because of increased customer traffic. The Company believes that
merchandise centered on other traditional holidays, such as Valentine's Day,
Easter and Halloween, is becoming more popular and is a growing contributor to
sales.
The Michaels selling floor strategy is developed centrally and implemented
at the store level through the use of planograms which provide store managers
with detailed descriptions and illustrations with respect to store layout and
merchandise presentation. Planograms are also used to cluster various products
which can be combined to create individual projects.
26
<PAGE>
Aaron Brothers stores offer professional custom framing services, photo
frames, and a full line of ready made frames as well as a wide selection of art
supplies. The Company's merchandising strategy for its Aaron Brothers stores is
to provide competitively priced superior custom framing services and selection,
with a five business day guarantee or the frame is free. In addition, Aaron
Brothers strives to provide a fashion forward merchandise selection in an
appealing environment with superior customer service.
CUSTOMER SERVICE
The Company believes that customer service is critical 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.
Accordingly, Michaels has hundreds of displays in every store in an effort to
stimulate and promote new project ideas, and supplies project sheets with
detailed instructions on how to assemble the products. In addition, many
Michaels sales associates are craft enthusiasts who are able 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.
ADVERTISING
The Company believes that its advertising promotes art, craft, floral,
framing and home decor ideas among its customers. The Company focuses on
circular and newspaper advertising. The Company has found full-color 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
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.
Generally, the Company has limited television advertising to network
television in those major markets in which it has clusters of Michaels stores or
in which it is adding new stores. From time to time, Michaels' marketing program
has included advertising campaigns on certain national cable television
networks, among them The Discovery Channel-TM-, Lifetime Television, and USA
Network-Registered Trademark-. A significant portion of the cost of these
advertising campaigns were underwritten by vendors in 1994 and 1995. These
programs have coordinated television advertising and circular advertisements
together with project booklets, in-store demonstrations, and new point-of-sale
techniques.
PURCHASING, DISTRIBUTION AND INVENTORY MANAGEMENT
To enhance its competitive positioning the Company is actively pursuing
improvements throughout its supply chain. These improvements are intended to
minimize the investment in inventory necessary to support the Company's sales
growth objectives, maximize its stores' in-stock position, and improve the cost-
effectiveness of the delivery of goods from its vendors to its stores.
PURCHASING AND DISTRIBUTION
The Company utilizes a centralized purchasing and distribution strategy to
manage its inventory. The Company's purchasing strategy is to negotiate
centrally with its vendors in order to take advantage of volume purchasing
discounts and improve control over product mix and inventory. In excess of 90%
of the merchandise acquired by the stores is from vendors on the Company's
"approved list". Of this merchandise, approximately one-half is received from
the Company's distribution centers and one-half is received directly from
vendors. In addition, most stores have the flexibility to purchase from 2% to 5%
of their merchandise directly from local vendors, which allows the store
managers to tailor the products offered in their stores to local tastes and
trends. District managers are responsible for monitoring store purchases on a
weekly basis to further manage the stores' merchandise needs.
The Company believes that its distribution capabilities allow it to maintain
a high in-stock position in its stores while balancing its overall inventory
position. The Company believes its distribution network is a competitive
advantage and it intends to increase the flow of goods through its distribution
centers and thereby reduce its supply chain costs and more effectively manage
its investment in inventories. The
27
<PAGE>
Company currently operates four distribution centers which supply the Michaels
stores with certain merchandise, including substantially all seasonal and
promotional items. The Company's distribution centers are located in Texas,
California, Kentucky, and Florida. The Company also utilizes a third-party
warehouse in Oregon which allows the Company to store bulk purchases of seasonal
and promotional merchandise prior to distribution and operates a secondary bulk
storage facility in Arizona. Michaels stores receive deliveries from the
distribution centers generally once a week (twice a week during the Christmas
selling season) through an internal distribution network using hired trucks.
To improve its capacity and efficiency, the Company is relocating its Texas
distribution center within the Dallas/Fort Worth area during the summer of 1996
at a total cost of $21 million, of which $14 million is covered by an operating
lease and $7 million will consist of a capital expenditure in fiscal 1996 by the
Company. (The leases on the Company's current Texas facilities expire in January
1997.) The Florida distribution center, which opened during fiscal 1995, and the
new Texas facility give the Company considerable flexibility and capacity in
meeting its distribution needs.
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).
Aaron Brothers purchases all of its merchandise centrally. Aaron Brothers
operates a 126,000 square foot distribution center located in the City of
Commerce, California that currently serves all of its stores. Approximately 60%
of the store stock is shipped directly from the Aaron Brothers distribution
center, with the remaining 40% being shipped directly from the vendors. Aaron
Brothers systematically replenishes each of its stores automatically on a weekly
basis.
INVENTORY MANAGEMENT
The Company's primary objectives for inventory management are maximizing the
efficiency of the flow of product to the stores, improving store efficiency, and
optimizing store in-stock and overall investment in inventory. The Company
manages its inventory in several ways, including: weekly tracking of the
"open-to-buy" status for each of several sources of inventory flow to the
stores; the use of planograms with "order point/order quantity" information to
control the reorder for each SKU; the review of item-level sales information in
order to track the sell-through of seasonal and promotional items and to plan
its assortments; and the use of management incentive plans that are linked to
the achievement of inventory goals. The data that the Company is obtaining from
its new POS system is an integral component in the inventory management process.
In addition, inventories are verified through physical counts conducted
throughout the year generally in groups of 30 to 40 stores and a complete
physical count in all stores as close as practicable to year-end.
STORE OPERATIONS
The Company's 448 Michaels stores average approximately 16,000 square feet
of selling space. The Company's 68 Aaron Brothers stores average approximately
6,700 square feet of selling space. Net sales for fiscal 1995 averaged
approximately $3.0 million per store for Michaels stores open the entire fiscal
year and $188 per square foot of selling space, and averaged approximately $0.9
million per store for Aaron Brothers stores open the entire fiscal year and $137
per square foot of selling space. Store sites are selected based upon meeting
certain economic, demographic and traffic criteria or for clustering stores in
markets where certain operating efficiencies can be achieved. The Michaels and
Aaron Brothers stores currently in operation are located primarily in strip
shopping centers in areas with easy access and ample parking.
Typically, a Michaels store is managed by a store manager and one to three
assistant store managers, depending on the sales volume of the store. Michaels'
field organization is headed by an executive vice president and is divided into
four geographic zones. Each zone has its own vice president, operations manager,
merchandise manager, and eight or nine district managers. There are a total of
35 districts. The Company believes this organizational structure enhances the
communication among the individual stores
28
<PAGE>
and between the stores and corporate headquarters. In addition, the Company
believes that the training and experience of its managers and assistant managers
are vital to the success of its stores, and therefore conducts training programs
for such personnel.
STORE EXPANSION
Having achieved its objective of becoming the largest national retailer in
the arts, crafts and decorative items industry, the Company has shifted its
focus towards achieving improved operational efficiencies, resulting in higher
returns on its invested capital. Accordingly, having grown sales and store
locations (excluding Aaron Brothers) at compounded annual rates of 32% and 33%,
respectively, over the past four fiscal years, Michaels has moderated its
internal store growth target to 12% to 15% per annum over the longer term.
However, in 1996 the Company currently anticipates opening only 12 to 15 new
Michaels stores and five to ten new Aaron Brothers stores. The slower growth in
fiscal 1996 will allow the Company to invest its resources to complete its POS
system rollout, expand its distribution capacity and enhance its inventory
management systems. The Company currently anticipates opening approximately 50
to 55 new Michaels stores during fiscal 1997.
The Company's expansion strategy is to give priority to adding stores in
existing markets in order to enhance economies of scale associated with
advertising, distribution, field supervision, and other regional expenses.
Management believes that few of its existing markets are saturated and that
there are attractive new markets available to the Company. The anticipated
development of Michaels and Aaron Brothers stores in fiscal 1996 and the rate at
which stores are developed thereafter will depend upon a number of factors,
including the success of existing Michaels and Aaron Brothers stores, the
availability and the cost of capital for expansion, 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.
Michaels has developed a standardized procedure which allows for the
efficient opening of new stores and their integration into the Company's
information and distribution systems. Michaels 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 a qualified
store opening staff to provide new store personnel with in-store training.
Accordingly, Michaels generally opens new stores during the period from February
through October because new store personnel require significant in-store
training prior to entering the Christmas selling season. The Company anticipates
developing a similar process for opening new Aaron Brothers stores.
Costs for opening stores at particular locations depend upon the type of
building and general cost levels in the area. In fiscal 1995, the average net
cost to the Company of opening a new Michaels store was approximately $530,000,
which included leasehold improvements, furniture, fixtures and equipment, and
pre-opening expenses. The initial inventory investment associated with each new
Michaels store in fiscal 1995 was approximately $450,000 to $650,000 depending
on the store size, operating format and the time of year in which the store was
opened. The initial inventory investment in new Michaels stores is offset, in
part, by extended vendor terms and allowances.
INVESTMENT IN INFORMATION TECHNOLOGY
Recognizing the increasingly competitive nature of retailing in general and
the need for productivity improvements through technology, the Company decided
to accelerate its POS system rollout and to implement item-level scanning for
the majority of the Company's product. The Company believes that the extent of
its investment in POS technology is unique in the arts and crafts industry, and
that this initiative is likely to provide it with a competitive advantage in the
future. The Company expects the POS system, which is presently installed in more
than 280 stores, to be in substantially all Michaels stores by the end of July
1996. The Company believes the information obtained from item-level scanning
through the new POS system will enable it to identify important trends to assist
it in managing its inventory by facilitating the elimination of less profitable
SKUs, increasing the in-stock level of more popular SKUs, assisting in the
analysis of product margins, and generating data for advertising cost/benefit
evaluations. The Company believes that the POS
29
<PAGE>
system will also allow Michaels to provide better customer service by increasing
the speed and accuracy of register check out, enabling the more rapid restocking
of items, and enabling the seamless repricing of sale items. The Company will
finance this new POS system through a $25 million capital lease with IBM Credit
Corporation at an interest rate of approximately 8%.
COMPETITION
Michaels is the largest nationwide retailer dedicated to serving the arts,
crafts and decorative items marketplace. The specialty arts, crafts and
decorative items retail business is highly competitive. Michaels competes
primarily with regional and local merchants that tend to specialize in
particular aspects of arts and crafts, 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
Michaels stores compete based on quality and variety of merchandise assortment,
customer service, such as instructional demonstrations, and competitive pricing
where appropriate. The Company 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.
The U.S. arts, crafts and decorative items retailing industry, which is
estimated by trade publications to have exceeded $10.8 billion in sales in
fiscal 1995, has increased in size each year since 1990 when industry sales
totaled $6.0 billion. The industry is highly fragmented and Michaels is the only
nationwide independent arts and crafts retailer. Management believes that there
are only a few independent retailers with arts and crafts sales that exceed $200
million annually, and that the Company's arts and crafts sales are more than
three times as large as those of its largest direct competitor. The Company
believes that its significant size relative to its competitors provides it with
several advantages including (i) superior purchasing power, (ii) critical mass
to support a cost efficient nationwide distribution network, and (iii) the
financial resources to support an annual advertising budget of approximately 5%
of sales ($63 million in fiscal 1995) and significant ongoing capital investment
in information technology.
Michaels' primary competitors include Hobby Lobby, a chain based in Oklahoma
City which operates approximately 105 stores primarily in the southwestern
United States; MJDesigns, a chain which operates approximately 60 stores in
Dallas/Fort Worth, Baltimore/Washington, D.C. and selected other east coast
markets; and A.C. Moore, a chain which operates approximately 20 stores in the
Philadelphia and New York markets. The Company also competes, to a lesser
degree, with Frank's Nursery (owned by General Host), Old America Stores and
Garden Ridge Pottery.
Aaron Brothers' competition is composed primarily of local independent
custom frame shops and mass merchandisers. Aaron Brothers believes it remains
competitive due to its five day guarantee on custom frame orders, its pricing
structure, its fashion forward merchandising assortments, and its customer
service.
SERVICE AND TRADE MARKS
The name "Michaels" and the Michaels logo are both federally registered
service marks held by an affiliate of the Company. The name "Aaron Brothers" and
the Aaron Brothers logo are federally registered trademarks.
FRANCHISES
The Company had previously granted to Dupey Management Corporation ("DMC")
the right to open royalty-free, licensed Michaels stores in an eight-county area
in north Texas which includes the Dallas-Fort Worth area. As a result of a
recent agreement between the Company and DMC, DMC agreed to relinquish its right
to use the Michaels name after March 31, 1997 and paid the Company a cash
settlement, in return for which Michaels surrendered its right of first refusal
to purchase shares and/or certain assets of DMC.
EMPLOYEES
As of April 15, 1996, approximately 19,330 persons were employed by the
Company, approximately 10,330 of whom were employed on a part-time basis. The
number of part-time employees is substantially
30
<PAGE>
increased during the Christmas selling season. Of the Company's full-time
employees, approximately 1,310 are engaged in various executive, operating,
training and administrative functions in the Company's offices and distribution
centers, and the remainder are engaged in store operations.
PROPERTIES
The Company's Michaels stores generally are situated in strip shopping
centers located near malls and on well-traveled roads. Almost all stores are in
leased premises with lease terms generally ranging from five to ten years. The
base rental rates generally range from $85,000 to $235,000 per year. Rental
expense for stores open during the full 12-month period of fiscal 1995 averaged
$156,000. The leases are generally renewable, with increases in lease rental
rates. A majority of the existing leases contain provisions pursuant to which
the lessor has provided leasehold improvements to prepare for opening. However,
the Company has been paying and anticipates continuing to pay for a larger
portion of future improvements directly as opposed to financing them through the
lessor.
The Company's Aaron Brothers stores are generally located in high visibility
strip shopping centers in trade areas having a high density of population and
above average discretionary income. The locations typically contain high profile
and/or complementary anchor stores. As of this date, all current stores are
located in leased properties with lease terms generally ranging from five to ten
years with options to renew. Rental expense for stores opened the full 12-month
period of fiscal 1995 averaged approximately $105,000.
The following table indicates the number of the Company's stores located in
each state or province as of April 25, 1996:
<TABLE>
<CAPTION>
STATE NUMBER OF STORES
- ------------------------------------ -------------------
<S> <C>
Alabama............................. 5
Alaska.............................. 1
Arizona............................. 17*
Arkansas............................ 3
British Columbia.................... 1
California.......................... 144*
Colorado............................ 9
Connecticut......................... 1
Florida............................. 22
Georgia............................. 19
Idaho............................... 2
Illinois............................ 22
Indiana............................. 9
Iowa................................ 6
Kansas.............................. 4
Kentucky............................ 3
Louisiana........................... 4
Maine............................... 2
Maryland............................ 1
Massachusetts....................... 10
Michigan............................ 16
Minnesota........................... 9
Mississippi......................... 1
Missouri............................ 11
<CAPTION>
STATE NUMBER OF STORES
- ------------------------------------ -------------------
<S> <C>
Nebraska............................ 1
Nevada.............................. 6*
New Hampshire....................... 2
New Jersey.......................... 7
New Mexico.......................... 3
New York............................ 11
North Dakota........................ 1
North Carolina...................... 14
Ohio................................ 21
Oklahoma............................ 7
Ontario............................. 15
Oregon.............................. 10
Pennsylvania........................ 9
Puerto Rico......................... 3
Rhode Island........................ 1
South Carolina...................... 4
Tennessee........................... 9
Texas............................... 35
Utah................................ 4
Virginia............................ 8
Washington.......................... 13
West Virginia....................... 1
Wisconsin........................... 7
---
Total............................. 514
---
---
</TABLE>
- ------------------------
* Of the store counts indicated in Arizona, California and Nevada, Aaron
Brothers accounts for 3, 63 and 2 stores, respectively.
The Company leases a 210,000 square foot building in Irving, Texas for use
as a distribution center and as the Company's corporate headquarters. In
addition it leases four nearby facilities for supplemental
31
<PAGE>
warehouse and office space. During 1995 the Company entered into lease
agreements to relocate its Irving distribution center and office space. A lease
was entered into and construction was started on a 426,000 square foot
distribution facility at the Alliance Airport in Tarrant County, Texas. In
addition, a lease was entered into for a 136,000 square foot building in Irving,
Texas, to which the Company will relocate its corporate offices. The relocation
of the distribution center and corporate offices is scheduled for mid 1996.
Michaels also leases a 400,000 square foot building in Buena Park, California, a
350,000 square foot building in Lexington, Kentucky, and a 500,000 square foot
facility in Jacksonville, Florida. Aaron Brothers leases a 126,000 square foot
building in City of Commerce, California, for use as a distribution center and
office facility.
LEGAL PROCEEDINGS
In August 1995, two lawsuits were filed by certain security holders against
the Company and certain present and former officers and directors seeking class
action status on behalf of purchasers of the Company's Common Stock between
February 1, 1995 and August 23, 1995. Among other things, the plaintiffs allege
that misstatements and omissions by defendants relating to projected and
historical operating results, inventory and other matters involving future plans
resulted in an inflation of the prices of the Company's Common Stock. The
plaintiffs seek on behalf of the purported class an unspecified amount of
compensatory damages and reimbursement for the plaintiffs' fees and expenses.
The United States District Court for the Northern District of Texas consolidated
the two lawsuits on November 16, 1995. The Company and the individual defendants
have filed a motion to dismiss the consolidated, amended complaint. Discovery
related to both class certification issues and the merits of plaintiffs' claims
has been stayed pending resolution of defendants' motion to dismiss. The Company
believes the claims are without merit and intends to vigorously defend this
action.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the security holder litigation
described above, would not have a material adverse impact on the Company's
financial position. However, there can be no assurances that future costs would
not be material to results of operations of the Company for a particular future
period. In addition, the Company's estimates of future costs are subject to
change as events evolve and additional information becomes available during the
course of litigation.
32
<PAGE>
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth information as of April 28, 1996, regarding
the beneficial ownership of Common Stock by each person known by the Company to
own 5% or more of the outstanding shares of Common Stock, each director of the
Company, certain named executive officers, and the directors and executive
officers of the Company as a group. The persons named in the table have sole
voting and investment power with respect to all shares of Common Stock owned by
them, unless otherwise noted.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF BENEFICIAL OWNER OR OF BENEFICIAL PERCENT OF
NUMBER OF PERSONS IN GROUP OWNERSHIP CLASS
- ----------------------------------------------------------------------------------- ------------------ -----------
<S> <C> <C>
Sam Wyly........................................................................... 1,934,905(a) 8.23%
Charles J. Wyly, Jr. .............................................................. 1,897,607(b) 8.07
R. Michael Rouleau................................................................. 200,000(c) *
Evan A. Wyly....................................................................... 55,875(d) *
Michael C. French.................................................................. 1,200 (e) *
Richard E. Hanlon.................................................................. 12,600 (f) *
Donald R. Miller, Jr. ............................................................. 13,437 (g) *
Dr. F. Jay Taylor.................................................................. 21,440 *
R. Don Morris...................................................................... 39,287 (h) *
Douglas B. Sullivan................................................................ 35,000 (i) *
David E. Bolen..................................................................... 26,713 *
The Wyly Group..................................................................... 3,532,512 (j) 15.03
8080 N. Central Expressway, Suite 1300 Dallas, Texas 75206
ICM Asset Management, Inc.......................................................... 1,471,430 (k) 6.26
601 W. Main Avenue, Suite 917
Spokane, Washington 99201
The Capital Group Companies, Inc. ................................................. 1,705,000 (l) 7.25
333 South Hope Street
Los Angeles, California 90071
LGT Asset Management, Inc.......................................................... 2,092,000 (m) 8.90
50 California, 27th Floor
San Francisco, California 94111
All directors and executive officers as a group (15 persons)....................... 3,985,624 (n) 16.96
</TABLE>
- ------------------------------
* Less than 1%
(a) Includes 1,074,536 shares held of record by Tallulah, Ltd. (a limited
partnership of which Mr. Wyly is general partner); 536,615 shares held of
record by family trusts of which Mr. Wyly is trustee; 300,000 shares held of
record by Maverick Entrepreneurs Fund, Ltd. ("Maverick"), a limited
partnership of which Mr. Wyly is a general partner; 7,918 shares held by his
daughter and for which he has power of attorney; and 15,836 shares held of
record by certain of Mr. Wyly's adult children, who have given him the power
to vote such shares. Does not include 1,333,333 shares of Common Stock
acquired as part of the Private Placement by two separate entities owned by
two separate independent irrevocable trusts established by Mr. Wyly. Mr.
Wyly disclaims beneficial ownership of those shares.
(b) Includes 755,000 shares held of record by Brush Creek, Ltd., a limited
partnership of which Mr. Wyly is general partner; 842,233 shares held of
record by family trusts of which Mr. Wyly is trustee; 300,000 shares held of
record by Maverick, of which Mr. Wyly is a general partner; and 374 shares
held of record by Mr. Wyly's adult children, who have given him the power to
vote such shares. Does not include 666,667 shares of Common Stock acquired
as part of the Private Placement by an entity owned by an independent
irrevocable trust established by Mr. Wyly. Mr. Wyly disclaims beneficial
ownership of those shares.
(c) Shares subject to presently exercisable options. Mr. Rouleau is the Chief
Executive Officer of the Company.
(d) Includes 30,000 shares subject to presently exercisable options.
(e) Shares held by a retirement account directed by Mr. French.
(f) Includes 10,000 shares subject to presently exercisable options.
(g) Includes 9,250 shares subject to presently exercisable options, and 187
shares held by Mr. Miller's spouse.
33
<PAGE>
(h) Includes 24,250 shares subject to presently exercisable options. Excludes
348,039 shares held by the Michaels Stores, Inc. Employees 401(k) Plan and
Trust, for which Mr. Morris is a trustee and a member of the Investment
Committee. Mr. Morris disclaims beneficial ownership of those excluded
shares.
(i) Includes 8,250 shares subject to presently exercisable options.
(j) The Wyly Group consists of Sam Wyly, Charles J. Wyly, Jr. and Maverick.
(k) Based on a Schedule 13G filed with the Securities and Exchange Commission
dated February 10, 1996, ICM Asset management, Inc., a registered investment
adviser, has the shared power to vote or direct the vote of 805,500 shares
of Common Stock and has the sole power to dispose of or direct the
disposition of 1,471,430 shares of Common Stock.
(l) Based on a Schedule 13G filed with the Securities and Exchange Commission
dated February 9, 1996, The Capital Group Companies, Inc. and its operating
subsidiary, Capital Research & Management Company, a registered investment
adviser, have the sole power to dispose or to direct the disposition of
1,705,000 shares of Common Stock and have no right to vote or direct the
vote of those shares.
(m) Based on a Schedule 13G filed with the Securities and Exchange Commission
dated February 13, 1996, LGT Asset Management, Inc., a registered investment
adviser, has the sole power to vote or to direct the vote of 2,092,000
shares of Common Stock and has the sole power to dispose or to direct the
disposition of 2,092,000 shares of Common Stock.
(n) Includes 69,000 shares subject to presently exercisable options held, in the
aggregate, by four executive officers not named in the table.
34
<PAGE>
MANAGEMENT
Michaels has assembled a management team of substantial experience in the
specialty retailing industry. Key executives and their backgrounds are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Sam Wyly 61 Chairman of the Board of Directors
Charles J. Wyly, Jr. 62 Vice Chairman of the Board of Directors
R. Michael Rouleau 57 Chief Executive Officer
Douglas B. Sullivan 45 President and Chief Operating Officer
R. Don Morris 56 Executive Vice President and Chief Financial Officer
David E. Bolen 44 Executive Vice President
Rex A. Rambo 54 Executive Vice President-Merchandising/Marketing
Evan A. Wyly 34 Vice President and Director
Kristen L. Magnuson 40 Vice President-Finance and Business Planning
Donald R. Miller, Jr. 41 Vice President-Market Development and Director
John H. Rittenhouse 39 Vice President-Distribution
Colby H. Springer 48 Vice President-Information Services
Michael C. French 53 Director
Richard E. Hanlon 48 Director
Dr. F. Jay Taylor 72 Director
</TABLE>
Mr. Sam Wyly has served as Chairman of the Board since 1984. In 1963, Mr.
Wyly founded University Computing Company, a computer software and services
company, and served as President or Chairman from 1963 until February 1979. Mr.
Wyly co-founded Earth Resources Company, an oil refining and silver and gold
mining company, and served as its Executive Committee Chairman from 1968 to
1980. Mr. Wyly and his brother, Charles J. Wyly, Jr., bought the 20 restaurant
Bonanza Steakhouse chain in 1967. While he served as Chairman, the restaurant
chain grew to approximately 600 restaurants by 1989. Mr. Wyly co-founded
Sterling Software, Inc. in 1981 and since that time has served as Chairman of
the Board and a director. Mr. Wyly serves as President of Maverick Capital,
Ltd., an investment fund management company, and has served as a director of
Sterling Commerce, Inc. since December 1995. Sam Wyly is the father of Evan A.
Wyly, a director of the Company.
Mr. Charles J. Wyly, Jr. became a director of the Company in October 1984
and Vice Chairman in February 1985. He co-founded Sterling Software, Inc. in
1981 and since such time has served as a director and (since November 1984) as
Vice Chairman of Sterling Software, Inc. Mr. Wyly served as an officer and
director of University Computing Company from 1964 to 1975, including President
from 1969 to 1973. From 1968 to 1980, Mr. Wyly served as Chairman of the Board
of Earth Resources Company, an oil refining and silver and gold mining company
which he co-founded with his brother, Sam Wyly. Mr. Wyly served as Vice Chairman
of the Bonanza Steakhouse chain from 1967 to 1989. Mr. Wyly serves as Chairman
of Maverick Capital Ltd., an investment fund management company, and has served
as a director of Sterling Commerce, Inc. since December 1995. Charles J. Wyly,
Jr. is the father-in-law of Donald R. Miller, Jr., a director and Vice
President-Market Development of the Company.
Mr. Rouleau became Chief Executive Officer of the Company in April 1996.
Prior to joining the Company, Mr. Rouleau had served as Executive Vice President
of Store Operations for Lowe's Companies, Inc. since May 1992 and as President
of Lowe's Contractor Yard Division since February 1995. Prior to joining Lowe's,
Mr. Rouleau was a co-founder and President of Office Warehouse which
subsequently was sold and merged into OfficeMax.
Mr. Sullivan became President and Chief Operating Officer of the Company in
August 1995. He joined the Company in 1988 and has served in a variety of
capacities, including overseeing the Company's store operations, distribution,
store opening, real estate, legal and personnel functions. Prior to his joining
the Company, Mr. Sullivan had served with Family Dollar Stores, Inc. for 11
years, most recently as Vice President-Real Estate.
35
<PAGE>
Mr. Morris became Executive Vice President and Chief Financial Officer of
the Company in August 1990. From January 1990 until August 1990 he was Senior
Vice President-Finance and Chief Financial Officer. From April 1988 until
January 1990, Mr. Morris was a director, President and Chief Executive Officer
of Frostcollection, Inc. Prior to April 1988, Mr. Morris was Partner-In-Charge
of the Accounting and Audit and the Merger and Acquisition Departments of the
Dallas, Texas office of Arthur Young & Company.
Mr. Bolen joined the Company as Executive Vice President in July 1994. From
January 1987 until July 1994, he held the positions of Vice President of Stores
and more recently Executive Vice President and Chief Operating Officer with
Leewards Creative Crafts, Inc. Prior to joining Leewards, Mr. Bolen held various
positions with Gemco and Zayre Corporation, principally in store operations.
Mr. Rambo has been Executive Vice President Merchandising/Marketing, with
responsibility for all merchandising and marketing functions, since November
1995. Mr. Rambo joined the Company most recently from Lechmere, Inc., a retail
chain, where he served as President. Prior to joining Lechmere, Mr. Rambo ran
the Electric Avenue division for Montgomery Ward. He also worked approximately
25 years with Sears, Roebuck and Company.
Mr. Evan A. Wyly became a director of the Company in September 1992 and has
served as Vice President of the Company from December 1991 to October 1993 and
from May 1994 to the present. In 1988, Mr. Wyly founded Premier Partners
Incorporated, a private investment firm, and served as President until 1992. He
has served as a director of Sterling Software, Inc. since July 1992 and as a
Vice President of Sterling Software, Inc. since December 1994. Mr. Wyly serves
as a director of Xscribe Corp., a high-technology information management company
and has served as a Managing Director of Maverick Capital, an investment fund
management company, since July 1992, and as a director of Sterling Commerce,
Inc., since December 1995. Evan A. Wyly is the son of Sam Wyly.
Ms. Magnuson became Vice President-Finance and Business Planning for the
Company in August 1990. She was Senior Vice President-Controller, Financial and
Strategic Planning, Mergers and Acquisitions, Treasury and Investments for
MeraBank from March 1987 to August 1990. Prior to March 1987, Ms. Magnuson was a
Senior Manager/Principal at Arthur Young & Company.
Mr. Miller has served as Vice President-Market Development of the Company
since November 1990 and as a director of the Company since September 1992. From
September 1984 to November 1990, he was Director of Real Estate. Prior to
joining the Company, Mr. Miller served in various real estate positions with
Bonanza and Peoples Restaurants. Mr. Miller has served as a director of Sterling
Software, Inc. since September 1993. He also serves on the Board of Directors of
Xscribe Corp. Mr. Miller is the son-in-law of Charles J. Wyly, Jr., Vice
Chairman of the Company.
Mr. Rittenhouse joined the Company as Vice President-Distribution in January
1995. For the previous eight years he had served with Target Stores, a division
of Dayton Hudson Corporation, as Director of Distribution. Prior to joining
Dayton Hudson Corporation, he held various positions with Southland Corporation.
Mr. Springer has been Vice President-Information Services since November
1995. From 1993 to November 1995 he was Vice President-Information Services with
Blockbuster Entertainment Corporation. Prior to joining Blockbuster
Entertainment Corporation, Mr. Springer was Vice President of Management
Information Systems with Pearle Vision, Incorporated.
Mr. French has served as a director of the Company since September 1992. He
has been a Managing Director of Maverick Capital Ltd., an investment fund
management company, since 1992 and a director of Sterling Software, Inc. since
July 1992. Mr. French is currently a consultant to the international law firm of
Jones, Day, Reavis & Pogue. Mr. French was a partner with the law firm of
Jackson & Walker, L.L.P. from 1976 through 1995.
Mr. Hanlon became a director of the Company in April 1990. Since February
1995, Mr. Hanlon has been Vice President-Investor Relations of America Online,
Inc., a provider of online computer services. From March 1993 until February
1995, Mr. Hanlon was President of Hanlon & Co. He was Vice President-
36
<PAGE>
Corporate Communications and Secretary from 1988 to 1993 for LEGENT Corporation
and its predecessor. From 1987 to 1988, Mr. Hanlon served as a consultant to Sam
Wyly, Chairman. From 1983 through 1987, Mr. Hanlon was Director of Investor &
Corporate Communications, UCCEL Corporation.
Dr. Taylor became a director of the Company in June 1989. Dr. Taylor was
President of Louisiana Tech University from 1962 until 1987, and has served as
President-Emeritus of Louisiana Tech since 1987. Dr. Taylor also currently
serves as a director of Illinois Central Railroad Corporation and Pizza Inn,
Inc. and performs mediation and arbitration services as a member of The American
Arbitration Association and The Federal Mediation and Conciliation Service.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following are summaries of the material terms and conditions of the
current Credit Agreement, the Credit Agreement as it is proposed to be modified,
and certain other indebtedness. The summary of the Credit Agreement is subject
to its detailed provisions and the provisions of the various related documents
entered into in connection therewith.
THE CREDIT AGREEMENT
The Credit Agreement provides for revolving loans and letters of credit in a
principal amount not to exceed the lesser of $200 million or 50 percent of
eligible inventories. The Credit Agreement provides that letters of credit to be
issued under the Credit Agreement shall not exceed $25 million. Amounts
outstanding under the Credit Agreement on loans to the Company bear interest at
a rate per annum equal to one of the following rates at the Company's option:
(i) a base rate equal to the higher of (A) the daily federal funds rate average
determined by the administrative lender under the Credit Agreement plus 50 basis
points or (B) the NationsBank prime commercial lending rate; or (ii) a
Eurodollar rate determined in accordance with the Credit Agreement plus one
percent, such Eurodollar rate margin being subject to upward or downward
adjustment based on the fixed charge coverage ratio of the Company in effect at
each June 1 and December 1. Letters of credit issued under the Credit Agreement
require, in addition to the payment of issuance fees to the administrative
lender, the payment of an interest factor of one percent of the face amount of
any stand-by letters of credit and one-quarter of one percent per annum of any
commercial letters of credit, subject to upward or downward adjustment based on
reported fixed charge coverage ratio in effect each June 1 and December 1.
Amounts advanced under the Credit Agreement presently bear interest at the
Eurodollar rate plus 150 basis points.
The Company may prepay loans outstanding under the Credit Agreement at any
time in increments of $100,000, in whole or in part, without penalty (subject to
a restriction on the prepayment of Eurodollar borrowings on any day which is not
the last day of an applicable interest rate period with respect to such
Eurodollar borrowing). The Credit Agreement requires mandatory prepayments to
the extent that the amount outstanding exceeds the borrowing base and requires
that the amount outstanding shall, for one consecutive thirty-day period during
the period commencing December 1 and ending the following February 28 of each
such twelve-month period, reduce the amounts outstanding under the Credit
Agreement to an amount equal to or less than the product of $200,000 times the
number of stores in business as of December 1 of such twelve-month period.
The Credit Agreement contains a number of significant covenants that, among
other things, restrict the ability of the Company to incur additional
indebtedness, create liens on assets, pay dividends, enter into certain mergers,
acquisitions, or consolidations, engage in certain investments, or engage in
certain transactions with subsidiaries and affiliates and otherwise restrict
certain corporate activities. In addition, under the Credit Agreement, the
Company is required to comply with certain financial ratios including a fixed
charge coverage ratio, current ratio, and ratio of total liabilities to net
worth.
The Credit Agreement includes various events of default customary for senior
credit facilities of similar size and nature. In addition, the Credit Agreement
provides that an event of default shall occur upon a change in control of the
Company.
37
<PAGE>
PROPOSED MODIFICATIONS TO THE CREDIT AGREEMENT
The Company has had negotiations with NationsBank of Texas, N.A., the
administrative lender for the syndicate of banks under the Credit Agreement,
concerning the material terms of a modification to the Credit Agreement. The
following is a summary of such material terms and conditions of the Credit
Agreement as the Company has proposed the Credit Agreement to be modified (the
"Modified Credit Agreement"). As such terms remain subject to further
negotiation and documentation, the final terms may differ substantially from
those described below. Although it is a condition to the Offering that the
Company modify the Credit Agreement to reduce the availability thereunder to a
maximum of $100 million, there can be no assurance that acceptable modification
to the other terms described below can be reached with the existing banks.
The proposed Modified Credit Agreement would provide that the sum of
outstanding loans and letters of credit thereunder plus the amount of the Notes
outstanding will not exceed 55% of eligible inventories, up to a maximum
availability of $100 million, subject to reduction at the option of the Company
(the "Commitment"). Letters of credit to be issued under the proposed Modified
Credit Agreement would not exceed the lesser of (a) $25 million, (b) the
difference between $100 million minus the aggregate amount of advances
outstanding under the proposed Modified Credit Agreement, and (c) the difference
between the Commitment minus the aggregate amount of advances outstanding under
the proposed Modified Credit Agreement. Amounts outstanding under the proposed
Modified Credit Agreement as loans to the Company would bear interest at a rate
per annum equal to one of the following rates at the Company's option: (i) a
base rate equal to the higher of (A) the daily federal funds rate average under
the proposed Modified Credit Agreement plus 50 basis points or (B) the
NationsBank prime commercial lending rate; or (ii) a Eurodollar rate determined
in accordance with the proposed Modified Credit Agreement plus 125 basis points,
such margin being subject to upward or downward adjustment based on the fixed
charge coverage ratio of the Company in effect at the end of each fiscal quarter
after January 31, 1997.
The proposed Modified Credit Agreement would also require payment of a
commitment fee of 30 basis points of the daily average unused revolving
Commitment, such commitment fee being subject to upward or downward adjustment
based on the fixed charge coverage ratio of the Company in effect at the end of
each fiscal quarter.
The proposed Modified Credit Agreement would require mandatory prepayments
to the extent that the amount outstanding thereunder exceeds the borrowing base
and would require that, for one consecutive thirty-day period during the
ninety-day period commencing on December 1 of each year, the Company repay all
amounts outstanding under the proposed Modified Credit Agreement.
The proposed Modified Credit Agreement would contain a number of significant
covenants that, among other things, would restrict the ability of the Company to
incur additional indebtedness, create liens on assets, pay dividends, enter into
certain mergers, acquisitions, or consolidations, make certain investments, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict certain corporate activities. In addition, under the proposed Modified
Credit Agreement, the Company would be required to comply with certain financial
ratios including a fixed charge coverage ratio, current ratio, and ratio of
total liabilities to total capitalization. Such modified ratios would provide
greater flexibility than the financial ratios to which the Company is currently
subject under the Credit Agreement.
Because the Company presently intends to merge most of its Restricted
Subsidiaries with and into the Company, it has discussed with the administrative
lender the possibility of eliminating any subsidiary guarantees of Indebtedness
under the proposed Modified Credit Agreement. Under the terms of the Indenture,
the Company's Restricted Subsidiaries would be required to guarantee the Notes
in the event that such Restricted Subsidiaries guarantee Indebtedness under the
proposed Modified Credit Agreement or Indebtedness of other Persons. See
"Description of the Notes -- Limitation on Indebtedness".
SUBORDINATED NOTES
On January 22, 1993, the Company issued $97.8 million of Subordinated Notes
due January 15, 2003. Interest, which is payable on January 15 and July 15 of
each year, was computed at the rate of 4 3/4% from the
38
<PAGE>
date of issuance to January 15, 1996, and is computed at the rate of 6 3/4%
thereafter. Interest expense is accrued by the Company based on an effective
interest rate of 6.38% (including amortization of deferred issuance cost) over
the full term of the Subordinated Notes. The Subordinated Notes are redeemable
at the option of the Company at redemption price ranges beginning at 104.14% and
declining to 100.00%. The Subordinated Notes are not entitled to any sinking
fund payments. The Subordinated Notes are convertible into the Company's Common
Stock at any time, at a conversion price of $38 per share. A total of 2,551,053
shares of Common Stock are reserved for conversion. During fiscal 1994 and
fiscal 1995, a total of $800,000 and $10,000 respectively, of Subordinated Notes
were converted to 21,315 shares of the Company's Common Stock.
The Subordinated Notes contain covenants requiring the Company to repurchase
the Subordinated Notes at the option of the holders thereof upon a change of
control of the Company. The Subordinated Notes also contain various events of
default customary for publicly issued convertible subordinated notes for an
offering of a similar size and nature. The Notes will rank senior in right of
payment to the Subordinated Notes.
CAPITALIZED LEASE -- POS SYSTEM
The Company has entered into a lease with IBM Credit Corporation to finance
POS equipment. The implicit interest rate under the lease is approximately 8%
and the lease expires in August 2001. As the POS equipment is installed in a
store, the Company enters into a lease supplement that covers that equipment. As
of April 28, 1996, the capitalized obligation outstanding under the lease was
$9.1 million.
39
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, to be dated as of ,
1996 (the "Indenture"), between the Company and The Bank of New York, as Trustee
(the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The following summary of certain provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
TIA. The summary provides an accurate description of all material terms of the
Notes. Capitalized terms used herein and not otherwise defined have the meanings
set forth under "-- Certain Definitions."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 101 Barclay Street, New York,
New York 10286), except that, at the option of the Company, payment of interest
may be made by check mailed to the registered holders of the Notes at their
registered addresses.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The definition of "Restricted Subsidiary" in the Indenture will exclude any
"Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture. Each of the
Company's Aaron Brothers Holdings, Inc. Subsidiary and the Company's Michaels of
Canada, Inc. Subsidiary will be an Unrestricted Subsidiary on the Issue Date. In
addition, the Board of Directors will have the ability, subject to the
provisions of the Indenture, to designate certain other Restricted Subsidiaries
as Unrestricted Subsidiaries after the Issue Date. Subject to the provisions of
the Indenture, the Board of Directors may also designate Unrestricted
Subsidiaries to be Restricted Subsidiaries. See the definitions of "Restricted
Subsidiary" and "Unrestricted Subsidiary" and "Certain Covenants -- Limitation
on Restricted Payments" herein.
TERMS OF THE NOTES
The Notes will be unsecured, senior obligations of the Company, limited to
$125 million aggregate principal amount, and will mature on , 2006.
Each Note will bear interest at a rate per annum shown on the front cover of
this Prospectus from , 1996, or from the most recent date to which
interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on the or immediately preceding
the interest payment date on and of each year, commencing , 1996.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time on or after , 2001, and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed as a
40
<PAGE>
percentage of principal amount), plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------- -----------
<S> <C>
2001......................................................... %
2002......................................................... %
2003......................................................... %
2004 and thereafter.......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to , 1999,
the Company may redeem in the aggregate up to $25 million principal amount of
the Notes with the proceeds of one or more Equity Offerings so long as there is
a Public Market at the time of such redemption at a redemption price (expressed
as a percentage of principal amount thereof) of % plus accrued interest, if
any, to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date); PROVIDED, HOWEVER, that at least $100 million principal amount of the
Notes must remain outstanding after each such redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
although no Note of $1,000 in original principal amount or less will be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
RANKING
The indebtedness evidenced by the Notes will be unsecured Senior
Indebtedness of the Company, will rank PARI PASSU in right of payment with all
existing and future Senior Indebtedness of the Company and will be senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Notes will also be effectively subordinated to all existing and
future Secured Indebtedness of the Company to the extent of the value of the
assets securing such Indebtedness and to all existing and future Indebtedness of
any Subsidiary of the Company.
At April 28, 1996, after giving effect to the Offering and the application
of net proceeds thereof, the Company and its subsidiaries would have had $231.0
million of indebtedness outstanding, $9.1 million of which would have
represented Secured Indebtedness, and $96.9 million of which would have
represented Subordinated Obligations. At April 28, 1996, Subsidiaries of the
Company had no indebtedness outstanding. Although the Indenture contains
limitations on the amount of additional Indebtedness which the Company or any
Restricted Subsidiary may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness, Secured Indebtedness or Indebtedness of Subsidiaries. See
"-- Certain Covenants -- Limitation on Indebtedness".
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control") with respect to the Company, each Holder will have the right to
require the Company to repurchase all or any part of such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase (subject to the
right of Holders of record on the relevant record date to receive interest due
on the related interest payment date):
(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person
and do
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not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors of the
Company (for the purposes of this clause, such other person shall be deemed
to beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person "beneficially owns" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, more
than 35% of the voting power of the Voting Stock of such parent corporation
and the Permitted Holders "beneficially own" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the aggregate a
lesser percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of such parent corporation);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of 66 2/3% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, the assets
of the Company to any Person or group of Persons (other than to any Wholly
Owned Subsidiary of the Company); or
(iv) the merger or consolidation of the Company with or into another
corporation with the effect that either (A) immediately after such
transaction any person (as defined in clause (i) above) (other than a
Permitted Holder) shall have become the "beneficial owner" (as defined in
clause (i) above) of securities of the surviving corporation of such merger
or consolidation representing a majority of the voting power of the Voting
Stock of the surviving corporation or (B) the securities of the Company that
are outstanding immediately prior to such transaction and which represent
100% of the voting power of the Voting Stock of the Company are changed into
or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, (1) securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
voting power of the Voting Stock of the surviving corporation or (2)
securities that represent immediately after such transaction at least a
majority of the voting power of the Voting Stock of the corporation that
owns, directly or indirectly, 100% of the voting power of the Voting Stock
of the surviving corporation of that transaction.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase (subject to the right of Holders of record on a record date to
receive interest on the relevant interest payment date); (2) the circumstances
and relevant facts and pro forma financial information regarding such Change of
Control; (3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Notes purchased. Notwithstanding the
occurrence of a Change of Control, the Company shall not be obligated to
repurchase the Notes upon a Change of Control if the Company has irrevocably
elected to redeem all of the Notes under the provisions described under "--
Optional Redemption" above, provided that the Company does not default in its
redemption obligations pursuant to such election.
Neither the Trustee nor the Board of Directors of the Company may waive the
covenant relating to the Holder's right to have its Notes repurchased upon a
Change of Control.
The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to
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judicial interpretation. Accordingly, in certain circumstances, there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of a Person
and therefore it may be unclear whether a Change of Control has occurred.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit rating.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Credit Agreement. Future
Indebtedness of the Company may contain prohibitions of certain events which
would constitute a Change of Control, and the Subordinated Notes require and
future Indebtedness may require such Indebtedness to be repurchased upon a
Change of Control. Moreover, the exercise by the Holders of their right to
require the Company to repurchase the Notes could cause a default under such
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the Holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The Company will not Incur, and will not
permit any Restricted Subsidiary to Incur, any Indebtedness; PROVIDED, HOWEVER,
that the Company (but not any Restricted Subsidiary other than a Foreign
Restricted Subsidiary) may Incur Indebtedness if on the date thereof the
Consolidated Coverage Ratio would be equal to or greater than 2.0 to 1.0 if such
Indebtedness is Incurred prior to June , 1998 or 2.5 to 1.0 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
and letters of credit (with letters of credit being deemed to have a principal
amount equal to the maximum face amount thereunder) of the Company or any
Restricted Subsidiary under the Credit Agreement and any Refinancing
Indebtedness with respect thereto in an aggregate principal amount outstanding
at any time not to exceed the greater of (x) an amount equal to 50% of the book
value of the inventory of the Company and its Restricted Subsidiaries as of any
date of Incurrence calculated on a consolidated basis in accordance with GAAP
and (y) $100 million; (ii) Indebtedness of the Company owing to and held by any
Wholly Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to and
held by the Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock or any other event which
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of any such Indebtedness (except to the
Company or a Wholly Owned Subsidiary) will be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (iii)
Indebtedness represented by the Notes and any Guarantees of the Notes by any of
the Company's Subsidiaries, any Indebtedness of the Company or any Restricted
Subsidiary (other than the Indebtedness described in clauses (i)-(ii) above)
outstanding on the Issue Date and any Refinancing Indebtedness Incurred in
respect of any Indebtedness described in this clause (iii) or paragraph (a);
(iv) (A) Indebtedness of a Restricted Subsidiary outstanding on or prior to the
date on which such Restricted Subsidiary was acquired by the Company or a
Restricted
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Subsidiary (other than Indebtedness Incurred in connection with, or in
contemplation of, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Subsidiary or was otherwise acquired
by the Company or a Restricted Subsidiary); PROVIDED, HOWEVER, that at the time
such Restricted Subsidiary is acquired by the Company or a Restricted
Subsidiary, the Company would have been able to Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) of this covenant after giving effect to
the Incurrence of such Indebtedness pursuant to this clause (iv) and such
transaction or series of related transactions and (B) Refinancing Indebtedness
Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (iv); (v) Indebtedness (A) in
respect of performance bonds, bankers' acceptances, letters of credit and surety
or appeal bonds provided by the Company or any Restricted Subsidiary in the
ordinary course of its business and which do not secure other Indebtedness and
(B) under Currency Agreements and Interest Rate Agreements Incurred which, at
the time of Incurrence, is in the ordinary course of business; PROVIDED,
HOWEVER, that, in the case of Currency Agreements and Interest Rate Agreements,
such Currency Agreements and Interest Rate Agreements do not increase the
Indebtedness of the Company outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; (vi) Indebtedness (A)
represented by Guarantees by the Company of Indebtedness otherwise permitted to
be Incurred pursuant to this covenant and (B) represented by Guarantees by a
Restricted Subsidiary of Indebtedness of the Company or another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this covenant;
PROVIDED that, in the case of clause (B), if a Restricted Subsidiary Guarantees
any such Indebtedness, such Restricted Subsidiary executes and delivers to the
Trustee a supplemental indenture in form satisfactory to the Trustee providing
for the Guarantee on a senior basis of the Notes; (vii) Indebtedness of the
Company or any Restricted Subsidiary represented by Capitalized Lease
Obligations, mortgage financings or purchase money obligations, in each case
Incurred for the purpose of financing or refinancing all or any part of the
purchase price or cost of construction, repairs, renovation, remodeling,
expansion or other improvement of property, plant and equipment, including
services and equipment supporting such items, used in the Company's or any
Restricted Subsidiary's business or a Related Business (collectively, "Purchase
Money Debt") in an aggregate principal amount not to exceed 10% of Total Assets
at the time of any Incurrence thereof; (viii) Indebtedness of the Company
represented by Capitalized Lease Obligations Incurred from time to time for
point-of-sale equipment and store systems, including services and equipment
supporting such equipment and systems, with the aggregate capitalized amount of
such obligation determined in accordance with GAAP outstanding at any one time
not to exceed $32 million; and (ix) other Indebtedness of the Company or any
Restricted Subsidiary in an aggregate principal amount outstanding at any time
not to exceed $10 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such new Indebtedness shall be subordinated to the Notes to at least the same
extent as such Subordinated Obligations being Refinanced. The Indenture further
provides that, notwithstanding any other provision of this "-- Limitation on
Indebtedness" covenant, the Company will not, and will not permit any Restricted
Subsidiary to, Incur any Guarantee of Indebtedness of any Unrestricted
Subsidiary other than Guarantees by the Company of Indebtedness of Unrestricted
Subsidiaries outstanding or available pursuant to written agreements existing on
the Issue Date (as such agreements may be renewed, modified or extended without
any increase in the maximum principal amount).
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company will classify such item
of Indebtedness or any portion thereof and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company), except (1) dividends or distributions payable solely in its
Capital Stock (other than Disqualified
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Stock) or in options, warrants or other rights to purchase such Capital Stock,
(2) a dividend of shares (or rights or warrants to purchase shares) of the
Capital Stock of Aaron Brothers Holdings, Inc. (or any successor) or any of its
Subsidiaries at any time when it is an Unrestricted Subsidiary and (3) dividends
or distributions payable to the Company or another Restricted Subsidiary (and,
if such Restricted Subsidiary making such dividend or distribution is not wholly
owned, to its other shareholders on a pro rata basis), (ii) purchase, redeem,
retire or otherwise acquire for value any Capital Stock of the Company held by
Persons other than the Company or another Restricted Subsidiary, (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of such purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement, Investment or payment being herein referred to as a
"Restricted Payment") if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default or Event of Default will have
occurred and be continuing (or would result therefrom); (2) the Company could
not Incur at least $1.00 of additional Indebtedness under paragraph (a) of the
covenant described under "-- Limitation on Indebtedness;" or (3) the aggregate
amount of such Restricted Payment and all other Restricted Payments (the amount
so expended, if other than in cash, to be determined in good faith by the Board
of Directors of the Company, whose determination will be evidenced by a
resolution of such Board of Directors certified in an Officers' Certificate to
the Trustee) declared or made subsequent to the Issue Date would exceed the sum
of: (A) either (1) 50% of the Consolidated Net Income if the Notes are rated
less than Investment Grade or (2) 75% of Consolidated Net Income if the Notes
are rated Investment Grade, in each case with respect to the period (treated as
one accounting period) from the Issue Date to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income will be a deficit, minus 100% of such
deficit); (B) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of Capital Stock (other than Disqualified Stock) subsequent to the
Issue Date (other than an issuance or sale to a Subsidiary); (C) the amount by
which Indebtedness of the Company is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Restricted
Subsidiary) subsequent to the Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified Stock) of
the Company (less the amount of any cash or other property distributed by the
Company upon such conversion or exchange); (D) the amount equal to the net
reduction in Investments in Unrestricted Subsidiaries resulting from (i)
payments of dividends, repayments of the principal of loans or advances or other
transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments; and (E) $5 million.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any
purchase, redemption, defeasance or other acquisition of Capital Stock of the
Company or Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary); PROVIDED, HOWEVER, that (A) such purchase, redemption, defeasance
or other acquisition will be excluded in the calculation of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale will be
excluded from clause (3)(B) of paragraph (a) above; (ii) any purchase,
redemption, defeasance or other acquisition of Subordinated Obligations made by
exchange for, or out of the net proceeds of the substantially concurrent sale
of, Subordinated Obligations of the Company; PROVIDED, HOWEVER, that (A) the
principal amount of such new Indebtedness does not exceed the principal amount
of the Subordinated Obligations being so redeemed, purchased, defeased, acquired
or retired for value (plus the amount of any premium required to be paid under
the terms of the instrument governing the Subordinated Obligations being so
redeemed, purchased, defeased, acquired or retired), (B) such new Indebtedness
is subordinated to the
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Notes at least to the same extent as such Subordinated Obligations so redeemed,
purchased, defeased, acquired or retired for value, (C) such new Indebtedness
has a final scheduled maturity date later than the final scheduled maturity date
of the Notes and (D) such new Indebtedness has an Average Life equal to or
greater than the Average Life of the Notes; PROVIDED FURTHER, HOWEVER, that such
purchase, redemption, defeasance or other acquisition will be excluded in the
calculation of the amount of Restricted Payments; (iii) any purchase,
redemption, defeasance or other acquisition of Subordinated Obligations (1) from
Net Available Cash to the extent permitted by the covenant described under "--
Limitation on Sales of Assets and Subsidiary Stock"; PROVIDED, HOWEVER, that
such purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments or (2) pursuant to an offer to purchase which is then
required to be made upon a change of control of the Company pursuant to the
terms of the instrument governing such Subordinated Obligation; PROVIDED,
HOWEVER, that such purchase will be included in the calculation of the amount of
Restricted Payments; or (iv) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; PROVIDED, HOWEVER, that the amount of such dividend
will be included in the calculation of the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except: (1) any encumbrance
or restriction pursuant to an agreement in effect at or entered into on the
Issue Date; (2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company or a Restricted Subsidiary (other than
Indebtedness Incurred in connection with, or in contemplation of, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Subsidiary or was acquired by the Company or a Restricted
Subsidiary) and outstanding on such date; (3) any encumbrance or restriction
pursuant to an agreement effecting a Refinancing of Indebtedness Incurred
pursuant to an agreement referred to in clause (1) or (2) of this covenant or
contained in any amendment to an agreement referred to in clause (1) or (2) of
this covenant; PROVIDED, HOWEVER, that the encumbrances and restrictions
contained in any such refinancing agreement or amendment are no less favorable
to the Noteholders than the encumbrances and restrictions contained in such
agreements as determined in good faith by the Company and evidenced by an
Officers' Certificate; (4) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, (B) by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the Indenture,
(C) arising or agreed to in the ordinary course of business and that does not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or such Restricted Subsidiary or (D) contained in security agreements
securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance
or restrictions restrict the transfer of the property subject to such security
agreements; (5) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and (6) encumbrances or
restrictions contained in any financing agreement of a Foreign Restricted
Subsidiary or arising or existing by reason of applicable law, including any
legal limitations restricting the ability of Foreign Restricted Subsidiaries to
pay as dividends or distribute or otherwise pay or repatriate funds to the
Company or its Subsidiaries.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Board of Directors of the
Company (including as to the value of all non cash consideration), of the shares
and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Temporary Cash
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Investments and (iii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company or such Restricted Subsidiary,
as the case may be (A) FIRST, to the extent the Company or any Restricted
Subsidiary, as the case may be, elects (or is required by the terms of any
Senior Indebtedness), to prepay, repay or purchase Senior Indebtedness or
Indebtedness (other than Disqualified Stock) of a Wholly Owned Subsidiary (in
each case other than Indebtedness owed to the Company or an Affiliate of the
Company) within 180 days from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) SECOND, to the extent of the balance
of Net Available Cash after application in accordance with clause (A), to the
extent the Company or such Restricted Subsidiary, as the case may be, elects, to
the investment by the Company or any Restricted Subsidiary in Additional Assets
within one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (C) THIRD, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A) and
(B), to make an Offer (as defined below) to purchase Notes pursuant to and
subject to the conditions set forth in paragraph (b) of this covenant within 45
days after the later of the application of Net Available Cash in accordance with
clauses (A) and (B) and the date that is one year from the receipt of such Net
Available Cash; and (D) FOURTH, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A), (B) and (C), to
(x) the acquisition by the Company or any Wholly Owned Subsidiary of Additional
Assets, (y) the prepayment, repayment, purchase or other acquisition of
Indebtedness of the Company (other than Indebtedness owed to an Affiliate of the
Company and other than Disqualified Stock of the Company) or Indebtedness of any
Restricted Subsidiary (other than Indebtedness owed to the Company or an
Affiliate of the Company) or (z) to general corporate purposes (other than to
the payment of dividends or distributions in respect of, or repurchases of,
Capital Stock), in each case within 45 days after the later of one year from the
receipt of such Net Available Cash and the date the Offer described in paragraph
(b) below is consummated; PROVIDED, HOWEVER that in connection with any
prepayment, repayment, purchase or other acquisition of Indebtedness pursuant to
clause (A), (C) or (D) above, the Company or such Restricted Subsidiary will, to
the extent such Indebtedness is not revolving Indebtedness, retire such
Indebtedness and, subject to clause (i) of paragraph (b) under "-- Limitation on
Indebtedness", will cause any related loan commitment or availability (if any)
to be permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant
exceeds $5,000,000. The Company shall not be required to make an Offer for Notes
pursuant to this covenant if the Net Available Cash available therefor (after
application of the proceeds as provided in clauses (A) and (B)) are less than
$10,000,000 for any particular Asset Disposition (which lesser amounts shall be
carried forward for purposes of determining whether an Offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption by the transferee of Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are promptly converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C) of this covenant, the Company will be required to
purchase Notes tendered pursuant to an offer by the Company for the Notes (the
"Offer") at a purchase price of 100% of their principal amount plus accrued
interest to the date of purchase in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Indenture. If the
aggregate purchase price of Notes tendered pursuant to the Offer is less than
the Net Available Cash allotted to the purchase of the Notes, the Company will
apply the remaining Net Available Cash in accordance with clause (a)(iii)(D)
above.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes
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pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
any agreement or conduct any transaction or series of related transactions
(including the purchase, sale, lease or exchange of any property, or rendering
of any service) with any Affiliate of the Company (an "Affiliate Transaction")
unless (i) the terms of such transaction or agreement are no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate; (ii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $1,000,000, the terms of
such transaction or agreement shall have been approved by a majority of the
members of the Board of Directors having no personal stake in such Affiliate
Transaction (and such majority determines that such Affiliate Transaction
satisfies the criteria in clause (i) above) and (iii) in the event such
Affiliate Transaction involves an aggregate amount in excess of $5,000,000, the
Company has received a written opinion from a nationally recognized Independent
Financial Advisor that such Affiliate Transaction is either fair to the Company
from a financial point of view or is on terms no less favorable to the Company
than could be obtained in an arm's length transaction from a Person who is not
an Affiliate.
(b) The foregoing shall not apply to (i) any Restricted Payment permitted to
be made pursuant to "-- Limitation on Restricted Payments", (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors or the payment of fees and
indemnities to directors of the Company and its Restricted Subsidiaries in the
ordinary course of business, (iii) loans or advances to employees in the
ordinary course of business, (iv) any transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries, (v) transactions
pursuant to written agreements in existence on the Issue Date or (vi) any
transaction between the Company or any Wholly Owned Subsidiary, on the one hand,
and a Restricted Subsidiary, on the other hand, in the ordinary course of
business on terms that are customary in the industry or consistent with past
practice.
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien on any of its property or assets (including Capital Stock), whether owned
on the Issue Date or thereafter acquired, securing any obligation, other than
Permitted Liens, unless contemporaneously therewith effective provision is made
to secure the Notes equally and ratably with (or on a senior basis to, in the
case of Subordinated Obligations) such obligation for so long as such obligation
is so secured.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Indebtedness with respect to such Sale/Leaseback
Transaction pursuant to the covenant described under "-- Limitation on
Indebtedness" and (B) create a Lien, if any, on such property securing such
Attributable Indebtedness without equally and ratably securing the Notes
pursuant to the covenant described under "-- Limitation on Liens," (ii) the net
cash proceeds received by the Company or any Restricted Subsidiary in connection
with such Sale/Leaseback Transaction are at least equal to the fair value (as
determined in good faith by the Board of Directors of the Company and certified
in an Officers' Certificate to the Trustee) of such property and (iii) the
transfer of such property is permitted by, and the Company or such Restricted
Subsidiary applies the proceeds of such transaction in compliance with, the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock".
LIMITATION ON SALE OF SUBSIDIARY CAPITAL STOCK. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of such Restricted Subsidiary and (b)
the net cash proceeds from such transfer, conveyance, sale, lease or other
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disposition are applied in accordance with the covenant described above under
"-- Limitation on Sales of Assets and Subsidiary Stock" and (ii) will not permit
any Restricted Subsidiary to issue any of its Capital Stock (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Subsidiary;
PROVIDED that any Restricted Subsidiary may issue in an underwritten public
offering or otherwise sell any shares of any class of its common stock so long
as (x) no more than 20% of such class, after giving effect to any such issuance
or sale, is then held by Persons other than the Company or any Restricted
Subsidiary and (y) the net cash proceeds from such public offering or sale are
applied in accordance with the covenant described above under "-- Limitation on
Sales of Assets and Subsidiary Stock".
SEC REPORTS. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the SEC and provide the Trustee and Noteholders
with the annual reports and such information, documents and other reports which
are specified in Sections 13 and 15(d) of the Exchange Act. The Company also
will comply with the other provisions of TIA Section 314(a).
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by supplemental indenture, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness which
becomes an obligation of the Successor Company or any Restricted Subsidiary as a
result of such transaction as having been Incurred by the Successor Company or
such Restricted Subsidiary at the time of such transaction), no Default or Event
of Default will have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness under paragraph (a) of the covenant described
under "-- Limitation on Indebtedness"; (iv) immediately after giving effect to
such transaction, the Successor Company will have a Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; provided that this clause (iv) will not
restrict the Company's ability to consolidate with or merge with any Person in a
transaction accounted for as a pooling of interests where the successor
Company's Consolidated Net Worth is no more than 5% less than the Consolidated
Net Worth of the Company immediately prior to such transaction; and (v) the
Company will have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture, as set forth in
the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all its assets or a conveyance,
transfer or lease of substantially all its assets will not be released from the
obligation to pay the principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), any Wholly Owned
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under "-- Merger
and Consolidation", (iv) the failure by the Company to comply for 30 days after
notice with any of its obligations under the covenants described under "--
Change of Control" or "-- Certain Covenants" (in each case, other than a failure
to purchase Notes), (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) the failure by
the Company or any Significant Subsidiary of the Company to pay any
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Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$5 million or its foreign currency equivalent (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary of the Company (the "bankruptcy
provisions") or (viii) any final, non-appealable judgment or decree for the
payment of money in excess $5 million is rendered against the Company or any
Significant Subsidiary of the Company and either (A) an enforcement proceeding
has been commenced by any creditor upon such judgment or decree or (B) such
judgment or decree remains unpaid and outstanding for a period of 60 days
following such judgment and is not discharged, waived or stayed (the "judgment
default provision").
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in aggregate principal amount of
the outstanding Notes notify the Company as provided in the Indenture of the
default and the Company does not cure such default within the time specified in
clauses (iv) and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Notes by notice
to the Company may declare the principal of and accrued but unpaid interest on
all the Notes to be due and payable. Upon such a declaration, such principal and
interest will be due and payable immediately. If an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of the Company occurs
and is continuing, the principal of and accrued interest on all the Notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in aggregate principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder shall
have previously given the Trustee notice that an Event of Default is continuing,
(ii) Holders of at least 25% in aggregate principal amount of the outstanding
Notes shall have requested the Trustee to pursue the remedy, (iii) such Holders
shall have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee shall not have complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity and (v) the Holders of a majority in principal amount of
the outstanding Notes shall not have given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain restrictions,
the Holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee will be entitled to indemnification from the Noteholders
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known by a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note, the Trustee may withhold notice if and so long as a committee of
its Trust Officers in good faith determines that withholding notice is in
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the interests of the Noteholders. In addition, the Company is required to
deliver to the Trustee, within 120 days after the end of each fiscal year, a
certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required to deliver to
the Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each Holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose Holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the principal of or
extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under "-- Optional Redemption", (v) make any Note payable in money
other than that stated in the Note, (vi) impair the right of any Holder to
receive payment of principal of and interest on such Holder's Notes on or after
the due dates therefor or to institute suit for the enforcement of any payment
on or with respect to such Holder's Notes or (vii) make any change in the
amendment provisions which require each Holder's consent or in the waiver
provisions.
Without the consent of any Holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are as described in Section 163(f)(2)(B) of
the Code), to add Guarantees with respect to the Notes, to secure the Notes, to
add to the covenants of the Company for the benefit of the Noteholders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder and to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the TIA.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture, including any transfer tax or
other similar governmental charge payable in connection therewith. The Company
is not required to transfer or exchange any Note selected for redemption or to
transfer or exchange any Note for a period of 15 days prior to a selection of
Notes to be redeemed or an interest payment date. The Notes will be issued in
registered form and the registered holder of a Note will be treated as the owner
of such Note for all purposes.
DEFEASANCE
The Company at any time may terminate all of its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust (as defined herein) and
obligations to register the transfer or exchange of the Notes, to replace
mutilated, destroyed, lost or stolen Notes and to maintain a registrar and
paying agent in respect of the Notes. The Company at any time may terminate its
obligations under the covenants described under "Certain Covenants", the
operation
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of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under "--
Defaults" and the limitations contained in clauses (iii) and (iv) under "--
Merger and Consolidation" ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (v), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under "-- Defaults" above or because of
the failure of the Company to comply with clauses (ii), (iii) or (iv) under "--
Merger and Consolidation".
In order to exercise either defeasance option, the Company must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest when due on all the Notes (except lost, stolen or
destroyed Notes which have been replaced or repaid) to maturity or redemption,
as the case may be, and must comply with certain other conditions, including
delivery to the Trustee of an Opinion of Counsel to the effect that holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than inventory
in the ordinary course of business and other than Indebtedness and Capital
Stock) in a Related Business; (ii) the Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants in the Indenture, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares),
property or other assets (each referred to for the purposes of this definition
as a "disposition") by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a
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merger, consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property, assets,
inventory or Temporary Cash Investments in the ordinary course of business,
(iii) for purposes of the "Limitation on Sales of Assets and Subsidiary Stock"
covenant only, a disposition that constitutes a Restricted Payment permitted by
the "Limitation on Restricted Payments" covenant, (iv) a disposition of
duplicative or excessive real property where less than 75% of the consideration
received is in the form of cash or Temporary Cash Investments, which disposition
occurs within one year of the acquisition thereof and (v) any disposition of
assets with an aggregate fair market value (as determined in good faith by the
Board of Directors) of less than $1 million.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended); PROVIDED, HOWEVER, that "Attributable Indebtedness"
shall not include any such obligations to the extent they relate to the lease of
stores, warehouses, offices or distribution facilities, including without
limitation, the fixtures appertaining thereto, unless such obligations are
required to be recorded on the Company's balance sheet in accordance with GAAP.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board or
equivalent governing body.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Asset Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly
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attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative)
directly attributable thereto for such period and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in connection
with such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary to the
extent the Company and its continuing Restricted Subsidiaries are no longer
liable for such Indebtedness after such sale), (3) if since the beginning of
such period the Company or any Restricted Subsidiary (by merger or otherwise)
shall have made an Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto (including
the Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period and (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition or any Investment that
would have required an adjustment pursuant to clause (2) or (3) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition or Investment occurred on
the first day of such period. For purposes of this definition, whenever pro
forma effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) interest actually paid by the
Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or
other obligation of any other Person, (vii) net costs associated with Hedging
Obligations (including amortization of fees), (viii) Preferred Stock dividends
in respect of all Preferred Stock of the Company and its Subsidiaries held by
Persons other than the Company or a Wholly Owned Subsidiary and (ix) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust; PROVIDED, HOWEVER, that there shall be excluded therefrom
any such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries in accordance with GAAP; PROVIDED,
HOWEVER, that there shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained
in (iv) below the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to a
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Restricted Subsidiary, to the limitations contained in clause (iii) below)
and (B) the Company's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period shall be included in determining
such Consolidated Net Income,
(ii) any net income (loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition,
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject
to the limitations contained in (iv) below the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed by such Restricted Subsidiary during such period
to the Company or another Restricted Subsidiary as a dividend (subject, in
the case of a dividend to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining
such Consolidated Net Income,
(iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person,
(v) any extraordinary gain or loss, and
(vi) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Credit Agreement" means the First Amended and Restated Credit Agreement,
dated as of June 18, 1994, among the Company, the lenders parties thereto, and
NationsBank of Texas, N.A., as agent, as it may be amended, extended, renewed,
refinanced or replaced from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Notes.
"EBITDA" for any period means the sum of Consolidated Net Income for such
period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
items to the extent they represent an accrual of, or reserve for, cash
disbursements for any subsequent period), less all non-cash items increasing
such Consolidated Net Income in each case for such period. Notwithstanding the
foregoing, the
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income tax expense, depreciation expense and amortization expense of a
Restricted Subsidiary of the Company shall be included in EBITDA only to the
extent (and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be distributable to
the Company by such Subsidiary as a dividend.
"Equity Offering" means an offering for cash of common stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary that is
organized and existing under the laws of any country or other jurisdiction other
than the United States of America, any State thereof or the District of Columbia
and substantially all the assets of which are located outside the United States
of America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money,
(ii) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments,
(iii) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more that six months after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services,
(v) all Capitalized Lease Obligations and all Attributable Indebtedness
of such Person,
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(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary, any Preferred Stock (but excluding, in each case,
any accrued dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED, HOWEVER, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person and
(ix) to the extent not otherwise included in this definition, Hedging
Obligations.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Independent Financial Advisor" means any independent investment banking,
actuarial, appraisal, consulting or accounting firm experienced in the appraisal
or similar review of the applicable transaction or similar types of
transactions.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant,
(i) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the time
of such redesignation less (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time that such Subsidiary is so redesignated a
Restricted Subsidiary; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors and evidenced by a resolution of such Board of Directors certified in
an Officers' Certificate to the Trustee.
"Investment Grade" means BBB- or higher by Standard & Poor's Ratings Group
and its successors and Baa3 or higher by Moody's Investors Service, Inc. and its
successors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) therefrom,
in each case net of (i) all legal, title and recording tax expenses, commissions
and other fees and expenses incurred, and all Federal, state, provincial,
foreign and
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local taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition, (iv) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition and (v) in the
case of an Asset Disposition by a Foreign Restricted Subsidiary, any amount
which, as a result of applicable law, may not be legally paid as a dividend, or
distributed or otherwise paid or repatriated to the Company or its Subsidiaries.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Permitted Holders" means Sam Wyly, Charles J. Wyly, Jr., Evan A. Wyly,
trusts established by or for the benefit of any such Persons or any of their
lineal descendants, entities controlled by any such trusts, and their respective
Affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER,that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practice of the Company or such Restricted Subsidiary;
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (viii) Investments by the Company or
any of its Restricted Subsidiaries in one or more Unrestricted Subsidiaries in
an aggregate amount not to exceed $15 million; and (ix) advances to vendors in
the ordinary course of business in an aggregate principal amount at any one time
outstanding not to exceed $5 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review and landlords' Liens; (c) Liens for property taxes not yet due or payable
or subject to penalties for non-payment or which are being contested in good
faith by appropriate proceedings; (d) Liens in favor of issuers of surety bonds
or letters of credit issued pursuant to the request of and for the account of
such Person in the ordinary course of its business; (e) minor survey exceptions,
minor encumbrances, easements or reservations of, or rights of others for,
licenses, rights-of-
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way, sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real properties or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Hedging Obligations so long as the
related Indebtedness is, and is permitted to be under the Indenture, secured by
a Lien on the same property securing such Hedging Obligations; (g) leases and
subleases of real property which do not interfere with the ordinary conduct of
the business of the Company or any of its Restricted Subsidiaries, and which are
made on customary and usual terms applicable to similar properties; (h) Liens
existing as of the date on which the Notes are originally issued and Liens
created by the Indenture; (i) Liens created solely for the purpose of securing
Purchase Money Debt Incurred after the date on which the Notes are originally
issued; PROVIDED, HOWEVER, that (A) the aggregate principal amount of
Indebtedness secured by such Liens shall not exceed the lesser of cost or fair
market value of the assets or property so acquired or constructed, (B) the
Indebtedness secured by such Liens shall have otherwise been permitted to be
issued under the Indenture and (C) such Liens shall not encumber any other
assets or property of the Company or any of its Restricted Subsidiaries and
shall attach to such assets or property within 90 days of the construction,
acquisition or improvement of such assets or property; (j) Liens on the assets
or property of a Restricted Subsidiary of the Company existing at the time such
Restricted Subsidiary became a Subsidiary of the Company and not incurred as a
result of (or in connection with or in anticipation of) such Restricted
Subsidiary becoming a Subsidiary of the Company; PROVIDED, HOWEVER, that (A) any
such Lien does not by its terms cover any property or assets after the time such
Restricted Subsidiary becomes a Subsidiary which were not covered immediately
prior to such time, (B) the incurrence of the Indebtedness secured by such Lien
shall have otherwise been permitted to be Incurred under the Indenture, and (C)
such Liens do not extend to or cover any other property or assets of the Company
or any of its Restricted Subsidiaries; (k) Liens to secure Capitalized Lease
Obligations permitted to be Incurred under the Indenture; (l) Liens to secure
Indebtedness permitted to be Incurred under the Indenture which is recourse
solely to the assets securing such Indebtedness; PROVIDED that (i) the fair
market value, as determined by the Board of Directors in good faith, of the
assets subject to such Liens (determined at the time such Liens are granted)
does not exceed an amount equal to 125% of the amount of such Indebtedness and
(ii) the aggregate principal amount outstanding at any one time of all
Indebtedness secured by such Liens shall not exceed $10 million; and (m) Liens
extending, renewing or replacing in whole or in part a Lien permitted by the
Indenture; PROVIDED, HOWEVER, that (A) such Liens do not extend beyond the
property subject to the existing Lien and improvements and construction on such
property and (B) the Indebtedness secured by the Lien may not exceed the
Indebtedness secured at the time by the existing Lien.
"Person" means any individual, corporation, limited liability company,
partnership joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Market" means any time after (x) the common stock of the Company is
then registered with the SEC pursuant to Section 12(b) or 12(g) of the Exchange
Act and traded either on a national securities exchange or in the National
Association of Securities Dealers Automated Quotation System and (y) at least
20% of the total issued and outstanding Voting Stock of the Company has been
distributed by means of an effective registration statement under the Securities
Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the Issue Date or Incurred in
compliance with the Indenture (including Indebtedness of the Company that
refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any
Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
PROVIDED,
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HOWEVER, that (i) the Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being refinanced, (ii) the
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to (or, to the extent of any
applicable premium in connection with a refinancing, greater than) or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of
the Indebtedness being refinanced; PROVIDED FURTHER, HOWEVER, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that
refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means any business related, ancillary or complementary to
the businesses of the Company and the Restricted Subsidiaries on the applicable
date.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means all Indebtedness of the Company, including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Notes; PROVIDED, HOWEVER, that Senior Indebtedness shall
not include (1) any obligation of the Company to any Subsidiary, (2) any
liability for Federal, state, local or other taxes owed or owing by the Company,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness, Guarantee or obligation of
the Company which is subordinate or junior in any respect to any other
Indebtedness, Guarantee or obligation of the Company, including any Subordinated
Obligations, (5) any obligations with respect to any Capital Stock, (6)
Indebtedness which, when Incurred and without respect to any election under
Section 1111(b) of Title II, United States Code, is without recourse to the
Company, or (7) any Indebtedness Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
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"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank or trust
company meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a Person (other than an Affiliate of an Issuer)
organized and in existence under the laws of the United States of America, any
State thereof or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group, (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors
Service, Inc., and (vi) investments in mutual funds whose investment guidelines
restrict such funds' investments to investments which are substantially similar
to those described in clauses (i) - (v) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection
77aaa-77bbbb) as in effect on the date of the Indenture.
"Total Assets" means, as of any date, the Company's total consolidated
assets as of such date, as determined in accordance with GAAP.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Unrestricted Subsidiary" means (i) initially, Aaron Brothers Holdings,
Inc., and Michaels of Canada, Inc., (ii) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below, and (iii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER,
that (i) either (A) the Subsidiary to be so designated has total consolidated
assets of $1,000 or less or (B) if such Subsidiary has consolidated assets
greater than $1,000, then such designation would be permitted under "Limitation
on Restricted Payments" and (ii) the holders of any permitted Indebtedness of
such Subsidiary do not have direct or indirect recourse against the Company or
any Restricted Subsidiary of the Company and neither the Company nor any
Restricted Subsidiary of the Company otherwise has any liability for any payment
obligations in respect of such Indebtedness except as permitted under
"Limitation on Indebtedness". The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under clause (a) of "Limitation on
Indebtedness" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
BOOK-ENTRY SYSTEM
The Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
Depositary or its nominee will initially be the sole registered holder of the
Notes for all purposes under the Indenture.
Upon the issuance of a Global Security, Depositary or its nominee will
credit the accounts of persons holding through it with the respective principal
amounts of the Notes represented by such Global Security purchased by such
persons in the Offering. Such accounts shall be designated by the Underwriters
with respect to Notes placed by the Underwriters for the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with Depositary ("participants") or persons that may hold interests
through participants. Ownership of beneficial interests by participants in a
Global Security will be shown on, and the transfer of that ownership interest
will be effected only through, records maintained by Depositary for such Global
Security. Ownership of beneficial interests in such Global Security by persons
that hold through participants will be shown on, and the transfer of that
ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal and interest on Notes represented by any such Global
Security will be made to Depositary or its nominee, as the case may be, as the
sole registered owner and the sole holder of the Notes represented thereby for
all purposes under the Indenture. None of the Company, the Trustee, any agent of
the Company, or the Underwriters will have any responsibility or liability for
any aspect of Depositary's records relating to or payments made on account of
beneficial ownership interests in a Global Security representing any Notes or
for maintaining, supervising, or reviewing any of Depositary's records relating
to such beneficial ownership interests.
The Company has been advised by Depositary that upon receipt of any payment
of principal of, or interest on, any Global Security, Depositary will
immediately credit, on its book-entry registration and transfer system, the
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal or face amount of such Global
Security as shown on the records of Depositary. Payments by participants to
owners of beneficial interests in a Global Security held through such
participants will be governed by standing instructions and customary practices
as is now the case with securities held for customer accounts registered in
"street name" and will be the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by Depositary to
a nominee of Depositary or by a nominee of Depositary to Depositary. A Global
Security is exchangeable for certificated Notes only if (i) Depositary notifies
the Issuers that it is unwilling or unable to continue as a Depositary (as
defined in the Indenture) for such Global Security or if at any time Depositary
ceases to be a clearing agency registered under the Exchange Act, (ii) the
Company executes and delivers to the Trustee a notice that such Global Security
shall be so transferable, registrable, and exchangeable, and such transfers
shall be registrable, or (iii) there shall have occurred and be continuing an
Event of Default or an event which, with the giving of notice or lapse of time
or both, would constitute an Event of Default with respect to the Notes
represented by such Global Security. Any Global Security that is exchangeable
for certificated Notes pursuant to the
62
<PAGE>
preceding sentence will be transferred to, and registered and exchanged for,
certificated notes in authorized denominations and registered in such names as
the Depositary holding such Global Security may direct. Subject to the
foregoing, a Global Security is not exchangeable, except for a Global Security
of like denomination to be registered in the name of the Depositary or its
nominee. In the event that a Global Security becomes exchangeable for
certificated Notes, (i) certificated Notes will be issued only in fully
registered form in denominations of $1,000 or integral multiples thereof, (ii)
payment of principal, any repurchase price, and interest on the certificated
Notes will be payable, and the transfer of the certificated Notes will be
registerable, at the office or agency of the Company maintained for such
purposes, and (iii) no service charge will be made for any registration of
transfer or exchange of the certificated Notes, although the Company may require
payment of a sum sufficient to cover any tax or governmental charge imposed in
connection therewith.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Notes
represented by such Global Security for the purposes of receiving payment on the
Notes, receiving notices, and for all other purposes under the Indenture and the
Notes. Beneficial interests in Notes will be evidenced only by, and transfers
thereof will be effected only through, records maintained by the Depositary and
its participants. Cede & Co. has been appointed as the nominee of Depositary.
Except as provided above, owners of beneficial interests in a Global Security
will not be entitled to and will not be considered the holders thereon for any
purposes under the Indenture. Accordingly, each person owning a beneficial
interest in a Global Security must rely on the procedures of the Depositary,
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder
under the Indenture. The Company understands that under existing industry
practices, in the event that the Company requests any action of holders or that
an owner of a beneficial interest in a Global Security desires to give or take
any action which a holder is entitled to give or take under the Indenture, the
Depositary would authorize the participants holding the relevant beneficial
interest to give or take such action and such participants would authorize
beneficial owners owning through such participants to give or take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Depositary has advised the Company that Depositary is a limited-purpose
trust company organized under the Banking Law of the State of New York, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code, and a "clearing agency" registered under
the Exchange Act. Depositary was created to hold the securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. Depositary's participants
include securities brokers and dealers (including the Underwriters), banks,
trust companies, clearing corporations, and certain other organizations some of
whom (and/or their representatives) own Depositary. Access to Depositary's
book-entry system is also available to others, such as banks, brokers, dealers,
and trust companies that clear through or maintain a custodial relationship with
a participant, either direct or indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest will be made by the Company in immediately
available funds. The Notes will trade in the Same-Day Funds Settlement System of
the Depositary until maturity, and secondary market trading activity for the
Notes will therefore settle in immediately available funds.
63
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Material United States federal income tax consequences that may be relevant
to holders of Notes generally are set forth below. The following discussion does
not address all aspects of United States federal income taxation that may be
relevant to a particular holder in light of personal investment circumstances or
certain types of investors subject to special treatment under the United States
federal income tax laws, (for example, individual retirement and other
tax-deferred accounts, life insurance companies, tax exempt organizations,
taxpayers subject to the alternative minimum tax, dealers in securities or
currencies, financial institutions or persons holding Notes as part of a
hedging, straddle or conversion transaction). This discussion deals only with
Notes held as capital assets by the initial purchasers thereof. The discussion
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), regulations, rulings, and judicial decisions now in effect, all of
which are subject to change. As used herein, a "U.S. Holder" of a Note means a
holder that is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust the
income of which is subject to United States federal income tax regardless of its
source. A Non-U.S. Holder is a holder other than a U.S. Holder.
INTEREST INCOME. Interest payments on a Note will be includable in a U.S.
Holder's gross income as ordinary interest income in accordance with such U.S.
Holder's regular method of accounting for tax purposes. For cash basis U.S.
Holders, such payments will be includable in income when received (or when made
available for receipt, if earlier). For accrual basis U.S. Holders, such
payments will be includable in income when all events necessary to establish the
right to receive such payments have occurred.
GAIN OR LOSS ON SALE OR EXCHANGE OF NOTES. If a Note is sold, exchanged or
otherwise disposed of (including by reason of redemption or retirement), the
disposing U.S. Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale or exchange and the U.S.
Holder's adjusted basis in the Note. A U.S. Holder's initial tax basis in a Note
will generally be equal to such U.S. Holder's cost of the Note. Subject to the
discussion of market discount below, any gain or loss on the sale or exchange of
a Note will be capital gain or loss if the Note was held as a capital asset. Any
capital gain or loss recognized on the sale or exchange of a Note will be
long-term capital gain or loss if the Note was held for more than one year as of
the time of its disposition. Under current law, net capital gains of certain
non-corporate taxpayers are, under certain circumstances, taxed at lower rates
than items of ordinary income. The deductibility of capital losses is subject to
limitations.
MARKET DISCOUNT. A U.S. Holder of a Note will be subject to the "market
discount" rules of the Code if such U.S. Holder acquires a Note that has a term
of more than one year from its issue date at a market discount that is greater
than the DE MINIMIS amount described below. In general, market discount will
equal the excess (if any) of the Note's stated redemption price at maturity over
the price paid for the Note. Under the DE MINIMIS rule, if such excess is less
than 0.25% of the stated redemption price at maturity of the Note multiplied by
the number of complete years to maturity remaining after the U.S. Holder
acquired the Note, market discount is deemed to be zero.
A U.S. Holder of a Note containing market discount generally will be
required to treat any gain realized on the sale or exchange (including by reason
of redemption or retirement) of a Note as ordinary interest income to the extent
of the market discount that has accrued on a straight-line basis (or on an
economic accrual basis, if such basis of accrual has been properly elected by
the U.S. Holder under Section 1276(b) of the Code) while the Note was held by
such U.S. Holder and that has not previously been included in income. If such
Note is disposed of in a nontaxable transaction (other than specified
nonrecognition transactions), accrued market discount will be includable as
ordinary income to the U.S. Holder as if such U.S. Holder has sold the Note at
its then fair market value. The Notes provide that they may be redeemed prior to
maturity under certain circumstances. If the Notes were redeemed in part, a U.S.
Holder with market discount would be required to include in gross income (as
ordinary income) the portion of the principal payment attributable to accrued
market discount on the Notes. The market discount rules also provide that a U.S.
Holder who acquires a Note at a market discount may be required to defer of all
or a portion of the interest expense that may otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such Note
64
<PAGE>
until the U.S. Holder disposes of the Note in a taxable transaction. Under
Section 1278(b) of the Code, a U.S. Holder may elect to include market discount
in income constantly as it accrues, in which case the rule described above
regarding deferral of interest deductions will not apply. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies and may not be revoked without the consent of the IRS.
NON-U.S. HOLDERS. If interest paid (or accrued) to a Non-U.S. Holder is not
effectively connected with the conduct of a trade or business within the United
States by the Non-U.S. Holder, the interest generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax if the Non-U.S. Holder (i) is not actually or
constructively a "10 percent shareholder" of the Company within the meaning of
section 871(h) of the Code and the regulations thereunder, (ii) is not a
"controlled foreign corporation" with respect to which the Company is a "related
person" within the meaning of the Code, and (iii) satisfies the statement
requirement in section 871(h)(5) and 881(c) of the Code and the regulations
thereunder. Pursuant to current temporary Treasury regulations, such statement
requirement will generally be met if the beneficial owner provides the person
otherwise required to withhold U.S. tax with an appropriate statement on
Internal Revenue Service Form W-8 or an appropriate substitute form, signed
under penalties of perjury, certifying that the beneficial owner of the Note is
not a U.S. person and providing the Non-U.S. Holder's name and address. If the
information provided in the statement changes, the Non-U.S. Holder must so
inform the person otherwise required to withhold U.S. tax within 30 days of such
change. The statement generally must be provided in the year a payment occurs or
in either of the two preceding years. If a Note is held through a securities
clearing organization or certain other financial institutions, the organization
or institution may provide a signed statement to the withholding agent. However,
in that case, the signed statement from the financial institution must certify
that the financial institution or a financial institution between it and the
beneficial owner has received a Form W-8 or substitute form from the beneficial
owner and must provide a copy of such Form W-8 or substitute form provided by
the Non-U.S. Holder that owns the Note. If such interest is not portfolio
interest, then it will be subject to United States withholding tax at a rate of
30%, unless reduced or eliminated pursuant to an applicable tax treaty; for
example, holders who are residents of Canada and entitled to the benefits of the
U.S.-Canada income tax treaty may be subject to a reduced rate of U.S. federal
withholding tax (generally 10%) on interest paid or accrued on Notes. Unless
certain documentary certification requirements, including the proper and timely
filing of an Internal Revenue Service Form 1001 (or successor form), are
satisfied, however, such payments will be subject to withholding at a rate of
30%.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a Non-U.S. Holder will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. Holder and (ii) in the case of an individual Non-U.S.
Holder, the Non-U.S. Holder is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a Non-U.S. Holder is
effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. Holder (although exempt from the tax previously discussed
and, if the holder provides a properly completed Internal Revenue Service Form
4224 (or successor form) exempt from withholding of such tax), the holder
generally will be subject to United States federal income tax on the interest,
gain or income at regular United States federal income tax rates. In addition,
if the Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, subject to adjustments,
unless it qualifies for a lower rate under an applicable tax treaty; for
example, under the U.S.-Canada income tax treaty, the rate of U.S. branch
profits tax to which corporate residents of Canada are subject is reduced to 6%
for 1996 and 5% thereafter if such residents comply with certain certification
requirements.
Proposed withholding regulations ("Withholding Proposals") issued by the IRS
were published in the Federal Register on April 22, 1996. If and when finalized,
the Withholding Proposals would substantially modify the existing rules
summarized above for the withholding of U.S. tax on payments of certain kinds of
income (including interest paid by U.S. obligors) to Non-U.S. Holders. The
Withholding Proposals would, if
65
<PAGE>
finalized in their current form and upon becoming effective, make significant
changes to certain of the procedures and certification requirements described
above in order to secure a reduction in, or an exemption from, U.S. withholding
tax otherwise due with respect to payments to holders who are Non-U.S. Holders.
Subject to certain exceptions and transition rules, if finalized in their
current form the Withholding Proposals would be effective for payments made
after December 31, 1997, regardless of the date of issuance of the instrument
with respect to which those payments are made. There can be no assurance that
the Withholding Proposals will be finalized (whether before or after their
proposed effective date) or, if they are finalized, that they will not be
materially modified from their current form. Prospective holders who are
Non-U.S. Holders are urged to consult their own tax advisors with respect to the
possible impact of the Withholding Proposals on their particular situations.
INFORMATION REPORTING AND BACKUP WITHHOLDING. In general, information
reporting requirements will apply to certain payments of principal, interest and
premium paid on Notes and to the proceeds of sale of a Note paid to holders
other than certain exempt recipients (such as corporations). A 31% backup
withholding tax will apply to such payments if the holder fails to provide a
taxpayer identification number or certification of foreign or other exempt
status upon request or fails to report in full dividend and interest income.
Generally, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in the first sentence under "Non-U.S. Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a United States person.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be allowed as a refund or credit against such holder's United States
federal income tax, provided that the required information is furnished to the
Internal Revenue Service.
The Withholding Proposals would, if finalized in their current form and upon
becoming effective, modify the foregoing information reporting and backup
withholding rules referred to above to conform them generally to the rules
proposed therein with respect to withholding of United States federal income tax
on certain payments to Non-U.S. Holders. Prospective holders who are Non-U.S.
Holders are urged to consult their own tax advisors with respect to the possible
impact of the Withholding Proposals on their particular situations.
THE FOREGOING DISCUSSION DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF ITS INDIVIDUAL
INVESTMENT CIRCUMSTANCES OR TO CERTAIN TYPES OF HOLDERS SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, NOR DOES SUCH DISCUSSION ADDRESS
ANY ASPECTS OF STATE, LOCAL, OR FOREIGN TAX LAWS OR OF ANY FEDERAL TAX LAWS
OTHER THAN THE INCOME TAX LAWS. ACCORDINGLY, PROSPECTIVE PURCHASERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE APPLICATION
OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND POSSIBLE FUTURE CHANGES
IN SUCH TAX LAWS.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1996 (the "Underwriting Agreement") among the
Company, CS First Boston Corporation, Salomon Brothers Inc, NationsBanc Capital
Markets, Inc. and Robertson, Stephens & Company LLC (the "Underwriters"), the
Underwriters have severally but not jointly agreed to purchase from the Company
the following respective principal amounts of the Notes.
<TABLE>
<CAPTION>
Principal
Underwriter Amount
- ---------------------------------------------------------------------------------- ----------
<S> <C>
CS First Boston Corporation....................................................... $
Salomon Brothers Inc..............................................................
NationsBanc Capital Markets, Inc..................................................
Robertson, Stephens & Company LLC.................................................
----------
Total........................................................................... $
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the Notes, if any are purchased. The Underwriting
Agreement provides that, in the event of a default by an Underwriter, in certain
circumstances the purchase commitments of non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has been advised that the Underwriters propose to offer the
Notes to the public initially at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession of % of the principal amount per Note, and the Underwriters and
such dealers may allow a discount of % of such principal amount per Note on
sales to certain other dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
The Notes are a new issue of securities with no established trading market.
The Underwriters have advised the Company that they intend to act as market
makers for the Notes. However, the Underwriters are not obligated to do so and
may discontinue any market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for the Notes.
NationsBank of Texas, N.A., an affiliate of NationsBanc Capital Markets,
Inc., is the agent and lender under the Credit Agreement and, as such, will be
receiving more than 10% of the net proceeds of the Offering. See "Use of
Proceeds". Accordingly, the Offering is being made in accordance with the
requirements of Section 44(c)(8) of Article III of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. (the "NASD"). This rule
provides generally that if more than 10% of the net proceeds from the sale of
debt securities, not including underwriting compensation, is paid to the
underwriters of such debt securities or their affiliates, the yield on the
securities may not be lower than that recommended by a "qualified independent
underwriter" meeting certain standards. Accordingly, CS First Boston Corporation
is assuming the responsibility of acting as the qualified independent
underwriter in pricing the offering and conducting due diligence. The yield on
the Notes, when sold to the public at the public offering price set forth on the
cover page of this Prospectus, is no lower than that recommended by CS First
Boston Corporation. In addition, CS First Boston Corporation and certain of its
affiliates have provided from time to time, and expect to provide in the future,
investment and commercial banking services to the Company and certain of its
affiliates.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes 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 Notes are effected. Accordingly, any resale of the Notes 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 Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Notes 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 such Notes without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above 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 Company'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
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such Company
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Notes 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 Notes acquired
by such purchaser pursuant to the Offering. Such report must be in the form
attached to British Columbia Securities 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 Notes acquired on the same date and under the same prospectus exemption.
LEGAL MATTERS
The validity of the Notes offered hereby has been passed upon for the
Company by Jones, Day, Reavis & Pogue, Dallas, Texas. Michael C. French, a
consultant to Jones, Day, Reavis & Pogue, is a director of the Company. Certain
legal matters have been passed upon for the Underwriters by Simpson Thacher &
Bartlett (a partnership which includes professional corporations), New York, New
York.
EXPERTS
The consolidated financial statements of Michaels Stores, Inc. at January
28, 1996 and January 29, 1995, and for each of the three years in the period
ended January 28, 1996, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 29, 1995 and January 28, 1996.................................. F-3
Consolidated Statements of Operations for the 1993, 1994 and 1995 Fiscal Years........................... F-4
Consolidated Statements of Cash Flows for the 1993, 1994 and 1995 Fiscal Years........................... F-5
Consolidated Statements of Shareholders' Equity for the 1993, 1994 and 1995 Fiscal Years................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Michaels Stores, Inc.
We have audited the accompanying consolidated balance sheets of Michaels
Stores, Inc. as of January 28, 1996 and January 29, 1995, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended January 28, 1996. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michaels
Stores, Inc. at January 28, 1996 and January 29, 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
January 28, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Dallas, Texas
March 6, 1996
F-2
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28,
1995 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents.................................................................. $ 1,907 $ 2,870
Marketable securities................................................................. 15,002 --
Merchandise inventories............................................................... 375,096 366,102
Income taxes receivable and deferred income taxes..................................... 15,002 35,177
Prepaid expenses and other............................................................ 11,525 12,143
----------- -----------
Total current assets................................................................ 418,532 416,292
----------- -----------
PROPERTY AND EQUIPMENT, AT COST......................................................... 204,032 255,386
Less accumulated depreciation......................................................... (62,228) (82,157)
----------- -----------
141,804 173,229
----------- -----------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET............................... 117,377 143,721
OTHER ASSETS............................................................................ 8,313 6,538
----------- -----------
125,690 150,259
----------- -----------
$ 686,026 $ 739,780
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 103,649 $ 98,799
Accrued liabilities and other......................................................... 82,441 88,510
----------- -----------
Total current liabilities........................................................... 186,090 187,309
----------- -----------
BANK DEBT............................................................................... 41,100 87,200
CONVERTIBLE SUBORDINATED NOTES.......................................................... 96,950 96,940
OTHER LONG-TERM LIABILITIES............................................................. 5,969 32,378
----------- -----------
Total long-term liabilities......................................................... 144,019 216,518
330,109 403,827
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000 shares authorized, none issued............. -- --
Common stock, $.10 par value, 50,000,000 shares authorized, 21,504,110 issued and
outstanding (21,354,167 in fiscal 1994).............................................. 2,135 2,150
Additional paid-in capital............................................................ 244,561 243,325
Retained earnings..................................................................... 109,221 90,478
----------- -----------
Total shareholders' equity.......................................................... 355,917 335,953
----------- -----------
$ 686,026 $ 739,780
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
NET SALES.................................................................. $ 619,688 $ 994,563 $ 1,294,886
---------- ---------- ------------
Cost of sales and occupancy expense........................................ 403,869 644,737 936,537
Selling, general and administrative expense................................ 174,463 278,716 373,395
Store closing and conversion costs......................................... -- 7,074 --
---------- ---------- ------------
OPERATING (LOSS) INCOME.................................................... 41,356 64,036 (15,046)
Interest expense........................................................... 6,378 9,103 16,841
Other expense and (income), net............................................ (7,666) (2,226) 2,952
---------- ---------- ------------
(LOSS) INCOME BEFORE INCOME TAXES.......................................... 42,644 57,159 (34,839)
(Benefit) provision for income taxes....................................... 16,357 21,512 (14,422)
---------- ---------- ------------
NET (LOSS) INCOME.......................................................... $ 26,287 $ 35,647 $ (20,417)
---------- ---------- ------------
---------- ---------- ------------
(LOSS) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Primary.................................................................. $ 1.53 $ 1.77 $ (0.95)
Assuming full dilution................................................... $ 1.52 $ 1.76 $ (0.95)
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary.................................................................. 17,231 20,146 21,517
Assuming full dilution................................................... 19,809 20,807 21,517
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1993 1994 1995
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ 26,287 $ 35,647 $ (20,417)
Adjustments:
Depreciation and amortization............................................ 12,490 21,512 30,928
Other.................................................................... (3,537) (501) 943
Change in assets and liabilities excluding the effects of acquisitions:
Merchandise inventories................................................ (87,885) (134,671) 13,406
Prepaid expenses and other............................................. (6,358) 5,747 (1,534)
Deferred income taxes and other........................................ (611) 7,276 (11,188)
Accounts payable....................................................... 11,545 37,065 (6,585)
Income taxes payable................................................... 3,304 (8,363) --
Accrued liabilities and other.......................................... 15,830 (1,979) 3,695
---------- ----------- ----------
Net change in assets and liabilities................................. (64,175) (94,925) (2,206)
---------- ----------- ----------
Net cash provided by (used in) operating activities.................. (28,935) (38,267) 9,248
---------- ----------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment........................................ (46,816) (68,106) (54,906)
Net proceeds from sales of property and equipment.......................... -- -- 3,159
Net proceeds from sales of marketable securities........................... 17,807 44,484 18,860
Acquisitions and other..................................................... -- (43,685) (24,909)
---------- ----------- ----------
Net cash used in investing activities................................ (29,009) (67,307) (57,796)
---------- ----------- ----------
FINANCING ACTIVITIES:
Net borrowings under bank credit facilities................................ 13,000 28,100 46,100
Payment of other long-term liabilities..................................... (115) (89) (891)
Proceeds from issuance of common stock..................................... 3,851 78,603 4,302
---------- ----------- ----------
Net cash provided by financing activities............................ 16,736 106,614 49,511
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................. (41,208) 1,040 963
CASH AND EQUIVALENTS AT BEGINNING OF YEAR.................................... 42,075 867 1,907
---------- ----------- ----------
CASH AND EQUIVALENTS AT END OF YEAR.......................................... $ 867 $ 1,907 $ 2,870
---------- ----------- ----------
---------- ----------- ----------
Cash payments (receipts) for:
Interest................................................................... $ 5,034 $ 7,166 $ 15,236
Income taxes............................................................... 11,620 17,753 (2,155)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 28, 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1993......................... 16,474,330 $ 1,647 $ 103,340 $ 50,290 $ 155,277
Exercise of stock options, net.................... 223,027 23 3,828 -- 3,851
Net income........................................ -- -- -- 26,287 26,287
------------ ----------- ---------- ---------- ----------
BALANCE AT JANUARY 30, 1994......................... 16,697,357 1,670 107,168 76,577 185,415
Adjustment for pooling-of-interests accounting in
an acquisition................................... -- -- -- (1,157) (1,157)
Issuance of shares in acquisitions................ 1,992,268 199 58,257 -- 58,456
Proceeds from stock offering...................... 2,353,432 235 71,980 -- 72,215
Adjustment for change in market value of
marketable securities............................ -- -- -- (1,514) (1,514)
Exercise of stock options and other............... 311,110 31 7,156 (332) 6,855
Net income........................................ -- -- -- 35,647 35,647
------------ ----------- ---------- ---------- ----------
BALANCE AT JANUARY 29, 1995......................... 21,354,167 2,135 244,561 109,221 355,917
Retirement of shares reacquired................... (170,025) (17) (5,516) -- (5,533)
Adjustment for change in market value of
marketable securities............................ -- -- -- 1,514 1,514
Exercise of stock options and other............... 319,968 32 4,280 160 4,472
Net loss.......................................... -- -- -- (20,417) (20,417)
------------ ----------- ---------- ---------- ----------
BALANCE AT JANUARY 28, 1996......................... 21,504,110 $ 2,150 $ 243,325 $ 90,478 $ 335,953
------------ ----------- ---------- ---------- ----------
------------ ----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS
Michaels Stores, Inc. (the "Company") owns and operates a chain of specialty
retail stores featuring creative craft products and home decor items. The
Company operates nationwide and also has stores in Canada and Puerto Rico.
FISCAL YEAR END
The Company reports on a 52/53-week fiscal year which ends on the Sunday
closest to January 31; thus, fiscal 1995 ("1995"), fiscal 1994 ("1994") and
fiscal 1993 ("1993"), ended on January 28, 1996, January 29, 1995 and January
30, 1994, respectively.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned and majority-owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
MARKETABLE SECURITIES
Marketable securities are carried at fair value, based on quoted market
prices or dealer quotes as of the last trading day of the fiscal year.
Marketable securities held by the Company at January 29, 1995 were classified as
available-for-sale securities. Net realized gains (losses), dividend income, and
interest income were: $(2.9) million, $0.5 million and $0.1 million,
respectively, for 1995; $0.1 million, $1.0 million and $0.3 million,
respectively, for 1994; and $4.1 million, $4.0 million and $1.5 million,
respectively, for 1993.
MERCHANDISE INVENTORIES
Store merchandise inventories are valued at the lower of average cost
(determined by a retail method) or market. Distribution center inventories are
valued at the lower of cost (determined by the first-in, first-out method) or
market.
During 1995 the Company implemented an inventory SKU reduction program which
resulted in charges of approximately $64.4 million primarily associated with the
retail markdown of inventories.
PROPERTY AND EQUIPMENT
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS
Costs in excess of net assets of acquired operations are being amortized
over 40 years on a straight-line basis. Accumulated amortization was $10,532,000
and $7,295,000 as of the end of 1995 and 1994, respectively. The Company
assesses the recoverability of costs in excess of net assets acquired annually
based on existing facts and circumstances. The Company measures the
recoverability of this asset on an on-going basis based on projected earnings
before interest, depreciation and amortization, on an undiscounted basis. Should
the Company's assessment indicate an impairment of this asset in the future, an
appropriate write-down will be recorded.
INTEREST-RATE SWAP AGREEMENTS
The Company enters into interest-rate swap agreements from time to time to
modify the interest characteristics of its outstanding debt from a floating rate
to a fixed basis. These agreements involve the receipt of fixed rate amounts in
exchange for floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt.
F-7
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed in the period in which the advertising first
occurs. In 1995, 1994 and 1993, the Company incurred $62,696,000, $47,089,000
and $29,227,000, respectively, of advertising expense.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed in the fiscal year in which the store
opens. In 1995, 1994 and 1993, the Company incurred $7,466,000, $6,541,000 and
$4,893,000, respectively, of store pre-opening costs.
EARNINGS PER SHARE
Earnings per share data are based on the weighted average number of shares
outstanding, including common stock equivalents and other dilutive securities.
The assumed conversion of the convertible subordinated notes was dilutive for
the fourth quarter and full year of both 1993 and 1994 and was therefore
included in the calculation of fully diluted earnings per share data for those
periods.
NEW ACCOUNTING PRONOUNCEMENTS
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
In the first quarter of fiscal 1996 the Company will adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets." The adoption is not
expected to have a material effect on the Company's financial position or
results of operations.
DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment:
Land and buildings............................................................ $ 7,640 $ 3,284
Fixtures and equipment........................................................ 145,253 183,545
Leasehold improvements........................................................ 51,139 68,557
---------- ----------
$ 204,032 $ 255,386
---------- ----------
---------- ----------
Accrued liabilities and other:
Salaries, bonuses and other payroll-related costs............................. $ 21,527 $ 29,467
Rent.......................................................................... 16,524 8,237
Taxes, other than income and payroll.......................................... 13,344 15,439
Other......................................................................... 31,046 35,367
---------- ----------
$ 82,441 $ 88,510
---------- ----------
---------- ----------
</TABLE>
DEBT
In January 1993, the Company issued $97.75 million of convertible
subordinated notes ("Subordinated Notes") due January 15, 2003. Interest,
payable semi-annually on January 15 and July 15, was computed at the rate of
4 3/4% from the date of issuance to January 15, 1996, and at 6 3/4% thereafter.
Interest expense is accrued by the Company based on an effective interest rate
of 6.38% (including amortization of deferred issuance costs) over the full term
of the Subordinated Notes. The Subordinated Notes are redeemable at the option
of the Company at redemption prices ranging from 104.14% to 100%. The
Subordinated Notes are not entitled to any sinking fund. The Subordinated Notes
are convertible into the Company's common stock at any time, at a conversion
price of $38 per share. A total of 2,551,053 shares of common stock are reserved
for conversion. During 1994 and 1995, a total of $800,000 and $10,000,
respectively, in Subordinated Notes were converted to 21,315 shares of the
Company's common stock. The fair value, based on dealer quotes, of the
outstanding Subordinated Notes as of January 28, 1996 and January 29, 1995 was
$76.0 million and $98.6 million, respectively.
F-8
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has a bank credit agreement ("Credit Agreement") which includes
an unsecured line of credit and provides for the issuance of commercial letters
of credit. Borrowings under the Credit Agreement, which expires in June 1998,
were $87.2 million and $41.1 million at January 28, 1996 and January 29, 1995,
respectively. The weighted average interest rates for outstanding borrowings
were 7.3% and 7.7% during 1995 and 1994, respectively. Borrowings under the
Credit Agreement are limited to the lesser of $200 million or the Company's
borrowing base (as defined in the Credit Agreement, $183.1 million at January
28, 1996) in either case minus the aggregate amount of letters of credit
outstanding. The Credit Agreement requires the Company to maintain various
financial ratios and restricts the Company's ability to pay dividends. On March
4, 1996, the Credit Agreement was amended to provide, among other things, for a
waiver of the fixed charges coverage ratio for the fourth quarter of 1995.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax liabilities and assets as of the respective year-end balance sheets
are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax inventory in excess of book inventory....................................... $ 748 $ 3,100
Accrued expenses not deductible until paid...................................... 11,114 13,529
Net operating loss and alternative minimum tax credit carryforwards............. 2,687 10,390
Other -- net.................................................................... 1,582 2,295
--------- ---------
Total deferred tax assets..................................................... 16,131 29,314
Valuation allowance for deferred tax assets..................................... -- (5,077)
Net deferred tax assets....................................................... 16,131 24,237
Deferred tax liabilities:
Tax over book depreciation/amortization......................................... 3,546 12,885
Other -- net.................................................................... 2,313 4,608
--------- ---------
Total deferred tax liabilities................................................ 5,859 17,493
--------- ---------
Net deferred tax assets........................................................... $ 10,272 $ 6,744
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) provision:
Federal:
Current............................................................. $ 14,249 $ 6,103 $ (18,202)
Deferred............................................................ 147 14,090 9,749
--------- --------- ----------
Total federal......................................................... 14,396 20,193 (8,453)
--------- --------- ----------
State:
Current............................................................. 1,961 1,319 (5,089)
Deferred............................................................ -- -- (880)
--------- --------- ----------
Total state........................................................... 1,961 1,319 (5,969)
--------- --------- ----------
$ 16,357 $ 21,512 $ (14,422)
--------- --------- ----------
--------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Reconciliation of income tax provision to statutory rate:
Income tax (benefit) expense at statutory rate........................ $ 14,925 $ 20,005 $ (12,194)
State income taxes, net of federal income tax effect.................. 1,275 858 (3,879)
Amortization of intangibles and other................................. 157 649 1,651
--------- --------- ----------
$ 16,357 $ 21,512 $ (14,422)
--------- --------- ----------
--------- --------- ----------
</TABLE>
At January 28, 1996, the Company had federal and state net operating loss
and tax credit carryforwards of $10,390,000 of which $8,590,000 expire at
various dates between 1998 and 2011. When realized, the tax benefit associated
with $4,501,000 of such carryforwards will be applied to reduce goodwill.
COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company operates stores and uses distribution centers, office facilities
and equipment generally leased under noncancellable operating leases, the
majority of which provide for renewal options. Future minimum rentals for all
noncancellable operating leases as of January 28, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------- RENT
--------------
(IN THOUSANDS)
<S> <C>
1996................................................................ $ 89,582
1997................................................................ 85,419
1998................................................................ 77,259
1999................................................................ 67,433
2000................................................................ 56,895
2001 and thereafter................................................. 190,901
--------------
$ 567,489
--------------
--------------
</TABLE>
Rental expense applicable to operating leases was $81,036,000, $56,181,000
and $33,551,000 in 1995, 1994 and 1993, respectively.
The Company has entered into operating leases for two distribution
facilities that require that the Company guarantee payment of the residual value
of the property to the lessor at the end of each lease. As of January 28, 1996
the guaranteed residual value of assets subject to these leases was $8,439,000.
F-10
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONTINGENCIES
In August 1995, two lawsuits were filed by certain security holders against
the Company and certain present and former officers and directors seeking class
action status on behalf of purchasers of the Company's Common Stock between
February 1, 1995 and August 23, 1995. Among other things, the plaintiffs allege
that misstatements and omissions by defendants relating to projected and
historical operating results, inventory and other matters involving future plans
resulted in an inflation of the prices of the Company's Common Stock. The
plaintiffs seek on behalf of the purported class an unspecified amount of
compensatory damages and reimbursement for the plaintiffs' fees and expenses.
The United States District Court for the Northern District of Texas consolidated
the two lawsuits on November 16, 1995. The Company and the individual defendants
have filed a motion to dismiss the consolidated, amended complaint. The court
has not yet ruled on this motion. Discovery related to both class certification
issues and the merits of the plaintiffs' claims has been stayed pending
resolution of the defendants' motion to dismiss. The Company believes the claims
are without merit and intends to vigorously defend this action.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the security holder litigation
described above, would not have a material adverse impact on the Company's
financial position. However, there can be no assurance that future costs would
not be material to results of operations of the Company for a particular future
period. In addition, the Company's estimates of future costs are subject to
change as events evolve and additional information becomes available during the
course of litigation.
Standby letters of credit relating to workers compensation and general
liability insurance coverages aggregated $6.5 million as of January 28, 1996.
STOCK OPTIONS
All full-time employees are eligible to participate in the Michaels Stores,
Inc. Key Employee Stock Compensation Program (the "Program"), as amended, under
which 3,000,000 shares of Common Stock have been authorized for issuance. Select
employees and key advisors, including directors, of the Company may participate
in the 1992 and 1994 Non-Statutory Stock Option Plans of Michaels Stores, Inc.
(the "Plans"), with an aggregate of 4,000,000 shares of Common Stock having been
authorized for issuance under the Plans. In addition, stock options have been
granted to certain directors and key advisors other than pursuant to the Program
or the Plans. The exercise price of all options granted was the fair market
value on the date of grant.
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Exercised during 1993..................................................... 223,027 $3 to $27
Exercised during 1994..................................................... 308,424 $3 to $27 7/8
$8 7/8 to
Exercised during 1995..................................................... 319,705 $32 1/4
Outstanding at January 28, 1996........................................... 4,067,316 $3 to $17
Exercisable at January 28, 1996........................................... 575,335 $3 to $16 3/4
</TABLE>
ACQUISITIONS
In February 1994, the Company acquired Treasure House Stores, Inc. ("THSI"),
for 280,000 shares of the Company's Common Stock in a transaction accounted for
as a pooling-of-interests. The transaction was not considered material to the
Company's sales, net income or financial position of any previous year, and
therefore the Company's financial statements were not restated.
In April 1994, the Company acquired the affiliated companies that operated
the arts and crafts store chains of Oregon Craft & Floral Supply Co. ("OCF") and
H&H Craft & Floral Supply Co. ("H&H") for a
F-11
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total of 455,000 shares of the Company's Common Stock valued at $18.5 million in
a transaction accounted for as a purchase. This transaction resulted in the
Company recording an addition to goodwill in the amount of $22.3 million.
Effective July 10, 1994, Michaels acquired Leewards Creative Crafts, Inc.
("Leewards"), an arts and crafts retailer with 98 stores located primarily in
the midwestern and northeastern United States. The acquisition consideration
consisted of $7.9 million in cash and 1,257,279 shares of the Company's Common
Stock valued at $39.9 million. Upon consummation of the Leewards acquisition,
Michaels also repaid $39.6 million of Leewards' indebtedness. The cost in excess
of the estimated fair value of net assets acquired was recorded as goodwill in
the amount of $77.9 million.
In March 1995, the Company purchased Aaron Brothers, Inc. ("Aaron
Brothers"), which operated a chain of 71 framing and art supplies stores
predominantly in California, for a purchase price of $25 million consisting of
approximately $5.3 million in cash and the assumption of $19.7 million of debt.
The transaction was accounted for as a purchase and resulted in the Company
recording an addition to goodwill in the amount of $26.7 million.
The OCF, H&H, Leewards and Aaron Brothers transactions were accounted for as
purchases; accordingly, the purchase prices have been allocated to assets and
liabilities based on estimated fair values as of the respective acquisition
dates. The results of operations since the acquisition dates are included in the
accompanying consolidated financial statements.
The following pro forma combined net sales, net income and earnings per
share data summarize the results of operations for 1994 and 1993 as if Leewards
had been acquired as of the beginning of 1993.
<TABLE>
<CAPTION>
PRO FORMA
------------------------
1993 1994
---------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales............................................................................... $ 780,302 $ 1,050,173
---------- ------------
---------- ------------
Net income (1).......................................................................... $ 26,157 $ 36,456
---------- ------------
---------- ------------
Earnings per share assuming full dilution (1)........................................... $ 1.41 $ 1.71
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Excludes a $7.1 million charge ($4.4 million after tax or $.21 per share)
for store closing and conversion costs.
The above pro forma data does not include THSI, OCF, H&H or Aaron Brothers
prior to their respective acquisition dates since the acquisitions were not
considered material, individually or in the aggregate, to the operating results
of the Company.
F-12
<PAGE>
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST THIRD FOURTH
QUARTER SECOND QUARTER QUARTER QUARTER
---------- -------------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Net sales.................................................... $ 265,547 $ 259,910 $ 312,696 $ 456,733
Cost of sales and occupancy expense.......................... 172,043 230,133 208,736 325,625
Operating income (loss)...................................... 15,420 (54,973)(1) 12,921 11,586
Net income (loss)............................................ 7,557 (33,124) 3,006 2,144
Fully-diluted earnings (loss) per common share............... $ .35 $ (1.55) $ .14 $ .10
Weighted average shares outstanding -- assuming full
dilution.................................................... 21,845 21,413 21,337 21,475
1994:
Net sales.................................................... $ 159,798 $ 174,204 $ 283,069 $ 377,492
Cost of sales and occupancy expense.......................... 103,511 111,237 187,566 242,423
Operating income............................................. 9,071 3,076 14,827 37,062
Net income................................................... 4,967 713(2) 7,813 22,154
Fully-diluted earnings per common share...................... $ .28 $ .04(2) $ .36 $ .94
Weighted average shares outstanding -- assuming full
dilution.................................................... 17,856 18,845 21,930 24,577
</TABLE>
- ------------------------
(1) Includes effect of an unusual pre-tax charge of $64.4 million for costs and
expenses primarily associated with an inventory reduction program.
(2) Includes a one-time charge of $4.4 million, net of tax, or $.23 per share
for store closing and conversion costs.
F-13
<PAGE>
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS 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>
Incorporation of Certain Documents by
Reference..................................... 1
Available Information.......................... 1
Prospectus Summary............................. 2
Risk Factors................................... 12
Use of Proceeds................................ 16
Capitalization................................. 17
Selected Financial and Operating Data.......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business....................................... 25
Principal Shareholders and Management
Ownership..................................... 33
Management..................................... 35
Description of Certain Indebtedness............ 37
Description of the Notes....................... 40
Certain Federal Income Tax Consequences........ 64
Underwriting................................... 67
Notice to Canadian Residents................... 68
Legal Matters.................................. 68
Experts........................................ 68
Index to Consolidated Financial Statements..... F-1
</TABLE>
[LOGO]
$125,000,000
% Senior Notes Due 2006
P R O S P E C T US
CS First Boston
Salomon Brothers Inc
NationsBanc Capital Markets, Inc.
Robertson, Stephens & Company
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the issuance and
distribution of the Notes covered by this Registration Statement, all of which
will be paid by the Registrant, are as follows:
<TABLE>
<S> <C>
Registration Fee.......................................................... $ 45,000
Printing, Engraving and Filing Expenses................................... $ 150,000
Accounting Fees and Expenses.............................................. $ 70,000
Legal Fees and Expenses................................................... $ 75,000
Miscellaneous............................................................. $ 20,000
---------
Total..................................................................... $ 360,000
---------
---------
</TABLE>
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 a corporation's
bylaws, any agreement or otherwise.
Reference is made to Article Nine of the Company's Restated Certificate of
Incorporation, as amended, which appears as Exhibit 3.2 to this Registration
Statement, which provides for indemnification of directors and officers.
Reference is made to Article IX of the Company's amended Bylaws which appear
as Exhibit 3.1 to this Registration Statement, which provides for
indemnification of directors and officers.
In addition, the Company has entered into Indemnity Agreements with certain
of its executive officers and directors.
The Company 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 Company against certain liabilities incurred by them in the
discharge of their functions as directors and officers except for liabilities
arising from their own malfeasance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
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>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of May 10, 1994, among Michaels Stores, Inc., LWA Acquisition
Corporation and Leewards Creative Crafts, Inc. (2)
2.2 First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels Stores, Inc.,
LWA Acquisition Corporation and Leewards Creative Crafts, Inc. (3)
2.3 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. (4)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
2.4 Amendment No. 1 to Stock Purchase Agreement. (4)
<C> <S>
2.5 Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other
parties listed therein. (2)
2.6 Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, among Michaels Stores, Inc.
and the other parties listed therein. (2)
2.7 Stock Purchase Agreement, dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., ABAM Investors
Limited Partnership, and Michaels Stores, Inc. (5)
3.1 Bylaws of the Registrant, as amended and restated. (5)
3.2 Restated Certificate of Incorporation of the Company. (10)
4.1 Form of % Senior Notes Due 2006 (included in Exhibit 4.2).
4.2 Form of Indenture.
4.3 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)
5.1 Opinion of Jones, Day, Reavis & Pogue.
10.1 First Amended and Restated Credit Agreement dated as of June 18, 1994, among Michaels Stores, Inc.,
NationsBank of Texas, N.A. and the other lenders signatory thereto (the "Credit Agreement").(11)
10.2 First Amendment to Credit Agreement dated April 26, 1995.(5)
10.3 Second Amendment to Credit Agreement dated as of September 1, 1995.(8)
10.4 Third Amendment to Credit Agreement dated as of February 12, 1996.(9)
10.5 Fourth Amendment to Credit Agreement dated as of March 4, 1996.(9)
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Jones, Day, Reavis & Pogue is contained in the opinion filed as Exhibit 5.1 hereto.
24.1 Power of attorney (included on signature page of the Registrant's Form S-3 (No. 333-03331)).
25.1 Statement of eligibility of trustee.
</TABLE>
- ------------------------
(1) Previously filed as an Exhibit to Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 (No. 333-03331) and incorporated herein
by reference.
(2) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-3 (No. 33-53639) and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 1, 1994 and incorporated herein by
reference.
(4) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-3 (No. 33-52311) 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 29, 1995 and incorporated herein by
reference.
II-2
<PAGE>
(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.
(7) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 30, 1994 and incorporated herein by
reference.
(8) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 30, 1995 and incorporated herein by
reference.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 28, 1996 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-54726) and incorporated herein by reference.
(11) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 28, 1996 and incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act 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.
Insofar as indemnification for liabilities arising under the Securities Act
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 Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the 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, 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>
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 Amendment 2
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Dallas, State of Texas on the 11th day
of June, 1996.
MICHAELS STORES, INC.
By: /s/ R. DON MORRIS
-----------------------------------
R. Don Morris
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ---------------------------------------- ---------------
/s/ SAM WYLY* Chairman of the Board of Directors June 11, 1996
-------------------------------------------
Sam Wyly
/s/ CHARLES J. WYLY, JR.* Vice Chairman of the Board of Directors June 11, 1996
-------------------------------------------
Charles J. Wyly, Jr.
/s/ R. MICHAEL ROULEAU* Chief Executive Officer (Principal June 11, 1996
------------------------------------------- Executive Officer)
R. Michael Rouleau
/s/ R. DON MORRIS Executive Vice President and Chief June 11, 1996
------------------------------------------- Financial Officer (Principal Financial
R. Don Morris and Accounting Officer)
/s/ EVAN A. WYLY* Director June 11, 1996
-------------------------------------------
Evan A. Wyly
/s/ DONALD R. MILLER, JR.* Vice President-Marketing Development and June 11, 1996
------------------------------------------- Director
Donald R. Miller, Jr.
/s/ MICHAEL C. FRENCH* Director June 11, 1996
-------------------------------------------
Michael C. French
Director
-------------------------------------------
Dr. F. Jay Taylor
Director
-------------------------------------------
Richard E. Hanlon
*By: /s/R. DON MORRIS
- -------------------------------------------
R. Don Morris
Pursuant to the power of
Attorney filed previously with
the Securities and Exchange Commission
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of May 10, 1994, among Michaels Stores, Inc., LWA Acquisition
Corporation and Leewards Creative Crafts, Inc. (2)
2.2 First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels Stores, Inc.,
LWA Acquisition Corporation and Leewards Creative Crafts, Inc. (3)
2.3 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. (4)
2.4 Amendment No. 1 to Stock Purchase Agreement. (4)
2.5 Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other
parties listed therein. (2)
2.6 Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, among Michaels Stores, Inc.
and the other parties listed therein. (2)
2.7 Stock Purchase Agreement, dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., ABAM Investors
Limited Partnership, and Michaels Stores, Inc. (5)
3.1 Bylaws of the Registrant, as amended and restated. (5)
3.2 Restated Certificate of Incorporation of the Company. (10)
4.1 Form of % Senior Notes Due 2006 (included in Exhibit 4.2).
4.2 Form of Indenture.
4.3 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)
5.1 Opinion of Jones, Day, Reavis & Pogue.
10.1 First Amended and Restated Credit Agreement dated as of June 18, 1994, among Michaels Stores, Inc.,
NationsBank of Texas, N.A. and the other lenders signatory thereto (the "Credit Agreement").(11)
10.2 First Amendment to Credit Agreement dated April 26, 1995.(5)
10.3 Second Amendment to Credit Agreement dated as of September 1, 1995.(8)
10.4 Third Amendment to Credit Agreement dated as of February 12, 1996.(9)
10.5 Fourth Amendment to Credit Agreement dated as of March 4, 1996.(9)
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Jones, Day, Reavis & Pogue is contained in the opinion filed as Exhibit 5.1 hereto.
24.1 Power of attorney (included on signature page of the Registrant's Form S-3 (No. 333-03331)).
25.1 Statement of eligibility of trustee.
</TABLE>
- ------------------------
(1) Previously filed as an Exhibit to Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 (No. 333-03331) and incorporated herein
by reference.
(2) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-3 (No. 33-53639) and incorporated herein by reference.
<PAGE>
(3) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 1, 1994 and incorporated herein by
reference.
(4) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-3 (No. 33-52311) 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 29, 1995 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.
(7) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 30, 1994 and incorporated herein by
reference.
(8) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 30, 1995 and incorporated herein by
reference.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended January 28, 1996 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-54726) and incorporated herein by reference.
(11) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 28, 1996 and incorporated herein by
reference.
<PAGE>
EXHIBIT 1.1
$125,000,000
MICHAELS STORES, INC.
__% SENIOR NOTES DUE 2006
UNDERWRITING AGREEMENT
June [__], 1996
CS FIRST BOSTON CORPORATION
SALOMON BROTHERS INC
NATIONSBANC CAPITAL MARKETS, INC.
ROBERTSON, STEPHENS & COMPANY LLC
As Representatives of the Several Underwriters,
c/o CS First Boston Corporation,
Park Avenue Plaza,
New York, N.Y. 10055
Dear Sirs:
1. INTRODUCTORY. Michaels Stores, Inc., a Delaware corporation
(the "Company"), proposes to issue and sell to the Underwriters, subject to
the terms and conditions hereof, $125,000,000 aggregate principal amount of
its __% Senior Notes due 2006 (the "Offered Securities"), all to be issued
under an indenture, to be dated as of June ___, 1996 ("Indenture"), between
the Company and The Bank of New York, as Trustee. The Company hereby agrees
with the several Underwriters named in Schedule A hereto ("Underwriters")
as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-03331) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (i) has
been declared effective under the Securities Act of 1933 ("Act") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("initial registration statement") has been declared effective, either
(i) an additional registration statement ("additional registration
statement") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company
does not propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company does
not propose to amend it, and if any post-effective amendment to either
such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared effective
by the Commission or has become effective
<PAGE>
upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in
the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (i) if
the Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and
time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement has
not been filed prior to the execution and delivery of this Agreement but
the Company has advised the Representatives that it proposes to file
one, "Effective Time" with respect to such additional registration
statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement or
the additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended
at its Effective Time, including all material incorporated by reference
therein, including all information contained in the additional
registration statement (if any) and deemed to be a part of the initial
registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form
on which it is filed and including all information (if any) deemed to be
a part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of
the additional registration statement as of its Effective Time pursuant
to Rule 430A(b), is hereinafter referred to as the "Additional
Registration Statement". The Initial Registration Statement and the
Additional Registration Statement are herein referred to collectively as
the "Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, including all
material incorporated by reference in such prospectus, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act, the Trust Indenture Act of 1939 ("Trust Indenture Act") and the
rules and regulations of the Commission ("Rules and Regulations") and
did not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the
Act, the Trust Indenture Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the applicable requirements of the Act, the Trust Indenture
Act and the Rules and Regulations, and neither of such documents
includes, or will include, any untrue statement of a material fact or
omits, or will omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all respects to the
requirements of the Act, the Trust Indenture Act and the Rules and
Regulations, neither of such documents will include any untrue
2
<PAGE>
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to (i)
that part of the Registration Statement which constitutes the Statement
of Eligibility and Qualification of Trustee (on Form T-1) filed pursuant
to the Trust Indenture Act and (ii) statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(b).
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority to own its properties and conduct its business
as described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct
of its business requires such qualification, except where the failure to
so qualify would not have a material adverse effect on the business,
financial position or results of operations or reasonably foreseeable
prospects of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority to own its
properties and conduct its business as described in the Prospectus; each
subsidiary of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires
such qualification, except where the failure to so qualify would not
have a Material Adverse Effect; all of the issued and outstanding
capital stock of each subsidiary of the Company has been duly authorized
and validly issued and is fully paid and nonassessable, the capital
stock of each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and defects, except
as described in the Prospectus; and except for Michaels of Canada, Inc.,
of which the Company owns ___%, the Company owns, directly or
indirectly, 100% of the outstanding capital stock of each of its
subsidiaries.
(e) The Indenture has been duly authorized and, if the Effective
Time of a Registration Statement is prior to the execution and delivery
of this Agreement, has been or otherwise upon the Effective Time will be
duly qualified under the Trust Indenture Act with respect to the Offered
Securities registered thereby; the Offered Securities have been duly
authorized; and when the Offered Securities are executed, authenticated
and delivered and paid for in accordance with the terms of this
Agreement and the Indenture on the Closing Date (as defined below), the
Indenture will have been duly executed and delivered, such Offered
Securities will have been duly executed, authenticated, issued and
delivered and will conform in all material respects to the description
thereof contained in the Prospectus and the Indenture and such Offered
Securities will constitute valid and legally binding obligations of the
Company, enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter
for a brokerage commission, finder's fee or other like payment in
connection with the offering of the Offered Securities.
(g) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act.
(h) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court having jurisdiction
over the Company is required for the consummation of the
3
<PAGE>
transactions contemplated by this Agreement in connection with the
issuance and sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act, the Trust Indenture Act
and the regulations of the NASD and such as may be required under state
securities laws.
(i) The execution, delivery and performance of the Indenture and
this Agreement, and the issuance and sale of the Offered Securities and
compliance with the terms and provisions thereof will not result in a
breach or violation of any of the terms and provisions of, or constitute
a default under, any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or any of
their properties, or any agreement or instrument (other than the Credit
Agreement until it is amended as contemplated by Section 6(h) hereof) to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary, except where
any such breach, violation or default would not have a Material Adverse
Effect. The Company has full power and authority to authorize, issue and
sell the Offered Securities as contemplated by this Agreement.
(j) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and legally binding agreement
enforceable against the Company in accordance with its terms.
(k) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would affect the value thereof or
interfere with the use made or to be made thereof by them, except where
the lack of any such title or existence of any such lien, encumbrance or
defect would not have a Material Adverse Effect; and except as disclosed
in the Prospectus, the Company and its subsidiaries hold any leased real
or personal property under valid and enforceable leases with no
exceptions that would interfere with the use made or to be made thereof
by them, except where the lack of any such lease would not have a
Material Adverse Effect.
(l) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have
not received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
Company and its subsidiaries taken as a whole.
(m) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(n) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property
rights") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(o) Neither the Company nor any of its subsidiaries is in violation
of any statute, rule, regulation, decision or order of any governmental
agency or body or any court, domestic or foreign, relating to the use,
disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to
hazardous or toxic substances (collectively, "environmental laws"), owns
or operates any real property contaminated with any substance in
violation of any environmental laws, is liable for any off-site disposal
or off-site contamination pursuant to any environmental laws, or has
knowledge of any pending claim (or any pending investigation that is
reasonably likely to lead to a claim),
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any claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the aggregate
have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, there are no pending
legal or governmental actions, suits or proceedings against or, to the
knowledge of the Company, affecting the Company, any of its subsidiaries
or to which any of their respective properties is subject, that could
reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect, or would materially and adversely affect the
ability of the Company to perform its obligations under the Indenture or
this Agreement; and no such actions, suits or proceedings are, to the
Company's knowledge, threatened.
(q) The financial statements included in each Registration
Statement and the Prospectus present fairly the combined financial
position of the Company and its consolidated subsidiaries as of the
dates shown and their results of operations and cash flows for the
periods shown, and such financial statements have been prepared in
conformity with the generally accepted accounting principles in the
United States applied on a consistent basis and the schedules included
in each Registration Statement present fairly the information required
to be stated therein.
(r) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving
a prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as a whole, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(s) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(t) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes and the
Company agrees to comply with such Section if prior to the completion of
the distribution of the Offered Securities it commences doing such
business.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of
the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to
the Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Company, at a purchase price of __% of the principal amount
thereof, plus accrued interest from June ____, 1996 to the Closing Date (as
hereinafter defined), the respective principal amounts of Offered Securities
set forth opposite the names of the Underwriters in Schedule A hereto.
The Company will deliver against payment of the purchase price the
Offered Securities in the form of one or more permanent global Securities in
definitive form (the "Global Securities") deposited with the Trustee as
custodian for The Depository Trust Company ("DTC") and registered in the name
of Cede & Co., as nominee for DTC. Interests in any permanent global
Securities will be held only in book-entry form through DTC, except in the
limited circumstances described in the Prospectus. Payment for the Offered
Securities shall be made by the Underwriters in Federal (same day) funds by
wire transfer to an account previously designated to CS First Boston
Corporation ("CS First Boston") by the Company, at 10:00 A.M., (New York
time), on June __, 1996, or at such other time not later than seven full
business days thereafter as CS First Boston and the Company determine, such
time being herein referred to as the "Closing Date", against delivery to the
Trustee as custodian for DTC of the Global Securities representing all of the
Offered Securities. The Global Securities will be made available for
inspection by CS First Boston on behalf of the Underwriters in New York, New
York.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public
as set forth in the Prospectus.
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5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by CS First
Boston, subparagraph (4)) of Rule 424(b) not later than the earlier of
(A) the second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement.
The Company will advise CS First Boston promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to
10:00 P.M., New York time, on the date of this Agreement or, if earlier,
on or prior to the time the Prospectus is printed and distributed to any
Underwriter, or will make such filing at such later date as shall have
been consented to by CS First Boston.
(b) The Company will advise CS First Boston promptly of any
proposal to amend or supplement the initial or any additional
registration statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CS First Boston's consent (which consent will not be
unreasonably withheld); and the Company will also advise CS First Boston
promptly after the Company receives notice thereof of the effectiveness
of each Registration Statement (if its Effective Time is subsequent to
the execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect
of a Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CS First Boston of such event and will
promptly prepare and file with the Commission, at its own expense, an
amendment or supplement which will correct such statement or omission or
an amendment which will effect such compliance. Neither CS First
Boston's consent to, nor the Underwriters' delivery of, any such
amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional
Registration Statement) which will satisfy the provisions of Section
11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of
the Company's fiscal year, "Availability Date" means the 90th day after
the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (two (2) of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as
delivery of a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements
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to such documents, in each case in such quantities as CS First Boston
requests. The Company will use its best efforts to furnish the
Prospectus on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or
the Effective Time of the Initial Registration Statement. All other
documents shall be so furnished as soon as available. The Company will
pay the expenses of printing and distributing to the Underwriters all
such documents.
(f) The Company will take such action as CS First Boston reasonably
requests for the qualification of the Offered Securities for sale under
the laws of such jurisdictions as CS First Boston designates and will
continue such qualifications in effect so long as required for the
distribution of the Offered Securities by the Underwriters; PROVIDED,
HOWEVER, that the Company will not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
such jurisdiction.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Exchange Act or mailed to
stockholders, and (ii) from time to time, such other information
concerning the Company as CS First Boston may reasonably request.
(h) The Company will pay all expenses incident to the performance
of its obligations under this Agreement and will reimburse the
Underwriters (if and to the extent incurred by them) for any filing fees
and other expenses (including fees and disbursements of counsel)
incurred by them in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CS First
Boston designates and the printing of memoranda relating thereto for any
fees charged by investment rating agencies for the rating of the Offered
Securities, for the filing fee of the National Association of Securities
Dealers, Inc. relating to the Offered Securities, for any travel
expenses of the Company's officers and employees and any other expenses
of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for expenses
incurred in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the Underwriters.
(i) The Company will apply the net proceeds from the sale of the
Offered Securities substantially in accordance with the description set
forth in the Prospectus.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the several Underwriters to purchase and pay for the Offered Securities on
the Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the
statements of Company officers made pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following
additional conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of Ernst &
Young LLP confirming that they are independent public accountants within
the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
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Standards No. 71, Interim Financial Information, on the unaudited
financial statements included or incorporated by reference in the
Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company
who have responsibility for financial and accounting matters and
other specified procedures, nothing came to their attention that
caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all
material respects with the applicable accounting requirements
of the Exchange Act as it applies to Form 10-Q and the related
published Rules and Regulations or any material modifications
should be made to such unaudited financial statements for them
to be in conformity with generally accepted accounting
principles;
(B) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date
not more than five days prior to the date of this Agreement,
there was any change in the capital stock or any increase in
long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available balance
sheet read by such accountants, there was any decrease in
consolidated net current assets or shareholders' equity, as
compared with amounts shown on the latest balance sheet
included in the Prospectus; or
(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing
date of the latest available income statement read by such
accountants there were any decreases, as compared with the
corresponding period of the previous year, in consolidated net
sales or in the total or per share amounts of consolidated
net income.
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case
to the extent that such dollar amounts, percentages and other
financial information are derived from the general accounting
records of the Company and its subsidiaries subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting
records and other procedures specified in such letter and have
found such dollar amounts, percentages and other financial
information to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean
the initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to
its Effective Time, (ii) if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional
Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration
Statement and the additional registration statement as proposed to
be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and
(iii) "Prospectus" shall mean the prospectus included in the
Registration Statements. All financial statements and schedules
included in material incorporated by reference into the Prospectus
shall be deemed included in the Registration Statements for
purposes of this subsection.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
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<PAGE>
time, on the date of this Agreement or such later date as shall have
been consented to by CS First Boston. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the execution
and delivery of this Agreement, such Effective Time shall have occurred
not later than 10:00 P.M., New York time, on the date of this Agreement
or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have
been consented to by CS First Boston. If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery of
this Agreement, the Prospectus shall have been filed with the Commission
in accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to the Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be threatened by
the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company or
its subsidiaries which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and
makes it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Securities;
(ii) any downgrading in the rating of any debt securities of the Company
by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act), or any public
announcement that any such organization has under surveillance or review
its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any
suspension or limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any
banking moratorium declared by U.S. Federal or, New York authorities; or
(v) any outbreak or escalation of major hostilities in which the United
States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable
to proceed with completion of the public offering or the sale of and
payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated the
Closing Date, of each of Jones, Day, Reavis & Pogue, counsel for the
Company, and of Mark V. Beasley, General Counsel of the Company (which
opinions shall be divided in a manner reasonably acceptable to counsel
for the Underwriters) to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus. The
Company is duly qualified to do business as a foreign corporation
in good standing in all other jurisdictions in which its ownership
or lease of property or the conduct of its business requires such
qualification except where the failure to so qualify would not have
a Material Adverse Effect. Each Significant Subsidiary (as defined
in Rule 1-02 of Regulation S-X under the Act) of the Company has
been duly incorporated and is an existing corporation in good
standing under the laws of the jurisdiction of its organization,
with corporate power and authority to own its properties and
conduct its business. Each such Significant Subsidiary is duly
qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock of
each such Significant Subsidiary has been duly authorized and
validly issued and is fully paid and nonassessable; the capital
stock of each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and defects;
and except for Michaels of Canada, Inc., of which the Company owns
___%, the Company owns 100% of the outstanding capital stock of
each of its subsidiaries.
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(ii) The Indenture has been duly authorized, executed and
delivered and has been duly qualified under the Trust Indenture
Act; the Offered Securities delivered on the Closing Date have been
duly authorized, executed, authenticated, issued and delivered and
conform to the description thereof contained in the Prospectus; the
Indenture and the Offered Securities delivered on the Closing Date
constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and the Offered
Securities are entitled to the benefits of the Indenture;
(iii) There are no contracts, agreements or understandings
known to such counsel between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by
the Company under the Act.
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of
1940.
(v) No consent, approval, authorization or order of, or filing
with, any U.S. Federal or State of New York governmental agency,
body or court or any Delaware court or governmental agency or body
acting pursuant to the Delaware General Corporation Law is required
for the consummation of the transactions contemplated by this
Agreement in connection with the issuance or sale of the Offered
Securities by the Company, except such as have been obtained and
made under the Act and the Trust Indenture Act and such as may be
required under state securities laws (as to which state securities
laws no opinion is expressed);
(vi) The execution, delivery and performance of the Indenture
and this Agreement and the issuance and sale of the Offered
Securities and compliance with the terms and provisions thereof
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any U.S. Federal or
State of New York statute or the Delaware General Corporation Law,
any rule, regulation or order known to such counsel issued pursuant
to any U.S. Federal or State of New York statute or the Delaware
General Corporation Law by any governmental agency or body or any
court having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument
to which the Company or any such subsidiary is a party or by which
the Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary, except
where any such breach, violation or default would not have a
Material Adverse Effect; and the Company has full corporate power
and authority to authorize, issue and sell the Offered Securities
as contemplated by this Agreement;
(vii) To such counsel's knowledge, except as disclosed in the
Prospectus, there are no pending actions, suits or proceedings
against or affecting the Company, any of its subsidiaries or any of
their respective properties that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the condition
(financial or other), business, properties or results of operations
of the Company and its subsidiaries taken as a whole, or would
materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are
otherwise material in the context of the sale of the Offered
Securities; and no such actions, suits or proceedings are
threatened or, to the Company's knowledge, contemplated;
(viii) To such counsel's knowledge, except as disclosed in the
Prospectus, the Company and its subsidiaries have good and
marketable title to all real properties and all other properties
and assets owned by them, in each case free from liens,
encumbrances and defects that would
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materially affect the value thereof or materially interfere with
the use made or to be made thereof by them; and, to such counsel's
knowledge, except as disclosed in the Prospectus, the Company and
its subsidiaries hold any leased real or personal property under
valid and enforceable leases with no exceptions that would
materially interfere with the use made or to be made thereof by
them;
(ix) To such counsel's knowledge, the Company has not received
any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, trade names and other rights
to inventions, know-how, patents, copyrights, confidential
information and other intellectual property that, if determined
adversely to the Company or any of its subsidiaries, would,
individually or in the aggregate reasonably be expected to have a
material adverse effect on the Company and its subsidiaries taken
as a whole.
(x) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion,
the Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge
of such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act, the Trust
Indenture Act and the Rules and Regulations. Such counsel has
participated in the preparation of the Registration Statements and
the Prospectus and, based on such participation, no facts have come
to the attention of such counsel which cause such counsel to
believe that any part of a Registration Statement or any amendment
thereto (other than the financial statements and other financial
data contained therein, as to which such counsel may express no
belief), as of its effective date or as of the Closing Date,
contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (other than the
financial statements and other financial data contained therein, as
to which such counsel may express no belief), as of its issue date
or as of the Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. However,
such counsel has not independently verified, and assumes no
responsibility for the accuracy, completeness or fairness of the
Registration Statement or the Prospectus except to the extent of
the opinion expressed in paragraphs (ii) above and (xii) below and
in the next sentence. The descriptions in the Registration
Statements and Prospectus of statutes, legal and governmental
proceedings and contracts and other documents are accurate in all
material respects and fairly present the information required to be
shown. Such counsel do not know of any legal or governmental
proceedings required to be described in a Registration Statement or
the Prospectus which are not described as required or of any
contracts or documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as exhibits
to a Registration Statement which are not described and filed as
required; it being understood that such counsel need express no
opinion as to the financial statements or other financial data
contained in the Registration Statements or the Prospectus;
(xi) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally
binding agreement enforceable against the Company in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
general equity principles and public policy considerations; and
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(xii) The statements contained in the Prospectus under the
caption "Certain Federal Income Tax Consequences," insofar as they
describe Federal statutes, rules and regulations, constitute a fair
summary thereof.
(e) The Representatives shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on the Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to
such counsel such documents as they reasonably request for the purpose
of enabling them to pass upon such matters.
(f) The Representatives shall have received a certificate, dated
the Closing Date, of the President or any Vice-President and a principal
financial or accounting officer of the Company in which such officers,
to the best of their knowledge after reasonable investigation, shall
state that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to the Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
threatened by the Commission; the Additional Registration Statement (if
any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change,
nor any development or event involving a prospective material adverse
change, in the condition (financial or other), business, properties or
results of operations of the Company and its subsidiaries taken as a
whole except as set forth in or contemplated by the Prospectus or as
described in such certificate.
(g) The Representatives shall have received a letter, dated the
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than five days prior to
the Closing Date for the purposes of this subsection.
(h) The Company and NationsBank of Texas, N.A., as administrative
lender for the syndicate of banks parties thereto, shall have entered
into an amendment to the First Amended and Restated Credit Agreement,
dated as of June 18, 1994 (the "Credit Agreement"), on terms that
conform in all material respects to the description thereof in the
Prospectus and the Underwriters shall have received evidence thereof
satisfactory to the Underwriters.
(i) The Indenture shall have been duly executed and delivered by
the Company and the Trustee and the Securities shall have been duly
executed and delivered by the Company and duly authenticated by the
Trustee.
(j) If any event shall have occurred that requires the Company
under Section 5(c) hereof to prepare an amendment or supplement to a
Registration Statement or the Prospectus, such amendment or supplement
shall have been prepared, the Underwriters shall have been given a
reasonable opportunity to comment thereon, and copies thereof shall have
been delivered to the Underwriters. The Company will furnish the
Representatives with such conformed copies of such opinions,
certificates, letters and documents as the Representatives reasonably
request. CS First Boston may in its sole discretion waive on behalf of
the Underwriters compliance with any conditions to the obligations of
the Underwriters hereunder. All opinions, letters, evidence and
certificates mentioned in this Agreement shall be deemed in compliance
with the terms hereof if they are in form and substance reasonably
satisfactory to CS First Boston.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
12
<PAGE>
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action
as such expenses are incurred; PROVIDED, HOWEVER, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information furnished by any Underwriter consists of the information
described as such in subsection (b) below; and PROVIDED, FURTHER, that with
respect to any untrue statement or alleged untrue statement in or omission or
alleged ommission from any preliminary prospectus, the indemnity agreement
contained in this subsection (a) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages
or liabilities purchased the Offered Securities concerned, to the extent that
a prospectus relating to such Offered Securities was required to be delivered
by such Underwriter under the Act in connection with such purchase and any
such loss, claim, damage or liability of such Underwriter results from the
fact that there was not sent or given to such person, at or prior to the
written confirmation of the sale of such Offered Securities to such person, a
copy of the Prospectus if the Company had previously furnished copies thereof
to such Underwriter.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company against any losses, claims, damages or liabilities to
which the Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by
such Underwriter through the Representatives specifically for use therein,
and will reimburse any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by any
Underwriter consists of (i) the following information in the Prospectus
furnished on behalf of each Underwriter: the last paragraph at the bottom of
the cover page concerning the terms of the offering by the Underwriters, the
legends concerning over-allotments, stabilizing and passive market making on
the inside front cover page and the concession and reallowance figures
appearing in the third paragraph under the caption "Underwriting" and (ii)
the information in the Prospectus furnished on behalf of NationsBanc Capital
Markets, Inc. appearing in the sixth paragraph under the caption
"Underwriting".
(c) Promptly after receipt by an indemnified party under this Section or
Section 9 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under subsection (a) or (b) above or Section 9, notify the indemnifying
party of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under subsection (a) or (b) above or
Section 9. In case any such action is brought against any indemnified party
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section or Section 9, as the case may be, for
any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such
13
<PAGE>
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in subsection (a) or (b) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering
of the Securities or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriters
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section and Section 9
shall be in addition to any liability which the Company may otherwise have
and shall extend, upon the same terms and conditions, to each person, if any,
who controls any Underwriter or the QIU (as hereinafter defined) within the
meaning of the Act; and the obligations of the Underwriters under this
Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter defaults in its
obligations to purchase Offered Securities hereunder on the Closing Date and
the aggregate principal amount of Offered Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10%
of the total principal amount of Offered Securities that the Underwriters are
obligated to purchase on the Closing Date, CS First Boston may make
arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no
such arrangements are made by the Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on the Closing Date. If
any Underwriter or Underwriters so default and the aggregate principal amount
of Offered Securities with respect to which such default or defaults occur
exceeds 10% of the total principal amount of Offered Securities that the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to CS First Boston and the Company for the purchase of such
Offered Securities by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company, except as provided in Section 10.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
14
<PAGE>
9. QUALIFIED INDEPENDENT UNDERWRITER. The Company hereby confirms that
at its request CS First Boston has without compensation acted as "qualified
independent underwriter" (in such capacity, the "QIU") within the meaning of
Schedule E to the By-Laws of the National Association of Securities Dealers,
Inc. in connection with the offering of the Offered Securities. The Company
will indemnify and hold harmless the QIU against any losses, claims, damages
or liabilities, joint or several, to which the QIU may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon the QIU's
acting (or alleged failing to act) as such "qualified independent
underwriter" and will reimburse the QIU for any legal or other expenses
reasonably incurred by the QIU in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred.
10. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of
the Company or its officers and of the several Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation, or statement as to the results thereof, made
by or on behalf of any Underwriter, the Company or any of their respective
representatives, officers or directors or any controlling person, and will
survive delivery of and payment for the Offered Securities. If this Agreement
is terminated pursuant to Section 8 or if for any reason the purchase of the
Offered Securities by the Underwriters is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant
to Section 5 and the respective obligations of the Company and the
Underwriters pursuant to Section 7 and the obligations of the Company
pursuant to Section 9 shall remain in effect, and if any Offered Securities
have been purchased hereunder the representations and warranties in Section 2
and all obligations under Section 5 shall also remain in effect. If the
purchase of the Offered Securities by the Underwriters is not consummated for
any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause
(iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements
of counsel) reasonably incurred by them in connection with the offering of
the Offered Securities.
11. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives c/o CS First Boston Corporation, Park Avenue
Plaza, New York, N.Y. 10055, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Michaels Stores,
Inc., 5931 Campus Circle Drive, Irving, TX 75063, Attention: Mark V. Beasley
with a copy to Jones, Day, Reavis & Pogue, 2300 Trammell Crow Center, 2001
Ross Avenue, Dallas, TX 75201, Attention Mark V. Minton; PROVIDED, HOWEVER,
that any notice to an Underwriter pursuant to Section 7 will be mailed,
delivered or telegraphed and confirmed to such Underwriter.
12. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 7, and
no other person will have any right or obligation hereunder. No purchaser of
any of the Offered Securities from any Underwriter shall be deemed a
successor by reason merely of such purchase.
13. REPRESENTATION OF UNDERWRITERS. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CS First Boston
will be binding upon all the Underwriters.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York
in any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
15
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement between
the Company and the several Underwriters in accordance with its terms.
Very truly yours,
MICHAELS STORES, INC.
By
---------------------------------------
Name:
Title:
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
CS FIRST BOSTON CORPORATION
SALOMON BROTHERS INC
NATIONSBANC CAPITAL MARKETS, INC.
ROBERTSON, STEPHENS & COMPANY LLC
By CS FIRST BOSTON CORPORATION
By
---------------------------------------
Name:
Title:
17
<PAGE>
SCHEDULE A
PRINCIPAL
AMOUNT OF OFFERED
UNDERWRITER SECURITIES
----------- -----------------
CS First Boston Corporation . . . . . . . . . . . . $
Salomon Brothers Inc . . . . . . . . . . . . . . . $
NationsBanc Capital Markets, Inc. . . . . . . . . . $
Robertson, Stephens & Company LLC . . . . . . . . . $
------------
Total . . . . . . . . . . . . . . . . . . . . $
------------
------------
18
<PAGE>
EXHIBIT 4.2
MICHAELS STORES, INC.
% SENIOR NOTES DUE 2006
---------------------
INDENTURE
DATED AS OF JUNE , 1996
---------------------
THE BANK OF NEW YORK,
AS TRUSTEE
<PAGE>
CROSS REFERENCE TABLE
<TABLE>
<CAPTION>
INDENTURE
TIA SECTION SECTION
- ------------------------------------------------------------------------------------------------- ---------------
<S> <C>
310(a)(1)........................................................................................ 7.10
(a)(2)........................................................................................ 7.10
(a)(3)........................................................................................ N.A.
(a)(4)........................................................................................ N.A.
(b)........................................................................................... 7.8; 7.10
(c)........................................................................................... N.A.
311(a)........................................................................................... 7.11
(b)........................................................................................... 7.11
312(a)........................................................................................... 2.5
(b)........................................................................................... 2.5; 10.3
(c)........................................................................................... 10.3
313(a)........................................................................................... 10.3
(b)(1)........................................................................................ 7.6
(b)(2)........................................................................................ N.A.
(c)........................................................................................... 10.2
(d)........................................................................................... 7.6
314(a)........................................................................................... 4.2; 4.10; 10.2
(b)........................................................................................... N.A.
(c)(1)........................................................................................ 10.4
(c)(2)........................................................................................ 10.4
(c)(3)........................................................................................ N.A.
(d)........................................................................................... N.A.
(e)........................................................................................... 10.5
(f)........................................................................................... 4.10
315(a)........................................................................................... 7.1
(b)........................................................................................... 7.5; 10.2
(c)........................................................................................... 7.1
(d)........................................................................................... 7.1
(e)........................................................................................... 6.11
316(a)(last sentence)............................................................................ 10.6
(a)(1)(A)..................................................................................... 6.5
(a)(1)(B)..................................................................................... 6.4
(a)(2)........................................................................................ N.A.
(b)........................................................................................... 6.7
317(a)(1)........................................................................................ 6.9
(a)(2)........................................................................................ 6.9
(b)........................................................................................... 2.4
318(a)........................................................................................... 10.1
N.A. means Not Applicable.
</TABLE>
- ------------------------
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE............................................. 1
SECTION 1.1 DEFINITIONS............................................................................ 1
SECTION 1.2 OTHER DEFINITIONS...................................................................... 12
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT...................................... 12
SECTION 1.4 RULES OF CONSTRUCTION.................................................................. 13
ARTICLE 2
THE SECURITIES......................................................................... 13
SECTION 2.1 FORM AND DATING........................................................................ 13
SECTION 2.2 EXECUTION AND AUTHENTICATION........................................................... 13
SECTION 2.3 REGISTRAR AND PAYING AGENT............................................................. 14
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.................................................... 14
SECTION 2.5 SECURITYHOLDER LISTS................................................................... 14
SECTION 2.6 TRANSFER AND EXCHANGE.................................................................. 14
SECTION 2.7 REPLACEMENT SECURITIES................................................................. 16
SECTION 2.8 OUTSTANDING SECURITIES................................................................. 16
SECTION 2.9 TEMPORARY SECURITIES................................................................... 17
SECTION 2.10 CANCELLATION........................................................................... 17
SECTION 2.11 DEFAULTED INTEREST..................................................................... 17
SECTION 2.12 CUSIP NUMBERS.......................................................................... 17
ARTICLE 3
REDEMPTION............................................................................. 17
SECTION 3.1 NOTICES TO TRUSTEE..................................................................... 17
SECTION 3.2 SELECTION OF SECURITIES TO BE REDEEMED................................................. 17
SECTION 3.3 NOTICE OF REDEMPTION................................................................... 18
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION......................................................... 18
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE............................................................ 18
SECTION 3.6 SECURITIES REDEEMED IN PART............................................................ 18
ARTICLE 4
COVENANTS.............................................................................. 19
SECTION 4.1 PAYMENT OF SECURITIES.................................................................. 19
SECTION 4.2 SEC REPORTS............................................................................ 19
SECTION 4.3 LIMITATION ON INDEBTEDNESS............................................................. 19
SECTION 4.4 LIMITATION ON RESTRICTED PAYMENTS...................................................... 21
SECTION 4.5 LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES............... 22
SECTION 4.6 LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK..................................... 23
SECTION 4.7 LIMITATION ON TRANSACTIONS WITH AFFILIATES............................................. 25
SECTION 4.8 CHANGE OF CONTROL...................................................................... 26
SECTION 4.9 COMPLIANCE CERTIFICATE................................................................. 27
SECTION 4.10 FURTHER INSTRUMENTS AND ACTS........................................................... 27
SECTION 4.11 LIMITATION ON LIENS.................................................................... 27
SECTION 4.12 LIMITATION ON SALE/LEASEBACK TRANSACTIONS.............................................. 27
SECTION 4.13 LIMITATION ON SALE OF SUBSIDIARY CAPITAL STOCK......................................... 27
ARTICLE 5
SUCCESSOR COMPANY...................................................................... 28
SECTION 5.1 WHEN THE COMPANY MAY MERGE OR TRANSFER ASSETS.......................................... 28
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
ARTICLE 6
<S> <C> <C>
DEFAULTS AND REMEDIES.................................................................. 28
SECTION 6.1 EVENTS OF DEFAULT...................................................................... 28
SECTION 6.2 ACCELERATION........................................................................... 30
SECTION 6.3 OTHER REMEDIES......................................................................... 30
SECTION 6.4 WAIVER OF PAST DEFAULTS................................................................ 30
SECTION 6.6 CONTROL BY MAJORITY.................................................................... 30
SECTION 6.6 LIMITATION ON SUITS.................................................................... 30
SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT................................................... 31
SECTION 6.8 COLLECTION SUIT BY TRUSTEE............................................................. 31
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM....................................................... 31
SECTION 6.10 PRIORITIES............................................................................. 31
SECTION 6.11 UNDERTAKING FOR COSTS.................................................................. 31
SECTION 6.12 WAIVER OF STAY OR EXTENSION LAWS....................................................... 32
ARTICLE 7
TRUSTEE................................................................................ 32
SECTION 7.1 DUTIES OF TRUSTEE...................................................................... 32
SECTION 7.2 RIGHTS OF TRUSTEE...................................................................... 33
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE........................................................... 33
SECTION 7.4 TRUSTEE'S DISCLAIMER................................................................... 33
SECTION 7.5 NOTICE OF DEFAULTS..................................................................... 33
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS.......................................................... 33
SECTION 7.7 COMPENSATION AND INDEMNITY............................................................. 33
SECTION 7.8 REPLACEMENT OF TRUSTEE................................................................. 34
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER............................................................ 35
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.......................................................... 35
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY...................................... 35
ARTICLE 8
DISCHARGE OF INDENTURE; DEFEASANCE..................................................... 35
SECTION 8.1 DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE....................................... 35
SECTION 8.2 CONDITIONS TO DEFEASANCE............................................................... 36
SECTION 8.3 APPLICATION OF TRUST MONEY............................................................. 37
SECTION 8.4 REPAYMENT TO COMPANY................................................................... 37
SECTION 8.5 INDEMNITY FOR GOVERNMENT OBLIGATIONS................................................... 37
SECTION 8.6 REINSTATEMENT.......................................................................... 37
ARTICLE 9
AMENDMENTS.............................................................................
SECTION 9.1 WITHOUT CONSENT OF HOLDERS............................................................. 37
SECTION 9.2 WITH CONSENT OF HOLDERS................................................................ 38
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.................................................... 38
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS AND WAIVERS.......................................... 38
SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES.................................................. 39
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS............................................................. 39
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
ARTICLE 10
<S> <C> <C>
MISCELLANEOUS.......................................................................... 39
SECTION 10.1 TRUST INDENTURE ACT CONTROLS........................................................... 39
SECTION 10.2 NOTICES................................................................................ 39
SECTION 10.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS............................................ 40
SECTION 10.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT..................................... 40
SECTION 10.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.......................................... 40
SECTION 10.6 WHEN SECURITIES DISREGARDED............................................................ 40
SECTION 10.7 RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR........................................... 40
SECTION 10.8 LEGAL HOLIDAYS......................................................................... 40
SECTION 10.9 GOVERNING LAW.......................................................................... 41
SECTION 10.10 NO RECOURSE AGAINST OTHERS............................................................. 41
SECTION 10.11 SUCCESSORS............................................................................. 41
SECTION 10.12 MULTIPLE ORIGINALS..................................................................... 41
SECTION 10.13 TABLE OF CONTENTS; HEADINGS............................................................ 41
SECTION 10.14 SEVERABILITY CLAUSE.................................................................... 41
Exhibit A -- Form of Security..........................................................
</TABLE>
iv
<PAGE>
INDENTURE dated as of June , 1996, between MICHAELS STORES, INC., a
Delaware corporation (the "Company"), and THE BANK OF NEW YORK, a New York
banking corporation (the "Trustee").
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Company's % Senior Notes Due
2006 (the "Securities"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS. "Additional Assets" means (i) any property or
assets (other than inventory in the ordinary course of business and other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Sections 4.6 and 4.7 only, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares),
property or other assets (each referred to for the purposes of this definition
as a "disposition") by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property, assets, inventory or Temporary Cash
Investments in the ordinary course of business, (iii) for purposes of Section
4.6 only, a disposition that constitutes a Restricted Payment permitted by
Section 4.4, (iv) a disposition of duplicative or excessive real property where
less than 75% of the consideration received is in the form of cash or Temporary
Cash Investments, which disposition occurs within one year of the acquisition
thereof and (v) any disposition of assets with an aggregate fair market value
(as determined in good faith by the Board of Directors) of less than $1 million.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Securities, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended); PROVIDED, HOWEVER, that "Attributable
Indebtedness" shall not include any such obligations to the extent they relate
to the lease of stores, warehouses, offices or distribution facilities,
including without limitation, the fixtures appertaining thereto, unless such
obligations are required to be recorded on the Company's balance sheet in
accordance with GAAP.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
1
<PAGE>
"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board or
equivalent governing body.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following events with
respect to the Company:
(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act), directly or indirectly, of more than 35% of the total
voting power of the Voting Stock of the Company and (B) the Permitted
Holders "beneficially own" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser percentage
of the total voting power of the Voting Stock of the Company than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors of the Company (for the purposes of this clause, such other person
shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other person "beneficially
owns" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, more than 35% of the voting power of the Voting Stock of such
parent corporation and the Permitted Holders "beneficially own" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in
the aggregate a lesser percentage of the voting power of the Voting Stock of
such parent corporation and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of 66 2/3% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approval) cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction or
a series of related transac-tions) of all, or substantially all, the assets
of the Company to any Person or group of Persons (other than to any Wholly
Owned Subsidiary of the Company); or
(iv) the merger or consolidation of the Company with or into another
corporation with the effect that either (A) immediately after such
transaction any person (as defined in clause (i) above) (other than a
Permitted Holder) shall have become the "beneficial owner" (as defined in
clause (i) above) of securities of the surviving corporation of such merger
or consolidation representing a majority of the voting power of the Voting
Stock of the surviving corporation or (B) the securities of the Company that
are outstanding immediately prior to such transaction and which represent
100% of the voting power of the Voting Stock of the Company are changed into
or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other
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consideration, (1) securities of the surviving corporation that represent
immediately after such transaction, at least a majority of the voting power
of the Voting Stock of the surviving corporation or (2) securities that
represent immediately after such transaction at least a majority of the
voting power of the Voting Stock of the corporation that owns, directly or
indirectly, 100% of the voting power of the Voting Stock of the surviving
corporation of that transaction.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; PROVIDED, HOWEVER, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Asset Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets
which are the subject of such Asset Disposition for such period, or increased by
an amount equal to the EBITDA (if negative) directly attributable thereto for
such period and Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness)
as if such Investment or acquisition occurred on the first day of such period
and (4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made any
Asset Disposition or any Investment that would have required an adjustment
pursuant to clause (2) or (3) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Disposition or Investment occurred on the first day of such period. For
purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost,
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(iii) capitalized interest, (iv) non-cash interest expense, (v) commissions,
discounts and other fees and charges with respect to letters of credit and
bankers' acceptance financing, (vi) interest actually paid by the Company or any
such Restricted Subsidiary pursuant to a Guarantee of Indebtedness or other
obligation of any other Person, (vii) net costs associated with Hedging
Obligations (including amortization of fees), (viii) Preferred Stock dividends
in respect of all Preferred Stock of the Company and its Subsidiaries held by
Persons other than the Company or a Wholly Owned Subsidiary and (ix) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust; PROVIDED, HOWEVER, that there shall be excluded therefrom
any such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries in accordance with GAAP; PROVIDED,
HOWEVER, that there shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained
in (iv) below the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to a
Restricted Subsidiary, to the limitations contained in clause (iii) below)
and (B) the Company's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period shall be included in determining
such Consolidated Net Income,
(ii) any net income (loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition,
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject
to the limitations contained in (iv) below the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed by such Restricted Subsidiary during such period
to the Company or another Restricted Subsidiary as a dividend (subject, in
the case of a dividend to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining
such Consolidated Net Income,
(iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person,
(v) any extraordinary gain or loss, and
(vi) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
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"Credit Agreement" means the First Amended and Restated Credit Agreement,
dated as of June 18, 1994, among the Company, the lenders parties thereto, and
NationsBank of Texas, N.A., as agent, as it may be amended, extended, renewed,
refinanced or replaced from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees and their
respective successors.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Securities.
"EBITDA" for any period means the sum of Consolidated Net Income for such
period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
items to the extent they represent an accrual of, or reserve for, cash
disbursements for any subsequent period), less all non-cash items increasing
such Consolidated Net Income, in each case for such period. Notwithstanding the
foregoing, the income tax expense, depreciation expense and amortization expense
of a Restricted Subsidiary of the Company shall be included in EBITDA only to
the extent (and in the same proportion) that the net income of such Subsidiary
was included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be distributable to
the Company by such Subsidiary as a dividend.
"Equity Offering" means an offering for cash of common stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary that is
organized and existing under the laws of any country or other jurisdiction other
than the United States of America, any State thereof or the District of Columbia
and substantially all the assets of which are located outside the United States
of America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in this Indenture shall be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); PROVIDED, HOWEVER that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
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"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a Security is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (to the extent paid or payable at the
time of determination) in respect of indebtedness of such Person for
borrowed money;
(ii) the principal of and premium (to the extent paid or payable at the
time of determination) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments;
(iii) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto);
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or completion of
such services;
(v) all Capitalized Lease Obligations and all Attributable Indebtedness
of such Person;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of the Company, any Preferred Stock of that
Subsidiary (but excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED, HOWEVER, that the amount of Indebtedness shall be the lesser of
(A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other Persons;
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and
(ix) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
"Indenture" means this Indenture as amended or supplemented from time to
time by one or more supplemental indentures entered into pursuant to the
applicable provisions hereof or otherwise in accordance with the terms hereof.
"Independent Financial Advisor" means any independent investment banking,
actuarial, appraisal, consulting or accounting firm experienced in the appraisal
or similar review of the applicable transaction or similar types of
transactions.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of
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such Person) or other extension of credit (including by way of Guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person. For purposes of
the definition of "Unrestricted Subsidiary" and Section 4.4, (i) "Investment"
shall include the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of any Subsidiary of
the Company at the time that such Subsidiary is designated an Unrestricted
Subsidiary; PROVIDED, HOWEVER, that upon a redesignation
of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to
continue to have a permanent "Investment" in an Unrestricted Subsidiary in an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time that such Subsidiary is so
redesignated a Restricted Subsidiary; and (ii) any property transferred to or
from an Unrestricted Subsidiary shall be valued at its fair market value at the
time of such transfer, in each case as determined in good faith by the Board of
Directors and evidenced by a resolution of such Board of Directors certified in
an Officers' Certificate to the Trustee.
"Investment Grade" means BBB- or higher by Standard & Poor's Ratings Group
and its successors and Baa3 or higher by Moody's Investors Service, Inc. and its
successors.
"Issue Date" means the date on which the Securities are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets that are the subject of such disposition or
received in any other non-cash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred, and all federal, state, provincial, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition and (v) in the case of an Asset Disposition by a
Foreign Restricted Subsidiary, any amount which, as a result of applicable law,
may not be legally paid as dividends, or distributed or otherwise paid or
repatriated to the Company or its Subsidiaries.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, any Vice Chairman, the Chief
Executive Officer, the Chief Financial Officer, the President, any Executive
Vice President, Vice President of Finance and Business Planning (or any such
other officer that performs similar duties), the Secretary or any General
Partner of the Company.
"Officers' Certificate" means a certificate signed by two Officers, one of
which is the Chairman of the Board, the Chief Executive Officer, the Chief
Financial Officer, the President, any Executive Vice President, Vice President
of Finance and Business Planning (or any such other officer that performs
similar duties) or any General Partner.
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"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Holders" means Sam Wyly, Charles J. Wyly, Jr., Evan A. Wyly,
trusts established by or for the benefit of any such Persons or any of their
lineal descendants, entities controlled by any such trusts, and their respective
Affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practice of the Company or such Restricted Subsidiary;
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (viii) Investments by the Company or
any of its Restricted Subsidiaries in one or more Unrestricted Subsidiaries in
an aggregate amount not to exceed $15 million; and (ix) advances to vendors in
the ordinary course of business in an aggregate principal amount at any one time
outstanding not to exceed $5 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other Liens
arising out of judgments or awards against such Person with respect to which
such Person shall then be proceeding with an appeal or other proceedings for
review and landlords' Liens; (c) Liens for property taxes not yet due or payable
or subject to penalties for non-payment or which are being contested in good
faith by appropriate proceedings; (d) Liens in favor of issuers of surety bonds
or letters of credit issued pursuant to the request of and for the account of
such Person in the ordinary course of its business; (e) minor survey exceptions,
minor encumbrances, easements or reservations of, or rights of others for,
licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning or other restrictions as to the use of
real properties or Liens incidental to the conduct of the business of such
Person or to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use in
the operation of the business of such Person; (f) Liens securing Hedging
Obligations so long as the related Indebtedness is, and is permitted to be under
this Indenture, secured by a Lien on the same property securing such Hedging
Obligations; (g) leases and subleases of real property which do not interfere
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries, and which are made on customary and usual terms
applicable to similar properties; (h) Liens existing as of the Issue Date and
Liens created by this Indenture; (i) Liens created solely for the purpose of
securing Purchase Money Debt Incurred after the Issue Date; PROVIDED, HOWEVER,
that (A) the aggregate principal amount of Indebtedness secured by such Liens
shall not exceed the lesser of cost or fair market value of the assets or
property so acquired or constructed, (B) the Indebtedness secured by such Liens
shall have otherwise been permitted to
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be issued under this Indenture and (C) such Liens shall not encumber any other
assets or property of the Company or any of its Restricted Subsidiaries and
shall attach to such assets or property within 90 days of the construction,
acquisition or improvement of such assets or property; (j) Liens on the assets
or property of a Restricted Subsidiary of the Company existing at the time such
Restricted Subsidiary became a Subsidiary of the Company and not incurred as a
result of (or in connection with or in anticipation of) such Restricted
Subsidiary becoming a Subsidiary of the Company; PROVIDED, HOWEVER, that (A) any
such Lien does not by its terms cover any property or assets after the time such
Restricted Subsidiary becomes a Subsidiary which were not covered immediately
prior to such time, (B) the Incurrence of the Indebtedness secured by such Lien
shall have otherwise been permitted to be Incurred under this Indenture, and (C)
such Liens do not extend to or cover any other property or assets of the Company
or any of its Restricted Subsidiaries; (k) Liens to secure Capitalized Lease
Obligations permitted to be Incurred under this Indenture; (l) Liens to secure
Indebtedness permitted to be Incurred under this Indenture which is recourse
solely to the assets securing such Indebtedness; PROVIDED THAT (i) the fair
market value, as determined by the Board of Directors in good faith, of the
assets subject to such Liens (determined at the time such Liens are granted)
does not exceed an amount equal to 125% of the amount of such Indebtedness and
(ii) the aggregate principal amount outstanding at any one time of all
Indebtedness secured by such Liens shall not exceed $10 million; and (m) Liens
extending, renewing or replacing in whole or in part a Lien permitted by this
Indenture; PROVIDED, HOWEVER, that (A) such Liens do not extend beyond the
property subject to the existing Lien and improvements and construction on such
property and (B) the Indebtedness secured by the Lien may not exceed the
Indebtedness secured at the time by the existing Lien;
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Prospectus" means the Prospectus dated June [ ], 1996, prepared in
connection with the issuance of the Securities.
"Public Market" means any time after (x) the common stock of the Company is
then registered with the SEC pursuant to Section 12(b) or 12(g) of the Exchange
Act and traded either on a national securities exchange or in the National
Association of Securities Dealers Automated Quotation System and (y) at least
20% of the total issued and outstanding Voting Stock of the Company has been
distributed by means of an effective registration statement under the Securities
Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the Issue Date or Incurred in
compliance with this Indenture (including Indebtedness of the Company that
refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any
Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
PROVIDED, HOWEVER, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the Stated Maturity of the Indebtedness being refinanced, (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is
Incurred in an aggregate principal amount (or if issued with original issue
discount, an aggregate issue price) that is equal to (or, to the extent of any
applicable premium in connection with a refinancing, greater than) or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of the Indebtedness
being refinanced; PROVIDED FURTHER, HOWEVER, that Refinancing Indebtedness shall
not
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include (x) Indebtedness of a Restricted Subsidiary that refinances Indebtedness
of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary
that refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary to
the businesses of the Company and the Restricted Subsidiaries on the applicable
date.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission, as from time to time
constituted, created under the Exchange Act, or if at any time after the
execution of this Indenture the SEC is not existing and performing the duties
now assigned to it under the TIA, then the body performing such duties at such
time.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Securities" has the meaning set forth in the second paragraph of this
Indenture.
"Senior Indebtedness" means all Indebtedness of the Company, including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Securities; PROVIDED, HOWEVER, that Senior Indebtedness
shall not include (1) any obligation of the Company to any Subsidiary, (2) any
liability for federal, state, local or other taxes owed or owing by the Company,
(3) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness or obligation of the Company
which is subordinate or junior in any respect to any other Indebtedness or
obligation of the Company, including any Subordinated Obligations, (5) any
obligations with respect to any Capital Stock, (6) Indebtedness which, when
Incurred and without respect to any election under Section 1111(b) of Title II
United States Code, is without recourse to the Company, or (7) any Indebtedness
Incurred in violation of this Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified-in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Securities pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person or (ii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign
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country recognized by the United States of America having capital, surplus and
undivided profits aggregating in excess of $250,000,000 (or the foreign currency
equivalent thereof) and whose long-term debt is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act), (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
or trust company meeting the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a Person (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America, any
State thereof or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group, and (v) investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors
Service, Inc., and (vi) investments in mutual funds whose investment guidelines
restrict such funds' investments to investments which are substantially similar
to those described in clauses (i) - (v) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. 77aaa-77bbbb) as in
effect on the date of this Indenture, except as provided in Section 9.03.
"Total Assets" means, as of any date, the Company's total consolidated
assets as of such date, as determined in accordance with GAAP.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform Commercial Code as in
effect from time to time.
"Unrestricted Subsidiary" means (i) initially, Aaron Brothers Holdings,
Inc., and Michaels of Canada, Inc., (ii) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below, and (iii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER,
that (i) either (A) the Subsidiary to be so designated has total consolidated
assets of $1,000 or less or (B) if such Subsidiary has consolidated assets
greater than $1,000, then such designation would be permitted under Section 4.4
and (ii) the holders of any permitted Indebtedness of such Subsidiary do not
have direct or indirect recourse against the Company or any Restricted
Subsidiary of the Company and neither the Company nor any Restricted Subsidiary
of the Company otherwise has any liability for any payment obligations in
respect of such Indebtedness except as permitted by Section 4.3(c). The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
clause (a) of Section 4.3 and (y) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock", with respect to a corporation, means all classes of Capital
Stock of such corporation then outstanding and normally entitled to vote in the
election of directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
SECTION 1.2. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
DEFINED IN
TERM SECTION
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
"Affiliate Transaction".............................................................................. 4.7
"Bankruptcy Law"..................................................................................... 6.1
"covenant defeasance option"......................................................................... 8.1(b)
"Custodian".......................................................................................... 6.1
"Event of Default.................................................................................... 6.1
"Global Securities".................................................................................. 2.1
"legal defeasance option"............................................................................ 8.1(b)
"Legal Holiday"...................................................................................... 10.8
"Notice of Default".................................................................................. 6.1
"Offer".............................................................................................. 4.6(b)
"Offer Amount"....................................................................................... 4.6(c)(2)
"Offer Period"....................................................................................... 4.6(c)(2)
"Participants"....................................................................................... 2.6
"Paying Agent"....................................................................................... 2.3
"Purchase Date"...................................................................................... 4.6(c)(1)
"Purchase Money Debt"................................................................................ 4.3(b)
"Registrar".......................................................................................... 2.3
"Restricted Payment"................................................................................. 4.4(a)
"Securities Register"................................................................................ 2.3
"Successor Company".................................................................................. 5.1
</TABLE>
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. This
Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
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SECTION 1.4. RULES OF CONSTRUCTION. Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to
it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i) the maximum
liquidation value of such Preferred Stock or (ii) the maximum mandatory
redemption or mandatory repurchase price with respect to such Preferred
Stock, whichever is greater; and
(9) all references to $, US$, dollars or United States dollars shall
refer to the lawful currency of the United States.
ARTICLE 2
THE SECURITIES
SECTION 2.1. FORM AND DATING. The Securities and the Trustee's certificate
of authentication shall be substantially in the form of Exhibit A, which is
hereby incorporated in and expressly made a part of this Indenture. The
Securities may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the Company). Each Security shall be dated the date of its authentication.
The terms of the Securities set forth in Exhibit A are part of the terms of this
Indenture.
(a) GLOBAL SECURITIES. The Securities shall be issued initially in the
form of one or more permanent Global Securities ("Global Securities") in
definitive, fully registered form without interest coupons in substantially the
form of Exhibit A, which shall be deposited on behalf of the purchasers of the
Securities represented thereby with the Trustee, at its principal corporate
trust office in New York City, as custodian for the Depositary, and registered
in the name of the Depositary or a nominee of the Depositary, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of the Global Securities may from time to time be
increased or decreased by adjustments made on the records of the Trustee and the
Depositary or its nominee in the limited circumstances hereinafter provided.
(b) CERTIFICATED SECURITIES. Except as provided in Section 2.6, owners of
beneficial interests in Global Securities will not be entitled to receive
physical delivery of certificated securities.
SECTION 2.2. EXECUTION AND AUTHENTICATION. An Officer of the Company shall
sign the Securities for the Company by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that office
at the time the Trustee authenticates the Security, the Security shall be valid
nevertheless.
A Security shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Security. The signature
shall be con-clusive evidence that the Security has been authenticated under
this Indenture.
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The Trustee shall authenticate and make available for delivery Securities
for original issue in an aggregate principal amount of $125,000,000, upon a
written order of the Company signed by an Officer of the Company. Such order
shall specify the amount of the Securities to be authenticated and the date on
which the original issue of Securities is to be authenticated. The aggregate
principal amount of Securities outstanding at any time may not exceed that
amount except as provided in Section 2.7.
The Trustee may appoint an authenticating agent acceptable to the Company to
authenticate the Securities, upon the consent of the Company to such
appointment. Unless limited by the terms of such appointment, an authenticating
agent may authenticate Securities whenever the Trustee may do so. Each reference
in this Indenture to authentication by the Trustee includes authentication by
such agent. An authenticating agent has the same rights as any Registrar, Paying
Agent or agent for service of notices and demands.
SECTION 2.3. REGISTRAR AND PAYING AGENT. The Company shall maintain an
office or agency where Securities may be presented for registration of transfer
or for exchange (the "Registrar") and an office or agency where Securities may
be presented for payment (the "Paying Agent"). The Registrar, acting on behalf
of and as agent for the Company, shall keep a register (the "Securities
Register") of the Securities and of their transfer and exchange. The Company may
have one or more co-registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.7. The
Company or any of its domestically incorporated Wholly Owned Subsidiaries may
act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying Agent in
connection with the Securities.
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to each due
date of the principal and interest on any Security, the Company shall deposit
with the Paying Agent a sum sufficient to pay such principal and interest when
so becoming due. The Company shall require each Paying Agent (other than the
Trustee) to agree in writing that the Paying Agent shall hold in trust for the
benefit of Securityholders or the Trustee all money held by the Paying Agent for
the payment of principal of or interest on the Securities and shall notify the
Trustee of any default by the Company in making any such payment. If the Company
or a Subsidiary acts as Paying Agent, it shall segregate the money held by it as
Paying Agent and hold it as a separate trust fund. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee and to account
for any funds disbursed by the Paying Agent. Upon complying with this Section,
the Paying Agent shall have no further liability for the money delivered to the
Trustee.
SECTION 2.5. SECURITYHOLDER LISTS. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee, in writing at least five
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Securityholders;
provided that as long as the Trustee is the Registrar, no such list need be
furnished.
SECTION 2.6. TRANSFER AND EXCHANGE. The Securities shall be issued in
registered form and shall be transferable only upon the surrender of a Security
for registration of transfer. When a Security is presented to the Registrar or a
co-registrar with a request to register a transfer, the Registrar and the
Trustee may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and the Registrar shall record in the
Securities Register the transfer as requested if the requirements of Section
8-401(1) of the Uniform Commercial Code are met, and thereupon one or more new
Securities in the same aggregate principal amount shall be issued to the
designated assignee or transferee and the old
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<PAGE>
Security will be returned to the Company. When Securities are presented to the
Registrar or a co-registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested, in the same manner, if the same requirements are met.
To permit registration of transfers and exchanges, the Company shall execute and
the Trustee shall authenticate Securities at the Registrar's or co-registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer or
exchange pursuant to this Section. The Company shall not be required to make and
the Registrar need not register transfers or exchanges of Securities selected
for redemption (except, in the case of Securities to be redeemed in part, the
portion thereof not to be redeemed) or any Securities for a period of 15 days
before a selection of Securities to be redeemed or 15 days before an interest
payment date.
Prior to the due presentation for registration of transfer of any Security,
the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar
may deem and treat the person in whose name a Security is registered as the
absolute owner of such Security for the purpose of receiving payment of
principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant to the terms of
this Indenture will evidence the same debt and will be entitled to the same
benefits under this Indenture as the Securities surrendered upon such transfer
or exchange.
With respect to Global Securities:
(1) Each Global Security authenticated under this Indenture shall be
registered in the name of the Depositary designated for such Global Security
or a nominee thereof and deposited with such Depositary or a nominee thereof
or custodian therefor, and each such Global Security shall constitute a
single Security for all purposes of this Indenture.
(2) A Global Security may not be transferred except as a whole by the
Depositary to a nominee of the Depositary or by a nominee of the Depositary
to the Depositary. A Global Security is exchangeable for certificated
Securities only if (i) the Depositary notifies the Company that it is
unwilling or unable to continue as a Depositary for such Global Security or
if at any time the Depositary ceases to be a clearing agency registered
under the Exchange Act, (ii) the Company executes and delivers to the
Trustee a notice that such Global Security shall be so transferable,
registrable, and exchangeable, and such transfers shall be registrable or
(iii) there shall have occurred and be continuing an Event of Default or an
event which, with the giving of notice or lapse of time or both, would
constitute an Event of Default with respect to the Securities represented by
such Global Security. Any Global Security that is exchangeable for
certificated Securities pursuant to the preceding sentence will be
transferred to, and registered and exchanged for, certificated Securities in
authorized denominations, without legends applicable to a Global Security,
and registered in such names as the Depositary holding such Global Security
may direct. Subject to the foregoing, a Global Security is not exchangeable,
except for a Global Security of like denomination to be registered in the
name of the Depositary or its nominee. In the event that a Global Security
becomes exchangeable for certificated Securities, (i) certificated
Securities will be issued only in fully registered form in denominations of
$1,000 or integral multiples thereof, (ii) payment of principal, any
repurchase price, and interest on the certificated Securities will be
payable, and the transfer of the certificated Securities will be
registrable, at the office or agency of the Company maintained for such
purposes, and (iii) no service charge will be made for any registration or
transfer or exchange of the certificated Securities, although the Company
may require payment of a sum sufficient to cover any tax or governmental
charge imposed in connection therewith.
(3) Securities issued in exchange for a Global Security or any portion
thereof shall have an aggregate principal amount equal to that of such
Global Security or portion thereof to be so exchanged, shall be registered
in such names and be in such authorized denominations as the Depositary
shall designate and shall bear the applicable legends provided for herein.
Any Global Security to be exchanged in whole shall be surrendered by the
Depositary to the Trustee. With respect to any Global
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<PAGE>
Security to be exchanged in part, either such Global Security shall be so
surrendered for exchange or, if the Trustee is acting as custodian for the
Depositary or its nominee with respect to such Global Security, the
principal amount thereof shall be reduced, by an amount equal to the portion
thereof to be so exchanged, by means of an appropriate adjustment made on
the records of the Trustee. Upon any such surrender or adjustment, the
Trustee shall authenticate and deliver the Security issuable on such
exchange to or upon the order of the Depositary or an authorized
representative thereof.
(4) Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any
portion mutilated thereof, whether pursuant to this Section, Section 2.07 or
2.09 or otherwise, shall be authenticated and delivered in the form of, and
shall be, a Global Security, unless such Security is registered in the name
of a Person other than the Depositary for such Global Security or a nominee
thereof.
Members of, or participants in, the Depositary ("Participants") shall have
no rights under this Indenture with respect to any Global Security held on their
behalf by the Depositary or by the Trustee as the custodian of the Depositary or
under such Global Security, and the Depositary may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Security for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Trustee or any agent of the
Company or the Trustee from giving effect to any written certification, proxy or
other authorization furnished by the Depositary or impair, as between the
Depositary and its Participants, the operation of customary practices of such
Depositary governing the exercise of the rights of a holder of a beneficial
interest in any Global Security.
SECTION 2.7. REPLACEMENT SECURITIES. If a mutilated Security is
surrendered to the Trustee or Registrar or if the Holder of a Security claims
that the Security has been lost, destroyed or wrongfully taken, the Company
shall issue and the Trustee shall authenticate a replacement Security if the
requirements of Section 8-405 of the Uniform Commercial Code are met and the
Holder satisfies any other reasonable requirements of the Trustee and the
Company. Such Holder shall furnish an indemnity bond sufficient in the judgment
of the Company and the Trustee to protect the Company, the Trustee, the Paying
Agent, the Registrar and any co-registrar from any loss which any of them may
suffer if a security is replaced. The Company and the Trustee may charge the
Holder for their expenses in replacing a Security.
Every replacement Security is an obligation of the Company under this
Indenture.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.8. OUTSTANDING SECURITIES. Securities outstanding at any time
are all Securities authenticated by the Trustee except for those canceled by it,
those delivered to it for cancellation and those described in this Section as
not outstanding. A Security does not cease to be outstanding because the Company
or an Affiliate of the Company holds the security.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a redemption date or maturity date or, pursuant to Section 8.1(a),
within 91 days prior thereto, money sufficient to pay all principal and interest
payable on that redemption or maturity date with respect to the Securities (or
portions thereof) to be redeemed or maturing, as the case may be, then on and
after such date such Securities (or portions thereof) cease to be outstanding
and on and after such redemption or maturity date interest on them ceases to
accrue.
SECTION 2.9. TEMPORARY SECURITIES. Until definitive Securities are ready
for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities and
deliver them in exchange for temporary securities.
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SECTION 2.10. CANCELLATION. The Company at any time may deliver Securities
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Securities surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel all
Securities surrendered for registration of transfer, exchange, payment or
cancellation and deliver such canceled Securities to the Company. The Trustee
shall from time to time provide the Company a list of all Securities that have
been canceled as requested by the Company. The Company may not issue new
Securities to replace Securities it has redeemed, paid or delivered to the
Trustee for cancellation.
SECTION 2.11. DEFAULTED INTEREST. If the Company defaults in a payment of
interest on the Securities, the Company shall pay defaulted interest (plus
interest on such defaulted interest to the extent lawful) in any lawful manner.
The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
SECTION 2.12. CUSIP NUMBERS. The Company in issuing the Securities may use
"CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use
"CUSIP" numbers in notices of redemption as a convenience to Holders; provided
that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers. The Company will
promptly notify the Trustee of any change in the CUSIP numbers.
ARTICLE 3
REDEMPTION
SECTION 3.1. NOTICES TO TRUSTEE. If the Company elects to redeem
Securities pursuant to paragraph 5 of the Securities, they shall notify the
Trustee in writing of the redemption date, the principal amount of Securities to
be redeemed and the paragraph of the Securities pursuant to which the redemption
will occur.
The Company shall give each notice to the Trustee provided for in this
Section at least 45 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate from the Company to the effect that such redemption will comply with
the provisions herein.
SECTION 3.2. SELECTION OF SECURITIES TO BE REDEEMED. If fewer than all the
Securities are to be redeemed, the Trustee shall select the Securities to be
redeemed pro rata or by lot or by a method that complies with applicable legal
and securities exchange requirements, if any, and that the Trustee considers
fair and appropriate and in accordance with methods generally used at the time
of selection by fiduciaries in similar circumstances. The Trustee shall make the
selection from outstanding Securities not previously called for redemption. The
Trustee may select for redemption portions of the principal of Securities that
have denominations larger than $1,000. Secur-ities and portions of them the
Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000.
Provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption. The Trustee shall notify
the Company promptly of the Securities or portions of Securities to be redeemed.
In the event the Company is required to make an offer to redeem Securities
pursuant to Sections 4.6 or 4.8 and the amount available for such offer is not
evenly divisible by $1,000, the Trustee shall promptly refund to the Company any
remaining funds, which in no event will exceed $1,000.
SECTION 3.3. NOTICE OF REDEMPTION. At least 30 days but not more than 60
days before a date for redemption of securities, the Company shall mail a notice
of redemption by first-class mail to the registered address appearing in the
Security Register of each Holder of Securities to be redeemed.
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The notice shall identify the Securities (including CUSIP numbers, if any)
to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed, the
identification and principal amounts of the particular Securities to be
redeemed;
(6) that, unless the Company defaults in making such redemption payment,
interest on Securities (or portion thereof) called for redemption ceases to
accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to which the Securities
called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or accuracy of
the CUSIP number, if any, listed in such notice or printed on the
Securities.
At the Company's request, the Trustee shall give the notice of redemption in
the Company's name and at the Company's expense. In such event, the Company
shall provide the Trustee with the information required by this Section.
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is
mailed, Securities called for redemption become due and payable on the
redemption date and at the redemption price stated in the notice. Upon surrender
to the Paying Agent, such Securities shall be paid at the redemption price
stated in the notice, plus accrued interest to the redemption date. Such notice
if mailed in the manner herein provided shall be conclusively presumed to have
been given, whether or not the Holder receives such notice. Failure to give
notice or any defect in the notice to any Holder shall not affect the validity
of the notice to any other Holder.
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE. Prior to 11:00 a.m. (New York
City time) on the redemption date, the Company shall deposit with the Trustee or
Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall
segregate and hold in trust) money sufficient to pay the redemption price of and
accrued interest (if any) on all Securities or portions thereof to be redeemed
on that date other than Securities or portions of Securities called for
redemption which have been delivered by the Company to the Trustee for
cancellation.
SECTION 3.6. SECURITIES REDEEMED IN PART. Upon surrender of a Security
that is redeemed in part (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), the Company shall execute, and the Trustee shall
authenticate and deliver to the Holder of such Security without service charge,
a new Security or Securities of any authorized denomination as requested by such
Holder, in aggregate principal amount equal to and in exchange for the
unredeemed portion of the principal of the Security so surrendered, except that
if a Global Security is so surrendered, the Company shall execute, and the
Trustee shall authenticate and deliver to the Depositary for such Global
Security, without service charge, a new Global Security in denomination equal to
and in exchange for the unredeemed portion of the principal of the Global
Security so surrendered.
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ARTICLE 4
COVENANTS
SECTION 4.1. PAYMENT OF SECURITIES. The Company shall promptly pay the
principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due.
The Company shall pay interest on overdue principal at the rate specified
therefor in the Securities, and it shall pay interest on overdue installments of
interest at the same rate to the extent lawful.
SECTION 4.2. SEC REPORTS. The Company shall file with the Trustee and
provide Securityholders, as their names appear in the Security Register, within
15 days after it files them with the SEC, copies of the annual reports and the
information, documents and other reports which it is required to file with the
SEC pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that
the Company may not be required to be or remain subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
continue to file with the SEC and provide the Trustee and Securityholders with
the annual reports and the information, documents and other reports which are
specified in Sections 13 and 15(d) of the Exchange Act. The Company also shall
comply with the other provisions of TIA 314(a).
Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 4.3. LIMITATION ON INDEBTEDNESS. (a) The Company will not Incur,
and will not permit any Restricted Subsidiary to Incur, any Indebtedness;
PROVIDED, HOWEVER, that the Company (but not any Restricted Subsidiary other
than a Foreign Restricted Subsidiary) may Incur Indebtedness if on the date
thereof the Consolidated Coverage Ratio would be equal to or greater than 2.0 to
1.0 if such Indebtedness is Incurred prior to June , 1998 or 2.5 to 1.0 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding Section 4.3(a), the Company and its Restricted
Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness and letters of credit (with letters of credit being
deemed to have a principal amount equal to the maximum face amount
thereunder) of the Company or any Restricted Subsidiary under the Credit
Agreement and any Refinancing Indebtedness with respect thereto in an
aggregate principal amount outstanding at any time not to exceed the greater
of (x) an amount equal to 50% of the book value of the inventory of the
Company and its Restricted Subsidiaries as of any date of Incurrence
calculated on a consolidated basis in accordance with GAAP and (y) $100
million;
(ii) Indebtedness of the Company owing to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by
the Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of any such Indebtedness (except
to the Company or a Wholly Owned Subsidiary) will be deemed, in each case,
to constitute the Incurrence of such Indebtedness by the issuer thereof;
(iii) Indebtedness represented by the Securities and any Guarantees of
the Securities by any of the Company's Subsidiaries, any Indebtedness of the
Company or any Restricted Subsidiary (other than the Indebtedness described
in Sections 4.3(b)(i)-(ii) above) outstanding on the Issue Date and any
Refinancing Indebtedness Incurred in respect of any Indebtedness described
in Section 4.3(b)(iii) or Section 4.3(a);
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(iv) (A) Indebtedness of a Restricted Subsidiary outstanding on or prior
to the date on which such Restricted Subsidiary was acquired by the Company
or a Restricted Subsidiary (other than Indebtedness Incurred in connection
with, or in contemplation of, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Subsidiary or was otherwise acquired by the Company or a Restricted
Subsidiary); PROVIDED, HOWEVER, that at the time such Restricted Subsidiary
is acquired by the Company or a Restricted Subsidiary, the Company would
have been able to Incur $1.00 of additional Indebtedness pursuant to Section
4.3(a) after giving effect to the Incurrence of such Indebtedness pursuant
to this Section 4.3(b)(iv) and such transaction or series of related
transactions and (B) Refinancing Indebtedness Incurred by a Restricted
Subsidiary in respect of Indebtedness Incurred by such Restricted Subsidiary
pursuant to this Section 4.3(b)(iv);
(v) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by the
Company or any Restricted Subsidiary in the ordinary course of its business
and which do not secure other Indebtedness and (B) under Currency Agreements
and Interest Rate Agreements Incurred which, at the time of Incurrence, is
in the ordinary course of business; PROVIDED, HOWEVER, that, in the case of
Currency Agreements and Interest Rate Agreements, such Currency Agreements
and Interest Rate Agreements do not increase the Indebtedness of the Company
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder;
(vi) Indebtedness (A) represented by Guarantees by the Company of
Indebtedness otherwise permitted to be Incurred pursuant to this Section 4.3
and (B) represented by Guarantees by a Restricted Subsidiary of Indebtedness
of the Company or another Restricted Subsidiary otherwise permitted to be
Incurred pursuant to this Section 4.3; PROVIDED, HOWEVER, that in the case
of this clause (B), if a Restricted Subsidiary Guarantees any such
Indebtedness, such Restricted Subsidiary must execute and deliver to the
Trustee a supplemental indenture containing provisions substantially in the
form of Exhibit B hereto providing for the Guarantee on a senior basis of
the Securities.
(vii) Indebtedness of the Company or any Restricted Subsidiary
represented by Capitalized Lease Obligations, mortgage financings or
purchase money obligations, in each case Incurred for the purpose of
financing or refinancing all or any part of the purchase price or cost of
construction, repairs, renovation, remodeling, expansion or other
improvement of property, plant and equipment, including services and
equipment supporting such items, used in the Company's or any Restricted
Subsidiary's business or a Related Business (collectively, "Purchase Money
Debt") in an aggregate principal amount outstanding not to exceed 10% of
Total Assets at the time of any Incurrence thereof;
(viii) Indebtedness of the Company represented by Capitalized Lease
Obligations Incurred from time to time for point-of-sale equipment and store
systems, including services and equipment supporting such equipment and
systems, with the aggregate capitalized amount of such obligation determined
in accordance with GAAP outstanding at any one time not to exceed $32
million; and
(ix) other Indebtedness of the Company or any Restricted Subsidiary in
an aggregate principal amount outstanding at any time not to exceed $10
million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing Section 4.3(b) if the proceeds thereof
are used, directly or indirectly, to Refinance any Subordinated Obligations
unless such new Indebtedness shall be subordinated to the Securities to at least
the same extent as such Subordinated Obligations being Refinanced. In addition,
notwithstanding any other provision of this Section 4.3, the Company will not,
and will not permit any Restricted Subsidiary to, Incur any Guarantee of
Indebtedness of any Unrestricted Subsidiary other than Guarantees by the Company
of Indebtedness of Unrestricted Subsidiaries outstanding or available pursuant
to written agreements existing on the Issue Date (as such agreements may be
renewed, modified or extended without any increase in the maximum principal
amount).
(d) For purposes of determining the outstanding principal amount of any
particular Indebtedness Incurred pursuant to this Section 4.3, (1) Indebtedness
Incurred pursuant to the Credit Agreement prior to
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or on the date of this Indenture shall be treated as Incurred pursuant to
Section 4.3(b)(i), (2) Indebtedness permitted by this Section 4.3 need not be
permitted solely by reference to one provision permitting such Indebtedness but
may be divided and classified in more than one type and permitted in part by one
such provision and in part by one or more other provisions of this Section 4.3
permitting such Indebtedness and (3) in the event that Indebtedness or any
portion thereof meets the criteria of more than one of the types of Indebtedness
described in this Section 4.3, the Company, in its sole discretion, shall
classify such Indebtedness or any portion thereof and only be required to
include the amount and type of such Indebtedness in one of such provisions of
this Section 4.3.
SECTION 4.4. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly, (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including, without duplication, any payment in connection with
any merger or consolidation involving the Company), except (1) dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to purchase such Capital Stock,
(2) a dividend of shares (or rights or warrants to purchase shares) of the
Capital Stock of Aaron Brothers Holdings, Inc. (or any successor) or any of its
Subsidiaries at any time when it is an Unrestricted Subsidiary and (3) dividends
or distributions payable to the Company or another Restricted Subsidiary (and,
if such Restricted Subsidiary making such dividend or distribution is not wholly
owned, to its other shareholders on a pro rata basis), (ii) purchase, redeem,
retire or otherwise acquire for value any Capital Stock of the Company held by
Persons other than the Company or another Restricted Subsidiary, (iii) purchase,
repurchase, redeem, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of such purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement, Investment or payment being herein referred to as a
"Restricted Payment") if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment:
(1) a Default or Event of Default will have occurred and be continuing
(or would result therefrom);
(2) the Company could not Incur at least $1.00 of additional
Indebtedness under Section 4.3(a); or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors of the Company, whose
determination will be evidenced by a resolution of such Board of Directors
certified in an Officers' Certificate to the Trustee) declared or made
subsequent to the Issue Date would exceed the sum of:
(A) either (1) 50% of the Consolidated Net Income if the Securities
are rated less than Investment Grade or (2) 75% of Consolidated Net
Income if the Securities are rated Investment Grade, in each case with
respect to the period (treated as one accounting period) from the Issue
Date to the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income will be a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of Capital Stock (other than Disqualified Stock) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Restricted Subsidiary) subsequent to the
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Issue Date of any Indebtedness of the Company convertible or exchangeable
for Capital Stock (other than Disqualified Stock) of the Company (less
the amount of any cash or other property distributed by the Company upon
such conversion or exchange);
(D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) payments of dividends,
repayments of the principal of loans or advances or other transfers of
assets to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries or (ii) the designation or redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided
in the definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was included in the calculation of the amount of Restricted
Payments; and
(E) $5 million.
(b) The provisions of Section 4.4(a) will not prohibit:
(i) any purchase, redemption, defeasance or other acquisition of Capital
Stock of the Company or Subordinated Obligations made by exchange for, or
out of the net proceeds of the substantially concurrent sale of, Capital
Stock of the Company (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary); PROVIDED, HOWEVER, that (A) such
purchase, redemption, defeasance or other acquisition will be excluded in
the calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale will be excluded from Section 4.4(a)(3)(B);
(ii) any purchase, redemption, defeasance or other acquisition of
Subordinated Obligations made by exchange for, or out of the net proceeds of
the substantially concurrent sale of, Subordinated Obligations of the
Company; PROVIDED, HOWEVER, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount of the Subordinated
Obligations being so redeemed, purchased, defeased, acquired or retired for
value (plus the amount of any premium required to be paid under the terms of
the instrument governing the Subordinated Obligations being so redeemed,
purchased, defeased, acquired or retired), (B) such new Indebtedness is
subordinated to the Securities at least to the same extent as such
Subordinated Obligations so purchased, exchanged, redeemed, purchased,
defeased, acquired or retired for value, (C) such new Indebtedness has a
final scheduled maturity date later than the final scheduled maturity date
of the Securities and (D) such new Indebtedness has an Average Life equal to
or greater than the Average Life of the Securities; PROVIDED FURTHER,
HOWEVER, that such purchase, redemption, defeasance or other acquisition
will be excluded in the calculation of the amount of Restricted Payments;
(iii) any purchase, redemption, defeasance or other acquisition of
Subordinated Obligations (1) from Net Available Cash to the extent permitted
by Section 4.6; PROVIDED, HOWEVER, that such purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments, or (2)
pursuant to an offer to purchase which is then required to be made upon a
change of control of the Company pursuant to the terms of the instrument
governing such Subordinated Obligation, but only if the Company has complied
with its obligations under Section 4.8; PROVIDED, HOWEVER, that such
purchase will be included in the calculation of the amount of Restricted
Payments; or
(iv) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with
Section 4.4(a); PROVIDED, HOWEVER, that the amount of such dividend will be
included in the calculation of the amount of Restricted Payments.
SECTION 4.5. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to
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(i) pay dividends or make any other distributions on its Capital Stock or pay
any Indebtedness or other obligation owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company or any Restricted Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date;
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company or a Restricted Subsidiary (other
than Indebtedness Incurred in connection with, or in contemplation of, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Subsidiary or was acquired by the Company or
a Restricted Subsidiary) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement effecting a
refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (1) or (2) of this Section 4.5 or contained in any amendment to an
agreement referred to in clause (1) or (2) of this Section 4.5; PROVIDED,
HOWEVER, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are no less favorable to the
Securityholders than the encumbrances and restrictions contained in such
agreements as determined in good faith by the Company and evidenced by an
Officers' Certificate;
(4) in the case of clause (iii), any encumbrance or restriction (A) that
restricts in a customary manner the subletting, assignment or transfer of
any property or asset that is subject to a lease, license or similar
contract, (B) by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or
any Restricted Subsidiary not otherwise prohibited by this Indenture, (C)
arising or agreed to in the ordinary course of business and that does not,
individually or in the aggregate, detract from the value of property or
assets of the Company or any Restricted Subsidiary in any manner material to
the Company or such Restricted Subsidiary or (D) contained in security
agreements securing Indebtedness of a Restricted Subsidiary to the extent
such encumbrance or restrictions restrict the transfer of the property
subject to such security agreements;
(5) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(6) encumbrances or restrictions contained in any financing agreement of
a Foreign Restricted Subsidiary or arising or existing by reason of
applicable law, including any legal limitations restricting the ability of
Foreign Restricted Subsidiaries to pay as dividends, or distribute or
otherwise pay or repatriate funds to the Company or its Subsidiaries.
SECTION 4.6. LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Board of Directors of the
Company (including as to the value of all non-cash consideration), of the shares
and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Temporary Cash Investments and (iii) an amount equal to
100% of the Net Available Cash from such Asset Disposition is applied by the
Company or such Restricted Subsidiary, as the case may be (A) FIRST, to the
extent the Company or any Restricted Subsidiary, as the case may be, elects (or
is required by the terms of any Senior Indebtedness), to prepay, repay or
purchase Senior Indebtedness or Indebtedness (other than Disqualified Stock) of
a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within 180 days from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash; (B)
SECOND, to the extent of the balance of Net Available Cash after application in
accordance with clause (A), to the extent the Company or such Restricted
Subsidiary, as the case may be, elects, to the investment by the Company or any
Restricted Subsidiary in Additional Assets within one year from the later of the
date of such Asset Disposition or the receipt of
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such Net Available Cash; (C) THIRD, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A) and (B), to make
an Offer (as defined below) to purchase Securities pursuant to and subject to
the conditions set forth in Section 4.6(b) within 45 days after the later of the
application of Net Available Cash in accordance with clauses (A) and (B) and the
date that is one year from the receipt of such Net Available Cash; and (D)
FOURTH, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), to (x) the acquisition
by the Company or any Wholly Owned Subsidiary of Additional Assets, (y) the
prepayment, repayment, purchase or other acquisition of Indebtedness of the
Company (other than Indebtedness owed to an Affiliate of the Company and other
than Disqualified Stock of the Company) or Indebtedness of any Restricted
Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the
Company) or (z) to general corporate purposes (other than to the payment of
dividends or distributions in respect of, or repurchases of, Capital Stock), in
each case within 45 days after the later of one year from the receipt of such
Net Available Cash and the date the Offer described in paragraph (b) below is
consummated; PROVIDED, HOWEVER, that in connection with any prepayment,
repayment, purchase or other acquisition of Indebtedness pursuant to clause (A),
(C) or (D) above, the Company or such Restricted Subsidiary will, to the extent
such Indebtedness is not revolving Indebtedness, retire such Indebtedness and,
subject to clause (i) of Section 4.3(b), will cause any related loan commitment
or availability (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased.
For the purposes of this Section, the following are deemed to be cash: (x)
the assumption by the transferee of Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are promptly converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Securities pursuant to Section 4.6(a)(iii)(C), the Company will be required to
purchase Securities tendered pursuant to an offer by the Company for the
Securities (the "Offer") at a purchase price of 100% of their principal amount
plus accrued interest to the date of purchase in accordance with the procedures
(including prorating in the event of oversubscription) set forth in Section
4.6(c). If the aggregate purchase price of Securities tendered pursuant to the
Offer is less than the Net Available Cash allotted to the purchase of the
Securities, the Company will apply the remaining Net Available Cash in
accordance with Section 4.6(a)(iii)(D) above. The Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this Section exceeds
$5,000,000. The Company shall not be required to make an Offer for Securities
pursuant to this Section if the Net Available Cash available therefor (after
application of the proceeds as provided in clauses (A) and (B)) are less than
$10,000,000 for any particular Asset Disposition (which lesser amounts shall be
carried forward for purposes of determining whether an Offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
(c) (1) Promptly, and in any event within 30 days after the Company becomes
obligated to make an Offer, the Company shall be obligated to deliver to the
Trustee and send, by first-class mail to each Holder, at the address appearing
in the Security Register, a written notice stating that the Holder may elect to
have his Securities purchased by the Company either in whole or in part (subject
to prorationing as hereinafter described in the event the Offer is
oversubscribed) in integral multiples of $1,000 of principal amount, at the
applicable purchase price. The notice shall specify a purchase date not less
than 30 days nor more than 60 days after the date of such notice (the "Purchase
Date") and shall contain (i) the most recently filed Annual Report on Form 10-K
(including audited consolidated financial statements) of the Company, the most
recent subsequently filed Quarterly Report on Form 10-Q of the Company and any
Current Report on Form 8-K of any the Company filed subsequent to such Quarterly
Report, other than Current Reports describing Asset Dispositions otherwise
described in the offering materials (or corresponding successor reports), (ii) a
description of material developments in the Company's business subsequent to the
date of the
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latest of such Reports, and (iii) if material, appropriate pro forma financial
information and all instructions and materials necessary to tender Securities
pursuant to the Offer, together with the information contained in clause (3).
(2) Not later than the date upon which written notice of an Offer is
delivered to the Trustee as provided below, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the amount of the Offer (the
"Offer Amount"), (ii) the allocation of the Net Available Cash from the
Asset Dispositions pursuant to which such Offer is being made and (iii) the
compliance of such allocation with the provisions of Section 4.6(a). Upon
the expiration of the period for which the Offer remains open (the "Offer
Period"), the Company shall deliver to the Trustee for cancellation the
Securities or portions thereof which have been properly tendered to and are
to be accepted by the Company. Not later than 11:00 a.m. (New York City
time) on the Purchase Date, the Company shall irrevocably deposit with the
Trustee or with a paying agent (or, if the Company is acting as Paying
Agent, segregate and hold in trust) an amount in cash sufficient to pay the
Offer Amount for all Securities properly tendered to and accepted by the
Company. The Trustee shall, on the Purchase Date, mail or deliver payment to
each tendering Holder in the amount of the purchase price.
(3) Holders electing to have a Security purchased will be required to
surrender the Security, together with all necessary endorsements and other
appropriate materials duly completed, to the Company at the address
specified in the notice at least three Business Days prior to the Purchase
Date. Holders will be entitled to withdraw their election in whole or in
part if the Trustee or the Company receives not later than one Business Day
prior to the Purchase Date, a facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Security (which shall be
$1,000 or an integral multiple thereof) which was delivered for purchase by
the Holder, the aggregate principal amount of such Security (if any) that
remains subject to the original notice of the Offer and that has been or
will be delivered for purchase by the Company and a statement that such
Holder is withdrawing his election to have such Security purchased. If at
the expiration of the Offer Period the aggregate principal amount of
Securities surrendered by Holders exceeds the Offer Amount, the Company
shall select the Securities to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only
securities in denominations of $1,000, or integral multiples thereof, shall
be purchased). Holders whose Securities are purchased only in part will be
issued new Securities equal in principal amount to the unpurchased portion
of the Securities surrendered.
(4) A Security shall be deemed to have been accepted for purchase at the
time the Trustee, directly or through an agent, mails or delivers payment
therefor to the surrendering Holder.
(d) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section by virtue thereof.
SECTION 4.7. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into any agreement or conduct any transaction or series of
related transactions (including the purchase, sale, lease or exchange of any
property, or rendering of any service) with any Affiliate of the Company (an
"Affiliate Transaction") unless (i) the terms of such transaction or agreement
are no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate; (ii) in the
event such Affiliate Transaction involves an aggregate amount in excess of
$1,000,000, the terms of such transaction or agreement shall have been approved
by a majority of the members of the Board of Directors having no personal stake
in such Affiliate Transaction (and such majority determines that such Affiliate
Transaction satisfies the criteria in clause (i) above) and (iii) in the event
such Affiliate Transaction involves an aggregate amount in excess of $5,000,000,
the Company has
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received a written opinion from a nationally recognized Independent Financial
Advisor that such Affiliate Transaction is either fair to the Company from a
financial point of view or is on terms no less favorable to the Company than
could be obtained in an arm's length transaction from a Person who is not an
Affiliate.
(b) The foregoing provisions of Section 4.7(a) shall not apply to (i) any
Restricted Payment permitted to be made pursuant to Section 4.4, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors or the
payment of fees and indemnities to directors of the Company and its Restricted
Subsidiaries in the ordinary course of business, (iii) loans or advances to
employees in the ordinary course of business, (iv) any transaction between the
Company and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries, (v)
transactions pursuant to written agreements in existence on the Issue Date or
(vi) any transaction between the Company or any Wholly Owned Subsidiary, on the
one hand, and a Restricted Subsidiary, on the other hand, in the ordinary course
of business on terms that are customary in the industry or consistent with past
practice.
SECTION 4.8. CHANGE OF CONTROL. (a) Upon a Change of Control, each Holder
shall have the right to require that the Company repurchase all or any part of
such Holder's Securities at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the related interest payment date), in
accordance with the terms contemplated in Section 4.8(b).
(b) Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Securities at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase (subject to
the right of Holders of record on a record date to receive interest on the
relevant interest payment date);
(2) the circumstances and relevant facts and pro forma financial
information regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with this
Section, that a Holder must follow in order to have its Securities
purchased.
(c) Holders electing to have a Security purchased will be required to
surrender the Security, together with all necessary endorsements and other
appropriate materials duly completed, to the Company at the address specified in
the notice at least three Business Days prior to the purchase date. Holders will
be entitled to withdraw their election if the Trustee or the Company receives
not later than one Business Day prior to the purchase date, a facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Security which was delivered for purchase by the Holder as to
which such notice of withdrawal is being submitted and a statement that such
Holder is withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the Company under this
Section shall be delivered to the Trustee for cancellation, and the Company
shall pay the purchase price plus accrued and unpaid interest, if any, to the
Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section by virtue thereof.
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(f) Notwithstanding the occurrence of a Change of Control, the Company shall
not be obligated to repurchase the Securities or otherwise comply with this
Section if the Company has irrevocably elected to redeem all the Securities in
accordance with Article Three; PROVIDED that the Company does not default in its
redemption obligations pursuant to such election.
SECTION 4.9. COMPLIANCE CERTIFICATE. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate, one of the signers of which shall be the principal
executive, financial or accounting officer of the Company, stating that in the
course of the performance by the signers of their duties as Officers of the
Company they would normally have knowledge of any Default and whether or not the
signers know of any Default that occurred during such period. If they do, the
certificate shall describe the Default, its status and what action the Company
is taking or proposes to take with respect thereto. The Company also shall
comply with TIA Section 314(a)(4).
SECTION 4.10. FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee,
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
SECTION 4.11. LIMITATION ON LIENS. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or permit to
exist any Lien on any of its property or assets (including Capital Stock),
whether owned on the Issue Date or thereafter acquired, securing any obligation
other than Permitted Liens, unless contemporaneously therewith effective
provision is made to secure the Securities equally and ratably with (or on a
senior basis to, in the case of Subordinated Obligations) such obligation for so
long as such obligation is so secured.
SECTION 4.12. LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company will
not, and will not permit any Restricted Subsidiary to, enter into any
Sale/Leaseback Transaction with respect to any property unless (i) the Company
or such Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an
amount equal to the Attributable Indebtedness with respect to such
Sale/Leaseback Transaction pursuant to Section 4.3 (including without limitation
Section 4.3(b)(vi)) and (B) create a Lien, if any, on such property securing
such Attributable Indebtedness without equally and ratably securing the
Securities pursuant to Section 4.11, (ii) the net cash proceeds received by the
Company or any Restricted Subsidiary in connection with such Sale/Leaseback
Transaction are at least equal to the fair value (as determined by the Board of
Directors of the Company and certified in an Officer's Certificate to the
Trustee) of such property and (iii) the transfer of such property is permitted
by, and the Company or such Restricted Subsidiary applies the proceeds of such
transaction in compliance with, Section 4.6.
SECTION 4.13. LIMITATION ON SALE OF SUBSIDIARY CAPITAL STOCK. The Company
(i) will not, and will not permit any Restricted Subsidiary of the Company to,
transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any
Restricted Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary), unless (a) such transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of such Restricted Subsidiary and (b)
the net cash proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the terms of Section 4.6 and (ii)
will not permit any Restricted Subsidiary to issue any of its Capital Stock
(other than, if necessary, shares of its Capital Stock constituting directors'
qualifying shares) to any Person other than to the Company or a Wholly Owned
Subsidiary; PROVIDED that any Restricted Subsidiary may issue in an underwritten
public offering or otherwise sell any shares of any class of its common stock so
long as (x) no more than 20% of such class, after giving effect to any such
issuance or sale, is then held by Persons other than the Company or any
Restricted Subsidiary and (y) the net cash proceeds from such public offering or
sale are applied in accordance with the terms of Section 4.6.
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ARTICLE 5
SUCCESSOR COMPANY
SECTION 5.1. WHEN THE COMPANY MAY MERGE OR TRANSFER ASSETS. Except as
otherwise provided in Section 4.13, the Company will not consolidate with or
merge with or into, or convey, transfer or lease all or substantially all its
assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or such Restricted Subsidiary at the time
of such transaction), no Default or Event of Default will have occurred and
be continuing;
(iii) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness under
Section 4.3(a);
(iv) immediately after giving effect to such transaction, the Successor
Company will have a Consolidated Net Worth in an amount which is not less
than the Consolidated Net Worth of the Company immediately prior to such
transaction; provided that this clause (iv) will not restrict the Company's
ability to consolidate with or merge with any Person in a transaction
accounted for as a pooling of interests where the successor Company's
Consolidated Net Worth is no more than 5% less than the Consolidated Net
Worth of the Company immediately prior to such transaction; and
(v) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with this
Indenture.
Opinions of Counsel required to be delivered under this Section or elsewhere
in this Indenture may have qualifications customary for opinions of the type
required and counsel delivering such Opinions of Counsel may rely on
certificates of the Company or government or other officials customary for
opinions of the type required, including certificates certifying as to matters
of fact.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture, but the
predecessor Company in the case of a lease of all its assets or a conveyance,
transfer or lease of substantially all its assets will not be released from the
obligation to pay the principal of and interest on the Securities.
Notwithstanding the foregoing clauses (ii) and (iii), any Wholly Owned
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any Security when
the same becomes due and payable, and such default continues for a period of
30 days;
(2) the Company (i) defaults in the payment of the principal or premium,
if any, of any Security when the same becomes due and payable at its Stated
Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise or (ii) fails to redeem or purchase Securities when
required pursuant to this Indenture or the Securities;
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(3) the Company fails to comply with Section 5.1;
(4) the Company fails to comply with Section 4.2, 4.3, 4.4, 4.5, 4.6,
4.7, 4.8, 4.11, 4.12 or 4.13 (other than a failure to purchase Securities
when required under Section 4.6 or 4.8) and such failure continues for 30
days after the notice specified below;
(5) the Company fails to comply with any of its agreements in the
Securities or this Indenture (other than those referred to in (1), (2), (3)
or (4) above) and such failure continues for 60 days after the notice
specified below;
(6) the Company or any Significant Subsidiary of the Company fails to
pay any Indebtedness within any applicable grace period after final maturity
or the acceleration of any such Indebtedness by the holders thereof because
of a default and the total amount of such Indebtedness unpaid or accelerated
exceeds $5,000,000 or its foreign currency equivalent at the time;
(7) the Company or any Significant Subsidiary of the Company pursuant to
or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case in which it is the debtor;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Significant Subsidiary
of the Company in an involuntary case;
(B) appoints a Custodian of the Company or any Significant Subsidiary
of the Company or for any substantial part of the property of the Company
or Significant Subsidiary; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary of the Company;]
(or any similar relief is granted under any foreign laws) and the order
or decree remains unstayed and in effect for 60 days; or
(9) any final, non-appealable judgment or decree for the payment of
money in excess of $5,000,000 or its foreign currency equivalent at the time
is entered against the Company or any Significant Subsidiary of the Company
and either:
(A) an enforcement proceeding has been commenced by any creditor upon
such judgment or decree; or
(B) such judgment or decree remains unpaid and outstanding for a
period of 60 days following such judgment and is not discharged, waived
or stayed.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
The term "Bankruptcy Law" means Title 11, UNITED STATES CODE, as amended, or
any similar federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
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A Default under clause (4) or (5) is not an Event of Default until the
Trustee or the Holders of at least 25% in aggregate principal amount of the
outstanding Securities notify the Company of the Default and the Company does
not cure such Default within the time specified after receipt of such notice.
Such notice must specify the Default, demand that it be remedied and state that
such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (6) and any event which with the giving of
notice or the lapse of time would become an Event of Default under clause (4),
(5) or (9), its status and what action the Company is taking or proposes to take
with respect thereto.
SECTION 6.2. ACCELERATION. If an Event of Default (other than an Event of
Default specified in Section 6.1(7) or (8) with respect to the Company) occurs
and is continuing, the Trustee by notice to the Company, or the Holders of at
least 25% in aggregate principal amount of the outstanding Securities by notice
to the Company and the Trustee, may declare the principal of and accrued
interest on all the Securities to be due and payable. Upon such a declaration,
such principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 6.1(7) or (8) with respect to the Company occurs
and is continuing, the principal of and accrued interest on all the Securities
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Securityholders. The
Holders of a majority in aggregate principal amount of the outstanding
Securities by notice to the Trustee may rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
SECTION 6.3. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the
Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are, to the extent
permitted by law, cumulative.
SECTION 6.4. WAIVER OF PAST DEFAULTS. The Holders of a majority in
aggregate principal amount of the Securities then outstanding by notice to the
Trustee may waive any past or existing Default and its consequences except (i) a
Default in the payment of the principal of or interest on a Security or (ii) a
Default in respect of a provision that under Section 9.2 cannot be amended
without the consent of each Securityholder affected. When a Default is waived,
it is deemed cured, and any Event of Default arising therefrom shall be deemed
to have been cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 6.5. CONTROL BY MAJORITY. The Holders of a majority in aggregate
principal amount of the Securities then outstanding may direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. However, the
Trustee may refuse to follow any direction that conflicts with law or this
Indenture or, subject to Section 7.1, that the Trustee determines is unduly
prejudicial to the rights of other Securityholders or would involve the Trustee
in personal liability; PROVIDED, HOWEVER, that the Trustee may take any other
action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled
to indemnification from the Securityholders satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such
action.
SECTION 6.6. LIMITATION ON SUITS. A Securityholder may not pursue any
remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an Event
of Default is continuing;
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(2) the Holders of at least 25% in aggregate principal amount of the
Securities then outstanding make a written request to the Trustee to pursue
the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in aggregate principal amount of the
Securities then outstanding do not give the Trustee a direction inconsistent
with the request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over another
Securityholder.
SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal of and interest on the Securities held by such Holder, on or after the
respective due dates expressed in the Securities, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.8. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified
in Section 6.1(1) or (2) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
for the whole amount then due and owing (together with interest on any unpaid
interest to the extent lawful) and the amounts provided for in Section 7.7.
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and the Securityholders allowed in
any judicial proceedings relative to the Company, its creditors or its property
and, unless prohibited by law or applicable regulations, may vote on behalf of
the Holders in any election of a trustee in bankruptcy or other Person
performing similar functions, and any Custodian in any such judicial proceeding
is hereby authorized by each Holder to make payments to the Trustee and, in the
event that the Trustee shall consent to the making of such payments directly to
the Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and its counsel, and any other amounts due the Trustee under Section 7.7.
SECTION 6.10. PRIORITIES. If the Trustee collects any money or property
pursuant to this Article 6, it shall pay out the money or property in the
following order, subject to applicable law:
FIRST: to the Trustee for amounts due under Section 7.7;
SECOND: to Securityholders for amounts due and unpaid on the Securities for
principal and interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securities for principal and
interest, respectively; and
THIRD: to the Company.
The Trustee may, upon prior written notice to the Company, fix a record date
and payment date for any payment to Securityholders pursuant to this Section. At
least 15 days before such record date, the Company shall mail to each
Securityholder and the Trustee a notice that states the record date, the payment
date and amount to be paid.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses
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made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.7 or a suit by Holders of more
than 10% in aggregate principal amount of the outstanding Securities.
SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the extent
it may lawfully do so) shall not at any time insist upon, or plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 7
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred
and is continuing, the Trustee shall exercise the rights and powers vested in it
by this Indenture and use the same degree of care and skill in their exercise as
a prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
in the case of any such certificates or opinions which by any provision
hereof are specifically required to be furnished to the Trustee, the Trustee
shall examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own wilful misconduct, except
that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it takes
or omits to take in good faith in accordance with a direction received by it
pursuant to Section 6.5.
(d) Every provision of this Indenture that in any way relates to the Trustee
is subject to paragraphs (a), (b) and (c) of this Section.
(e) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur financial liability in the performance of
any of its duties hereunder or in the exercise of any of its rights or powers,
if it shall have reasonable grounds to believe that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
(g) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section and to the provisions of the TIA.
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SECTION 7.2. RIGHTS OF TRUSTEE. (a) The Trustee may rely on any document
believed by it to be genuine and to have been signed or presented by the proper
person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for the
misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to take
in good faith which it believes to be authorized or within its rights or powers;
PROVIDED, HOWEVER, that the Trustee's conduct does not constitute wilful
misconduct or negligence.
(e) The Trustee may consult with counsel of its selection, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Securities shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it here-under
in good faith and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders pursuant to this Indenture, unless such Holders shall have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual
or any other capacity may become the owner or pledgee of Securities and may
otherwise deal with the Company or its respective Affiliates with the same
rights it would have if it were not Trustee. Any Paying Agent, Registrar,
co-registrar or co-paying agent may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.4. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible
for and makes no representation as to the validity or adequacy of this Indenture
or the Securities, it shall not be accountable for the Company's use of the
proceeds from the Securities, and it shall not be responsible for any statement
of the Company in this Indenture or in any document issued in connection with
the sale of the Securities or in the Securities other than the Trustee's
certificate of authentication.
SECTION 7.5. NOTICE OF DEFAULTS. If a Default occurs and is continuing and
if it is known to the Trustee, the Trustee shall mail to each Securityholder
notice of the Default within the earlier of 90 days after it occurs or 30 days
after it is known by a Trust Officer or written notice is received by the
Trustee. Except in the case of a Default in payment of principal of or interest
on any Security (including payments pursuant to the mandatory redemption
provisions of such Security, if any), the Trustee may withhold the notice if and
so long as a committee of its Trust Officers in good faith determines that
withholding the notice is in the interests of Securityholders.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS. As promptly as practicable
after each May 15 beginning with the May 15 following the date of this
Indenture, and in any event prior to July 15 in each year, the Trustee shall
mail to each Securityholder a brief report dated as of May 15 that complies with
TIA 313(a). The Trustee also shall comply with TIA 313(b). The Trustee shall
promptly deliver to the Company a copy of any report it delivers to Holders
pursuant to Section 7.6.
A copy of each report at the time of its mailing to Securityholders shall be
filed with the SEC and each stock exchange (if any) on which the Securities are
listed. The Company agrees to notify promptly the Trustee whenever the
Securities become listed on any stock exchange and of any delisting thereof.
SECTION 7.7. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time such compensation for its services as the Company and
the Trustee shall from time to time agree in writing. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an
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express trust. The Company shall reimburse the Trustee upon request for all
reasonable out-of-pocket expenses incurred or made by it, including costs of
collection, in addition to such compensation for its services, except any such
expense, disbursement or advance as may arise from its negligence, wilful
misconduct or bad faith. Such expenses shall include the reasonable compensation
and expenses, disbursements and advances of the Trustee's agents, counsel,
accountants and experts. The Trustee shall provide the Company reasonable notice
of any expenditure not in the ordinary course of business; PROVIDED that prior
approval by the Company of any such expenditure shall not be a requirement for
the making of such expenditure nor for reimbursement by the Company thereof. The
Company shall indemnify each of the Trustee and any predecessor Trustees against
any and all loss, damage, claim, liability or expense (including attorneys' fees
and expenses) (other than taxes applicable to the Trustee's compensation
hereunder) incurred by it in connection with the acceptance or administration of
this trust and the performance of its duties hereunder. The Trustee shall notify
the Company promptly of any claim for which it may seek indemnity. Failure by
the Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder. The Company shall defend the claim and the Trustee may
have separate counsel at its own expense. The Company need not reimburse any
expense or indemnify against any loss, liability or expense incurred by the
Trustee through the Trustee's own wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section shall survive the
discharge of this Indenture. When the Trustee incurs expenses after the
occurrence of a Default specified in Section 6.1(7) or (8) with respect to the
Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
SECTION 7.8. REPLACEMENT OF TRUSTEE. The Trustee may resign at any time by
so notifying the Company. The Holders of a majority in principal amount of the
Securities then outstanding, may remove the Trustee by so notifying the Trustee
and may appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of a
majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its appointment to
the retiring Trustee and to the Company. Thereupon the resignation or removal of
the retiring Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. The
successor Trustee shall mail a notice of its succession to Securityholders. The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee, subject to the lien provided for in Section 7.7.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
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Notwithstanding the replacement of the Trustee pursuant to this Section, the
Company, obligations under Section 7.7 shall continue for the benefit of the
retiring Trustee.
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee, PROVIDED that such corporation shall
be eligible under this Article Seven and TIA Section 3.10(a).
In case at the time such successor or successors by merger, conversion or
consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Securities so authenticated; and in
case at that time any of the Securities shall not have been authenticated, any
successor to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Securities or in this Indenture provided that the certificate of the
Trustee shall have.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all
times satisfy the requirements of TIA Section 310(a). The Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
Section 310(b); PROVIDED, HOWEVER, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which other
securities or certificates of interest or participation in other securities of
the Company are outstanding if the requirements for such exclusion set forth in
TIA 310(b)(1) are met.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with Section TIA 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA 311(a) to the extent indicated.
ARTICLE 8
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.1. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE. (a) When
(i) the Company delivers to the Trustee all outstanding Securities (other than
Securities replaced pursuant to Section 2.7) for cancellation or (ii) all
outstanding Securities have become due and payable, whether at maturity or as a
result of the mailing of a notice of redemption pursuant to Article 3 hereof or
the Securities will become due and payable at their Maturity within 91 days, or
the securities are to be called for redemption within 91 days under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and, in each case of
this clause (ii), the Company irrevocably deposits or causes to be deposited
with the Trustee funds sufficient to pay at maturity or upon redemption all
outstanding Securities, including interest thereon to maturity or such
redemption date (other than Securities replaced pursuant to Section 2.7), and if
in either case the Company pays all other sums payable hereunder by the Company,
then this Indenture shall, subject to Section 8.1(c), cease to be of further
effect. The Trustee shall acknowledge satisfaction and discharge of this
Indenture on demand of the Company accompanied by an Officers' Certificate and
an Opinion of Counsel from the Company that all conditions precedent provided
herein for relating to satisfaction and discharge of this Indenture have been
complied with and at the cost and expense of the Company.
(b) Subject to Sections 8.1(c) and 8.2, the Company at any time may
terminate (i) all of its obligations under the Securities and this Indenture
("legal defeasance option") or (ii) its obligations under Sections 4.2, 4.3,
4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12 and 4.13 and the operation of
Sections 6.1(4), 6.1(5), 6.1(6), 6.1(7) (but only with respect to a Significant
Subsidiary), 6.1(8) (but only with respect to a Significant Subsidiary), 6.1(9)
and 5.1(ii), 5.1(iii) and 5.1(iv) ("covenant defeasance option"). The Company
may exercise its legal defeasance option notwithstanding its prior exercise of
its covenant defeasance option.
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If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the Company
exercises its covenant defeasance option, payment of the Securities may not be
accelerated because of an Event of Default specified in Section 6.1(4), 6.1(5),
6.1(6), 6.1(7) (but only with respect to a Significant Subsidiary), 6.1(8) (but
only with respect to a Significant Subsidiary) or 6.1(9) or because of the
failure of the Company to comply with Sections 5.1(ii), 5.1(iii) and 5.1(iv).
Upon satisfaction of the conditions set forth herein and upon request of the
Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's obligations in
Sections 2.3, 2.4, 2.5, 2.6, 2.7, 7.7, 7.8, 8.4, 8.5 and 8.6 shall survive until
the Securities have been paid in full. Thereafter, the Company's obligations in
Sections 7.7, 8.4 and 8.5 shall survive.
SECTION 8.2. CONDITIONS TO DEFEASANCE. The Company may exercise its legal
defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits or causes to be deposited in trust
with the Trustee money or U.S. Government Obligations which through the
scheduled payment of principal and interest in respect thereof in accordance
with their terms will provide cash at such times and in such amounts as will
be sufficient to pay principal and interest when due on all outstanding
Securities (except Securities replaced pursuant to Section 2.7) to maturity
or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a nationally
recognized firm of independent accountants expressing their opinion that the
payments of principal and interest when due and without reinvestment on the
deposited U.S. Government Obligations plus any deposited money without
investment will provide cash at such times and in such amounts as will be
sufficient to pay principal and interest when due on all outstanding
Securities (except Securities replaced pursuant to Section 2.7) to maturity
or redemption, as the case may be;
(3) 91 days pass after the deposit is made and during the 91-day period
no Default specified in Section 6.1(7) or (8) with respect to the Company
occurs which is continuing at the end of the period;
(4) the deposit does not constitute a default under any other material
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(6) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
have received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of this Indenture there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such Opinion of Counsel shall confirm that,
the Securityholders will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such deposit and defeasance
had not occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders will not recognize income, gain or loss for federal income
tax purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such deposit and covenant defeasance
had not occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article 8
have been complied with.
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Opinions of Counsel required to be delivered under this Section may have
qualifications customary for opinions of the type required and counsel
delivering such Opinions of Counsel may rely on certificates of the Company or
government or other officials customary for opinions of the type required,
including certificates certifying as to matters of fact.
Before or after a deposit, the Company may make arrangements satisfactory to
the Trustee for the redemption of Securities at a future date in accordance with
Article 3.
SECTION 8.3. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust
money or U.S. Government Obligations deposited with it pursuant to this Article
8. It shall apply the deposited money and the money from U.S. Government
Obligations either directly or through the Paying Agent (including the Company
acting as its own Paying Agent as the Trustee may determine) and in accordance
with this Indenture to the payment of principal of and interest on the
Securities.
SECTION 8.4. REPAYMENT TO COMPANY. The Trustee and the Paying Agent shall
promptly turn over to the Company upon request any excess money or securities
held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the Paying
Agent shall pay to the Company upon written request any money held by them for
the payment of principal or interest that remains unclaimed for two years, and,
thereafter, Securityholders entitled to the money must look to the Company for
payment as general creditors.
SECTION 8.5. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay
and shall indemnify the Trustee against any tax, fee or other charge imposed on
or assessed against deposited U.S. Government Obligations or the principal and
interest received on such U.S. Government Obligations other than any such tax,
fee or other charge which by law is for the account of the Holders of the
defeased Securities; provided that the Trustee shall be entitled to charge any
such tax, fee or other charge to such Holder's account.
SECTION 8.6. REINSTATEMENT. If the Trustee or Paying Agent is unable to
apply any money or U.S. Government Obligations in accordance with this Article 8
by reason of any legal proceeding or by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article 8 until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with this Article 8; PROVIDED, HOWEVER, that, (a) if the Company has made any
payment of interest on or principal of any Securities following the
reinstatement of their obligations, the Company shall be subrogated to the
rights of the Holders of such Securities to receive such payment from the money
or U.S. Government Obligations held by the Trustee or Paying Agent and (b)
unless otherwise required by any legal proceeding or any order or judgment of
any court or governmental authority, the Trustee or Paying Agent shall return
all such money and U.S. Government Obligations to the Company promptly after
receiving a written request therefor at any time, if such reinstatement of the
Company's obligations has occurred and continues to be in effect.
ARTICLE 9
AMENDMENTS
SECTION 9.1. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may
amend this Indenture or the Securities without notice to or consent of any
Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in place
of certificated Securities; PROVIDED, HOWEVER, that the uncertificated
Securities are issued in registered form for purposes of Section 163(f) of
the Code or in a manner such that the uncertificated Securities are as
described in Section 163(f)(2)(B) of the Code;
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(4) to add guarantees with respect to the Securities;
(5) to secure the Securities;
(6) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(7) to make any change that does not adversely affect the rights of any
Securityholder; or
(8) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA.
After an amendment under this Section becomes effective, the Company shall
mail to Securityholders a notice briefly describing such amendment. The failure
to give such notice to all Securityholders, or any defect therein, shall not
impair or affect the validity of an amendment under this section.
SECTION 9.2. WITH CONSENT OF HOLDERS. The Company and the Trustee may
amend this Indenture or the Securities without notice to any Securityholder but
with the written consent of the Holders of at least a majority in principal
amount of the Securities then outstanding. However, without the consent of each
Securityholder affected, an amendment may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on any
Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) reduce the premium payable upon the redemption of any Security or
change the time at which any Security may be redeemed in accordance with
Article 3;
(5) make any Security payable in money other than that stated in the
Security;
(6) impair the right of any Holder to receive payment of principal of
and interest on such Holder's Securities on or after the due dates therefor
or to institute suit for the enforcement of any payment on or with respect
to such Holder's Securities; or
(7) make any change in Section 6.4 or 6.7 or the second sentence of this
Section.
It shall not be necessary for the consent of the Holders under this Section
to approve the particular form of any proposed amendment, but it shall be
sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company shall
mail to Securityholders a notice briefly describing such amendment. The failure
to give such notice to all Securityholders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to this
Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to
an amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same debt as the consenting Holder's Security, even if notation of
the consent or waiver is not made on the Security. After an amendment or waiver
becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Securityholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Securityholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
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SECTION 9.5. NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determine, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.1) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment complies with the provisions of Article 9 of this Indenture.
ARTICLE 10
MISCELLANEOUS
SECTION 10.1. TRUST INDENTURE ACT CONTROLS. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control. If this Indenture excludes any provision of the TIA that is
required to be included, such provision shall be deemed included herein.
SECTION 10.2. NOTICES. Any notice or communication shall be in writing and
delivered in person, by overnight courier or facsimile (if to the Company, with
receipt confirmed by an Officer) or mailed by first-class mail addressed as
follows:
Before August 1, 1996:
if to the Company:
Michaels Stores
5931 Campus Circle Drive
Irving, TX 75063
Attention: General Counsel
From and after August 1, 1996:
Michaels Stores
8000 Bentbranch
Irving, TX 75063
Attention: General Counsel
With copies to:
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee
Administration
The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.
Any notice or communication mailed or sent by overnight courier or facsimile
to a Securityholder shall be sent to the Securityholder at the Securityholder's
address as it appears on the registration books of the Registrar and shall be
sufficiently given if so sent within the time prescribed.
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Failure to send a notice or communication to a Securityholder or any defect
in it shall not affect its sufficiency with respect to other Securityholders. If
a notice or communication is sent in the manner provided above, it is duly
given, whether or not the addressee receives it.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
SECTION 10.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Securityholders
may communicate pursuant to TIA 312(b) with other Securityholders with respect
to their rights under this Indenture or the Securities. The Company, the
Trustee, the Registrar and anyone else shall have the protection of TIA Section
312(c).
SECTION 10.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any
request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, each the Company shall furnish to the
Trustee:
(1) an Officers' Certificate (which in connection with the original
issuance of the Securities need only be executed by one Officer for the
Company) in form and substance reasonably satisfactory to the Trustee
stating that, in the opinion of the signers, all conditions precedent, if
any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably satisfactory
to the Trustee stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
SECTION 10.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such individual,
such covenant or condition has been complied with.
SECTION 10.6. WHEN SECURITIES DISREGARDED. In determining whether the
Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities which the Trustee actually knows are so owned shall be so
disregarded. Also, subject to the foregoing, only Securities outstanding at the
time shall be considered in any such determination.
SECTION 10.7. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee
may make reasonable rules for action by or a meeting of Securityholders. The
Trustee shall provide the Company reasonable notice of such rules; PROVIDED that
neither prior notice to the Company of such rules nor prior approval by the
Company of such rules shall be a requirement for their effectiveness. The
Registrar and the Paying Agent may make reasonable rules for their functions.
SECTION 10.8. LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, a Sunday or
a day on which banking institutions are not required to be open in the State of
New York. If a payment date is a Legal
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Holiday, payment shall be made on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period. If a regular
record date is a Legal Holiday, the record date shall not be affected.
SECTION 10.9. GOVERNING LAW. This Indenture and the Securities shall be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflict of laws to the
extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 10.10. NO RECOURSE AGAINST OTHERS. A director, officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Securities or this Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.
SECTION 10.11. SUCCESSORS. All agreements of the Company in this Indenture
and the Securities shall bind the Company's successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 10.12. MULTIPLE ORIGINALS. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 10.13. TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
SECTION 10.14. SEVERABILITY CLAUSE. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
MICHAELS STORES, INC.
By:
-----------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By:
-----------------------------------
Name:
Title:
41
<PAGE>
EXHIBIT A
FACE OF SECURITY
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO
THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
No. [ ] $125,000,000
[ ]% Senior Notes Due 2006
CUSIP No. [ ]
MICHAELS STORES, INC., a Delaware corporation, promises to pay to Cede &
Co., or registered assigns, the principal sum of 125,000,000 Dollars on
[ ], 2006.
Interest Payment Dates: [ ] and
[ ].
Record Dates: [ ] and [ ].
Additional provisions of this Security are set forth on the other side of
this Security.
MICHAELS STORES, INC.
By:
-----------------------------------
Name:
Title:
Dated: [ ], 1996
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE BANK OF NEW YORK, as Trustee,
certifies that this is one of the
Securities referred to in the
within-mentioned Indenture.
By:
-----------------------------------
Authorized Signatory
A-1
<PAGE>
REVERSE OF SECURITY
[ ]% SENIOR NOTE DUE 2006
1. INTEREST
MICHAELS STORES, INC., a Delaware corporation (such entity, and its
successors and assigns under the Indenture hereinafter referred to, and each
other entity which is required to become the Company pursuant to the Indenture,
and its successors and assigns under the Indenture, being herein called the
"Company"), promises to pay interest on the principal amount of this Security at
the rate per annum shown above. The Company will pay interest semiannually on
[ ] and [ ] of each year commencing [ ]. Interest
on the Securities will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from [ ], 1996. Interest
will be computed on the basis of a 360-day year of twelve 30-day months. The
Company shall pay interest on overdue principal at the rate borne by the
Securities plus 1% per annum, and it shall pay interest on overdue installments
of interest at the same rate to the extent lawful.
2. METHOD OF PAYMENT
The Company will pay interest on the Securities (except defaulted interest)
to the Persons who are registered holders of Securities at the close of business
on the [ ] or [ ] next preceding the interest payment date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in money
of the United States that at the time of payment is legal tender for payment of
public and private debts. However, the Company may pay principal and interest by
check payable in such money and may mail an interest check to a Holder's
registered address. All payments of principal of, premium, if any, and interest
on the Securities will be made by the Company in immediately available funds.
3. PAYING AGENT AND REGISTRAR
Initially, The Bank of New York, a New York banking corporation ("Trustee"),
will act as Paying Agent and Registrar. The Company may appoint and change any
Paying Agent, Registrar or co-registrar without notice. The Company or any of
its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent,
Registrar or co-registrar.
4. INDENTURE
The Company issued the Securities under an Indenture dated as of June [ ],
1996 (the "Indenture"), among the Company and the Trustee. The terms of the
Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
SectionSection 77aaa-77bbbb) as in effect on the date of the Indenture (the
"TIA"). Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such terms,
and Securityholders are referred to the Indenture and the TIA for a statement of
those terms. Any conflict between this Note and the Indenture will be governed
by the Indenture.
The Securities are general unsecured obligations of the Company limited to
$125,000,000 aggregate principal amount (subject to Section 2.7 of the
Indenture). The Indenture imposes certain limitations on the Incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the existence of
liens, the payment of dividends on, and redemption of, the Capital Stock of the
Company and its Subsidiaries and the redemption of certain subordinated
obligations of the Company and its Subsidiaries, restricted payments, the sale
or transfer of assets and Subsidiary stock, the issuance or sale of Capital
Stock of Restricted Subsidiaries, sale and leaseback transactions, the
investments of the Company and its Restricted Subsidiaries, consolidations,
mergers and transfers of all or substantially all the assets of the Company, and
transactions with Affiliates. In addition, the Indenture limits the ability of
the Company and certain of its Subsidiaries to restrict distributions and
dividends from Subsidiaries.
A-2
<PAGE>
5. OPTIONAL REDEMPTION
Except as set forth in the next paragraph, the Securities may not be
redeemed prior to [ ], 2001. On and after that date, the Company may
redeem as provided in, and subject to the terms of, the Indenture the Securities
in whole at any time or in part from time to time at the following redemption
prices (expressed in percentages of principal amount), plus accrued interest to
the redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the related interest payment date):
if redeemed during the 12-month period beginning [ ],
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... %
2002................................................................... %
2003................................................................... %
2004 and thereafter.................................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to [ ], 1999,
the Company may redeem in the aggregate up to $25 million principal amount of
the Securities with the proceeds of one or more Equity Offerings so long as
there is a Public Market at the time of such redemption, at a redemption price
(expressed as a percentage of principal amount) of [ ]% plus accrued
interest, if any, to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date) as provided in, and subject to the terms of, the
Indenture; provided, however, that at least $100 million principal amount of the
Securities must remain outstanding after each such redemption.
6. NOTICE OF REDEMPTION
Notice of redemption will be mailed by first-class mail at least 30 days but
not more than 60 days before the redemption date to each Holder of Securities to
be redeemed at his registered address. Securities in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000. If money
sufficient to pay the redemption price of and accrued interest on all Securities
(or portions thereof) to be redeemed on the redemption date is deposited with
the Paying Agent on or before the redemption date and certain other conditions
are satisfied, on and after such date interest ceases to accrue on such
Securities (or such portions thereof) called for redemption. If a notice or
communication is sent in the manner provided in the Indenture, it is duly given,
whether or not the addressee receives it. Failure to send a notice or
communication to a Securityholder or any defect in it shall not affect its
sufficiency with respect to other Securityholders.
In addition, in the event of certain Asset Dispositions, the Company will be
required to make an offer to purchase Securities at a purchase price of 100% of
their principal amount plus accrued interest to the date of purchase (subject to
the rights of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date) as provided in, and subject to the
terms of, the Indenture.
7. PUT PROVISIONS
Upon a Change of Control, any Holder of Securities will have the right to
require the Company to repurchase all or any part of the Securities of such
Holder at a repurchase price in cash equal to 101% of the principal amount of
the Securities to be repurchased plus accrued interest to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the related interest payment date) as provided in, and
subject to the terms of, the Indenture.
8. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a Holder,
among other things, to furnish appropriate endorsements or transfer documents
and to pay any taxes and fees required by law or permitted by the Indenture,
including any transfer tax or other similar governmental charge payable in
connection therewith. The Registrar need not register the transfer of
A-3
<PAGE>
or exchange any Securities selected for redemption (except, in the case of a
Security to be redeemed in part, the portion of the Security not to be redeemed)
or any Securities for a period of 15 days before a selection of Securities to be
redeemed or 15 days before an interest payment date.
9. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of it for
all purposes.
10. UNCLAIMED MONEY
If money for the payment of principal or interest remains unclaimed for two
years, the Trustee or Paying Agent shall pay the money back to the Company at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Company and not to the Trustee for payment.
11. DISCHARGE AND DEFEASANCE
Subject to certain conditions, the Company at any time may terminate some or
all of its obligations under the Securities and the Indenture if the Company
deposits with the Trustee money or U.S. Government Obligations for the payment
of principal and interest on the Securities to redemption or maturity, as the
case may be.
12. AMENDMENT, WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Securities may be amended with the written consent of the Holders of at
least a majority in principal amount outstanding of the Securities and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount outstanding of the
Securities. Subject to certain exceptions set forth in the Indenture, without
the consent of any Securityholder, the Company and the Trustee may amend the
Indenture or the Securities to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Securities in addition to or in place of certificated Securities,
or to add guarantees with respect to the Securities, or to secure the
Securities, or to add additional covenants or surrender rights and powers
conferred on the Company, or to make any change that does not adversely affect
the rights of any Securityholder or to comply with any request of the SEC in
connection with qualifying the Indenture under the TIA.
13. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) default for 30 days in
payment of interest on the Securities; (ii) default in payment of principal on
the Securities at maturity, upon redemption pursuant to paragraphs 5 or 6 above,
upon acceleration or otherwise, or failure by the Company to redeem or purchase
Securities when required; (iii) failure by the Company to comply with other
agreements in the Indenture or the Securities, in certain cases subject to
notice and lapse of time; (iv) certain accelerations (including failure to pay
within any grace period after final maturity) of other Indebtedness of the
Company and any Significant Subsidiary if the amount accelerated (or so unpaid)
exceeds $5 million; (v) certain events of bankruptcy or insolvency with respect
to the Company and its Significant Subsidiaries; and (vi) certain judgments or
decrees for the payment of money is in excess of $5 million.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the Securities then outstanding may
declare all the Securities to be due and payable. Certain events of bankruptcy
or insolvency are Events of Default which will result in the Securities being
due and payable immediately upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Securities
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Securityholders notice of any continuing Default (except a Default
in payment of principal or interest) if it determines that withholding notice is
in the interest of the Holders.
A-4
<PAGE>
14. TRUSTEE DEALINGS WITH THE COMPANY
Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or any of its Affiliates and may otherwise deal with the
Company or any of its Affiliates with the same rights it would have if it were
not Trustee.
15. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company or the
Trustee shall not have any liability for any obligations of the Company under
the Securities or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Securityholder waives and releases all such liability. The waiver and release
are part of the consideration for the issue of the Securities.
16. GOVERNING LAW
The Indenture and the Securities shall be governed by, and construed in
accordance with, the laws of the State of New York but without giving effect to
applicable principles of conflict of laws to the extent that the application of
the laws of another jurisdiction would be required thereby.
17. AUTHENTICATION
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. ABBREVIATIONS
Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. CUSIP NUMBERS
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and have directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Securityholder upon written request and
without charge to the Securityholder a copy of the Indenture which has in it the
text of this Security in larger type. Requests may be made as follows:
Before August 1, 1996:
if to the Company:
Michaels Stores, Inc.
5931 Campus Circle Drive
Irving, TX 75063
Attention: General Counsel
From and after August 1, 1996:
Michaels Stores, Inc.
8000 Bentbranch
Irving, TX 75063
Attention: General Counsel
With copies to:
A-5
<PAGE>
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee
Administration
------------------------
A-6
<PAGE>
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to (Print or type assignee's name,
address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on the books of
the Company. The agent may substitute another to act for him.
________________________________________________________________________________
Date: ________________________ Your Signature: ________________________________
Signature Guarantee: ___________________________________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
A-7
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company pursuant
to Section 4.6 or 4.8 of the Indenture, check the box: / /
If you want to elect to have only part of this Security purchased by the
Company pursuant to Section 4.6 or 4.8 of the Indenture, state the
amount: $
Date: ________________________ Your Signature: ________________________________
(Sign exactly as your name appears on the other
side of the Security)
Signature Guarantee: ___________________________________________________________
(Signature must be guaranteed)
A-8
<PAGE>
[Letterhead of Jones, Day, Reavis & Pogue]
EXHIBIT 5.1
2634:tzf
961228-065-003
June 11, 1996
Michaels Stores, Inc.
5931 Campus Circle Drive
Irving, Texas 75036
Re: $125,000,000 Aggregate Principal Amount of Notes
Due 2006 to be Sold in an Underwritten Offering
Ladies and Gentlemen:
We are acting as counsel to Michaels Stores, Inc., a Delaware corporation
(the "Company"), in connection with the creation and the authorization of the
issuance and sale of $125,000,000 aggregate principal amount of Senior Notes due
2006 (the "Notes") to be issued pursuant to an indenture to be entered into
between the Company and The Bank of New York, as Trustee (the "Indenture").
We have examined such documents, records, and matters of law as we have
deemed necessary for purposes of this opinion. Based thereupon, we are of the
opinion that:
(1) The Indenture, when duly executed and delivered by the Company and
the Trustee, will constitute a valid and binding instrument of the Company.
(2) The Notes have been duly authorized and, when duly executed by the
Company, duly authenticated by the Trustee and delivered to and paid for in
the manner contemplated in the Registration Statement (as defined below),
the Notes will be valid and binding obligations of the Company and will be
entitled to the benefits of the Indenture.
In rendering the foregoing opinion, we have assumed the due authorization,
execution, and delivery of the Indenture on behalf of the Trustee, and we have
relied as to certain factual matters, without independent verification, upon
certificates and other assurances of officers of the Company and public
officials. In rendering the foregoing opinion, our examination of matters of law
has been limited to the laws of the State of New York, the General Corporation
Law of the State of Delaware, and the federal laws of the United States of
America, as in effect on the date hereof.
<PAGE>
Michaels Stores, Inc.
June 11, 1996
Page 2
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement on Form S-3 (the "Registration Statement") filed by the
Company to effect the Registration of the Notes under the Securities Act of
1933, as amended, and to the reference to our firm under the caption "Legal
Matters" in the Prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ JONES, DAY, REAVIS & POGUE
--------------------------------------
Jones, Day, Reavis & Pogue
<PAGE>
EXHIBIT 12.1
MICHAELS STORES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR --------------------
------------------------------------------------------ APRIL 30, APRIL 28,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes and extraordinary
item......................................... $ 17,759 $ 33,462 $ 42,644 $ 57,159 $ (34,839) $ 12,288 $ 4,395
Fixed charges................................. 16,868 8,992 17,562 27,830 43,853 9,158 11,007
--------- --------- --------- --------- ---------- --------- ---------
Earnings.................................... $ 34,627 $ 42,454 $ 60,206 $ 84,989 $ 9,014 $ 21,446 $ 15,402
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
Fixed Charges:
Interest expense.............................. $ 6,971 $ 263 $ 6,378 $ 9,103 $ 16,841 $ 3,341 $ 3,710
Amortization of debt issuance expense......... 1,749 -- -- -- -- -- --
Interest portion of rent expense.............. 8,148 8,729 11,184 18,727 27,012 5,817 7,297
--------- --------- --------- --------- ---------- --------- ---------
Fixed Charges............................... $ 16,868 $ 8,992 $ 17,562 $ 27,830 $ 43,853 $ 9,158 $ 11,007
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
Ratio of Earnings to Fixed Charges.............. 2.1x 4.7x 3.4x 3.1x 0.2x 2.3x 1.4x
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA DATA
---------------------------
FISCAL YEAR QUARTER ENDED
1995 APRIL 28, 1996
----------- --------------
<S> <C> <C>
Earnings:
Income before income taxes and extraordinary item.............................................. $ (39,847) $ 3,160
Fixed charges.................................................................................. 48,861 12,242
----------- -------
Earnings..................................................................................... $ 9,014 $ 15,402
----------- -------
----------- -------
Fixed Charges:
Interest expense............................................................................... $ 21,849 $ 4,945
Amortization of debt issuance expense.......................................................... -- --
Interest portion of rent expense............................................................... 27,012 7,297
----------- -------
Fixed Charges................................................................................ $ 48,861 $ 12,242
----------- -------
----------- -------
Ratio of Earnings to Fixed Charges............................................................... .2x 1.3x
----------- -------
----------- -------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 1996 in the Registration Statement (Form
S-3) and related Prospectus of Michaels Stores, Inc. for the registration of
$125,000,000 aggregate principal amount of Senior Notes and to the incorporation
by reference therein of our report dated March 6, 1996, with respect to the
consolidated financial statements of Michaels Stores, Inc. incorporated by
reference in its Annual Report (Form 10-K) for the year ended January 28, 1996,
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Dallas, Texas
June 10, 1996
<PAGE>
EXHIBIT 25.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
______________________
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
______________________
MICHAELS STORES, INC.
(Exact name of obligor as specified in its charter)
Delaware 75-1943604
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5931 Campus Circle Drive
Irving, Texas 75063
P.O. Box 619566
DFW, Texas 75261-9566
(Address of principal executive offices) (Zip code)
______________________
__% Senior Notes Due 2006
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None. (See Note on page 3.)
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE ""ACT'') AND
RULE 24 OF THE COMMISSION'S RULES OF PRACTICE.
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1
to Form T-1 filed with Registration Statement No. 33-6215,
Exhibits 1a and 1b to Form T-1 filed with Registration Statement
No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
NOTE
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
Trustee of all facts on which to base a responsive answer to Item 2, the answer
to said Item is based on incomplete information.
Item 2 may, however, be considered as correct unless amended by an
amendment to this Form T-1.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of
New York, a corporation organized and existing under the laws of the State of
New York, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in The City of New
York, and State of New York, on the 30th day of May, 1996.
THE BANK OF NEW YORK
By: /s/ PAUL J. SCHMALZEL
---------------------------------
Name: PAUL J. SCHMALZEL
Title: ASSISTANT TREASURER
-4-
<PAGE>
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1995, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
DOLLAR AMOUNTS
IN THOUSANDS
--------------
ASSETS
Cash and balances due from depos itory institutions:
Noninterest-bearing balances and currency and coin ..... $ 4,500,312
Interest-bearing balances .............................. 643,938
Securities:
Held-to-maturity securities ............................ 806,221
Available-for-sale securities .......................... 2,036,768
Federal funds sold and securities purchased under
agreements to resell in domestic offices of the bank:
Federal funds sold ..................................... 4,166,720
Securities purchased under agreements to resell......... 50,413
Loans and lease financing receivables:
Loans and leases, net of unearned income .............. 27,068,535
LESS: Allowance for loan and lease losses ............. 520,024
LESS: Allocated transfer risk reserve.................. 1,000
Loans and leases, net of unearned income and
allowance, and reserve.............................. 26,547,511
Assets held in trading accounts ......................... 758,462
Premises and fixed assets (including capitalized leases). 615,330
Other real estate owned ................................. 63,769
Investments in unconsolidated subsidiaries and associated
companies ............................................. 223,174
Customers' liability to this bank on acceptances
outstanding ............................................ 900,795
Intangible assets ....................................... 212,220
Other assets ............................................ 1,186,274
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Total assets ............................................ $42,711,907
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LIABILITIES
Deposits:
In domestic offices ................................... $21,248,127
Noninterest-bearing ................................... 9,172,079
Interest-bearing ...................................... 12,076,048
In foreign offices, Edge and Agreement subsidiaries,
and IBFs ............................................. 9,535,088
Noninterest-bearing ................................... 64,417
Interest-bearing ...................................... 9,470,671
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge and Agreement subsidiaries,
and in IBFs:
Federal funds purchased ............................... 2,095,668
Securities sold under agreements to repurchase ........ 69,212
Demand notes issued to the U.S. Treasury ................ 107,340
Trading liabilities ..................................... 615,718
Other borrowed money:
With original maturity of one year or less ............ 1,638,744
With original maturity of more than one year .......... 120,863
Bank's liability on acceptances executed and
outstanding ............................................ 909,527
Subordinated notes and debentures ....................... 1,047,860
Other liabilities ....................................... 1,836,573
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Total liabilities ....................................... 39,224,720
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EQUITY CAPITAL
Common stock ............................................ 942,284
Surplus ................................................. 525,666
Undivided profits and capital reserves .................. 1,995,316
Net unrealized holding gains (losses) on available-
for-sale securities .................................... 29,668
Cumulative foreign currency translation adjustments ..... (5,747)
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Total equity capital .................................... 3,487,187
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Total liabilities and equity capital .................... $42,711,907
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I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of
Governors of the Federal Reserve System and is true to the best of my
knowledge and belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this
Report of Condition and declare that it has been examined by us and to the
best of our knowledge and belief has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System
and is true and correct.
J. Carter Bacot |
Thomas A. Renyi | Directors
Alan R. Griffith |
