<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997
REGISTRATION NO. 333-41143
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONSOLIDATED STORES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5331 06-1119097
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code Number)
Organization)
</TABLE>
1105 NORTH MARKET STREET, SUITE 1300
WILMINGTON, DELAWARE 19801
(302) 478-4896
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
ALBERT J. BELL, ESQ.
300 PHILLIPI ROAD, P.O. BOX 28512
COLUMBUS, OHIO 43228-0512
(614) 278-6800
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
------------------------
COPY TO:
MICHAEL WAGER, ESQ.
BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP
2300 BP AMERICA BUILDING, 200 PUBLIC SQUARE
CLEVELAND, OHIO 44114-2378
(216) 363-4500
------------------------
Approximate date of commencement of proposed sale to the public: At the
effective time as described in the attached joint proxy statement/prospectus.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT.
================================================================================
<PAGE> 2
CONSOLIDATED STORES CORPORATION
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
------------------------------------------ ---------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page of Registration Statement;
Outside Front Cover Page of Joint Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Available Information; Incorporation of
Certain Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............. Summary; Risk Factors
4. Terms of the Transaction.................. Summary; The Merger; Description of
Consolidated Stores Capital Stock
5. Pro Forma Financial Information........... Pro Forma Combined Financial Data
6. Material Contacts with the Company Being
Acquired.................................. The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ *
8. Interests of Named Experts and Counsel.... Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *
10. Information with Respect to S-3
Registrants............................... Available Information; Incorporation of
Certain Documents by Reference
11. Incorporation of Certain Information by
Reference................................. Available Information; Incorporation of
Certain Documents by Reference; Description
of Consolidated Stores Capital Stock
12. Information with Respect to S-2 or S-3
Registrants............................... *
13. Incorporation of Certain Information by
Reference................................. *
14. Information with Respect to Registrants
Other than S-3 or S-2 Registrants......... *
15. Information with Respect to S-3
Companies................................. Available Information; Incorporation of
Certain Documents by Reference
16. Information with Respect to S-2 or S-3
Companies................................. *
17. Information with Respect to Companies
Other than S-3 or S-2 Companies........... *
18. Information if Proxies, Consents or
Authorizations are to be Solicited........ Outside Front Cover Page; Incorporation of
Certain Documents by Reference; Summary; Mac
Frugal's Special Meeting; Consolidated Stores
Special Meeting; The Merger; Stockholders'
Proposals
19. Information if Proxies, Consents or
Authorizations are not to be Solicited, or
in an Exchange Offer...................... *
</TABLE>
- ---------------
*Indicates that Item is not applicable or answer is in the negative.
<PAGE> 3
1105 North Market Street
LOGO Suite 1300
P.O. Box 8985
Wilmington, Delaware 19801
December 16, 1997
Dear Stockholder of Consolidated Stores Corporation:
You are cordially invited to attend the Special Meeting of Stockholders of
Consolidated Stores Corporation ("Consolidated Stores") to be held at 1:00 p.m.,
local time, on Thursday, January 15, 1998 at the headquarters of Consolidated
Stores' principal operating subsidiary located at 300 Phillipi Road, Columbus,
Ohio (the "Consolidated Stores Special Meeting").
The purpose of the Consolidated Stores Special Meeting is to consider and
vote upon a proposal to approve the issuance of up to a maximum of 28,000,000
shares (the "Share Issuance") of Consolidated Stores common stock, par value
$.01 ("Consolidated Stores Common Stock"), pursuant to the Agreement and Plan of
Merger, dated as of November 4, 1997 (the "Merger Agreement"), by and among
Consolidated Stores, MBC Consolidated Acquisition Corporation, a wholly owned
subsidiary of Consolidated Stores ("Sub"), and Mac Frugal's
Bargains - Close-outs Inc. ("Mac Frugal's"), which provides for the merger (the
"Merger") of Sub with and into Mac Frugal's.
In the Merger, each share of Mac Frugal's common stock, par value $.02778
("Mac Frugal's Common Stock"), other than shares of Mac Frugal's Common Stock
owned by Mac Frugal's as treasury stock and any shares of Mac Frugal's Common
Stock owned by Consolidated Stores, Sub or any other direct or indirect wholly
owned subsidiary of Consolidated Stores, will by virtue of the Merger and
without any action on the part of the holder thereof be converted into the right
to receive a number of duly authorized, validly issued, fully paid and
nonassessable shares of Consolidated Stores Common Stock, with cash being paid
in lieu of fractional shares, on and subject to the terms and conditions set
forth in the Merger Agreement, all as more fully described in the attached Joint
Proxy Statement/Prospectus.
The combination of Consolidated Stores and Mac Frugal's is expected to
result in a larger, more efficient company that will be well-positioned to
capitalize on opportunities for future growth. We anticipate a quick and smooth
integration of the two companies.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS
ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF CONSOLIDATED STORES AND HAS
APPROVED THE MERGER AGREEMENT AND ACCORDINGLY RECOMMENDS THAT CONSOLIDATED
STORES STOCKHOLDERS VOTE IN FAVOR OF THE SHARE ISSUANCE. MERRILL LYNCH & CO.,
CONSOLIDATED STORES' FINANCIAL ADVISOR, HAS DELIVERED ITS OPINION, DATED
NOVEMBER 3, 1997, TO THE CONSOLIDATED STORES BOARD OF DIRECTORS TO THE EFFECT
THAT, BASED UPON AND SUBJECT TO CERTAIN FACTORS AND ASSUMPTIONS STATED THEREIN,
AS OF SUCH DATE, THE EXCHANGE RATE IS FAIR FROM A FINANCIAL POINT OF VIEW TO
CONSOLIDATED STORES.
Your vote is important, regardless of the number of shares you own. Approval
of the Share Issuance will require the affirmative vote of a majority of the
votes cast on the Share Issuance, provided that the total number of votes cast
on such proposal represents more than 50% of the outstanding shares of
Consolidated Stores Common Stock voting at the Consolidated Stores Special
Meeting. The Notice of Special Meeting and Joint Proxy Statement/Prospectus
accompanying this letter describe the proposed transactions more fully and
include other information about Consolidated Stores, Sub and Mac Frugal's.
Please give this information your careful attention.
Accordingly, on behalf of your Board of Directors, I urge you to complete,
date and sign the accompanying proxy and return it promptly in the enclosed
postage-paid envelope. This will not prevent you from attending the Consolidated
Stores Special Meeting or voting in person, but will assure that your vote is
counted if you are unable to attend the Consolidated Stores Special Meeting. You
may revoke your proxy at any time by filing a written notice of revocation with,
or delivering a duly executed proxy bearing a later date to, the Secretary of
Consolidated Stores at Consolidated Stores' main office prior to the
Consolidated Stores Special Meeting or by attending the Consolidated Stores
Special Meeting and voting in person.
On behalf of your Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Share Issuance.
Sincerely,
WILLIAM G. KELLEY
Chairman and Chief Executive Officer
<PAGE> 4
CONSOLIDATED STORES CORPORATION
300 PHILLIPI ROAD
COLUMBUS, OHIO 43228-0512
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 15, 1998
To the Stockholders of Consolidated Stores Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
Consolidated Stores Corporation, a Delaware corporation ("Consolidated Stores"),
will be held on Thursday, January 15, 1998, at 1:00 p.m., local time, at the
headquarters of Consolidated Stores' principal operating subsidiary located at
300 Phillipi Road, Columbus, Ohio (the "Consolidated Stores Special Meeting"),
for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of up
to a maximum of 28,000,000 shares of Consolidated Stores common stock, par
value $.01 per share, pursuant to the Agreement and Plan of Merger, dated
as of November 4, 1997 (the "Merger Agreement"), providing for the merger
(the "Merger") of MBC Consolidated Acquisition Corporation ("Sub"), a
Delaware corporation and a wholly owned subsidiary of Consolidated Stores,
with and into Mac Frugal's Bargains - Close-outs Inc., a Delaware
corporation ("Mac Frugal's"), as a result of which Mac Frugal's will become
a wholly owned subsidiary of Consolidated Stores, all as more fully
described in the accompanying Joint Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
Consolidated Stores Special Meeting or any adjournments or postponements
thereof.
Only holders of record of Consolidated Stores at the close of business on
December 15, 1997 are entitled to notice of the Consolidated Stores Special
Meeting and to vote thereat and at any and all adjournments or postponements
thereof.
BY ORDER OF THE BOARD OF DIRECTORS
ALBERT J. BELL
Senior Vice President, General Counsel
and Secretary
December 16, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE CONSOLIDATED STORES SPECIAL MEETING,
PLEASE COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY IN THE MANNER
DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE THE PROXY
HAS BEEN VOTED AT THE CONSOLIDATED STORES SPECIAL MEETING.
<PAGE> 5
2430 E. Del Amo Boulevard, Dominguez, California 90220-6306
December 16, 1997
Dear Stockholder of Mac Frugal's Bargains - Close-outs Inc.:
You are cordially invited to attend a Special Meeting of Stockholders of
Mac Frugal's Bargains - Close-outs Inc. ("Mac Frugal's") to be held at 10:00
a.m., local time, on Thursday, January 15, 1998, at the Long Beach Airport
Marriott Hotel, 4700 Airport Plaza Drive, Long Beach, California ("Mac Frugal's
Special Meeting").
At the Mac Frugal's Special Meeting, you will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as
of November 4, 1997 (the "Merger Agreement"), by and among Consolidated Stores
Corporation, a Delaware corporation ("Consolidated Stores"), MBC Consolidated
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Consolidated Stores ("Sub"), and Mac Frugal's. Pursuant to the Merger Agreement,
Sub will be merged with and into Mac Frugal's (the "Merger"), and Mac Frugal's
will become a wholly owned subsidiary of Consolidated Stores. When the Merger is
consummated, all issued and outstanding shares of common stock, par value
$.02778 per share, of Mac Frugal's ("Mac Frugal's Common Stock") (other than
shares held in the treasury of Mac Frugal's and shares held by Consolidated
Stores, Sub or any other direct or indirect wholly owned subsidiary of
Consolidated Stores) will be canceled and converted automatically into the right
to receive a number of shares of common stock, par value $.01 per share, of
Consolidated Stores ("Consolidated Stores Common Stock"), with cash being paid
in lieu of fractional shares, on and subject to the terms and conditions set
forth in the Merger Agreement, all as more fully described in the attached Joint
Proxy Statement/Prospectus.
PRIOR TO THE EXECUTION OF THE MERGER AGREEMENT, THE BOARD OF DIRECTORS OF
MAC FRUGAL'S, AFTER CAREFUL CONSIDERATION OF THE TERMS AND CONDITIONS OF THE
MERGER, DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, MAC
FRUGAL'S STOCKHOLDERS, UNANIMOUSLY APPROVED THE MERGER AGREEMENT, AND
RECOMMENDED THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT.
In connection with its review and consideration of the terms of the Merger,
the Board of Directors of Mac Frugal's retained NationsBanc Montgomery
Securities, Inc. ("NMSI") to render an opinion as investment bankers as to
whether the exchange rate for the conversion of shares of Mac Frugal's Common
Stock into Consolidated Stores Common Stock is fair from a financial point of
view to the holders of Mac Frugal's Common Stock as of the date of such opinion
and as of the date of this letter. A description of the opinions delivered by
NMSI to the Board of Directors of Mac Frugal's (including a description of
qualifications, assumptions and limitations set forth therein), and a discussion
of the reasons for the Board of Directors' determination that the Merger is fair
to, and in the best interests of, Mac Frugal's stockholders, is set forth in the
attached Joint Proxy Statement/Prospectus.
Under the Delaware General Corporation Law, the affirmative vote of the
holders of a majority of the outstanding shares of Mac Frugal's Common Stock
entitled to vote is required for adoption of the Merger Agreement. Your vote is
important, regardless of the number of shares you own.
Attached to this letter is a Notice of Mac Frugal's Special Meeting and a
Joint Proxy Statement/ Prospectus with respect to the Merger. These materials
include information concerning Mac Frugal's, Consolidated Stores and Sub, as
well as a description of the proposed Merger. We encourage you to carefully read
and review them.
We urge you to complete, sign, date and return the enclosed proxy card as
soon as possible, whether or not you plan to attend the Mac Frugal's Special
Meeting in person and regardless of the number of shares you own. You may, of
course, attend the Mac Frugal's Special Meeting and vote in person even if you
have previously returned your proxy card.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH THE PROXY CARD.
Sincerely,
David H. Batchelder Sig
David H. Batchelder
Chairman of the Board
<PAGE> 6
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
2430 E. DEL AMO BOULEVARD
DOMINGUEZ, CALIFORNIA 90220-6306
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 15, 1998
To the Stockholders of Mac Frugal's Bargains - Close-outs Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Mac
Frugal's Bargains - Close-outs Inc., a Delaware corporation ("Mac Frugal's"),
will be held at 10:00 a.m., local time, on Thursday, January 15, 1998, at the
Long Beach Airport Marriott Hotel, 4700 Airport Plaza Drive, Long Beach,
California (the "Mac Frugal's Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of November 4, 1997 (the "Merger
Agreement"), by and among Consolidated Stores Corporation, a Delaware
corporation ("Consolidated Stores"), MBC Consolidated Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of
Consolidated Stores ("Sub"), and Mac Frugal's, pursuant to which:
(a) Sub will be merged with and into Mac Frugal's (the "Merger"),
with Mac Frugal's surviving as a wholly owned subsidiary of Consolidated
Stores; and
(b) at the Effective Time of the Merger, all issued and outstanding
shares of common stock, par value $.02778 per share, of Mac Frugal's
("Mac Frugal's Common Stock") (other than shares of Mac Frugal's Common
Stock held in the treasury of Mac Frugal's or owned by Consolidated
Stores, Sub or any other direct or indirect wholly owned subsidiary of
Consolidated Stores) will be canceled and converted automatically into
the right to receive, upon the surrender of the certificate formerly
representing such shares, a number of duly authorized, validly issued,
fully paid and nonassessable shares of common stock, par value $.01 per
share, of Consolidated Stores ("Consolidated Stores Common Stock")
determined as more fully described in the attached Joint Proxy
Statement/Prospectus. Under the terms of the Merger Agreement,
Consolidated Stores will issue between 0.88 and 1.00 shares of
Consolidated Stores Common Stock for each share of Mac Frugal's Common
Stock.
2. To transact such other business as may properly come before the Mac
Frugal's Special Meeting or any adjournments or postponements thereof.
Additional information relating to these matters is set forth in the
attached Joint Proxy Statement/Prospectus.
Only holders of record of shares of Mac Frugal's Common Stock at the close
of business on December 15, 1997 are entitled to notice of, and to vote at, the
Mac Frugal's Special Meeting and any adjournments or postponements thereof.
All stockholders are cordially invited to attend the Mac Frugal's Special
Meeting in person. However, to ensure your representation at the Mac Frugal's
Special Meeting, you are urged to complete, sign and date the enclosed proxy
card and return it as promptly as possible in the enclosed postage-prepaid
envelope.
BY ORDER OF THE BOARD OF DIRECTORS
Philip L. Carter Sig
Philip L. Carter
President and Chief Executive Officer
December 16, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MAC FRUGAL'S SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN
THE JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED
AT THE MAC FRUGAL'S SPECIAL MEETING.
DO NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR STOCK CERTIFICATES.
<PAGE> 7
CONSOLIDATED STORES CORPORATION
AND
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
JOINT PROXY STATEMENT
CONSOLIDATED STORES CORPORATION
PROSPECTUS
------------------------
This Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is
being furnished to the holders of common stock, par value $.01 per share
("Consolidated Stores Common Stock"), of Consolidated Stores Corporation, a
Delaware corporation ("Consolidated Stores"), in connection with the
solicitation of proxies by the Board of Directors of Consolidated Stores (the
"Consolidated Stores Board") for use at a Special Meeting of Stockholders of
Consolidated Stores to be held at 1:00 p.m., local time, on January 15, 1998, at
the headquarters of Consolidated Stores' principal operating subsidiary located
at 300 Phillipi Road, Columbus, Ohio, and at any and all adjournments or
postponements thereof (the "Consolidated Stores Special Meeting") for the
purposes described herein.
This Proxy Statement/Prospectus is also being furnished to the holders of
common stock, par value $.02778 per share ("Mac Frugal's Common Stock"), of Mac
Frugal's Bargains - Close-outs Inc., a Delaware corporation ("Mac Frugal's"), in
connection with the solicitation of proxies by the Board of Directors of Mac
Frugal's (the "Mac Frugal's Board") for use at a Special Meeting of Stockholders
of Mac Frugal's to be held at 10:00 a.m., local time, on January 15, 1998, at
the Long Beach Airport Marriott Hotel, 4700 Airport Plaza Drive, Long Beach,
California, and at any and all adjournments or postponements thereof (the "Mac
Frugal's Special Meeting," and together with the Consolidated Stores Special
Meeting, the "Special Meetings") for the purposes described herein.
This Proxy Statement/Prospectus relates to the Agreement and Plan of Merger,
dated as of November 4, 1997 (the "Merger Agreement"), by and among Consolidated
Stores, MBC Consolidated Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Consolidated Stores ("Sub"), and Mac Frugal's, which
provides for the merger (the "Merger") of Sub with and into Mac Frugal's, with
Mac Frugal's surviving as a wholly owned subsidiary of Consolidated Stores.
Subject to the terms and conditions of the Merger Agreement, if the Merger is
consummated, each share of Mac Frugal's Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger other than shares of Mac
Frugal's Common Stock owned by Mac Frugal's as treasury stock and other than
shares of Mac Frugal's Common Stock held by Consolidated Stores, Sub or any
other direct or indirect wholly owned subsidiary of Consolidated Stores shall by
virtue of the Merger and without any action on the part of the holder thereof be
canceled and converted automatically into the right to receive a number of duly
authorized, validly issued, fully paid and nonassessable shares of Consolidated
Stores Common Stock equal to the "Exchange Rate."
The Exchange Rate means: (i) 1.00, if and only if the average closing price
per share of Consolidated Stores Common Stock on the New York Stock Exchange
("NYSE") as reported on the NYSE Composite Tape during the period comprising the
twenty NYSE trading days immediately preceding the second NYSE trading day
immediately preceding the Effective Time of the Merger (the "Pricing Period")
(the "Average Consolidated Stores Share Price") is less than or equal to $39.00;
or (ii) the quotient of (a) $39.00 divided by (b) the Average Consolidated
Stores Share Price, if and only if the Average Consolidated Stores Share Price
is both (x) greater than $39.00 and (y) less than or equal to $41.49; or (iii)
.94, if and only if the Average Consolidated Stores Share Price is both (x)
greater than $41.49 and (y) less than or equal to $43.62; or (iv)(a) .94 less
(b) the product of (x) the Average Consolidated Stores Share Price less $43.62
multiplied by (y) .01, if and only if the Average Consolidated Stores Share
Price is both (A) greater than $43.62 and (B) less than or equal to $49.62; or
(v) .88, if and only if the Average Consolidated Stores Share Price is greater
than $49.62. In the event that the Average Consolidated Stores Share Price is
less than or equal to $35.00, Mac Frugal's may, at any time on or prior to the
Effective Time, terminate the Merger Agreement in accordance with the
termination provisions of the Merger Agreement. Each option granted by Mac
Frugal's to purchase Mac Frugal's Common Stock that is outstanding and
unexercised (each a "Mac Frugal's Stock Option") will be converted automatically
into an option to purchase shares of Consolidated Stores Common Stock, on the
terms and subject to the conditions set forth in the Merger Agreement, as more
fully described in this Proxy Statement/Prospectus. PROMPTLY FOLLOWING THE
CLOSING OF THE PRICING PERIOD, CONSOLIDATED STORES AND MAC FRUGAL'S WILL ISSUE A
JOINT PRESS RELEASE ANNOUNCING THE EXCHANGE RATE. ONCE THE PRICING PERIOD HAS
ENDED, STOCKHOLDERS MAY ALSO CALL GEORGESON & COMPANY AT 1-800-223-2064 TO
CONFIRM THE EXCHANGE RATE. No fractional shares of Consolidated Stores Common
Stock will be issued in the Merger. In lieu of any such fractional shares, each
holder of Mac Frugal's Common Stock who otherwise would be entitled to receive a
fractional share of Consolidated Stores Common Stock pursuant to the Merger will
be paid an amount in cash equal to such fractional interest multiplied by the
Average Consolidated Stores Share Price. See "MERGER AGREEMENT -- Conversion of
Mac Frugal's Common Stock." Each share of Consolidated Stores Common Stock will
be issued with one associated preferred stock purchase right (a "Right").
This Proxy Statement/Prospectus also constitutes the prospectus of
Consolidated Stores filed as part of a Registration Statement on Form S-4 with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended, relating to the shares of Consolidated Stores Common
Stock to be issued in the Merger. Such Registration Statement also relates to
the Consolidated Stores Rights.
SEE "RISK FACTORS" ON PAGE 23 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY THE STOCKHOLDERS OF CONSOLIDATED STORES AND MAC
FRUGAL'S.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Consolidated Stores and Mac Frugal's on or
about December 19, 1997.
------------------------
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER 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 ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is December 16, 1997.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
AVAILABLE INFORMATION................................................................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 1
FORWARD-LOOKING STATEMENTS............................................................ 3
SUMMARY............................................................................... 4
The Companies....................................................................... 4
The Special Meetings................................................................ 4
Risk Factors........................................................................ 5
The Merger.......................................................................... 6
Accounting Treatment................................................................ 15
Certain Federal Income Tax Consequences............................................. 15
Appraisal Rights.................................................................... 15
Other Legal Matters; Regulatory Approvals........................................... 15
Comparative Market Prices and Dividends............................................. 16
UNAUDITED COMPARATIVE PER SHARE DATA.................................................. 18
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA...................................... 19
SELECTED HISTORICAL FINANCIAL DATA.................................................... 19
SELECTED UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA................................... 22
RISK FACTORS.......................................................................... 23
Effect of Consolidated Stores' Stock Price on Merger Consideration.................. 23
Ability to Efficiently Integrate and Operate Mac Frugal's........................... 23
Ability to Achieve Continued Growth................................................. 23
Competition......................................................................... 24
Seasonality......................................................................... 24
Purchasing of Suitable Merchandise.................................................. 24
Impact of Foreign Imports........................................................... 24
Disruptions in Receiving and Distribution........................................... 25
Effect of Certain Anti-Takeover Provisions.......................................... 25
INTRODUCTION.......................................................................... 26
CONSOLIDATED STORES SPECIAL MEETING................................................... 27
Purpose............................................................................. 27
Record Date; Voting Rights.......................................................... 27
Share Ownership of Management....................................................... 27
Quorum.............................................................................. 27
Revocation of Proxies............................................................... 27
Solicitation of Proxies............................................................. 28
Required Vote....................................................................... 28
MAC FRUGAL'S SPECIAL MEETING.......................................................... 28
Purpose............................................................................. 28
Record Date; Voting Rights.......................................................... 28
Share Ownership of Management....................................................... 29
Quorum.............................................................................. 29
Revocation of Proxies............................................................... 29
Solicitation of Proxies............................................................. 29
Required Vote....................................................................... 29
</TABLE>
i
<PAGE> 9
<TABLE>
<CAPTION>
SECTION PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
THE MERGER............................................................................ 30
General............................................................................. 30
Background of the Merger............................................................ 31
Consolidated Stores' Reasons for the Merger; Recommendation of the Consolidated
Stores Board..................................................................... 33
Opinion of Financial Advisor to Consolidated Stores................................. 34
Mac Frugal's Reasons for the Merger; Recommendation of the Mac Frugal's Board....... 38
Opinion Addressed to the Mac Frugal's Board......................................... 40
Plans for Mac Frugal's.............................................................. 44
Interests of Certain Persons........................................................ 44
Indemnification..................................................................... 51
Estimated Synergies................................................................. 51
Certain Federal Income Tax Consequences............................................. 52
Accounting Treatment................................................................ 53
Other Legal Matters; Regulatory Approvals........................................... 53
No Appraisal Rights................................................................. 54
Delisting and Deregistration of Mac Frugal's Common Stock........................... 54
Resales of Consolidated Stores Common Stock......................................... 54
New York Stock Exchange Listing..................................................... 54
COMPARATIVE MARKET PRICES AND DIVIDENDS............................................... 55
MERGER AGREEMENT...................................................................... 57
The Merger.......................................................................... 57
Conversion of Mac Frugal's Common Stock............................................. 57
Exchange Procedures................................................................. 58
Treatment of Stock Options.......................................................... 59
Interim Operations.................................................................. 60
Treatment of Certain Indebtedness................................................... 62
No Solicitation..................................................................... 62
Directors' and Officers' Insurance and Indemnification.............................. 64
Employee Benefits and Employee Matters.............................................. 64
Confidentiality Agreements.......................................................... 65
Representations and Warranties...................................................... 65
Effective Time...................................................................... 65
Conditions to the Merger............................................................ 65
Termination; Fees................................................................... 66
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................................... 68
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS............................ 76
DESCRIPTION OF CONSOLIDATED STORES CAPITAL STOCK...................................... 77
Consolidated Stores Common Stock.................................................... 77
Dividend Rights..................................................................... 77
Voting Rights....................................................................... 77
Change of Control................................................................... 77
Miscellaneous....................................................................... 79
Consolidated Stores Preferred Stock................................................. 80
</TABLE>
ii
<PAGE> 10
<TABLE>
<CAPTION>
SECTION PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
COMPARISON OF THE RIGHTS OF HOLDERS OF MAC FRUGAL'S COMMON STOCK AND CONSOLIDATED
STORES COMMON STOCK................................................................. 80
Authorized Capital Stock......................................................... 80
Board of Directors............................................................... 80
Repurchase and Redemption of Shares.............................................. 82
Payment of Dividends to Stockholders............................................. 82
Preemptive Rights................................................................ 83
Amendments to Charter; Amendments to By-Laws..................................... 83
Change of Control Provisions..................................................... 83
Special Meeting of Stockholders.................................................. 83
Stockholder Consent to Action Without a Meeting.................................. 84
Liquidation Rights............................................................... 84
BUSINESS OF CONSOLIDATED STORES....................................................... 85
BUSINESS OF MAC FRUGAL'S.............................................................. 85
EXPERTS............................................................................... 86
LEGAL OPINIONS........................................................................ 86
STOCKHOLDERS' PROPOSALS............................................................... 86
ANNEXES
Annex A Agreement and Plan of Merger dated November 4, 1997......................... A-1
Annex B Consulting Agreement dated November 4, 1997................................. B-1
Annex C Noncompetition Agreement dated November 4, 1997............................. C-1
Annex D Opinion, dated November 3, 1997, of Merrill Lynch........................... D-1
Annex E Opinion, dated December 16, 1997, of NMSI................................... E-1
</TABLE>
iii
<PAGE> 11
AVAILABLE INFORMATION
Each of Consolidated Stores and Mac Frugal's is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Information, as of particular dates, concerning Consolidated
Stores and Mac Frugal's directors and officers, their remuneration, stock
options granted to them, the principal holders of Consolidated Stores and Mac
Frugal's securities, any material interests of such persons in transactions with
Consolidated Stores and Mac Frugal's and other matters is required to be
disclosed in proxy statements distributed to Consolidated Stores stockholders
and to Mac Frugal's stockholders and filed with the Commission. Such reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: 7 World Trade Center, Thirteenth Floor, New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may also be obtained by mail, upon payment of the Commission's
customary fees, by writing to the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be
accessed electronically by means of the Commission's web site on the Internet at
http://www.sec.gov. Consolidated Stores Common Stock and Mac Frugal's Common
Stock are each listed on the New York Stock Exchange ("NYSE"). Reports, proxy
statements and other information filed by Mac Frugal's and Consolidated Stores
may be inspected at the offices of the NYSE at 20 Broad Street, New York, New
York 10005.
Consolidated Stores has filed with the Commission a registration statement
on Form S-4 (together with any amendments thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), relating to
the shares of Consolidated Stores Common Stock offered hereby of which this
Proxy Statement/Prospectus is a part. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto filed by Consolidated Stores, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. The
Registration Statement and exhibits thereto may be inspected without charge at
the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies thereof may be obtained from the Commission at prescribed rates.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER
THAN EXHIBITS THERETO WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER OF SHARES OF CONSOLIDATED STORES COMMON STOCK OR MAC FRUGAL'S COMMON STOCK
TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST, TO, IN THE CASE OF DOCUMENTS RELATING TO CONSOLIDATED STORES, MICHAEL
J. POTTER, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, CONSOLIDATED
STORES CORPORATION, 300 PHILLIPI ROAD, P.O. BOX 28512, COLUMBUS, OHIO
43228-0512, TELEPHONE NUMBER (614) 278-6800 AND, IN THE CASE OF DOCUMENTS
RELATING TO MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC., NEIL T. WATANABE, SENIOR
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, 2430 E. DEL AMO BOULEVARD,
DOMINGUEZ, CALIFORNIA 90220-6306, TELEPHONE NUMBER (310) 537-9220. IN ORDER TO
ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING, ANY
REQUEST THEREFOR SHOULD BE MADE NOT LATER THAN JANUARY 5, 1998.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by
Consolidated Stores pursuant to the Exchange Act are incorporated by reference
in this Proxy Statement/Prospectus:
1. Consolidated Stores' Annual Report on Form 10-K for the fiscal year
ended February 1, 1997;
2. Consolidated Stores' Annual Report on Form 10-K/A dated June 27,
1997;
1
<PAGE> 12
3. Consolidated Stores' Quarterly Reports on Forms 10-Q for the fiscal
quarters ended May 3, 1997, August 2, 1997 and November 1, 1997;
4. Consolidated Stores' Current Report on Form 8-K dated May 21, 1997;
5. Consolidated Stores' Current Report on Form 8-K dated November 6,
1997;
6. The description of capital stock of Consolidated Stores, including
Consolidated Stores Common Stock, that is contained in the registration
statement filed under the Exchange Act under File No. 333-2545, including
all amendments or reports filed for the purpose of updating such
description;
7. Consolidated Stores' Schedule 14A Definitive Proxy Statement dated
April 25, 1997; and
8. Consolidated Stores' Registration Statement on Form S-8 dated July
25, 1997.
The following documents previously filed with the Commission by Mac
Frugal's pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. Mac Frugal's Annual Report on Form 10-K for the fiscal year ended
February 2, 1997;
2. Mac Frugal's Quarterly Reports on Form 10-Q for the quarters ended
May 4, 1997, August 3, 1997 and November 2, 1997;
3. Mac Frugal's Current Report on Form 8-K dated November 7, 1997; and
4. Mac Frugal's Schedule 14A Definitive Proxy Statement dated May 15,
1997.
The information relating to Consolidated Stores and Mac Frugal's contained
in this Proxy Statement/ Prospectus does not purport to be comprehensive and
should be read together with the information in the documents incorporated by
reference herein.
All information herein with respect to Consolidated Stores and Sub has been
furnished by Consolidated Stores and all information herein with respect to Mac
Frugal's has been furnished by Mac Frugal's.
This Proxy Statement/Prospectus does not cover any resale of the securities
to be received by stockholders of Mac Frugal's upon consummation of the Merger,
and no person is authorized to make any use of this Proxy Statement/Prospectus
in connection with any such resale.
All documents filed by either Consolidated Stores or Mac Frugal's pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Proxy Statement/Prospectus and prior to the date of the Special Meetings
shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and be a part hereof from the dates of filing such
documents or reports. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document which
also is or is deemed to be incorporated 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 Proxy
Statement/Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY EITHER CONSOLIDATED STORES OR MAC
FRUGAL'S. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, NOR DOES IT CONSTITUTE
THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CONSOLIDATED STORES OR MAC FRUGAL'S
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
2
<PAGE> 13
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Proxy Statement/Prospectus under "THE
MERGER -- Background of the Merger," "THE MERGER -- Consolidated Stores' Reasons
for the Merger; Recommendation of the Consolidated Stores Board," "THE
MERGER -- Mac Frugal's Reasons for the Merger; Recommendation of the Mac
Frugal's Board" and "THE MERGER -- Estimated Synergies," in addition to certain
statements contained elsewhere in this Proxy Statement/Prospectus or
incorporated herein by reference that are not statements of historical facts,
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are thus prospective. Such forward-looking
statements include, without limitation, statements regarding Consolidated
Stores' or Mac Frugal's future financial position, business strategy, budgets,
reserve estimates, expected future production, capital costs and expenses,
expected cost savings or synergies, expected sources, timing and adequacy of
funding of projects and other cash requirements and plans and objectives of
management for future operations. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Important factors that could cause actual results to differ
materially from the results expressed or implied by any forward-looking
statements ("Cautionary Statements") include the general economic conditions,
changes in consumer demand and preferences, adverse weather patterns, import
risks, including potential political and social unrest, duties, tariffs and
quotas and other factors disclosed under "Risk Factors." All subsequent written
and oral forward-looking statements relating to the matters described in this
Proxy Statement/Prospectus and attributable to Consolidated Stores or Mac
Frugal's or to persons acting on behalf of either are expressly qualified in
their entirety by the Cautionary Statements.
3
<PAGE> 14
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus. This summary is qualified in its entirety by
reference to the more detailed information contained elsewhere in this Proxy
Statement/Prospectus, the Annexes hereto and the documents referred to herein.
Stockholders are urged to review carefully this Proxy Statement/Prospectus, the
Merger Agreement attached hereto as Annex A and the other Annexes attached
hereto.
THE COMPANIES
Consolidated Stores Corporation. Consolidated Stores Corporation
("Consolidated Stores") is a Delaware corporation with its principal executive
offices located at 300 Phillipi Road, Columbus, Ohio 43228-0512. The telephone
number of Consolidated Stores at such offices is (614) 278-6800. Consolidated
Stores is the nation's largest close-out retailer with 1,946 stores located in
all 50 states and Puerto Rico. Consolidated Stores operates 677 retail close-out
stores, primarily under the names Odd Lots and Big Lots in the Midwestern,
Southern and Mid-Atlantic regions of the United States, and 1,269 retail toy
stores throughout the United States and Puerto Rico, primarily under the names
K-B Toys, K-B Toy Works and K-B Toy Outlet. Approximately 1,045 of the toy
stores were acquired as of May 5, 1996 in the acquisition of Kay-Bee Center,
Inc. from Melville Corporation. See "BUSINESS OF CONSOLIDATED STORES."
MBC Consolidated Acquisition Corporation. MBC Consolidated Acquisition
Corporation ("Sub"), a newly incorporated Delaware corporation and a wholly
owned subsidiary of Consolidated Stores, has not conducted any business other
than in connection with the Agreement and Plan of Merger, dated as of November
4, 1997, by and among Mac Frugal's, Consolidated Stores and Sub (the "Merger
Agreement"). All of the issued and outstanding shares of capital stock of Sub
are directly owned by Consolidated Stores. The principal executive offices of
Sub are located at 300 Phillipi Road, Columbus, Ohio 43228-0512. The telephone
number of Sub at such offices is (614) 278-6800. See "BUSINESS OF CONSOLIDATED
STORES."
Mac Frugal's Bargains - Close-outs Inc. Mac Frugal's Bargains - Close-outs
Inc. ("Mac Frugal's") is a Delaware corporation with its principal executive
offices located at 2430 E. Del Amo Boulevard, Dominguez, California 90220-6306.
The telephone number of Mac Frugal's at such offices is (310) 537-9220. Mac
Frugal's operates a chain of 326 retail stores that specialize in the sale of
new "close-out" merchandise which is purchased from manufacturers and
wholesalers at prices less than initial wholesale prices and is sold at prices
below normal retail prices. Mac Frugal's operates 121 of its retail stores under
the name "Pic 'N' Save" in the Southern California area and 205 of its retail
stores under the name "Mac Frugal's Bargains - Close-outs" in the western region
of the United States. Approximately 52% of Mac Frugal's stores are located in
California. See "BUSINESS OF MAC FRUGAL'S."
THE SPECIAL MEETINGS
Consolidated Stores Special Meeting
Purpose. The Consolidated Stores Special Meeting will be held at the
headquarters of Consolidated Stores' principal operating subsidiary located at
300 Phillipi Road, Columbus, Ohio, on January 15, 1998, at 1:00 p.m., local
time, to consider and vote upon a proposal to approve the issuance of shares of
common stock, par value $.01 per share, of Consolidated Stores (the
"Consolidated Stores Common Stock") pursuant to the Merger Agreement (the "Share
Issuance"). The stockholders of Consolidated Stores will also consider and take
action upon any other business that may properly be brought before the
Consolidated Stores Special Meeting. See "CONSOLIDATED STORES SPECIAL
MEETING -- Purpose."
Record Date. Only holders of record of Consolidated Stores Common Stock at
the close of business on December 15, 1997 ("Consolidated Stores Record Date")
are entitled to receive notice of and to vote at the Consolidated Stores Special
Meeting. At the close of business on the Consolidated Stores Record Date, there
were 84,386,867 shares of Consolidated Stores Common Stock outstanding, each of
which entitles the registered holder thereof to one vote. See "CONSOLIDATED
STORES SPECIAL MEETING -- Record Date; Voting Rights."
4
<PAGE> 15
Required Vote. Approval of the Share Issuance will require the affirmative
vote of a majority of the votes cast on the Share Issuance, provided that the
total number of votes cast on such proposal represents more than 50% of the
outstanding shares of Consolidated Stores Common Stock entitled to vote at the
Consolidated Stores Special Meeting.
THE BOARD OF DIRECTORS OF CONSOLIDATED STORES (THE "CONSOLIDATED STORES
BOARD") HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS ADVISABLE AND FAIR TO AND
IN THE BEST INTERESTS OF CONSOLIDATED STORES, HAS APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT CONSOLIDATED STORES STOCKHOLDERS VOTE FOR THE
SHARE ISSUANCE. SEE "CONSOLIDATED STORES SPECIAL MEETING -- REQUIRED VOTE."
Share Ownership of Management. At the close of business on the
Consolidated Stores Record Date, directors and executive officers of
Consolidated Stores and their affiliates were the record owners of an aggregate
of 302,075 (approximately .358%) of the shares of Consolidated Stores Common
Stock then outstanding.
Mac Frugal's Special Meeting
Purpose. The Mac Frugal's Special Meeting will be held at the Long Beach
Airport Marriott Hotel, 4700 Airport Plaza Drive, Long Beach, California, on
January 15, 1998, at 10:00 a.m., local time, to consider and vote upon a
proposal to approve and adopt the Merger Agreement, which provides for the
merger of Sub with and into Mac Frugal's, with Mac Frugal's surviving as a
wholly owned subsidiary of Consolidated Stores. The stockholders of Mac Frugal's
will also consider and take action upon any other business which may properly be
brought before the Mac Frugal's Special Meeting. See "MAC FRUGAL'S SPECIAL
MEETING -- Purpose."
Record Date. Only holders of record of common stock, par value $.02778 per
share, of Mac Frugal's (the "Mac Frugal's Common Stock") at the close of
business on December 15, 1997 (the "Mac Frugal's Record Date") are entitled to
receive notice of and to vote at the Mac Frugal's Special Meeting. At the close
of business on the Mac Frugal's Record Date, there were 24,837,042 shares of Mac
Frugal's Common Stock outstanding, each of which entitles the registered holder
thereof to one vote. See "MAC FRUGAL'S SPECIAL MEETING -- Record Date; Voting
Rights."
Required Vote. Approval and adoption of the Merger Agreement will require
the affirmative vote of a majority of the outstanding shares of Mac Frugal's
Common Stock entitled to vote thereon at the Mac Frugal's Special Meeting.
Share Ownership of Management. At the close of business on the Mac
Frugal's Record Date, directors and executive officers of Mac Frugal's and their
affiliates were the record owners of an aggregate of 23,000 (approximately
.0926%) of the shares of Mac Frugal's Common Stock then outstanding.
PRIOR TO THE EXECUTION OF THE MERGER AGREEMENT, THE BOARD OF DIRECTORS OF
MAC FRUGAL'S (THE "MAC FRUGAL'S BOARD") UNANIMOUSLY DETERMINED THAT THE MERGER
IS FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF MAC FRUGAL'S,
APPROVED THE MERGER AGREEMENT, AND RECOMMENDED THAT STOCKHOLDERS OF MAC FRUGAL'S
VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AT THE MAC
FRUGAL'S SPECIAL MEETING.
RISK FACTORS
Stockholders of Mac Frugal's, in deciding whether to approve the Merger
Agreement, and stockholders of Consolidated Stores, in deciding whether to
approve the Share Issuance, should carefully consider the following risk
factors, in addition to other information contained in this Joint Proxy
Statement/Prospectus or incorporated by reference herein: (i) the effect of
Consolidated Stores' stock price on the Exchange Rate; (ii) Consolidated Stores'
ability to efficiently integrate and operate the Mac Frugal's business; (iii)
Consolidated Stores' ability to achieve continued growth; (iv) the highly
competitive and seasonal nature of the retail industry; (v) the ability to
purchase suitable merchandise at competitive prices; (vi) the potential
5
<PAGE> 16
impact of foreign imports; (vii) disruptions in receiving and distribution
operations; and (viii) effects of certain anti-takeover provisions on
Consolidated Stores Common Stock. See "Risk Factors" beginning on page 23 for a
more detailed discussion of such factors.
THE MERGER
General
Pursuant to the Agreement and Plan of Merger, dated as of November 4, 1997,
by and among Consolidated Stores, Sub and Mac Frugal's (the "Merger Agreement"),
on the date on which a certificate of merger has been filed with the Secretary
of State of the State of Delaware (the "Effective Time"), each share of Mac
Frugal's Common Stock issued and outstanding immediately prior to the Effective
Time, other than shares of Mac Frugal's Common Stock owned by Mac Frugal's as
treasury stock and shares of Mac Frugal's Common Stock owned by Consolidated
Stores, Sub or any other direct or indirect wholly owned subsidiary of
Consolidated Stores, shall by virtue of the Merger and without any action on the
part of the holder thereof be canceled and converted automatically into the
right to receive a number of duly authorized, validly issued, fully paid and
nonassessable shares of Consolidated Stores Common Stock equal to the Exchange
Rate (as defined below).
The Exchange Rate means: (i) 1.00, if and only if the average closing price
per share of Consolidated Stores Common Stock on the New York Stock Exchange
("NYSE") as reported on the NYSE Composite Tape during the period comprising the
twenty NYSE trading days immediately preceding the second NYSE trading day
immediately preceding the Effective Time of the Merger (the "Pricing Period")
(the "Average Consolidated Stores Share Price") is less than or equal to $39.00;
or (ii) the quotient of (a) $39.00 divided by (b) the Average Consolidated
Stores Share Price, if and only if the Average Consolidated Stores Share Price
is both (x) greater than $39.00 and (y) less than or equal to $41.49; or (iii)
.94, if and only if the Average Consolidated Stores Share Price is both (x)
greater than $41.49 and (y) less than or equal to $43.62; or (iv)(a) .94 less
(b) the product of (x) the Average Consolidated Stores Share Price less $43.62
multiplied by (y) .01, if and only if the Average Consolidated Stores Share
Price is both (A) greater than $43.62 and (B) less than or equal to $49.62; or
(v) .88, if and only if the Average Consolidated Stores Share Price is greater
than $49.62. In the event that the Average Consolidated Stores Share Price is
less than or equal to $35.00, Mac Frugal's may, on or prior to the Effective
Time, terminate the Merger Agreement in accordance with the termination
provisions of the Merger Agreement. PROMPTLY FOLLOWING THE CLOSING OF THE
PRICING PERIOD, CONSOLIDATED STORES AND MAC FRUGAL'S WILL ISSUE A JOINT PRESS
RELEASE ANNOUNCING THE EXCHANGE RATE. ONCE THE PRICING PERIOD HAS ENDED,
STOCKHOLDERS MAY ALSO CALL GEORGESON & COMPANY AT 1-800-223-2064 TO CONFIRM THE
EXCHANGE RATE. No fractional shares of Consolidated Stores Common Stock will be
issued in the Merger. In lieu of any such fractional shares, each holder of Mac
Frugal's Common Stock who otherwise would be entitled to receive a fractional
share of Consolidated Stores Common Stock pursuant to the Merger will be paid an
amount in cash equal to such fractional interest multiplied by the Average
Consolidated Stores Share Price. Additionally, each share of Consolidated Stores
Common Stock issued pursuant to the Merger will be issued with one associated
Consolidated Stores Right. See "MERGER AGREEMENT -- Conversion of Mac Frugal's
Common Stock."
By way of example (but in each instance subject to payment of cash in lieu
of fractional shares): if the Average Consolidated Stores Share Price is $38.00,
the Exchange Rate will be 1.00 and each holder of a share of Mac Frugal's Common
Stock will be entitled to receive one share of Consolidated Stores Common Stock.
If the Average Consolidated Stores Share Price is $40.00, the Exchange Rate will
be .975 and each holder of a share of Mac Frugal's Common Stock will be entitled
to receive .975 shares of Consolidated Stores Common Stock. If the Average
Consolidated Stores Share Price is $42.00, the Exchange Rate will be .94 and
each holder of a share of Mac Frugal's Common Stock will be entitled to receive
.94 shares of Consolidated Stores Common Stock. If the Average Consolidated
Stores Share price is $44.00, the Exchange Rate will be .936 shares and each
holder of a share of Mac Frugal's Common Stock will be entitled to receive .936
shares of Consolidated Stores Common Stock. If the Average Consolidated Stores
Share Price is $50.00, the Exchange Rate will be .88 and each holder of a share
of Mac Frugal's Common Stock will be entitled to receive .88 shares of
Consolidated Stores Common Stock.
6
<PAGE> 17
THE CONSIDERATION TO BE RECEIVED BY MAC FRUGAL'S STOCKHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT BE DETERMINED PRECISELY PRIOR TO THE
CLOSE OF BUSINESS ON THE SECOND DAY IMMEDIATELY PRECEDING THE EFFECTIVE TIME.
THE CONSIDERATION WILL DEPEND UPON THE AVERAGE CONSOLIDATED STORES SHARE PRICE,
WHICH ESTABLISHES THE EXCHANGE RATE. BECAUSE THE AVERAGE CONSOLIDATED STORES
SHARE PRICE AND THE EXCHANGE RATE AS OF THE EFFECTIVE TIME ARE NOT DETERMINABLE
AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE
SPECIAL MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE
FOR THE OUTSTANDING MAC FRUGAL'S COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Had
the Merger been consummated on December 15, 1997, the Average Consolidated
Stores Share Price would have been $48.44 and each share of Mac Frugal's Common
Stock outstanding would have been converted into .892 shares of Consolidated
Stores Common Stock (together with one associated Consolidated Stores Right). In
fact, the Average Consolidated Stores Share Price may be greater than or less
than $48.44. See "MERGER AGREEMENT -- Conversion of Mac Frugal's Common Stock."
THE MARKET VALUE OF THE CONSOLIDATED STORES COMMON STOCK DURING THE PRICING
PERIOD AND AFTER THE EFFECTIVE TIME WILL, AMONG OTHER THINGS, DEPEND UPON, AND
IS EXPECTED TO FLUCTUATE WITH, THE PERFORMANCE OF CONSOLIDATED STORES,
CONDITIONS (ECONOMIC OR OTHERWISE) AFFECTING THE RETAIL CLOSE-OUT INDUSTRY, AND
MARKET CONDITIONS AND OTHER FACTORS THAT GENERALLY INFLUENCE PRICES OF
SECURITIES. SEE "THE MERGER -- GENERAL."
Consolidated Stores' Reasons for the Merger; Recommendation of the
Consolidated Stores Board
The Consolidated Stores Board has unanimously determined that the Merger is
advisable and fair to and in the best interests of Consolidated Stores and has
approved the Merger Agreement. THE CONSOLIDATED STORES BOARD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF CONSOLIDATED STORES VOTE IN FAVOR OF THE
SHARE ISSUANCE AT THE CONSOLIDATED STORES SPECIAL MEETING. In reaching its
conclusion, the Consolidated Stores Board considered a number of factors,
including, without limitation, the following:
- the judgment, advice and analyses of its management;
- the analyses prepared by Merrill Lynch & Co. ("Merrill Lynch"), and the
opinion of Merrill Lynch, delivered to the Consolidated Stores Board,
dated November 3, 1997, to the effect that, based upon and subject to
certain factors and assumptions stated therein, as of such date, the
Exchange Rate is fair from a financial point of view to Consolidated
Stores. See "THE MERGER -- Opinion of Financial Advisor to Consolidated
Stores"; "THE MERGER -- Background of the Merger";
- the financial condition, results of operations and cash flows of
Consolidated Stores and Mac Frugal's, both on a historical and a
prospective basis;
- the fact that the Merger is expected to be accretive to Consolidated
Stores' earnings per share by the end of the first year of operations
following the Merger;
- Consolidated Stores management's preliminary review of Mac Frugal's
business and operations, that the Merger will result in a number of
important synergies including, but not limited to, improvement in gross
margins through enhanced purchasing power, enhanced utilization of
distribution facilities, elimination of duplicative overhead, reduced
advertising and marketing expenses, the consolidation of data centers and
improved communications systems and a working capital benefit from the
consolidation of warehouse inventories. See "THE MERGER -- Estimated
Synergies";
- the terms and conditions of the Merger Agreement, including the amount
and form of Merger consideration and the structuring of the Merger to
take advantage of the pooling of interests method of accounting;
- historical market prices and trading information with respect to
Consolidated Stores Common Stock and Mac Frugal's Common Stock; and
7
<PAGE> 18
- the strategic fit between Consolidated Stores and Mac Frugal's, including
the potential for synergies, and the fact that Mac Frugal's was the
foremost logical acquisition partner given Consolidated Stores' and Mac
Frugal's businesses and geographical diversity.
In view of the number and disparate nature of the factors considered by the
Consolidated Stores Board, the Consolidated Stores Board did not assign relative
weight to the factors considered in reaching its conclusions. Rather, the
Consolidated Stores Board viewed its conclusions and recommendations as being
based on the totality of the information being presented to and considered by
it. See "THE MERGER -- Consolidated Stores' Reasons for the Merger;
Recommendations of the Consolidated Stores Board."
Opinion of Financial Advisor to Consolidated Stores
Merrill Lynch delivered its oral opinion on November 3, 1997 to the
Consolidated Stores Board, which was confirmed by its written opinion, dated
November 3, 1997, to the effect that, based upon and subject to certain factors
and assumptions stated therein, as of such date, the Exchange Rate is fair from
a financial point of view to Consolidated Stores. The full text of the Merrill
Lynch written opinion, which sets forth a description of the assumptions made,
factors considered and limitations on the review undertaken, is attached hereto
as Annex D. CONSOLIDATED STORES STOCKHOLDERS ARE URGED TO READ THE MERRILL LYNCH
OPINION CAREFULLY IN ITS ENTIRETY. See "THE MERGER -- Opinion of Financial
Advisor to Consolidated Stores."
Mac Frugal's Reasons for the Merger; Recommendation of the Mac Frugal's Board
AT A SPECIAL MEETING HELD ON NOVEMBER 4, 1997, THE MAC FRUGAL'S BOARD (A)
DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
ARE FAIR TO, AND IN THE BEST INTEREST OF THE STOCKHOLDERS OF MAC FRUGAL'S, AND
(B) UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. AT SUCH MEETING, THE MAC FRUGAL'S BOARD RECOMMENDED THAT THE HOLDERS OF
SHARES OF MAC FRUGAL'S COMMON STOCK APPROVE AND ADOPT THE MERGER.
In reaching its conclusion to approve and recommend the Merger Agreement,
the Mac Frugal's Board considered a number of factors, including, without
limitation, the following:
- the Exchange Rate in the Merger, assuming the Average Consolidated
Stores Share Price is $40 1/4, the closing price of Consolidated Stores
Common Stock on November 3, 1997 (the last full trading day prior to the
approval of the Merger Agreement), represents a premium of approximately
21% over $32.36, the average closing price of Mac Frugal's Common Stock
over the twenty consecutive NYSE trading days ended November 3, 1997;
- the Exchange Rate provides for participation in increases in value
of the Consolidated Stores Common Stock above $41.50 per share as well as
for limited downside protection if the price drops below $41.50, and the
Merger Agreement provides a right of termination for Mac Frugal's if the
price of Consolidated Stores Common Stock drops to or below $35;
- the information presented by Batchelder & Partners, Inc.
("Batchelder & Partners") to the Mac Frugal's Board, including analysis of
historical trading prices, ratios of Mac Frugal's versus Consolidated
Stores Common Stock and comparative stock prices for each company relative
to applicable stock market indices;
- the written opinion of NationsBanc Montgomery Securities, Inc.
("NMSI") dated November 4, 1997 (and confirmed as of the date hereof)
addressed to and considered by the Mac Frugal's Board. The written opinion
of NMSI dated as of the date hereof, is attached hereto as Annex E, which
contains certain important qualifications and a description of assumptions
made, matters considered, areas of reliance on others, and limitations on
the review undertaken by NMSI (Mac Frugal's stockholders should review this
opinion in its entirety. See "The Merger -- Opinion Addressed to the Mac
Frugal's Board" and "The Merger -- Background of the Merger");
8
<PAGE> 19
- other strategic alternatives open to Mac Frugal's, such as remaining
independent and continuing to grow by expansion, involve a greater risk
from the standpoint of stockholder value than the proposed Merger;
- the Merger Agreement permits Mac Frugal's to furnish information to
and participate in discussions with competing bidders under specified
circumstances consistent with the Mac Frugal's Board's legal obligations;
- the strategic fit between Mac Frugal's and Consolidated Stores,
including the potential for synergies, and the fact that Consolidated
Stores was the foremost logical acquisition partner given Mac Frugal's and
Consolidated Stores' businesses and geographical diversity;
- the Merger is expected to be treated as a tax-free reorganization
and is intended to be accounted for under the pooling of interests method
of accounting. (See "THE MERGER -- Accounting Treatment" and "THE
MERGER -- Certain Federal Income Tax Consequences"); and
- the Merger Agreement is not conditioned on Consolidated Stores
obtaining financing in connection with the transactions contemplated by the
Merger.
In view of the number and disparate nature of the factors considered by the
Mac Frugal's Board, the Mac Frugal's Board did not assign relative weights to
the factors considered in reaching its conclusions. Rather, the Mac Frugal's
Board viewed its conclusions and recommendations as being based on the totality
of the information being presented to and considered by it. See "THE
MERGER -- Mac Frugal's Reasons for the Merger; Recommendation of the Mac
Frugal's Board."
Opinion Addressed to the Mac Frugal's Board
NMSI delivered its oral opinion to the Mac Frugal's Board on November 4,
1997, which was confirmed by its written fairness opinion dated November 4, 1997
(and later confirmed as of the date hereof) to the Mac Frugal's Board. The full
text of the NMSI opinion dated the date hereof, which sets forth certain
important qualifications, assumptions made, matters considered, areas of
reliance on others and limitations on the review undertaken, is attached hereto
as Annex E. MAC FRUGAL'S STOCKHOLDERS ARE URGED TO READ THE NMSI OPINION
CAREFULLY IN ITS ENTIRETY. See "THE MERGER -- Opinion Addressed to the Mac
Frugal's Board."
Plans for Mac Frugal's
It is expected that certain business functions of Mac Frugal's will be
integrated into the operations of Consolidated Stores following the Merger.
Consolidated Stores expects to take an estimated pre-tax charge to earnings
ranging from $75 million to $100 million relating to the cost of integrating the
two companies.
As a result of the Merger, Consolidated Stores anticipates that only a
small percentage of the combined stores of Consolidated Stores and Mac Frugal's
will be closed or converted to another retail format. A decision on which
stores, if any, will be closed or converted to another retail format will not be
made until after the consummation of the Merger. In addition, Consolidated
Stores will continue to evaluate the business and operations of Mac Frugal's
after the consummation of the Merger and will take such further actions as it
deems appropriate under the circumstances then existing. See "THE
MERGER -- Plans for Mac Frugal's."
Background of the Merger
For a description of the background of the Merger, see "THE
MERGER -- Background of the Merger."
Interests of Certain Persons
Mac Frugal's Board. Certain members of the Mac Frugal's Board may be
deemed to have interests in the Merger that are in addition to their interests
as stockholders of Mac Frugal's generally. Since public announcement of the
Merger Agreement, as of December 15, 1997, David H. Batchelder and James J.
Zehentbauer, members of the Mac Frugal's Board, exercised and sold an aggregate
of 56,365 of the vested shares underlying their Mac Frugal's stock options, and
Mr. Batchelder sold 20,215 outstanding shares of Mac Frugal's Common Stock.
Additionally, Messrs. Batchelder and Zehentbauer are principals of Batchelder &
Partners, financial advisors to Mac Frugal's in connection with the Merger,
which firm will receive a representation fee equal to one-half of one percent of
the total merger consideration received by Mac Frugal's
9
<PAGE> 20
or its stockholders upon consummation of the Merger. Of this fee, $150,000 was
paid upon the engagement of Batchelder & Partners, $500,000 was paid upon
execution of the Merger Agreement and the remainder is due upon consummation of
the Merger. Assuming the Merger was consummated on December 15, 1997, the
representation fee payable to Batchelder & Partners would be approximately
$5,650,000, $650,000 of which has already been paid. Additionally, Mac Frugal's
has agreed to reimburse Batchelder & Partners for its reasonable out-of-pocket
expenses; provided, however, that expenses in excess of $25,000 must be approved
by Mac Frugal's, which approval shall not be unreasonably withheld. In
connection with the engagement of Batchelder & Partners as financial advisor,
Mac Frugal's has agreed to indemnify Batchelder & Partners and its respective
directors, officers, partners, agents, employees, affiliates and controlling
persons, to the full extent permitted by law, from and against all losses,
claims, damages, liabilities and expenses incurred by such persons which are
related to or arise out of the engagement of Batchelder & Partners as financial
advisor, except to the extent that such losses, claims, damages, liabilities and
expenses result from the bad faith or gross negligence of the person seeking
such indemnification.
At the close of business on the Mac Frugal's Record Date, directors and
executive officers of Mac Frugal's and their affiliates were the record owners
of an aggregate of 23,000 (approximately .0926%) of the Mac Frugal's Common
Stock then outstanding.
The Mac Frugal's Board was aware of these interests and considered them,
among other matters, in approving the Merger Agreement and the transactions
contemplated thereby. See "THE MERGER -- Interests of Certain Persons."
Existing Employment Agreements and Bonuses. Mac Frugal's has employment
agreements with each of its six executive officers (the "Covered Executives" or,
individually, a "Covered Executive"). Except for the base salaries and severance
payments, the forms of these agreements are substantially similar. The
agreements provide, among other things, for base salary, performance stock
options, performance bonuses, severance payments and certain other termination
protections. For personal tax planning reasons, since public announcement of the
Merger Agreement, as of December 15, 1997, the Covered Executives exercised and
sold an aggregate of 261,186 of the vested shares underlying their Mac Frugal's
stock options, and certain of the Covered Executives sold an aggregate of 1,740
outstanding shares of Mac Frugal's Common Stock. In addition, the Covered
Executives and certain other key members of management are eligible to receive
bonuses under the 1997 Bonus Plan. See "THE MERGER -- Interests of Certain
Persons."
Savings and Retirement Plan. The Mac Frugal's Bargains - Close-outs Inc.
Savings and Retirement Plan, as amended (the "401(k) Plan"), is a profit sharing
plan with a cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"). The 401(k) Plan provides that
full-time employees who are at least 21 years of age with one year of service
with Mac Frugal's are eligible to make contributions ranging from 1% to 12% of
annual compensation ("Deferrals"). Subject to the maximum contribution permitted
under the 401(k) Plan, Mac Frugal's will match the amount of employee Deferrals
pursuant to the 401(k) Plan ("Matching Amounts") and, may at the discretion of
the Mac Frugal's Board, make additional contributions to the plan for the
benefit of the participants ("Company Contributions").
Participants under the 401(k) Plan are 100% vested in Deferrals and
Matching Amounts at the time that such contributions are made. The 401(k) Plan
is administered by the Profit Sharing Plan Committee (the "Committee"), the
members of which are appointed by the Mac Frugal's Board.
The 401(k) Plan provides that in the event Mac Frugal's undergoes a
consolidation, merger, sale, liquidation, or other transfer of substantially all
of its operating assets, the ultimate successor is automatically deemed to elect
to continue the plan, unless the successor's board of directors resolves to
terminate the plan. The Committee may agree to merge or consolidate the 401(k)
Plan with another plan so long as the participants are entitled to benefits
equal to or greater than those provided under the 401(k) Plan immediately after
such merger or consolidation. The 401(k) Plan will be rolled into Consolidated
Stores' 401(k) Plan. As of September 30, 1997, the aggregate amount of vested
accounts is $24,177,856 and the aggregate amount of unvested accounts is
$279,729.
10
<PAGE> 21
Long Term Cash Incentive Award Plan. In fiscal 1996, Mac Frugal's adopted
a Long Term Cash Incentive Award Plan (the "Cash Incentive Award Plan") for its
executive officers. Pursuant to the Cash Incentive Award Plan, each Covered
Executive will receive an amount equal to his or her annual base salary in
fiscal 1999 if the aggregate earnings per share of Mac Frugal's over the three
fiscal years ending with fiscal 1999 exceeds a target level. In addition, the
Covered Executive must be employed by Mac Frugal's as an officer through the end
of fiscal 1999 in order to earn this award.
The Cash Incentive Award Plan requires that a pro rata portion of the
amount that would have been paid to the Covered Executives at the end of fiscal
1999 be paid to the Covered Executives in the event of a Change in Control (as
defined therein). The Merger will constitute a Change in Control under the Cash
Incentive Award Plan. The Merger Agreement provides that the Severance Payments
(as defined therein) include the 1997 portion of any awards earned by the
Covered Executives under the Plan. The Merger Agreement further provides that
subject to the payment of the Severance Payments, Mac Frugal's shall amend its
Cash Incentive Award Plan to provide that such Plan will be terminated as of the
Effective Time.
Supplemental Executive Retirement Plan. Effective January 1, 1995, Mac
Frugal's established the Mac Frugal's Bargains - Close-outs Inc. Supplemental
Executive Retirement Plan (the "SERP") for the purpose of providing retirement
benefits for a select group of management or highly compensated employees of Mac
Frugal's. To date, the SERP has been used solely as a deferred compensation plan
for certain executive officers who have elected to defer a portion of earned
compensation thereunder. The SERP is an unfunded plan within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). All
amounts due under the SERP are provided solely from the general assets of Mac
Frugal's. The SERP is administered by a trustee. The SERP may be amended,
modified or terminated at any time by action of the Mac Frugal's Board. The SERP
provides that in the event of a "Change of Control," the trustee shall pay to
each of the participants within 90 days of such "Change in Control," an amount
equal to the participant's account in a single lump-sum payment of cash. A
"Change in Control" is defined in the SERP to include any consolidation or
merger of Mac Frugal's pursuant to which shares of Mac Frugal's common stock
would be converted into cash, securities or other property, other than a merger
of Mac Frugal's in which the holders of Mac Frugal's common stock immediately
prior to the merger have the same proportionate ownership of at least 80% of
common stock of the surviving corporation immediately after the merger. There
are currently 17 eligible and 6 active participants in the SERP. The Merger will
constitute a Change in Control under the SERP. The estimated aggregate amounts
payable to the participants in the SERP as a result of the Merger is $317,593.
1990 Employee Stock Incentive Plan. Mac Frugal's 1990 Employee Stock
Incentive Plan (the "Incentive Plan") authorizes the issuance of options to
purchase up to 3,200,000 shares of Mac Frugal's Common Stock including incentive
stock options within the meaning of Section 422 of the Code, stock options that
do not qualify as incentive stock options, stock appreciation rights and
restricted shares of Mac Frugal's Common Stock. Officers and other salaried
employees of Mac Frugal's are eligible to participate in the Incentive Plan. As
of November 5, 1997, approximately 85 persons were eligible to participate in
the Incentive Plan.
The Incentive Plan is administered by the Compensation Committee of the Mac
Frugal's Board. The Compensation Committee selects from the eligible
participants under the Incentive Plan and determines the terms and conditions of
all grants and awards to such participants including the terms and conditions
under which each option may be exercisable and the expiration date of each
option, except that each option must expire no later than ten years from the
date of grant. Grants and awards are made in consideration of services rendered
or to be rendered by the recipients thereof.
Options to purchase shares of Mac Frugal's Common Stock were granted to
certain executive officers of Mac Frugal's during fiscal 1996. All such options
(a) become exercisable in full on the third anniversary of the date of grant,
(b) have an exercise price equal to the fair market value of Mac Frugal's Common
Stock on the date of grant, and (c) immediately and fully vest and become
exercisable in certain defined events including a merger of Mac Frugal's, a
Change in Control (as defined therein) of Mac Frugal's or a sale of
substantially all of the assets of Mac Frugal's. Payment of the exercise price
of options granted under the Incentive Plan must be made in full in cash or a
cash equivalent concurrently with the exercise of such option.
11
<PAGE> 22
The Merger will be deemed to be a "Change in Control" under the Incentive
Plan, and all of the options outstanding under the Incentive Plan will vest as
of the Effective Time and will become options to purchase shares of Consolidated
Stores Common Stock in accordance with the Merger Agreement. As of December 15,
1997, approximately 1,240,145 options are outstanding under the Incentive Plan.
See "THE MERGER -- Interests of Certain Persons."
1992 Non-Employee Directors Stock Option Plan. The 1992 Non-Employee
Directors Stock Option Plan, as amended (the "Non-Employee Directors Plan"),
provides for each non-employee director to receive a stock option for 2,250
shares of Mac Frugal's Common Stock upon his election and re-election at the
annual meeting of stockholders at which he is elected or re-elected subsequent
to the annual stockholders' meeting in 1999. On December 11, 1996, the Mac
Frugal's Board approved an amendment that eliminated the grant of the automatic
annual options to directors under the Non-Employee Directors Plan until the date
of the annual stockholders' meeting in 2000. The exercise price of each such
option is the fair market value of the common stock at the close of business on
the date preceding the date of the grant. In addition, each non-employee
director may elect, on the date of each annual meeting at which he is elected or
re-elected, to receive his annual retainer in the form of a stock option to
purchase a number of shares of Mac Frugal's Common Stock determined by a
formula. The exercise price of each such option is 80% of the fair market value
of Mac Frugal's Common Stock on the date of the grant. The options vest and are
exercisable one year from the date of the grant at the following annual meeting
of stockholders. As of December 15, 1997, approximately 200,000 options are
outstanding under the Non-Employee Directors Plan.
On December 11, 1996, the Mac Frugal's Board granted to each of Messrs.
Batchelder and Zehentbauer, the non-employee directors, an option to purchase
50,000 shares of Mac Frugal's Common Stock at an exercise price of $25.50, the
fair market value of the Mac Frugal's Common Stock on the date of grant.
Additionally, effective January 1, 1997, the Mac Frugal's Board granted to each
of Messrs. Cooper and Corley, upon their election as non-employee directors, an
option to purchase 50,000 shares of Mac Frugal's Common Stock at an exercise
price of $24.00, the fair market value of the Mac Frugal's Common Stock on the
date of the grant. These options vest and become immediately exercisable in full
on the third anniversary of the date of grant, provided that the holder is a
member of the Mac Frugal's Board at such time. All of the options immediately
and fully vest and become exercisable in certain defined events including a
merger, a change in control or a sale of substantially all of the assets of Mac
Frugal's. All of the options held by the non-employee directors will vest and
become exercisable upon consummation of the Merger. See "THE MERGER -- Interests
of Certain Persons."
Treatment of Stock Options. The Merger Agreement provides that, effective
as of the Effective Time, each option granted by Mac Frugal's to purchase Mac
Frugal's Common Stock that is outstanding and unexercised immediately prior
thereto (each a "Mac Frugal's Stock Option"), whether vested or unvested as of
the Effective Time, will cease to represent a right to acquire Mac Frugal's
Common Stock and will be converted automatically into a fully vested and
exercisable option to purchase shares of Consolidated Stores Common Stock in an
amount and at an exercise price determined as provided below. The number of
shares of Consolidated Stores Common Stock subject to the new option shall be
determined in a manner that preserves both (i) the aggregate gain (or loss) on
Mac Frugal's Stock Options immediately prior to the Effective Time and (ii) the
ratio of the exercise price per share subject to Mac Frugal's Stock Options to
the fair market value (determined immediately prior to the Effective Time) per
share subject to such option, provided that any fractional shares of
Consolidated Stores Common Stock resulting from such determination will be
rounded down to the nearest share. Pursuant to the terms of existing award
agreements under the Incentive Plan, outstanding options shall vest and become
exercisable upon consummation of the Merger. The Merger Agreement provides that
the duration and other terms of the new options will be the same as the Mac
Frugal's Stock Options that they replace, except that (i) all references to Mac
Frugal's shall be deemed to be references to Consolidated Stores, and (ii) all
such new options will not expire until at least 60 days after the end of the
first fiscal quarter of Consolidated Stores ending at least 30 days after the
Effective Time. New option award agreements will be provided to each holder of
new options within 30 days after the Effective Time.
12
<PAGE> 23
Concurrent with the execution of the Merger Agreement, each of the Covered
Executives delivered a Waiver providing that in the event the Merger is
consummated, such Covered Executive will not receive any cash payment in
exchange for outstanding vested options under the Incentive Plan held by Covered
Executives, including options that become vested in connection with a Change in
Control under the terms of existing award agreements under the Incentive Plan
and their respective Employment Agreements. Such stock options shall be treated
as set forth in the immediately preceding paragraph.
The Merger Agreement provides that, effective as of the Effective Time, the
Option Plans will terminate and the provisions in any other plan, program,
agreement or arrangement providing for the issuance or grant of any other
interest in respect of the capital stock of Mac Frugal's or any of its
subsidiaries, will be deleted. Furthermore, Mac Frugal's will take all actions
necessary to ensure that following the Effective Time, no holder of Mac Frugal's
Stock Options or any participant in the Option Plans or any other plans,
programs, agreements or arrangements will have any right thereunder to acquire
any equity securities of Mac Frugal's or any subsidiary of Mac Frugal's. See
"THE MERGER -- Interests of Certain Persons."
Severance Benefits. With respect to the Covered Executives, upon the date
of termination of employment by the Covered Executive pursuant to the terms of
their respective employment agreement with Mac Frugal's in effect immediately
prior to the Effective Time, Mac Frugal's will pay to each Covered Executive
payments (collectively, the "Severance Payments") in the amounts set forth in
the Merger Agreement as specified therein.
The estimated cost of providing the Severance Payments to the Covered
Executives upon termination of employment is:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT OF
SEVERANCE PAYMENTS
-------------------
<S> <C>
Philip L. Carter........................................... $ 4,126,636
Mark J. Miller............................................. 2,210,538
Neil T. Watanabe........................................... 1,065,386
Earl C. Bonnecaze.......................................... 835,001
Frank C. Bianchi........................................... 833,731
Michael Dobbs.............................................. 811,731
----------
Total Amount of Severance Payments due to the Covered
Executives............................................ $ 9,883,023
==========
</TABLE>
These Severance Payments include (i) the severance amounts due under the
employment agreements with the Covered Executives, (ii) payments due under Mac
Frugal's 1997 Bonus Plan upon achievement of the required targets, (iii)
payments due under Mac Frugal's Long Term Cash Incentive Award Plan, and (iv)
the estimated payments in lieu of unused vacation. The Severance Payments will
be paid to a Covered Executive only if such Covered Executive is actively
employed by Mac Frugal's immediately prior to the Effective Time and terminates
his employment in accordance with his employment agreement subsequent to the
Effective Time. In addition, each of the Covered Executives and their spouses
are entitled to receive medical and dental health benefits equivalent to their
current benefits until the earlier of December 31, 1998 or until such Covered
Executive is employed full-time by a subsequent permanent employer.
Other Benefits. Pursuant to the Merger Agreement, employees of Mac
Frugal's who continue to be employed by Mac Frugal's as of the Effective Time
will receive employee benefits comparable to those benefits provided to
similarly situated employees of Consolidated Stores. See "THE
MERGER -- Interests of Certain Persons."
Consulting Agreement. Concurrent with the execution of the Merger
Agreement, Consolidated Stores entered into a Consulting Agreement with Philip
L. Carter, Mac Frugal's President and Chief Executive Officer ("Carter"),
whereby immediately following the termination of his employment with Mac
Frugal's, Carter will for a period of six months from the Effective Time provide
to Consolidated Stores advice and recommendations concerning various matters
respecting the business of Mac Frugal's as requested by Consolidated Stores,
including, without limitation, advice and recommendations as to business
arrangements, customers and the operations of Mac Frugal's. Consolidated Stores
will pay to Carter for his services under the agreement an aggregate amount of
$970,000, payable in equal weekly installments in arrears. Such amount
13
<PAGE> 24
will be placed in escrow as of the Effective Time. The weekly payments shall
continue throughout the six-month period of the consultancy, regardless of
whether the Consulting Agreement is terminated by Consolidated Stores. The
Consulting Agreement may be terminated by Consolidated Stores at any time upon
30 days written notice to Carter.
Noncompetition Agreement. Concurrent with the execution of the Merger
Agreement, Consolidated Stores entered into a Noncompetition Agreement with
Carter, whereby Carter will receive an aggregate amount of $930,000 over the
period of the Noncompetition Agreement. Such amount will be placed in escrow as
of the Effective Time. Pursuant to the terms of the Noncompetition Agreement,
Carter is restricted for a two-year period commencing August 1, 1998 from
certain competitive activities, including owning any interest in, or accepting
employment directly or indirectly with, any entity that is predominantly engaged
in the specialty retail close-out industry or specialty wholesale close-out
industry in the United States.
Indemnification
Pursuant to the terms of the Merger Agreement, Consolidated Stores has
agreed that at all times after the Effective Time, it will indemnify, or will
cause Mac Frugal's, as the surviving corporation, and its subsidiaries to
indemnify each director, officer, employee or agent of Mac Frugal's or any of
Mac Frugal's subsidiaries, successors and assigns (an "Indemnified Party"), to
the fullest extent permitted by law, with respect to any claim, liability, loss,
damage, judgment, fine, penalty, amount paid in settlement or compromise, cost
or expense, including reasonable fees and expenses of legal counsel (whenever
asserted or claimed) ("Indemnified Liability") based in whole or in part on, or
arising in whole or in part out of, any matter existing or occurring at or prior
to the Effective Time. Consolidated Stores has also agreed to maintain certain
directors and officers liability insurance for three years following the Merger
as set forth in the Merger Agreement. See "THE MERGER -- Indemnification"; and
"MERGER AGREEMENT -- Directors' and Officers' Insurance and Indemnification."
Estimated Synergies
Consolidated Stores management believes the Merger will result in a number
of important synergies including, but not limited to: (i) improvement in gross
margins through enhanced purchasing power, (ii) reduced transportation and
distribution costs (as a percentage of combined revenues of the companies)
resulting from the combination of the complimentary distribution networks of the
individual companies, (iii) reduced advertising and marketing expenses (as a
percentage of combined revenues of the companies) resulting from reduction of
overlapping promotion and advertising programs of the separate companies, and
(iv) other reductions in selling and administrative expenses (as a percentage of
combined revenues of the companies) from the elimination of certain duplicative
financial and administrative functions. Consolidated Stores expects to take an
estimated pre-tax charge to earnings of approximately $75 million to $100
million relating to the cost of integrating the two companies. THE FOREGOING
ESTIMATES OF COST SAVINGS AND SYNERGIES ARE INHERENTLY SUBJECT TO SIGNIFICANT
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF
CONSOLIDATED STORES. THERE CAN BE NO ASSURANCE THAT THEY WILL BE ACHIEVED AND
ACTUAL SAVINGS AND SYNERGIES MAY VARY MATERIALLY FROM THOSE ESTIMATED. THE
INCLUSION OF SUCH ESTIMATES HEREIN SHOULD NOT BE REGARDED AS AN INDICATION THAT
CONSOLIDATED STORES, SUB OR ANY OTHER PARTY CONSIDERS SUCH ESTIMATES AN ACCURATE
PREDICTION OF FUTURE EVENTS. See "THE MERGER -- Estimated Synergies."
Conditions to the Merger
The obligations of Consolidated Stores and Mac Frugal's to consummate the
Merger are subject to the satisfaction or waiver (where permissible) of various
conditions, including, among others, the approval of the Merger Agreement by the
stockholders of Mac Frugal's, the approval of the Share Issuance by Consolidated
Stores stockholders and the absence of any order or legal restraint or
prohibition preventing the consummation of the Merger. See "MERGER
AGREEMENT -- Conditions to the Merger."
14
<PAGE> 25
ACCOUNTING TREATMENT
The Merger will be accounted for under the "pooling of interests" method of
accounting in accordance with generally accepted accounting principles ("GAAP").
See "THE MERGER -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization within the
meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. See "THE MERGER -- Certain
Federal Income Tax Consequences." Stockholders are advised to consult their own
tax advisors.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law (the "DGCL"), neither Mac
Frugal's stockholders nor Consolidated Stores stockholders will have any
appraisal rights in connection with the Merger.
OTHER LEGAL MATTERS; REGULATORY APPROVALS
General. Except as otherwise disclosed herein, based upon its review of
publicly available information with respect to Mac Frugal's and the review of
certain information furnished by Mac Frugal's to Consolidated Stores, neither
Sub nor Consolidated Stores is aware of (i) any license or regulatory permit
that appears to be material to the business of Mac Frugal's and its
subsidiaries, taken as a whole, that might be adversely affected pursuant to the
Merger or (ii) any approval or other action by any governmental, administrative
or regulatory agency or authority, domestic or foreign, that would be required
for the consummation of the Merger. Should any such approval or other action be
required, Consolidated Stores and Sub currently contemplate that such approval
or action would be sought. While Consolidated Stores does not currently intend
to delay the Merger pending the outcome of any such matter, there can be no
assurance that any such approval or action, if needed, would be obtained or
would be obtained without substantial conditions or that adverse consequences
might not result to the business of Mac Frugal's, Sub or Consolidated Stores or
that certain parts of the business of Mac Frugal's, Sub or Consolidated Stores
might not have to be disposed of in the event that such approvals were not
obtained or any other actions were not taken.
Antitrust. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act") and the regulations promulgated thereunder by the
Federal Trade Commission ("FTC"), the Merger may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the United States Department of Justice (the
"Antitrust Division") and the applicable waiting period has expired or been
terminated. The consummation of the Merger is also conditioned upon the
expiration or termination of the applicable waiting period under the HSR Act. On
November 17, 1997, Consolidated Stores and Mac Frugal's filed notifications and
report forms under the HSR Act with the FTC and the Antitrust Division.
At any time before or after the Effective Time, notwithstanding that the
waiting period under the HSR Act has expired, the FTC or the Antitrust Division
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Consolidated
Stores or Mac Frugal's. At any time before or after the Effective Time, and
notwithstanding that the waiting period under the HSR Act has expired, any state
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Merger or seeking divestiture of substantial assets of
Consolidated Stores or Mac Frugal's. Private persons may also seek to take legal
action under the antitrust laws under certain circumstances.
Closing Condition. The respective obligations of Consolidated Stores and
Mac Frugal's to consummate the Merger are subject to the condition that no
court, arbitrator or governmental body, agency or official will have issued any
order, decree or ruling which remains in force and there will not have been any
statute, rule or regulation, restraining, enjoining or prohibiting the
consummation of the Merger. See "MERGER AGREEMENT -- Conditions to the Merger."
15
<PAGE> 26
COMPARATIVE MARKET PRICES AND DIVIDENDS
The shares of Consolidated Stores Common Stock are listed and principally
traded on the NYSE and quoted under the symbol CNS. The following table sets
forth, for the quarters indicated, the high and low sales prices per share of
Consolidated Stores Common Stock on the NYSE as reported on the Dow Jones News
Service. Prices have been restated to reflect (a) a 5 for 4 common stock split
effected by a distribution of shares of Consolidated Stores Common Stock on
December 24, 1996 to stockholders of record on December 10, 1996, and (b) a 5
for 4 common stock split effected by a distribution of shares of Consolidated
Stores Common Stock on June 24, 1997 to stockholders of record on June 10, 1997.
<TABLE>
<CAPTION>
HIGH LOW
----------- ----
<S> <C> <C> <C> <C>
FISCAL 1995:
First Quarter............................................ $13 23/64 $10 13/32
Second Quarter........................................... 14 23/32 10 5/64
Third Quarter............................................ 16 5/64 13 33/64
Fourth Quarter........................................... 16 13/32 12 13/32
FISCAL 1996:
First Quarter............................................ $23 49/64 $13 9/32
Second Quarter........................................... 25 59/64 19 13/64
Third Quarter............................................ 28 5/16 21 3/64
Fourth Quarter........................................... 27 23/64 22 61/64
FISCAL 1997:
First Quarter............................................ $34 3/32 $25 51/64
Second Quarter........................................... 40 3/4 29 29/32
Third Quarter............................................ 43 3/8 34 9/16
Fourth Quarter (through December 15, 1997)............... 50 39 3/4
</TABLE>
Consolidated Stores has never paid cash dividends on its common stock and
does not anticipate paying any cash dividends in the foreseeable future.
Consolidated Stores has followed a policy of reinvesting earnings in the
business. In addition, a portion of the Consolidated Stores' indebtedness
contains covenants that limit Consolidated Stores' ability to pay dividends.
On November 4, 1997, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the reported closing
sales price of Consolidated Stores Common Stock on the NYSE Composite Tape was
$41 1/8 per share. On December 15, 1997, the last full trading day for which
information was available prior to the printing and mailing of this Proxy
Statement/Prospectus, the reported closing sales price of Consolidated Stores
Common Stock on the NYSE Composite Tape was $47 7/16 per share.
The shares of Mac Frugal's Common Stock are listed and principally traded
on the NYSE and quoted under the symbol MFI. The following table sets forth, for
the quarters indicated, the high and low sales prices per share on the NYSE as
reported by the Dow Jones News Service.
<TABLE>
<CAPTION>
HIGH LOW
----------- ----
<S> <C> <C> <C> <C>
FISCAL 1995:
First Quarter............................................ $17 3/8 $12 15/16
Second Quarter........................................... 18 3/8 14 3/8
Third Quarter............................................ 18 1/2 11 5/8
Fourth Quarter........................................... 15 11 1/2
FISCAL 1996:
First Quarter............................................ $16 7/8 $12 3/8
Second Quarter........................................... 19 1/2 13 3/8
Third Quarter............................................ 25 1/8 18 3/8
Fourth Quarter........................................... 27 21 1/2
</TABLE>
16
<PAGE> 27
<TABLE>
<CAPTION>
HIGH LOW
----------- ----
<S> <C> <C> <C> <C>
FISCAL 1997:
First Quarter............................................ $30 3/4 $23
Second Quarter........................................... 31 5/8 27 1/4
Third Quarter............................................ 34 1/4 26 7/8
Fourth Quarter (through December 15, 1997)............... 44 1/8 34
</TABLE>
Mac Frugal's has never declared or paid cash dividends on its common stock.
Mac Frugal's currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
Payment of dividends is within the discretion of Mac Frugal's Board of Directors
and will depend upon, among other factors, Mac Frugal's earnings, financial
condition and capital requirements. In addition, certain of Mac Frugal's debt
instruments contain covenants that limit Mac Frugal's ability to pay dividends.
On November 4, 1997, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the reported closing
sales price of Mac Frugal's Common Stock on the NYSE Composite Tape was $37 9/16
per share. On December 15, 1997, the last full trading day for which information
was available prior to the printing and mailing of this Proxy
Statement/Prospectus, the reported closing sales price of Mac Frugal's Common
Stock on the NYSE Composite Tape was $42 5/8 per share.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES
OF CONSOLIDATED STORES COMMON STOCK AND MAC FRUGAL'S COMMON STOCK.
17
<PAGE> 28
UNAUDITED COMPARATIVE PER SHARE DATA
The following table sets forth certain historical and pro forma equivalent
per share data for Consolidated Stores Common Stock for the 39 weeks ended
November 1, 1997 and November 2, 1996 and for the fiscal years ended February 1,
1997, February 3, 1996 and January 28, 1995, and certain historical and pro
forma equivalent per share data for Mac Frugal's Common Stock for the 39 weeks
ended November 2, 1997 and October 27, 1996 and for the fiscal years ended
February 2, 1997, January 28, 1996 and January 29, 1995. The information
presented herein should be read in conjunction with the selected historical
financial data and unaudited pro forma combined financial statements found
elsewhere in this Proxy Statement/Prospectus. Equivalent historical per share
data is derived from the audited financial statements of Consolidated Stores and
Mac Frugal's. Equivalent pro forma per share data of Consolidated Stores Common
Stock is derived from the pro forma combined financial statements found
elsewhere in this Proxy Statement/Prospectus. Equivalent pro forma per share
data of Mac Frugal's Common Stock is derived from the pro forma combined per
share data allocable to the approximately 25,500,000 shares of Mac Frugal's
Common Stock that will be converted into shares of Consolidated Stores Common
Stock upon completion of the Merger based upon an assumed Exchange Rate of one
share of Consolidated Stores Common Stock for each share of Mac Frugal's Common
Stock. See "UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED FISCAL YEAR ENDED
--------------------------- ------------------------------------------
NOVEMBER 1, NOVEMBER 2, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997(1) 1996(1) 1997(1) 1996(1) 1995(1)
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STORES COMMON STOCK:
Income (loss) from continuing
operations...................... $ (0.04) $ 0.04 $1.35 $0.92 $0.77
Net income (loss)................. (0.04) (0.10) 1.00 0.84 0.74
Book value........................ 8.21 7.00 8.15 5.22 4.30
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED FISCAL YEAR ENDED
--------------------------- ------------------------------------------
NOVEMBER 2, OCTOBER 27, FEBRUARY 2, JANUARY 28, JANUARY 29,
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
MAC FRUGAL'S COMMON STOCK:
Net income......................... $ 0.85 $0.45 $ 1.67 $0.56 $1.37
Book value......................... 10.61 9.39 10.21 9.05 8.49
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED FISCAL YEAR ENDED
--------------------------- ------------------------------------------
NOVEMBER 1, NOVEMBER 2, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED PER
CONSOLIDATED STORES SHARE(2):
Income from continuing
operations...................... $0.17 $0.14 $1.42 $0.83 $0.93
Net income........................ 0.17 0.03 1.16 0.77 0.91
Book value........................ 8.75 7.56 8.62 6.19 5.39
EQUIVALENT PRO FORMA COMBINED PER
MAC FRUGAL'S SHARE(3):
Income from continuing
operations...................... $0.17 $0.14 $1.42 $0.83 $0.93
Net income........................ 0.17 0.03 1.16 0.77 0.91
Book value........................ 8.75 7.56 8.62 6.19 5.39
</TABLE>
- ---------------
(1) The pro forma financial information has been prepared assuming the Merger
occurred at the beginning of the respective periods using an Exchange Rate
of 1.00 share of Consolidated Stores Common Stock for each share of Mac
Frugal's Common Stock.
(2) The per share amount used in the pro forma calculations were computed by
adding Mac Frugal's weighted average shares outstanding for the respective
periods multiplied by an Exchange Rate of 1.00 to the actual number of
outstanding shares of Consolidated Stores Common Stock for the respective
periods.
(3) Equivalent pro forma data for Mac Frugal's were computed by multiplying the
pro forma combined per share data of Consolidated Stores by the Exchange
Rate, assuming an Exchange Rate of 1.00.
18
<PAGE> 29
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary sets forth certain unaudited historical consolidated
financial data and selected unaudited pro forma financial data. This financial
data should be read in conjunction with the historical consolidated financial
data, including the notes thereto, which are incorporated herein by reference,
and in conjunction with the unaudited pro forma financial statements and related
notes thereto included elsewhere in this Proxy Statement/Prospectus. See
"AVAILABLE INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"; and
"UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS."
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical financial data
of Consolidated Stores and Mac Frugal's for each of the last five fiscal years
and selected unaudited historical financial data for Consolidated Stores' 39
weeks ended November 1, 1997 and November 2, 1996 and Mac Frugal's 39 weeks
ended November 2, 1997 and October 27, 1996. The selected historical financial
data for the last five fiscal years has been derived from the audited historical
financial statements of Consolidated Stores and Mac Frugal's and should be read
in conjunction with such information. The information for Consolidated Stores
for the 39 weeks ended November 1, 1997 and November 2, 1996 and Mac Frugal's
for the 39 weeks ended November 2, 1997 and October 27, 1996 is derived from the
unaudited books and records of both Consolidated Stores and Mac Frugal's and
includes, in the opinion of the management of each of Consolidated Stores and
Mac Frugal's, all adjustments necessary to present fairly the information for
each such period. Such adjustments include only normal recurring adjustments.
Such data is not necessarily indicative of an entire year's results or future
operating results.
19
<PAGE> 30
CONSOLIDATED STORES CORPORATION
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED FISCAL YEAR ENDED
------------------------ ---------------------------------------------------------------
NOVEMBER 1, NOVEMBER 2, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30,
1997 1996 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............. $ 1,889,026 $ 1,451,830 $ 2,647,516 $ 1,406,016 $ 1,185,054 $ 963,008 $ 856,294
Operating profit...... 15,668 16,666 196,547 118,664 101,480 77,682 62,294
Income (loss) from
continuing
operations before
extraordinary
charge............. (3,336) 3,526 113,311 70,133 57,820 44,743 36,266
Net income (loss)..... (3,336) (7,987) 83,917 64,406 55,220 43,027 37,110
Income (loss) per
common and common
equivalent share of
stock:
Continuing
operations....... (0.04) 0.04 1.35 0.92 0.77 0.60 0.49
Net income
(loss)........... (0.04) (0.10) 1.00 0.84 0.74 0.58 0.50
BALANCE SHEET DATA:
Working capital....... 897,157 682,518 469,290 253,858 210,601 174,529 142,305
Total assets.......... 1,847,577 1,599,369 1,330,503 639,815 551,620 468,220 390,942
Long-term
obligations........ 616,054 456,368 151,292 25,000 40,000 50,000 50,000
Stockholders'
equity............. 692,217 584,171 682,085 389,564 315,234 258,535 209,459
</TABLE>
20
<PAGE> 31
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED FISCAL YEAR ENDED
------------------------- -------------------------------------------------------------------
NOVEMBER 2, OCTOBER 27, FEBRUARY 2, JANUARY 28, JANUARY 29, JANUARY 30, JANUARY 31,
1997 1996 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........... $ 550,177 $ 491,572 $ 772,648 $ 704,934 $ 682,083 $ 627,063 $ 540,295
Operating profit.... 36,619 23,905 75,826 35,867 70,645 57,667 24,268
Net income.......... 21,415 11,634 43,149 14,559 38,884 31,937 11,348
Income per common
and common
equivalent share
of stock......... 0.85 0.45 1.67 0.56 1.37 1.07 0.37
BALANCE SHEET DATA:
Working capital..... 160,962 178,514 93,021 144,519 44,012 108,323 105,834
Total assets........ 448,351 474,990 384,996 419,072 386,376 369,563 382,621
Long-term
obligations...... 61,730 113,263 3,757 96,435 4,491 3,869 54,475
Stockholders'
equity........... 259,358 239,124 252,029 230,399 216,881 257,350 224,447
</TABLE>
21
<PAGE> 32
SELECTED UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma financial information for
Consolidated Stores and Mac Frugal's gives effect to the Merger. The applicable
transactions are reflected in the pro forma financial statements as if they
occurred at the beginning of the earliest periods presented. The Merger will be
accounted for under the pooling of interests method of accounting. The unaudited
pro forma financial statements are prepared for illustrative purposes only and
are not necessarily indicative of the financial position or results of
operations that might have occurred had the applicable transactions actually
taken place on the dates indicated, or of future results of operations or
financial position of the stand alone or combined entities. No material
adjustments were required to conform the accounting policies of the two
companies.
Consolidated Stores and Mac Frugal's estimate that they will incur
aggregate Merger transaction costs of approximately $15 million consisting of
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. Additionally, it is expected that as a result of the
Merger, the combined company will incur consolidation and integration expenses
of approximately $60 million to $85 million, before any income tax effect. These
expenses are expected to include (i) the costs of integrating Mac Frugal's; (ii)
store closure and conversion expenses and associated asset write-offs in
overlapping markets; (iii) costs associated with discontinued product, inventory
consolidation and retail price equalization for the combined inventory
assortment; (iv) write-off of hardware and software relating to the elimination
of duplicative management information systems; (v) severance, retention and
relocation costs; (vi) incremental advertising and marketing expenses; and (vii)
other related charges. Consolidated Stores expects that the majority of these
costs will be charged to operations in the fiscal quarter in which the Merger is
consummated. Any inventory-related charges in the above estimates will be
recorded as a cost of goods sold. The pro forma combined statements of income do
not include such merger-related consolidation and integration expenses
associated with the Merger. The unaudited pro forma financial statements do not
reflect any synergies expected to be realized after the Merger. The unaudited
pro forma financial statements are based on the historical consolidated
financial statements of Consolidated Stores and Mac Frugal's and should be read
in conjunction with (i) such historical financial statements and the notes
thereto, which are incorporated by reference in this Proxy Statement/Prospectus,
(ii) the unaudited selected pro forma financial data and unaudited comparative
per share data, including the notes thereto, appearing elsewhere in this Proxy
Statement/Prospectus and (iii) the selected historical financial data of
Consolidated Stores and Mac Frugal's appearing elsewhere in this Proxy
Statement/Prospectus. See "UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS."
SELECTED UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED FISCAL YEAR ENDED
------------------------- -------------------------------------------------------------------
NOVEMBER 1, NOVEMBER 2, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30,
1997 1996 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................. $2,439,203 $1,943,402 $ 3,420,164 $ 2,110,950 $ 1,867,137 $ 1,590,071 $ 1,396,589
Operating profit........... 52,287 40,571 272,373 154,531 172,125 135,349 86,562
Income from continuing
operations before
extraordinary charge..... 18,079 15,160 156,460 84,692 96,704 76,680 47,614
Net income................. 18,079 3,647 127,066 78,965 94,104 74,964 48,458
Income per common and
common equivalent share
of stock (1):
Continuing operations.... 0.17 0.14 1.42 0.83 0.93 0.73 0.45
Net income............... 0.17 0.03 1.16 0.77 0.91 0.71 0.46
BALANCE SHEET DATA:
Working capital............ $1,058,119 $ 861,032 $ 562,311 $ 398,377 $ 254,613 $ 282,852 $ 248,139
Total assets............... 2,295,928 2,074,359 1,715,499 1,058,887 937,996 837,783 773,563
Long-term obligations...... 677,784 569,631 155,049 121,435 44,491 53,869 104,475
Stockholders' equity....... 951,575 823,295 934,114 619,963 532,115 515,885 433,906
</TABLE>
- ---------------
(1) Pro forma adjustment to income per common and common equivalent share of
stock represents the assumed issuance of Consolidated Stores Common Stock
for Mac Frugal's Common Stock, based on an exchange ratio of 1.00.
22
<PAGE> 33
RISK FACTORS
EFFECT OF CONSOLIDATED STORES' STOCK PRICE ON MERGER CONSIDERATION
THE CONSIDERATION TO BE RECEIVED BY MAC FRUGAL'S STOCKHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT BE DETERMINED PRECISELY PRIOR TO THE
CLOSE OF BUSINESS ON THE SECOND NYSE TRADING DAY IMMEDIATELY PRECEDING THE
EFFECTIVE TIME. THE CONSIDERATION WILL DEPEND UPON THE AVERAGE CONSOLIDATED
STORES SHARE PRICE, WHICH ESTABLISHES THE EXCHANGE RATE. BECAUSE THE AVERAGE
CONSOLIDATED STORES SHARE PRICE, EXCHANGE RATE AND THE MARKET PRICE OF
CONSOLIDATED STORES COMMON STOCK DURING THE PRICING PERIOD ARE NOT DETERMINABLE
AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE
SPECIAL MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE
FOR THE OUTSTANDING MAC FRUGAL'S COMMON STOCK IS NOT CURRENTLY DETERMINABLE. In
considering the Merger, Mac Frugal's stockholders should take into account the
following: (a) that fluctuations in the stock price of Consolidated Stores
Common Stock may affect the Exchange Rate, and (b) that the price of
Consolidated Stores Common Stock during the Pricing Period, a period when the
market price of Consolidated Stores Common Stock fluctuates in anticipation of
Consolidated Stores' fourth quarter results, may vary from the price of
Consolidated Stores Common Stock as of the Effective Time, the date of this
Proxy Statement/Prospectus and the date on which Mac Frugal's Stockholders vote
on the Merger. Such fluctuations may be due to changes in the business,
operations or prospects of Consolidated Stores, market assessments of the
likelihood that the Merger will be consummated and the time thereof, general
market, economic and retail conditions, and other factors.
ABILITY TO EFFICIENTLY INTEGRATE AND OPERATE MAC FRUGAL'S
The future success of Consolidated Stores will depend in part upon its
ability to integrate and operate Mac Frugal's successfully with its core
close-out business. Consummation of the Merger will significantly expand
Consolidated Stores' retail sale of close-out merchandise, which, as a category,
is highly competitive, very seasonal and heavily dependent on the ability to
select and purchase quality merchandise at attractive prices. Consummation of
the Merger will increase the number of retail stores operated by Consolidated
Stores by approximately 20%, with most of the acquired stores located in the
southwestern United States. While Consolidated Stores operates a number of
close-out stores, its historical focus has been in the Midwestern, Southern and
Mid-Atlantic regions of the United States. Most of the Mac Frugal's stores are
located in geographic areas in which Consolidated Stores has not previously
operated a significant number of retail close-out stores. The future success of
Consolidated Stores will also depend in part on its ability to retain and
assimilate qualified employees of Mac Frugal's. There can be no assurance that
Consolidated Stores will be able to efficiently integrate and operate Mac
Frugal's with its core close-out business or retain or assimilate qualified
employees of Mac Frugal's. A failure to do so could have a material adverse
effect on Consolidated Stores' results of operations and financial condition.
ABILITY TO ACHIEVE CONTINUED GROWTH
Over the past five fiscal years, Consolidated Stores has experienced
substantial growth in net sales, operating profit and earnings per share.
Consolidated Stores' continued growth depends on, among other factors, its
ability to (i) open and operate new stores profitably, (ii) increase comparable
store sales and (iii) efficiently integrate and operate Mac Frugal's after the
Merger. Consolidated Stores' ability to successfully manage its growth is
dependent on a number of factors, including its ability to (a) identify new
markets in which it can successfully compete, (b) locate suitable store sites
and negotiate acceptable lease terms, (c) introduce its stores and the
value-oriented, close-out retailing concept in new markets, (d) adapt its
purchasing, distribution, management information and other systems to
accommodate expanded operations, (e) attract and train qualified personnel and
(f) maintain adequate financing. In addition, Consolidated Stores' future growth
is dependent upon factors beyond its control such as general economic and
business conditions affecting manufacturing and consumer spending. There can be
no assurance that Consolidated
23
<PAGE> 34
Stores will be able to achieve its planned store growth or comparable store
sales increases or that such growth will allow Consolidated Stores to maintain
profitability.
COMPETITION
The retail industry is highly competitive. The retail close-out stores of
Consolidated Stores and Mac Frugal's compete with discount stores (such as
Wal-Mart(R), Kmart(R) and Target(R)), deep discount drugstore chains and other
value-oriented specialty retailers. Consolidated Stores' retail toy operations
compete directly with local and regional enclosed shopping mall-based toy
retailers, destination toy stores (such as Toys "R" Us(R)) and discount
retailers with toy departments and indirectly with enclosed shopping mall-based
retailers such as concept stores and theme-based stores that feature toys or
toy-related merchandise. Certain competitors of Mac Frugal's and Consolidated
Stores have greater financial, distribution, marketing and other resources than
Consolidated Stores.
SEASONALITY
Consolidated Stores and Mac Frugal's historically have experienced
seasonality, with a significant percentage of their net sales and income being
realized in the fourth fiscal quarter. As a result of the Merger, Consolidated
Stores will continue to recognize a significant volume of its sales, operating
profit and net income in the fourth quarter. In addition, Consolidated Stores'
quarterly results can be affected by the timing of store openings and closings,
the amount of net sales contributed by new and existing stores and the timing of
certain holidays. Furthermore, in anticipation of increased sales activity
during the fourth fiscal quarter, Consolidated Stores purchases substantial
amounts of inventory during the second and third fiscal quarters and hires a
significant number of temporary employees to bolster its store staffing during
the fourth fiscal quarter. If for any reason Consolidated Stores' net sales are
below the financial markets' expectations for the fourth fiscal quarter, the
market price of Consolidated Stores Common Stock could be adversely affected.
The combined operations of Consolidated Stores and Mac Frugal's may also
increase demand for seasonal borrowings. Consolidated Stores and Mac Frugal's
have traditionally drawn upon their respective credit lines in the first three
fiscal quarters and substantially repaid the borrowings during the fourth fiscal
quarter. Consummation of the Merger may increase the amount of seasonal
borrowings in the first three fiscal quarters. If for any reason the combined
operations of Consolidated Stores' and Mac Frugal's net sales are below
expectations for the fourth fiscal quarter, their ability to repay seasonal
borrowings in total by fiscal year end could be adversely affected.
PURCHASING OF SUITABLE MERCHANDISE
The success of Consolidated Stores' close-out business depends upon its
ability to select and purchase quality merchandise at attractive prices in order
to maintain a balance of product in certain core merchandising categories along
with a changing mix of merchandise. In addition, the success of Mac Frugal's
close-out business depends upon its ability to select and purchase such quality
merchandise at attractive prices. Consolidated Stores has no continuing
contracts for the purchase of close-out merchandise and relies on buying
opportunities from both existing and new sources, for which it competes with
other close-out merchandisers and wholesalers. In addition, the success of the
Consolidated Stores' toy business depends in part upon its ability to purchase
in-line toys at competitive prices and on competitive terms. Although
Consolidated Stores believes that its management has longstanding relationships
with its suppliers and is competitively positioned to continue to seek new
sources, there can be no assurance that Consolidated Stores will be successful
in maintaining an adequate continuing supply of quality merchandise at
attractive prices.
IMPACT OF FOREIGN IMPORTS
Consolidated Stores imports approximately 20% to 25% of its inventory
directly from certain Asian, South American and European countries, and a
material amount of its domestically purchased merchandise is also manufactured
abroad. In addition, Mac Frugal's imports approximately 20% to 25% of its
inventory. As a result, a significant portion of Consolidated Stores'
merchandise supply after the Merger will be subject to certain risks including
increased import duties and more restrictive quotas, loss of "most favored
nation" ("MFN") trading status, currency fluctuations, work stoppages,
transportation delays, economic uncertainties
24
<PAGE> 35
including inflation, foreign government regulations, political unrest and trade
restrictions, including retaliation by the United States against foreign
practices. MFN status allows the importation of products at lower tariff rates
than otherwise imposed by U.S. laws.
Consolidated Stores believes at least 65% of its direct and indirect
imports come from the People's Republic of China ("China"). In addition, at
least 50% of Mac Frugal's imported products come from China. The United States
customarily grants China MFN status, which must be renewed annually. There are
currently a number of trade-related and other issues between the governments of
the United States and China, any one of which could result in the revocation or
nonrenewal of China's MFN status. If after the Merger, China's MFN status were
revoked or not renewed, Consolidated Stores could have higher purchasing costs
or a material depletion of available merchandise because of increased tariffs on
products imported from China. While Consolidated Stores believes that
alternative domestic and foreign sources could supply merchandise to
Consolidated Stores, an interruption or delay in supply from China or
Consolidated Stores' other foreign sources, or the imposition of additional
duties, taxes or other charges on these imports, could have a material adverse
effect on Consolidated Stores' results of operations and financial condition.
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Substantially all of Consolidated Stores' inventory for Odd Lots and Big
Lots is shipped directly from suppliers to Consolidated Stores' 2,884,100 square
foot distribution facility in Columbus, Ohio, where the inventory is processed
and then distributed to stores. Additionally, Mac Frugal's ships substantially
all of its inventory from a single distribution facility in Rancho Cucamonga,
California to all of its stores. A natural disaster or other calamity that
causes long-term damage to either the Columbus facility or the Rancho Cucamonga
facility or any long-term disruption in operations of these facilities could
have a material adverse effect on Consolidated Stores' results of operations and
financial condition.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
Consolidated Stores has adopted a stockholder's rights agreement that
includes certain provisions that are intended to prevent or delay the
acquisition of Consolidated Stores by means of a tender offer, proxy contest or
otherwise. Additionally, Consolidated Stores' Restated Certificate of
Incorporation authorizes the Board of Directors to issue preferred stock,
without further stockholder approval, which could have dividend, redemption,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Consolidated Stores Common
Stock. The ability of the Consolidated Stores Board to issue and set the terms
of Consolidated Stores Preferred Stock could have the effect of making it more
difficult for a third person to acquire, or of discouraging a third person from
attempting to acquire, control of Consolidated Stores. Consolidated Stores is
subject to Section 203 of the Delaware General Corporation Law, which limits
transactions between a publicly held company and "interested stockholders"
(generally, those stockholders who, together with their affiliates and
associates, own 15% or more of a company's outstanding capital stock). Any one
of, or a combination of, the above anti-takeover provisions could discourage a
third party from attempting to acquire control of Consolidated Stores. See
"DESCRIPTION OF CONSOLIDATED STORES CAPITAL STOCK."
25
<PAGE> 36
INTRODUCTION
This Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is
being furnished to the holders of common stock, par value $.01 per share
("Consolidated Stores Common Stock"), of Consolidated Stores Corporation, a
Delaware corporation ("Consolidated Stores"), in connection with the
solicitation of proxies by the Board of Directors of Consolidated Stores (the
"Consolidated Stores Board") for use at a Special Meeting of Stockholders of
Consolidated Stores to be held at the Company's principal operating subsidiary
located at 300 Phillipi Road, Columbus, Ohio, on January 15, 1998, at 1:00 p.m.,
local time, and at any and all adjournments or postponements thereof (the
"Consolidated Stores Special Meeting") for purposes described herein.
This Proxy Statement/Prospectus is also being furnished to the holders of
common stock, par value $.02778 per share ("Mac Frugal's Common Stock"), of Mac
Frugal's Bargains - Closeouts Inc., a Delaware corporation ("Mac Frugal's"), in
connection with the solicitation of proxies by the Board of Directors of Mac
Frugal's (the "Mac Frugal's Board") for use at a Special Meeting of Stockholders
of Mac Frugal's to be held at the Long Beach Airport Marriott Hotel, 4700
Airport Plaza Drive, Long Beach, California, on January 15, 1998, at 10:00 a.m.,
local time, and at any and all adjournments or postponements thereof (the "Mac
Frugal's Special Meeting," and together with the Consolidated Stores Special
Meeting, the "Special Meetings") for purposes described herein.
This Proxy Statement/Prospectus relates to the Agreement and Plan of
Merger, dated as of November 4, 1997 (the "Merger Agreement"), among
Consolidated Stores, MBC Consolidated Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Consolidated Stores ("Sub"), and
Mac Frugal's, which provides for the merger (the "Merger") of Sub with and into
Mac Frugal's, with Mac Frugal's surviving as a wholly owned subsidiary of
Consolidated Stores. Subject to the terms and conditions of the Merger
Agreement, if the Merger is consummated, each share of Mac Frugal's Common Stock
issued and outstanding immediately prior to the date on which a certificate of
merger has been duly filed with the Secretary of State of the State of Delaware
(the "Effective Time") (other than shares of Mac Frugal's Common Stock owned by
Mac Frugal's as treasury stock and other than shares of Mac Frugal's Common
Stock held by Consolidated Stores or its subsidiaries) shall by virtue of the
Merger and without any action on the part of the holder thereof be canceled and
converted into the right to receive a number of duly authorized, validly issued,
fully paid and nonassessable shares of Consolidated Stores Common Stock equal to
the "Exchange Rate."
The Exchange Rate means: (i) 1.00, if and only if the average closing price
per share of Consolidated Stores Common Stock on the New York Stock Exchange
("NYSE") as reported on the NYSE Composite Tape during the period comprising the
twenty NYSE trading days immediately preceding the second NYSE trading day
immediately preceding the Effective Time of the Merger (the "Pricing Period")
(the "Average Consolidated Stores Share Price") is less than or equal to $39.00;
or (ii) the quotient of (a) $39.00 divided by (b) the Average Consolidated
Stores Share Price, if and only if the Average Consolidated Stores Share Price
is both (x) greater than $39.00 and (y) less than or equal to $41.49; or (iii)
.94, if and only if the Average Consolidated Stores Share Price is both (x)
greater than $41.49 and (y) less than or equal to $43.62; or (iv)(a) .94 less
(b) the product of (x) the Average Consolidated Stores Share Price less $43.62
multiplied by (y) .01, if and only if the Average Consolidated Stores Share
Price is both (A) greater than $43.62 and (B) less than or equal to $49.62; or
(v) .88, if and only if the Average Consolidated Stores Share Price is greater
than $49.62. In the event that the Average Consolidated Stores Share Price is
less than or equal to $35.00, Mac Frugal's may, at any time on or prior to the
Effective Time, terminate the Merger Agreement in accordance with the
termination provisions of the Merger Agreement. PROMPTLY FOLLOWING THE CLOSING
OF THE PRICING PERIOD, CONSOLIDATED STORES AND MAC FRUGAL'S WILL ISSUE A JOINT
PRESS RELEASE ANNOUNCING THE EXCHANGE RATE. ONCE THE PRICING PERIOD HAS ENDED,
STOCKHOLDERS MAY ALSO CALL GEORGESON & COMPANY AT 1-800-223-2064 TO CONFIRM THE
EXCHANGE RATE. No fractional shares of Consolidated Stores Common Stock will be
issued in the Merger. In lieu of any such fractional shares, each holder of Mac
Frugal's Common Stock who otherwise would be entitled to receive a fractional
share of Consolidated Stores Common Stock pursuant to the Merger will be paid an
amount in cash equal to such fractional interest multiplied by the Average
Consolidated Stores Share Price. Additionally, each share of Consolidated Stores
Common Stock issued
26
<PAGE> 37
pursuant to the Merger will be issued with one associated Consolidated Stores
Right. See "MERGER AGREEMENT -- Conversion of Mac Frugal's Common Stock."
This Proxy Statement/Prospectus also constitutes the prospectus of
Consolidated Stores filed as part of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, relating to the
shares of Consolidated Stores Common Stock constituting the Share Issuance. Such
Registration Statement also relates to the Rights to be issued pursuant to the
Consolidated Stores Rights Agreement.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of Consolidated Stores and Mac Frugal's on or
about December 19, 1997.
CONSOLIDATED STORES SPECIAL MEETING
PURPOSE
At the Consolidated Stores Special Meeting, the stockholders of
Consolidated Stores will consider and vote upon a proposal to approve the
issuance of up to a maximum of 28,000,000 shares of Consolidated Stores Common
Stock pursuant to the Merger (the "Share Issuance").
THE CONSOLIDATED STORES BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS
ADVISABLE AND FAIR TO AND IN THE BEST INTERESTS OF CONSOLIDATED STORES, HAS
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF
CONSOLIDATED STORES VOTE IN FAVOR OF THE SHARE ISSUANCE AT THE CONSOLIDATED
STORES SPECIAL MEETING. See "THE MERGER -- Consolidated Stores' Reasons for the
Merger; Recommendation of the Consolidated Stores Board."
RECORD DATE; VOTING RIGHTS
Only holders of record of Consolidated Stores Common Stock at the close of
business on December 15, 1997 (the "Consolidated Stores Record Date") are
entitled to receive notice of and to vote at the Consolidated Stores Special
Meeting. At the close of business on the Consolidated Stores Record Date, there
were 84,386,867 shares of Consolidated Stores Common Stock outstanding, each of
which entitles the registered holder thereof to one vote.
SHARE OWNERSHIP OF MANAGEMENT
At the close of business on the Consolidated Stores Record Date, directors
and executive officers of Consolidated Stores and their affiliates were the
beneficial owners of an aggregate of 5,270,908 (approximately 6.246 %) of the
shares of Consolidated Stores Common Stock then outstanding.
QUORUM
The holders of a majority of the shares of Consolidated Stores Common Stock
outstanding and entitled to vote must be present in person or represented by
proxy at the Consolidated Stores Special Meeting in order for a quorum to be
present.
Shares of Consolidated Stores Common Stock represented by proxies which are
marked "abstain" will be counted as shares present for purposes of determining
the presence of a quorum on all matters, as will shares that are represented by
proxies that are executed by any broker, fiduciary or other nominee on behalf of
the beneficial owner(s) thereof regardless of whether authority to vote is
withheld by such broker, fiduciary or nominee on one or more matters.
In the event that a quorum is not present at the Consolidated Stores
Special Meeting, it is expected that such meeting will be adjourned or postponed
to solicit additional proxies.
REVOCATION OF PROXIES
All shares of Consolidated Stores Common Stock represented by properly
executed proxies in the enclosed form that are received in time for the
Consolidated Stores Special Meeting and have not been revoked will be voted in
accordance with the instructions indicated in such proxies. IF A PROXY IS
27
<PAGE> 38
SUBMITTED BUT NO DIRECTIONS ARE GIVEN THEREIN, SHARES OF CONSOLIDATED STORES
COMMON STOCK REPRESENTED BY THE PROXY WILL BE VOTED FOR THE SHARE ISSUANCE.
Abstentions will have the effect of a vote cast against the Share Issuance.
Broker non-votes will be disregarded and will have no effect on the vote. In
addition, the persons designated in such proxy will have discretion to vote upon
any procedural matter relating to the Consolidated Stores Special Meeting,
including the right to vote for any adjournment or postponement thereof proposed
by the Consolidated Stores Board, including a postponement and adjournment to
solicit additional proxies. Any proxy in the enclosed form may be revoked by the
stockholder executing it at any time prior to its exercise by giving written
notice thereof to the Secretary of Consolidated Stores, by signing and returning
a later dated proxy or by voting in person at the Consolidated Stores Special
Meeting. Attendance at the Consolidated Stores Special Meeting will not in and
of itself constitute the revocation of a proxy.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Consolidated Stores
Board. In addition to the use of the mail, solicitation may be made in person or
by telephone or otherwise by directors, officers and regular employees of
Consolidated Stores. Such directors, officers and regular employees will not be
additionally compensated for such solicitation, but may be reimbursed for
out-of-pocket expenses incurred in connection therewith. If undertaken, the
expense of such solicitation would be nominal. Consolidated Stores has retained
Georgeson & Company to aid in the solicitation of proxies from its stockholders.
The fees paid to Georgeson & Company are not expected to exceed approximately
$11,500, plus reasonable out-of-pocket costs and expenses. Consolidated Stores
will bear its expenses in connection with the solicitation of proxies for its
Special Meeting.
REQUIRED VOTE
Approval of the Share Issuance will require the affirmative vote of a
majority of the votes cast on the Share Issuance, provided that the total number
of votes cast on such proposal represents more than 50% of the outstanding
shares of Consolidated Stores Common Stock entitled to vote thereon at the
Consolidated Stores Special Meeting.
MAC FRUGAL'S SPECIAL MEETING
PURPOSE
At the Mac Frugal's Special Meeting, the stockholders of Mac Frugal's will
consider and vote upon a proposal to approve and adopt the Merger Agreement. The
stockholders of Mac Frugal's will also consider and take action upon any other
business that may properly be brought before the Mac Frugal's Special Meeting.
PRIOR TO THE EXECUTION OF THE MERGER AGREEMENT, THE MAC FRUGAL'S BOARD
UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF
THE STOCKHOLDERS OF MAC FRUGAL'S, APPROVED THE MERGER AGREEMENT, AND RECOMMENDED
THAT THE STOCKHOLDERS OF MAC FRUGAL'S VOTE IN FAVOR OF THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT AT THE MAC FRUGAL'S SPECIAL MEETING. See "THE
MERGER -- Mac Frugal's Reasons for the Merger; Recommendation of the Mac
Frugal's Board." For a discussion of the interests that certain executive
officers of Mac Frugal's have with respect to the Merger in addition to their
interests as stockholders of Mac Frugal's generally and information regarding
the treatment of options to purchase Mac Frugal's Common Stock, see "THE
MERGER -- Interests of Certain Persons." Such interests, together with other
relevant factors, were considered by the Mac Frugal's Board in making its
recommendation and approving the Merger Agreement.
RECORD DATE; VOTING RIGHTS
Only holders of record of Mac Frugal's Common Stock at the close of
business on December 15, 1997 (the "Mac Frugal's Record Date") are entitled to
receive notice of and to vote at the Mac Frugal's Special Meeting. At the close
of business on the Mac Frugal's Record Date, there were 24,837,042 shares of Mac
Frugal's Common Stock outstanding, each of which entitles the registered holder
thereof to one vote.
28
<PAGE> 39
SHARE OWNERSHIP OF MANAGEMENT
At the close of business on the Mac Frugal's Record Date, directors and
executive officers of Mac Frugal's and their affiliates were the beneficial
owners of an aggregate of 1,087,293 (approximately 4.4%) of the Mac Frugal's
Common Stock then outstanding.
QUORUM
The presence of stockholders entitled to cast at least a majority of the
votes that all stockholders of Mac Frugal's are entitled to cast on the Merger
Agreement at the Mac Frugal's Special Meeting is required in order for a quorum
to be present.
Mac Frugal's Common Stock represented by proxies which are marked "abstain"
will be counted as shares present for purposes of determining the presence of a
quorum on all matters, as will shares that are represented by proxies that are
executed by any broker, fiduciary or other nominee on behalf of the beneficial
owner(s) thereof regardless of whether authority to vote is withheld by such
broker, fiduciary or nominee on one or more matters.
In the event that a quorum is not present at Mac Frugal's Special Meeting,
it is expected that such meeting will be adjourned or postponed to solicit
additional proxies.
REVOCATION OF PROXIES
All Mac Frugal's Common Stock represented by properly executed proxies in
the enclosed form that are received in time for the Mac Frugal's Special Meeting
and have not been revoked will be voted in accordance with the instructions
indicated in such proxies. IF A PROXY IS SUBMITTED BUT NO DIRECTIONS ARE GIVEN
THEREIN, SHARES OF MAC FRUGAL'S COMMON STOCK REPRESENTED BY THE PROXY WILL BE
VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. Abstentions and
broker non-votes will have the effect of a vote cast against the Merger and the
Merger Agreement. In addition, the persons designated in such proxy will have
discretion to vote upon any procedural matter relating to the Mac Frugal's
Special Meeting, including the right to vote for any adjournment or postponement
thereof proposed by the Mac Frugal's Board to solicit additional proxies. Any
proxy in the enclosed form may be revoked by the stockholder executing it at any
time prior to its exercise by giving written notice thereof to the Secretary of
Mac Frugal's, by signing and returning a later dated proxy or by voting in
person at the Mac Frugal's Special Meeting. Attendance at the Mac Frugal's
Special Meeting will not in and of itself constitute the revocation of a proxy.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Mac Frugal's Board. In
addition to the use of the mail, solicitation may be made in person or by
telephone or otherwise by officers and regular employees of Mac Frugal's. Such
officers and regular employees will not be additionally compensated for such
solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. If undertaken, the expense of such solicitation would be
nominal. Mac Frugal's has retained Georgeson & Company to aid in the
solicitation of proxies from its stockholders. The fees paid to Georgeson &
Company are not expected to exceed approximately $9,000, plus reasonable
out-of-pocket expenses. Mac Frugal's will bear its expenses in connection with
the solicitation of proxies for its Special Meeting.
REQUIRED VOTE
Approval and adoption of the Merger Agreement will require the affirmative
vote of a majority of the outstanding shares of Mac Frugal's Common Stock
entitled to vote thereon at the Mac Frugal's Special Meeting.
29
<PAGE> 40
THE MERGER
The description of the Merger and the Merger Agreement contained in this
Proxy Statement/Prospectus does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, a conformed copy of which is
attached hereto as Annex A and incorporated herein by reference.
GENERAL
The Merger will become effective upon the date on which a certificate of
merger (the "Certificate of Merger") has been duly filed with the Secretary of
State of the State of Delaware (the "Effective Time"), or at such time as is
agreed upon by the parties and specified in the Certificate of Merger. At the
Effective Time, each share of Mac Frugal's Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Mac Frugal's
Common Stock owned by Mac Frugal's as treasury stock and shares of Mac Frugal's
Common Stock owned by Consolidated Stores, Sub or any other direct or indirect
wholly owned subsidiary of Consolidated Stores), shall by virtue of the Merger
and without any action on the part of the holder thereof be canceled and
converted automatically into the right to receive a number of duly authorized,
validly issued, fully paid and nonassessable shares of Consolidated Stores
Common Stock, equal to the Exchange Rate (as defined herein).
The Exchange Rate means: (i) 1.00, if and only if the average closing price
per share of Consolidated Stores Common Stock on the New York Stock Exchange
("NYSE") as reported on the NYSE Composite Tape during the period comprising the
twenty NYSE trading days immediately preceding the second NYSE trading day
immediately preceding the Effective Time of the Merger (the "Pricing Period")
(the "Average Consolidated Stores Share Price") is less than or equal to $39.00;
or (ii) the quotient of (a) $39.00 divided by (b) the Average Consolidated
Stores Share Price, if and only if the Average Consolidated Stores Share Price
is both (x) greater than $39.00 and (y) less than or equal to $41.49; or (iii)
.94, if and only if the Average Consolidated Stores Share Price is both (x)
greater than $41.49 and (y) less than or equal to $43.62; or (iv)(a) .94 less
(b) the product of (x) the Average Consolidated Stores Share Price less $43.62
multiplied by (y) .01, if and only if the Average Consolidated Stores Share
Price is both (A) greater than $43.62 and (B) less than or equal to $49.62; or
(v) .88, if and only if the Average Consolidated Stores Share Price is greater
than $49.62. In the event that the Average Consolidated Stores Share Price is
less than or equal to $35.00, Mac Frugal's may, on or prior to the Effective
Time, terminate the Merger Agreement in accordance with the termination
provisions of the Merger Agreement. PROMPTLY FOLLOWING THE CLOSING OF THE
PRICING PERIOD, CONSOLIDATED STORES AND MAC FRUGAL'S WILL ISSUE A JOINT PRESS
RELEASE ANNOUNCING THE EXCHANGE RATE. ONCE THE PRICING PERIOD HAS ENDED,
STOCKHOLDERS MAY ALSO CALL GEORGESON & COMPANY AT 1-800-223-2064 TO CONFIRM THE
EXCHANGE RATE. No fractional shares of Consolidated Stores Common Stock will be
issued in the Merger. In lieu of any such fractional shares, each holder of Mac
Frugal's Common Stock who otherwise would be entitled to receive a fractional
share of Consolidated Stores Common Stock pursuant to the Merger will be paid an
amount in cash equal to such fractional interest multiplied by the Average
Consolidated Stores Share Price. Additionally, each share of Consolidated Stores
Common Stock issued pursuant to the Merger will be issued with one associated
Consolidated Stores Right. See "MERGER AGREEMENT -- Conversion of Mac Frugal's
Common Stock."
By way of example (but in each instance subject to payment of cash in lieu
of fractional shares): if the Average Consolidated Stores Share Price is $38.00,
the Exchange Rate will be 1.00 and each holder of a share of Mac Frugal's Common
Stock will be entitled to receive one share of Consolidated Stores Common Stock.
If the Average Consolidated Stores Share Price is $40.00, the Exchange Rate will
be .975 and each holder of a share of Mac Frugal's Common Stock will be entitled
to receive .975 shares of Consolidated Stores Common Stock. If the Average
Consolidated Stores Share Price is $42.00, the Exchange Rate will be .94 and
each holder of a share of Mac Frugal's Common Stock will be entitled to receive
.94 shares of Consolidated Stores Common Stock. If the Average Consolidated
Stores Share price is $44.00, the Exchange Rate will be .936 shares of
Consolidated Stores Common Stock and each holder of a share of Mac Frugal's
Common Stock will be entitled to .936 shares of Consolidated Stores Common
Stock. If the Average Consolidated Stores Share Price is $50.00, the Exchange
Rate will be .88 and each holder of a share of Mac Frugal's Common Stock will be
entitled to receive .88 shares of Consolidated Stores Common Stock.
30
<PAGE> 41
THE CONSIDERATION TO BE RECEIVED BY MAC FRUGAL'S STOCKHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT BE DETERMINED PRECISELY PRIOR TO THE
CLOSE OF BUSINESS ON THE SECOND DAY IMMEDIATELY PRECEDING THE EFFECTIVE TIME.
THE CONSIDERATION WILL DEPEND UPON THE AVERAGE CONSOLIDATED STORES SHARE PRICE,
WHICH ESTABLISHES THE EXCHANGE RATE. BECAUSE THE AVERAGE CONSOLIDATED STORES
SHARE PRICE AND THE EXCHANGE RATE AS OF THE EFFECTIVE TIME ARE NOT DETERMINABLE
AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE MAC
FRUGAL'S SPECIAL MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN
EXCHANGE FOR THE OUTSTANDING MAC FRUGAL'S COMMON STOCK IS NOT CURRENTLY
DETERMINABLE. Had the Merger been consummated on December 15, 1997, the Average
Consolidated Stores Share Price would have been $48.44 and each share of Mac
Frugal's Common Stock outstanding would have been converted into .892 shares of
Consolidated Stores Common Stock (together with one associated Consolidated
Stores Right). In fact, the Average Consolidated Stores Share Price may be
greater than or less than $48.44. See "MERGER AGREEMENT -- Conversion of Mac
Frugal's Common Stock."
THE MARKET VALUE OF THE CONSOLIDATED STORES COMMON STOCK DURING THE PRICING
PERIOD AND AFTER THE EFFECTIVE TIME WILL, AMONG OTHER THINGS, DEPEND UPON, AND
IS EXPECTED TO FLUCTUATE WITH, THE PERFORMANCE OF CONSOLIDATED STORES,
CONDITIONS (ECONOMIC OR OTHERWISE) AFFECTING THE RETAIL CLOSEOUT INDUSTRY, AND
MARKET CONDITIONS AND OTHER FACTORS THAT GENERALLY INFLUENCE PRICES OF
SECURITIES.
BACKGROUND OF THE MERGER
The Consolidated Stores Board and senior management of Consolidated Stores
regularly review the current and future state of Consolidated Stores' strategic
position and short-term and long-term prospects. In the ordinary course of
Consolidated Stores' long-term strategic review process, Consolidated Stores
routinely analyzes potential acquisitions of various retail store operations.
On August 19, 1997, the Consolidated Stores Board held a meeting. At that
meeting, members of Consolidated Stores' senior management made presentations to
the Consolidated Stores Board regarding the proposed acquisition of Mac
Frugal's. The Consolidated Stores Board analyzed and discussed the proposed
acquisition, and it was the consensus of the Consolidated Stores Board that
senior management of Consolidated Stores should continue to analyze a possible
transaction and report back to the Consolidated Stores Board.
On September 11, 1997, Mr. William G. Kelley, Chairman and Chief Executive
Officer of Consolidated Stores, spoke by telephone with Mr. Philip L. Carter,
President and Chief Executive Officer of Mac Frugal's who is a member of the Mac
Frugal's Board. In the conversation, Mr. Kelley told Mr. Carter that
Consolidated Stores was interested in purchasing Mac Frugal's in a merger
transaction involving a stock-for-stock exchange. Mr. Carter told Mr. Kelley
that he would be willing to meet with Mr. Kelley.
On September 12, 1997, Mr. Kelley and Mr. Michael J. Potter, Senior Vice
President and Chief Financial Officer of Consolidated Stores, met in Marina Del
Rey, California with Mr. Carter. A meeting took place and issues such as the
possible synergies that would be created from a merger were discussed. Mr.
Carter informed Mr. Kelley and Mr. Potter that the possibility of a merger would
be discussed with the Mac Frugal's Board at its regularly scheduled board
meeting on September 17, 1997. The parties ended the meeting without any
definitive conclusions about a future meeting.
On September 15, 1997, Mr. Kelley spoke with Mr. Carter by telephone and
discussed the letter that Mr. Kelley would be forwarding to Mr. Carter. On
September 15, 1997, Mr. Kelley forwarded a letter to Mr. Carter discussing
certain tentative terms of a merger transaction including the possible price.
On September 17, 1997, the Mac Frugal's Board discussed the possibility of
a merger with Consolidated Stores and potential issues relevant to a merger
transaction. At the Board meeting, the Mac Frugal's Board authorized management
to engage Batchelder & Partners, Inc. ("Batchelder & Partners") as a financial
advisor to Mac Frugal's in connection with the Merger. Batchelder & Partners is
a nationally recognized
31
<PAGE> 42
investment banking firm with substantial experience in merger transactions.
Thereafter, Mr. Carter delivered a memorandum dated September 18, 1997 to Mr.
Kelley outlining issues that Mac Frugal's would like to discuss in connection
with any merger transaction between the two companies.
During the week of September 15, 1997, Mr. Carter called Mr. Kelley and a
meeting was arranged for September 22, 1997 in Los Angeles, California to
discuss the issues outlined in the September 18, 1997 memorandum.
At the September 22, 1997 meeting, Mr. Kelley, Mr. Potter and Mr. Albert J.
Bell, Senior Vice President, General Counsel and Secretary of Consolidated
Stores, together with representatives of Merrill Lynch, met with Mr. Carter and
Mr. David H. Batchelder, the Chairman of Mac Frugal's and a principal of
Batchelder & Partners, and other representatives of Batchelder & Partners, and
established a preliminary basis for continuing discussions to reach an agreement
concerning a merger transaction. At the meeting, the parties identified issues
that would have to be resolved before realistic consideration could be given to
a merger transaction. At such time, a fixed exchange rate proposal was made by
Consolidated Stores, but was not accepted by Mac Frugal's. The parties ended the
meeting without any definitive conclusions about a future meeting.
Between the September 22, 1997 meeting and mid-October, representatives of
Merrill Lynch and Batchelder & Partners discussed possible exchange rate
proposals and the possibility of a "collar" structure. These discussions
culminated in the decision of Consolidated Stores to instruct its counsel to
commence drafting a merger agreement.
During the week of October 12, 1997, members of senior management of
Consolidated Stores and its legal advisors continued to negotiate the terms of
the proposed merger with representatives of Mac Frugal's, including Mr. Carter
and Mr. Batchelder, and their legal and financial advisors.
Throughout the month of October, each of Mac Frugal's and Consolidated
Stores, and their respective financial and legal advisors, conducted due
diligence investigations. Each party provided requested documents to the other
party and its advisors for review, and numerous meetings and discussions took
place between members of the management teams of each party, legal counsel for
each party and the outside auditors for each party.
On October 22, 1997, counsel for Consolidated Stores distributed a draft of
the Merger Agreement to Mac Frugal's and its legal and financial advisors.
On October 27, 1997, representatives of Consolidated Stores and its legal
and financial advisors met in Los Angeles, California with representatives of
Mac Frugal's and its legal and financial advisors to commence negotiations with
respect to the terms of the proposed Merger Agreement. These negotiations
continued throughout the week. The issues discussed in these negotiations
included finalizing the Exchange Rate, the amount and triggers for termination
fees, the terms of the prohibition on solicitation of competing offers, the
terms of executive severance packages and the feasibility of the proposed tax
and accounting treatment for the transaction.
On October 31, 1997, the Mac Frugal's Board held a special meeting to
review, with the advice and assistance of Mac Frugal's Board's financial and
legal advisors, the proposed Merger Agreement and the transactions contemplated
thereby. At such meeting, Mac Frugal's management and its financial and legal
advisors discussed the transaction with the Mac Frugal's Board, and NMSI advised
the Board that it would be prepared to provide its opinion to the effect that
based upon, and subject to certain factors and assumptions stated therein, the
Exchange Rate would be fair as of that date from a financial point of view to
such Mac Frugal's stockholders. Following the Mac Frugal's Board's review of the
transaction, the Mac Frugal's Board advised management and its financial and
legal advisors that it would consider the transaction further over the weekend
and instructed its representatives to proceed with negotiations with a view to
resolving any remaining issues.
On November 3, 1997, the Consolidated Stores Board held a special meeting
to review, with the advice and assistance of the Board's financial and legal
advisors, the proposed Merger Agreement and the transactions contemplated
thereby. At such meeting, Consolidated Stores' management and legal advisors
made presentations to the Consolidated Stores Board concerning the transaction,
and Merrill Lynch delivered
32
<PAGE> 43
its opinion to the Consolidated Stores Board to the effect that, based upon and
subject to certain factors and assumptions stated therein, as of such date, the
Exchange Rate is fair from a financial point of view to Consolidated Stores. The
full text of the Merrill Lynch written opinion, which sets forth a description
of the assumptions made, factors considered and limitations on the review
undertaken, is attached hereto as Annex D. Stockholders of Consolidated Stores
are urged to read the Merrill Lynch opinion carefully in its entirety. Following
the Consolidated Stores Board's review of the transaction, the Consolidated
Stores Board, subject to the resolution of remaining open issues, unanimously
authorized and approved the proposed Merger Agreement and the transactions
contemplated thereby and authorized the execution and delivery of such Merger
Agreement.
Negotiations between members of senior management of Consolidated Stores
and its legal advisors and representatives of Mac Frugal's and their legal and
financial advisors to finalize the remaining issues in the Merger Agreement
continued through November 4, 1997. On the morning of November 4, 1997, the Mac
Frugal's Board met again with its financial and legal advisors and determined
that the transaction had been fully negotiated in a satisfactory manner. NMSI
then provided its opinion to the Mac Frugal's Board as of that date (which
opinion has been reconfirmed as of the date of this Proxy Statement/Prospectus)
to the effect that the Exchange Rate is fair to the Mac Frugal's stockholders
from a financial point of view. The full text of the opinion of NMSI dated the
date hereof, which contains certain important qualifications, assumptions made,
matters considered, areas of reliance on others and limitations on the review
undertaken, is attached hereto as Annex E. Stockholders of Mac Frugal's are
urged to read the NMSI opinion carefully in its entirety. Following the Mac
Frugal's Board's review of the transaction, the Mac Frugal's Board unanimously
approved the proposed Merger Agreement and the transactions contemplated
thereby, authorized the execution and delivery of such Merger Agreement,
determined that the Merger is fair to and in the best interests of the Mac
Frugal's stockholders and determined to recommend the transaction to the Mac
Frugal's stockholders.
On the evening of November 4, 1997, Consolidated Stores, the Sub and Mac
Frugal's executed and delivered the Merger Agreement.
As of December 17, 1997, the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), will expire.
CONSOLIDATED STORES' REASONS FOR THE MERGER; RECOMMENDATION OF THE CONSOLIDATED
STORES BOARD
The Consolidated Stores Board has unanimously determined that the Merger is
advisable and fair to and in the best interests of Consolidated Stores from a
financial point of view and has approved the Merger Agreement. Accordingly, the
Consolidated Stores Board recommends that the stockholders of Consolidated
Stores vote to approve the Share Issuance.
From time to time over the last several years, the Consolidated Stores
Board has reviewed and reexamined its business strategy and prospects. In the
course of doing so, the Consolidated Stores Board considered possible
acquisitions and combinations with various industry participants. The
acquisition in 1996 of Kay-Bee Center, Inc. was the result of such a review and
the identification of an opportunity to expand the operations of Consolidated
Stores. After careful review and consideration, the Consolidated Stores Board
determined that the Merger provides another opportunity to expand the operations
of Consolidated Stores and provides significant value to the stockholders of
Consolidated Stores.
For the foregoing reasons, the Consolidated Stores Board believes that the
terms and conditions of the Merger Agreement are in the best interests of
Consolidated Stores. In reaching its conclusion, the Consolidated Stores Board
considered, among other things:
1. The judgment, advice and analyses of Consolidated Stores'
management.
2. The analyses prepared by Merrill Lynch and the written opinion of
Merrill Lynch delivered to the Consolidated Stores Board on November 3,
1997, to the effect that, based upon and subject to certain factors and
assumptions stated therein, as of such date, the Exchange Rate is fair from
a financial point of view to Consolidated Stores. The full text of the
Merrill Lynch written opinion, which sets forth the assumptions made,
factors considered and limitations on the review undertaken, is attached as
Annex D hereto. STOCKHOLDERS OF CONSOLIDATED STORES ARE URGED TO READ THE
33
<PAGE> 44
MERRILL LYNCH OPINION CAREFULLY IN ITS ENTIRETY. See "THE MERGER -- Opinion
of Financial Advisor to Consolidated Stores"; and "THE MERGER -- Background
of the Merger."
3. The financial condition, results of operations and cash flows of
Consolidated Stores and Mac Frugal's, both on a historical and a
prospective basis.
4. The fact that the Merger is expected to be accretive to
Consolidated Stores' earnings per share by the end of the first year of
operations following the Merger.
5. Consolidated Stores management believes the Merger will result in a
number of important synergies including: (i) improvement in gross margins
through enhanced purchasing power, (ii) reduced transportation and
distribution costs (as a percentage to combined revenues of the companies)
resulting from the combination of the complimentary distribution networks
of the individual companies, (iii) reduced advertising and marketing
expenses (as a percentage to combined revenues of the companies) resulting
from reduction of overlapping promotion and advertising programs of the
separate companies, and (iv) other reductions in selling and administrative
expenses (as a percentage to combined revenues of the companies) from the
elimination of certain duplicative financial and administrative functions.
See "THE MERGER -- Estimated Synergies."
6. The terms and conditions of the Merger Agreement, including the
amount and form of Merger consideration, the structure of the "collar"
mechanism and the structuring of the transaction to take advantage of the
pooling of interests method of accounting.
7. Historical market prices and trading information with respect to
Consolidated Stores Common Stock and Mac Frugal's Common Stock.
8. The strategic fit between Consolidated Stores and Mac Frugal's,
including the potential for synergies, and the fact that Consolidated
Stores was the foremost logical acquisition partner given Consolidated
Stores' and Mac Frugal's businesses and geographical diversity.
The foregoing discussion of the information and factors considered and
given weight by the Consolidated Stores Board is not intended to be exhaustive.
The Consolidated Stores Board did not assign relative weights to the factors or
determine that any factor was of particular importance. Rather, the Consolidated
Stores Board viewed their position and recommendation as being based on the
totality of the information presented to and considered by it.
THE CONSOLIDATED STORES BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
CONSOLIDATED STORES COMMON STOCK VOTE "FOR" APPROVAL OF THE SHARE ISSUANCE.
OPINION OF FINANCIAL ADVISOR TO CONSOLIDATED STORES
Consolidated Stores retained Merrill Lynch to act as its exclusive
financial advisor in connection with the Merger. On November 3, 1997, Merrill
Lynch delivered to the Consolidated Stores Board its oral opinion, later
confirmed in writing (the "Merrill Lynch Opinion"), to the effect that, based
upon and subject to certain factors and assumptions stated therein, as of such
date, the Exchange Rate is fair from a financial point of view to Consolidated
Stores.
THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH A DESCRIPTION
OF THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, FACTORS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX D AND IS
INCORPORATED HEREIN BY REFERENCE. THE MERRILL LYNCH OPINION WAS PROVIDED TO THE
CONSOLIDATED STORES BOARD FOR ITS INFORMATION AND IS DIRECTED ONLY TO THE
FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE EXCHANGE RATE TO CONSOLIDATED
STORES, DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY CONSOLIDATED
STORES TO ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
CONSOLIDATED STORES STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE
SHARE ISSUANCE OR ANY TRANSACTION RELATED THERETO. CONSOLIDATED STORES
STOCKHOLDERS ARE URGED TO READ THE MERRILL LYNCH OPINION CAREFULLY IN ITS
ENTIRETY, ESPECIALLY WITH REGARD TO THE ASSUMPTIONS MADE AND FACTORS CONSIDERED
BY MERRILL LYNCH. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
34
<PAGE> 45
The Exchange Rate was determined through arms-length negotiations between
Consolidated Stores and Mac Frugal's and was approved by the Consolidated Stores
Board.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Merrill Lynch Opinion or the presentation made by
Merrill Lynch to the Consolidated Stores Board. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
applications of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Merrill Lynch did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Merrill Lynch believes that its analyses must be considered
as a whole and that selecting portions of its analyses, without considering all
of its analyses, would create an incomplete view of the process underlying the
Merrill Lynch Opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, Consolidated Stores or Mac Frugal's. Any estimates contained in the
analyses performed by Merrill Lynch are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. Additionally, estimates of the value of businesses
or securities do not purport to be appraisals or to reflect the prices at which
such businesses or securities might actually be sold. Accordingly, such analyses
and estimates are inherently subject to substantial uncertainty. In addition, as
described above, the Merrill Lynch Opinion and Merrill Lynch's presentation to
the Consolidated Stores Board were among several factors taken into
consideration by the Consolidated Stores Board in making its determination to
approve and adopt the Merger Agreement. Consequently, the Merrill Lynch analyses
described below should not be viewed as determinative of the decision of the
Consolidated Stores Board with respect to the fairness of the Exchange Rate.
In arriving at its opinion, Merrill Lynch, among other things: (i) reviewed
certain publicly available business and financial information relating to each
of Consolidated Stores and Mac Frugal's that Merrill Lynch deemed to be
relevant; (ii) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and prospects
of Consolidated Stores and Mac Frugal's, as well as the amount and timing of the
cost savings and related expenses expected to result from the Merger (the
"Expected Synergies") furnished to Merrill Lynch by Consolidated Stores; (iii)
conducted discussions with members of senior management and representatives of
Consolidated Stores and Mac Frugal's concerning the matters described in clauses
(i) and (ii) above, as well as their respective businesses and prospects before
and after giving effect to the Merger and the Expected Synergies; (iv) reviewed
the market prices and valuation multiples for the Consolidated Stores Common
Stock and Mac Frugal's Common Stock and compared them with those of certain
publicly traded companies that Merrill Lynch deemed to be relevant; (v) reviewed
the results of operations of Consolidated Stores and Mac Frugal's and compared
them with those of certain publicly traded companies that Merrill Lynch deemed
to be relevant; (vi) compared the proposed financial terms of the Merger with
the financial terms of certain other transactions that Merrill Lynch deemed to
be relevant; (vii) participated in certain discussions and negotiations among
representatives of Consolidated Stores and Mac Frugal's and their financial and
legal advisors; (viii) reviewed the potential pro forma impact of the Merger;
(ix) reviewed a draft, dated November 2, 1997, of the Merger Agreement; and (x)
reviewed such other financial studies and analyses and took into account such
other matters as Merrill Lynch deemed necessary, including Merrill Lynch's
assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or publicly
available, and Merrill Lynch did not assume any responsibility for independently
verifying such information, did not undertake an independent evaluation or
appraisal of any of the assets or liabilities, contingent or otherwise, of
Consolidated Stores or Mac Frugal's or any of their subsidiaries, and was not
furnished with any such evaluation or appraisal. In addition, Merrill Lynch did
not assume any obligation to conduct any physical inspection of the properties
or facilities of Consolidated Stores or Mac Frugal's. With respect to the
financial forecast information and the Expected Synergies furnished to or
discussed with Merrill
35
<PAGE> 46
Lynch by Consolidated Stores or Mac Frugal's, Merrill Lynch assumed that they
were reasonably prepared and reflected the best currently available estimates
and judgment of Consolidated Stores or Mac Frugal's management as to the
expected future financial performance of Consolidated Stores or Mac Frugal's, as
the case may be, and the Expected Synergies. Merrill Lynch expressed no opinion
as to such financial forecast information or the Expected Synergies or the
assumptions on which they were based. Merrill Lynch further assumed that the
Merger will be accounted for as a pooling-of-interests under generally accepted
accounting principles and that it will qualify as a tax-free reorganization for
U.S. federal income tax purposes.
The Merrill Lynch Opinion is necessarily based upon market, economic, and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of such opinion.
Merrill Lynch assumed that the final form of the Merger Agreement would be
substantially similar to the last draft reviewed by Merrill Lynch. Additionally,
for the purposes of rendering its opinion Merrill Lynch assumed, in all respects
material to its analyses, that the representations and warranties of each party
in the Merger Agreement are true and correct, that each party to the Merger
Agreement will perform all of the covenants and agreements required to be
performed by such party under the Merger Agreement, and that all conditions to
the consummation of the Merger will be satisfied without waiver thereof. Merrill
Lynch also assumed that in the course of obtaining the necessary regulatory or
other consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger. Merrill Lynch was not asked to consider,
and the Merrill Lynch Opinion does not in any manner address, the prices at
which shares of Consolidated Stores Common Stock will trade following the
announcement or consummation of the Merger.
The following is a brief summary of the material analyses performed by
Merrill Lynch in connection with its preparation of the Merrill Lynch Opinion.
Historical Relative Trading Analysis. Merrill Lynch reviewed the recent
historical stock market performance of Mac Frugal's Common Stock and
Consolidated Common Stock in relation to each other. This analysis indicated
that for the three-year period through October 31, 1997, the ratio of the price
of a share of Mac Frugal's Common Stock to the price of a share of Consolidated
Stores Common Stock ranged between 0.5543 and 1.9111 and averaged 1.0226.
Merrill Lynch also noted that such ratio ranged from 0.5543 to 1.1516 and
averaged 0.8607 for the two-year period through October 31, 1997, such ratio
ranged from 0.8474 to 1.1516 and averaged 0.8789 for the one-year period through
October 31, 1997, such ratio ranged from 0.7113 to 1.0223 and averaged 0.8455
for the 180-day period through October 31, 1997, such ratio ranged from 0.7113
to 0.9143 and averaged 0.7725 for the 90-day period through October 31, 1997,
such ratio ranged from 0.7113 to 0.9143 and averaged 0.7716 for the 60-day
period through October 31, 1997, such ratio ranged from 0.7204 to 0.9143 and
averaged 0.7925 for the 30-day period through October 31, 1997, such ratio
ranged from 0.7333 to 0.9143 and averaged 0.8072 for the 20-day period through
October 31, 1997, such ratio ranged from 0.7959 to 0.9143 and averaged 0.8379
for the 10-day period through October 31, 1997, and such ratio was 0.8558 based
on the closing prices on October 31, 1997.
Selected Publicly Traded Comparable Companies Analysis. Using publicly
available information, Merrill Lynch reviewed the stock prices (as of October
31, 1997) and market multiples of common stocks of the following companies:
Dollar General Corporation; 99 Cents Only Stores; Consolidated Stores; Dollar
Tree Stores, Inc.; Family Dollar Stores, Inc.; Mazel Stores, Inc.; Ross Stores,
Inc.; The TJX Companies, Inc.; and Value City Department Stores, Inc. Merrill
Lynch believes these companies are engaged in lines of business that are
generally comparable to those of Mac Frugal's. Merrill Lynch determined the
equity market value and derived the unlevered value (defined as equity market
value plus the book value of debt less the cash and cash equivalents) for these
comparable companies. Merrill Lynch calculated a range of such unlevered values
as a multiple of the latest 12 months sales, earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and earnings before interest and taxes
("EBIT"). Unlevered value as a multiple of the latest 12 months sales ranged
from 0.98x to 1.29x, compared to an implied transaction multiple of 1.29x for
Mac Frugal's. Unlevered value as a multiple of the latest 12 months EBITDA
ranged from 10.0x to 13.4x, compared to an implied transaction multiple of 11.4x
for Mac Frugal's. Unlevered value as a multiple of the latest 12 months EBIT
ranged from 11.1x to 16.6x, compared to an implied transaction multiple of 14.2x
for
36
<PAGE> 47
Mac Frugal's. Merrill Lynch also determined the prices of the comparable
companies as a multiple of estimated fiscal year 1998 earnings per share ("EPS")
and estimated fiscal year 1999 EPS as estimated by First Call Research Network.
For estimated fiscal year 1998 EPS, the multiples ranged from 18.2x to 24.8x,
compared to an implied transaction multiple of 21.2x for Mac Frugal's. For
estimated fiscal year 1999 EPS, the multiples ranged from 15.8x to 20.3x,
compared to an implied transaction multiple of 18.9x for Mac Frugal's.
Selected Acquisition Transactions Analysis. Using publicly available
information, Merrill Lynch reviewed the purchase prices and multiples paid in
selected completed and pending mergers and acquisitions involving discount
retail companies which Merrill Lynch deemed relevant in evaluating the Merger.
Merrill Lynch reviewed the acquisition of Tuesday Morning Corporation by Madison
Dearborn Partners, Inc.; the acquisition of Kay-Bee Center, Inc. by Consolidated
Stores; the acquisition of Terrific Promotions, Inc. by Dollar Bills, Inc.; the
acquisition of Marshalls of Roseville, Minn., Inc. by The TJX Companies, Inc.;
the acquisition of The Price Company by Costco Wholesale Corporation; the
acquisition of PACE Membership Warehouse, Inc. by Kmart Corporation; the
acquisition of Best Products Co., Inc. by Adler & Shaykin; the acquisition of
Zayre Discount Stores by Ames Department Stores, Inc.; the acquisition of
Loehmann's, Inc. by Loehmanns Holdings, Inc.; and the acquisition of Montgomery
Ward & Co., Incorporated in a management buyout.
Multiples of unlevered value of the transactions (consideration offered for
the equity plus the book value of debt less the cash and cash equivalents) to
the sales of the acquired businesses for the 12 months preceding the acquisition
ranged from 0.53x to 1.26x, compared to an implied transaction multiple of 1.21x
for Mac Frugal's. The multiples of EBITDA for the 12 months preceding the
acquisition ranged from 8.0x to 11.7x, compared to an implied transaction
multiple of 10.6x for Mac Frugal's. The multiples of EBIT for the 12 months
preceding the acquisition announcement ranged from 10.9x to 14.0x, compared to
an implied transaction multiple of 13.2x for Mac Frugal's. Multiples of equity
value of the transactions to the net income for the 12 months preceding the
acquisition ranged from 15.9x to 27.7x, compared to an implied transaction
multiple of 22.8x for Mac Frugal's.
No company, transaction or business used in the analyses described under
"-- Selected Publicly Traded Comparable Companies Analysis" and "-- Selected
Acquisition Transactions Analysis" is identical to Consolidated Stores, Mac
Frugal's or the Merger. Accordingly, an analysis of the results thereof
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics and other factors that could affect
the transaction or the public trading or other values of the company or
companies to which they are being compared. Mathematical analysis (such as
determining the average or median) is not in itself a meaningful method of using
comparable acquisition or company data.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash
flow analysis of Mac Frugal's on a stand alone basis using a set of underlying
operating plans which were based upon the forecasts provided by management of
Mac Frugal's (the "Mac Frugal's Plans"). Utilizing the Mac Frugal's Plans,
Merrill Lynch calculated the theoretical unlevered discounted present value for
Mac Frugal's by adding together the present value of (i) the planned stream of
unlevered free cash flow through the fiscal year 2002 for Mac Frugal's and (ii)
the planned value of Mac Frugal's at the end of the fiscal year 2002 (the "Mac
Frugal's Terminal Value"). Merrill Lynch also performed a discounted cash flow
analysis of Consolidated Stores using a set of underlying operating plans which
were based upon the forecasts provided by the management of Consolidated Stores
(the "Consolidated Stores Plans"). Utilizing the Consolidated Stores Plans,
Merrill Lynch calculated the theoretical unlevered discounted present value for
Consolidated Stores by adding together the present value of (i) the projected
stream of unlevered free cash flow through the fiscal year 2002 for Consolidated
Stores and (ii) the projected value of Consolidated Stores at the end of the
fiscal year 2002 (the "Consolidated Stores Terminal Value"). The Mac Frugal's
Terminal Value and the Consolidated Stores Terminal Value were each calculated
based upon EBITDA multiples ranging from 8.0x to 10.0x. The unlevered after-tax
discount rates used in the discounted cash flow analyses ranged from 10.0% to
12.0%.
The theoretical value of Mac Frugal's based on the Mac Frugal's Plans
produced a range of value per share of Mac Frugal's Common Stock of $35.53 to
$44.81. Merrill Lynch noted that, based on the closing price of Consolidated
Stores Common Stock on October 31, 1997, the implied value of $39.34 per share
of
37
<PAGE> 48
Mac Frugal's Common Stock in the Merger based upon the Exchange Rate was within
the range of the theoretical value based on the Mac Frugal's Plans. The
theoretical value of Consolidated Stores based on the Consolidated Stores
Projections produced a range of value per share of Consolidated Stores Common
Stock of $37.78 to $49.68. Merrill Lynch noted that the closing price of
Consolidated Stores Common Stock on October 31, 1997, $39.88 per share, was
within the range of the theoretical value based on the Consolidated Stores
Plans.
In addition, Merrill Lynch calculated the theoretical value of Mac Frugal's
and Consolidated Stores combined, based on the Mac Frugal's Plans, the
Consolidated Stores Plans and the Expected Synergies, including certain
synergies and cost savings estimated by the management of Consolidated Stores.
The theoretical value of Consolidated Stores based on Mac Frugal's and
Consolidated Stores combined produced a range of value per share of Consolidated
Stores Common Stock of $38.21 to $49.84. Merrill Lynch noted that the per share
values were above the comparable per share values for Consolidated Stores on a
stand alone basis.
Contribution Analysis. Merrill Lynch analyzed the percentage of sales,
EBITDA, EBIT, pretax income, net income, and cash flow (net income plus
depreciation and amortization plus deferred taxes) that each of Consolidated
Stores and Mac Frugal's would contribute to the total of the combined entity
based upon the Mac Frugal's Plans and Consolidated Stores Plans referred to
above. Based upon the Mac Frugal's Plans and Consolidated Stores Plans,
Consolidated Stores' contribution to the combined entity ranged from 74.0% to
84.3%. Merrill Lynch noted that, based upon the Exchange Rate as of November 3,
1997, of 0.99 shares of Consolidated Stores Common Stock for each share of Mac
Frugal's Common Stock, the Consolidated Stores stockholders would own
approximately 78% of the combined entity, within the range of contribution based
upon the statistics considered.
Pro Forma Impact Analysis. Merrill Lynch examined the pro forma impact of
the Merger on Consolidated Stores' earnings per share based on operating and
financial plans for the two companies. The plan for such earnings was based upon
the Mac Frugal's Plans, the Consolidated Stores Plans and the Expected Synergies
referred to above. This analysis indicated that the Merger would be accretive to
Consolidated Stores' earnings per share in each of the fiscal years 1998 through
2002.
Consolidated Stores retained Merrill Lynch on the basis of its experience
and expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm which, as a part of its investment banking business, regularly
is engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the past, Merrill Lynch has
provided financial advisory and financing services to Consolidated Stores and
may continue to do so, and has received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of its business, Merrill
Lynch may actively trade the equity securities of Consolidated Stores and Mac
Frugal's for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to the engagement letter, dated as of September 17, 1997, between
Consolidated Stores and Merrill Lynch, Consolidated Stores has agreed to pay
Merrill Lynch a fee of $4,500,000 for services rendered in connection with the
Merger. Of this amount, $250,000 was payable on the date of the engagement
letter, and $4,250,000 will be payable upon the consummation of the Merger.
Consolidated Stores has also agreed to reimburse Merrill Lynch for the expenses
reasonably incurred by it in connection with its engagement (including
reasonable counsel fees and disbursements) and to indemnify Merrill Lynch and
its affiliates from and against certain liabilities, including liabilities under
the federal securities laws, arising out of its engagement.
MAC FRUGAL'S REASONS FOR THE MERGER; RECOMMENDATION OF THE MAC FRUGAL'S BOARD
At a special meeting held on November 4, 1997, the Mac Frugal's Board (i)
determined that the Merger Agreement and the transactions contemplated thereby
are fair to, and in the best interest of the stockholders of Mac Frugal's, and
(ii) unanimously approved the Merger Agreement and the transactions contemplated
38
<PAGE> 49
thereby. At such meeting, the Mac Frugal's Board determined that it recommended
that the holders of shares of Mac Frugal's Common Stock approve and adopt the
Merger.
In reaching its conclusion to approve and recommend the Merger Agreement,
the Mac Frugal's Board considered a number of factors, including, without
limitation, the following:
1. The fact that the Exchange Rate in the Merger, assuming the Average
Consolidated Stores Share Price is $40 1/4, the closing price of
Consolidated Stores Common Stock on November 3, 1997 (the last full trading
prior to the approval of the Merger Agreement), represents a premium of
approximately 21% over the closing price of $32.36, the average closing
price of Mac Frugal's Common Stock over the twenty consecutive NYSE trading
days ended November 3, 1997.
2. The Exchange Rate provides for participation in increases in value
of the Consolidated Stores Common Stock above $41.50 per share and $49.62
as well as for limited downside protection if the price drops below $41.50.
Mac Frugal's may elect to terminate the Merger Agreement if the price of
Consolidated Stores Common Stock drops to or below $35.
3. The information presented by Batchelder & Partners to the Mac
Frugal's Board, including analysis of historical trading prices, ratios of
Mac Frugal's versus Consolidated Stores Common Stock and comparative stock
prices for each company relative to applicable stock market indices.
4. The written opinion of NMSI dated November 4, 1997 addressed to and
considered by the Mac Frugal's Board (which opinion has been reconfirmed as
of the date of this Proxy Statement/Prospectus and is attached hereto as
Annex E). This opinion contains certain important qualifications and a
description of assumptions made, matters considered, areas of reliance on
others and limitations on the review undertaken by NMSI. Stockholders
should review this opinion carefully in its entirety.
5. The fact that while recent earnings and the expected near-term
performance of Mac Frugal's represent a significant improvement over prior
periods, other strategic alternatives open to Mac Frugal's, such as
remaining independent and continuing to grow by expansion, involve a
greater risk from the standpoint of stockholder value than the proposed
Merger.
6. The fact that while the Merger Agreement prohibits Mac Frugal's
from soliciting or encouraging potential acquisition proposals, it does
permit Mac Frugal's to furnish information to and participate in
discussions with competing bidders under specified circumstances,
consistent with the Mac Frugal's Board's legal obligations.
7. The strategic fit between Mac Frugal's and Consolidated Stores,
including the potential for synergies, and the fact that Consolidated
Stores was the foremost logical acquisition partner given Mac Frugal's and
Consolidated Stores' businesses and geographical diversity.
8. The fact that the Merger is expected to be treated as a tax-free
reorganization and is intended to be accounted for under the pooling of
interests method of accounting. See "THE MERGER -- Accounting Treatment"
and "THE MERGER -- Certain Federal Income Tax Consequences."
9. The Merger Agreement is not conditioned on Consolidated Stores
obtaining financing in connection with the transactions contemplated by the
Merger.
The Mac Frugal's Board did not assign relative weights to the above factors
or determine that any factor was of particular importance. Rather, the Mac
Frugal's Board viewed its position and recommendations as being based on the
totality of the information presented to, and considered by, it.
The Mac Frugal's Board recognized that, while there can be no assurance as
to the level of growth or profits to be attained by Consolidated Stores in the
future and there can be no assurance that the requisite Federal Trade Commission
(the "FTC") approval for the Merger will be obtained, the Merger and the
transactions contemplated thereby give Mac Frugal's stockholders the opportunity
to receive Consolidated Stores Common Stock pursuant to the Merger and thereby
participate in the synergies expected to be created by the combination of Mac
Frugal's with Consolidated Stores and the future growth and profits of the
combined company. See "THE MERGER -- Estimated Synergies."
39
<PAGE> 50
It is presently expected that, if the Merger is not consummated, Mac
Frugal's management, under the general direction of the current Mac Frugal's
Board, will continue to manage Mac Frugal's as an ongoing business.
THE MAC FRUGAL'S BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF MAC
FRUGAL'S COMMON STOCK VOTE "FOR" ADOPTION OF THE MERGER AGREEMENT.
OPINION ADDRESSED TO THE MAC FRUGAL'S BOARD
The Board of Directors of Mac Frugal's retained NationsBanc Montgomery
Securities, Inc. ("NMSI") to review the Merger and render an opinion as
investment bankers as to the fairness from a financial point of view of the
aggregate consideration to be received by the holders of Mac Frugal's Common
Stock pursuant to the Merger. NMSI was not retained to act as financial advisor
to Mac Frugal's or the Board of Directors of Mac Frugal's in connection with the
Merger, and NMSI was not retained or requested to consider any strategic or
financial alternatives to the Merger or to seek indications of interest from
other potential buyers in connection with rendering its opinion. Mac Frugal's
selected and retained NMSI for this assignment on the basis of NMSI's experience
and expertise in transactions similar to the Merger, and its reputation in the
retail and investment communities. NMSI is a nationally recognized investment
banking and financial advisory firm and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with the consideration by the Board of Directors of Mac
Frugal's of the merits of the Merger, NMSI was asked under the terms of its
engagement to perform various financial analyses and deliver to the Board of
Directors of Mac Frugal's its opinion based on such analyses that is more fully
described below. At the November 4, 1997 meeting of the Board of Directors of
Mac Frugal's, NMSI delivered an oral opinion described below to the Mac Frugal's
Board, which was subsequently confirmed in writing as of such date. NMSI also
delivered a substantially identical written opinion dated the date of this Proxy
Statement/Prospectus reconfirming its earlier opinion dated November 4, 1997.
THE OPINIONS OF NMSI WERE AND ARE DIRECTED SOLELY TO THE BOARD OF DIRECTORS OF
MAC FRUGAL'S FOR ITS CONSIDERATION IN CONNECTION WITH THE MERGER AND ARE NOT A
RECOMMENDATION TO ANY HOLDER OF MAC FRUGAL'S COMMON STOCK AS TO WHETHER THE
MERGER IS IN SUCH HOLDER'S BEST INTERESTS OR AS TO WHETHER HOLDERS OF MAC
FRUGAL'S COMMON STOCK SHOULD VOTE FOR OR AGAINST THE MERGER. THE FULL TEXT OF
SUCH WRITTEN OPINION OF NMSI DATED AS OF THE DATE HEREOF, IS ATTACHED HERETO AS
ANNEX E, AND SETS FORTH CERTAIN IMPORTANT QUALIFICATIONS, ASSUMPTIONS MADE,
MATTERS CONSIDERED, AREAS OF RELIANCE ON OTHERS, AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH SUCH OPINION. NMSI HAS PROVIDED THAT ITS OPINION
IS NOT A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE SECURITIES
ACT (A STATEMENT TO SUCH EFFECT IS INCLUDED IN NMSI'S OPINION) AND NMSI HAS NOT
ASSUMED RESPONSIBILITY UNDER THE TERMS OF ITS ENGAGEMENT FOR PERFORMING THE
LEVEL OF DILIGENCE OR INDEPENDENT VERIFICATION THAT WOULD BE REQUIRED FOR NMSI
TO RENDER A REPORT OR VALUATION WITHIN THE MEANING OF THE APPLICABLE PROVISIONS
OF THE SECURITIES ACT.
The summary description of NMSI's opinion set forth below is qualified in
its entirety by the full text of the opinion attached hereto as Annex E.
In connection with its opinion, NMSI among other things (i) reviewed
certain publicly available financial and other data with respect to Mac Frugal's
and Consolidated Stores, including the consolidated financial statements for
recent years and interim periods to November 2, 1997, and certain other relevant
financial and operating data relating to Mac Frugal's and Consolidated Stores
made available to it from published sources and from the internal records of Mac
Frugal's and Consolidated Stores; (ii) reviewed the financial terms and
conditions of the Merger Agreement; (iii) reviewed certain publicly available
information concerning the
40
<PAGE> 51
trading of, and the trading market for, Mac Frugal's Common Stock and
Consolidated Stores Common Stock; (iv) compared Mac Frugal's and Consolidated
Stores from a financial point of view with certain other companies in the retail
industry which NMSI deemed to be relevant; (v) considered the financial terms,
to the extent publicly available, of selected recent business combinations of
companies in the retail industry which NMSI deemed to be comparable, in whole or
in part, to the Merger; (vi) reviewed and discussed with representatives of the
management of Mac Frugal's and Consolidated Stores certain information of a
business and financial nature regarding Mac Frugal's and Consolidated Stores
furnished by Mac Frugal's and Consolidated Stores to NMSI, including financial
forecasts and related assumptions of Mac Frugal's and Consolidated Stores; (vii)
made inquiries regarding and discussed the Merger and the Merger Agreement and
other matters related thereto with Mac Frugal's counsel; and (viii) performed
such other analyses and examinations as NMSI deemed appropriate.
Based upon its review of the foregoing, but subject to the limitations set
forth below and in reliance upon the assumptions set forth below, NMSI provided
the Board of Directors of Mac Frugal's with its opinion as investment bankers
that as of the date of their opinion (November 4, 1997, and reconfirmed as of
the date of this Proxy Statement/Prospectus), the aggregate consideration to be
received by the holders of Mac Frugal's Common Stock pursuant to the Merger was
fair to such holders of Mac Frugal's Common Stock from a financial point of
view. The terms of the Merger and the amount of the consideration to be received
by stockholders of Mac Frugal's thereunder were determined pursuant to
negotiations between Mac Frugal's and Consolidated Stores and not pursuant to
recommendations of NMSI. No limitations were imposed by Mac Frugal's on NMSI
with respect to the investigations made or procedures followed in rendering its
opinion.
In connection with its review, NMSI did not assume any obligation to verify
the above described information reviewed by it, and relied on its being accurate
and complete in all material respects. With respect to the financial forecasts
for Mac Frugal's and Consolidated Stores provided to NMSI by Mac Frugal's and
Consolidated Stores' respective managements, NMSI assumed that the forecasts had
been reasonably prepared on bases reflecting the best available estimates and
judgments of the respective managements as to the future financial performance
of Mac Frugal's and Consolidated Stores, and that such projections (together
with NMSI's analysts' forecasts that were discussed with the respective
managements of Mac Frugal's and Consolidated Stores) provided a reasonable basis
upon which NMSI could form its opinion. NMSI also assumed that there had been no
material changes in Mac Frugal's or Consolidated Stores' assets, financial
condition, results of operations, business or prospects since the respective
dates of their last financial statements made available to NMSI. NMSI relied on
advice of the counsel and the independent accountants to Mac Frugal's as to all
legal and financial reporting matters with respect to Mac Frugal's, the Merger
and the Merger Agreement. NMSI assumed that the Merger will be consummated in a
manner that complies in all respects with the applicable provisions of the
Securities Act, the Exchange Act and all other applicable federal and state
statutes, rules and regulations. In addition, NMSI did not assume responsibility
for making an independent evaluation, appraisal or physical inspection of any of
the assets or liabilities (contingent or otherwise) of Mac Frugal's or
Consolidated Stores, nor was NMSI furnished with any such appraisals. Finally,
NMSI's opinion was based on economic, monetary and market and other conditions
as in effect on, and the information made available to NMSI as of, the date of
the opinion (November 4, 1997, and reconfirmed as of the date of this Proxy
Statement/Prospectus). Accordingly, although subsequent developments may affect
this opinion, NMSI did not assume and does not have any obligation to update,
revise or reaffirm this opinion.
NMSI also assumed that the Merger will be consummated in accordance with
the terms described in the Merger Agreement, without any further amendments
thereto, and without waiver by Mac Frugal's of any of the conditions to its
obligations thereunder. The full text of the Merger Agreement is attached hereto
as Annex A and the terms described in the Merger Agreement and the conditions to
Mac Frugal's obligations thereunder should be reviewed and understood by holders
of Mac Frugal's Common Stock in connection with their consideration of the
Merger.
Finally, NMSI did not and could not express any opinion regarding the price
at which the Consolidated Stores Common Stock may trade at any future time.
Since the aggregate consideration to be received by the holders of Mac Frugal's
Common Stock pursuant to the Merger is based upon a fixed exchange ratio
(subject
41
<PAGE> 52
to adjustment downward if the price of Consolidated Stores Common Stock for
purposes of the Merger Agreement exceeds $39.00 per share), the market value of
the aggregate consideration that holders of Mac Frugal's Common Stock will
receive in the Merger may vary significantly from (i) what such holders would
have received when the opinion of NMSI was presented to the Mac Frugal's Board
on November 4, 1997, or (ii) what such holders would receive if the Merger were
consummated on the date of this Proxy Statement/Prospectus. Additionally, the
market value of the aggregate consideration received by holders of Mac Frugal's
Common Stock in the Merger can be expected to change after the consummation of
the Merger as the trading price of Consolidated Stores Common Stock changes in
the ordinary course (or otherwise) of purchases and sales in the open market.
Set forth below is a brief summary of the report presented by NMSI to the
Mac Frugal's Board on November 4, 1997 in connection with its opinion described
above.
Comparable Public Company Analysis. Using public and other available
information, NMSI calculated a range of implied values for Mac Frugal's Common
Stock based on a comparison of the last twelve months' revenues ("LTM
Revenues"), estimated 1997 revenues ("1997E Revenues), estimated 1998 revenues
("1998E Revenues"), last twelve months' earnings before interest, taxes,
depreciation and amortization ("LTM EBITDA"), last twelve months' earnings
before interest and taxes ("LTM EBIT"), estimated 1997 earnings per share
("EPS") and estimated 1998 EPS of seven publicly traded comparable discount
retail companies and three publicly traded comparable close-out retail companies
(the "Retail Companies"). The Retail Companies used in this analysis were Dollar
General Corporation, Dollar Tree Stores, Inc., Family Dollar Stores, Inc.,
Fred's, Kmart(R), Shopko Stores, Wal-Mart Stores, Mazel Stores, Inc., 99 Cents
Only Stores, and Consolidated Stores. The October 29, 1997 stock prices of the
Retail Companies reflected the following mean and median multiples of (i)
aggregate value (defined as equity value plus net debt): 1.25x and 0.90x LTM
Revenues; 1.14x and 0.87x 1997E Revenues; 0.97x and 0.76x 1998E Revenues; 13.2x
and 12.6x LTM EBITDA; and 16.7x and 16.6x LTM EBIT; and (ii) equity value: 24.2x
and 23.8x estimated 1997 EPS; and 19.7x and 19.9x estimated 1998 EPS. NMSI
applied the mean and median multiples for the Retail Companies to the applicable
results and forecasts for Mac Frugal's (and made adjustments by subtracting Mac
Frugal's net debt as of August 3, 1997 ($44 million) where applicable) to
determine the implied equity value of Mac Frugal's. The range of values produced
from these calculations for the implied equity value of Mac Frugal's was $656.7
million to $1,201.5 million. NMSI considered the different types of multiples
calculated and gave more weight to the multiples of reported cash flow and
earnings per share in this analysis. This analysis indicated an implied equity
value (defined as aggregate value minus net debt) of Mac Frugal's of between
$900.0 million and $1,100.0 million, or between $35.43 and $43.31 per share.
Comparable Transaction Analysis. NMSI reviewed the consideration paid in
merger and acquisition transactions in the retail industry that have been
announced since January 1995. NMSI analyzed the consideration paid in such
transactions as a multiple of aggregate value to the target companies' LTM
Revenues, LTM EBITDA, and LTM EBIT. Such analysis yielded mean and median
multiples of 0.63x and 0.60x LTM Revenues, 7.8x and 7.6x LTM EBITDA, and 13.3x
and 13.6x LTM EBIT, respectively. NMSI then applied the foregoing multiples to
Mac Frugal's LTM Revenues, LTM EBITDA and LTM EBIT. The range of values produced
from such calculations for the implied equity value of Mac Frugal's was $443.2
million to $966.1 million. NMSI gave more weight to the value calculations based
on LTM EBITDA in this analysis. This analysis indicated an imputed equity value
of Mac Frugal's of between $700.0 million and $800.0 million, or between $27.56
and $31.50 per share.
Premiums Paid Analysis. NMSI reviewed the consideration paid in comparable
U.S. acquisitions involving consideration of between $500 million and $2 billion
that have been announced since January 1, 1996 (excluding technology and
biotechnology deals). NMSI calculated the premiums paid in these transactions
over the applicable stock prices of the target companies one day, one week and
30 days prior to the announcement of the acquisition, and then calculated the
average of those premiums (which were 25.2%, 29.9% and 36.3%, respectively).
NMSI also calculated the premiums paid in transactions that qualify for pooling
of interest accounting over the applicable stock prices of the target companies
one day, one week and 30 days prior to the announcement of the acquisition
offer, and then calculated the average of those premiums (which were 29.0%,
33.2% and 39.7%, respectively). NMSI then applied the average premiums so
derived to
42
<PAGE> 53
Mac Frugal's closing stock price on October 29, 1997 ($32.44), which NMSI noted
was the highest closing price for Mac Frugal's Common Stock during the preceding
24 months. Based on this analysis, an application of the average premiums to the
closing stock price of Mac Frugal's Common Stock indicated an assessed equity
valuation range of $1,031.7 million to $1,151.0 million, or between $40.62 to
$45.32 per share.
No company or transaction used in the comparable company analysis, the
comparable transactions analysis or the premiums paid analysis as a comparison
is identical to Mac Frugal's or the Merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which Mac Frugal's and the Merger are being
compared.
Discounted Cash Flow Analysis. NMSI performed a discounted cash flow
analysis using forecasts for Mac Frugal's for 1998 available from NMSI's retail
analyst and financial forecasts for 1998 and 1999 supplied by and discussed with
Mac Frugal's management. Further financial forecasts for 2000 through 2004 were
prepared by NMSI (with the assistance of and following discussions with Mac
Frugal's management) from the 1998 and 1999 forecasts described in the preceding
sentence based primarily on Mac Frugal's management's current assumptions for
new store openings and operating margins.
In conducting this discounted cash flow analysis, NMSI first calculated the
estimated future streams of free cash flows that Mac Frugal's would produce
through 2004 and then estimated Mac Frugal's terminal value at the end of 2004
by applying a range of EBITDA exit multiples from 7.0x to 9.0x to Mac Frugal's
estimated EBITDA in 2004. Such cash flow streams and terminal values were
discounted to present values using discount rates ranging from 12.0% to 14.0%,
chosen to reflect reasonable ranges of Mac Frugal's cost of capital. This
analysis indicated an implied equity value of Mac Frugal's (using a 13% discount
rate) of between $711.2 million and $838 million, or between $28.00 and $33.00
per share.
Pro Forma Merger Analysis. Holders of Mac Frugal's Common Stock will
receive Consolidated Stores Common Stock in the Merger. NMSI reviewed and
analyzed the pro forma financial impact of the Merger on Consolidated Stores'
projected earnings per share for Consolidated Stores' 1997 and 1998 fiscal
years. Assuming the accuracy of the financial forecasts used for Mac Frugal's
and Consolidated Stores, and without giving effect to any operating synergies
that might be realized following the Merger, this analysis indicated that the
Merger should be accretive to Consolidated Stores' anticipated 1997 and 1998
earnings per share.
Pro Forma Contribution Analysis. Assuming no adjustment in the exchange
ratio (i.e., that one share of Consolidated Stores Common Stock will be received
for each share of Mac Frugal's Common Stock owned), Mac Frugal's current
stockholders will have an aggregate ownership interest in Consolidated Stores of
approximately 22.4% after the consummation of the Merger. On a pro forma basis
(assuming the accuracy of the financial forecasts used for Mac Frugal's and
Consolidated Stores), Mac Frugal's would contribute to the combined operations
of Consolidated Stores, after giving effect to the Merger, the following: 20.4%
of the 1997E Revenues, 23.2% of 1997 estimated earnings before interest, taxes,
depreciation and amortization, 23.2% of 1997 estimated earnings before interest
and taxes, 24.4% of 1997 estimated net income, and 23.1% of 1998 estimated net
income.
While the foregoing summary describes all analyses and examinations that
NMSI deemed material to the preparation of its opinion to the Mac Frugal's
Board, it does not purport to be a comprehensive description of all analyses and
examinations actually conducted by NMSI. The preparation of a fairness opinion
necessarily is not susceptible to partial analysis or summary description; and
selecting portions of the analyses and of the factors considered by NMSI,
without considering all analyses and factors, would create an incomplete view of
the process underlying the analyses set forth in the presentation of NMSI to the
Mac Frugal's Board. In addition, NMSI may have given some analyses more or less
weight than other analyses, and may have deemed various assumptions more or less
probable than other assumptions. Accordingly, the ranges of valuations resulting
from any particular analysis described above should not be taken to be NMSI's or
Mac Frugal's view of the actual value of Mac Frugal's or Mac Frugal's Common
Stock. To the contrary, NMSI expressed no opinion on the actual value of Mac
Frugal's or Mac Frugal's Common Stock, and its opinion that is addressed and
limited to the Mac Frugal's Board extends only to the belief expressed by NMSI
that the immediate value to holders of Mac Frugal's Common Stock, from a
financial point of view under the Merger, is within the
43
<PAGE> 54
range of values that might fairly be ascribed to Mac Frugal's Common Stock as of
the date of the opinion of NMSI (November 4, 1997, and reconfirmed as of the
date of this Proxy Statement/Prospectus).
In performing its analyses, NMSI made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Mac Frugal's and Consolidated
Stores. The analyses performed by NMSI are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as part of NMSI's analysis for the Mac Frugal's Board of the fairness of
the Merger to Mac Frugal's from a financial point of view, and were provided
solely to the Mac Frugal's Board in connection with the Mac Frugal's Board's
consideration of the Merger. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at any time in the future. NMSI used in its
analyses various projections of future performance prepared by the managements
of Mac Frugal's and Consolidated Stores. The projections are based on numerous
variables and assumptions which are inherently unpredictable and must be
considered not certain of occurrence as projected. Accordingly, actual results
could vary significantly from those assumed in such projections.
As described above, the opinion of NMSI and the presentation to the Mac
Frugal's Board summarized above were among the many factors taken into
consideration by the Mac Frugal's Board in making its determination to approve
and to recommend that its stockholders approve the Merger. NMSI, however, does
not make any recommendation to holders of Mac Frugal's Common Stock (or to any
other person or entity) as to whether such stockholders should vote for or
against the Merger.
NMSI's fee for delivering the above described opinion was not conditioned
on the outcome of the opinion (or whether such opinion was deemed favorable or
unfavorable by Mac Frugal's or its Board of Directors). Of the total fee of
$1,100,000 plus out-of-pocket expenses to be paid to NMSI pursuant to the terms
of its engagement, $700,000 plus expenses has been paid or is currently payable
and $400,000 will be due upon the consummation of the Merger. In addition, Mac
Frugal's has agreed to indemnify NMSI, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against certain liabilities, including liabilities under the federal
securities laws. In the past, NMSI has provided financial advisory and
investment banking services to Mac Frugal's and has received customary fees for
the rendering of such services. In the ordinary course of its business, NMSI
actively trades securities of both Mac Frugal's and Consolidated Stores for its
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
PLANS FOR MAC FRUGAL'S
It is expected that certain business functions of Mac Frugal's will be
integrated into the operations of Consolidated Stores following the Merger.
Consolidated Stores expects to take an estimated pre-tax charge to earnings
ranging from $75 million to $100 million relating to the cost of integrating the
two companies.
As a result of the Merger, Consolidated Stores anticipates that only a
small percentage of the combined stores, if any, of Consolidated Stores and Mac
Frugal's will be closed or converted to another retail format. A decision on
which stores will be closed, if any, will not be made until after the
consummation of the Merger. In addition, Consolidated Stores will continue to
evaluate the business and operations of Mac Frugal's after the consummation of
the Merger and will take such further actions as it deems appropriate under the
circumstances then existing.
INTERESTS OF CERTAIN PERSONS
Certain members of Mac Frugal's management and Mac Frugal's Board may be
deemed to have certain interests in the Merger that are in addition to their
interests as stockholders of Mac Frugal's generally. At the close of business on
the Mac Frugal's Record Date, directors and executive officers of Mac Frugal's
and their affiliates were the beneficial owners of an aggregate of 1,087,293
(approximately 4.4%) of the Mac Frugal's Common Stock then outstanding. For
personal tax planning reasons, since public announcement of the Merger
Agreement, as of December 15, 1997, the Covered Executives (as defined below)
exercised and sold an aggregate of 261,186 of the vested shares underlying their
Mac Frugal's stock options, and certain of the Covered Executives sold an
aggregate of 1,740 outstanding shares of Mac Frugal's Common Stock.
44
<PAGE> 55
Additionally, since public announcement of the Merger Agreement, as of December
15, 1997, Messrs. David H. Batchelder and James J. Zehentbauer, members of the
Mac Frugal's Board, exercised and sold an aggregate of 56,365 of the vested
shares underlying their Mac Frugal's stock options and Mr. Batchelder sold
20,215 outstanding shares of Mac Frugal's Common Stock. Messrs. Batchelder and
Zehentbauer are principals of Batchelder & Partners, financial advisors to Mac
Frugal's in connection with the Merger, which firm will receive a representation
fee equal to one-half of one percent of the total merger consideration received
by Mac Frugal's or its stockholders upon consummation of the Merger. Of this
fee, $150,000 was paid upon the engagement of Batchelder & Partners, $500,000
was paid upon execution of the Merger Agreement and the remainder is due upon
consummation of the Merger. Assuming the Merger was consummated on December 15,
1997, the representation fee payable to Batchelder & Partners would be
$5,650,000, of which $650,000 has already been paid. Additionally, Mac Frugal's
has agreed to reimburse Batchelder & Partners for its reasonable out-of-pocket
expenses; provided however, that expenses in excess of $25,000 must be approved
by Mac Frugal's, which approval shall not be unreasonably withheld. Mac Frugal's
also has agreed to indemnify Batchelder & Partners and its respective directors,
officers, partners, agents, employees, affiliates and controlling persons, to
the full extent permitted by law, from and against all losses, claims, damages,
liabilities and expenses incurred by such persons which are related to or arise
out of the engagement of Batchelder & Partners as financial advisor, except to
the extent that such losses, claims, damages, liabilities and expenses result
from the bad faith or gross negligence of the person seeking such
indemnification. The Mac Frugal's Board was aware of these interests and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Described below under "Existing Arrangements" are material employment and
employee benefit agreements and arrangements as they currently exist. A
description of the effect of the Merger on such agreements and arrangements
follows under the heading "THE MERGER -- Interests of Certain Persons --
Treatment Under the Merger Agreement."
EXISTING ARRANGEMENTS
Existing Employment Agreements. Mac Frugal's has employment agreements
(the "Employment Agreements") with its six executive officers (collectively, the
"Covered Executives" or, individually, a "Covered Executive"). Except for the
base salaries and severance payments (described below), the forms of these
agreements are substantially similar. The significant provisions of the
agreements are as follows:
1. Term of the Employment Agreements. The Employment Agreements
continue until terminated by reason of (a) the employee's death, (b) the
employee's total disability for any consecutive six-month period, (c) 30
days written notice of termination by Mac Frugal's, (d) 30 days written
notice of termination by Mac Frugal's "For Cause" (as defined in the
Employment Agreements) or (e) written notice by the employee to Mac
Frugal's of termination in the event (i) the employee's authority to
function in the capacity in which he was hired is removed or limited in any
material respect (unless such removal or limitation results from an event
that would entitle Mac Frugal's to terminate the employment agreement "For
Cause") and such removal or limitation is not cured by Mac Frugal's within
45 days after such written notice, (ii) Mac Frugal's breaches in any
material respect any of its covenants or agreements under the employment
agreement and such breach is not cured by Mac Frugal's within 45 days after
such written notice, (iii) certain defined events of a change in control of
Mac Frugal's provided notice of termination of employment is given within a
specified time after such change in control, or (iv) in the case of Neil T.
Watanabe, Mr. Watanabe is forced to relocate due to a move or consolidation
of the corporate headquarters. The Merger will constitute a change in
control as defined in the Employment Agreements. For purposes of the
Employment Agreements, a change in control giving rise to the receipt of
severance payments upon a Covered Executive's termination of employment
within two months thereafter means the acquisition by any person of
beneficial ownership of more than 35% of the combined voting power of Mac
Frugal's outstanding securities, as a result of purchases of such
securities which are not expressly approved by the Mac Frugal's Board. The
Employment Agreements provide that for purposes of determining whether or
not the Mac Frugal's Board has expressly approved purchases of the Mac
Frugal's then outstanding securities, express approval of the Board shall
mean that individuals constituting at least a majority of the Mac Frugal's
Board for a consecutive 24-month period
45
<PAGE> 56
voted in favor thereof. For purposes of the Employment Agreements, the
Merger was not expressly approved by the Mac Frugal's Board because a
majority of the members of the Mac Frugal's Board have not been on the
Board for a consecutive 24-month period due to resignations by certain
directors in the ordinary course. See "-- Treatment Under the Merger
Agreement -- Severance Benefits" below for a description of the Severance
Payments due to the Covered Executives upon termination of employment after
the Effective Time in accordance with their Employment Agreements. None of
the agreements provide for any fixed term of employment and all are subject
to termination by Mac Frugal's upon 30 days notice.
2. Base Salary and Bonus. The Employment Agreements provide for the
payment of base salary and participation in Mac Frugal's performance bonus
plan, described more fully below. The following table sets forth Mac
Frugal's Covered Executives, their positions and their current base
salaries:
The Covered Executives are as follows:
<TABLE>
<CAPTION>
NAME POSITION BASE SALARY
---------------------------------- ---------------------------------------- -----------
<S> <C> <C>
Philip L. Carter ("Carter")....... President and Chief Executive Officer $ 590,000
Mark J. Miller ("Miller")......... Executive Vice President of Merchandise $ 450,000
and Stores
Neil T. Watanabe ("Watanabe")..... Senior Vice President and Chief $ 230,000
Financial Officer
Earl C. Bonnecaze ("Bonnecaze")... Senior Vice President, Stores $ 182,000
Frank C. Bianchi ("Bianchi")...... Senior Vice President, Human Resources $ 180,000
Michael Dobbs ("Dobbs")........... Senior Vice President, Distribution $ 177,000
</TABLE>
The Mac Frugal's 1997 Bonus Plan was approved by the Mac Frugal's Board on
March 12, 1997 and provides a salary bonus to the Covered Executives and certain
other key members of management. The maximum aggregate amount payable to the
Covered Executives under the Mac Frugal's 1997 Bonus Plan is approximately $1.5
million. Certain of the bonuses for 1997 are based on achieving a pre-tax profit
goal of $67,797,000, while others are based on departmental increases in gross
margin dollars over last year.
Pursuant to the Merger Agreement, Consolidated Stores acknowledged that,
subject to the terms of the 1997 Bonus Plan, the 1997 Bonus Plan Awards will be
earned by the Covered Executives employed by Mac Frugal's immediately prior to
the Merger and all bonus payments and grants of options for 1997 will be made on
or before April 1, 1998. In calculating the 1997 Bonus Plan payments, all
adjustments taken and costs and expenses incurred in connection with the Merger
will be excluded.
3. Other Benefits. The Employment Agreements provide that the Covered
Executives will be eligible to participate in Mac Frugal's other employee
benefit programs for the provision of welfare and other benefits.
4. Severance. Each of the Employment Agreements provides that, in the
event the executive's employment is terminated without cause (as defined in
the Employment Agreements), Mac Frugal's will continue to make the base
salary payments at the rate then being paid for 34.8 months after
termination of employment in the case of Carter, 18 months in the case of
Miller, 12 months in the case of Watanabe, Bianchi and Dobbs, and, in the
case of Bonnecaze, 6 months if his employment is terminated prior to the
second anniversary of the date of his employment agreement, 9 months if his
employment is terminated prior to the third such anniversary and 12 months
if his employment is terminated subsequent to the third such anniversary.
The Employment Agreements also provide that if, within a specified time
after a change in control (as defined therein), the Covered Executive's
employment terminates, then Mac Frugal's will pay him a lump sum severance
payment equal to 2 (2.9 in the case of Carter) multiplied by the sum of his
annual base salary in effect during the year immediately preceding
termination and the amount of any incentive, bonus or other cash
compensation that was paid to him during either the 12 months immediately
preceding the date of termination or the 12 months immediately preceding
the change in control, whichever is greater. In addition, upon such
termination after a change in control, the
46
<PAGE> 57
Covered Executive would be entitled to receive a cash payment equal to the
amount by which the greater of (i) the closing price of the common stock on
the day before termination or (ii) the highest price per share actually
paid in connection with the change in control, exceeds the per share
exercise price of each then vested and exercisable stock option held by
such Covered Executive, multiplied by the number of shares covered by each
such option. Concurrent with the execution of the Merger Agreement, each of
the Covered Executives delivered a Waiver providing that in the event the
Merger is consummated, such Covered Executive will not receive the cash
payment described in the immediately preceding sentence for such options,
but shall receive options to purchase shares of Consolidated Stores Common
Stock in accordance with the Merger Agreement. For personal tax planning
reasons, since public announcement of the Merger Agreement, as of December
15, 1997, the Covered Executives exercised and sold an aggregate of 261,186
of the vested shares underlying the Mac Frugal's stock options, and certain
of the Covered Executives sold an aggregate of 1,740 outstanding shares of
Mac Frugal's Common Stock.
Carter's Employment Agreement additionally provides that any unvested
portion of the stock option to purchase 250,000 shares of common stock granted
to him on May 2, 1995 shall immediately vest and become exercisable in the event
of a change in control (as defined therein).
The estimated aggregate cost of providing Severance Payments (as defined in
the Merger Agreement) to the Covered Executives upon termination of employment
is $9,883,023. See "-- Treatment Under the Merger Agreement --Severance
Benefits." These Severance Payments include (i) the severance amounts due under
the Employment Agreements described above, (ii) payments due under Mac Frugal's
1997 Bonus Plan upon achievement of the required targets, (iii) payments due
under Mac Frugal's Long Term Cash Incentive Award Plan discussed below, and (iv)
the estimated expense of unused vacation. In addition, the Covered Executives
would be entitled to receive medical and dental health benefits equivalent to
their current benefits until the earlier of December 31, 1998 or until such
covered Executive is employed full-time by a subsequent permanent employer.
Savings and Retirement Plan. The Mac Frugal's Bargains - Close-outs Inc.
Savings and Retirement Plan, as amended (the "401(k) Plan"), is a profit sharing
plan with a cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"). The 401(k) Plan provides that
full-time employees who are at least 21 years of age with one year of service
with Mac Frugal's are eligible to make contributions ranging from 1% to 12% of
annual compensation ("Deferrals"). Subject to the maximum contribution permitted
under the 401(k) Plan, Mac Frugal's will match the amount of employee Deferrals
pursuant to the 401(k) Plan ("Matching Amounts") and, may at the discretion of
the Mac Frugal's Board, make additional contributions to the plan for the
benefit of the participants ("Company Contributions").
Participants under the 401(k) Plan are 100% vested in Deferrals and
Matching Amounts at the time that such contributions are made. The 401(k) Plan
is administered by the Profit Sharing Plan Committee (the "Committee"), the
members of which are appointed by the Mac Frugal's Board.
The 401(k) Plan provides that in the event Mac Frugal's undergoes a
consolidation, merger, sale, liquidation, or other transfer of substantially all
of its operating assets, the ultimate successor is automatically deemed to elect
to continue the plan, unless the successor's board of directors resolves to
terminate the plan. The Committee may agree to merge or consolidate the 401(k)
Plan with another plan so long as the participants are entitled to benefits
equal to or greater than those provided under the 401(k) Plan immediately after
such merger or consolidation. The 401(k) Plan will be rolled into Consolidated
Stores' 401(k) Plan. As of September 30, 1997, the aggregate amount of vested
accounts is $23,898,126 and the aggregate amount of unvested accounts is
$279,729.
Long Term Cash Incentive Award Plan. In fiscal 1996, Mac Frugal's adopted
the Cash Incentive Award Plan (the "Cash Incentive Award Plan") for its
executive officers. Pursuant to the Cash Incentive Award Plan, each Covered
Executive will receive an amount equal to his or her annual base salary in
fiscal 1999 if the aggregate earnings per share of Mac Frugal's over the three
fiscal years ending with fiscal 1999 exceeds a target level. In addition, the
Covered Executive must be employed by Mac Frugal's as an officer through the end
of fiscal 1999 in order to earn this award.
47
<PAGE> 58
The Cash Incentive Award Plan requires that a pro rata portion of the
amount that would have been paid to the Covered Executives at the end of fiscal
1999 be paid to the Covered Executives in the event of a Change in Control (as
defined therein). The Merger Agreement provides that the Severance Payments
include the 1997 portion of any awards earned by the Covered Executives under
this Plan. The Merger Agreement further provides that subject to the payment of
the Severance Payments, Mac Frugal's shall amend its Cash Incentive Award Plan
to provide that such Plan will be terminated as of the Effective Time.
Supplemental Executive Retirement Plan. Effective January 1, 1995, Mac
Frugal's established the Mac Frugal's Bargains - Close-outs Inc. Supplemental
Executive Retirement Plan (the "SERP") for the purpose of providing retirement
benefits for a select group of management or highly compensated employees of Mac
Frugal's. To date, the SERP has been used solely as a deferred compensation plan
for certain executive officers who have elected to defer a portion of earned
compensation thereunder. The SERP is an unfunded plan within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). All
amounts due under the SERP are provided solely from the general assets of Mac
Frugal's. The SERP is administered by a trustee. The SERP may be amended,
modified or terminated at any time by action of the Mac Frugal's Board. The SERP
provides that in the event of a "Change in Control," the trustee shall pay to
each of the participants within 90 days of such "Change in Control," an amount
equal to the participant's account in a single lump-sum payment of cash. A
"Change in Control" is defined in the SERP to include any consolidation or
merger of Mac Frugal's pursuant to which shares of Mac Frugal's common stock
would be converted into cash, securities or other property, other than a merger
of Mac Frugal's in which the holders of Mac Frugal's common stock immediately
prior to the merger have the same proportionate ownership of at least 80% of
common stock of the surviving corporation immediately after the merger. There
are currently 17 eligible and 6 active participants in the SERP. The Merger will
constitute a "Change in Control" under the SERP. The estimated aggregate amounts
payable to the participants in the SERP as a result of the Merger is $317,593.
1990 Employee Stock Incentive Plan. Mac Frugal's 1990 Employee Stock
Incentive Plan (the "Incentive Plan") authorizes the issuance of options to
purchase up to 3,200,000 shares of Mac Frugal's Common Stock including incentive
stock options within the meaning of Section 422 of the Code, stock options that
do not qualify as incentive stock options, stock appreciation rights and
restricted shares of Mac Frugal's Common Stock. Officers and other salaried
employees of Mac Frugal's are eligible to participate in the Incentive Plan. As
of November 5, 1997, approximately 85 persons were eligible to participate in
the Incentive Plan.
The Incentive Plan is administered by the Compensation Committee of the Mac
Frugal's Board. The Committee selects from the eligible participants under the
Incentive Plan and determines the terms and conditions of all grants and awards
to such participants including the terms and conditions under which each option
may be exercisable and the expiration date of each option, except that each
option must expire no later than ten years from the date of grant. Grants and
awards are made in consideration of services rendered or to be rendered by the
recipients thereof.
Options to purchase shares of Mac Frugal's Common Stock were granted to
certain executive officers of Mac Frugal's during fiscal 1996. All such options
(a) become exercisable in full on the third anniversary of the date of grant,
(b) have an exercise price equal to the fair market value of Mac Frugal's Common
Stock on the date of grant, and (c) immediately and fully vest and become
exercisable in certain defined events including a merger of Mac Frugal's, a
Change in Control (as defined therein) of Mac Frugal's or a sale of
substantially all of the assets of Mac Frugal's. Payment of the exercise price
of options granted under the Incentive Plan must be made in full in cash or a
cash equivalent concurrently with the exercise of such option.
The Merger will be deemed to be a "Change in Control" under the Incentive
Plan, and all of the options outstanding under the Incentive Plan will vest as
of the Effective Time and will become options to purchase shares of Consolidated
Stores Common Stock in accordance with the Merger Agreement. As of December 15,
1997, approximately 1,240,145 options are outstanding under the Incentive Plan.
See "THE MERGER -- Interests of Certain Persons -- Treatment Under the Merger
Agreement."
48
<PAGE> 59
1992 Non-Employee Directors Stock Option Plan. The 1992 Non-Employee
Directors Stock Option Plan, as amended (the "Non-Employee Directors' Plan"),
provides for each non-employee director to receive a stock option for 2,250
shares of Mac Frugal's Common Stock upon his election and re-election at the
annual meeting of stockholders at which he is elected or re-elected subsequent
to the annual stockholders' meeting in 1999. On December 11, 1996, the Mac
Frugal's Board approved an amendment that eliminated the grant of the automatic
annual options to directors under the Non-Employee Directors Plan until the date
of the annual stockholders' meeting in 2000. The exercise price of each such
option is the fair market value of the common stock at the close of business on
the date preceding the date of the grant. In addition, each non-employee
director may elect, on the date of each annual meeting at which he is elected or
re-elected, to receive his annual retainer in the form of a stock option to
purchase a number of shares of Mac Frugal's Common Stock determined by a
formula. The exercise price of each such option is 80% of the fair market value
of the Mac Frugal's Common Stock on the date of the grant. The options vest and
are exercisable one year from the date of the grant at the following annual
meeting of stockholders. As of December 15, 1997, approximately 200,000 options
are outstanding under the Non-Employee Directors Plan.
On December 11, 1996, the Mac Frugal's Board granted to each of Messrs.
Batchelder and Zehentbauer, the non-employee directors, an option to purchase
50,000 shares of Mac Frugal's Common Stock at an exercise price of $25.50, the
fair market value of the Mac Frugal's Common Stock on the date of grant.
Additionally, effective January 1, 1997, the Mac Frugal's Board granted to each
of Messrs. Cooper and Corley, upon their election as non-employee directors, an
option to purchase 50,000 shares of Mac Frugal's Common Stock at an exercise
price of $24.00, the fair market value of the Mac Frugal's Common Stock on the
date of grant. These options vest and become immediately exercisable in full on
the third anniversary of the date of grant, provided that the holder is a member
of the Mac Frugal's Board at such time. All of the options immediately and fully
vest and become exercisable in certain defined events including a merger, a
change in control or a sale of substantially all of the assets of Mac Frugal's.
All of the options held by the non-employee directors will vest and become
exercisable upon consummation of the Merger.
TREATMENT UNDER THE MERGER AGREEMENT
The Merger Agreement provides that Consolidated Stores will cause Mac
Frugal's to provide its employees with certain payments and benefits, as
described below.
Treatment of Stock Options. The Merger Agreement provides that, effective
as of the Effective Time, each option granted by Mac Frugal's to purchase shares
of Mac Frugal's Common Stock that is outstanding and unexercised immediately
prior thereto (the "Mac Frugal's Stock Options"), whether vested or unvested as
of the Effective Time, will cease to represent a right to acquire shares of Mac
Frugal's Common Stock and will be converted automatically into a fully vested
and exercisable option to purchase shares of Consolidated Stores Common Stock in
an amount and at an exercise price determined as provided below. The number of
shares of Consolidated Stores Common Stock subject to, and the option price and
terms and conditions of, the new option shall be determined in a manner that
preserves both (i) the aggregate gain (or loss) on Mac Frugal's Stock Options
immediately prior to the Effective Time and (ii) the ratio of the exercise price
per share subject to Mac Frugal's Stock Options to the fair market value
(determined immediately prior to the Effective Time) per share subject to such
option, provided that any fractional shares of Consolidated Stores Common Stock
resulting from such determination will be rounded down to the nearest share.
Pursuant to the terms of existing award agreements under the Incentive Plan,
outstanding options shall vest and become exercisable upon consummation of the
Merger. The Merger Agreement provides that the duration and other terms of the
new options will be the same as the Mac Frugal's Stock Options that they
replace, except that (i) all references to Mac Frugal's shall be deemed to be
references to Consolidated Stores, and (ii) all such new options will not expire
until at least 60 days after the end of the first fiscal quarter of Consolidated
Stores ending at least 30 days after the Effective Time. New option award
agreements will be provided to each holder of new options within 30 days after
the Effective Time.
Concurrent with the execution of the Merger Agreement, each of the Covered
Executives delivered a Waiver providing that in the event the Merger is
consummated, such Covered Executive will not receive any cash payment in
exchange for outstanding vested options under the Incentive Plan held by Covered
49
<PAGE> 60
Executives, including options that vest in connection with a Change in Control
under the terms of existing award agreements under the Incentive Plan and their
respective Employment Agreements. Such stock options shall be treated as set
forth in the immediately preceding paragraph.
The Merger Agreement provides that, effective as of the Effective Time, the
Incentive Plan and the Non-Employee Directors Plan (the "Option Plans") will
terminate and the provisions in any other plan, program, agreement or
arrangement providing for the issuance or grant of any other interest in respect
of the capital stock of Mac Frugal's or any of its Subsidiaries, will be
deleted. Furthermore, Mac Frugal's will take all actions necessary to ensure
that following the Effective Time, no holder of Mac Frugal's Stock Options or
any participant in the Option Plans or any other plans, programs, agreements or
arrangements will have any right thereunder to acquire any equity securities of
Mac Frugal's or any subsidiary of Mac Frugal's.
Severance Benefits. With respect to the Covered Executives, upon the date
of termination of employment by the Covered Executive pursuant to the terms of
their respective Employment Agreement with Mac Frugal's in effect immediately
prior to the Effective Time, Mac Frugal's will pay to each Covered Executive
payments ("Severance Payments") in the amounts set forth in the Merger Agreement
as specified therein.
The estimated cost of providing the Severance Payments to the Covered
Executives upon termination of employment is:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT OF
SEVERANCE PAYMENTS
-------------------
<S> <C>
Philip L. Carter................................................... $ 4,126,636
Mark J. Miller..................................................... 2,210,538
Neil T. Watanabe................................................... 1,065,386
Earl C. Bonnecaze.................................................. 835,001
Frank C. Bianchi................................................... 833,731
Michael Dobbs...................................................... 811,731
-------------------
Total Amount of Severance Payments due to the Covered
Executives.................................................... $ 9,883,023
</TABLE>
These Severance Payments include (i) the severance amounts due under the
Employment Agreements, (ii) payments due under Mac Frugal's 1997 Bonus Plan upon
achievement of the required targets, (iii) payments due under Mac Frugal's Long
Term Cash Incentive Award Plan, and (iv) the estimated payments in lieu of
unused vacation. The Severance Payments will be paid to a Covered Executive only
if such Covered Executive is actively employed by Mac Frugal's immediately prior
to the Effective Time and terminates his employment in accordance with his
Employment Agreement subsequent to the Effective Time. In addition, each of the
Covered Executives and their spouses are entitled to receive medical and dental
health benefits equivalent to their current benefits until the earlier of
December 31, 1998 or until such Covered Executive is employed full-time by a
subsequent permanent employer.
Other Benefits. Pursuant to the Merger Agreement, employees of Mac
Frugal's who continue to be employed by Mac Frugal's as of the Effective Time
will receive employee benefits comparable to those benefits provided to
similarly situated employees of Consolidated Stores. In addition, with respect
to medical benefits provided to continuing employees as of the Effective Time,
waiting periods and pre-existing condition requirements under the plans covering
the continuing employees will be waived, and these employees will be given
credit for any co-payments and deductibles actually paid by such employees under
Mac Frugal's medical plans during the calendar year in which the closing of the
Merger occurs. Finally, service with Mac Frugal's will be recognized for
purposes of eligibility under Consolidated Stores' welfare plans as well as for
purposes of Consolidated Stores' programs or policies for vacation pay and sick
pay.
Certain additional information with respect to executive compensation and
related employee benefits and other information concerning Mac Frugal's
executive officers and directors, as modified by the foregoing discussion set
forth in this Proxy Statement/Prospectus, is set forth in the Mac Frugal's
Schedule 14A Definitive Proxy Statement dated May 15, 1997 under the sections
titled "Information About the Board of Directors and Committees of The Board of
Directors -- Director Compensation," "Principal Stockholders --
50
<PAGE> 61
Security Ownership of Management," "Compensation of Executive Officers" and
"Employment Agreements" and is incorporated herein by reference.
Consulting Agreement. Concurrent with the execution of the Merger
Agreement, Consolidated Stores entered into a Consulting Agreement with Philip
L. Carter, Mac Frugal's President and Chief Executive Officer, whereby
immediately following the termination of his employment with Mac Frugal's,
Carter will for a period of six months from the Effective Time provide to
Consolidated Stores advice and recommendations concerning various matters
respecting the business of Mac Frugal's as requested by Consolidated Stores,
including, without limitation, advice and recommendations as to business
arrangements, customers and the operations of Mac Frugal's. Consolidated Stores
will pay to Carter for his services under the agreement an aggregate amount of
$970,000, payable in equal weekly installments in arrears. Such amount will be
placed in escrow as of the Effective Time. The weekly payments shall continue
throughout the six-month period of the consultancy regardless of whether the
Consulting Agreement is terminated by Consolidated Stores. The Consulting
Agreement may be terminated by Consolidated Stores at any time upon 30 days
written notice to Carter.
Noncompetition Agreement. Concurrent with the execution of the Merger
Agreement, Consolidated Stores entered into a Noncompetition Agreement with
Philip L. Carter, whereby Carter will receive an aggregate amount of $930,000
over the period of the Noncompetition Agreement. Such amount will be placed in
escrow as of the Effective Time. Pursuant to the terms of the Noncompetition
Agreement, Carter is restricted for a two-year period commencing August 1, 1998
from certain competitive activities, including owning any interest in, or
accepting employment directly or indirectly with, any entity that is
predominantly engaged in the specialty retail close-out industry or specialty
wholesale close-out industry in the United States.
INDEMNIFICATION
Pursuant to the terms of the Merger Agreement, Consolidated Stores has
agreed that at all times after the Effective Time, it will indemnify, or will
cause Mac Frugal's, as the surviving corporation, and its subsidiaries to
indemnify each director, officer, employee or agent of Mac Frugal's or any of
Mac Frugal's subsidiaries, successors and assigns (an "Indemnified Party"), to
the fullest extent permitted by law, with respect to any claim, liability, loss,
damage, judgment, fine, penalty, amount paid in settlement or compromise, cost
or expense, including reasonable fees and expenses of legal counsel (whenever
asserted or claimed) ("Indemnified Liability") based in whole or in part on, or
arising in whole or in part out of, any matter existing or occurring at or prior
to the Effective Time. Consolidated Stores has also agreed to maintain certain
directors and officers liability insurance for three years following the Merger
as set forth in the Merger Agreement. See "MERGER AGREEMENT -- Directors' and
Officers' Insurance and Indemnification."
ESTIMATED SYNERGIES
Upon consummation of the Merger, Consolidated Stores intends to review Mac
Frugal's and its assets, businesses, operations, properties, policies, corporate
structure, capitalization and management and consider if any changes would be
desirable in light of the circumstances then existing. Upon consummation of the
Merger, Consolidated Stores intends to review the business of Mac Frugal's and
identify synergies and cost savings.
Consolidated Stores management believes the Merger will result in a number
of important synergies including, but not limited to: (i) improvement in gross
margins through enhanced purchasing power, (ii) reduced transportation and
distribution costs (as a percentage of combined revenues of the companies)
resulting from the combination of the complimentary distribution networks of the
individual companies, (iii) reduced advertising and marketing expenses (as a
percentage of combined revenues of the companies) resulting from reduction of
overlapping promotion and advertising programs of the separate companies, and
(iv) other reductions in selling and administrative expenses (as a percentage of
combined revenues of the companies) from the elimination of certain duplicative
financial and administrative functions. Consolidated Stores expects to take an
estimated pre-tax charge to earnings of approximately $75 million to $100
million relating to the cost of integrating the two companies. THE FOREGOING
ESTIMATES OF COST SAVINGS AND SYNERGIES ARE INHERENTLY SUBJECT TO SIGNIFICANT
UNCERTAINTIES
51
<PAGE> 62
AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF CONSOLIDATED STORES.
THERE CAN BE NO ASSURANCE THAT THEY WILL BE ACHIEVED AND ACTUAL SAVINGS AND
SYNERGIES MAY VARY MATERIALLY FROM THOSE ESTIMATED. THE INCLUSION OF SUCH
ESTIMATES HEREIN SHOULD NOT BE REGARDED AS AN INDICATION THAT CONSOLIDATED
STORES, SUB OR ANY OTHER PARTY CONSIDERS SUCH ESTIMATES AN ACCURATE PREDICTION
OF FUTURE EVENTS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material tax consequences of the
Merger. The Merger is intended to qualify as a tax-free reorganization within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. In this
regard, the Merger Agreement contains a covenant by Consolidated Stores that it
will not take any action, nor will it cause Sub or Mac Frugal's to take any
action, following the Effective Time, that would jeopardize the characterization
of the Merger as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. In addition, certain factual
representations deemed necessary by counsel to Mac Frugal's and by counsel to
Consolidated Stores in order to confirm that the requirements of Code Sections
368(a)(1)(A) and 368(a)(2)(E) are expected to be satisfied have been obtained
from the parties to the Merger. However, none of the parties to the Merger
intends to obtain a ruling from the Internal Revenue Service as to the tax
consequences of the Merger.
Mac Frugal's has, however, received an opinion of Gibson, Dunn & Crutcher,
LLP substantially to the effect that for federal income tax purposes:
(a) the Merger will qualify as a tax-free reorganization within the
meaning of Code
Sections 368(a)(1)(A) and 368(a)(2)(E) and Mac Frugal's and Consolidated
Stores will each be a party to the reorganization;
(b) no gain or loss will be recognized by Mac Frugal's as a result of
the Merger;
(c) no gain or loss will be recognized by a stockholder of Mac
Frugal's upon the exchange of shares of Mac Frugal's Common Stock for
Consolidated Stores Common Stock (including the Consolidated Stores
Rights), except that gain or loss will be recognized by a stockholder of
Mac Frugal's on the receipt of cash in lieu of fractional shares;
(d) the adjusted tax basis of the Consolidated Stores Common Stock
received by a stockholder of Mac Frugal's pursuant to the Merger (including
any fractional share interests deemed received) will be the same as the
adjusted tax basis of the shares of Mac Frugal's Common Stock surrendered
in exchange therefor;
(e) the holding period of the Consolidated Stores Common Stock
received by a stockholder of Mac Frugal's as a result of the Merger
(including any fractional share interests deemed received) will include the
holding period of the shares of Mac Frugal's Common Stock surrendered in
exchange therefor, provided that such Mac Frugal's Common Stock is held as
a capital asset by the Mac Frugal's stockholder at the consummation of the
Merger; and
(f) any cash payment received by a holder of Mac Frugal's Common Stock
in lieu of a fractional share of Consolidated Stores Common Stock will be
treated as if such fractional share of Consolidated Stores Common Stock had
been issued in the Merger and then redeemed by Consolidated Stores.
The above tax opinion is based upon certain representations and assumptions
referred to in such tax opinion and assumes that the Merger will be completed in
the manner described in this Proxy Statement/Prospectus and that the
representations made by the parties to the Merger are accurate and complete and
will continue to be accurate and complete as of the Effective Time. Any change
in the facts, representations or assumptions could affect the status of the
Merger as a tax-free reorganization (within the meaning of Section 368(a)(1)(A)
and 368(a)(2)(E) of the Code).
Finally, under Revenue Ruling 90-11, the Rights accompanying the
Consolidated Stores Common Stock to be received by holders of Mac Frugal's
Common Stock in the Merger will be considered part of the Consolidated Stores
Common Stock prior to the occurrence of a Triggering Event (as defined in the
Consolidated Stores Rights Plan). The opinion with respect to the receipt of the
Rights in subparagraph (c)
52
<PAGE> 63
above is based upon the current position of the Internal Revenue Service as set
forth in Revenue Ruling 90-11 and in several private letter rulings that the
receipt of such rights upon the exchange of shares in a merger that is a
tax-free reorganization does not give rise to the realization of gross income.
No assurance can be given that the Internal Revenue Service will not change its
position on the tax treatment of a merger.
In connection with the foregoing, see "THE MERGER" and "MERGER AGREEMENT."
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND
IS BASED ON EXISTING TAX LAWS AND INTERNAL REVENUE SERVICE PRONOUNCEMENTS AT THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS, WHICH MAY DIFFER AT THE EFFECTIVE TIME
OR THEREAFTER. FURTHER, THE DISCUSSION SET FORTH ABOVE MAY NOT APPLY TO
PARTICULAR CATEGORIES OF STOCKHOLDERS OF MAC FRUGAL'S, INCLUDING STOCKHOLDERS
WHO ACQUIRED SHARES OF MAC FRUGAL'S COMMON STOCK PURSUANT TO THE EXERCISE OF
EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN CORPORATIONS, OR ENTITIES
THAT ARE OTHERWISE SUBJECT TO SPECIAL TAX TREATMENT UNDER THE CODE (SUCH AS
INSURANCE COMPANIES, TAX-EXEMPT ENTITIES AND REGULATED INVESTMENT COMPANIES).
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICATION TO
THEM AND POSSIBLE EFFECT UPON THEM OF ANY PENDING LEGISLATION, THE ALTERNATIVE
MINIMUM TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for under the "pooling of interests" method of
accounting in accordance with generally accepted accounting principles ("GAAP").
Under this method of accounting, the recorded assets and liabilities of Mac
Frugal's will be carried forward to Consolidated Stores at their recorded
amounts, income of Consolidated Stores will include income of Mac Frugal's for
the entire fiscal year in which the Merger occurs and the reported income of Mac
Frugal's for prior periods will be combined with and included as income of
Consolidated Stores. The qualification of the Merger as a pooling of interests
is a condition to the consummation of the Merger.
OTHER LEGAL MATTERS; REGULATORY APPROVALS
General. Except as otherwise disclosed herein, based upon its review of
publicly available information with respect to Mac Frugal's and the review of
certain information furnished by Mac Frugal's to Consolidated Stores, neither
Sub nor Consolidated Stores is aware of (i) any license or regulatory permit
that appears to be material to the business of Mac Frugal's and its
subsidiaries, taken as a whole, that might be adversely affected pursuant to the
Merger or (ii) any approval or other action by any governmental, administrative
or regulatory agency or authority, domestic or foreign, that would be required
for the consummation of the Merger. Should any such approval or other action be
required, Consolidated Stores and Sub currently contemplate that such approval
or action would be sought. While Consolidated Stores does not currently intend
to delay the Merger pending the outcome of any such matter, there can be no
assurance that any such approval or action, if needed, would be obtained or
would be obtained without substantial conditions or that adverse consequences
might not result to the business of Mac Frugal's, Sub or Consolidated Stores or
that certain parts of the businesses of Mac Frugal's, Sub or Consolidated Stores
might not have to be disposed of in the event that such approvals were not
obtained or any other actions were not taken.
Antitrust. Under the HSR Act and the regulations promulgated thereunder by
the FTC, the Merger may not be consummated until notifications have been given
and certain information has been furnished to the FTC and the Antitrust Division
of the United States Department of Justice (the "Antitrust Division") and the
applicable waiting period has expired or been terminated. The consummation of
the Merger is also conditioned upon the expiration or termination of the
applicable waiting period under the HSR Act. On November 17, 1997, Consolidated
Stores and Mac Frugal's filed notifications and report forms under the HSR Act
with the FTC and the Antitrust Division.
53
<PAGE> 64
At any time before or after the Effective Time, notwithstanding that the
waiting period under the HSR Act has expired, the FTC or the Antitrust Division
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Consolidated
Stores or Mac Frugal's. At any time before or after the Effective Time, and
notwithstanding that the waiting period under the HSR Act has expired, any state
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Merger or seeking divestiture of substantial assets of
Consolidated Stores or Mac Frugal's. Private persons may also seek to take legal
action under the antitrust laws under certain circumstances.
Closing Condition. The respective obligations of Consolidated Stores and
Mac Frugal's to consummate the Merger are subject to the condition that no
court, arbitrator or governmental body, agency or official will have issued any
order, decree or ruling which remains in force and there will not have been any
statute, rule or regulation, restraining, enjoining or prohibiting the
consummation of the Merger. See "MERGER AGREEMENT -- Conditions to the Merger."
NO APPRAISAL RIGHTS
Under the Delaware General Corporation Law (the "DGCL"), neither Mac
Frugal's stockholders nor Consolidated Stores stockholders will have any
appraisal rights in connection with the Merger.
DELISTING AND DEREGISTRATION OF MAC FRUGAL'S COMMON STOCK
If the Merger is consummated, the shares of Mac Frugal's Common Stock will
be delisted from the New York Stock Exchange (the "NYSE") and will be
deregistered under the Exchange Act.
RESALES OF CONSOLIDATED STORES COMMON STOCK
All shares of Consolidated Stores Common Stock constituting the Share
Issuance will be freely transferable, except that shares received by any person
who may be deemed to be an "affiliate" (as used in paragraphs (c) and (d) of
Rule 145 under the Securities Act, including, without limitation, directors and
certain executive officers) of Mac Frugal's for purposes of such Rule 145 may
not be resold except in transactions permitted by such Rule 145 or as otherwise
permitted under the Securities Act. In addition, such shares may not be
transferred by an "affiliate" in violation of the Commission's rules governing
the treatment of the Merger as a pooling of interests.
Mac Frugal's has agreed to deliver to Consolidated Stores a letter
identifying, to the best of Mac Frugal's knowledge, all persons who are, at the
time of the Mac Frugal's Special Meeting, deemed to be "affiliates" (as used in
the preceding paragraph) of Mac Frugal's and to use its best efforts to cause
each person so identified to deliver to Consolidated Stores at least 30 days
prior to the Closing Date an agreement, substantially in the form previously
approved by Consolidated Stores and Mac Frugal's, providing that such person
will not sell, pledge, transfer or otherwise dispose of any Consolidated Stores
Common Stock received by such person in exchange for shares of Mac Frugal's
Common Stock pursuant to the Merger, except pursuant to an effective
registration statement or in compliance with such Rule 145 or another exemption
from the registration requirements of the Securities Act. Such agreement further
provides that such person will not sell, pledge, transfer or otherwise dispose
of any Consolidated Stores Common Stock received by such person in exchange for
shares of Mac Frugal's Common Stock pursuant to the Merger, or any interest
therein, until such time as financial results of Consolidated Stores covering at
least 30 days of post-merger operations have been published. In the Merger
Agreement, Consolidated Stores has agreed that as soon as is reasonably
practicable, but in no event later than 15 business days after the end of the
first fiscal month of Consolidated Stores ending at least 30 days after the
Effective time, Consolidated Stores will publish financial results covering at
least 30 days of post-merger combined operations.
NEW YORK STOCK EXCHANGE LISTING
Consolidated Stores has agreed to use its best efforts to list, prior to
the Effective Time, on the NYSE, subject to official notice of issuance, the
shares of Consolidated Stores Common Stock to be issued in the Merger.
54
<PAGE> 65
COMPARATIVE MARKET PRICES AND DIVIDENDS
COMPARATIVE MARKET PRICES AND DIVIDENDS
The shares of Consolidated Stores Common Stock are listed and principally
traded on the NYSE and quoted under the symbol CNS. The following table sets
forth, for the quarters indicated, the high and low sales prices per share of
Consolidated Stores Common Stock on the NYSE as reported on the Dow Jones News
Service. Prices have been restated to reflect (a) a 5 for 4 common stock split
effected by a distribution of shares of Consolidated Stores Common Stock on
December 24, 1996 to stockholders of record on December 10, 1996, and (b) a 5
for 4 common stock split effected by a distribution of shares of Consolidated
Stores Common Stock on June 24, 1997 to stockholders of record on June 10, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995:
First Quarter.............................................. $13 23/64 $10 /32
Second Quarter............................................. 14 23/32 10 /64
Third Quarter.............................................. 16 5/64 13 /64
Fourth Quarter............................................. 16 13/32 12 /32
FISCAL 1996:
First Quarter.............................................. $23 49/64 $13 /32
Second Quarter............................................. 25 59/64 19 /64
Third Quarter.............................................. 28 5/16 21 /64
Fourth Quarter............................................. 27 23/64 22 /64
FISCAL 1997:
First Quarter.............................................. $34 3/32 $25 /64
Second Quarter............................................. 40 3/4 29 /32
Third Quarter.............................................. 43 3/8 34 /16
Fourth Quarter (through December 15, 1997)................. 50 393/4
</TABLE>
Consolidated Stores has never paid cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future.
Consolidated Stores has followed a policy of reinvesting earnings in the
business. In addition, a portion of the Consolidated Stores' indebtedness
contains covenants that limit Consolidated Stores' ability to pay dividends.
On November 4, 1997, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the reported closing
sales price of Consolidated Stores Common Stock on the NYSE Composite Tape was
$41 1/8 per share. On December 15, 1997, the last full trading day for which
information was available prior to the printing and mailing of this Proxy
Statement/Prospectus, the reported closing sales price of Consolidated Stores
Common Stock on the NYSE Composite Tape was $47 7/16 per share.
55
<PAGE> 66
The shares of Mac Frugal's Common Stock are listed and principally traded
on the NYSE and quoted under the symbol MFI. The following table sets forth, for
the quarters indicated, the high and low sales prices per share on the NYSE as
reported by the Dow Jones News Service.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995:
First Quarter.............................................. $17 3/8 $12 /16
Second Quarter............................................. 18 3/8 143/8
Third Quarter.............................................. 18 1/2 115/8
Fourth Quarter............................................. 15 111/2
FISCAL 1996:
First Quarter.............................................. $16 7/8 $123/8
Second Quarter............................................. 19 1/2 133/8
Third Quarter.............................................. 25 1/8 183/8
Fourth Quarter............................................. 27 211/2
FISCAL 1997:
First Quarter.............................................. $30 3/4 $23
Second Quarter............................................. 31 5/8 271/4
Third Quarter.............................................. 34 1/4 267/8
Fourth Quarter (through December 15, 1997)................. 44 1/8 34
</TABLE>
Mac Frugal's has never declared or paid cash dividends on its common stock.
Mac Frugal's currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
Payment of dividends is within the discretion of Mac Frugal's Board of Directors
and will depend upon, among other factors, Mac Frugal's earnings, financial
condition and capital requirements. In addition, certain of Mac Frugal's debt
instruments contain covenants that limit Mac Frugal's ability to pay dividends.
On November 4, 1997, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the reported closing
sales price of Mac Frugal's Common Stock on the NYSE Composite Tape was $37 9/16
per share. On December 15, 1997, the last full trading day for which information
was available prior to the printing and mailing of this Proxy
Statement/Prospectus, the last sales prices reported for Mac Frugal's Common
Stock on the NYSE Composite Tape was $42 5/8 per share.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES
OF CONSOLIDATED STORES COMMON STOCK AND MAC FRUGAL'S COMMON STOCK.
56
<PAGE> 67
MERGER AGREEMENT
The following summary of the Merger Agreement and the Merger contained in
this Proxy Statement/ Prospectus is not intended to be a complete description of
the terms and conditions thereof and is qualified in its entirety by reference
to the full text thereof, which is incorporated herein by reference and a copy
of which is attached hereto as Annex A. Capitalized terms not otherwise defined
herein or in the following summary shall have the meanings set forth in the
Merger Agreement.
THE MERGER
The Merger Agreement provides that, subject to the terms and conditions
thereof, and in accordance with the DGCL, at the Effective Time, Mac Frugal's
and Sub shall consummate the Merger pursuant to which (i) Sub shall be merged
with and into Mac Frugal's and the separate corporate existence of Sub shall
thereupon cease, and (ii) Mac Frugal's shall be the surviving corporation and
shall continue to be governed by the laws of the State of Delaware. Pursuant to
the Merger, (x) the Certificate of Incorporation of Mac Frugal's, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the surviving corporation until thereafter amended as provided
by law and such Certificate of Incorporation, and (y) the By-laws of Mac
Frugal's, as in effect immediately prior to the Effective Time, shall be the
By-laws of the surviving corporation until thereafter amended as provided by
law, the Certificate of Incorporation of the surviving corporation and such
By-laws. The Merger shall have the effects set forth in the DGCL.
CONVERSION OF MAC FRUGAL'S COMMON STOCK
The Merger Agreement provides that each share of Common Stock, par value
$.01 per share, of Sub issued and outstanding immediately prior to the Effective
Time without any other action by Consolidated Stores, Sub or Mac Frugal's,
shall, at the Effective Time, be converted into and become one fully paid and
nonassessable share of common stock of Mac Frugal's.
Each share of Mac Frugal's Common Stock issued and outstanding immediately
prior to the Effective Time (other than Mac Frugal's Common Stock owned by Mac
Frugal's as treasury stock and any Mac Frugal's Common Stock owned by
Consolidated Stores, Sub or any other direct or indirect wholly owned subsidiary
of Consolidated Stores) shall, at the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof, be canceled and
converted into the right to receive a number of duly authorized, validly issued,
fully paid and nonassessable shares of Consolidated Stores Common Stock equal to
the Exchange Rate.
The Exchange Rate means: (i) 1.00, if and only if the average closing price
per share of Consolidated Stores Common Stock on the New York Stock Exchange
("NYSE") as reported on the NYSE Composite Tape during the period comprising the
twenty NYSE trading days immediately preceding the second NYSE trading day
immediately preceding the Effective Time of the Merger (the "Pricing Period")
(the "Average Consolidated Stores Share Price") is less than or equal to $39.00;
or (ii) the quotient of (a) $39.00 divided by (b) the Average Consolidated
Stores Share Price, if and only if the Average Consolidated Stores Share Price
is both (x) greater than $39.00 and (y) less than or equal to $41.49; or (iii)
.94, if and only if the Average Consolidated Stores Share Price is both (x)
greater than $41.49 and (y) less than or equal to $43.62; or (iv)(a) .94 less
(b) the product of (x) the Average Consolidated Stores Share Price less $43.62
multiplied by (y) .01, if and only if the Average Consolidated Stores Share
Price is both (A) greater than $43.62 and (B) less than or equal to $49.62; or
(v) .88, if and only if the Average Consolidated Stores Share Price is greater
than $49.62. In the event that the Average Consolidated Stores Share Price is
less than or equal to $35.00, Mac Frugal's may, on or prior to the Effective
Time, terminate the Merger Agreement in accordance with the termination
provisions of the Merger Agreement. PROMPTLY FOLLOWING THE CLOSING OF THE
PRICING PERIOD, CONSOLIDATED STORES AND MAC FRUGAL'S WILL ISSUE A JOINT PRESS
RELEASE ANNOUNCING THE EXCHANGE RATE. ONCE THE PRICING PERIOD HAS ENDED,
STOCKHOLDERS MAY ALSO CALL GEORGESON & COMPANY AT 1-800-223-2064 TO CONFIRM THE
EXCHANGE RATE. No fractional shares of Consolidated Stores Common Stock will be
issued in the Merger. In lieu of any such fractional shares, each holder of Mac
Frugal's Common Stock who otherwise would be entitled to receive a fractional
share of Consolidated Stores Common Stock pursuant to the Merger will be paid an
amount in cash equal to such fractional interest multiplied by the Average
57
<PAGE> 68
Consolidated Stores Share Price. The Exchange Rate, along with the cash in lieu
of fractional shares and the treatment of Mac Frugal's stock options shall
hereinafter be referred to as the "Merger Consideration."
By way of example (but in each instance subject to payment of cash in lieu
of fractional shares): if the Average Consolidated Stores Share Price is $38.00,
the Exchange Rate will be 1.00 and each holder of a share of Mac Frugal's Common
Stock will be entitled to receive one share of Consolidated Stores Common Stock.
If the Average Consolidated Stores Share Price is $40.00, the Exchange Rate will
be .975 and each holder of a share of Mac Frugal's Common Stock will be entitled
to receive .975 shares of Consolidated Stores Common Stock. If the Average
Consolidated Stores Share Price is $42.00, the Exchange Rate will be .94 and
each holder of a share of Mac Frugal's Common Stock will be entitled to receive
.94 shares of Consolidated Stores Common Stock. If the Average Consolidated
Stores Share price is $44.00, the Exchange Rate will be .936 shares of
Consolidated Stores Common Stock and each holder of a share of Mac Frugal's
Common Stock will be entitled to .936 shares of Consolidated Stores Common
Stock. If the Average Consolidated Stores Share Price is $50.00, the Exchange
Rate will be .88 and each holder of a share of Mac Frugal's Common Stock will be
entitled to receive .88 shares of Consolidated Stores Common Stock.
THE CONSIDERATION TO BE RECEIVED BY MAC FRUGAL'S STOCKHOLDERS IN THE MERGER
WILL BE BASED UPON A FORMULA AND CANNOT BE DETERMINED PRECISELY PRIOR TO THE
CLOSE OF BUSINESS ON THE SECOND DAY IMMEDIATELY PRECEDING THE EFFECTIVE TIME.
THE CONSIDERATION WILL DEPEND UPON THE AVERAGE CONSOLIDATED STORES SHARE PRICE,
WHICH ESTABLISHES THE EXCHANGE RATE. BECAUSE THE AVERAGE CONSOLIDATED STORES
SHARE PRICE AND THE EXCHANGE RATE AS OF THE EFFECTIVE TIME ARE NOT DETERMINABLE
AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS AND AS OF THE DATE OF THE
SPECIAL MEETING, THE EXACT CONSIDERATION PER SHARE TO BE RECEIVED IN EXCHANGE
FOR THE OUTSTANDING MAC FRUGAL'S COMMON STOCK IS NOT CURRENTLY DETERMINABLE. Had
the Merger been consummated on December 15, 1997, the Average Consolidated
Stores Share Price would have been $48.44 and each share of Mac Frugal's Common
Stock outstanding would have been converted into .892 shares of Consolidated
Stores Common Stock (together with one associated Consolidated Stores Right). In
fact, the Average Consolidated Stores Share Price may be greater than or less
than $48.44, and the price at which Consolidated Stores Common Stock will be
trading on the NYSE on and after the Effective Time may be greater than or less
than the Average Consolidated Stores Share Price.
All shares of Mac Frugal's Common Stock that are owned by Mac Frugal's as
treasury stock and any shares of Mac Frugal's Common Stock owned by Consolidated
Stores, Sub or any other direct or indirect wholly owned subsidiary of
Consolidated Stores shall, at the Effective Time, be canceled and retired and
shall cease to exist and no Consolidated Stores Common Stock shall be delivered
in exchange therefor.
The Merger Agreement provides that, on and after the Effective Time,
holders of certificates which immediately prior to the Effective Time
represented outstanding shares of Mac Frugal's Common Stock (the "Certificates")
shall cease to have any rights as stockholders of Mac Frugal's, except the right
to receive the Merger Consideration set forth therein for each share of Mac
Frugal's Common Stock held by them.
Each share of Consolidated Stores Common Stock issued to holders of Mac
Frugal's Common Stock in the Merger will be issued together with one associated
Right in accordance with the Consolidated Stores Rights Agreement. See
"DESCRIPTION OF CONSOLIDATED STORES CAPITAL STOCK -- Change of
Control -- Consolidated Stores Rights Agreement."
THE MARKET VALUE OF THE CONSOLIDATED STORES COMMON STOCK DURING THE PRICING
PERIOD AND AFTER THE EFFECTIVE TIME WILL, AMONG OTHER THINGS, DEPEND UPON, AND
IS EXPECTED TO FLUCTUATE WITH, THE PERFORMANCE OF CONSOLIDATED STORES,
CONDITIONS (ECONOMIC OR OTHERWISE) AFFECTING THE RETAIL CLOSEOUT INDUSTRY, AND
MARKET CONDITIONS AND OTHER FACTORS THAT GENERALLY INFLUENCE PRICES OF
SECURITIES.
EXCHANGE PROCEDURES
Consolidated Stores will designate National City Bank (the "Exchange
Agent") to act as agent for the holders of shares of Mac Frugal's Common Stock
in connection with the Merger to receive the shares of
58
<PAGE> 69
Consolidated Stores Common Stock to which holders of shares of Mac Frugal's
Common Stock will become entitled pursuant to the Merger Agreement.
No certificates or scrip representing fractional shares of Consolidated
Stores Common Stock will be issued upon the surrender for exchange of
Certificates representing shares of Mac Frugal's Common Stock, no dividend or
distribution with respect to shares will be payable on or with respect to any
fractional share and such fractional share interests will not entitle the owner
thereof to vote or to exercise any other rights of a stockholder of Consolidated
Stores. In lieu of any such fractional shares, each holder of Mac Frugal's
Common Stock who otherwise would be entitled to receive a fractional share of
Consolidated Stores Common Stock pursuant to the Merger will be paid an amount
in cash equal to such fractional interest multiplied by the Average Consolidated
Stores Share Price. As soon as practicable after the determination of the amount
of cash to be paid to former stockholders of Mac Frugal's in lieu of any
fractional interests, Consolidated Stores will make available to the Exchange
Agent, which will in turn make available in accordance with the Merger
Agreement, such amounts to such former Mac Frugal's stockholders.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each holder of record of a Certificate (i) a letter of
transmittal (which will specify that delivery will be effected, and risk of loss
and title to the Certificates will pass, only upon delivery of the Certificates
to the Exchange Agent and will be in such form and have such other provisions as
Consolidated Stores may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Consolidated
Stores, together with such letter of transmittal, duly executed, the holder of
such Certificate will be entitled to receive in exchange therefor the Merger
Consideration for each share of Mac Frugal's Common Stock formerly represented
by such Certificate and the Certificate so surrendered will forthwith be
canceled. If payment of the Merger Consideration is to be made to a person other
than the person in whose name the surrendered Certificate is registered, it will
be a condition of payment that the Certificate so surrendered will be properly
endorsed or will be otherwise in proper form for transfer and that the person
requesting such payment will have paid any transfer and other taxes required by
reason of the payment of the Merger Consideration to a person other than the
registered holder of the Certificate surrendered or will have established to the
satisfaction of Mac Frugal's that such tax either has been paid or is not
applicable.
Immediately following the Effective Time, Consolidated Stores will deliver,
in trust, to the Exchange Agent, for the benefit of the holders of shares of Mac
Frugal's Common Stock, certificates representing an aggregate number of shares
of Consolidated Stores Common Stock as nearly as practicable equal to the
product of the Exchange Rate and the number of shares of Mac Frugal's Common
Stock to be converted into Consolidated Stores Common Stock. As soon as
practicable after the Effective Time, each holder of shares of Mac Frugal's
Common Stock converted into Consolidated Stores Common Stock, upon surrender to
the Exchange Agent of one or more Certificates for such shares for cancellation,
will be entitled to receive certificates representing the number of shares of
Consolidated Stores Common Stock into which such shares of Mac Frugal's Common
Stock will have been converted in the Merger. No dividends or distributions that
have been declared will be paid to persons entitled to receive certificates for
shares of Consolidated Stores Common Stock until such persons surrender their
Certificates for shares of Mac Frugal's Common Stock, at which time all such
dividends will be paid. In no event will the persons entitled to receive such
dividends be entitled to receive interest on such dividends. Neither the
Exchange Agent, Consolidated Stores, Sub or Mac Frugal's will be liable to a
holder of shares of Mac Frugal's Common Stock for any Consolidated Stores Common
Stock or dividends thereon delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
TREATMENT OF STOCK OPTIONS
The Merger Agreement provides that, effective as of the Effective Time,
each Mac Frugal's Stock Option, whether vested or unvested as of the Effective
Time, will cease to represent a right to acquire shares of Mac Frugal's Common
Stock and will be converted automatically into a fully vested and exercisable
option to purchase shares of Consolidated Stores Common Stock in an amount and
at an exercise price determined as provided below. The number of shares of
Consolidated Stores Common Stock subject to, and the option price and terms and
conditions of, the new option shall be determined in a manner that preserves
both (i) the
59
<PAGE> 70
aggregate gain (or loss) on Mac Frugal's Stock Options immediately prior to the
Effective Time and (ii) the ratio of the exercise price per share subject to Mac
Frugal's Stock Options to the fair market value (determined immediately prior to
the Effective Time) per share subject to such option, provided that any
fractional shares of Consolidated Stores Common Stock resulting from such
determination will be rounded down to the nearest share. The adjustment provided
herein with respect to any Mac Frugal's Stock Options that are "incentive stock
options" (as defined in Section 422 of the Code) shall be and is intended to be
effected in a manner that is consistent with Section 424(a) of the Code. The
Merger Agreement also provides that the duration, vesting and other terms of the
new options will be the same as the Mac Frugal's Stock Options that they
replace, except that (i) all references to Mac Frugal's shall be deemed to be
references to Consolidated Stores, and (ii) all such new options will not expire
until at least 60 days after the end of the first fiscal quarter of Consolidated
Stores ending at least 30 days after the Effective Time. New option awards
agreements will be provided to each holder of new options within 30 days after
the Effective Time.
Concurrent with the execution of the Merger Agreement, each of the Covered
Executives delivered a Waiver providing that in the event the Merger is
consummated, the Covered Executive will not be entitled to receive any cash
payment in exchange for outstanding vested options under the Incentive Plan held
by Covered Executives (as defined in the Merger Agreement), including options
that become vested in connection with a "Change in Control" under the terms of
existing award agreements under the Incentive Plan and their respective
Employment Agreements. Such stock options shall be treated as set forth in the
immediately preceding paragraph.
The Merger Agreement provides that, effective as of the Effective Time, the
Option Plans will terminate and the provisions in any other plan, program,
agreement or arrangement, providing for the issuance or grant of any other
interest in respect of the capital stock of Mac Frugal's or any of its
subsidiaries will be deleted. Furthermore, Mac Frugal's will take all actions
necessary to ensure that following the Effective Time, no holder of Mac Frugal's
Stock Options or any participant in the Option Plans or any other plans,
programs, agreements or arrangements will have any right thereunder to acquire
any equity securities of Mac Frugal's, the Surviving Corporation or any
subsidiary of either of the foregoing.
INTERIM OPERATIONS
In the Merger Agreement, Mac Frugal's has covenanted and agreed that: (i)
except as expressly provided in the Merger Agreement, and (ii) during the period
following execution of the Merger Agreement and prior to the Effective Time,
except with the prior written consent of Consolidated Stores, which shall not be
unreasonably withheld: (a) the business of Mac Frugal's and its subsidiaries
shall be conducted only in the ordinary course of business consistent with past
practice and, to the extent consistent therewith, each of Mac Frugal's and its
subsidiaries will use its best efforts to preserve its business organization
intact and maintain its existing relations with customers, suppliers, employees,
creditors and business partners; (b) Mac Frugal's will not, directly or
indirectly, split, combine or reclassify the outstanding shares of Mac Frugal's
Common Stock, or any outstanding capital stock of any of the subsidiaries of Mac
Frugal's; (c) neither Mac Frugal's nor any of its subsidiaries will: (I) amend
its certificate of incorporation or by-laws or similar organizational documents;
(II) declare, set aside or pay any dividend or other distribution payable in
cash, stock or property with respect to its capital stock other than dividends
paid by Mac Frugal's subsidiaries to Mac Frugal's or its subsidiaries; (III)
issue, sell, transfer, pledge, dispose of or encumber any additional shares of,
or securities convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of capital stock of any
class of Mac Frugal's or its subsidiaries, other than issuances pursuant to
exercise of stock-based awards or options outstanding on the date thereof; (IV)
transfer, lease, license, sell, mortgage, pledge, dispose of, or encumber any
material assets other than in the ordinary course of business consistent with
past practice; or (V) redeem, purchase or otherwise acquire directly or
indirectly any of its capital stock; (d) neither Mac Frugal's nor any of its
subsidiaries shall: (I) except as otherwise provided in the Merger Agreement,
and except for normal, regularly scheduled increases for non-officer employees
consistent with past practice or pursuant to the terms of existing collective
bargaining agreements, grant any increase in the compensation payable or to
become payable by Mac Frugal's or any of its subsidiaries to any officer or
employee (including through any new award made under, or the exercise of any
discretion under, any Benefit Plan); (II) adopt any new, or amend or otherwise
increase, or accelerate the payment or vesting of the
60
<PAGE> 71
amounts payable or to become payable under any existing bonus, incentive
compensation, deferred compensation, severance, profit sharing, stock option,
stock purchase, insurance, pension, retirement or other employee benefit plan
agreement or arrangement; (III) enter into any, or amend any existing,
employment or severance agreement with or, grant any severance or termination
pay to any officer, director, employee or consultant of Mac Frugal's or any of
its subsidiaries; (IV) make any additional contributions to any grantor trust
created by Mac Frugal's to provide funding for non-tax-qualified employee
benefits or compensation; or (V) provide any severance program to any subsidiary
which does not have a severance program as of the date of the Merger Agreement;
(e) neither Mac Frugal's nor any of its subsidiaries shall modify, amend or
terminate any of the Company Agreements or waive, release or assign any material
rights or claims, except in the ordinary course of business consistent with past
practice; (f) neither Mac Frugal's nor any of its subsidiaries will permit any
material insurance policy naming it as a beneficiary or a loss payable payee to
be canceled or terminated without notice to Consolidated Stores, except in the
ordinary course of business consistent with past practice; (g) except as
previously disclosed by Mac Frugal's in writing to Consolidated Stores and Sub,
neither Mac Frugal's nor any of its Subsidiaries will: (I) incur or assume any
debt except for borrowings under existing credit facilities in the ordinary
course consistent with past practice; (II) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, except in the ordinary
course of business consistent with past practice; (III) make any loans, advances
or capital contributions to, or investments in, any other person (other than to
wholly owned subsidiaries of Mac Frugal's or customary loans or advances to
employees in accordance with past practice); (IV) enter into any purchase order
other than in the ordinary course of business consistent with past practice; or
(V) enter into any material commitment (including, but not limited to, any
leases, capital expenditure or purchase of assets) other than in the ordinary
course of business consistent with past practice; (h) neither Mac Frugal's nor
any of its subsidiaries shall change any of the accounting principles used by it
unless required by GAAP; (i) neither Mac Frugal's nor any of its subsidiaries
shall pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of any such claims, liabilities or
obligations, (I) reflected or reserved against in the consolidated financial
statements (or the notes thereto) of Mac Frugal's and its consolidated
subsidiaries, (II) incurred in the ordinary course of business consistent with
past practice or (III) which are legally required to be paid, discharged or
satisfied; (j) neither Mac Frugal's nor any of its subsidiaries will adopt a
plan of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other material reorganization of Mac Frugal's
or any of its subsidiaries (other than the Merger or in accordance with a
Takeover Proposal (as defined below)); (k) neither Mac Frugal's nor any of its
subsidiaries will take, or agree to commit to take, any action that would make
any representation or warranty of Mac Frugal's contained in the Merger Agreement
inaccurate in any respect at, or as of any time prior to, the Effective Time;
(l) neither Mac Frugal's nor any of its subsidiaries will engage in any
transaction with, or enter into any agreement, arrangement, or understanding
with, directly or indirectly, any of Mac Frugal's affiliates, including, without
limitation, any transactions, agreements, arrangements or understandings with
any affiliate or other Person covered under Item 404 of Regulation S-K under the
Securities Act that would be required to be disclosed under such Item 404, other
than pursuant to such agreements, arrangements, or understandings existing on
the date of the Merger Agreement; (m) neither Mac Frugal's nor any of its
subsidiaries will close, shut down, or otherwise eliminate any of Mac Frugal's
stores other than in the ordinary course of business consistent with past
practice; (n) neither Mac Frugal's nor any of its subsidiaries will change the
name of or exterior signage (except ordinary course maintenance) at any of Mac
Frugal's stores; (o) neither Mac Frugal's nor any of its subsidiaries will
close, shut down, or otherwise eliminate any of Mac Frugal's distribution
centers; (p) neither Mac Frugal's nor any of its subsidiaries will move the
location, close, shut down or otherwise eliminate Mac Frugal's headquarters, or
effect a general staff reduction at such headquarters; (q) neither Mac Frugal's
nor any of its Subsidiaries will change or modify in any material respect Mac
Frugal's existing advertising program and policies except in the ordinary course
of business consistent with past practice; (r) except as previously disclosed by
Mac Frugal's in writing to Consolidated Stores and Sub, neither Mac Frugal's nor
any of its subsidiaries will enter into any new lease (other than renewals of
existing leases after consultation with Consolidated Stores) or purchase or
acquire or enter into any agreement to purchase or acquire any real estate; (s)
neither Mac Frugal's nor any of its subsidiaries will incur any liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise, that
have, or
61
<PAGE> 72
would be reasonably likely to have, a material adverse effect on Mac Frugal's
and its subsidiaries; (t) neither Mac Frugal's nor any of its subsidiaries will
take, or cause, any act or omission that would prevent the Merger from (I)
qualifying as a tax-free plan of reorganization within the meaning of Section
368(a)(1)(A) and Section 368(a)(2)(E) of the Code, or (II) being accounted for
as a pooling of interests; and (u) neither Mac Frugal's nor any of its
subsidiaries will enter into an agreement, contract, commitment or arrangement
to do any of the foregoing, or to authorize, recommend, propose or announce an
intention to do any of the foregoing.
In the Merger Agreement, Consolidated Stores has covenanted and agreed that
(i) except as expressly provided in the Merger Agreement, and (ii) during the
period following execution of the Merger Agreement and prior to the Effective
Time, except with the prior written consent of Mac Frugal's: (a) the business of
Consolidated Stores shall be conducted only in the ordinary course of business
consistent with past practice and, to the extent consistent therewith,
Consolidated Stores will use its best efforts to preserve its business
organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners; (b) Consolidated Stores
will not, directly or indirectly, split, combine or otherwise reclassify the
outstanding Consolidated Stores Common Stock; (c) Consolidated Stores shall not
(I) amend its Certificate of Incorporation or By-laws, except as contemplated by
the Merger Agreement, (II) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with respect to its capital
stock other than dividends paid by its subsidiaries to Consolidated Stores or
its subsidiaries, or (III) issue, sell, transfer, pledge, dispose of or encumber
any additional shares of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire, any
shares of capital stock of any class of Consolidated Stores, other than
issuances pursuant to the grant or exercise of stock-based awards or options;
(d) Consolidated Stores will not adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other material reorganization other than the Merger or except in accordance
with a Takeover Proposal; (e) neither Consolidated Stores nor Sub will take, or
cause, any act or omission that would prevent the Merger from (I) qualifying as
a tax-free plan of reorganization within the meaning of Section 368(a)(1)(A) or
Section 368(a)(2)(E) of the Code, or (II) being accounted for as a pooling of
interests; (f) neither Consolidated Stores nor Sub will take, or agree to commit
to take, any action that would make any representation or warranty of
Consolidated Stores or Sub contained in the Merger Agreement inaccurate in any
respect at, or as of any time prior to, the Effective Time; or (g) Consolidated
Stores will not enter into an agreement, contract, commitment or arrangement to
do any of the foregoing, or to authorize, recommend, propose or announce an
intention to do any of the foregoing.
TREATMENT OF CERTAIN INDEBTEDNESS
The Merger Agreement provides that as of the Effective Time, Consolidated
Stores, in its sole discretion, will cause Mac Frugal's to retire (including all
fees, penalties or related costs in connection with any such retirement), or to
continue performance of, all existing obligations of Mac Frugal's or any of its
subsidiaries under any Debt Instrument (as defined in the Merger Agreement).
Consolidated Stores expects to terminate the Debt Instruments subsequent to the
Effective Time.
NO SOLICITATION
Pursuant to the Merger Agreement, Mac Frugal's (and its subsidiaries and
affiliates over which it exercises control) will not, and Mac Frugal's (and its
subsidiaries and affiliates over which it exercises control) will use their best
efforts to ensure that their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents do not, directly or
indirectly: (i) initiate, solicit or encourage, or take any action to facilitate
the making of, any offer or proposal which constitutes or is reasonably likely
to lead to any Takeover Proposal (as defined below) of Mac Frugal's or any
subsidiary or an inquiry with respect thereto, or (ii) in the event of an
unsolicited Takeover Proposal for Mac Frugal's or any Subsidiary or affiliate of
Mac Frugal's, engage in negotiations or discussions with, or provide any
information or data to, any corporation, partnership, person or other entity or
group (other than Consolidated Stores, any of its affiliates or representatives)
(each, a "Person") relating to any Takeover Proposal, except in the case of
clause (ii) above to the extent that (x) the Takeover Proposal is a bona fide
written proposal submitted to Mac Frugal's Board of Directors and (y) the Mac
Frugal's Board determines, after having consulted with financial and legal
advisors to Mac Frugal's, that the failure to engage in such negotiations or
discussions or provide such information would create a reasonable likelihood of
a breach of the Board of Directors' fiduciary duties under
62
<PAGE> 73
applicable law. Mac Frugal's has agreed to notify Consolidated Stores and Sub
orally and in writing of any such offers, proposals, inquiries or Takeover
Proposals (including, without limitation, the material terms and conditions
thereof and the identity of the Person making it), within 24 hours of the
receipt thereof, and shall thereafter inform Consolidated Stores on a reasonable
basis of the status and content of any discussions or negotiations with such a
third party, including any material changes to the terms and conditions thereof.
Mac Frugal's and its Board of Directors must afford Consolidated Stores a
three-day period after any such notification in which to propose alternative
terms for the acquisition by Consolidated Stores of Mac Frugal's. The Merger
Agreement also provides that Mac Frugal's shall, and shall cause its
subsidiaries and affiliates over which it exercises control to, and will use
best efforts to, ensure that their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents immediately cease
and cause to be terminated all discussions and negotiations that have taken
place prior to the date of the Merger Agreement, if any, with any parties
conducted theretofore with respect to any Takeover Proposal relating to Mac
Frugal's. The Merger Agreement provides, however, that the covenants relating to
solicitation contained therein will not prohibit Mac Frugal's or the Mac
Frugal's Board from taking and disclosing to its stockholders a position with
respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or making such disclosure as may be required
by applicable law.
Pursuant to the Merger Agreement, Consolidated Stores (and its subsidiaries
and affiliates over which it exercises control) will not, and Consolidated
Stores (and its subsidiaries and affiliates over which it exercises control)
will use their best efforts to ensure that their respective officers, directors,
employees, investment bankers, attorneys, accountants and other agents do not,
directly or indirectly: (i) initiate, solicit or encourage, or take any action
to facilitate the making of, any offer or proposal which constitutes or is
reasonably likely to lead to any Takeover Proposal (as defined below) of
Consolidated Stores or any subsidiary or an inquiry with respect thereto, or
(ii) in the event of an unsolicited Takeover Proposal for Consolidated Stores or
any subsidiary or affiliate of Consolidated Stores, engage in negotiations or
discussions with, or provide any information or data to, any Person relating to
any Takeover Proposal, except in the case of clause (ii) above to the extent
that (x) the Takeover Proposal is a bona fide written proposal submitted to
Consolidated Stores Board and (y) the Consolidated Stores Board determines,
after having consulted with financial and legal counsel to Consolidated Stores,
that the failure to engage in such negotiations or discussions or provide such
information would result in a breach of the Board of Directors' fiduciary duties
under applicable law. Consolidated Stores has agreed to notify Mac Frugal's
orally and in writing of any such offers, proposals, inquiries or Takeover
Proposals (including, without limitation, the material terms and conditions
thereof and the identity of the Person making it), within 24 hours of the
receipt thereof, and shall thereafter inform Mac Frugal's on a reasonable basis
of the status and content of any discussions or negotiations with such a third
party, including any material changes to the terms and conditions thereof. The
Merger Agreement also provides that Consolidated Stores shall, and will cause
its subsidiaries and affiliates over which it exercises control to, use best
efforts to ensure that their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents immediately cease
and cause to be terminated all discussions and negotiations that have taken
place prior to the date of the Merger Agreement, if any, with any parties
conducted theretofore with respect to any Takeover Proposal relating to
Consolidated Stores. The Merger Agreement provides, however, that the covenants
relating to solicitation contained therein will not prohibit Consolidated Stores
or the Consolidated Stores Board from taking and disclosing to its stockholders
a position with respect to a tender offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or making such disclosure
as may be required by applicable law.
As used in the Merger Agreement and herein, "Takeover Proposal" when used
in connection with any Person shall mean any tender or exchange offer involving
the capital stock of such Person, any proposal for a merger, consolidation or
other business combination involving such Person or any subsidiary of such
Person, any proposal or offer to acquire in any manner a substantial equity
interest in, or a substantial portion of the business or assets of, such Person
or any subsidiary of such Person, any proposal or offer with respect to any
recapitalization or restructuring with respect to such Person or any Subsidiary
of such Person or any proposal or offer with respect to any other transaction
similar to any of the foregoing with respect to such Person or any subsidiary of
such Person other than pursuant to the transactions to be effected pursuant to
the Merger Agreement.
63
<PAGE> 74
DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION
In the Merger Agreement, Consolidated Stores agreed that at all times after
the Effective Time, it will cause Mac Frugal's and its subsidiaries to
indemnify, each person who is now, or has been at any time prior to the date of
the Merger Agreement, an employee, agent, director or officer of Mac Frugal's or
of any of Mac Frugal's subsidiaries, successors and assigns (individually an
"Indemnified Party" and collectively the "Indemnified Parties"), to the fullest
extent permitted by law, with respect to any claim, liability, loss, damage,
judgment, fine, penalty, amount paid in settlement or compromise, cost or
expense, including reasonable fees and expenses of legal counsel, (whenever
asserted or claimed) ("Indemnified Liability") based in whole or in part on, or
arising in whole or in part out of, any matter existing or occurring at or prior
to the Effective Time whether commenced, asserted or claimed before or after the
Effective Time, including liability arising under the Securities Act, the
Exchange Act or state law. The Merger Agreement provides that Consolidated
Stores will, and will cause Mac Frugal's to, maintain in effect for not less
than three years after the Effective Time the current policies of directors' and
officers' liability insurance maintained by Mac Frugal's and its Subsidiaries on
the date of the Merger Agreement (provided that Consolidated Stores may
substitute therefor policies having at least the same coverage and containing
terms and conditions which are no less advantageous to the persons currently
covered by such policies as insured) with respect to matters existing or
occurring at or prior to the Effective Time; provided, however, that if the
aggregate annual premiums for such insurance during such period shall exceed
200% of the per annum rate of the aggregate premium currently paid by Mac
Frugal's and its subsidiaries for such insurance on the date of the Merger
Agreement, then Consolidated Stores will cause Mac Frugal's to, and Mac Frugal's
will, provide coverage affording the same protections as those maintained by
Consolidated Stores as of such date for its officers and directors. The Merger
Agreement provides that Consolidated Stores shall pay all expenses (including
fees and expenses of counsel) that may be incurred by any Indemnified Party in
successfully enforcing the indemnity or other obligations under this paragraph.
The rights under this paragraph are in addition to rights that an Indemnified
Party may have under the Certificate of Incorporation, By-laws, other similar
organizational documents of Mac Frugal's or any of its subsidiaries or the DGCL.
The Merger Agreement also provides that the rights under this paragraph shall
survive consummation of the Merger and are expressly intended to benefit each
Indemnified Party. Consolidated Stores will cause Mac Frugal's and any of its
subsidiaries (or their successors) to keep in effect the provisions of its
Certificate of Incorporation or By-laws or similar organizational documents
providing for indemnification to the fullest extent provided by law.
EMPLOYEE BENEFITS AND EMPLOYEE MATTERS
Pursuant to the Merger Agreement, Consolidated Stores has agreed that,
effective as of the Effective Time, Mac Frugal's will provide to employees of
Mac Frugal's certain payments and benefits, as described therein. See "THE
MERGER -- Interests of Certain Persons."
With respect to the Covered Executives, upon the date of termination of his
employment by the Covered Executive pursuant to the terms of their respective
Employment Agreements with Mac Frugal's in effect immediately prior to the
Effective Time, Mac Frugal's will pay to each Covered Executive payments
(collectively, the "Severance Payments") in the amounts set forth in the Merger
Agreement as specified therein. See "THE MERGER -- Interests of Certain
Persons -- Treatment Under the Merger Agreement."
The Severance Payments will be paid to a Covered Executive only if such
Covered Executive is actively employed by Mac Frugal's immediately prior to the
Effective Time and terminates his employment in accordance with his Employment
Agreement subsequent to the Effective Time.
Pursuant to the Merger Agreement, employees of Mac Frugal's who continue to
be employed by Mac Frugal's as of the Effective Time will receive employee
benefits comparable to those benefits provided to similarly situated employees
of Consolidated Stores. In addition, with respect to medical benefits provided
to continuing employees as of the Effective Time, waiting periods and
pre-existing condition requirements under the plans covering the continuing
employees will be waived, and these employees will be given credit for any
co-payments and deductibles actually paid by such employees under Mac Frugal's
medical plans during the calendar year in which the Closing occurs. Finally,
service with Mac Frugal's will be recognized for purposes of eligibility under
Consolidated Stores' welfare plans as well as for purposes of Consolidated
Stores' programs or policies for vacation pay and sick pay.
64
<PAGE> 75
CONFIDENTIALITY AGREEMENTS
Pursuant to the Confidentiality Agreements, dated as of October 27, 1997,
between Consolidated Stores and Mac Frugal's (the "Confidentiality Agreements"),
Consolidated Stores and Mac Frugal's have agreed, among other things, to keep
confidential certain non-public confidential or proprietary information of the
other party furnished to Consolidated Stores or Mac Frugal's, as the case may
be, by or on behalf of such other party. The Confidentiality Agreements provide
that without the prior written consent, neither Consolidated Stores or Mac
Frugal's or their representatives will disclose to any person or entity the fact
that certain information has been made available, the fact that discussions or
negotiations are taking place concerning a possible transaction involving
Consolidated Stores or Mac Frugal's, or any of the terms, conditions or other
facts with respect to any such possible transaction (including the status
thereof). The Confidentiality Agreements further provide that Consolidated
Stores and Mac Frugal's agree not to offer employment to, or to hire, any
officers or buyers of Consolidated Stores or Mac Frugal's or cause any customer
or supplier of Consolidated Stores or Mac Frugal's to alter such customer's or
supplier's current relationship with Consolidated Stores or Mac Frugal's within
two years of the date of the Confidentiality Agreements, unless Consolidated
Stores and Mac Frugal's previously agree in writing or the transactions
contemplated by the Merger Agreement are consummated.
The Merger Agreement provides that any provision in the Confidentiality
Agreements which in any manner limits, restricts or prohibits the voting or
acquisition of shares of Mac Frugal's Common Stock by Consolidated Stores or any
of its affiliates or the representation of Consolidated Stores' designees on the
Mac Frugal's Board or which in any manner would be inconsistent with the Merger
Agreement or the transactions contemplated thereby will terminate as of the date
of the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, Mac Frugal's has made customary representations
and warranties to Consolidated Stores and Sub with respect to, among other
things, its organization, capitalization, corporate authorization, financial
statements, public filings, insurance, compliance with laws, transactions with
affiliates, litigation, absence of defaults, contracts, tax matters, assets,
real property, environmental matters, consents and approvals, information in the
Proxy Statement/Prospectus, vote required, undisclosed liabilities and the
absence of any material adverse change in Mac Frugal's since February 2, 1997.
In the Merger Agreement, Consolidated Stores and Sub have made customary
representations and warranties to Mac Frugal's with respect to, among other
things, their organization, capitalization, corporate authorization, financial
statements, public filings, insurance, compliance with laws, transactions with
affiliates, litigation, absence of defaults, contracts, tax matters, consents
and approvals, information in the Proxy Statement/Prospectus, vote required,
undisclosed liabilities and the absence of any material adverse change in
Consolidated Stores since February 1, 1997.
EFFECTIVE TIME
The Merger will become effective upon the date on which a certificate of
merger (the "Certificate of Merger") has been duly filed with the Secretary of
State of the State of Delaware (the "Effective Time"), or at such time as is
agreed upon by the parties and specified in the Certificate of Merger.
CONDITIONS TO THE MERGER
The respective obligations of Consolidated Stores and Sub, on the one hand,
and Mac Frugal's, on the other hand, to consummate the Merger are subject to the
satisfaction (or, if permissible, waiver by the party for whose benefit such
conditions exist) of the following conditions: (i) the Merger Agreement shall
have been approved by stockholders of Mac Frugal's and the Share Issuance shall
have been approved by the stockholders of Consolidated Stores in accordance with
the DGCL; (ii) no court, arbitrator or governmental body, agency or official
shall have issued any order, decree or ruling which remains in force and there
shall not be any statute, rule or regulation restraining, enjoining or
prohibiting the consummation of the Merger; (iii) the Registration Statement
shall have become effective under the Securities Act and no stop order
suspending effectiveness of the Registration Statement shall have been issued
and no proceeding for that purpose shall have been initiated or threatened by
the Commission; (iv) the waiting period applicable to the
65
<PAGE> 76
consummation of the Merger under the HSR Act shall have expired or been
terminated and all material approvals necessary for the consummation of the
transactions contemplated by the Merger Agreement shall have been obtained and
any such approvals shall be in full force and effect; and (v) the Consolidated
Stores Common Stock issuable in the Merger shall have been authorized for
listing on the NYSE, subject to official notice of issuance.
The obligation of Mac Frugal's to consummate the Merger is subject to the
satisfaction of the following additional conditions, unless waived (if
permissible) by Mac Frugal's: (i) Consolidated Stores and Sub shall have
performed in all material respects their agreements contained in the Merger
Agreement required to be performed on or prior to the Effective Time, and except
as contemplated or permitted by the Merger Agreement, the representations and
warranties of Consolidated Stores and Sub contained in the Merger Agreement
(except to the extent such representations and warranties speak as of an earlier
date) shall be true and correct when made and on and as of the Effective Time as
if made on and as of such date; (ii) Mac Frugal's shall have received a
certificate, dated the Effective Time, signed by the respective President or
Chief Executive Officer or a Vice President of both Consolidated Stores and Sub,
certifying that the conditions specified in clause (i) above have been
fulfilled; (iii) Mac Frugal's shall have received a letter from Deloitte &
Touche LLP, Consolidated Stores' independent auditors, dated a date within two
business days before the date on which the Registration Statement on Form S-4
shall become effective and addressed to Mac Frugal's, in form and substance
reasonably satisfactory to Mac Frugal's and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement (including, among
other things, that the Merger will be treated as a pooling of interests under
Accounting Principles Board Opinion No. 16); (iv) Mac Frugal's shall have
received an opinion of Gibson, Dunn & Crutcher LLP, its legal counsel, that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the
Code); and (v) on or prior to the mailing date of the Proxy
Statement/Prospectus, Mac Frugal's shall have received an updated opinion
addressed to it from NMSI to the effect that the Exchange Rate is fair from a
financial point of view to Mac Frugal's and its stockholders.
The obligations of Consolidated Stores and Sub to consummate the Merger
shall be subject to the satisfaction of the following additional conditions,
unless waived (if permissible) by Consolidated Stores: (i) Mac Frugal's shall
have performed in all material respects its agreements contained in the Merger
Agreement required to be performed on or prior to the Effective Time, and except
as contemplated or permitted by the Merger Agreement, the representations and
warranties of Mac Frugal's contained in the Merger Agreement (except to the
extent such representations and warranties speak as of an earlier date) shall be
true and correct when made and on and as of the Effective Time as if made on and
as of such date; (ii) Consolidated Stores and Sub shall have received a
certificate, dated the Effective Time, signed by the President or Chief
Executive Officer or a Vice President of Mac Frugal's, certifying that the
conditions specified in clause (i) above have been fulfilled; (iii) in
connection with the receipt of certain regulatory approvals (as required by the
Merger Agreement), no approval shall impose on Consolidated Stores or Sub any
conditions or other requirements that would (A) cause Consolidated Stores or Sub
any material additional costs, or (B) materially interfere with the continued
operations of Mac Frugal's and the subsidiaries, taken as a whole, or
Consolidated Stores or its subsidiaries; and (iv) Consolidated Stores shall have
received a letter from Deloitte & Touche LLP, Consolidated Stores' independent
auditors, dated a date within two business days before the date on which the
Registration Statement on Form S-4 shall become effective and addressed to
Consolidated Stores, in form and substance reasonably satisfactory to
Consolidated Stores and customary in scope and substance for letters delivered
by independent public accountants in connection with registration statements
similar to the Registration Statement (including, among other things, that the
Merger will be treated as a pooling of interests under Accounting Principles
Board Opinion No. 16).
TERMINATION; FEES
The Merger Agreement may be terminated and the Merger contemplated therein
may be abandoned at any time prior to the Effective Time, whether before or
after stockholder approval thereof: (a) by mutual consent of the Consolidated
Stores Board and the Mac Frugal's Board; (b) by either the Consolidated Stores
Board or the Mac Frugal's Board (i) if any court of competent jurisdiction or
Governmental Entity (as
66
<PAGE> 77
defined therein) shall have issued an order, decree or ruling or taken any other
action (which order, decree, ruling or other action the parties thereto shall
use their best efforts to lift), in each case permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by the Merger Agreement
and such order, decree, ruling or other action shall have become final and
non-appealable, (ii) if the Merger shall not have been consummated on or before
April 30, 1998, unless the failure of the Closing to occur by such date shall be
due to the failure of the party seeking to terminate the Merger Agreement to
perform or observe the covenants and agreements of such party set forth therein,
(iii) provided that the terminating party is not then in material breach of the
Merger Agreement, if the other party shall have breached any of the covenants or
agreements made by such other party or any of the representations or warranties
made by such other party, and in either case, such breach is not cured within 30
days following written notice to the breaching party, or which breach cannot be
cured prior to the Effective Time and would entitle the non-breaching party not
to consummate the transactions contemplated by the Merger Agreement, (iv) if any
approval of the stockholders of Consolidated Stores or Mac Frugal's contemplated
by the Merger Agreement shall not have been obtained by reason of the failure to
obtain the required vote at the relevant Special Meeting or at any adjournment
or postponement thereof, or (v) if the Board of Directors of the other party
withdraws, modifies or changes in a manner adverse to the terminating party its
approval or recommendation of the Merger Agreement and the transactions
contemplated thereby; (c) by the Mac Frugal's Board if (i) prior to the approval
of the Merger Agreement by the requisite vote of Mac Frugal's stockholders,
there exists at such time a Takeover Proposal by a third party to merge with or
acquire a substantial equity interest in, or a substantial portion of, the
assets of the terminating party and the Board of Directors of the terminating
party, after having consulted with outside legal counsel, reasonably determines
in good faith that acceptance of such Takeover Proposal is necessary in the
exercise of its fiduciary duties; or (ii) Mac Frugal's would not be obligated to
consummate the transactions contemplated by the Merger Agreement because the
Average Parent Share Price is equal to or less than $35.00; or (d) by the
Consolidated Stores Board if (i) prior to the approval of the Merger Agreement
by the requisite vote of Consolidated Stores stockholders, there exists at such
time a Takeover Proposal by a third party to merge with or acquire a substantial
equity interest in, or a substantial portion of, the assets of the terminating
party and the Board of Directors of the terminating party, after having
consulted with outside legal counsel, reasonably determines in good faith that
acceptance of such Takeover Proposal is necessary in the exercise of its
fiduciary duties, or (ii) Consolidated Stores would not be obligated to
consummate the transactions contemplated by the Merger Agreement because the
receipt of a required regulatory approval imposes on Consolidated Stores or Sub
a condition or requirement that would (1) cause Consolidated Stores or Sub any
material additional costs, or (2) materially interfere with the continued
operations of Mac Frugal's and the subsidiaries, taken as a whole, or
Consolidated Stores or its subsidiaries.
If (x) the Mac Frugal's Board terminates the Merger Agreement pursuant to
clause (c)(i) in the immediately preceding paragraph hereof, or (y) the
Consolidated Stores Board terminates the Merger Agreement pursuant to clause
(b)(v) in the immediately preceding paragraph hereof, then in any such case as
described above, Mac Frugal's shall pay to Consolidated Stores (not later than
the date of termination of the Merger Agreement in the event of termination by
Mac Frugal's and the date one business day after the date of termination of the
Merger Agreement in the event of termination by Consolidated Stores) an amount
equal to $26 million inclusive of Consolidated Stores' reasonable out-of-pocket
expenses incurred in connection with the transactions contemplated by the Merger
Agreement. If the Board of Directors of Mac Frugal's terminates the Merger
Agreement pursuant to clause (b)(iv) in the immediately preceding paragraph
hereof, Mac Frugal's shall pay to Consolidated Stores (not later than the date
of termination of the Merger Agreement) an amount equal to $5 million to cover
Consolidated Stores' expenses incurred in connection with the Merger Agreement.
If (x) the Consolidated Board terminates the Merger Agreement pursuant to
clause (d)(i) in the second immediately preceding paragraph hereof, or (y) the
Mac Frugal's Board terminates the Merger Agreement pursuant to clause (b)(v) in
the second immediately preceding paragraph hereof, then in any such case as
described above, Consolidated Stores shall pay to Mac Frugal's (not later than
the date of termination of the Merger Agreement in the event of termination by
Consolidated Stores and the date one business day after the date of termination
of the Merger Agreement in the event of termination by Mac Frugal's) an amount
equal to $26 million inclusive of Mac Frugal's reasonable out-of-pocket expenses
incurred in connection with the
67
<PAGE> 78
transactions contemplated by the Merger Agreement. If the Board of Consolidated
Stores terminates the Merger Agreement pursuant to clause (b)(iv) in the second
immediately preceding paragraph hereof, Consolidated Stores shall pay to Mac
Frugal's (not later than the date of termination of the Merger Agreement) an
amount equal to $5 million to cover Mac Frugal's expenses incurred in connection
with the Merger Agreement.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Statements of Income for the 39
weeks ended November 1, 1997 and the 39 weeks ended November 2, 1996 and the
fiscal year ended February 1, 1997, February 3, 1996, and January 28, 1995
present pro forma operating results for Consolidated Stores as if the Merger had
occurred as of the beginning of the periods presented. The following Unaudited
Pro Forma Combined Balance Sheets present the pro forma financial condition of
Consolidated Stores as if the Merger had occurred as of November 1, 1997 and
February 1, 1997. The Exchange Rate of Mac Frugal's was determined based on
arm's-length negotiations between the parties to the Merger Agreement. The
Unaudited Pro Forma Combined Statements of Income and Balance Sheets were
prepared assuming consummation of the Merger, which is accounted for under the
pooling of interests method of accounting.
The pro forma adjustments are described in the accompanying notes and
represent Consolidated Stores' preliminary determination of the necessary
adjustments. The pro forma adjustments are based upon certain assumptions
Consolidated Stores considered reasonable under the circumstances, including
certain assumptions based on the information provided by Mac Frugal's. Final
amounts will differ from those set forth in the statements.
Consolidated Stores and Mac Frugal's estimate that they will incur
aggregate Merger transaction costs of approximately $15 million consisting of
fees for investment bankers, attorneys, accountants, financial printing and
other related charges. Additionally, it is expected that as a result of the
Merger, the combined company will incur consolidation and integration expenses
of approximately $60 million to $85 million, before any income tax effect. These
expenses are expected to include (i) the costs of integrating Mac Frugal's; (ii)
store closure and conversion expenses and associated asset write-offs in
overlapping markets; (iii) costs associated with discontinued product, inventory
consolidation and retail price equalization for the combined inventory
assortment; (iv) write-off of hardware and software relating to the elimination
of duplicative management information systems; (v) severance, retention and
relocation costs; (vi) incremental advertising and marketing expenses; and (vii)
other related charges. Consolidated Stores expects that the majority of these
costs will be charged to operations in the fiscal quarter in which the Merger is
consummated. Any inventory-related charges in the above estimates will be
recorded as a cost of goods sold. The pro forma combined statements of income do
not include such merger-related consolidation and integration expenses
associated with the Merger. The unaudited pro forma financial statements do not
reflect any synergies expected to be realized after the Merger.
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred had the Merger been consummated at the dates indicated,
nor is it necessarily indicative of future operating results or financial
position.
The pro forma condensed financial information should be read in conjunction
with the consolidated financial statements of each of Consolidated Stores and
Mac Frugal's and the related notes thereto contained in (i) Consolidated Stores'
Annual Report on Form 10-K for the year ended February 1, 1997, (ii)
Consolidated Stores' Quarterly Reports on Form 10-Q for the quarters ended May
3, 1997, August 2, 1997 and November 1, 1997, (iii) Mac Frugal's Annual Report
on Form 10-K for the year ended February 2, 1997 and (iv) Mac Frugal's Quarterly
Reports on Form 10-Q for the quarters ended May 4, 1997, August 3, 1997 and
November 2, 1997.
68
<PAGE> 79
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONSOLIDATED PRO FORMA PRO FORMA(1)
STORES MAC FRUGAL'S ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................ $ 1,889,026 $550,177 $2,439,203
---------- ------- ------ ----------
Costs and expenses:
Cost of sales.......................... 1,104,591 315,212 1,419,803
Selling and administrative expenses.... 768,767 198,346 967,113
Interest expense....................... 19,722 1,512 21,234
Other expense (income) -- net.......... 1,415 -- 1,415
---------- ------- ------ ----------
1,894,495 515,070 2,409,565
---------- ------- ------ ----------
Income before income taxes............... (5,469) 35,107 29,638
Income taxes............................. (2,133) 13,692 11,559
---------- ------- ------ ----------
Net income (loss)........................ $ (3,336) $ 21,415 $ 18,079
========== ======= ====== ==========
Income (loss) per common and common
equivalent share of stock.............. $ (0.04) $ 0.17
========== ==========
Weighted average common and common
equivalent shares outstanding.......... 84,197 25,298(2) 109,495
========== ====== ==========
</TABLE>
- ---------------
(1) The pro forma combined statement of income was prepared by combining the
Consolidated Stores consolidated statement of income for the 39 weeks ended
November 1, 1997 with the Mac Frugal's consolidated statement of earnings
for the 39 weeks ended November 2, 1997.
(2) Pro forma adjustment to weighted average common and common equivalent shares
outstanding represents the assumed issuance of Consolidated Stores Common
Stock for Mac Frugal's Common Stock, based on an exchange ratio of 1.00.
69
<PAGE> 80
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONSOLIDATED PRO FORMA PRO FORMA(1)
STORES MAC FRUGAL'S ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................ $ 1,451,830 $491,572 $1,943,402
------- -------- ------ ----------
Costs and expenses:
Cost of sales.......................... 844,889 280,779 1,125,668
Selling and administrative expenses.... 590,275 186,888 777,163
Interest expense....................... 12,741 5,141 17,882
Other expense (income) -- net.......... (1,668) -- (1,668)
------- -------- ------ ----------
1,446,237 472,808 1,919,045
------- -------- ------ ----------
Income from continuing operations before
income taxes and extraordinary
charge................................. 5,593 18,764 24,357
Income taxes........................... 2,067 7,130 9,197
------- -------- ------ ----------
Income from continuing operations before
extraordinary charge................... 3,526 11,634 15,160
Loss from discontinued operations...... (9,657) -- (9,657)
Extraordinary charge................... (1,856) -- (1,856)
------- -------- ------ ----------
Net income (loss)........................ $ (7,987) $ 11,634 $ 3,647
======= ======== ====== ==========
Income (loss) per common and common
equivalent share of stock:
Continuing operations.................. $ 0.04 $ 0.14
Discontinued operations................ (0.12) (0.09)
Extraordinary charge................... (0.02) (0.02)
------- ------ ----------
$ (0.10) $ 0.03
======= ====== ==========
Weighted average common and common
equivalent shares outstanding.......... 83,051 25,856(2) 108,907
======= ====== ==========
</TABLE>
- ---------------
(1) The pro forma combined statement of income was prepared by combining the
Consolidated Stores consolidated statement of income for the 39 weeks ended
November 2, 1996 with the Mac Frugal's consolidated statement of earnings
for the 39 weeks ended October 27, 1996.
(2) Pro forma adjustment to weighted average common and common equivalent shares
outstanding represents the assumed issuance of Consolidated Stores Common
Stock for Mac Frugal's Common Stock, based on an exchange ratio of 1.00.
70
<PAGE> 81
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONSOLIDATED PRO FORMA PRO FORMA(1)
STORES MAC FRUGAL'S ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................ $ 2,647,516 $772,648 $3,420,164
---------- -------- ------ ----------
Costs and expenses:
Cost of sales.......................... 1,542,501 438,302 1,980,803
Selling and administrative expenses.... 908,468 258,520 1,166,988
Interest expense....................... 16,759 6,232 22,991
Other expense (income) -- net.......... (70) -- (70)
---------- -------- ------ ----------
2,467,658 703,054 3,170,712
---------- -------- ------ ----------
Income from continuing operations before
income taxes and extraordinary
charge................................. 179,858 69,594 249,452
Income taxes........................... 66,547 26,445 92,992
---------- -------- ------ ----------
Income from continuing operations before
extraordinary charge................... 113,311 43,149 156,460
Loss from discontinued operations...... (27,538) -- (27,538)
Extraordinary charge................... (1,856) -- (1,856)
---------- -------- ------ ----------
Net income............................... $ 83,917 $ 43,149 $ 127,066
========== ======== ====== ==========
Income (loss) per common and common
equivalent share of stock:
Continuing operations.................. $ 1.35 $ 1.42
Discontinued operations................ (0.33) (0.25)
Extraordinary charge................... (0.02) (0.01)
---------- ------ ----------
$ 1.00 $ 1.16
========== ====== ==========
Weighted average common and common
equivalent shares outstanding.......... 84,042 25,915(2) 109,957
========== ====== ==========
</TABLE>
- ---------------
(1) The pro forma combined statement of income was prepared by combining the
Consolidated Stores consolidated statement of income for the fiscal year
ended February 1, 1997 with the Mac Frugal's consolidated statement of
earnings for the fiscal year ended February 2, 1997.
(2) Pro forma adjustment to weighted average common and common equivalent shares
outstanding represents the assumed issuance of Consolidated Stores Common
Stock for Mac Frugal's Common Stock, based on an exchange ratio of 1.00.
71
<PAGE> 82
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED FEBRUARY 3, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONSOLIDATED PRO FORMA PRO FORMA(1)
STORES MAC FRUGAL'S ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................ $ 1,406,016 $704,934 $2,110,950
-------- -------- ------ ----------
Costs and expenses:
Cost of sales.......................... 811,554 414,640 1,226,194
Selling and administrative expenses.... 475,798 254,427 730,225
Interest expense....................... 5,607 12,385 17,992
Other expense (income) -- net.......... 1,706 -- 1,706
-------- -------- ------ ----------
1,294,665 681,452 1,976,117
-------- -------- ------ ----------
Income from continuing operations before
income taxes........................... 111,351 23,482 134,833
Income taxes............................. 41,218 8,923 50,141
-------- -------- ------ ----------
Income from continuing operations........ 70,133 14,559 84,692
Loss from discontinued operations........ (5,727) -- (5,727)
-------- -------- ------ ----------
Net income............................... $ 64,406 $ 14,559 $ 78,965
======== ======== ====== ==========
Income (loss) per common and common
equivalent share of stock:
Continuing operations.................. $ 0.92 $ 0.83
Discontinued operations................ (0.08) (0.06)
-------- ------ ----------
$ 0.84 $ 0.77
======== ====== ==========
Weighted average common and common
equivalent shares outstanding.......... 76,411 25,782(2) 102,193
======== ====== ==========
</TABLE>
- ---------------
(1) The pro forma combined statement of income was prepared by combining the
Consolidated Stores consolidated statement of income for the fiscal year
ended February 3, 1996 with the Mac Frugal's consolidated statement of
earnings for the fiscal year ended January 28, 1996.
(2) Pro forma adjustment to weighted average common and common equivalent shares
outstanding represents the assumed issuance of Consolidated Stores Common
Stock for Mac Frugal's Common Stock, based on an exchange ratio of 1.00.
72
<PAGE> 83
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED JANUARY 28, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONSOLIDATED PRO FORMA PRO FORMA(1)
STORES MAC FRUGAL'S ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................ $ 1,185,054 $682,083 $1,867,137
---------- -------- ------ ----------
Costs and expenses:
Cost of sales.......................... 681,163 358,338 1,039,501
Selling and administrative expenses.... 402,411 253,100 655,511
Interest expense....................... 5,646 6,373 12,019
Other expense (income) -- net.......... (532) -- (532)
---------- -------- ------ ----------
1,088,688 617,811 1,706,499
---------- -------- ------ ----------
Income from continuing operations before
income taxes........................... 96,366 64,272 160,638
Income taxes............................. 38,546 25,388 63,934
---------- -------- ------ ----------
Income from continuing operations........ 57,820 38,884 96,704
Loss from discontinued operations........ (2,600) -- (2,600)
---------- -------- ------ ----------
Net income............................... $ 55,220 $ 38,884 $ 94,104
========== ======== ====== ==========
Income (loss) per common and common
equivalent share of stock:
Continuing operations.................. $ 0.77 $ 0.93
Discontinued operations................ (0.03) (0.02)
---------- ------ ----------
$ 0.74 $ 0.91
========== ====== ==========
Weighted average common and common
equivalent shares outstanding.......... 75,120 28,353(2) 103,473
========== ====== ==========
</TABLE>
- ---------------
(1) The pro forma combined statement of income was prepared by combining the
Consolidated Stores consolidated statement of income for the fiscal year
ended January 28, 1995 with the Mac Frugal's consolidated statement of
earnings for the fiscal year ended January 29, 1995.
(2) Pro forma adjustment to weighted average common and common equivalent shares
outstanding represents the assumed issuance of Consolidated Stores Common
Stock for Mac Frugal's Common Stock, based on an exchange ratio of 1.00.
73
<PAGE> 84
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
AS OF NOVEMBER 1, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED MAC PRO FORMA PRO FORMA(1)
STORES FRUGAL'S ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 27,645 $ 12,582 $ 40,227
Accounts receivable....................... 10,935 -- 10,935
Inventories............................... 1,228,513 246,642 1,475,155
Prepaid expenses and other................ 66,278 7,968 74,246
Deferred income taxes..................... 55,151 8,800 63,951
---------- ------- ------- ----------
Total current assets................... 1,388,522 275,992 1,664,514
---------- ------- ------- ----------
Property and equipment -- net............... 432,647 169,719 602,366
Other assets................................ 26,408 2,640 29,048
---------- ------- ------- ----------
Total assets........................... 1,847,577 $448,351 $2,295,928
========== ======= ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... 390,006 $ 56,848 $ 446,854
Accrued liabilities....................... 47,546 55,110 102,656
Current maturities of long-term
obligations............................ 53,813 3,072 56,885
---------- ------- ------- ----------
Total current liabilities.............. 491,365 115,030 606,395
---------- ------- ------- ----------
Long-term obligations....................... 616,054 61,730 677,784
Deferred income taxes and other noncurrent
liabilities............................... 47,941 12,233 60,174
Stockholders' equity........................ 692,217 259,358 951,575
---------- ------- ------- ----------
Total liabilities and stockholders'
equity............................... $ 1,847,577 $448,351 $2,295,928
========== ======= ======= ==========
</TABLE>
- ---------------
(1) The pro forma combined balance sheet was prepared by combining the
Consolidated Stores consolidated balance sheet as of November 1, 1997 with
the Mac Frugal's consolidated balance sheet as of November 2, 1997.
74
<PAGE> 85
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
AS OF FEBRUARY 1, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED MAC PRO FORMA PRO FORMA(1)
STORES FRUGAL'S ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 30,044 $ 9,639 $ 39,683
Accounts receivable....................... 9,342 -- 9,342
Inventories............................... 792,665 182,275 974,940
Prepaid expenses and other................ 35,820 9,284 45,104
Deferred income taxes..................... 58,647 8,800 67,447
---------- ------- ------- ----------
Total current assets................... 926,518 209,998 1,136,516
---------- ------- ------- ----------
Property and equipment -- net............... 380,095 173,495 553,590
Other assets................................ 23,890 1,503 25,393
---------- ------- ------- ----------
Total assets........................... $ 1,330,503 $384,996 $1,715,499
========== ======= ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 295,701 $ 44,091 $ 339,792
Accrued liabilities....................... 68,590 56,306 124,896
Income taxes.............................. 65,045 13,408 78,453
Current maturities of long-term
obligations............................ 27,892 3,172 31,064
---------- ------- ------- ----------
Total current liabilities.............. 457,228 116,977 574,205
---------- ------- ------- ----------
Long-term obligations....................... 151,292 3,757 155,049
Deferred income taxes and other noncurrent
liabilities............................... 39,898 12,233 52,131
Stockholders' equity........................ 682,085 252,029 934,114
---------- ------- ------- ----------
Total liabilities and stockholders'
equity................................. $ 1,330,503 $384,996 $1,715,499
========== ======= ======= ==========
</TABLE>
- ---------------
(1) The pro forma combined balance sheet was prepared by combining the
Consolidated Stores consolidated balance sheet as of February 1, 1997 with
the Mac Frugal's consolidated balance sheet as of February 2, 1997.
75
<PAGE> 86
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Merger has been accounted for in the Unaudited Pro Forma Combined
Financial Statements using the pooling of interests method of accounting (see
"ACCOUNTING TREATMENT"). The accompanying Unaudited Pro Forma Combined Financial
Statements do not give effect to cost savings resulting from any synergies which
are expected to occur due to the integration of Consolidated Stores and Mac
Frugal's operations. Additionally, the Unaudited Pro Forma Combined Financial
Statements do not reflect the non-recurring costs and expenses associated with
integrating the operations of the two companies. Certain costs of integration
could result in a significant, non-recurring charge to the combined results of
operations after consummation of the Merger; however, the actual amount of such
charge cannot be determined until the transition plan relating to the
integration of operations is completed. No material adjustments were required to
conform the accounting policies of Consolidated Stores and Mac Frugal's.
2. WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARE
Pro forma combined income (loss) per common and common equivalent share are
based on the combined weighted average number of common shares outstanding after
adjusting historical amounts for the conversion of outstanding shares of Mac
Frugal's assuming an Exchange Rate of 1.00.
The weighted average number of shares for Consolidated Stores reflects 5
for 4 stock splits distributed on June 24, 1997 and December 24, 1996 to
stockholders of record on June 10, 1997 and December 10, 1996, respectively.
76
<PAGE> 87
DESCRIPTION OF CONSOLIDATED STORES CAPITAL STOCK
The statements set forth under this heading with respect to the DGCL,
Consolidated Stores' Restated Certificate of Incorporation (the "Consolidated
Stores Charter"), Consolidated Stores' By-laws (the "Consolidated Stores
By-laws") and its Stockholder Rights Agreement, dated as of April 18, 1989, (the
"Consolidated Stores Rights Agreement") with Manufacturers Hanover Trust
Company, as Rights Agent, are brief summaries thereof and do not purport to be
complete; such statements are subject to the detailed provisions of the DGCL,
the Consolidated Stores Charter, the Consolidated Stores By-laws and the
Consolidated Stores Rights Agreement. See "Available Information."
Under Consolidated Stores' Charter, Consolidated Stores' authorized capital
stock consists of 290,000,000 shares of Consolidated Stores Common Stock, par
value $.01 per share, 8,000,000 shares of Non-Voting Common Stock, par value
$.01 per share ("Consolidated Stores Non-Voting Common Stock"), and 2,000,000
shares of Preferred Stock, par value $.01 per share ("Consolidated Stores
Preferred Stock"), of which 600,000 shares have been designated as Series A
Junior Participating Preferred Stock.
CONSOLIDATED STORES COMMON STOCK
Assuming the issuance of approximately 25,500,000 shares of Consolidated
Stores Common Stock issuable to stockholders of Mac Frugal's in the Merger and
assuming the Merger occurred as of the date of this Proxy Statement/Prospectus,
approximately 112,360,000 shares of Consolidated Stores Common Stock would be
issued and outstanding. No shares of Consolidated Stores Common Stock are issued
and held in the treasury of Consolidated Stores, 5,394,321 shares of
Consolidated Stores Common Stock are reserved for issuance under Consolidated
Stores' 1996 Performance Incentive Plan (of which, 3,406,445 are reserved for
issuance pursuant to options already granted), 5,804,411 shares of Consolidated
Stores Common Stock are reserved for issuance under Consolidated Stores'
Executive Stock Option and Stock Appreciation Rights Plan and 712,495 shares of
Consolidated Stores Common Stock are reserved for issuance under Consolidated
Stores' Director Stock Option Plan (of which, 285,016 are reserved for issuance
pursuant to options already granted). Shares of Consolidated Stores Non-Voting
Common Stock are convertible, upon a public offering or public sale by the
holder, into Consolidated Stores Common Stock on a one-for-one basis provided
that as a result of the conversion the holder and its affiliates do not,
directly or indirectly, own, control or possess the power to vote more
securities issued by Consolidated Stores than such holder is permitted to own,
control or possess under any applicable law or governmental regulation. No
shares of Consolidated Stores Non-Voting Common Stock are outstanding.
DIVIDEND RIGHTS
The Consolidated Stores Charter provides that holders of Consolidated
Stores Preferred Stock shall be entitled to dividends, as granted by the
Consolidated Stores Board, payable in preference to, or in such relation to, the
dividends payable on any other class or classes of stock, or cumulative or
noncumulative as stated by the Consolidated Stores Board.
VOTING RIGHTS
Each holder of Consolidated Stores Common Stock is entitled to one vote in
respect of each share of such stock. See "COMPARISON OF THE RIGHTS OF HOLDERS OF
MAC FRUGAL'S COMMON STOCK AND CONSOLIDATED STORES COMMON STOCK -- Authorized
Capital Stock."
CHANGE OF CONTROL
DGCL. Section 203 of the DGCL prohibits generally a public Delaware
corporation, including Consolidated Stores, from engaging in a Business
Combination (as defined below) with an Interested Stockholder (as defined below)
for a period of three years after the date of the transaction in which an
Interested Stockholder became such, unless: (i) the board of directors of such
corporation approved, prior to the date such Interested Stockholder became such,
either such Business Combination or such transaction; (ii) upon consummation of
such transaction, such Interested Stockholder owns at least 85% of the voting
shares of such corporation (excluding specified shares); or (iii) such Business
Combination is approved by the board of directors of such corporation and
authorized by the affirmative vote (at an annual or special meeting
77
<PAGE> 88
and not by written consent) of at least 66 2/3% of the outstanding voting shares
of such corporation (excluding shares held by such Interested Stockholder). A
"Business Combination" includes (i) mergers, consolidations and sales or other
dispositions of 10% or more of the assets of a corporation to or with an
Interested Stockholder, (ii) certain transactions resulting in the issuance or
transfer to an Interested Stockholder of any stock of such corporation or its
subsidiaries and (iii) other transactions resulting in a disproportionate
financial benefit to an Interested Stockholder. An "Interested Stockholder" is a
person who, together with its affiliates and associates, owns (or within a
three-year period did own) 15% or more of a corporation's stock entitled to vote
generally in the election of directors.
By-laws Provisions. The Consolidated Stores By-laws specify that the
Consolidated Stores Board shall consist of not less than eight nor more than ten
directors elected for a one-year term. The Consolidated Stores By-laws provide
that the number of directors on the Consolidated Stores Board be fixed by the
Consolidated Stores Board only. The maximum and minimum number of directors may
be increased or decreased by an amendment to the By-laws only. In the interim
period between annual meetings of stockholders or special meetings of
stockholders, vacancies and newly created directorships may be filled by the
affirmative vote of a majority of the Consolidated Stores Board, although less
than a quorum. Any directors so elected will hold office until the next election
of directors.
The Consolidated Stores By-laws provide that any corporate action taken at
a special meeting of stockholders called by the Consolidated Stores Board, the
Chairman of the Board, the President or by written request of at least 25% of
the stockholders, shall require the approval of a majority of the then
outstanding voting stock.
The ability of the Consolidated Stores Board to issue and set the terms of
Consolidated Stores Preferred Stock could have the effect of making it more
difficult for a third person to acquire, or of discouraging a third person from
attempting to acquire, control of Consolidated Stores.
Consolidated Stores Rights Agreement. On April 18, 1989, the Consolidated
Stores Board of Directors declared a dividend distribution of one Right for each
outstanding share of Consolidated Stores Common Stock payable to stockholders of
record at the close of business on April 24, 1989, and authorized the attachment
of Rights to all shares of Consolidated Stores Common Stock issued thereafter.
Each Right entitles the registered holder to purchase from Consolidated Stores a
unit consisting of one one-hundredth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $1.00 per share, at a purchase price of
$35 per Unit (the "Purchase Price"), subject to adjustment.
The Rights will separate from the Consolidated Stores Common Stock and a
distribution date (the "Distribution Date") will occur upon the earlier of (i)
10 business days following a public announcement that a person or group of
affiliated or associated persons other than Consolidated Stores and its
subsidiaries or benefit plans (an "Acquiring Person") has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of Consolidated Stores Common Stock (the "Stock Acquisition Date"), or
(ii) 10 business days (or such later date as may be determined by the
Consolidated Stores Board) following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 20% or
more of such outstanding shares of Consolidated Stores Common Stock.
Until the Distribution Date, (i) the Rights will be evidenced by the
certificates of Consolidated Stores Common Stock and will be transferred with
and only with such certificates, (ii) new Consolidated Stores Common Stock
certificates issued after April 24, 1989 will contain a notation incorporating
the Consolidated Stores Rights Agreement by reference and (iii) the surrender or
transfer of any certificates of Consolidated Stores Common Stock outstanding
will also constitute the transfer of the Rights associated with the Consolidated
Stores Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on April 18, 1999, unless earlier redeemed by
Consolidated Stores.
In the event that a person becomes the beneficial owner of 20% or more of
the then outstanding shares of Consolidated Stores Common Stock (except pursuant
to a tender offer or exchange offer for all outstanding shares of Common Stock
at a price and on terms determined by at least a majority of the Board who are
not officers of Consolidated Stores or representatives of an Acquiring Person to
be (i) at a price which is fair to
78
<PAGE> 89
Consolidated Stores' stockholders and (ii) otherwise in the best interests of
Consolidated Stores and its stockholders), each holder of a Right shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right. Notwithstanding any of the foregoing, following the occurrence of any of
the events set forth in this paragraph, all Rights that are, or (under certain
circumstances) were, beneficially owned by any Acquiring Person will be null and
void. However, Rights are not exercisable following the occurrence of either of
the events set forth above until such time as the Rights are no longer
redeemable by Consolidated Stores.
In the event that, at any time following the Stock Acquisition Date (i)
Consolidated Stores is acquired in a merger or other business combination
transaction in which Consolidated Stores is not the surviving corporation (other
than mergers which follow certain types of offers) or (ii) more than 50% of
Consolidated Stores' assets, cash flow or earning power is sold or transferred,
each holder of a Right (except voided Rights) shall thereafter have the right to
receive, upon exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the Right. In the event that Rights
cannot be exercised for common stock of the acquiring company as set forth
above, holders of Rights will be entitled to put the Rights to the Acquiring
Person for cash equal to the Purchase Price.
The Purchase Price payable, and the number of Units of Consolidated Stores
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, Consolidated Stores Preferred Stock, (ii) if holders of
Consolidated Stores Preferred Stock are granted certain rights or warrants to
subscribe for Consolidated Stores Preferred Stock or convertible securities at
less than the current market price of the Consolidated Stores Preferred Stock,
or (iii) upon the distribution to holders of the Consolidated Stores Preferred
Stock of evidences of indebtedness or assets (excluding regular quarterly cash
dividends) or of subscription rights or warrants (other than those referred to
above).
In general, at any time until the close of business on the tenth business
day following the Stock Acquisition Date, Consolidated Stores may redeem the
Rights in whole, but not in part, at a price of $.01 per Right (payable in cash,
Consolidated Stores Common Stock or other consideration deemed appropriate by
the Consolidated Stores Board). Immediately upon the action of the Consolidated
Stores Board ordering redemption of the Rights, the Rights will terminate and
the only right of the holders of Rights will be to receive the $.01 redemption
price.
Each share of Consolidated Stores' Common Stock issued to holders of Mac
Frugal's Common Stock in the Merger will be issued together with one associated
Right in accordance with the Consolidated Stores Rights Agreement.
Consolidated Stores Stock Options. Pursuant to the stock option plans
and/or awards of Consolidated Stores, all of the outstanding options of
Consolidated Stores vest and become immediately exercisable in the event of a
change in control (as defined therein) of Consolidated Stores. The acceleration
and vesting of the Consolidated Stores stock options could have the effect of
making it more difficult for a third person to acquire, or of discouraging a
third person from attempting to acquire, control of Consolidated Stores.
MISCELLANEOUS
The holders of Consolidated Stores Common Stock do not have preemptive,
subscription, redemption or conversion rights. However, the holders of
Consolidated Stores Non-Voting Common Stock do have conversion rights which
entitle them, upon a public offering or a public sale of the Consolidated Stores
Non-Voting Common Stock, to convert, on a one-for-one basis, their shares into
Consolidated Stores Common Stock. The outstanding shares of Consolidated Stores
Common Stock are, and the shares of Consolidated Stores Common Stock
constituting the Share Issuance upon issuance will be, duly authorized, validly
issued, fully paid, nonassessable and the outstanding shares of Consolidated
Stores Common Stock are, and the shares of Consolidated Stores Common Stock
constituting the Share Issuance upon notice of issuance will be, listed on the
NYSE.
79
<PAGE> 90
CONSOLIDATED STORES PREFERRED STOCK
No shares of Consolidated Stores Preferred Stock will be issued or
outstanding immediately following the Merger. The Consolidated Stores Board is
authorized to issue Consolidated Stores Preferred Stock in one or more series
and to determine liquidation preferences, voting rights, dividend rights,
conversion rights and redemption rights. The Consolidated Stores Board has
designated a Series A Junior Participating Preferred Stock (the "Series A
Stock"). These shares are entitled to cumulative quarterly dividends equal to
the greater of (i) $.05 per share or (ii) 100 times the per share dividend
payable on Common Stock. The shares also have a liquidation preference equal to
$.10 per share plus accrued dividends. The Series A Stock ranks junior to any
other series of Consolidated Stores Preferred Stock, unless otherwise provided.
The Series A Stock is entitled to 100 votes per share on all matters and, if
dividends are in arrears for six quarters, are entitled to elect two members of
the Consolidated Stores Board. Finally, the Series A Stock is subject to
redemption by Consolidated Stores. No shares of Series A Stock are outstanding.
COMPARISON OF THE RIGHTS OF HOLDERS OF MAC FRUGAL'S
COMMON STOCK AND CONSOLIDATED STORES COMMON STOCK
The statements set forth under this heading with respect to the DGCL, the
Mac Frugal's Restated Certificate of Incorporation (the "Mac Frugal's Charter")
and the Mac Frugal's Restated By-laws (the "Mac Frugal's By-laws"), the
Consolidated Stores Charter, the Consolidated Stores By-laws and the
Consolidated Stores Rights Agreement are brief summaries thereof and do not
purport to be complete; such statements are subject to the detailed provisions
of the DGCL, the Mac Frugal's Charter and the Mac Frugal's By-laws, the
Consolidated Stores Charter, the Consolidated Stores By-laws and the
Consolidated Stores Rights Agreement. See "AVAILABLE INFORMATION."
The following summary compares certain rights of the holders of Mac
Frugal's Common Stock to the rights of the holders of Consolidated Stores Common
Stock. The rights of Mac Frugal's stockholders are governed principally by DGCL,
the Mac Frugal's Charter and the Mac Frugal's By-laws. Upon consummation of the
Merger, such stockholders will become holders of Consolidated Stores Common
Stock (and associated Rights), and their rights will be governed principally by
the DGCL, the Consolidated Stores Charter, the Consolidated Stores By-laws and
the Consolidated Stores Rights Agreement.
AUTHORIZED CAPITAL STOCK
Consolidated Stores. The Consolidated Stores Charter provides for the
authorization and issuance of 290,000,000 shares of Consolidated Stores Common
Stock, par value $.01 per share, 8,000,000 shares of Consolidated Stores
Non-Voting Common Stock, par value $.01 per share, and 2,000,000 shares of
Consolidated Stores Preferred Stock, par value $.01 per share, of which 600,000
shares have been designated as Series A Junior Participating Preferred Stock.
Mac Frugal's. The Mac Frugal's Charter provides for the authorization and
issuance of 100,000,000 shares of Mac Frugal's Common Stock, par value $.02778
per share, and 500,000 shares of Mac Frugal's Preferred Stock, par value $1.00
per share ("Mac Frugal's Preferred Stock"), of which 410,000 shares have been
designated as Series A Junior Participating Preferred Stock.
Common Stock Voting Rights.
Consolidated Stores. The Consolidated Stores Charter provides that holders
of Consolidated Stores Common Stock are entitled to one vote for each share
thereof held.
Mac Frugal's. The Mac Frugal's Charter provides that holders of Mac
Frugal's Common Stock shall be entitled to one vote for each share of Mac
Frugal's Common Stock thereof held.
BOARD OF DIRECTORS
Election of Directors; Cumulative Voting.
Consolidated Stores. The Consolidated Stores By-laws provide that
directors shall be elected by a plurality of the votes cast. Neither the
Consolidated Stores By-laws nor the Consolidated Stores Charter provides for
cumulative voting of directors.
80
<PAGE> 91
Mac Frugal's. The Mac Frugal's By-laws provide that directors must be
elected by written ballot at the annual meeting or a special meeting called for
that purpose. The Mac Frugal's By-laws provide that the Mac Frugal's Board shall
be elected by a majority vote of the stockholders at the stockholders' annual
meetings. Neither the Mac Frugal's By-laws nor the Mac Frugal's Charter provide
for cumulative voting of directors.
Number of Directors.
Consolidated Stores. The Consolidated Stores By-laws provide that the
Consolidated Stores Board shall consist of not less than eight nor more than ten
directors elected for a one-year term. The Consolidated Stores By-laws provide
that the number of directors on the Consolidated Stores Board be fixed by the
Consolidated Stores Board only. The maximum and minimum number of directors may
be increased or decreased by an amendment to the By-laws only. In the interim
period between annual meetings of stockholders or of special meetings, vacancies
and newly created directorships may be filled by the affirmative vote of a
majority of the Consolidated Stores Board, although less than a quorum. Any
directors so elected will hold office until the next election.
Mac Frugal's. The Mac Frugal's By-laws provide that the Mac Frugal's Board
shall consist of not less than five nor more than nine directors. The first Mac
Frugal's Board was set at seven directors. Thereafter, within the limits
specified, the Mac Frugal's Board shall be determined by resolution of the Mac
Frugal's Board or the stockholders. Neither the Mac Frugal's By-laws nor the Mac
Frugal's Charter provide for the Mac Frugal's Board to be classified.
Removal of Directors.
Consolidated Stores. The Consolidated Stores By-laws provide that any or
all of the directors may be removed, with or without cause, by a majority vote
of the stockholders.
The Consolidated Stores By-laws provide that stockholders can fill a
vacancy on the Consolidated Stores Board caused by removal. However, if the
stockholders choose not to fill that vacancy, or a vacancy is created for any
other reason, including increasing the size of the Consolidated Stores Board,
then Consolidated Stores Board may fill the vacancy by a majority vote.
Mac Frugal's. The Mac Frugal's By-laws do not provide for a removal
procedure for directors. However, the DGCL provides that a director may be
removed, with or without cause, by a majority vote of the stockholders.
The Mac Frugal's By-laws provide that vacancies on the Mac Frugal's Board
are to be filled by a majority vote of the remaining directors. The stockholders
may fill any vacancy not filled by the Mac Frugal's Board and any vacancy
created at the meeting where the Mac Frugal's Board is increased in size.
Indemnification.
The DGCL provides that a director, employee, officer or agent of a Delaware
corporation may be indemnified against liability (other than in an action by or
in the right of the corporation) and other costs incurred by such person in
connection with such proceeding, provided such person acted in good faith and in
a manner such person reasonably believed to be in, or at least not opposed to,
the best interests of the corporation, and, with respect to any criminal
proceeding, had no reason to believe the conduct was unlawful. For actions or
suits brought by or in the name of the corporation, the DGCL provides that a
director, employee, officer or agent of a corporation may be indemnified against
expenses incurred by such person in connection with such proceeding if such
person acted in good faith and in a manner such person reasonably believed to be
in, or at least not opposed to, the best interests of the corporation, except
that if such person is adjudged to be liable to the corporation, such person can
be indemnified if and only to the extent that a court determines that despite
the adjudication of liability, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses as
the court shall deem proper. See "THE MERGER -- Interests of Certain Persons."
Consolidated Stores. In addition to the provisions of the DGCL described
in the immediately preceding paragraph, the Consolidated Stores By-laws provide
that to the extent that a director, officer, employee or agent of Consolidated
Stores has been successful on the merits or otherwise in defense of any action
for which
81
<PAGE> 92
indemnification may have been proper, he will be reimbursed for expenses
(including attorney's fees) actually or reasonably incurred. Further, the
Consolidated Stores By-laws provide that the determination regarding
indemnification will be made by a majority of a disinterested quorum of the
Consolidated Stores Board or independent legal counsel in a written opinion or
by the stockholders.
Mac Frugal's. In addition to the provisions of the DGCL described in the
introductory paragraph, the Mac Frugal's By-laws provide that to the extent that
a director or officer of Mac Frugal's has been successful on the merits or
otherwise in defense of any action for which indemnification may have been
proper, he will be reimbursed for expenses (including attorney's fees) actually
and reasonably incurred. Further, the Mac Frugal's By-laws provide that the
determination regarding indemnification will be made by a majority of a
disinterested quorum of the Mac Frugal's Board or independent legal counsel in a
written opinion or by the stockholders.
Liability.
The DGCL provides that a corporation may include, in its articles or
certificate of incorporation, a provision which limits or eliminates the
personal liability of a director to the corporation and its stockholders or of
stockholders for monetary damages for such person's conduct as a director,
provided that such provision may not so limit a director's liability: (i) for a
breach of his or her duty of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law; (iii) for unlawful payments of dividends, certain
stock repurchases or redemptions; or (iv) for any transaction from which the
director derived an improper personal benefit.
Consolidated Stores. The Consolidated Stores Charter expressly limits the
personal liability of directors to the fullest extent permitted under the DGCL.
Mac Frugal's. The Mac Frugal's Charter expressly limits the personal
liability of directors to the fullest extent permitted under the DGCL.
REPURCHASE AND REDEMPTION OF SHARES
The DGCL provides that a corporation may redeem or repurchase any of its
shares for cash, or other property, including debt securities, except when the
capital of the corporation is impaired, or when such repurchase or redemption
would impair the capital of the corporation.
PAYMENT OF DIVIDENDS TO STOCKHOLDERS
The DGCL provides that a corporation, subject to any restrictions in its
certificate of incorporation, may declare and pay dividends upon its shares of
capital stock either out of its surplus (as determined under the statute) or, in
the event there is no such surplus, out of its net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year. Further
restrictions on dividends apply in the event a corporation has issued shares
possessing a preference upon the distribution of assets.
Consolidated Stores. The Consolidated Stores Charter provides that holders
of Consolidated Stores Common Stock shall be entitled to dividends, subject to
the rights of Consolidated Stores Preferred Stock, when and as declared by the
Consolidated Stores Board, out of the assets of Consolidated Stores which are by
law available therefor payable either in cash, or property or securities of
Consolidated Stores. The Consolidated Stores Charter provides that holders of
Consolidated Stores Preferred Stock shall be entitled to dividends, as granted
by the Consolidated Stores Board, payable in preference to, or in such relation
to, the dividends payable on any other class or classes of stock, or cumulative
or noncumulative as stated by the Consolidated Stores Board. The holders of
Series A Junior Participating Preferred Stock are entitled to, subject to the
superior rights of the holders of Consolidated Preferred Stock, cumulative
quarterly dividends equal to the greater of (i) $.05 per share or (ii) 100 times
the per share dividend payable on Consolidated Stores Common Stock.
Mac Frugal's. The Mac Frugal's Charter provides that holders of Mac
Frugal's Common Stock shall be entitled to receive, when and if declared by the
Mac Frugal's Board and subject to the preferential rights, if any, of
outstanding shares of Mac Frugal's Preferred Stock, dividends out of any funds
or assets. The Mac Frugal's Charter provides that holders of Mac Frugal's
Preferred Stock shall be entitled to dividends, as
82
<PAGE> 93
granted by the Mac Frugal's Board, payable in preference to, or in such relation
to, the dividends payable on any other class or classes of stock, or cumulative
or noncumulative as stated by the Mac Frugal's Board. The holders of Series A
Junior Participating Preferred Stock are entitled to, subject to the superior
rights of the holders of Mac Frugal's Preferred Stock, cumulative quarterly
dividends equal to the greater of (i) $1.00 per share or (ii) 100 times the per
share dividend payable on Mac Frugal's Common Stock.
PREEMPTIVE RIGHTS
The DGCL provides that no stockholder of a Delaware corporation shall have
any preemptive right to subscribe to an additional issue of stock or to any
security convertible into such stock unless such right is expressly granted in
the articles or certificate of incorporation.
Consolidated Stores. The Consolidated Stores Charter does not expressly
grant stockholders any preemptive rights.
Mac Frugal's. The Mac Frugal's Charter does not expressly grant
stockholders any preemptive rights.
AMENDMENTS TO CHARTER; AMENDMENTS TO BY-LAWS
The DGCL provides that stockholders may amend the by-laws of a corporation,
provided, however, the corporation may in its articles or certificate of
incorporation also confer such power upon the board of directors. The DGCL
provides that stockholders must approve any amendment to the articles or
certificate of incorporation.
Consolidated Stores. The Consolidated Stores By-laws provide that the
Consolidated Stores Board has the power to make, alter, amend or repeal the
Consolidated Stores By-laws at any regular or special meeting of the
Consolidated Stores Board. The Consolidated Stores By-laws also provide that the
Consolidated Stores By-laws are subject to amendment, alteration or repeal by
the stockholders entitled to vote at any annual meeting or at any special
meeting, provided notice of the proposed amendment, addition, alteration or
repeal is given in the notice of said meeting.
Mac Frugal's. The Mac Frugal's Charter provides that Mac Frugal's reserves
the right to amend, alter, change or repeal any provision of the Mac Frugal's
Charter, in a manner consistent with statutory law. The Mac Frugal's By-laws
provide that the Mac Frugal's By-laws may be amended or repealed or new Mac
Frugal's By-laws adopted (a) by action of Mac Frugal's stockholders entitled to
vote thereon at any annual or special meeting of stockholders or (b) by the Mac
Frugal's Board at a regular or special meeting thereof. Any Mac Frugal's By-law
made by the Mac Frugal's Board may be amended or repealed by action of the
stockholders at any annual or special meeting of stockholders.
CHANGE OF CONTROL PROVISIONS
Consolidated Stores. Neither the Consolidated Stores Charter or the
Consolidated Stores By-laws provide for any change of control provisions.
The ability of the Consolidated Stores Board to issue and set the terms of
Consolidated Stores Preferred Stock could have the effect of making it more
difficult for a third person to acquire, or of discouraging a third person from
attempting to acquire control of Consolidated Stores. See "DESCRIPTION OF
CONSOLIDATED STORES CAPITAL STOCK."
Mac Frugal's. Pursuant to the DGCL, Mac Frugal's By-laws provide that Mac
Frugal's is not subject to the provisions of Section 203 of the DGCL, which
regulates the vote required to approve certain business combinations with
certain "interested shareholders."
The ability of the Mac Frugal's Board to issue and set the terms of Mac
Frugal's Preferred Stock could have the effect of making it more difficult for a
third person to acquire, or of discouraging a third person from attempting to
acquire, control of Mac Frugal's.
SPECIAL MEETING OF STOCKHOLDERS
The DGCL provides that special meetings of stockholders of a corporation
may be called by the board of directors or by such persons as are authorized by
the corporation's articles or certificate of incorporation or by-
83
<PAGE> 94
laws provided that notice of such stockholders' meeting is given to all
stockholders of record entitled to vote thereon not less than 10 nor more than
60 days prior to the meeting.
Consolidated Stores. The Consolidated Stores By-laws provide that special
meetings may be called by the Consolidated Stores Board, by the Chairman of the
Board or the President, or at the written request of stockholders holding at
least 25% of the stock entitled to vote. The special meetings shall be held on
the date and at the time fixed by the directors and that notice of such
stockholders' meeting is to be given to all stockholders of record entitled to
vote thereon not less than 10 nor more than 60 days prior to the meeting.
Mac Frugal's. The Mac Frugal's By-laws provide that special meetings may
be called at any time by the Mac Frugal's Board, by the Chairman of the Mac
Frugal's Board or the President. Notice of a special meeting must be given not
less than 10 nor more than 60 days before the meeting. Neither the Mac Frugal's
By-laws or Mac Frugal's Charter provide for the stockholders' ability to call a
special meeting.
STOCKHOLDER CONSENT TO ACTION WITHOUT A MEETING
The DGCL provides that, unless otherwise provided in the articles or
certificate of incorporation, any action which may be taken at any meeting of
stockholders may be taken without a meeting, prior notice or a vote, if written
consents setting forth the action taken are signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to take such action if the action were taken at a meeting.
Consolidated Stores. The Consolidated Stores Charter has no provision
relating to stockholder consent to action without a meeting.
Mac Frugal's. The Mac Frugal's By-laws provide that stockholder action may
be taken without a meeting and vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares of stock of Mac Frugal's
entitled to vote thereon were present and voted.
LIQUIDATION RIGHTS
Generally, under the DGCL, a corporation may create one or more classes or
series of stock which classes or series may have such preferences as shall be
stated and expressed in the certificate of incorporation or in the resolution
adopted by the board of directors providing for the issue of such stock pursuant
to authority expressly vested in it by the provisions of its certificate of
incorporation. These preferences may include a priority on the distribution of
assets in liquidation.
Consolidated Stores. The Consolidated Stores Charter provides that
distribution to holders of Consolidated Stores Preferred Stock of preferential
or other payment upon the dissolution of, or upon any distribution of the assets
of Consolidated Stores are to be determined by the Consolidated Stores Board.
The Series A Junior Participating Preferred Stock has a liquidation preference
of $.10 per share plus accrued and unpaid dividends.
Mac Frugal's. The Mac Frugal's Charter provides that in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of Mac Frugal's, after payment or provision for payment of the debts and other
liabilities of the preferential amounts, if any, payable to the holders of any
outstanding Mac Frugal's Preferred Stock, the holders of all outstanding shares
of Mac Frugal's Common Stock shall be entitled to share ratably in the remaining
net assets of Mac Frugal's. The Series A Junior Participating Preferred Stock
has a liquidation preference of $100 per share plus accrued and unpaid
dividends.
84
<PAGE> 95
BUSINESS OF CONSOLIDATED STORES
Consolidated Stores. Consolidated Stores Corporation is a Delaware
corporation with its principal executive offices located at 1105 North Market
Street, Suite 1300, Wilmington, DE 19801. The telephone number of Consolidated
Stores at such offices is (302) 478-4896. Consolidated Stores is one of the
largest close-out retailers in the United States with 1,946 stores located in
all 50 states and Puerto Rico. Consolidated Stores operates 677 retail close-out
stores, primarily under the names Odd Lots and Big Lots, in the Midwestern,
Southern and Mid-Atlantic regions of the United States and 1,156 retail toy
stores throughout the United States and Puerto Rico primarily under the names
Kay - Bee Toys, K - B Toy Works and K - B Toy Outlet. Approximately 1,045 of the
toy stores were acquired as of May 5, 1996 in the acquisition of Kay-Bee Center,
Inc.
Consolidated Stores' core close-out stores offer substantial savings on a
wide variety of name-brand consumer products, including food items, health and
beauty aids, electronics, housewares, tools, paint, lawn and garden, hardware,
sporting goods, toys and softlines. In addition, these stores supplement their
broad offering of items in core product categories with a changing mix of new
merchandise and seasonal goods such as back-to-school and holiday merchandise.
Consolidated Stores' toy stores offer a broad variety of close-out toys, as well
as in-line toys and traditional toy merchandise. Consolidated Stores' close-out
merchandise primarily consists of new, name-brand products obtained from
manufacturers' excess inventories, which generally result from production
overruns, package changes, discontinued products and returns.
Information regarding the names, ages, positions, and business backgrounds
of the executive officers and directors of Consolidated Stores, as well as
additional information, including executive compensation, security ownership of
certain beneficial owners and management and certain relationships and related
transactions, is incorporated by reference to Items 10, 11, 12 and 13 of
Consolidated Stores' Annual Report on Form 10-K for the fiscal year ended
February 1, 1997 (which incorporates portions of Consolidated Stores' definitive
Proxy Statement for its 1997 Annual Meeting of Stockholders held on May 20,
1997).
Sub. Sub, a newly incorporated Delaware corporation and a wholly owned
subsidiary of Consolidated Stores, has not conducted any business other than in
connection with the Merger Agreement. All of the issued and outstanding shares
of capital stock of Sub are owned directly by Consolidated Stores. The principal
executive offices of Sub are located at 300 Phillipi Road, Columbus, Ohio
43228-0512. The telephone number of Sub at such offices is (614) 278-6800.
BUSINESS OF MAC FRUGAL'S
Mac Frugal's is a Delaware corporation with its principal executive offices
located at 2430 E. Del Amo Boulevard, Dominguez, California 90220-6306. The
telephone number of Mac Frugal's at such offices is (310) 537-9220. Mac Frugal's
operates a chain of 326 retail stores that specialize in the sale of new "close-
out" merchandise which is purchased from manufacturers and wholesalers at prices
less than initial wholesale prices and is sold at prices below normal retail
prices. Mac Frugal's stores are operated under the names "Pic 'N' Save" and "Mac
Frugal's Bargains - Close-outs" and collectively offer, on a self-service basis,
a wide selection of close-out merchandise, including apparel and accessories,
notions, novelties, toys, games, stationery, greeting cards, books, candles,
luggage, artificial flowers, beauty aids, candy, snacks, beverages, housewares,
household supplies, domestics, seasonal theme items and giftwares. Mac Frugal's
targets value-oriented consumers, and merchandise is currently sold on a
cash-and-carry basis, with certain credit cards accepted.
At February 2, 1997, 205 of Mac Frugal's retail stores operated under the
name "Mac Frugal's Bargains - Close-outs." The remaining 121 stores, located in
Southern California, operated under the name "Pic 'N' Save."
Seasonal fluctuations in sales have followed the traditional trend in the
retail industry, with a substantial portion of its annual sales volume and
annual earnings occurring during the fourth quarter of its fiscal year. Mac
Frugal's expects this pattern to continue in the future.
Information regarding the names, ages, positions, and business backgrounds
of the executive officers and directors of Mac Frugal's, as well as additional
information, including executive compensation, security
85
<PAGE> 96
ownership of certain beneficial owners and management and certain relationships
and related transactions, is incorporated by reference to Items 10, 11, 12 and
13 of Mac Frugal's Annual Report on Form 10-K for the fiscal year ended February
2, 1997 (which incorporates portions of Mac Frugal's definitive Proxy Statement
for its 1997 Annual Meeting of Stockholders held on June 18, 1997).
EXPERTS
The financial statements and the related financial statement schedule
incorporated in this Proxy Statement/Prospectus by reference from Consolidated
Stores Corporation Annual Report on Form 10-K for the year ended February 1,
1997 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements and the related financial statement schedule
incorporated in this Proxy Statement/Prospectus by reference from Mac Frugal's
Annual Report on Form 10-K for the year ended February 2, 1997 have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report, which
is incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
LEGAL OPINIONS
The validity of the shares of Consolidated Stores Common Stock to be issued
in connection with the Merger will be passed upon by Benesch, Friedlander,
Coplan & Aronoff LLP.
Certain of the tax consequences of the Merger to Mac Frugal's stockholders
will be passed upon by Gibson, Dunn & Crutcher LLP. See "THE MERGER--Certain
Federal Income Tax Consequences."
STOCKHOLDERS' PROPOSALS
If the Merger is not consummated, it is presently anticipated that Mac
Frugal's will hold its 1998 Annual Meeting on or about June 17, 1998. Any
stockholder wishing to submit a proposal to Mac Frugal's for consideration for
inclusion in its proxy statement relating to its 1998 Annual Meeting of
Stockholders must deliver such proposal to Mac Frugal's by January 15, 1998.
It is presently anticipated that Consolidated Stores will hold its 1998
Annual Meeting on or about May 19, 1998. Any stockholder wishing to submit a
proposal to Consolidated Stores for consideration for inclusion in its proxy
statement relating to its 1998 Annual Meeting of Stockholders must deliver such
proposal to Consolidated Stores by January 19, 1998.
86
<PAGE> 97
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CONSOLIDATED STORES CORPORATION,
MBC CONSOLIDATED ACQUISITION CORPORATION
AND
MAC FRUGAL'S BARGAINS -- CLOSE-OUTS INC.
DATED AS OF
NOVEMBER 4, 1997
================================================================================
<PAGE> 98
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER......................................................... A-1
Section 1.1 The Merger......................................................... A-1
Section 1.2 Effective Time..................................................... A-1
Section 1.3 Tax-Free Reorganization............................................ A-1
Section 1.4 Closing............................................................ A-1
Section 1.5 Board of Directors; Officers....................................... A-2
Section 1.6 Stockholders' Meetings............................................. A-2
ARTICLE II CONVERSION OF SHARES............................................... A-2
Section 2.1 Conversion of Shares............................................... A-2
Section 2.2 Issuance of Parent Common Stock.................................... A-3
Section 2.3 Treatment of Stock Options......................................... A-4
Section 2.4 Stock Transfer Books............................................... A-5
Section 2.5 Assistance in Consummation of the Merger........................... A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................... A-5
Section 3.1 Organization....................................................... A-5
Section 3.2 Capitalization..................................................... A-6
Section 3.3 Corporate Authorization; Validity of Agreement; Company Action..... A-7
Section 3.4 Consents and Approvals; No Violations.............................. A-7
Section 3.5 SEC Reports and Financial Statements............................... A-7
Section 3.6 Absence of Certain Changes......................................... A-8
Section 3.7 No Undisclosed Liabilities......................................... A-8
Section 3.8 Information in Proxy Statement/Prospectus.......................... A-8
Section 3.9 Litigation......................................................... A-9
Section 3.10 No Default......................................................... A-9
Section 3.11 Taxes.............................................................. A-9
Section 3.12 Assets; Real Property.............................................. A-10
Section 3.13 Environmental Matters.............................................. A-10
Section 3.14 Insurance.......................................................... A-11
Section 3.15 Transactions with Affiliates....................................... A-11
Section 3.16 Compliance with Law................................................ A-11
Section 3.17 Vote Required...................................................... A-11
Section 3.18 Financial Advisors................................................. A-11
Section 3.19 Supplemental Executive Retirement Plan............................. A-11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB................... A-12
Section 4.1 Organization....................................................... A-12
Section 4.2 Capitalization..................................................... A-12
Section 4.3 Corporate Authorization; Validity of Agreement; Necessary Action... A-13
Section 4.4 Consents and Approvals; No Violations.............................. A-13
Section 4.5 SEC Reports and Financial Statements............................... A-13
Section 4.6 Absence of Certain Changes......................................... A-14
Section 4.7 No Undisclosed Liabilities......................................... A-14
Section 4.8 Information in Proxy Statement/Prospectus.......................... A-14
</TABLE>
i
<PAGE> 99
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.9 Litigation......................................................... A-15
Section 4.10 No Default......................................................... A-15
Section 4.11 Taxes.............................................................. A-15
Section 4.12 Environmental Matters.............................................. A-15
Section 4.13 Insurance.......................................................... A-16
Section 4.14 Transactions with Affiliates....................................... A-16
Section 4.15 Compliance with Law................................................ A-16
Section 4.16 Vote Required...................................................... A-16
Section 4.17 Financial Advisor.................................................. A-16
ARTICLE V COVENANTS.......................................................... A-17
Section 5.1 Interim Operations of the Company.................................. A-17
Section 5.2 Interim Operations of Parent....................................... A-19
Section 5.3 Treatment of Certain Indebtedness.................................. A-19
Section 5.4 Access to Information.............................................. A-19
Section 5.5 Consents and Approvals............................................. A-20
Section 5.6 Employee Benefits.................................................. A-20
Section 5.7 No Solicitation.................................................... A-21
Section 5.8 Additional Agreements.............................................. A-23
Section 5.9 Publicity.......................................................... A-23
Section 5.10 Notification of Certain Matters.................................... A-23
Section 5.11 Directors' and Officers' Insurance and Indemnification............. A-23
Section 5.12 Compliance with the Securities Act................................. A-24
Section 5.13 Cooperation........................................................ A-24
Section 5.14 Proxy Statement/Prospectus......................................... A-24
Section 5.15 Stock Exchange Listing............................................. A-25
Section 5.16 Confidentiality Agreements......................................... A-25
Section 5.17 Tax Matters........................................................ A-25
ARTICLE VI CONDITIONS......................................................... A-25
Section 6.1 Conditions to the Obligations of Each Party........................ A-25
Section 6.2 Conditions to Obligation of the Company to Effect the Merger....... A-26
Section 6.3 Conditions to Obligations of Parent and Sub to Effect the Merger... A-26
ARTICLE VII TERMINATION........................................................ A-27
Section 7.1 Termination........................................................ A-27
Section 7.2 Effect of Termination.............................................. A-28
Section 7.3 Termination Fee.................................................... A-28
Section 7.4 Extension; Waiver.................................................. A-28
ARTICLE VIII MISCELLANEOUS...................................................... A-29
Section 8.1 Fees and Expenses.................................................. A-29
Section 8.2 Finders' Fees...................................................... A-29
Section 8.3 Amendment and Modification......................................... A-29
Section 8.4 Nonsurvival of Representations and Warranties...................... A-29
Section 8.5 Notices............................................................ A-29
Section 8.6 Interpretation..................................................... A-30
</TABLE>
ii
<PAGE> 100
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 8.7 Counterparts....................................................... A-30
Section 8.8 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership........................................................ A-30
Section 8.9 Severability....................................................... A-30
Section 8.10 Specific Performance............................................... A-30
Section 8.11 Governing Law...................................................... A-31
Section 8.12 Assignment......................................................... A-31
Section 8.13 Joint and Several Liability........................................ A-31
EXHIBITS
Form of Waiver................................................................... Ex-A-1
Form of Affiliate Agreement...................................................... Ex-B-1
</TABLE>
iii
<PAGE> 101
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of November 4,
1997, by and among Consolidated Stores Corporation, a Delaware corporation
("Parent"), MBC Consolidated Acquisition Corporation, a Delaware corporation and
a wholly owned subsidiary of Parent ("Sub"), and Mac Frugal's
Bargains -- Close-outs Inc., a Delaware corporation (the "Company").
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved, and deem it advisable and in the best interests of their respective
stockholders to consummate, the acquisition of the Company by Parent upon the
terms and subject to the conditions set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free plan of reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests."
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement and in accordance with the Delaware General Corporation Law ("DGCL")
at the Effective Time (as defined in Section 1.2 below), the Company and Sub
shall consummate a merger (the "Merger") pursuant to which (i) Sub shall be
merged with and into the Company and the separate corporate existence of Sub
shall thereupon cease, and (ii) the Company shall be the successor or surviving
corporation in the Merger (the "Surviving Corporation") and shall continue to be
governed by the laws of the State of Delaware. Pursuant to the Merger, (x) the
Certificate of Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended as provided by law and such Certificate of
Incorporation, and (y) the By-laws of the Company, as in effect immediately
prior to the Effective Time, shall be the By-laws of the Surviving Corporation
until thereafter amended as provided by law, the Certificate of Incorporation of
the Surviving Corporation and such By-laws. The Merger shall have the effects
set forth in Section 259 of the DGCL.
Section 1.2 Effective Time. Parent, Sub and the Company will cause a
Certificate of Merger (the "Certificate of Merger") with respect to the Merger
to be executed and filed on the Closing Date (as defined in Section 1.4) (or on
such other date as Parent and the Company may agree) with the Secretary of State
of the State of Delaware as provided in the DGCL. The Merger shall become
effective on the date on which the Certificate of Merger has been duly filed
with the Secretary of State or such time as is agreed upon by the parties and
specified in the Certificate of Merger, and such time is hereinafter referred to
as the "Effective Time."
Section 1.3 Tax-Free Reorganization. The parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) and 368(a)(2)(E) of the
Code. In this regard, Parent represents that it presently intends, and that at
the Effective Time it will intend, to continue the Company's historic business
or use a significant portion of the Company's business assets in a business.
Section 1.4 Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m., local time, on a date to be specified by the parties, which
shall be no later than the third business day after satisfaction or waiver of
all of the conditions set forth in Article VI hereof (the "Closing Date"), at
the offices of Parent, unless another time, date or place is agreed to in
writing by the parties hereto.
A-1
<PAGE> 102
Section 1.5 Board of Directors; Officers. The directors and officers of
Sub immediately prior to the Effective Time shall be the directors and officers
of the Surviving Corporation, in each case until their respective successors are
duly elected and qualified.
Section 1.6 Stockholders' Meetings. (a) In order to consummate the Merger,
the Company, acting through its Board of Directors, shall, in accordance with
applicable law, duly call, give notice of, convene and hold a special meeting of
its stockholders (the "Company Special Meeting"), as soon as practicable after
the registration statement on Form S-4 (together with all amendments, schedules,
and exhibits thereto) to be filed by Parent in connection with the registration
of the Parent Common Stock to be issued by Parent in the Merger (the
"Registration Statement") is declared effective, for the purpose of considering
and taking action upon this Agreement. The Company shall include in the joint
proxy statement/prospectus forming a part of the Registration Statement (the
"Proxy Statement/Prospectus") the recommendation of the Board of Directors of
the Company that stockholders of the Company vote in favor of the approval of
the Merger and the adoption of this Agreement. Parent agrees that it will vote,
or cause to be voted, all of the shares of Company Common Stock (as defined in
Section 2.1(b)) then owned by it, Sub or any of its other Subsidiaries, if any,
in favor of the approval of the Merger and adoption of this Agreement at the
Company Special Meeting.
(b) In order to consummate the Merger, Parent, acting through its Board of
Directors, shall, in accordance with applicable law, duly call, give notice of,
convene and hold a special meeting of its stockholders (the "Parent Special
Meeting" and together with the "Company Special Meeting," the "Special
Meetings"), as soon as practicable after the Registration Statement is declared
effective, for the purpose of authorizing the issuance of shares of Parent
Common Stock (as defined below), authorizing an increase in the number of
authorized shares of Parent Preferred Stock (as defined in Section 4.2) and
authorizing any other action requiring stockholder approval pursuant to the
Merger. Parent shall include in the Proxy Statement/Prospectus the
recommendation of the Board of Directors of Parent that stockholders of Parent
vote in favor of the issuance of shares of Parent common stock, par value $.01
("Parent Common Stock"), in the Merger.
(c) Nothing in this Section 1.6 is intended to impair the fiduciary duties
of the Boards of Directors of the Company or Parent or, in the case of the Board
of Directors of the Company, to restrict its ability to withdraw its
recommendation otherwise contemplated pursuant to Section 1.6(a) of this
Agreement (subject to the termination provisions of Article VII) or to exercise
its right of termination pursuant to Section 7.1(c) of this Agreement, or in the
case of the Board of Directors of Parent, to restrict its ability to withdraw
its recommendation otherwise contemplated pursuant to Section 1.6(b) of this
Agreement (subject to the termination provisions of Article VII) or to exercise
its right of termination pursuant to Section 7.1(d) of this Agreement.
ARTICLE II
CONVERSION OF SHARES
Section 2.1 Conversion of Shares. (a) Each share of Common Stock, par
value $.01 per share, of Sub issued and outstanding immediately prior to the
Effective Time, without any other action by Parent, Sub or the Company, shall,
at the Effective Time, be converted into and become one fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) Each share of Company common stock, par value $.02778 ("Company Common
Stock"), issued and outstanding immediately prior to the Effective Time (other
than shares to be canceled pursuant to Section 2.1(e) hereof) shall, at the
Effective Time, by virtue of the Merger and without any action on the part of
the holder thereof, be canceled and converted automatically into the right to
receive a number of duly authorized, validly issued, fully paid and
nonassessable shares of Parent Common Stock equal to the Exchange Rate (as
defined below). Additionally, each share of Parent Common Stock issued pursuant
to the Merger will be issued with one associated preferred stock purchase right
(a "Right").
A-2
<PAGE> 103
(c) For purposes hereof, the "Exchange Rate" shall mean:
(i) 1.00, if and only if the Average Parent Share Price (as defined
below) is less than or equal to $39.00; provided, however, that in the
event the Average Parent Share Price is equal to or less than $35.00, then
in that event the Company may, in its sole discretion, terminate this
Agreement in accordance with the provisions of Article VII hereof, in which
case none of the parties hereto shall have any further obligations
hereunder except as set forth in Section 7.2; or
(ii) The quotient of (A) $39.00 divided by (B) the Average Parent
Share Price, if and only if the Average Parent Share Price is both (x)
greater than $39.00 and (y) less than or equal to $41.49; or
(iii) .94, if and only if the Average Parent Share Price is both (x)
greater than $41.49 and (y) less than or equal to $43.62; or
(iv) (A) .94 less (B) the product of (x) the Average Parent Share
Price less $43.62 multiplied by (y) .01, if and only if the Average Parent
Share Price is both (I) greater than $43.62 and (II) less than or equal to
$49.62; or
(v) .88, if and only if the Average Parent Share Price is greater than
$49.62.
(d) The "Average Parent Share Price" shall mean the average closing price
per share of Parent Common Stock on the New York Stock Exchange (the "NYSE") as
reported on the NYSE Composite Tape during the period comprising the twenty NYSE
trading days immediately preceding the second NYSE trading day immediately
preceding the Effective Time of the Merger (the "Pricing Period"). Promptly
following the closing of the Pricing Period, Parent and Company will issue a
joint press release announcing the Exchange Rate.
(e) All shares of Company Common Stock that are owned by the Company as
treasury stock and any shares of Company Common Stock owned by Parent, Sub or
any other direct or indirect wholly owned Subsidiary of Parent shall, at the
Effective Time, be canceled and retired and shall cease to exist and no Parent
Common Stock shall be delivered in exchange therefor.
(f) On and after the Effective Time, holders of certificates which
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "Certificates") shall cease to have any rights as
stockholders of the Company, except the right to receive the consideration set
forth in this Article II (the "Merger Consideration") for each share of Company
Common Stock held by them.
Section 2.2 Issuance of Parent Common Stock. (a) The manner in which each
share of Company Common Stock (other than shares to be canceled as set forth in
Section 2.1(e)) will be converted into Parent Common Stock shall be as set forth
in this Section 2.2.
(b) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of Certificates
representing shares of Company Common Stock, no dividend or distribution with
respect to shares shall be payable on or with respect to any fractional share
and such fractional share interests shall not entitle the owner thereof to vote
or to exercise any other rights of a stockholder of Parent. In lieu of any such
fractional shares, each holder of Company Common Stock who otherwise would be
entitled to receive a fractional share of Parent Common Stock pursuant to the
Merger will be paid an amount in cash equal to such fractional interest
multiplied by the Average Parent Share Price. As soon as practicable after the
determination of the amount of cash to be paid to former stockholders of the
Company in lieu of any fractional interests, Parent shall make available to the
Exchange Agent (as defined below), which shall in turn make available in
accordance with this Agreement, such amounts to such former stockholders.
(c) Parent shall designate a bank or trust company to act as agent for the
holders of shares of Company Common Stock in connection with the Merger (the
"Exchange Agent") to receive the shares of Parent Common Stock to which holders
of shares of Company Common Stock shall become entitled pursuant to this Article
II.
(d) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a Certificate whose shares
were converted pursuant to this Article II into the right to
A-3
<PAGE> 104
receive the Merger Consideration (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Parent, together with such letter of transmittal,
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefor the Merger Consideration for each share of Company Common
Stock formerly represented by such Certificate and the Certificate so
surrendered shall forthwith be canceled. If payment of the Merger Consideration
is to be made to a person other than the person in whose name the surrendered
Certificate is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or shall be otherwise in
proper form for transfer and that the person requesting such payment shall have
paid any transfer and other taxes required by reason of the payment of the
Merger Consideration to a person other than the registered holder of the
Certificate surrendered or shall have established to the satisfaction of the
Surviving Corporation that such tax either has been paid or is not applicable.
(e) Immediately following the Effective Time, Parent shall deliver, in
trust, to the Exchange Agent, for the benefit of the holders of shares of
Company Common Stock, (i) certificates representing an aggregate number of
shares of Parent Common Stock as nearly as practicable equal to the product of
the Exchange Rate and the number of shares of Company Common Stock to be
converted into Parent Common Stock as determined by this Article II. As soon as
practicable after the Effective Time, each holder of shares of Company Common
Stock converted into Parent Common Stock, upon surrender to the Exchange Agent
of one or more Certificates for such shares for cancellation, shall be entitled
to receive certificates representing the number of shares of Parent Common Stock
into which such shares of Company Common Stock shall have been converted in the
Merger. No dividends or distributions that have been declared will be paid to
persons entitled to receive certificates for shares of Parent Common Stock until
such persons surrender their Certificates for shares of Company Common Stock, at
which time all such dividends shall be paid. In no event shall the persons
entitled to receive such dividends be entitled to receive interest on such
dividends. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of shares of Company Common Stock for
any Parent Common Stock or dividends thereon delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(f) At any time following nine months after the Effective Time, the
Surviving Corporation shall be entitled to require the Exchange Agent to deliver
to it any shares of Parent Common Stock or funds (including any interest
received with respect thereto) which had been made available to the Exchange
Agent and which have not been disbursed to holders of Certificates, and
thereafter such holders shall be entitled to look to the Surviving Corporation
and Parent (subject to abandoned property, escheat or other similar laws) only
with respect to the Merger Consideration payable or issuable upon due surrender
of their Certificates, without any interest thereon.
Section 2.3 Treatment of Stock Options. (a) Effective as of the Effective
Time, each option granted by the Company to purchase shares of Company Common
Stock that is outstanding and unexercised immediately prior thereto (the
"Company Stock Options"), whether vested or unvested as of the Effective Time,
shall cease to represent a right to acquire shares of Company Common Stock and
shall be converted automatically into a fully vested and exercisable option to
purchase shares of Parent Common Stock in an amount, at an exercise price and
for an exercise period determined as provided below (and otherwise subject to
the terms of the Company plans (the "Option Plans"), and the agreements
evidencing grants thereunder). The number of shares of Parent Common Stock
subject to, and the option price and terms and conditions of, the new option
shall be determined in a manner that preserves both (i) the aggregate gain (or
loss) on the Company Stock Option immediately prior to the Effective Time and
(ii) the ratio of the exercise price per share subject to the Company Stock
Option to the fair market value (determined immediately prior to the Effective
Time) per share subject to such option, provided that any fractional shares of
Parent Common Stock resulting from such determination shall be rounded down to
the nearest share. Effective as of the Effective Time, the Surviving Corporation
shall assume each Company Stock Option agreement, each as amended, as
A-4
<PAGE> 105
provided herein. The adjustment provided herein with respect to any Company
Stock Options that are "incentive stock options" (as defined in section 422 of
the Code) shall be and is intended to be effected in a manner that is consistent
with section 424(a) of the Code. The duration and other terms of the new options
shall be the same as the Company Stock Options that they replace, except that
all references to the Company shall be deemed to be references to Parent;
provided, however, that all such new options shall not expire until at least
sixty (60) days after the end of the first fiscal quarter of Parent ending at
least thirty (30) days after the Effective Time. New option award agreements
will be provided to each holder of new options within 30 days after the
Effective Time.
(b) Effective as of the Effective Time, the Option Plans shall terminate
and the provisions in any other plan, program, agreement or arrangement
providing for the issuance or grant of any other interest in respect of the
capital stock of the Company or any of its Subsidiaries shall be deleted.
Furthermore, the Company shall take all actions necessary to ensure that
following the Effective Time, no holder of Company Stock Options or any
participant in the Option Plans or any other plans, programs, agreements or
arrangements shall have any right thereunder to acquire any equity securities of
the Company, the Surviving Corporation or any subsidiary of either of the
foregoing.
Section 2.4 Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of shares of Company Common Stock on the records of
the Company. If, after the Effective Time, Certificates representing shares of
Company Common Stock are presented to the Surviving Corporation, they shall be
canceled and exchanged for certificates representing Parent Common Stock
pursuant to this Article II.
Section 2.5 Assistance in Consummation of the Merger. Each of Parent, Sub
and the Company shall provide all reasonable assistance to, and shall cooperate
with, each other to bring about the consummation of the Merger as soon as
practicable in accordance with the terms and conditions of this Agreement.
Parent shall cause Sub to perform all of its obligations in connection with this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 3.1 Organization. Each of the Company and its Subsidiaries is a
corporation, partnership or other entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization, and has all requisite corporate or other power and authority and
all necessary governmental approvals to own, lease and operate its properties
and to carry on its business as now being conducted, except where the failure to
be so organized, existing and in good standing or to have such power, authority
and governmental approvals would not have a material adverse effect on the
Company and its Subsidiaries taken as a whole. Each of the Company and its
Subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not, individually or in the aggregate, have a material
adverse effect on the Company and its Subsidiaries taken as a whole. All such
jurisdictions are listed in Section 3.1 of the Disclosure Schedule delivered by
the Company to Parent on or prior to the date hereof (the "Company Disclosure
Schedule"). As used in this Agreement, the word "Subsidiary" means, with respect
to any party, any corporation or other organization, whether incorporated or
unincorporated, of which (i) such party or any other Subsidiary of such party is
a general partner (excluding such partnerships where such party or any
Subsidiary of such party do not have a majority of the voting interest in such
partnership) or (ii) at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the Board of
Directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such party or by any one or more of its Subsidiaries, or by such party and
one or more of its Subsidiaries. As used in this Agreement, any reference to any
event, change or effect having a material adverse effect on or with respect to
any entity (or group of entities taken as a whole) means such event, change or
effect, individually or in the aggregate with such other
A-5
<PAGE> 106
events, changes, or effects, which is materially adverse to the financial
condition, business or results of
operations of such entity. If "material adverse effect" is used with respect to
more than one entity, it shall mean such events, changes or effects with respect
to all such entities taken as a whole. Section 3.1 of the Company Disclosure
Schedule sets forth a complete list of the Company's Subsidiaries. Complete and
correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of the Company and each of its Subsidiaries have been provided to
Parent.
Section 3.2 Capitalization. (a) The authorized capital stock of the
Company consists of 100,000,000 shares of Company Common Stock, par value
$.02778 per share and 500,000 shares of preferred stock, par value $1.00 per
share ("Company Preferred Stock"), of which 410,000 shares have been designated
as Series A Junior Participating Preferred Stock. As of October 31, 1997, (i)
25,116,973 shares of Company Common Stock are issued and outstanding, 661,600
shares of Company Common Stock are held in the Company's treasury, 295,731
shares of Company Common Stock are reserved for issuance under the Company's
1990 Employee Stock Incentive Plan, 150,004 shares of Company Common Stock are
reserved for issuance pursuant to options previously granted pursuant to the
1992 Non-Employee Directors Stock Option Plan, 25,000 shares of Company Common
Stock are reserved for issuance pursuant to a Stock Option Agreement between the
Company and Peter Willmott and an aggregate of 200,000 shares of Company Common
Stock are reserved for issuance pursuant to individual Stock Option Agreements
between the Company and each of its current non-employee directors, (ii) no
shares of Preferred Stock are issued and outstanding, and (iii) no shares of
Preferred Stock are issued and held in the treasury of the Company. All the
outstanding shares of the Company's capital stock are, and all shares which may
be issued pursuant to the Option Plans will be, when issued in accordance with
the respective terms thereof, duly authorized, validly issued, fully paid and
non-assessable. Except as disclosed in Section 3.2(a) of the Company Disclosure
Schedule, there are no bonds, debentures, notes or other indebtedness having
voting rights (or convertible into securities having such rights) ("Voting
Debt") of the Company or any of its Subsidiaries issued and outstanding. Except
as disclosed in Section 3.2(a) of the Company Disclosure Schedule as of the date
hereof (and as of October 28, 1997 with respect to stock options), (i) there are
no shares of capital stock of the Company authorized, issued or outstanding and
(ii) there are no existing options, warrants, calls, pre-emptive rights,
subscriptions or other rights, convertible securities, agreements, arrangements
or commitments of any character, relating to the issued or unissued capital
stock of the Company or any of its Subsidiaries, obligating the Company or any
of its Subsidiaries to issue, transfer or sell or cause to be issued,
transferred or sold any shares of capital stock or Voting Debt of, or other
equity interest in, the Company or any of its Subsidiaries or securities
convertible into or exchangeable for such shares or equity interests or
obligations of the Company or any of its Subsidiaries to grant, extend or enter
into any such option, warrant, call, subscription or other right, convertible
security, agreement, arrangement or commitment. Except as disclosed in Section
3.2(a) of the Company Disclosure Schedule, there are no outstanding contractual
obligations of the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any Shares of the capital stock of the Company or any
subsidiary or affiliate of the Company or to provide funds to make any
investment (in the form of a loan, capital contribution or otherwise) in any
Subsidiary or any other entity. Except as permitted by this Agreement, following
the Merger, neither the Company nor any of its Subsidiaries will have any
obligation to issue, transfer or sell any shares of its capital stock pursuant
to any employee benefit plan or otherwise.
(b) Except as disclosed in Section 3.2(b) of the Company Disclosure
Schedule, all of the outstanding shares of capital stock of each of the
Subsidiaries are beneficially owned by the Company, directly or indirectly, and
all such shares have been validly issued and are fully paid and nonassessable
and are owned by either the Company or one of its Subsidiaries free and clear of
all liens, charges, security interests, options, claims or encumbrances of any
nature whatsoever.
(c) There are no voting trusts or other agreements or understandings to
which the Company or any of its Subsidiaries is a party with respect to the
voting of the capital stock of the Company or any of the Subsidiaries. None of
the Company or its Subsidiaries is required to redeem, repurchase or otherwise
acquire shares of capital stock of the Company, or any of its Subsidiaries,
respectively, as a result of the transactions contemplated by this Agreement.
There are no stockholder agreements, registration rights agreements or other
similar agreements to which the Company or any of its subsidiaries is a party.
A-6
<PAGE> 107
Section 3.3 Corporate Authorization; Validity of Agreement; Company
Action. (a) The Company has full corporate power and authority to execute and
deliver this Agreement, and, subject to obtaining any necessary approval of its
stockholders as contemplated by Section 1.6(a) hereof with respect to the
Merger, to consummate the transactions contemplated hereby. The execution,
delivery and performance by the Company of this Agreement, and the consummation
by it of the transactions contemplated hereby, have been duly and validly
authorized by its Board of Directors and, except for obtaining the approval of
its stockholders as contemplated by Section 1.6(a) hereof with respect to the
Merger, no other corporate action or proceedings on the part of the Company is
necessary to authorize the execution and delivery by the Company of this
Agreement and the consummation by it of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by the Company and, assuming
this Agreement constitutes a valid and binding obligation of Parent and Sub,
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except that (i) such enforcement may
be subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
(b) The Board of Directors of the Company has duly and validly approved and
taken all corporate action required to be taken by the Board of Directors for
the consummation of the transactions contemplated by this Agreement, including,
but not limited to, all actions necessary to render the provisions of Section
203 of the DGCL inapplicable to such transactions.
Section 3.4 Consents and Approvals; No Violations. Except as disclosed in
Section 3.4 of the Company Disclosure Schedule, and except for all filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Exchange Act, the DGCL, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and for the approval of this Agreement by the Company's stockholders and
the filing and recordation of the Certificate of Merger as required by the DGCL,
neither the execution, delivery or performance of this Agreement, nor the
consummation by the Company of the transactions contemplated hereby or thereby
nor compliance by the Company with any of the provisions hereof or thereof will
(i) conflict with or result in any breach of any provision of the Certificate of
Incorporation or By-laws or similar organizational documents of the Company or
of any of its Subsidiaries, (ii) require any filing with, or permit,
authorization, consent or approval of, any court, arbitral tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency (a "Governmental Entity"), except where the failure to
obtain such permits, authorizations, consents or approvals or to make such
filings would not have a material adverse effect on the Company and its
Subsidiaries and would not, or would not be reasonably likely to, materially
impair the ability of the Company to consummate the Merger or the other
transactions contemplated hereby or thereby, (iii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration) under, any of the terms, conditions or provisions of any material
credit agreement, credit facility, note, bond, mortgage, indenture, guarantee,
other evidence of indebtedness (collectively, the "Debt Instruments"), lease,
license, contract, agreement or other instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound (a "Company Agreement") or (iv) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
the Company, any of its Subsidiaries or any of their properties or assets,
except in the case of clause (iii) or (iv) for such violations, breaches or
defaults which would not, individually or in the aggregate, have a material
adverse effect on the Company and its Subsidiaries, and which would not, or
would not be reasonably likely to, materially impair the ability of the Company
to consummate the Merger or the other transactions contemplated hereby. Except
as disclosed in Section 3.4 of the Company Disclosure Schedule, neither the
Company nor any Subsidiary is a party to any agreement that expressly limits the
ability of the Company or any Subsidiary or affiliate to compete in or conduct
any line of business currently being conducted by the Company or compete with
any person or in any geographic area or during any period of time.
Section 3.5 SEC Reports and Financial Statements. The Company has filed
with the United States Securities and Exchange Commission (the "SEC"), and has
heretofore made available to Parent true and
A-7
<PAGE> 108
complete copies of, all forms, reports, schedules, statements and other
documents required to be filed by it and its Subsidiaries since December 31,
1994 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
or the Securities Act of 1933, as amended (the "Securities Act") (as such
documents have been amended since the time of their filing, collectively, the
"Company SEC Documents"). As of their respective dates or, if amended, as of the
date of the last such amendment, the Company SEC Documents, including, without
limitation, any financial statements or schedules included therein (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (b) complied as to form in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the case
may be, and the applicable rules and regulations of the SEC thereunder. Each of
the consolidated financial statements included in the Company SEC Documents have
been prepared from, and are in accordance with, the books and records of the
Company and/or its consolidated Subsidiaries, comply in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with United States generally accepted accounting principles ("GAAP") applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present in all material respects the consolidated
financial position and the consolidated results of operations and cash flows
(and changes in financial position, if any) of the Company and its consolidated
Subsidiaries as at the dates thereof or for the periods presented therein.
Section 3.6 Absence of Certain Changes. Except to the extent disclosed in
the Company SEC Documents filed prior to the date of this Agreement or as
otherwise disclosed to Parent in the Company Disclosure Schedules (including
Section 3.6 thereof), since February 2, 1997, (a) the Company and its
Subsidiaries have conducted their respective businesses and operations in the
ordinary course of business consistent with past practice, and (b) there has not
occurred (i) any events, changes, or effects (including the incurrence of any
liabilities of any nature, whether or not accrued, contingent or otherwise)
having or, which would be reasonably likely to have, individually or in the
aggregate, a material adverse effect on the Company and its Subsidiaries; (ii)
any declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the equity interests of the
Company or of any of its Subsidiaries, other than dividends paid by wholly owned
Subsidiaries; or (iii) any material change by the Company or any of its
Subsidiaries in accounting principles or methods, except insofar as may be
required by a change in GAAP. Except as set forth on Schedule 3.6 of the Company
Disclosure Schedule, since February 2, 1997, neither the Company nor any of its
Subsidiaries has taken any of the actions prohibited by Section 5.1 hereof,
except in the ordinary course of business consistent with past practice.
Section 3.7 No Undisclosed Liabilities. Except (a) to the extent disclosed
in the Company SEC Documents filed prior to the date of this Agreement, (b) for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice and (c) for matters disclosed in the Company
Disclosure Schedules (including Section 3.7 thereof), since February 2, 1997,
neither the Company nor any of its Subsidiaries have incurred any liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise
(including without limitation those relating, directly or indirectly, to the
Company's distribution facility), that have, or would be reasonably likely to
have, a material adverse effect on the Company and its Subsidiaries or would be
required to be reflected or reserved against on a consolidated balance sheet of
the Company and its Subsidiaries (including the notes thereto) prepared in
accordance with GAAP as applied in preparing the February 2, 1997 consolidated
balance sheet of the Company and its Subsidiaries. Section 3.4 of the Company
Disclosure Schedule sets forth each instrument evidencing indebtedness of the
Company and its Subsidiaries which will accelerate or become due or payable, or
result in a right of redemption or repurchase on the part of the holder of such
indebtedness, or with respect to which any other payment or amount will become
due or payable, in any such case with or without due notice or lapse of time, as
a result of this Agreement, the Merger or the other transactions contemplated
hereby.
Section 3.8 Information in Proxy Statement/Prospectus. The Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto), at the
date mailed to the Company's stockholders, on the date
A-8
<PAGE> 109
filed with the SEC and at the time of the Special Meetings, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, provided,
however, that no representation is made by the Company with respect to
statements made therein based on information supplied by Parent or Sub for
inclusion in the Proxy Statement/Prospectus. None of the information supplied by
the Company for inclusion or incorporation by reference in the Registration
Statement will, at the date it becomes effective and at the time of the Special
Meetings contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. Subject to the proviso set forth in the second preceding sentence,
the Proxy Statement/Prospectus will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
Section 3.9 Litigation. Except to the extent disclosed in the Company SEC
Documents filed prior to the date of this Agreement or in Section 3.9 of the
Company Disclosure Schedule, there is no suit, claim, action, proceeding or, to
the best knowledge of the Company, investigation pending or threatened against
or affecting, the Company or any of its Subsidiaries which, individually or in
the aggregate, is reasonably likely to have a material adverse effect on the
Company and its Subsidiaries, or would, or would be reasonably likely to,
materially impair the ability of the Company to consummate the Merger or the
other transactions contemplated hereby.
Section 3.10 No Default. The business of the Company and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of its respective Certificate of Incorporation or By-laws
or similar organizational documents. To the best knowledge of the Company, no
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending or threatened, nor has any Governmental
Entity indicated an intention to conduct the same, except such investigations or
reviews that, individually or in the aggregate, would not have a material
adverse effect on the Company and its Subsidiaries or would not, or would not be
reasonably likely to, materially impair the ability of the Company to consummate
the Merger or the other transactions contemplated hereby.
Section 3.11 Taxes. (a) Except as set forth in Section 3.11(a) of the
Company Disclosure Schedule, the Company and each of its Subsidiaries, and any
consolidated, combined, unitary or aggregate group for Tax purposes of which the
Company or any of its Subsidiaries is or has been a member has timely filed all
Tax Returns required to be filed by it (other than those that are not,
individually or in the aggregate, material), has paid all Taxes shown thereon to
be due and has provided adequate accruals in all material respects in accordance
with GAAP in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. In addition, (i) no
material claim for unpaid Taxes has become a lien against the property of the
Company or any of its Subsidiaries or is being asserted against the Company or
any of its Subsidiaries, (ii) no audit of any Tax Return of the Company or any
of its Subsidiaries is being conducted by a taxing authority that has had or
could reasonably be expected to have, a material adverse effect on the Company
and its Subsidiaries taken as a whole, (iii) no extension of the statute of
limitations on the assessment of any Taxes has been granted by the Company or
any of its Subsidiaries and is currently in effect that has had or could
reasonably be expected to have, a material adverse effect on the Company and its
Subsidiaries taken as a whole.
(b) As of the date of this Agreement, except as set forth in Section
3.11(b) of the Company Disclosure Schedule:
(i) there are no material liens for Taxes upon any property or assets
of the Company or any Subsidiary thereof, except for liens for Taxes not
yet due and payable and liens for Taxes that are being contested in good
faith by appropriate proceedings;
(ii) neither the Company nor any of its Subsidiaries has agreed to or
is required to make any adjustment under Section 481(a) of the Code;
A-9
<PAGE> 110
(iii) the federal income Tax Returns of the Company and its
Subsidiaries have been examined by the Service (or the applicable statutes
of limitation for the assessment of federal income Taxes for such periods
have expired) for all periods as set forth in Section 3.11(b) of the
Company Disclosure Schedule;
(iv) neither the Company nor any of its Subsidiaries is a party to any
material agreement providing for the allocation or sharing of Taxes; and
(v) neither the Company nor any of its Subsidiaries has, with regard
to any assets or property held or acquired by any of them, filed a consent
to the application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by the
Company or any of its Subsidiaries.
(c) "Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, income, gross receipts or gross
income, excise, premium, custom, duty, real or personal property, ad valorem,
value added, sales, withholding, social security, retirement, employment,
unemployment, occupation, use, service, service use, profits, license, net
worth, payroll, capital stock, franchise, stamp, transfer and recording taxes,
alternative or add-on minimum taxes fees and charges, imposed by the Service or
any taxing authority (whether domestic or foreign including, without limitation,
any state, county, local or foreign government or any subdivision or taxing
agency thereof (including a United States possession)), whether computed on a
separate, consolidated, unitary, combined or any other basis; and such term
shall include liability for payment of any amounts as a result of being a party
to any tax sharing agreement or as a result of any express or implied obligation
to indemnify any other person with respect to the payment of any amounts of the
type described in this section (c), any interest whether paid or received,
fines, penalties (including penalties for failures in connection with
information returns including, partnership information returns and escheat
returns) or additional amounts attributable to, or imposed upon, or with respect
to, any such taxes, charges, fees, levies or other assessments. "Tax Return"
shall mean any report, return, document, declaration or other information or
filing required to be supplied to any taxing authority or jurisdiction (foreign
or domestic) with respect to Taxes, including, without limitation, information
returns, any documents with respect to or accompanying payments of estimated
Taxes, or with respect to or accompanying requests for the extension of time in
which to file any such report, return, document, declaration or other
information.
Section 3.12 Assets; Real Property. The assets, properties, rights and
contracts, including, without limitation (as applicable), title or leaseholds
thereto, of the Company and its Subsidiaries, taken as a whole, are sufficient
to permit the Company and its Subsidiaries to conduct their business as
currently being conducted. All real property owned by the Company and its
Subsidiaries (the "Real Property") is owned free and clear of all liens,
charges, security interests, options, claims, mortgages, pledges, easements,
rights-of-way or other encumbrances and restrictions of any nature whatsoever,
except those which do not materially impair the ability of the Company, taken as
a whole, to conduct its business as now being conducted.
Section 3.13 Environmental Matters. Except as disclosed in Section 3.13 of
the Company Disclosure Schedule, as of the date of this Agreement, the Company
is in compliance in all material respects with all applicable Environmental Laws
and there are no Environmental Liabilities and Costs of the Company and its
Subsidiaries that would have or are reasonably likely to have a material adverse
effect on the Company and its Subsidiaries which have not been fully reserved
against in the Company's consolidated financial statements.
For purposes of this Section 3.13, the following definitions shall apply:
"Environmental Laws" means all applicable foreign, federal, state and local
laws, common law, regulations, rules and ordinances relating to pollution or
protection of the environment.
"Environmental Liabilities and Costs" means all liabilities, obligations,
responsibilities, obligations to conduct cleanup, losses, damages, deficiencies,
punitive damages, consequential damages, treble damages, costs and expenses
(including, without limitation, all reasonable fees, disbursements and expenses
of counsel, expert and consulting fees and costs of investigations and
feasibility studies and responding to government requests for information or
documents), fines, penalties, restitution and monetary sanctions, interest,
direct or indirect, known or unknown, absolute or contingent, past, present or
future, resulting from any claim or
A-10
<PAGE> 111
demand, by any person or entity, whether based in contract, tort, implied or
express warranty, strict liability, joint and several liability, criminal or
civil statute, under any Environmental Law, or arising from environmental
conditions, as a result of past or present ownership, leasing or operation of
any properties, owned, leased or operated by the Company or any of its
Subsidiaries.
Section 3.14 Insurance. As of the date hereof, the Company and each of its
Subsidiaries are insured by insurers against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged. All
policies of insurance and fidelity or surety bonds are in full force and effect.
Descriptions of these plans and related liability coverage have been previously
provided to Parent. Section 3.14 of the Company Disclosure Schedule contains a
listing of all open workers compensation and general liability claims as of a
recent date. These claims, individually or in the aggregate, would not have a
material adverse effect on the Company and its Subsidiaries, taken as a whole.
To the best knowledge of the Company, all necessary notifications of claims have
been made to insurance carriers.
Section 3.15 Transactions With Affiliates. Except to the extent disclosed
in the Company SEC Documents filed prior to the date of this Agreement or in
Section 3.15 of the Company Disclosure Schedule, from December 31, 1994 through
the date of this Agreement there have been no transactions, agreements,
arrangements or understandings between the Company or its Subsidiaries, on the
one hand, and the Company's affiliates (other than wholly-owned Subsidiaries of
the Company) or other persons, on the other hand, that would be required to be
disclosed under Item 404 of Regulation S-K under the Securities Act.
Section 3.16 Compliance With Law. The Company and its Subsidiaries have
complied in all material respects with all laws, statutes, regulations, rules,
ordinances, and judgments, decrees, orders, writs and injunctions, of any court
or governmental entity relating to any of the property owned, leased or used by
them and applicable to them, or applicable to their business, including, but not
limited to, equal employment opportunity, discrimination, occupational safety
and health, interstate commerce, antitrust laws, ERISA and laws relating to
Taxes (as defined in Section 3.11). The Company, with respect to each store
location, has all permits and licenses necessary to carry on the business being
conducted at each store location, except for such permits and licenses the
failure of which to obtain would not have a material adverse effect on the
Company and its Subsidiaries, taken as a whole.
Section 3.17 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote are
the only votes of the holders of any class or series of the Company's capital
stock necessary to approve the Merger.
Section 3.18 Financial Advisors. (a) Except for Batchelder & Partners,
Inc. ("Batchelder & Partners") and Montgomery Securities, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company, and
the fees and commissions payable to Batchelder & Partners and Montgomery
Securities as contemplated by this Section will be payable by the Company.
(b) The Company has received an opinion from Montgomery Securities, dated
as of a date which is on or prior to the date of this Agreement to the effect
that, as of such date, the Exchange Rate is fair from a financial point of view
to the stockholders of the Company.
Section 3.19 Supplemental Executive Retirement Plan. The Company and its
Subsidiaries have no financial liabilities of any kind or nature in excess of
$500,000 related to the Supplemental Executive Retirement Plan dated January 1,
1995.
A-11
<PAGE> 112
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
Section 4.1 Organization. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate or other power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority and
governmental approvals would not have a material adverse effect on Parent and
its Subsidiaries taken as a whole. Parent and each of its Subsidiaries is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure to be so duly qualified or licensed and in good standing would
not have a material adverse effect on Parent and its Subsidiaries taken as a
whole.
Section 4.2 Capitalization. (a) The authorized capital stock of Parent
consists of 290,000,000 shares of Parent Common Stock (b) 8,000,000 shares of
non-voting common stock, par value $.01 per share (the "Parent Non-Voting Common
Stock") and (c) 2,000,000 shares of preferred stock, par value $.01 per share
(the "Parent Preferred Stock"), of which 600,000 shares have been designated as
Series A Junior Participating Preferred Stock. As of October 31, 1997, (i)
84,359,968 shares of Parent Common Stock are issued and outstanding, (ii) no
shares of Parent Non-Voting Common Stock are issued and outstanding; (iii) no
shares of Parent Preferred Stock are issued and outstanding, (iv) no shares of
Parent Common Stock are issued and held in the treasury of Parent, and (v)
5,394,321 shares of Parent Common Stock are reserved for issuance under Parent's
1996 Performance Incentive Plan (of which, 3,406,445 are reserved for issuance
pursuant to options already granted), 5,804,411 are reserved for issuance under
Parent's Executive Stock Option and Stock Appreciation Rights Plan and 712,495
shares of Parent Common Stock are reserved for issuance under the Director Stock
Option Plan (of which 285,016 are reserved for issuance pursuant to options
already granted). All of the outstanding shares of Parent's capital stock are,
and all shares which may be issued pursuant to the exercise of outstanding
options or pursuant to the Parent Plan will be, when issued in accordance with
the respective terms thereof, duly authorized, validly issued, fully paid and
non-assessable. Except as set forth in Section 4.2 of the Disclosure Schedule
delivered by Parent to the Company on or prior to the date hereof (the "Parent
Disclosure Schedule"), there are no bonds, debentures, notes or other
indebtedness having voting rights (or convertible into securities having such
rights) ("Parent Voting Debt") of Parent or any of its Subsidiaries issued and
outstanding. Except as set forth above, and except as set forth in Section 4.2
of the Parent Disclosure Schedule and except for transactions contemplated by
this Agreement, as of the date hereof, (i) there are no shares of capital stock
of Parent authorized, issued or outstanding and (ii) there are no existing
options, warrants, calls, pre-emptive rights, subscriptions or other rights,
convertible securities, agreements, arrangements or commitments of any
character, relating to the issued or unissued capital stock of Parent or any of
its Subsidiaries, obligating Parent or any of its Subsidiaries to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Parent Voting Debt of, or other equity interest in, Parent or
any of its Subsidiaries or securities convertible into or exchangeable for such
shares or equity interests or obligations of Parent or any of its Subsidiaries
to grant, extend or enter into any such option, warrant, call, subscription or
other right, convertible security, agreement, arrangement or commitment. There
are no outstanding contractual obligations of Parent or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of Parent Common Stock or
the capital stock of Parent or any subsidiary or affiliate of Parent or to
provide funds to make any investment (in the form of a loan, capital
contribution or otherwise) in any Subsidiary or any other entity.
(b) There are no voting trusts or other agreements or understandings to
which Parent or any of its Subsidiaries is a party with respect to the voting of
the capital stock of Parent or its Subsidiaries. None of Parent or its
Subsidiaries is required to redeem, repurchase or otherwise acquire shares of
capital stock of Parent, or any of its Subsidiaries, respectively, as a result
of the transactions contemplated by this Agreement.
A-12
<PAGE> 113
Section 4.3 Corporate Authorization; Validity of Agreement; Necessary
Action. Each of Parent and Sub has full corporate power and authority to
execute and deliver this Agreement, and, subject to obtaining any necessary
approval of Parent's stockholders as contemplated by Section 1.6(b) hereof with
respect to the Merger, to consummate the transactions contemplated hereby. The
execution, delivery and performance by Parent and Sub of this Agreement and the
consummation by Parent and Sub of the transactions contemplated hereby have been
duly and validly authorized by their respective Boards of Directors and by Sub's
sole stockholder and, except in the case of obtaining any necessary approval of
Parent's stockholders as contemplated by Section 1.6(b) hereof, no other
corporate action or proceedings on the part of Parent and Sub are necessary to
authorize the execution and delivery by Parent and Sub of this Agreement and the
consummation by Parent and Sub of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Parent and Sub, and, assuming
this Agreement constitutes valid and binding obligations of the Company,
constitutes valid and binding obligations of each of Parent and Sub, enforceable
against them in accordance with its terms, except that (i) such enforcement may
be subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought. The shares of Parent Common Stock issued
pursuant to the Merger will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights.
Section 4.4 Consents and Approvals; No Violations. Except as disclosed in
Schedule 4.4 of Parent's Disclosure Schedule, and except for filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Exchange Act, the Securities Act, the DGCL, the
HSR Act, state blue sky laws and any applicable state takeover laws and the
approval by Parent's stockholders of the issuance of Parent Common Stock in the
Merger, neither the execution, delivery or performance of this Agreement by
Parent and Sub nor the consummation by Parent and Sub of the transactions
contemplated hereby nor compliance by Parent and Sub with any of the provisions
hereof will (i) conflict with or result in any breach of any provision of the
amended and restated certificate of incorporation or by-laws of Parent and Sub,
(ii) require any filing with, or permit, authorization, consent or approval of,
any Governmental Entity (except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings would not have a
material adverse effect on Parent and its Subsidiaries or would not, or would
not be reasonably likely to, materially impair the ability of Parent and Sub to
consummate, the Merger or the other transactions contemplated hereby), (iii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration) under, any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, guarantee, other
evidence of indebtedness, lease, license, contract, agreement or other
instrument or obligation to which Parent or any of its Subsidiaries is a party
or by which any of them or any of their properties or assets may be bound or
(iv) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to Parent, any of its Subsidiaries or any of their properties or
assets, except in the case of clauses (iii) and (iv) for violations, breaches or
defaults which would not have a material adverse effect on Parent and its
Subsidiaries or would not, or would not be reasonably likely to, materially
impair the ability of Parent or Sub to consummate, the Merger or the other
transactions contemplated hereby. Except as disclosed in Section 4.4 of the
Parent Disclosure Schedule, neither Parent nor Sub is a party to any agreement
that expressly limits the ability of Parent or Sub to compete in or conduct any
line of business or compete with any person or in any geographic area or during
any period of time.
Section 4.5 SEC Reports and Financial Statements. Parent has filed with
the SEC, and has heretofore made available to the Company, true and complete
copies of, all forms, reports, schedules, statements and other documents
required to be filed by it and its Subsidiaries since December 31, 1994 under
the Exchange Act or the Securities Act (as such documents have been amended
since the time of their filing, collectively, the "Parent SEC Documents"). As of
their respective dates or, if amended, as of the date of the last such
amendment, the Parent SEC Documents, including, without limitation, any
financial statements or schedules included therein (a) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances
A-13
<PAGE> 114
under which they were made, not misleading and (b) complied as to form in all
material respects with the applicable requirements of the Exchange Act and the
Securities Act, as the case may be, and the applicable rules and regulations of
the SEC thereunder. Each of the consolidated financial statements included in
the Parent SEC Documents have been prepared from, and are in accordance with,
the books and records of Parent and/or its consolidated Subsidiaries, comply in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present in all material respects the consolidated financial position and the
consolidated results of operations and cash flows (and changes in financial
position, if any) of Parent and its consolidated Subsidiaries as at the dates
thereof or for the periods presented therein.
Section 4.6 Absence of Certain Changes. Except to the extent disclosed in
the Parent SEC Documents filed prior to the date of this Agreement, since
February 1, 1997, (a) Parent and its Subsidiaries have conducted their
respective businesses in the ordinary course of business consistent with past
practice, and (b) there has not occurred (i) any events, changes, or effects
(including the incurrence of any liabilities of any nature, whether or not
accrued, contingent or otherwise) having or, which would be reasonably likely to
have, individually or in the aggregate, a material adverse effect on Parent and
its Subsidiaries; (ii) any declaration, setting aside or payment of any dividend
or other distribution (whether in cash, stock or property) with respect to the
equity interests of Parent or of any of its Subsidiaries other than regular
quarterly cash dividends or dividends paid by wholly owned Subsidiaries; or
(iii) any change by Parent or any of its Subsidiaries in accounting principles
or methods, except insofar as may be required by a change in GAAP. Since
February 1, 1997, Parent has not taken any of the actions prohibited by Section
5.2 hereof.
Section 4.7 No Undisclosed Liabilities. Except (a) to the extent disclosed
in the Parent SEC Documents filed prior to the date of this Agreement, (b) for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice and (c) for matters listed on Section 4.7 of the
Parent Disclosure Schedule, since February 1, 1997, neither Parent nor any of
its Subsidiaries have incurred any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, that have, or would be
reasonably likely to have, a material adverse effect on Parent and its
Subsidiaries or would be required to be reflected or reserved against on a
consolidated balance sheet of Parent and its Subsidiaries (including the notes
thereto) prepared in accordance with GAAP as applied in preparing the February
1, 1997 consolidated balance sheet of Parent and its Subsidiaries. Section 4.7
of the Parent Disclosure Schedule sets forth each instrument evidencing
indebtedness of Parent which will accelerate or become due or payable, or result
in a right of redemption or repurchase on the part of the holder of such
indebtedness, or with respect to which any other payment or amount will become
due or payable, in any such case with or without due notice or lapse of time, as
a result of this Agreement, the Merger or the other transactions contemplated
hereby.
Section 4.8 Information in Proxy Statement/Prospectus. The Registration
Statement (or any amendment thereof or supplement thereto), at the date it is
filed with the SEC and as of the date it becomes effective and the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) at the
date mailed to Parent's stockholders and at the time of the Special Meetings,
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, provided, however, that no representation is made by Parent or Sub
with respect to statements made therein based on information supplied by the
Company for inclusion in the Registration Statement. None of the information
supplied by Parent or Sub for inclusion or incorporation by reference in the
Proxy Statement/Prospectus will, at the date mailed to stockholders and at the
time of the Special Meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. Subject to the proviso set forth in the second
preceding sentence, the Registration Statement will comply in all material
respects with the provisions of the Securities Act and Exchange Act,
respectively, and the rules and regulations thereunder.
A-14
<PAGE> 115
Section 4.9 Litigation. Except to the extent disclosed in the Parent SEC
Documents filed prior to the date of this Agreement, as of the date of this
Agreement, there is no suit, claim, action, proceeding or investigation pending
or, to the best knowledge of Parent, threatened against or affecting, Parent or
any of its Subsidiaries, which, individually or in the aggregate, is reasonably
likely to have a material adverse effect on Parent and its Subsidiaries or
would, or would be reasonably likely to, materially impair the ability of Parent
or Sub to consummate the Merger or the other transactions contemplated hereby.
Section 4.10 No Default. The business of Parent and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of its respective Certificate of Incorporation or By-laws
or similar organizational documents. To the best knowledge of Parent of Sub and
except as set forth in Section 4.10 of the Parent Disclosure Schedule, no
investigation or review by any Governmental Entity with respect to Parent or any
of its Subsidiaries is pending or threatened, nor has any Governmental Entity
indicated an intention to conduct the same, except such investigations or
reviews that, individually or in the aggregate, would not have a material
adverse effect on Parent and its Subsidiaries or would not, or would not be
reasonably likely to, materially impair the ability of Parent or Sub to
consummate the Merger or other transactions contemplated hereby.
Section 4.11 Taxes. (a) Except as set forth in Section 4.11 of the Parent
Disclosure Schedule, Parent and each of its Subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which the Company or
any of its Subsidiaries is or has been a member has timely filed all Tax Returns
required to be filed by it (other than those that are not, individually or in
the aggregate, material), has paid all Taxes shown thereon to be due and has
provided adequate accruals in all material respects in accordance with GAAP in
its financial statements for any Taxes that have not been paid, whether or not
shown as being due on any Tax Returns. In addition, (i) no material claim for
unpaid Taxes has become a lien against the property of Parent or any of its
Subsidiaries or is being asserted against Parent or any of its Subsidiaries,
(ii) no audit of any Tax Return of Parent or any of its Subsidiaries is being
conducted by a taxing authority that has had or could not reasonably be expected
to have, a material adverse effect on the Company and its Subsidiaries taken as
a whole, (iii) no extension of the statute of limitations on the assessment of
any Taxes has been granted by Parent or any of its Subsidiaries and is currently
in effect that has had or could reasonably be expected to have, a material
adverse effect on Parent and its Subsidiaries taken as a whole.
(b) As of the date of this Agreement, except as set forth in Section 4.11
of the Parent Disclosure Schedule:
(i) there are no material liens for Taxes upon any property or assets
of Parent or any Subsidiary thereof, except for liens for Taxes not yet due
and payable and liens for Taxes that are being contested in good faith by
appropriate proceedings;
(ii) neither Parent nor any of its Subsidiaries has agreed to or is
required to make any adjustment under Section 481(a) of the Code;
(iii) the federal income Tax Returns of Parent and its Subsidiaries
have been examined by the Service (or the applicable statutes of limitation
for the assessment of federal income Taxes for such periods have expired)
for all periods through and including January 29, 1994;
(iv) neither Parent nor any of its Subsidiaries is a party to any
material agreement providing for the allocation or sharing of Taxes; and
(v) neither Parent nor any of its Subsidiaries has, with regard to any
assets or property held or acquired by any of them, filed a consent to the
application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by Parent
or any of its Subsidiaries.
Section 4.12 Environmental Matters. Except as disclosed in Section 4.12 of
the Parent Disclosure Schedule, as of the date of this Agreement, Parent is in
compliance in all material respects with all applicable Environmental Laws and
there are no Environmental Liabilities and Costs of Parent and its Subsidiaries
that
A-15
<PAGE> 116
would have or are reasonably likely to have a material adverse effect on Parent
and its Subsidiaries which have not been fully reserved against in the Parent's
consolidated financial statements.
For purposes of this Section 4.12, the following definitions shall apply:
"Environmental Laws" means all applicable foreign, federal, state and
local laws, common law, regulations, rules and ordinances relating to
pollution or protection of the environment.
"Environmental Liabilities and Costs" means all liabilities,
obligations, responsibilities, obligations to conduct cleanup, losses,
damages, deficiencies, punitive damages, consequential damages, treble
damages, costs and expenses (including, without limitation, all reasonable
fees, disbursements and expenses of counsel, expert and consulting fees and
costs of investigations and feasibility studies and responding to
government requests for information or documents), fines, penalties,
restitution and monetary sanctions, interest, direct or indirect, known or
unknown, absolute or contingent, past, present or future, resulting from
any claim or demand, by any person or entity, whether based in contract,
tort, implied or express warranty, strict liability, joint and several
liability, criminal or civil statute, under any Environmental Law, or
arising from environmental conditions, as a result of past or present
ownership, leasing or operation of any properties, owned, leased or
operated by the Company or any of its Subsidiaries.
Section 4.13 Insurance. As of the date hereof, Parent and each of its
Subsidiaries are insured by insurers against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged. All
policies of insurance and fidelity or surety bonds are in full force and effect.
Descriptions of these plans and related liability coverage have been previously
provided to the Company.
Section 4.14 Transactions With Affiliates. Except to the extent disclosed
in Parent SEC Documents filed prior to the date of this Agreement, from December
31, 1994 through the date of this Agreement there have been no transactions,
agreements, arrangements or understandings between Parent or its Subsidiaries,
on the one hand, and Parent's affiliates (other than wholly-owned Subsidiaries
of Parent) or other persons, on the other hand, that would be required to be
disclosed under Item 404 of Regulation S-K under the Securities Act.
Section 4.15 Compliance With Law. Parent and its Subsidiaries have
complied in all material respects with all laws, statutes, regulations, rules,
ordinances, and judgments, decrees, orders, writs and injunctions, of any court
or governmental entity relating to any of the property owned, leased or used by
them, or applicable to their business, including, but not limited to, equal
employment opportunity, discrimination, occupational safety and health,
interstate commerce, antitrust laws, ERISA and laws relating to Taxes.
Section 4.16 Vote Required. The affirmative vote of the holders of (a) a
majority of the shares of Parent Common Stock voting at the Parent Special
Meeting are the only votes of the holders of any class or series of Parent's
capital stock necessary to approve the issuance of Parent Common Stock; and (b)
a majority of the outstanding shares of Parent Common Stock entitled to vote at
the Parent Special Meeting are the only votes of the holders of any class or
series of Parent's Capital Stock necessary to approve the authorization of
Parent Preferred Stock.
Section 4.17 Financial Advisor. (a) Except for Merrill Lynch & Co.
("Merrill Lynch"), no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Parent or Merger Sub, and the fees and commissions payable to
Merrill Lynch as contemplated by this Section will be payable by Parent.
(b) Parent has received an opinion from Merrill Lynch, dated as of a date
which is on or prior to the date of this Agreement to the effect that, as of
such date, the Exchange Rate is fair from a financial point of view to Parent.
A-16
<PAGE> 117
ARTICLE V
COVENANTS
Section 5.1 Interim Operations of The Company. The Company covenants and
agrees that, without the prior consent of Parent, which consent shall not be
unreasonably withheld, (i) except as expressly provided in this Agreement, and
(ii) during the period prior to the Effective Time:
(a) the business of the Company and its Subsidiaries shall be
conducted only in the ordinary course of business consistent with past
practice and, to the extent consistent therewith, each of the Company and
its Subsidiaries shall use its best efforts to preserve its business
organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners;
(b) the Company will not, directly or indirectly, split, combine or
reclassify the outstanding Company Common Stock, or any outstanding capital
stock of any of the Subsidiaries of the Company;
(c) neither the Company nor any of its Subsidiaries shall: (i) amend
its Certificate of Incorporation or By-laws or similar organizational
documents; (ii) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with respect to its capital
stock other than dividends paid by the Company's Subsidiaries to the
Company or its Subsidiaries; (iii) issue, sell, transfer, pledge, dispose
of or encumber any additional shares of, or securities convertible into or
exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of capital stock of any class of the Company or
its Subsidiaries, other than issuances pursuant to exercise of stock-based
awards or options outstanding on the date hereof as disclosed in Section
3.2 or in Section 5.1(c) of the Company Disclosure Schedule; (iv) transfer,
lease, license, sell, mortgage, pledge, dispose of, or encumber any
material assets other than in the ordinary course of business consistent
with past practice; or (v) redeem, purchase or otherwise acquire directly
or indirectly any of its capital stock;
(d) except as disclosed in Section 5.1(d) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries shall: (i) except
as otherwise provided in this Agreement and except for normal, regularly
scheduled increases for non-officer employees consistent with past practice
or pursuant to the terms of existing collective bargaining agreements,
grant any increase in the compensation payable or to become payable by the
Company or any of its Subsidiaries to any officer or employee (including
through any new award made under, or the exercise of any discretion under,
any Benefit Plan); (ii) adopt any new, or amend or otherwise increase, or
accelerate the payment or vesting of the amounts payable or to become
payable under any existing, bonus, incentive compensation, deferred
compensation, severance, profit sharing, stock option, stock purchase,
insurance, pension, retirement, savings or other employee benefit plan,
agreement or arrangement; (iii) enter into any, or amend any existing,
employment or severance agreement with or, grant any severance or
termination pay to, any officer, director, employee or consultant of the
Company or any of its Subsidiaries; or (iv) make any additional
contributions to any grantor trust created by the Company to provide
funding for non-tax-qualified employee benefits or compensation; or (v)
provide any severance program to any Subsidiary which does not have a
severance program as of the date of this Agreement;
(e) neither the Company nor any of its Subsidiaries shall modify,
amend or terminate any of the Company Agreements or waive, release or
assign any material rights or claims, except in the ordinary course of
business consistent with past practice;
(f) neither the Company nor any of its Subsidiaries shall permit any
material insurance policy naming it as a beneficiary or a loss payable
payee to be canceled or terminated without notice to Parent, except in the
ordinary course of business consistent with past practice;
(g) except as set forth in Section 5.1(g) of the Company Disclosure
Schedule, including, without limitation, the opening and equipping of the
five proposed store locations set forth therein, neither the Company nor
any of its Subsidiaries shall: (i) incur or assume any debt except for
borrowings under existing credit facilities in the ordinary course
consistent with past practice; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the
A-17
<PAGE> 118
obligations of any other person, except in the ordinary course of business
consistent with past practice; (iii) make any loans, advances or capital
contributions to, or investments in, any other person (other than to wholly
owned Subsidiaries of the Company or customary loans or advances to
employees in accordance with past practice); (iv) enter into any purchase
order other than in the ordinary course of business consistent with past
practice; or (v) enter into any other material commitment (including, but
not limited to, any leases, capital expenditure or purchase of assets)
other than in the ordinary course of business consistent with past
practice;
(h) neither the Company nor any of its Subsidiaries shall change any
of the accounting principles used by it unless required by GAAP;
(i) neither the Company nor any of its Subsidiaries shall pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction of any such claims, liabilities or
obligations, (x) reflected or reserved against in the consolidated
financial statements (or the notes thereto) of the Company and its
consolidated Subsidiaries, (y) incurred in the ordinary course of business
consistent with past practice or (z) which are legally required to be paid,
discharged or satisfied;
(j) neither the Company nor any of its Subsidiaries will adopt a plan
of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other material reorganization of the
Company or any of its Subsidiaries other than the Merger or in accordance
with Section 5.7;
(k) neither the Company nor any of its Subsidiaries will take, or
agree to commit to take, any action that would make any representation or
warranty of the Company contained herein inaccurate in any respect at, or
as of any time prior to, the Effective Time;
(l) neither the Company nor any of its Subsidiaries will engage in
any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of the Company's
affiliates, including, without limitation, any transactions, agreements,
arrangements or understandings with any affiliate or other person covered
under Item 404 of Regulation S-K under the Securities Act that would be
required to be disclosed under such Item 404, other than pursuant to such
agreements, arrangements, or understandings existing on the date of this
Agreement (which are set forth on Section 3.15 of the Company Disclosure
Schedule);
(m) close, shut down, or otherwise eliminate any of the Company's
stores other than in the ordinary course of business consistent with past
practice;
(n) change the name of or exterior signage (except ordinary course
maintenance) at any of the Company's stores;
(o) close, shut down, or otherwise eliminate any of the Company's
distribution centers;
(p) move the location, close, shut down or otherwise eliminate the
Company's headquarters, or effect a general staff reduction at such
headquarters;
(q) change or modify in any material respect the Company's existing
advertising programs and policies in the ordinary course of business
consistent with past practice;
(r) except as set forth in Section 5.1(g) or Section 5.1(r) of the
Company Disclosure Schedule, enter into any new lease (other than renewals
of existing leases after consultation with Parent) or purchase or acquire
or enter into any agreement to purchase or acquire any real estate;
(s) neither the Company nor any of its Subsidiaries will incur any
liabilities or obligations of any nature, whether or not accrued,
contingent or otherwise, that have, or would be reasonably likely to have,
a material adverse effect on the Company and its Subsidiaries;
(t) neither the Company nor any of its Subsidiaries will take, or
cause, any act or omission that would prevent the Merger from (i)
qualifying as a tax-free plan of reorganization within the meaning of
A-18
<PAGE> 119
Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code, or (ii) being
accounted for as a pooling of interests; and
(u) neither the Company nor any of its Subsidiaries will enter into
an agreement, contract, commitment or arrangement to do any of the
foregoing, or to authorize, recommend, propose or announce an intention to
do any of the foregoing.
Section 5.2 Interim Operations of Parent. Parent covenants and agrees
that, (i) except as expressly provided in this Agreement, and (ii) during the
period prior to the Effective Time:
(a) the business of Parent shall be conducted only in the ordinary
course of business consistent with past practice and, to the extent
consistent therewith, Parent shall use its best efforts to preserve its
business organization and maintain its existing relations with customers,
suppliers, employees, creditors and business partners;
(b) Parent will not, directly or indirectly, split, combine or
otherwise reclassify the outstanding Parent Common Stock;
(c) Parent shall not amend its Certificate of Incorporation or
By-laws, except as contemplated by the Agreement; (ii) declare, set aside
or pay any dividend or other distribution payable in cash, stock or
property with respect to its capital stock other than dividends paid by
Parent's Subsidiaries to Parent or its Subsidiaries; or (iii) issue, sell,
transfer, pledge, dispose of or encumber any additional shares of, or
securities convertible into or exchangeable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of capital
stock of any class of Parent, other than issuances pursuant to the grant or
exercise of stock-based awards or options;
(d) Parent will not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other material reorganization of Parent other than the Merger or except in
accordance with Section 5.7;
(e) neither Parent nor Sub will take, or cause, any act or omission
that would prevent the Merger from (i) qualifying as a tax-free plan of
reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Code, or (ii) being accounted for as a pooling of
interests;
(f) neither Parent nor Sub will take, or agree to commit to take, any
action that would make any representation or warranty of the Parent or Sub
contained herein inaccurate in any respect at, or as of any time prior to,
the Effective Time; and
(g) Parent will not enter into an agreement, contract, commitment or
arrangement to do any of the foregoing, or to authorize, recommend, propose
or announce an intention to do any of the foregoing.
Section 5.3 Treatment of Certain Indebtedness. Effective as of the
Effective Time, Parent, in its sole discretion, shall cause the Surviving
Corporation to retire (including all fees, penalties or related costs in
connection with any such retirement), or to continue performance of, all
existing obligations of the Company or any of its Subsidiaries under any of the
Debt Instruments (as defined in Section 3.4). All of the Debt Instruments are
set forth in Section 3.4 of the Company Disclosure Schedule. The Company and
each of its Subsidiaries will cooperate with Parent, and take such further
actions as shall be necessary, to effect the provisions of this Section 5.3.
Section 5.4 Access to Information. (a) To the extent permitted by
applicable law, the Company shall (and shall cause each of its Subsidiaries to)
afford to the officers, employees, accountants, counsel, financing sources and
other representatives of Parent, access during normal business hours and upon
48-hour prior notice from Parent to the Company, which will not unreasonably
interfere with the Company's normal business operations, during the period prior
to the Effective Time, to all of its and its Subsidiaries' properties, books,
contracts, commitments, records (including any Tax Returns or other Tax related
information pertaining to the Company and its Subsidiaries) and employees and,
during such period, the Company shall (and shall cause each of its Subsidiaries
to) furnish promptly to Parent (i) a copy of each report, schedule,
A-19
<PAGE> 120
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws and (ii) all
other information concerning its business, properties and personnel as Parent
may reasonably request (including any Tax Returns or other Tax related
information pertaining to the Company and its Subsidiaries). Parent will hold
any such information which is nonpublic in confidence.
(b) To the extent permitted by applicable law, Parent shall (and shall
cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel, financing sources and other representatives of the
Company, access during normal business hours and upon 48-hour prior notice from
the Company to Parent, which will not unreasonably interfere with Parent's
normal business operations, during the period prior to the Effective Time, to
all of its and its Subsidiaries' properties, books, contracts, commitments,
records (including any Tax Returns or other Tax related information pertaining
to Parent and its Subsidiaries) and employees and, during such period, Parent
shall (and shall cause each of its Subsidiaries to) furnish promptly to the
Company (i) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of the federal securities laws and (ii) all other information as the Company may
reasonably request (including any Tax Returns or other Tax related information
pertaining to Parent and its Subsidiaries). The Company will hold any such
information which is nonpublic in confidence.
Section 5.5 Consents and Approvals. (a) The Company and Parent shall take
all reasonable actions necessary to file as soon as practicable notifications
under the HSR Act and to respond as promptly as practicable to any inquiries
received from the Federal Trade Commission and the Anti-trust Division of the
Department of Justice for additional information or documentation and to respond
as promptly as practicable to all inquiries and requests received from any State
Attorney General or other Governmental Entity in connection with antitrust
matters.
(b) Parent and the Company shall, and each shall cause each of its
Subsidiaries to, subject to the preceding subsection, (i) cooperate with one
another to prepare, as soon as practicable, all filings and other presentations
in connection with seeking any regulatory approval from a Governmental Entity,
exemption or other authorization necessary to consummate the transactions
contemplated by this Agreement, (ii) prosecute such filings and other
presentations with diligence, (iii) diligently oppose any objections to, appeals
from or petitions to reconsider or reopen any such approval by persons not party
to this Agreement, and (iv) take all such further action as in Parent's and the
Company's judgment reasonably may facilitate obtaining any final order or orders
approving such transactions consistent with this Agreement.
(c) Each of the Company, Parent and Sub will take all reasonable actions
necessary to comply promptly with all legal requirements (which actions shall
include, without limitation, furnishing all information in connection with
approvals of or filings with any Governmental Entity, including, without
limitation, any schedule, or report required to be filed with the SEC), and will
promptly cooperate with and furnish information to each other in connection with
any such requirements imposed upon any of them or any of their Subsidiaries in
connection with this Agreement and the transactions contemplated hereby. Each of
the Company, Parent and Sub will, and will cause its Subsidiaries to, take all
reasonable actions necessary to obtain any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity or other public or
private third party, required to be obtained or made by Parent, Sub, the Company
or any of their Subsidiaries in connection with the Merger or the taking of any
action contemplated thereby or by this Agreement.
Section 5.6 Employee Benefits. (a) Parent agrees to cause Surviving
Corporation and its Subsidiaries to provide to certain employees of the Company
payments and benefits, which are set forth in this Section 5.6(a), and certain
of which shall be effected, by means of individual agreements, negotiated in
good faith by the parties hereto, reflecting the economic terms set forth in
this Section 5.6.
(i) SEVERANCE PAY
With respect to the executives of the Company listed on Section 5.6(a)(i)
of the Company Disclosure Schedule attached hereto (the "Covered Executives"),
effective as soon as practicable following the Effective
A-20
<PAGE> 121
Time (or if later, the date of termination of employment of the Covered
Executive), pursuant to the terms of their respective Employment Agreements with
the Company in effect immediately prior to the Effective Time, the Company shall
pay to each Covered Executive payments in the amounts set forth on Section
5.6(a)(i) of the Company Disclosure Schedule with respect to such Covered
Executive (the "Severance Payments"), in accordance with such Schedule.
Notwithstanding anything in this Agreement to the contrary, the Severance
Payments shall be paid to a Covered Executive only if such Covered Executive is
actively employed by the Company immediately prior to the Effective Time.
(ii) SAVINGS AND RETIREMENT PLAN
Each Company employee who is (A) covered by the Company's Savings and
Retirement Plan (the "401(k) Plan") and (B) actively employed by the Company
immediately prior to the Effective Time (each, a "401(k) Employee") shall be
eligible to receive benefits under the 401(k) Plan based on the terms of the
401(k) Plan, as modified herein. For each 401(k) Employee, the amount of service
taken into account for purposes of calculating benefits and vesting under the
401(k) Plan shall be equal to the 401(k) Employee's service with the Company
prior to the Effective Time plus, in the case of a Covered Executive, such
Covered Executive's Severance Period. Parent agrees that the 401(k) Plan will be
rolled into Parent's 401(k) Plan.
(iii) LONG TERM INCENTIVE AWARD PLAN
Subject to the payments required by Section 5.6(a)(i), which payments shall
be made as part of the Severance Payments as set forth on Section 5.6(a)(i) of
the Company Disclosure Schedule, the Company shall amend its Long Term Incentive
Award Plan to provide that such plan shall terminate and cease as of the
Effective Time.
(iv) 1997 BONUS PROGRAM
Parent acknowledges that 1997 Bonus Plan Awards (pursuant and subject to
the terms of the Plan described on Section 5.1(c) of the Company's Disclosure
Schedule) shall be earned by any Covered Executive employed by the Company
immediately prior to the Effective Time and further agrees to cause the
Surviving Corporation to make all bonus payments and grants of options on terms
determined as specified in Section 2.3 hereof to employees for 1997 (pursuant
and subject to the terms of such Plan ) on or before April 1, 1998. Parent
further agrees that for purposes of calculating the 1997 Bonus Plan payments,
all adjustments taken and costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be excluded.
(v) EMPLOYMENT AGREEMENTS
Concurrent with the execution of this Agreement, the Company shall cause
each of the Covered Executives to execute a Waiver in the form of EXHIBIT A to
this Agreement.
(b) Parent agrees to cause the Surviving Corporation and its Subsidiaries
to provide to all active employees of the Company who continue to be employed by
the Company as of the Effective Time ("Continuing Employees") employee benefits
comparable to those benefits provided to similarly situated employees of Parent
(which benefits may be provided by covering Company employees under benefit
plans maintained by Parent for employees of Parent who perform similar duties).
In addition, with respect to medical benefits provided to Continuing Employees
as of the Effective Time, Parent agrees to cause the Surviving Corporation and
its Subsidiaries to waive waiting periods and pre-existing condition
requirements under such plans, and to give Continuing Employees credit for any
copayments and deductibles actually paid by such employees under the Company's
medical plans during the calendar year in which the Closing occurs. In addition,
service with the Company shall be recognized for purposes of eligibility under
Parent welfare plans as well as for purposes of Parent's programs or policies
for vacation pay and sick pay.
Section 5.7 No Solicitation. (a) The Company (and its Subsidiaries and
affiliates over which it exercises control) will not, and the Company (and its
Subsidiaries and affiliates over which it exercises control) will use their best
efforts to ensure that their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents do not, directly or
indirectly: (i) initiate, solicit or encourage,
A-21
<PAGE> 122
or take any action to facilitate the making of, any offer or proposal which
constitutes or is reasonably likely to lead to any Takeover Proposal (as defined
below) of the Company or any Subsidiary or an inquiry with respect thereto, or,
(ii) in the event of an unsolicited Takeover Proposal for the Company or any
Subsidiary or affiliate of the Company, engage in negotiations or discussions
with, or provide any information or data to, any corporation, partnership,
person or other entity or group (other than Parent, any of its affiliates or
representatives) (each, a "Person") relating to any Takeover Proposal, except in
the case of clause (ii) above to the extent that (x) the Takeover Proposal is a
bona fide written proposal submitted to the Company's Board of Directors and (y)
the Company's Board of Directors determines, after having consulted with
financial and legal advisors to the Company, that the failure to engage in such
negotiations or discussions or provide such information would create a
reasonable likelihood of a breach of the Board of Directors' fiduciary duties
under applicable law. The Company shall notify Parent and Sub orally and in
writing of any such offers, proposals, inquiries or Takeover Proposals
(including, without limitation, the material terms and conditions thereof and
the identity of the Person making it), within 24 hours of the receipt thereof,
and shall thereafter inform Parent on a reasonable basis of the status and
content of any discussions or negotiations with such a third party, including
any material changes to the terms and conditions thereof. The Company and its
Board of Directors shall afford Parent a three-day period after any such
notification in which to propose alternative terms for the acquisition by Parent
of the Company. The Company shall, and shall cause its Subsidiaries and
affiliates over which it exercises control, and will use best efforts to ensure
their respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents to, immediately cease and cause to be terminated
all discussions and negotiations that have taken place prior to the date hereof,
if any, with any parties conducted heretofore with respect to any Takeover
Proposal relating to the Company. Nothing contained in this Section 5.7 shall
prohibit the Company or its Board of Directors from taking and disclosing to its
stockholders a position with respect to a tender offer by a third party pursuant
to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or making such
disclosure as may be required by applicable law.
(b) Parent (and its Subsidiaries and affiliates over which it exercises
control) will not, and Parent (and its Subsidiaries and affiliates over which it
exercises control) will use their best efforts to ensure that their respective
officers, directors, employees, investment bankers, attorneys, accountants and
other agents do not, directly or indirectly: (i) initiate, solicit or encourage,
or take any action to facilitate the making of, any offer or proposal which
constitutes or is reasonably likely to lead to any Takeover Proposal (as defined
below) of Parent or any Subsidiary or an inquiry with respect thereto, or, (ii)
in the event of an unsolicited Takeover Proposal for Parent or any Subsidiary or
affiliate of Parent, engage in negotiations or discussions with, or provide any
information or data to, any corporation, partnership, person or other entity or
group (each, a "Person") relating to any Takeover Proposal, except in the case
of clause (ii) above to the extent that (x) the Takeover Proposal is a bona fide
written proposal submitted to Parent's Board of Directors and (y) Parent's Board
of Directors determines, after having consulted with financial and legal counsel
to Parent, that the failure to engage in such negotiations or discussions or
provide such information would result in a breach of the Board of Directors'
fiduciary duties under applicable law. Parent shall notify the Company orally
and in writing of any such offers, proposals, inquiries or Takeover Proposals
(including, without limitation, the material terms and conditions thereof and
the identity of the Person making it), within 24 hours of the receipt thereof,
and shall thereafter inform the Company on a reasonable basis of the status and
content of any discussions or negotiations with such a third party, including
any material changes to the terms and conditions thereof. Parent shall, and
shall cause its Subsidiaries and affiliates over which it exercises control, and
will use best efforts to ensure their respective officers, directors, employees,
investment bankers, attorneys, accountants and other agents to, immediately
cease and cause to be terminated all discussions and negotiations that have
taken place prior to the date hereof, if any, with any parties conducted
heretofore with respect to any Takeover Proposal relating to Parent. Nothing
contained in this Section 5.7 shall prohibit the Company or its Board of
Directors from taking and disclosing to its stockholders a position with respect
to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or making such disclosure as may be required
by applicable law.
(c) As used in this Agreement, "Takeover Proposal" when used in connection
with any Person shall mean any tender or exchange offer involving the capital
stock of such Person, any proposal for a merger, consolidation or other business
combination involving such Person or any Subsidiary of such Person, any
A-22
<PAGE> 123
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, such Person or any
Subsidiary of such Person, any proposal or offer with respect to any
recapitalization or restructuring with respect to such Person or any Subsidiary
of such Person or any proposal or offer with respect to any other transaction
similar to any of the foregoing with respect to such Person or any Subsidiary of
such Person other than pursuant to the transactions to be effected pursuant to
this Agreement.
Section 5.8 Additional Agreements. Subject to the terms and conditions
herein provided (including, but not limited to, Section 5.5) each of the parties
hereto agrees to use its reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or
advisable, whether under applicable laws and regulations or otherwise, or to
remove any injunctions or other impediments or delays, legal or otherwise, to
consummate and make effective the Merger and the other transactions contemplated
by this Agreement. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of the Company and Parent shall use their
reasonable efforts to take, or cause to be taken, all such necessary actions;
provided, however, in no event shall Parent or Sub be required to undertake any
further actions under this Section 5.8 which would impose on Parent or Sub any
of the conditions, or effects set forth in Section 6.3(c) hereof.
Section 5.9 Publicity. So long as this Agreement is in effect, neither the
Company nor Parent nor affiliates which either of them control shall issue or
cause the publication of any press release or other public statement or
announcement with respect to this Agreement or the transactions contemplated
hereby without the prior consultation of the other party, except as may be
required by law or by obligations pursuant to any listing agreement with a
national securities exchange, provided that each party will use its best efforts
to consult with the other party prior to any such issuance.
Section 5.10 Notification of Certain Matters. The Company shall give
prompt notice to Parent, and Parent shall give prompt notice to the Company, of
(a) the occurrence, or non-occurrence of any event the occurrence or
non-occurrence of which would cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Effective Time and (b) any material failure of the Company or Parent, as the
case may be, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 5.10 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 5.11 Directors' and Officers' Insurance and
Indemnification. Parent agrees that at all times after the Effective Time, it
shall cause the Surviving Corporation and its Subsidiaries to indemnify each
person who is now, or has been at any time prior to the date hereof, an
employee, agent, director or officer of the Company or of any of the Company's
Subsidiaries, successors and assigns (individually an "Indemnified Party" and
collectively the "Indemnified Parties"), to the fullest extent permitted by law,
with respect to any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense, including reasonable
fees and expenses of legal counsel, (whenever asserted or claimed) ("Indemnified
Liability") based in whole or in part on, or arising in whole or in part out of,
any matter existing or occurring at or prior to the Effective Time whether
commenced, asserted or claimed before or after the Effective Time, including
liability arising under the Securities Act, the Exchange Act or state law.
Parent shall, and shall cause the Surviving Corporation to, maintain in effect
for not less than three years after the Effective Time the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries on the date hereof (provided that Parent may substitute therefor
policies having at least the same coverage and containing terms and conditions
which are no less advantageous to the persons currently covered by such policies
as insured) with respect to matters existing or occurring at or prior to the
Effective Time; provided, however, that if the aggregate annual premiums for
such insurance during such period shall exceed 200% of the per annum rate of the
aggregate premium currently paid by the Company and its Subsidiaries for such
insurance on the date of this Agreement, then Parent shall cause the Surviving
Corporation to, and the Surviving Corporation shall, provide coverage affording
the same protections as those maintained by Parent as of such date for its
officers and directors. Parent agrees to pay all expenses (including fees and
expenses of counsel) that may be incurred by any Indemnified Party in
successfully enforcing the
A-23
<PAGE> 124
indemnity or other obligations under this Section 5.11. The rights under this
Section 5.11 are in addition to rights that an Indemnified Party may have under
the Certificate of Incorporation, By-laws, other similar organizational
documents of the Company or any of its Subsidiaries or the DGCL. The rights
under this Section 5.11 shall survive consummation of the Merger and are
expressly intended to benefit each Indemnified Party. Parent agrees to cause
Surviving Corporation and any of its Subsidiaries (or their successors) to keep
in effect the provisions of its Certificate of Incorporation or By-laws or
similar organizational documents providing for indemnification to the fullest
extent provided by law.
Section 5.12 Compliance With The Securities Act. (a) At least 60 days
prior to the Closing Date, the Company shall deliver to Parent a letter
identifying, to the best of the Company's knowledge, all persons who are, at the
time of the Company Special Meeting, deemed to be "affiliates" of the Company
for purposes of Rule 145 under the Securities Act ("Company Affiliates").
(b) The Company shall use its reasonable best efforts to cause each Person
who is identified as a Company Affiliate to deliver to Parent at least 30 days
prior to the Closing Date an agreement substantially in the form of EXHIBIT B to
this Agreement. The Company shall use its reasonable best efforts to deliver to
Parent, on or prior to the earlier of (i) the mailing of the Proxy
Statement/Prospectus or (ii) the thirtieth day prior to the Effective Time, a
written agreement from each Person who is identified as a Company Affiliate, in
a form to be approved by the parties hereto, that such Company Affiliate will
not thereafter sell or in any other way reduce such Company Affiliate's risk
relative to any Parent Common Stock received in the Merger (within the meaning
of the Commission's Financial Reporting Release No. 1, "Codification of
Financing Reporting Policies," ss. 201.01 (47 F.R. 21030) (April 15, 1982)),
until such time as financial results (including combined sales and net income)
covering at least 30 days of post-merger operations have been published, except
as permitted by Staff Accounting Bulletin No. 76 issued by the Commission. As
soon as is reasonably practicable but in no event later than 15 business days
after the end of the first fiscal month of Parent ending at least 30 days after
the Effective Time, Parent will publish results including at least 30 days of
combined operations of Parent and the Company as referred to in the written
agreements provided for by this Section 5.12(b).
Section 5.13 Cooperation. Parent and the Company shall together, or
pursuant to an allocation of responsibility to be agreed upon between them,
coordinate and cooperate (a) with respect to the timing of the Special Meetings,
(b) in determining whether any action by or in respect of, or filing with, any
Governmental Entity is required, or any actions, consents, approvals or waivers
are required to be obtained from parties to any material contracts, in
connection with the consummation of the transactions contemplated by this
Agreement, (c) in seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection therewith
and timely seeking to obtain any such actions, consents, approvals or waivers.
As soon as possible following the execution of this Agreement, the Company shall
cooperate with Parent in the preparation and filing of the Proxy
Statement/Prospectus with the Commission, including, but not limited to
providing legal, financial, and accounting information concerning the Company
and assisting in the preparation of all financial and pro forma financial
information required to be included in such Proxy Statement/Prospectus. Subject
to the terms and conditions of this Agreement, Parent and the Company will each
use its reasonable best efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after the
Registration Statement is filed, and Parent and the Company shall, subject to
applicable law, confer on a regular and frequent basis with one or more
representatives of one another to report operational matters of significance to
the Merger and the general status of ongoing operations insofar as relevant to
the Merger, provided that the parties will not confer on any matter to the
extent inconsistent with law.
Section 5.14 Proxy Statement/Prospectus. As soon as practicable following
the execution of this Agreement, Parent and the Company shall prepare and file
with the SEC the Proxy Statement/Prospectus and each shall use its reasonable
best efforts to have the Proxy Statement/Prospectus filed on or before November
11, 1997 and to be cleared by the SEC as promptly as practicable thereafter. As
soon as practicable following such clearance Parent shall prepare and file with
the SEC the Registration Statement, of which the Proxy Statement/Prospectus will
form a part, and shall use its best efforts to have the Registration Statement
A-24
<PAGE> 125
declared effective by the SEC as promptly as practicable thereafter. Parent and
the Company shall cooperate with each other in the preparation of the Proxy
Statement/Prospectus, and each will provide to the other promptly copies of all
correspondence between it or any of its representatives and the SEC. Each of the
Company and Parent shall furnish all information concerning it required to be
included in the Registration Statement and the Proxy Statement/Prospectus, and
as promptly as practicable after the effectiveness of the Registration
Statement, the Proxy Statement/Prospectus will be mailed to the stockholders of
the Company and Parent. No amendment or supplement to the Registration Statement
or the Proxy Statement/Prospectus will be made without the approval of each of
the Company and Parent, which approval will not be unreasonably withheld or
delayed. Each of the Company and Parent will advise the other promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any amendment thereto or any supplement or amendment to the Proxy
Statement/Prospectus has been filed, or the issuance of any stop order, or the
suspension of the qualification of the Parent Common Stock to be issued in the
Merger for offering or sale in any jurisdiction, or of any request by the SEC or
the NYSE for amendment of the Registration Statement or the Proxy
Statement/Prospectus.
Section 5.15 Stock Exchange Listing. Parent shall use its reasonable best
efforts to list prior to the Effective Time on the NYSE, subject to official
notice of issuance, the shares of Parent Common Stock to be issued in the
Merger.
Section 5.16 Confidentiality Agreements. The parties hereto agree that the
Confidentiality Agreements between the parties dated October 27, 1997 shall be
hereby amended to provide that any provision therein which in any manner would
be inconsistent with the Agreement or the transactions contemplated hereby shall
terminate as of the date hereof.
Section 5.17 Tax Matters. Parent and Sub agree to report the Merger as a
tax-free reorganization under Section 368(a)(1)(A) and Section 368(a)(2)(E) of
the Code for federal income tax purposes. Parent and Sub agree that after the
Closing they will take all actions necessary to qualify the Merger, and will
refrain from taking any action that may adversely affect the qualification of
the Merger, as a tax-free reorganization under Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Code.
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to The Obligations of Each Party. The obligations
of the Company, on the one hand, and Parent and Sub, on the other hand, to
consummate the Merger are subject to the satisfaction (or, if permissible,
waiver by the party for whose benefit such conditions exist) of the following
conditions:
(a) (i) this Agreement and the Merger shall have been adopted by the
stockholders of the Company and (ii) the issuance of Parent Company Stock
shall have been approved by the stockholders of Parent, in accordance with
the DGCL;
(b) no court, arbitrator or governmental body, agency or official
shall have issued any order, decree or ruling which remains in force and
there shall not be any statute, rule or regulation, restraining, enjoining
or prohibiting the consummation of the Merger;
(c) the Registration Statement shall have become effective under the
Securities Act and no stop order suspending effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the SEC;
(d) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and all material
approvals necessary for the consummation of the transactions contemplated
by this Agreement shall have been obtained and any such approvals shall be
in full force and effect; and
A-25
<PAGE> 126
(e) The Parent Common Stock issuable in the Merger shall have been
authorized for listing on the NYSE, subject to official notice of issuance.
Section 6.2 Conditions to Obligation of The Company to Effect The
Merger. The obligation of the Company to consummate the Merger shall be subject
to the satisfaction of the following additional conditions, unless waived (if
permissible) by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior
to the Effective Time, and except as contemplated or permitted by this
Agreement, the representations and warranties of Parent and Sub contained
in this Agreement (except to the extent such representations and warranties
speak as of an earlier date in which case as of such earlier date) shall be
true and correct when made and on and as of the Effective Time as if made
on and as of such date;
(b) The Company shall have received a certificate, dated the Effective
Time, signed by the President or Chief Executive Officer or a Senior Vice
President of Parent and Sub, certifying that the conditions specified in
Section 6.2(a) have been fulfilled;
(c) The Company shall have received a letter from Deloitte & Touche
LLP, Parent's independent auditors, dated a date within two business days
before the date on which the Registration Statement shall become effective
and addressed to the Company, in form and substance reasonably satisfactory
to the Company and customary in scope and substance for letters delivered
by independent public accountants in connection with registration
statements similar to the Registration Statement (including, among other
things, that the Merger will be treated as a pooling of interests under
Accounting Principles Board Opinion No. 16);
(d) The Company shall have received an opinion from Gibson, Dunn &
Crutcher LLP, the Company's legal counsel, that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code; and
(e) On or prior to the mailing date of the Proxy Statement/Prospectus
referred to in Section 5.14, the Company shall have received an updated
opinion addressed to it from Montgomery Securities to the effect that the
Exchange Rate is fair from a financial point of view to the Company and its
stockholders.
Section 6.3 Conditions to Obligations of Parent and Sub to Effect The
Merger. The obligations of Parent and Sub to consummate the Merger shall be
subject to the satisfaction of the following additional conditions, unless
waived (if permissible) by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Effective Time, and except as contemplated or permitted by this
Agreement, the representations and warranties of the Company contained in
this Agreement (except to the extent such representations and warranties
speak as of an earlier date in which case as of such earlier date) shall be
true and correct when made and on and as of the Effective Time as if made
on and as of such date;
(b) Parent and Sub shall have received a certificate, dated the
Effective Time, signed by the President or Chief Executive Officer or a
Vice President of the Company, certifying that the conditions specified in
Section 6.3(a) have been fulfilled;
(c) In connection with the receipt of the approvals referred to in
Section 5.5, no approval shall impose on Parent or Sub any conditions or
other requirements that would (i) cause Parent or Sub any material
additional costs, or (ii) materially interfere with the continued
operations of the Company and the Subsidiaries, taken as a whole, or Parent
or its subsidiaries; and
(d) Parent shall have received a letter from Deloitte & Touche LLP,
Parent's independent auditors, dated a date within two business days before
the date on which the Registration Statement shall become effective and
addressed to Parent, in form and substance reasonably satisfactory to
Parent and customary
A-26
<PAGE> 127
in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement (including, among other things, that the Merger will
be treated as a pooling of interests under Accounting Principles Board
Opinion No. 16).
ARTICLE VII
TERMINATION
Section 7.1 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Merger contemplated
herein may be abandoned at any time prior to the Effective Time, whether before
or after stockholder approval hereof (unless otherwise specified herein):
(a) By the mutual consent of the Board of Directors of Parent and the
Board of Directors of the Company.
(b) By either of the Board of Directors of the Company or the Board of
Directors of Parent:
(i) if any court of competent jurisdiction or Governmental Entity
shall have issued an order, decree or ruling or taken any other action
(which order, decree, ruling or other action the parties hereto shall
use their reasonable best efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable;
(ii) if the Merger shall not have been consummated on or before
April 30, 1998; provided, however, that the rights to terminate this
Agreement under this Section 7.1(b)(ii) shall not be available to any
party whose failure to fulfill any obligations under this Agreement has
been the cause of, or resulted in, the failure to satisfy the conditions
to the Merger;
(iii) provided that the terminating party is not then in material
breach of any representation, warranty, covenant or other agreement
contained herein, if the other party shall have breached (i) any of the
covenants or agreements made by such other party herein or (ii) any of
the representations or warranties made by such other party herein, and
in either case, (x) such breach is not cured within 30 days following
written notice to the party committing such breach, or which breach, by
its nature, cannot be cured prior to the Closing and (y) such breach
would entitle the non-breaching party not to consummate the transactions
contemplated hereby under Article VI hereof;
(iv) if any approval of the stockholders of Parent or the Company
contemplated by this Agreement shall not have been obtained by reason of
the failure to obtain the required vote at a duly held meeting of
stockholders or at any adjournment or postponement thereof; or
(v) if the Board of Directors of the other party shall have
withdrawn, or modified or changed in a manner adverse to the terminating
party, its approval or recommendation of this Agreement and the
transactions contemplated hereby.
(c) By the Board of Directors of the Company:
(i) if prior to the approval of this Agreement by the requisite
vote of the Company's stockholders, there exists at such time a Takeover
Proposal (as defined in Section 5.7(c)) for the Company, and the
Company's Board of Directors, after having consulted with and considered
the advice of outside legal counsel, reasonably determines in good faith
that such action is necessary in the exercise of its fiduciary duties
under applicable laws, and the Company has paid to Parent the
termination fee as required by Section 7.3 hereof; or
(ii) if the Company would not to be obligated consummate the
transactions contemplated hereby under Section 2.1(c)(i).
(d) By the Board of Directors of Parent:
A-27
<PAGE> 128
(i) if prior to the approval of this Agreement by the requisite
vote of Parent's stockholders, there exists at such time a Takeover
Proposal (as defined in Section 5.7(c)) for Parent, and Parent's Board
of Directors, after having consulted with and considered the advice of
outside legal counsel, reasonably determines in good faith that such
action is necessary in the exercise of its fiduciary duties under
applicable laws, and Parent has paid to the Company the termination fee
required by Section 7.3 hereof; or
(ii) if Parent would not be obligated to consummate the
transactions contemplated hereby under Section 6.3(c) hereof.
Section 7.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 7.1, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof pursuant to
which such termination is made, and this Agreement shall forthwith become null
and void, and there shall be no liability on the part of Parent, Sub or the
Company except (A) for fraud or for material breach of this Agreement and (B) as
set forth in Sections 7.3, 8.1 and 8.2 hereof.
Section 7.3 Termination Fee. (a) If (i) the Board of Directors of the
Company shall terminate this Agreement pursuant to Section 7.1(c)(i) hereof; or
(ii) the Board of Directors of Parent shall terminate this Agreement pursuant to
Section 7.1(b)(v) hereof, then in any such case as described in clause (i) or
(ii), the Company shall pay to Parent (not later than the date of termination of
this Agreement in the case of clause (i) above and the date one business day
after the date of termination of this Agreement in the case of clause (ii)
above) by wire transfer of immediately available funds an amount equal to $26
million inclusive of Parent's reasonable out-of-pocket expenses incurred in
connection with the transactions contemplated by this Agreement. If the Board of
Directors of the Company shall terminate this Agreement pursuant to Section
7.1(b)(iv) hereof, the Company shall pay to Parent (not later than the date of
termination of this Agreement) by wire transfer of immediately available funds
an amount equal to $5 million to cover Parent's expenses incurred in connection
with the transactions contemplated by this Agreement.
(b) If (i) the Board of Directors of Parent shall terminate this Agreement
pursuant to Section 7.1(d)(i) hereof; or (ii) the Board of Directors of the
Company shall terminate this Agreement pursuant to Section 7.1(b)(v) hereof,
then in any such case as described in clause (i) or (ii), Parent shall pay to
the Company (not later than the date of termination of this Agreement in the
case of clause (i) above and the date one business day after the date of
termination of this Agreement in the case of clause (ii) above) by wire transfer
of immediately available funds an amount equal to $26 million inclusive of the
Company's reasonable out-of-pocket expenses incurred in connection with the
transactions contemplated by this Agreement. If the Board of Directors of Parent
shall terminate this Agreement pursuant to Section 7.1(b)(iv) hereof, Parent
shall pay to the Company (not later than the date of termination of this
Agreement) by wire transfer of immediately available funds an amount equal to $5
million to cover the Company's expenses incurred in connection with the
transactions contemplated by this Agreement.
(c) Any amounts due under this Section 7.3 shall be in the nature of
liquidated damages and not in the nature of a penalty.
Section 7.4 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party, but such
extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
A-28
<PAGE> 129
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Fees and Expenses. Except as otherwise provided in Section 7.3
hereof and except for expenses incurred in connection with printing the Proxy
Statement/Prospectus and the Registration Statement, as well as the filing fees
relating thereto and relating to the filing under the HSR Act, which costs shall
be shared equally by Parent and the Company, all costs (other than the filing
fee for registration of the Parent Common Stock which will be paid by Parent)
and expenses incurred in connection with this Agreement and the consummation of
the transactions contemplated hereby and thereby shall be paid by the party
incurring such expenses.
Section 8.2 Finders' Fees. (a) Except for Batchelder & Partners and
Montgomery Securities, copies of whose engagement agreements have been provided
to Parent and whose fees will be paid by the Company, there is no investment
banker, broker, finder or other intermediary which has been retained by or is
authorized to act on behalf of the Company or any of its Subsidiaries who might
be entitled to any fee or commission from the Company or any of its Subsidiaries
upon consummation of the transactions contemplated by this Agreement.
(b) Except for Merrill Lynch, a copy of whose engagement agreement has been
provided to the Company and whose fees will be paid by Parent, there is no
investment banker, broker, finder or other intermediary which has been retained
by or is authorized to act on behalf of Parent or any of its Subsidiaries who
might be entitled to any fee or commission from Parent or any of its
Subsidiaries upon consummation of the transactions contemplated by this
Agreement.
Section 8.3 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the stockholders of the Company contemplated
hereby, by written agreement of the parties hereto, pursuant to action taken by
their respective Boards of Directors, at any time prior to the Closing Date with
respect to any of the terms contained herein; provided, however, that after the
approval of this Agreement by the stockholders of the Company, no such
amendment, modification or supplement shall reduce or change the consideration
to be received by the Company's stockholders in the Merger.
Section 8.4 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
Section 8.5 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or sent by an overnight courier service, such as FedEx, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent or Sub, to:
Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-8707
Attention: General Counsel
Telephone No.: (614) 278-6762
Telecopy No.: (614) 278-6763
A-29
<PAGE> 130
with a copy to:
Michael Wager, Esq.
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378
Telephone No.: (216) 363-4500
Telecopy No.: (216) 363-4588
and
(b) if to the Company, to:
Mac Frugal's Bargains -- Close-outs Inc.
2430 East Del Amo Boulevard
Dominguez, California 90020-6306
Attention: Chief Executive Officer
Telephone No.: (310) 761-4167
Telecopy No.: (310) 631-4106
with a copy to:
Robert K. Montgomery, Esq.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Telephone No.: (310) 557-8022
Telecopy No.: (310) 551-8741
Section 8.6 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include," "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation." The phrases "the date of this Agreement," "the date hereof," and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to November 4, 1997. As used in this Agreement, the term "affiliate(s)"
shall have the meaning set forth in Rule 12b-2 of the Exchange Act.
Section 8.7 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 8.8 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement and the Confidentiality Agreements dated October 27,
1997 between the parties (including the exhibits hereto and the documents and
the instruments referred to herein and therein): (a) constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, and (b)
except as provided in Sections 5.6 and 5.11 with respect to the obligations of
the Company or the Surviving Corporation thereunder, is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder.
Section 8.9 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 8.10 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to the remedy of specific performance of the terms hereof, in addition
to any other remedy at law or equity.
A-30
<PAGE> 131
Section 8.11 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law thereof.
Section 8.12 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
Parent or to any direct or indirect wholly owned Subsidiary of Parent; provided,
however, that no such assignment shall relieve Parent from any of its
obligations hereunder. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
Section 8.13 Joint and Several Liability. Parent and Sub hereby agree that
they will be jointly and severally liable for all covenants, agreements,
obligations and representations and warranties made by either of them in this
Agreement.
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
CONSOLIDATED STORES CORPORATION
By: /s/ MICHAEL J. POTTER
----------------------------------
Name: Michael J. Potter
Title: Senior Vice President and
Chief
Financial Officer
MBC CONSOLIDATED ACQUISITION
CORPORATION
By: /s/ ALBERT J. BELL
----------------------------------
Name: Albert J. Bell
Title: Secretary
MAC FRUGAL'S BARGAINS --
CLOSE-OUTS INC.
By: /s/ PHILIP L. CARTER
----------------------------------
Name: Philip L. Carter
Title: President and Chief
Executive Officer
A-31
<PAGE> 132
EXHIBIT A
FORM OF WAIVER
WAIVER
This Waiver ("Waiver") is executed and delivered as of this day of
November, 1997 by Mac Frugal's Bargains -- Close-Outs, Inc. (the "Company"), a
Delaware corporation, and (the "Executive") in respect of that
certain Employment Agreement dated , 199 between the Company and
Executive (the "Employment Agreement"). Capitalized terms used without
definition herein have the meanings ascribed to them in the Employment
Agreement.
RECITALS
A. The Company, Consolidated Stores Corporation, a Delaware corporation
("CNS"), and MBC Consolidated Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of CNS ("MBC") have entered into an Agreement and
Plan of Merger (the "Merger Agreement") dated as of the date hereof providing
for the merger of MBC with and into the Company with the Company as the
surviving corporation (the "Merger").
B. Section 5.6(a)(v) of the Merger Agreement requires that, concurrent with
the execution of the Merger Agreement, the Company shall cause Executive to
execute this Waiver. Section 5.12(b) of the Merger Agreement requires that the
Company seek to obtain an Affiliate Letter from Executive in substantially the
form of Exhibit A attached hereto.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and subject to the conditions
herein set forth, the parties agree as follows:
AGREEMENT
1. WAIVER OF CERTAIN RIGHTS UNDER THE EMPLOYMENT AGREEMENT. Section 9 of
the Employment Agreement provides in pertinent part that in the event
Executive's employment is terminated within two months after the Merger,
Executive is entitled to certain payments including the following:
. . . the greater of (A) the closing price of the Company's Common Stock on
the day before the date Executive's employment terminates or (B) the highest
price per share actually paid in connection with the Change of Control of
the Company, exceeds the per share exercise price of each vested and
exercisable stock option held by Executive on the day before the date
Executive's employment terminates, multiplied by the number of shares
covered by each such option. Executive will surrender all such options to
the Company without exercising them.
To facilitate the proposed accounting treatment of the Merger, the Company has
asked Executive to waive, and Executive hereby waives, the operation of the
above provision in connection with any termination of his employment within two
months following the closing of the Merger, such waiver to be entirely
contingent upon the closing of the Merger.
2. AFFILIATE LETTER. Executive hereby agrees that at such time as the
Company requests, he will execute and deliver the Affiliate Letter in
substantially the form attached hereto as Exhibit A.
3. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. Executive acknowledges that
he has freely executed this Waiver and has had an opportunity to consult with
counsel of his choice as regards his rights under the Employment Agreement being
waived hereunder and as to the contents of the Affiliate Letter. There are no
conditions to the waiver and agreement to execute an Affiliate Letter other than
as expressly set forth herein.
4. EMPLOYMENT AGREEMENT UNMODIFIED. Except as otherwise expressly set forth
herein, the terms of the Employment Agreement and any option award agreement
referenced therein or herein shall
EX-A-1
<PAGE> 133
remain in full force and effect and are unaffected hereby. In the event the
Merger is not consummated, this Waiver shall be null and void.
IN WITNESS WHEREOF, the undersigned have executed this Waiver as of the
date first above written.
Mac Frugal's Bargains -- Close-Outs, Inc.
By: ------------------------------------- Executive
Name:------------------------------------
Title:----------------------------------- --------------------------------
EX-A-2
<PAGE> 134
EXHIBIT B
FORM OF AFFILIATE AGREEMENT
Consolidated Stores Corporation
300 Phillipi Road
P.O. Box 28512
Columbus, Ohio 43228-0512
Ladies and Gentlemen:
The undersigned is a holder of shares of Common Stock, par value $.02778
per share (the "Company Common Stock"), of Mac Frugal's Bargains -Close-outs
Inc., a Delaware corporation (the "Company"). The undersigned may receive shares
of Common Stock, par value $.01 per share (the "Parent Common Stock"), of
Consolidated Stores Corporation, a Delaware corporation ("Parent"), in
connection with the merger of MBC Consolidated Acquisition Corporation, a
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), with and
into the Company, with the Company continuing as the surviving corporation (the
"Merger").
The undersigned acknowledges that the undersigned may be deemed an
"affiliate" of the Company as the term "affiliate" is defined for purposes of
paragraphs (c) and (d) of Rule 145 ("Rule 145") of the rules and regulations
under the Securities Act of 1933, as amended (the "Act"). Execution of this
Agreement by the undersigned should not be construed as an admission of
"affiliate" status or as a waiver of any rights the undersigned may have to
object to any claim that the undersigned is such an affiliate on or after the
date of this Agreement.
If in fact the undersigned were an affiliate of the Company under the Act,
the undersigned's ability to sell, transfer or otherwise dispose of any Parent
Common Stock received by the undersigned in exchange for any shares of Company
Common Stock pursuant to the Merger may be restricted unless such transaction is
registered under the Act or an exemption from such registration is available.
The undersigned understands that such exemptions are limited and the undersigned
has obtained advice of counsel as to the nature and conditions of such
exemptions, including information with respect to the applicability to the sale
of such securities of Rules 144 and 145(d) promulgated under the Act.
A. The undersigned hereby represents to and covenants with Parent that the
undersigned will not sell, transfer or otherwise dispose of any Parent Common
Stock received by the undersigned in exchange for shares of Company Common Stock
pursuant to the Merger except (i) pursuant to an effective registration
statement under the Act, (ii) by a sale made in conformity with the provisions
of Rule 145 (and otherwise in accordance with Rule 144 under the Act if the
undersigned is an affiliate of Parent and if so required at the time) or (iii)
in a transaction which, in the opinion of independent counsel reasonably
satisfactory to Parent or as described in a "no-action" or interpretive letter
from the Staff of the Securities and Exchange Commission (the "Commission"), is
not required to be registered under the Act.
B. The undersigned understands that Parent is under no obligation to
register the sale, transfer or other disposition of Parent Common Stock by the
undersigned or on behalf of the undersigned under the Act or, except as provided
in paragraph F.1 below, to take any other action necessary in order to make
compliance with an exemption from such registration available.
C. The undersigned also understands that stop transfer instructions will be
given to Parent's transfer agents with respect to the Parent Common Stock issued
to the undersigned and that there will be placed on the certificates for the
Parent Common Stock issued to the undersigned, or any substitutions therefor, a
legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES.
EX-B-1
<PAGE> 135
D. The undersigned also understands that unless a sale or transfer is made
in conformity with the provisions of Rule 145, or pursuant to a registration
statement, Parent reserves the right to put the following legend on the
certificates issued to the undersigned's transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED
SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER
NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION
THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933."
E. In the event of a sale of Parent Common Stock pursuant to Rule 145, the
undersigned will supply Parent with evidence of compliance with such Rule, in
the form of customary seller's and broker's Rule 145 representation letters or
as Parent may otherwise reasonably request. The undersigned understands that
Parent may instruct its transfer agent to withhold the transfer of any Parent
Common Stock disposed of by the undersigned in a manner inconsistent with this
letter.
F. I have made no sale, disposition or other transfer of, or otherwise
reduced my investment risk with respect to, Parent Common Stock during the
thirty (30) days preceding the date of this letter and agree to make no such
sale, disposition or other transfer, or otherwise reduce my investment risk with
respect to, Parent Common Stock until such time as financial results (including
combined sales and net income) covering at least thirty (30) days of post-Merger
operations have been published, except as permitted by Staff Accounting Bulletin
No. 76 issued by the Commission.
G. By Parent's acceptance of this Agreement, Parent hereby agrees with the
undersigned as follows:
1. For so long as to the extent necessary to permit the undersigned to
sell the Parent Common Stock pursuant to Rule 145 and, to the extent
applicable, Rule 144 under the Act, Parent shall (a) use its reasonable
best efforts to (i) file, on a timely basis, all reports and data required
to be filed with the Commission by it pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended (the "1934 Act") and (ii)
furnish to the undersigned upon request a written statement as to whether
Parent has complied with such reporting requirements during the 12 months
preceding any proposed sale of Parent Common Stock by the undersigned under
Rule 145 and Rule 144. Parent has filed all reports required to be filed
with the Commission under Section 13 of the 1934 Act during the preceding
12 months.
2. It is understood and agreed that the legends set forth in paragraph
C and D above shall be removed by delivery of substitute certificates
without such legend if such legend is not required for purposes of the Act
or this Agreement. It is understood and agreed that such legends and the
stop orders referred to above will be removed if (i) one year shall have
elapsed from the date the undersigned acquired Parent Common Stock received
in the Merger and the provisions of Rule 145(d)(2) are then available to
the undersigned, (ii) two years shall have elapsed from the date the
undersigned acquired the Parent Common Stock received in the Merger and the
provisions of Rule 145(d)(3) are then applicable to the undersigned, or
(iii) in the event of a sale of Parent Common Stock received by the
undersigned in the Merger which has been registered under the Act or made
in conformity with the provisions of Rule 145; and, in the case of (i) and
(ii) above, Parent has received either an opinion of counsel, which opinion
and counsel shall be reasonably satisfactory to Parent, or a "no action"
letter obtained from the staff of the Commission, to the effect that the
restrictions imposed by Rule 145 under the Act no longer apply to the
undersigned.
3. As soon as reasonably practicable, but in no event later than
fifteen (15) business days after the end of the first fiscal month of
Parent ending at least thirty (30) days after the effective date of the
Merger, Parent will publish combined results as referred to in paragraph F
above.
EX-B-2
<PAGE> 136
4. Parent will, and will cause its Transfer Agent to, promptly process
all transfers of Parent Company Stock permitted by this letter and as to
which all appropriate documentation has been submitted by the undersigned.
The undersigned acknowledges that it has carefully reviewed this letter and
understands the requirements hereof and the limitations imposed upon the
distribution, sale, transfer or other disposition of Parent Common Stock
received by the undersigned in the Merger.
Very truly yours,
Accepted this day of 199 , by:
CONSOLIDATED STORES CORPORATION [Name]
By:------------------------------------- ----------------------------------
Name:-----------------------------------
Title:----------------------------------
EX-B-3
<PAGE> 137
ANNEX B
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into this 4th day of
November, 1997 and effective as of the Effective Time (as defined in the Merger
Agreement (defined below)) by and between Consolidated Stores Corporation, a
Delaware corporation (the "Company"), and Philip L. Carter ("Consultant"). In
the event the Merger (defined below) is not consummated, this Agreement shall be
null and void.
WITNESSETH:
WHEREAS, the Company, MBC Consolidated Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of the Company ("Sub") and Mac
Frugal's Bargains Close-Outs Inc., a Delaware corporation ("Mac Frugal's") have
entered into an Agreement and Plan of Merger dated as of the date hereof (the
"Merger Agreement"); and
WHEREAS, Consultant prior to the Effective Time (as defined in the Merger
Agreement) served as the President and Chief Executive Officer of Mac Frugal's;
and
WHEREAS, the execution and delivery of this Agreement is contemplated by
the parties in connection with the Merger Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants hereinafter set forth, the parties hereby agree as follows:
1. Consulting Period. The Company shall engage Consultant on the terms and
conditions set forth herein for a term of six (6) months, commencing as of the
Effective Time (as defined in the Merger Agreement) and continuing through and
until July 31, 1998; provided, however, that following the Effective Time, the
Company, in its sole discretion, may, upon 30 days written notice to Consultant,
terminate this Agreement. The term of this Agreement is hereinafter referred to
as the "Consulting Period."
2. Consulting Services. During the Consulting Period, Consultant shall
provide the Company, at such times and as may be requested by the Company, with
advice and recommendations concerning various matters respecting the business of
Mac Frugal's, including, without limitation, advice and recommendations as to
business arrangements, customers and the operations of Mac Frugal's. At the
request of the Company, Consultant shall meet periodically with the Company's
officers or such other persons as may be designated by the Company for the
purpose of providing the consulting services as provided herein. Consultant will
be reimbursed for his reasonable business expenses incurred in connection with
this Agreement provided that such expenses result from providing consulting
services hereunder as requested by the Company and that Consultant submits
documentation of such expenses in accordance with Company policy. Consultant
will receive 48-hour prior notice of consulting services that will require
travel by him outside of the State of California and will not be required to
travel outside the greater Los Angeles area for more than five days during any
consecutive 4-week period. Airline travel required of Consultant in connection
with this Agreement will be at a class equivalent to that used by the Chief
Executive Officer of the Company.
3. Payments. As consideration for the obligations of Consultant under this
Agreement, the Company shall pay the aggregate amount of Nine Hundred Seventy
Thousand Dollars ($970,000), payable in equal weekly installments in arrears, to
Consultant, with no other payments or benefits due to Consultant. Such weekly
payments shall commence as of the Effective Time (as defined in the Merger
Agreement) and continue through and until July 31, 1998 regardless of whether
this Agreement is terminated by the Company pursuant to Section 1 hereof.
4. Severable Provisions. The provisions of this Agreement are severable,
and if any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining
B-1
<PAGE> 138
provisions and any partially unenforceable provision to the extent enforceable
in any jurisdiction shall nevertheless be binding and enforceable.
5. Binding Agreement. The rights and obligations of the Company and
Consultant under this Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of the Company and the heirs, estate and
personal representatives of Consultant.
6. Waiver. Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions as to future violations thereof, nor prevent that party
thereafter from enforcing each and every other provision of this Agreement. The
rights granted the parties herein are cumulative and the waiver by a party of
any single remedy shall not constitute a waiver of such party's right to assert
all other legal remedies available to that party under the circumstances.
7. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto with respect to the subject matter hereof. It may not be changed
orally but may be changed only by an agreement in writing signed by the party
against whom enforcement is sought.
8. Notices. All notices, requests, demands and other communications under
this Agreement must be in writing and shall be deemed duly given, unless
otherwise expressly indicated to the contrary in this Agreement, (i) when
personally delivered, (ii) upon receipt of a telephonic facsimile transmission
with a confirmed telephonic transmission answer back, (iii) three (3) days after
having been deposited in the United States mail, certified or registered, return
receipt requested, postage prepaid, or (iv) one (1) business day after having
been dispatched by a nationally recognized overnight courier service, addressed
to the parties or their permitted assigns at the following addresses (or at such
other address or number as is given in writing by either party to the other) as
follows:
<TABLE>
<S> <C>
To the Company: Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-8707
Facsimile No.: 614-278-6762
Attention: General Counsel
With a copy to: Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378
Facsimile No.: (216) 363-4588
Attention: Michael Wager, Esq.
To Consultant: Philip L. Carter
10520 Wilshire Boulevard #702
Los Angeles, California 90024
</TABLE>
9. Governing Law; Jurisdiction and Venue. This Agreement shall be construed
under and governed by the laws of the State of California without regard to the
principles of conflicts of laws. The parties hereto consent to the jurisdiction
of the courts of the State of California and to venue within the State of
California.
10. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, may be settled by arbitration in Los
Angeles, California, in accordance with the commercial arbitration rules of the
American Arbitration Association then pertaining; provided, however, that any
such arbitration procedure shall not be binding on the parties absent their
written agreement to the determination of the arbitrator. Nothing in this
Section 10 shall be construed so as to deny any party the right and power to
seek and obtain any other remedy available to such party in equity or at law.
11. Counterparts. This Agreement may be executed in multiple identical
counterparts, which when taken together, shall constitute a single instrument.
B-2
<PAGE> 139
IN WITNESS WHEREOF, the Company and Consultant have caused this Consulting
Agreement to be executed as of the date first above written.
CONSOLIDATED STORES CORPORATION
By: /s/ MICHAEL J. POTTER
------------------------------------
Name: Michael J. Potter
Title: Senior Vice President and
Chief Financial Officer
CONSULTANT
By: /s/ PHILIP L. CARTER
------------------------------------
Philip L. Carter
B-3
<PAGE> 140
ANNEX C
NONCOMPETITION AGREEMENT
This Noncompetition Agreement (the "Agreement") is entered into this 4th
day of November, 1997 and effective as of the Effective Time (as defined in the
Merger Agreement (defined below)) between Consolidated Stores Corporation, a
Delaware corporation (the "Company"), and Philip L. Carter ("Carter"). In the
event the Merger (as defined below) is not consummated, this Agreement shall be
null and void.
WHEREAS, Carter is currently the Chief Executive Officer and President of
Mac Frugal's Bargains -- Close-outs, Inc., a Delaware corporation ("Mac
Frugal's") and a member of the Board of Directors of Mac Frugal's (the "Board"),
is intimately familiar with the business of Mac Frugal's, and has been
instrumental to the operation of Mac Frugal's.
WHEREAS, the Company, Mac Frugal's and MBC Consolidated Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of the Company
("MBC"), have entered into an Agreement and Plan of Merger (the "Merger
Agreement") dated as of the date hereof providing for the merger of MBC with and
into Mac Frugal's with Mac Frugal's as the surviving corporation (the "Merger").
WHEREAS, the execution and delivery of this Agreement is contemplated by
the parties in connection with the Merger Agreement.
NOW, THEREFORE, the Company and Carter agree as follows:
1. NONCOMPETITION PAYMENTS.
(a) In consideration of Carter's covenant not to compete (as set forth
in Section 2 below) and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Company hereby agrees to
pay Carter the aggregate amount of Nine Hundred Thirty Thousand Dollars
($930,000), payable in equal weekly installments beginning as of August 1,
1998 and continuing for a period of two (2) years thereafter.
(b) As of the Effective Time (as defined in the Merger Agreement), the
Company is establishing a single purpose escrow account in a Los Angeles,
California office of a national bank into which it is depositing the Nine
Hundred Thirty Thousand Dollars ($930,000) aggregate amount of compensation
payable to Carter pursuant to this Agreement and the Nine Hundred Seventy
Thousand Dollars ($970,000) payable to Carter pursuant to the Consultant
Agreement of even date herewith. Funds shall be released from escrow on a
weekly basis as provided in Section 1(a) above and Section 3 of the
Consulting Agreement, without any offsets, claims or charges of any kind
whatsoever being asserted by the Company, except in the event that a court
of law makes a final adjudication that the Company is entitled to assert
any such offset, claim or charge against Carter.
2. NONCOMPETITION COVENANTS AND CONFIDENTIAL INFORMATION.
(a) Carter agrees that, for a period of two (2) years from August 1, 1998,
he will continue to be subject to the contractual provisions contained in
Sections 11, 12 and 13 of his Employment Agreement with Mac Frugal's dated March
12, 1997.
(b) Carter also agrees that for a period of two (2) years from August 1,
1998, he will not:
(i) own any interest in, or accept employment directly or indirectly
with, any person, firm, corporation, or other business entity that directly
or indirectly engages in business competition with the Company or any of
its affiliates in the United States, other than ownership of up to five
percent (5%) of the stock of any publicly-held entity;
(ii) become employed, either directly or indirectly, with any
wholesaler or retailer which has revenues equivalent to those of the
Company; and
C-1
<PAGE> 141
(iii) accept employment, either directly or indirectly, with the
following retail/close-out businesses -- , K-Mart, Target, 99 Cent Stores,
TJ Maxx, Ross Stores, Dollar General and Stage Stores.
(c) For the purposes of this Agreement, the phrase "business competition"
with the Company or any of its affiliates will mean any business that is
predominantly engaged in the specialty retail close-out industry or specialty
wholesale close-out industry.
(d) The parties confirm and agree that the restrictions imposed by this
Section 2 are reasonable, designed to limit unfair competition, do not stifle
the skill and experience of Carter and will not operate as a bar to Carter's
means of support.
3. ATTORNEY'S FEES. In the event that litigation is commenced to enforce
this Agreement, the prevailing party shall be awarded attorneys fees and costs
in connection with such litigation.
4. NOTICES. All notices, requests, demands and other communications under
this Agreement must be in writing and shall be deemed duly given, unless
otherwise expressly indicated to the contrary in this Agreement, (i) when
personally delivered, (ii) upon receipt of a telephonic facsimile transmission
with a confirmed telephonic transmission answer back, (iii) three (3) days after
having been deposited in the United States mail, certified or registered, return
receipt requested, postage prepaid, or (iv) one (1) business day after having
been dispatched by a nationally recognized overnight courier service, addressed
to the parties or their permitted assigns at the following addresses (or at such
other address or number as is given in writing by either party to the other) as
follows:
<TABLE>
<S> <C>
To the Company: Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-8707
Facsimile No.: 614-278-6762
Attention: General Counsel
With a Copy to: Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378
Facsimile No.: 216-363-4588
Attention: Michael Wager, Esq.
To Carter: Philip L. Carter
10520 Wilshire Boulevard, #702
Los Angeles, California 90024
</TABLE>
5. ASSIGNMENTS. The rights and obligations of Carter under this Agreement
are not assignable by Carter, but, upon his death prior to July 31, 2000, any
unpaid balance owing under Section 1 shall be paid to Carter's estate. The
rights and obligations of the Company under this Agreement will inure to the
benefit of, and will be binding upon, the Company and its successors and
assigns.
6. WAIVER. The failure of either party to enforce any provision or
provisions of this Agreement will not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor prevent
that party thereafter from enforcing each and every other provision of this
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy will not constitute a waiver of such party's right to
assert all other legal and equitable remedies available to it under the
circumstances.
7. SEVERAL PROVISIONS. The provisions of this Agreement are severable, and
if any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable in any jurisdiction shall
nevertheless be binding and enforceable.
C-2
<PAGE> 142
8. MISCELLANEOUS. This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof. Section headings used in this
Agreement are for convenience only and are not a part of this Agreement and are
not to be used in construing it. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing and signed by the party
against whom the same is sought to be enforced. This Agreement may be executed
in several identical counterparts, each of which when executed by the parties
and delivered will constitute a single agreement.
9. GOVERNING LAW. This Agreement shall be construed under and governed by
the laws of the State of California without regard to conflicts of laws
principles. The parties hereto consent to the jurisdiction of the courts of the
State of California and to venue within the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CONSOLIDATED STORES CORPORATION
By: /s/ MICHAEL J. POTTER
------------------------------------
Michael J. Potter, Senior Vice
President
and Chief Financial Officer
CARTER
By: /s/ PHILIP L. CARTER
------------------------------------
Philip L. Carter
C-3
<PAGE> 143
ANNEX D
[Merrill Lynch Letterhead]
November 3, 1997
Board of Directors
Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228
Members of the Board of Directors:
Consolidated Stores Corporation (the "Acquiror"), MBC Consolidated
Acquisition Corporation, a newly formed, wholly owned subsidiary of the Acquiror
(the "Acquisition Sub"), and Mac Frugal's Bargains -- Close-Outs Inc. (the
"Company") propose to enter into an Agreement and Plan of Merger (the
"Agreement") pursuant to which the Acquisition Sub will be merged with and into
the Company in a transaction (the "Merger") in which each outstanding share of
the Company's common stock, par value $0.02778 per share (the "Company Shares"),
will be converted into the right to receive between 0.88 and 1.00 shares (the
Exchange Rate") of the common stock of the Acquiror, par value $0.01 per share
(the "Acquiror Shares"), as provided for in the formula described in the
Agreement. The terms and conditions of the Merger are more fully set forth in
the Agreement.
You have asked us whether, in our opinion, the Exchange Rate is fair from a
financial point of view to the Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Acquiror that we deemed
to be relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities
and prospects of the Company and the Acquiror, as well as the amount
and timing of the cost savings and related expenses expected to
result from the Merger (the "Expected Synergies") furnished to us by
the Acquiror;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the
matters described in clauses 1 and 2 above, as well as their
respective businesses and prospects before and after giving effect
to the Merger and the Expected Synergies;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and the Acquiror Shares and compared them with those of
certain publicly traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror
and compared them with those of certain publicly traded companies
that we deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that we deemed to be
relevant;
D-1
<PAGE> 144
(7) Participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial
and legal advisors;
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed a draft, dated November 2, 1997, of the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities, contingent or otherwise, of the Company or the Acquiror or any of
their subsidiaries, or been furnished with any such evaluation or appraisal. In
addition, we have not assumed any obligation to conduct any physical inspection
of the properties or facilities of the Company or the Acquiror. With respect to
the financial forecast information and the Expected Synergies furnished to or
discussed with us by the Company or the Acquiror, we have assumed that they have
been reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected future
financial performance of the Company or the Acquiror, as the case may be, and
the Expected Synergies. We express no opinion as to such financial forecast
information or the Expected Synergies or the assumptions on which they were
based. We have further assumed that the Merger will be accounted for as a
pooling-of-interests under generally accepted accounting principles and that it
will qualify as a tax-free reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that the final form of the Agreement
will be substantially similar to the last draft reviewed by us. Additionally,
for the purposes of rendering this opinion we have assumed, in all respects
material to our analysis, that the representation and warranties of each party
in the Agreement are true and correct, that each party to the Agreement will
perform all of the covenants and agreements required to be performed by such
party under the Agreement, and that all conditions to the consummation of the
Merger will be satisfied without waiver thereof. We have also assumed that in
the course of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the Merger, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the contemplated benefits of the Merger.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Acquiror has agreed to indemnify us for certain liabilities arising out of
our engagement. We have, in the past, provided financial advisory and financing
services to the Acquiror and may continue to do so and have received, and may
receive, fees for the rendering of such services. In addition, in the ordinary
course of our business, we may actively trade the Company Shares, as well as the
Acquiror Shares, for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
D-2
<PAGE> 145
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger and does not constitute a recommendation to
any shareholder of the Acquiror as to how such shareholder should vote on the
proposed Merger or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange Rate is fair from a financial point of view
to the Acquiror.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner &
Smith
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
D-3
<PAGE> 146
ANNEX E
NATIONSBANC MONTGOMERY SECURITIES, INC.
December 16, 1997
Board of Directors
Mac Frugal's Bargains - Close-outs Inc.
2430 East Del Amo Boulevard
Dominguez, CA 90220
Gentlemen and Ladies:
We understand that Mac Frugal's Bargains - Close-outs Inc., a Delaware
corporation ("Seller"), MBC Consolidated Acquisition Corporation, a Delaware
corporation ("Sub"), and Consolidated Stores Corporation, a Delaware corporation
("Buyer"), have entered into an Agreement and Plan of Merger dated November 4,
1997 (the "Merger Agreement"), pursuant to which Sub will be merged with and
into Seller (the "Merger"), and Seller will become a wholly-owned subsidiary of
Buyer. Pursuant to the Merger, as more fully described in the Merger Agreement,
we understand that each outstanding share of the common stock, $.02778 par value
per share ("Seller Common Stock"), of Seller will be converted into and
exchangeable for one share of the common stock, $.01 par value per share ("Buyer
Common Stock"), of Buyer (plus one associated preferred stock purchase right per
share of Buyer Common Stock), subject to certain adjustments if the price of
Buyer Common Stock exceeds $39.00 per share as set forth and defined in the
Merger Agreement (the "Consideration"). The terms and conditions of the Merger
are set forth in more detail in the Merger Agreement.
We previously delivered to you an opinion dated November 4, 1997 (the
"Prior Letter") which stated, subject to the limitations and conditions
contained therein, our opinion as investment bankers that the Consideration to
be received by the stockholders of Seller pursuant to the Merger is fair to such
stockholders from a financial point of view, as of the date of the Prior Letter.
You have asked us to reconfirm the opinion expressed in the Prior Letter, and
further asked for our opinion as investment bankers as to whether the
Consideration to be received by the stockholders of Seller pursuant to the
Merger is fair to such stockholders from a financial point of view, as of the
date hereof. As you are aware, we were not retained to nor did we advise Seller
with respect to alternatives to the Merger or Seller's underlying decision to
proceed with or effect the Merger. Further, we were not requested to nor did we
solicit or assist Seller in soliciting indications of interest from third
parties for all or any part of Seller.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Seller and
Buyer, including the consolidated financial statements for recent years and
interim periods to November 2, 1997 and certain other relevant financial and
operating data relating to Seller and Buyer made available to us from published
sources and from the internal records of Seller and Buyer, (ii) reviewed the
financial terms and conditions of the Merger Agreement; (iii) reviewed certain
publicly available information concerning the trading of, and the trading market
for, Seller Common Stock and Buyer Common Stock; (iv) compared Seller and Buyer
from a financial point of view with certain other companies in the retail
industry which we deemed to be relevant; (v) considered the financial terms, to
the extent publicly available, of selected recent business combinations of
companies in the retail industry which we deemed to be comparable, in whole or
in part, to the Merger; (vi) reviewed and discussed with representatives of the
management of Seller and Buyer certain information of a business and financial
nature regarding Seller and Buyer, furnished to us by them, including financial
forecasts and related assumptions of Seller and Buyer, (vii) made inquiries
regarding and discussed the Merger and the Merger Agreement and other matters
related thereto with Seller's counsel; and (viii) performed such other analyses
and examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Seller and Buyer provided to us by their respective managements,
upon their advice and
E-1
<PAGE> 147
with your consent we have assumed for purposes of our opinion that the forecasts
have been reasonably prepared on bases reflecting the best available estimates
and judgments of their respective managements at the time and through the date
hereof as to the future financial performance of Seller and Buyer, and that they
provide a reasonable basis upon which we can form our opinion. We have also
assumed that there have been no material changes in Seller's or Buyer's assets,
financial condition, results of operations, business or prospects since the
respective dates of their last financial statements made available to us. We
have relied on advice of the counsel and the independent accountants to Seller
as to all legal and financial reporting matters with respect to Seller, the
Merger and the Merger Agreement. You have informed us, and we have assumed
without verification and with your consent, that the Merger will be treated as a
pooling of interests under Accounting Principles Board Opinion No. 16 and that
the Merger will be treated as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. We have assumed that the Merger
will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934 and all other applicable federal and
state statutes, rules and regulations. In addition, we have not assumed
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
Seller or Buyer, nor have we been furnished with any such appraisals. Finally,
our opinion is based on economic, monetary and market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Accordingly, although subsequent developments may affect this opinion, we have
not assumed any obligation to update, revise or reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by Seller of any of
the conditions to its obligations thereunder.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the stockholders of
Seller pursuant to the Merger is fair to such stockholders from a financial
point of view, as of the date hereof.
We are not expressing (and cannot express) an opinion regarding the price
at which the Buyer Common Stock may trade at any future time. The Consideration
to be received by the stockholders of Seller pursuant to the Merger is based
upon a fixed exchange ratio (subject to adjustment downward if the price of
Buyer Common Stock for purposes of the Merger Agreement exceeds $39.00 per
share) and, accordingly, the market value of the Consideration may vary
significantly from what such stockholders would receive if the Merger were
completed today. Additionally, the market value of the Consideration received in
the Merger can be expected to change after consummation of the Merger as the
trading price of Buyer Common Stock changes in the ordinary course (or
otherwise) of purchases and sales in the open market.
This opinion is directed to the Board of Directors of Seller for use only
in connection with its consideration of the Merger (and is not a recommendation
to any stockholder as to how such stockholder should vote with respect to the
Merger or otherwise). Further, this opinion addresses only the financial
fairness of the Consideration to stockholders as of the date hereof, and it does
not address any other aspect of the Merger including, without limitation, the
relative merits of the Merger, any alternatives to the Merger or Seller's
underlying decision to proceed with or effect the Merger. This opinion may not
be used or referred to by Seller, or quoted or disclosed to any person in any
manner, without our prior written consent, which consent is herby given to the
inclusion of this opinion in any proxy statement or prospectus filed with the
Securities and Exchange Commission in connection with the Merger. In furnishing
this opinion, we do not admit that we are experts within the meaning of the term
"experts" as used in the Securities Act and the rules and regulations
promulgated thereunder, nor do we admit that this opinion constitutes a report
or valuation within the meaning of Section 11 of the Securities Act.
Very truly yours,
/s/ NATIONSBANC MONTGOMERY SECURITIES, INC.
--------------------------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
E-2
<PAGE> 148
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the DGCL, Article Seventh of the
Consolidated Stores Restated Certificate of Incorporation (Exhibit 3.1 hereto)
eliminates the monetary liability of a director to the corporation or its
stockholders for breach of fiduciary duty as a director, with the following
exceptions, as required by Delaware law; (i) breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (iii) payment of unlawful dividends or the making of unlawful stock
purchases or redemptions; or (iv) any transaction from which the director
derived an improper personal benefit.
In addition, under Section 145 of the DGCL, a corporation may indemnify a
director, officer, employee or agent of the corporation against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any threatened,
pending or completed proceeding (other than an action by or in the right of the
corporation) if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In the case of an action brought by or in the
right of the corporation, the corporation may indemnify a director, officer,
employee or agent of the corporation against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of any threatened, pending or completed action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that a
court determines upon application that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper. Article VI of the Consolidated Stores
By-laws (Exhibit 3.2 hereto) provides for indemnification of its directors,
officers, employees, and other agents to the fullest extent permitted by the
DGCL.
II-1
<PAGE> 149
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<S> <C>
* 2.1 Agreement and Plan of Merger, dated as of November 4, 1997, by and between
Consolidated Stores Corporation, MBC Consolidated Acquisition Corporation and
Mac Frugal's Bargains - Close-outs Inc. (included in Joint Proxy
Statement/Prospectus as Annex A). The Registrant agrees to furnish
supplementally a copy of omitted schedules to the Commission upon request.
* 2.2 Consulting Agreement, dated as of November 4, 1997, by and between Philip L.
Carter and Consolidated Stores Corporation (included in Joint Proxy
Statement/Prospectus as Annex B).
* 2.3 Noncompetition Agreement, dated as of November 4, 1997, by and between Philip L.
Carter and Consolidated Stores Corporation (included in Joint Proxy
Statement/Prospectus as Annex C).
* 3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit 4(a))
to the Registrant's Registration Statement (No. 33-6086) on Form S-8.
* 3.2 Bylaws of the Registrant, as amended July 18, 1989, filed as Exhibit 3(c) to the
Registrant's Annual Report on Form 10-K for the year ended February 3, 1990, and
as amended April 14, 1992, filed as Exhibit 3(c) to the Registrant's Annual
Report on Form 10-K for the year ended February 1, 1992.
* 4.1 Rights Agreement of the Registrant dated as of April 18, 1989 (filed as Exhibit
4(c)) to the Registrant's Annual Report on Form 10-K for the year ended February
3, 1990.
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
8.1 Tax Opinion of Gibson, Dunn & Crutcher LLP.
23.1 Consent of Deloitte & Touche LLP, Dayton Ohio.
23.2 Consent of Deloitte & Touche LLP, Los Angeles, California.
23.3 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (included in Exhibit 5.1).
23.4 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1).
24.1 Powers of Attorney (included in Part II of the Form S-4 Registration Statement).
99.1 Form of Proxy for Special Meeting of Stockholders of Consolidated Stores
Corporation.
99.2 Form of Proxy for Special Meeting of Stockholders of Mac Frugal's
Bargains - Close-outs Inc.
*99.3 Certificate of Incorporation of Mac Frugal's Bargains - Close-outs Inc., as
amended (incorporated by reference to Exhibit 6.1 to Mac Frugal's
Bargains - Close-outs Inc.'s Registration Statement on Form 8-A dated May 22,
1992).
*99.4 Bylaws of Mac Frugal's Bargains - Close-outs Inc., as amended (incorporated by
reference to Exhibit 6.2 to Mac Frugal's Bargains - Close-outs Inc.'s
Registration Statement on Form 8-A dated May 22, 1992).
*99.5 Rights Agreement, dated as of March 16, 1988, between Pic 'N' Save Corporation
(n.k.a. Mac Frugal's Bargains - Close-outs Inc.) and First Interstate Bank of
California, as Rights Agent, as amended (incorporated by reference to Exhibit 1
to Pic 'N' Save Corporation's (n.k.a. Mac Frugal's Bargains - Close-outs Inc.)
Registration Statement on Form 8-A, dated March 21, 1988).
*99.6 Opinion of Merrill Lynch & Co. (included in Joint Proxy Statement/Prospectus as
Annex D).
99.7 Consent of Merrill Lynch & Co.
*99.8 Opinion of NationsBanc Montgomery Securities, Inc. (included in Joint Proxy
Statement/Prospectus as Annex E).
99.9 Consent of NationsBanc Montgomery Securities, Inc.
</TABLE>
- ---------------
* Incorporated by reference.
(b) Financial Statement Schedules.
None.
(c) Reports, Opinions and Appraisals.
None.
II-2
<PAGE> 150
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) (1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (I) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the Effective Time of the registration statement through the date
of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 151
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
16th day of December, 1997.
CONSOLIDATED STORES CORPORATION
By: /s/ MICHAEL J. POTTER
------------------------------------
Michael J. Potter
Senior Vice President and Chief
Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------- ---------------------
<S> <C> <C>
* Chairman of the Board and Chief December 16, 1997
- ------------------------------------- Executive Officer
William G. Kelley
* President and Director December 16, 1997
- -------------------------------------
Michael L. Glazer
/s/ MICHAEL J. POTTER Senior Vice President and Chief December 16, 1997
- ------------------------------------- Financial Officer
Michael J. Potter
* Director December 16, 1997
- -------------------------------------
Sheldon M. Berman
* Director December 16, 1997
- -------------------------------------
W. Eric Carlborg
* Director December 16, 1997
- -------------------------------------
David T. Kollat
* Director December 16, 1997
- -------------------------------------
Brenda J. Lauderback
* Director December 16, 1997
- -------------------------------------
Nathan P. Morton
* Director December 16, 1997
- -------------------------------------
Dennis B. Tishkoff
* Director December 16, 1997
- -------------------------------------
William A. Wickham
</TABLE>
*By: /s/ MICHAEL J. POTTER
--------------------------
Michael J. Potter
Attorney-in-fact
II-4
<PAGE> 152
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- -------------------------------------------------------------------------- --------
<S> <C> <C>
* 2.1 Agreement and Plan of Merger, dated as of November 4, 1997, by and between
Consolidated Stores Corporation, MBC Consolidated Acquisition Corporation
and Mac Frugal's Bargains - Close-outs Inc. (included in Joint Proxy
Statement/Prospectus as Annex A). The Registrant agrees to furnish
supplementally a copy of omitted schedules to the Commission upon request.
* 2.2 Consulting Agreement, dated as of November 4, 1997, by and between Philip
L. Carter and Consolidated Stores Corporation (included in Joint Proxy
Statement/Prospectus as Annex B).
* 2.3 Noncompetition Agreement, dated as of November 4, 1997, by and between
Philip L. Carter and Consolidated Stores Corporation (included in Joint
Proxy Statement/Prospectus as Annex C).
* 3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit
4(a)) to the Registrant's Registration Statement (No. 33-6086) on Form
S-8.
* 3.2 Bylaws of the Registrant, as amended July 18, 1989, filed as Exhibit 3(c)
to the Registrant's Annual Report on Form 10-K for the year ended February
3, 1990, and as amended April 14, 1992, filed as Exhibit 3(c) to the
Registrant's Annual Report on Form 10-K for the year ended February 1,
1992.
* 4.1 Rights Agreement of the Registrant dated as of April 18, 1989 (filed as
Exhibit 4(c)) to the Registrant's Annual Report on Form 10-K for the year
ended February 3, 1990.
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
8.1 Tax Opinion of Gibson, Dunn & Crutcher LLP.
23.1 Consent of Deloitte & Touche LLP, Dayton, Ohio.
23.2 Consent of Deloitte & Touche LLP, Los Angeles, California.
23.3 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (included in Exhibit
5.1).
23.5 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1).
24.1 Powers of Attorney (included in Part II of the Form S-4 Registration
Statement).
99.1 Form of Proxy for Special Meeting of Stockholders of Consolidated Stores
Corporation.
99.2 Form of Proxy for Special Meeting of Stockholders of Mac Frugal's
Bargains - Close-outs Inc.
* 99.3 Certificate of Incorporation of Mac Frugal's Bargains - Close-outs Inc.,
as amended (incorporated by reference to Exhibit 6.1 to Mac Frugal's
Bargains - Close-outs Inc.'s Registration Statement on Form 8-A dated May
22, 1992).
* 99.4 Bylaws of Mac Frugal's Bargains - Close-outs Inc., as amended
(incorporated by reference to Exhibit 6.2 to Mac Frugal's
Bargains - Close-outs Inc.'s Registration Statement on Form 8-A dated May
22, 1992).
* 99.5 Rights Agreement, dated as of March 16, 1988, between Pic 'N' Save
Corporation (n.k.a. Mac Frugal's Bargains - Close-outs Inc.) and First
Interstate Bank of California, as Rights Agent, as amended (incorporated
by reference to Exhibit 1 to Pic 'N' Save Corporation's (n.k.a. Mac
Frugal's Bargains - Close-outs Inc.) Registration Statement on Form 8-A,
dated March 21, 1988).
* 99.6 Opinion of Merrill Lynch & Co. (included in Joint Proxy
Statement/Prospectus as Annex D).
99.7 Consent of Merrill Lynch & Co.
</TABLE>
II-5
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- ------- -------------------------------------------------------------------------- --------
<S> <C> <C>
* 99.8 Opinion of NationsBanc Montgomery Securities, Inc. (included in Joint
Proxy Statement/Prospectus as Annex E).
99.9 Consent of NationsBanc Montgomery Securities, Inc.
</TABLE>
- ---------------
* Incorporated by reference.
II-6
<PAGE> 1
EXHIBIT 5.1
December 16, 1997
Board of Directors
Consolidated Stores Corporation
300 Phillipi Road
Columbus, Ohio 43228-0512
Gentlemen:
Consolidated Stores Corporation, a Delaware corporation (the "Company"),
has filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, a Registration Statement on Form S-4 (the "Registration
Statement") relating to an Agreement and Plan of Merger dated as of November 4,
1997 (the "Merger Agreement"), by and among the Company, MBC Consolidated
Acquisition Corporation ("Sub"), a Delaware Corporation and a wholly owned
subsidiary of the Company, and Mac Frugal's Bargains - Close-outs Inc. ("Mac
Frugal's"), whereby Sub will be merged with and into Mac Frugal's, resulting in
Mac Frugal's being a wholly owned subsidiary of the Company (the "Merger"). In
connection with the Merger, the Company will be registering 28,000,000 shares of
common stock, par value $.01 per share (the "Shares").
You have requested our opinion in connection with the Company's filing of
the Registration Statement. In this connection, we have examined and relied upon
originals or copies, certified or otherwise identified to our satisfaction as
being true copies, of all such records of the Company, all such agreements,
certificates of officers of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary as a
basis for the opinion expressed in this letter, including, without limitation,
the Company's Restated Certificate of Incorporation (the "Charter"), the
Registration Statement and the related joint proxy statement/prospectus which
forms a part of the Registration Statement (the "Prospectus").
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all documents submitted to us as certified or photostatic copies.
We have investigated such questions of law for the purpose of rendering the
opinion in this letter as we have deemed necessary. We express no opinion in
this letter concerning any law other than the General Corporation Law of the
State of Delaware and the federal law of the United States of America.
On the basis of and in reliance on the foregoing, we are of the opinion
that the Shares, when and if issued and exchanged in accordance with the terms
of the Merger Agreement, will be validly issued, fully paid and non-assessable.
The opinion in this letter is rendered only to the Company in connection
with the filing of the Registration Statement. We consent to the filing of this
letter as an exhibit to the Registration Statement and to being named in the
Prospectus under the heading "Legal Opinions" as counsel for the Company. The
opinion may not be relied upon by the Company for any other purpose. This letter
may not be paraphrased, quoted or summarized, nor may it be duplicated or
reproduced in part.
Very truly yours,
/s/ BENESCH, FRIEDLANDER, COPLAN & ARONOFF
LLP
------------------------------------------
BENESCH, FRIEDLANDER,
COPLAN & ARONOFF LLP
<PAGE> 1
EXHIBIT 8.1
November 25, 1997
(213) 229-7000 C 71236-00073
Mac Frugal's Bargains - Close-outs Inc.
2430 E. Del Amo Boulevard
Dominguez, California 90220-6306
Re: Registration Statement on Form S-4
Gentlemen:
We are acting as counsel to Mac Frugal's Bargains - Close-outs Inc., a
Delaware corporation ("Mac Frugal's"), in connection with the merger (the
"Merger") of MBC Consolidated Acquisition Corporation, ("Acquisition Sub"), a
Delaware corporation and a wholly-owned subsidiary of Consolidated Stores
Corporation, a Delaware corporation ("Consolidated Stores"), with and into Mac
Frugal's. You have requested our opinion as to the material federal income tax
consequences of the Merger to holders of Mac Frugal's common stock, $.02778 par
value ( "Mac Frugal's Common Stock" ). The Merger will be effected pursuant to
the terms and conditions of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of November 4, 1997, among Mac Frugal's, Consolidated
Stores and Acquisition Sub. In the Merger, each share of Mac Frugal's Common
Stock will be exchanged for shares of Consolidated Stores Common Stock, par
value $.01 per share ("Consolidated Stores Common Stock"), as specified in the
Merger Agreement. The Merger Agreement is attached as an exhibit to the
Registration Statement on Form S-4 (the "Registration Statement") filed with the
Securities and Exchange Commission in connection with the Merger. Defined terms
used herein have the meanings ascribed to them in the Registration Statement.
In rendering our opinion, we have examined the Merger Agreement and have,
with your permission, relied upon, and assumed as correct now and as of the
Effective Time, (i) the factual information contained in the Registration
Statement, (ii) the representations and covenants contained in the Merger
Agreement, (iii) certain factual representations made by Mac Frugal's,
Consolidated Stores and Acquisition Sub, which are attached hereto and made a
part hereof, and (iv) such other materials as we have deemed necessary or
appropriate as a basis for our opinion.
On the basis of the information, representations and covenants contained in
the foregoing materials, it is our opinion that for federal income tax purposes:
(a) the Merger will qualify as a tax-free reorganization within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue
Code of 1986, as amended (the "Code"), and Consolidated Stores, Acquisition
Sub and Mac Frugal's will each be a party to the reorganization;
(b) no gain or loss will be recognized by Mac Frugal's as a result of
the Merger;
(c) no gain or loss will be recognized by a stockholder of Mac
Frugal's upon the exchange of shares of Mac Frugal's Common Stock for
Consolidated Stores Common Stock (including the Consolidated Stores
Rights), except that gain or loss will be recognized by a stockholder of
Mac Frugal's on the receipt of cash in lieu of fractional shares;
(d) the adjusted tax basis of the Consolidated Stores Common Stock
received by a stockholder of Mac Frugal's pursuant to the Merger (including
any fractional share interests deemed received) will be the same as the
adjusted tax basis of the shares of Mac Frugal's Common Stock surrendered
in exchange therefor;
<PAGE> 2
Mac Frugal's Bargains - Close-outs Inc.
November 25, 1997
Page 2
(e) the holding period of the Consolidated Stores Common Stock
received by a stockholder of Mac Frugal's as a result of the Merger
(including any fractional share interests deemed received) will include the
holding period of the shares of Mac Frugal's Common Stock surrendered in
exchange therefor, provided that such Mac Frugal's Common Stock is held as
a capital asset by the Mac Frugal's stockholder at the consummation of the
Merger; and
(f) any cash payment received by a holder of Mac Frugal's Common Stock
in lieu of a fractional share of Consolidated Stores Common Stock will be
treated as if such fractional share of Consolidated Stores Common Stock had
been issued in the Merger and then redeemed by Consolidated Stores.
Furthermore, the discussion under the caption "Certain Federal Income Tax
Consequences" in the Registration Statement, to the extent it constitutes
matters of law or legal conclusions, is based on our opinion and accurately
describes the material federal income tax consequences of the Merger.
This opinion expresses our views only as to federal income tax laws in
effect as of the date hereof, including the Code, applicable Treasury
Regulations, published rulings and administrative practices of the Internal
Revenue Service (the "Service") and court decisions. This opinion represents our
best legal judgment as to the matters addressed herein, but is not binding on
the Service or the courts. Furthermore, the legal authorities upon which we rely
are subject to change either prospectively or retroactively. Any change in such
authorities or any change in the facts or representations, or any past or future
actions by Mac Frugal's, Consolidated Stores or Acquisition Sub contrary to such
representations, might adversely affect the conclusions stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name under the
caption "Certain Federal Income Tax Consequences" and "Legal Opinions" in the
Registration Statement.
Very truly yours,
/s/ GIBSON, DUNN & CRUTCHER LLP
------------------------------------
GIBSON, DUNN & CRUTCHER LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Consolidated Stores Corporation on Amendment No. 1 to Form S-4 of our report
dated February 24, 1997, incorporated by reference in the Annual Report on Form
10-K of Consolidated Stores Corporation for the year ended February 1, 1997 and
to the reference to us under the heading "Experts" in the Prospectus, which is
part of this Registration Statement.
DELOITTE & TOUCHE LLP
Dayton, OH
December 12, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-41143 of Consolidated Stores Corporation on Form
S-4 of our report dated March 12, 1997, appearing in the Annual Report on Form
10-K of Mac Frugal's Bargains - Close-outs Inc. and subsidiaries for the year
ended February 2, 1997 and to the reference to us under the heading "Experts" in
the Joint Proxy Statement/Prospectus, which is part of this Registration
Statement.
DELOITTE & TOUCHE LLP
Los Angeles, California
December 15, 1997
<PAGE> 1
EXHIBIT 99.1
[Form of Consolidated Stores Proxy]
CONSOLIDATED STORES CORPORATION PROXY
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 15, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice of Special
Meeting to be held on January 15, 1998 and the accompanying Joint Proxy
Statement/Prospectus, and (2) appoints Albert J. Bell and Michael J. Potter, and
each of them, proxies of the undersigned with full power of substitution to vote
as indicated herein all shares of Common Stock of Consolidated Stores
Corporation ("Consolidated Stores") held of record by the undersigned on
December 15, 1997, at the special meeting of stockholders to be held on January
15, 1998 or any postponements or adjournments thereof, with all the powers the
undersigned would possess if then and there personally present.
1. Proposal to approve the Share Issuance pursuant to the terms of the Agreement
and Plan of Merger, dated as of November 4, 1997, by and among Consolidated
Stores, MBC Consolidated Acquisition Corporation, a wholly owned subsidiary
of Consolidated Stores, and Mac Frugal's Bargains - Close-outs Inc. ("Mac
Frugal's"), pursuant to which the shares of Mac Frugal's will be converted
into shares of Consolidated Stores.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting or any adjournments
or postponements thereof.
(Continued, and to be dated and signed, on the other side)
(Continued from other side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ITEM 1 AND WITH
DISCRETIONARY AUTHORITY ON ALL MATTERS THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
CONSOLIDATED STORES' BOARD OF DIRECTORS RECOMMENDS THAT CONSOLIDATED STORES'
STOCKHOLDERS VOTE FOR ITEM 1.
Dated
-----------------------------------------------------------------------------
, 199
----------------------------------------------------
-----------------------------
Signature(s) of Stockholders
-----------------------------
Signature(s) of Stockholders
(PLEASE SIGN EXACTLY AS YOUR
NAME APPEARS HEREON. IF
SHARES ARE HELD JOINTLY, ALL
HOLDERS MUST SIGN. WHEN
SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE
GIVE YOUR FULL TITLE. IF A
CORPORATION, PLEASE SIGN IN
FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP,
PLEASE SIGN IN PARTNERSHIP
NAME BY AUTHORIZED PERSON,
INDICATING WHERE PROPER,
OFFICIAL POSITION OR
REPRESENTATIVE CAPACITY.)
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
[ ] If you plan to attend the Special Meeting of Stockholders, please check this
box.
<PAGE> 1
[Form of Mac Frugal's Proxy] EXHIBIT 99.2
MAC FRUGAL'S BARGAINS - CLOSE-OUTS INC. PROXY
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 15, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice of Special
Meeting to be held on January 15, 1998 and the accompanying Joint Proxy
Statement/Prospectus, and (2) appoints David H. Batchelder and Philip L. Carter,
and each of them, proxies of the undersigned with full power of substitution to
vote as indicated herein all shares of Common Stock of Mac Frugal's
Bargains - Close-outs Inc. ("Mac Frugal's") held of record by the undersigned on
December 15, 1997, at the special meeting of stockholders to be held on January
15, 1998 or any postponements or adjournments thereof, with all the powers the
undersigned would possess if then and there personally present.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
ABOVE. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ITEM 1 AND WITH
DISCRETIONARY AUTHORITY ON ALL MATTERS THAT MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
(Continued, and to be dated and signed, on the other side)
(Continued from other side)
MAC FRUGAL'S BOARD OF DIRECTORS RECOMMENDS THAT MAC FRUGAL'S STOCKHOLDERS VOTE
FOR ITEM 1.
1. Proposal to approve and adopt the Agreement and Plan of Merger, dated as of
November 4, 1997, by and among Consolidated Stores Corporation ("Consolidated
Stores"), MBC Consolidated Acquisition Corporation, a wholly owned subsidiary
of Consolidated Stores, and Mac Frugal's, pursuant to which the shares of Mac
Frugal's will be converted into shares of Consolidated Stores.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the special meeting or any adjournments
or postponements thereof.
Dated , 199__
-----------------------------
Signature(s) of Stockholders
-----------------------------
Signature(s) of Stockholders
(PLEASE SIGN EXACTLY AS YOUR
NAME APPEARS HEREON. IF
SHARES ARE HELD JOINTLY, ALL
HOLDERS MUST SIGN. WHEN
SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE
GIVE YOUR FULL TITLE. IF A
CORPORATION, PLEASE SIGN IN
FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP,
PLEASE SIGN IN PARTNERSHIP
NAME BY AUTHORIZED PERSON,
INDICATING WHERE PROPER,
OFFICIAL POSITION OR
REPRESENTATIVE CAPACITY.)
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
[ ] If you plan to attend the Special Meeting of Stockholders, please check this
box.
<PAGE> 1
EXHIBIT 99.7
CONSENT OF MERRILL LYNCH
We hereby consent to the use of our opinion letter, dated November 3, 1997,
to the Board of Directors of Consolidated Stores Corporation included as Annex D
to the Joint Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") which
forms a part of the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission on November 12, 1997 (the "Registration
Statement") relating to the proposed merger of MBC Consolidated Acquisition
Corporation, a wholly owned subsidiary of Consolidated Stores Corporation, with
and into Mac Frugal's Bargains - Close-outs Inc. and to the references to our
firm and such opinion in the Proxy Statement/Prospectus and the Registration
Statement. In giving such consent, we do not admit and we hereby disclaim that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
-------------------------------------------------
November 11, 1997
<PAGE> 1
EXHIBIT 99.9
CONSENT OF NMSI
We hereby consent to the including of our opinion letter dated December 16,
1997, to the Board of Directors of Mac Frugal's Bargains -- Close-outs Inc. (the
"Company") regarding the proposed acquisition of the Company by Consolidated
Stores Corporation ("Consolidated Stores"), in Consolidated Stores' Registration
Statement on Form S-4 (the "Registration Statement") and the Joint Proxy
Statement/Prospectus (the "Proxy Statement/Prospectus") to be filed with the
Securities and Exchange Commission on December 16, 1997, and to the references
therein to our firm and to our opinion in the form of letter to the Company's
Stockholders in the Registration Statement and in the following sections of the
Proxy Statement/Prospectus: (i) "Summary -- The Merger -- Mac Frugal's Reasons
for the Merger; Recommendation of the Mac Frugal's Board," (ii) "Summary -- The
Merger -- Opinion Addressed to the Mac Frugal's Board," (iii) "The
Merger -- Background of the Merger," with respect to October 31, 1997 and
November 4, 1997, (iv) "The Merger -- Mac Frugal's Reasons for the Merger;
Recommendation of the Mac Frugal's Board," with respect to item 4 listed
therein, (v) "The Merger -- Opinion Addressed to the Mac Frugal's Board," and
(vi) "Merger Agreement -- Conditions to the Merger." In giving the foregoing
consent, we do not admit and we hereby disclaim (i) that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of the 1933, as amended (the "Securities Act"), or the rules and regulations
of the Securities and Exchange Commission promulgated thereunder, and (ii) that
we are experts with respect to any part of the Registration Statement within the
meaning of the term "experts" as used in the Securities Act and the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ NATIONSBANC MONTGOMERY SECURITIES, INC.
--------------------------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
Dated: December 16, 1997
