<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
AMENDMENT NO. 2
TO
SCHEDULE 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange
Act of 1934)
(Amendment No. 1)
TUESDAY MORNING CORPORATION
(Name of Issuer)
MADISON DEARBORN PARTNERS II, L.P.
MADISON DEARBORN CAPITAL PARTNERS II, L.P.
MADISON DEARBORN PARTNERS, INC.
MR. LLOYD L. ROSS
MR. JERRY M. SMITH
(Name of Persons Filing Statement)
COMMON STOCK, $.01 PAR VALUE
(Title of Class of Securities)
89903710
(CUSIP Number of Class of Securities)
Jerry M. Smith Benjamin D. Chereskin
President Vice President
Tuesday Morning Corporation Madison Dearborn Partners II, L.P.
14621 Inwood Rd. Madison Dearborn Capital Partners II, L.P.
Dallas, Texas 75244 Madison Dearborn Partners, Inc.
(972) 387-3562 Three First National Plaza
Chicago, Illinois 60602
(312) 732-5115
Lloyd L. Ross Tuesday Morning Corporation
Chief Executive officer 14621 Inwood Rd.
Tuesday Morning Corporation Dallas, Texas 75244
14621 Inwood Rd. (972) 387-3562
Dallas, Texas 75244
(972) 387-3562
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Persons Filing Statement)
Copies to:
Bruce Hallet, Esq. Carter W. Emerson, P.C.
Crouch & Hallet, L.L.P. Kirkland & Ellis
717 N. Harwood Suite 1400 200 East Randolph Drive
Dallas, TX 775201 Chicago, Illinois 60601
(214) 953-0053 (312) 861-2000
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [_] The filing of registration statement under the Securities Act of 1933.
c. [_] A tender offer.
d. [_] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
CALCULATION OF FILING FEE
________________________________________________________________________________
Transaction Valuation* Amount of Filing Fee
--------------------- --------------------
$314,417,070 $62,883
________________________________________________________________________________
*The transaction valuation has been calculated by multiplying $23.88, the
average of the high and low sale price for shares of Common Stock on September
19, 1997 on the Nasdaq National Market, by 13,166,544, the number of shares of
Common Stock estimated to be outstanding at the time of the transaction
(includes 1,248,863 underlying options to purchase shares of Common Stock).
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $62,883
Form or Registration No.: Schedule 14A
Filing Party: Tuesday Morning Corporation
Date Filed: September 24, 1997
================================================================================
<PAGE>
AMENDMENT NO. 2 TO SCHEDULE 13E-3
---------------------------------
This Rule 13E-3 Transaction Statement (this "Statement") relates to the
solicitation of proxies by Tuesday Morning Corporation, a Delaware corporation
("Issuer"), in connection with a Special Meeting of Issuer's stockholders at
which such stockholders will be asked to consider the approval of, among other
things, an Agreement and Plan of Merger (the "Merger Agreement"), dated as of
September 12, 1997, by and among Issuer, Madison Dearborn Partners II, L.P., a
Delaware limited partnership ("Madison Dearborn"), and Tuesday Morning
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Madison Dearborn ("Merger Subsidiary"). This Statement further amends the
Schedule 13E-3, dated November 3, 1997, previously amended by Amendment No. 1
dated November 10, 1997 (as heretofore and hereby amended, the "Schedule 13E-
3").
This Statement amends and restates in entirety all of the Items of the
Schedule 13E-3.
The cross reference sheet on the following pages, which is being supplied
pursuant to General Instruction F to Schedule 13E-3, shows the location in the
Preliminary Proxy Statement (the "Proxy Statement") filed by Issuer with the
Securities and Exchange Commission on the date hereof, of the information
required to be included in response to the items of this Statement. The
information set forth in the Proxy Statement which is attached hereto as Exhibit
(d)(1), including all exhibits thereto, is hereby incorporated herein by
reference, and the responses to each Item herein are qualified in their entirety
by the provisions of the Proxy Statement.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to General Instruction F to Schedule 13E-3)
All references are to portions of the Proxy Statement which are
incorporated herein and made a part hereof by reference.
<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM RESPONSE / CAPTION IN
NUMBER AND CAPTION PROXY STATEMENT
------------------ ---------------
<S> <C>
1. Issuer and Class of Security
Subject to the Transaction.
(a) "SUMMARY -- Parties to the Merger"
(b) "SUMMARY -- Special Meeting"; "SUMMARY -- Market
Prices for Common Stock and Dividends"; "THE SPECIAL
MEETING -- Record Date"; THE SPECIAL MEETING --
Quorum"
(c) "SUMMARY -- Market Prices for Common Stock and
Dividends"
(d) *
(e) *
(f) *
2. Identity and Background.
(a) - (g) "SUMMARY -- Parties to the Merger"; "Certain Information Concerning Madison
Dearborn, Merger Subsidiary and Affiliates"
3. Past Contacts, Transactions or Negotiations.
(a) (1) *
(2) "SUMMARY -- Conflicts of Interest"; "SPECIAL FACTORS --
Background of the Merger"; "SPECIAL FACTORS -- Conflicts
of Interest"; "SPECIAL FACTORS -- Effective Time and
Consequences of the Merger"
(b) "SPECIAL FACTORS -- Conflicts of Interest"; "SPECIAL FACTORS --
Background of the Merger"
4. Terms of the Transaction.
(a) "SUMMARY -- The Merger"; "SUMMARY -- Conflicts of
Interest"; "SPECIAL FACTORS"
(b) "SUMMARY -- Conflicts of Interest"; "SPECIAL FACTORS --
Background of the Merger"; "SPECIAL FACTORS -- Conflicts of
Interest"
5. Plans or Proposals of the Issuer or Affiliate.
(a) *
(b) *
(c) "SPECIAL FACTORS -- Effective Time and Consequences of the
Merger"
(d) "SUMMARY -- Financing of the Merger"; "THE MERGER -- Financing"
(e) "SPECIAL FACTORS -- Effective Time and Consequences of the Merger"
</TABLE>
________________
* Not applicable or answer is negative.
i
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM RESPONSE / CAPTION IN
NUMBER AND CAPTION PROXY STATEMENT
------------------ ---------------
<S> <C>
(f) "SUMMARY -- The Merger"; "SPECIAL FACTORS -- Effective Time
and Consequences of the Merger"
(g) *
6. Source and Amount of Funds or Other
Consideration.
(a) "SUMMARY -- Financing of the Merger"; "THE MERGER
-- Financing"
(b) "THE MERGER -- Fees and Expenses"
(c) (1) and (2) "SUMMARY -- Financing of the Merger"; "THE MERGER
-- Financing"
(d) *
7. Purpose(s), Alternatives, Reasons and Effects.
(a) "SPECIAL FACTORS -- Reasons for the Merger and Recommendation of the
Company's Board of Directors"; "SPECIAL FACTORS -- Madison Dearborn's Reasons
for the Merger"
(b) "SPECIAL FACTORS -- Background of the Merger"; "SPECIAL FACTORS -- Reasons
for the Merger and Recommendation of the Company's Board of Directors";
"SPECIAL FACTORS -- Position of Messrs. Ross and Smith as to Fairness of the
Merger"; "SPECIAL FACTORS -- Opinion of Financial Advisor"; "SPECIAL
FACTORS -- Position of Madison Dearborn as to Fairness of Merger""
(c) "SPECIAL FACTORS -- Madison Dearborn's Reasons for the
Merger"
(d) "SUMMARY"; "SPECIAL FACTORS -- Conflicts of Interest";
"SPECIAL FACTORS -- Effective Time and Consequences of the
Merger"; "SPECIAL FACTORS -- Federal Income Tax Consequences"
"SPECIAL FACTORS -- Reasons for the Merger and Recommendation
of the Company's Board of Directors";
"SPECIAL FACTORS -- Madison Dearborn's Reasons for the Merger"
8. Fairness of the Transaction.
(a) "SPECIAL FACTORS -- Background of the Merger"; "SPECIAL FACTORS -- Reasons
for the Merger and Recommendation of the Company's Board of Directors";
"SPECIAL FACTORS -- Position of Messrs. Ross and Smith as to Fairness of the
Merger"; "SPECIAL FACTORS -- Opinion of Financial Advisor"; "SPECIAL
FACTORS -- Position of Madison Dearborn as to Fairness of Merger""
(b) "SPECIAL FACTORS -- Background of the Merger"; "SPECIAL FACTORS -- Reasons
for the Merger and Recommendation of the Company's Board of Directors";
"SPECIAL FACTORS -- Position of Messrs. Ross and Smith as to Fairness of the
Merger"; "SPECIAL FACTORS -- Opinion of Financial Advisor"; "SPECIAL
FACTORS -- Position of Madison Dearborn as to Fairness of Merger""
(c) "SPECIAL MEETING -- Vote Required"
(d) *
(e) "SPECIAL FACTORS -- Reasons for the Merger and
Recommendation of the Company's Board of Directors"
(f) *
9. Reports, Opinions, Appraisals and Certain
Negotiations.
(a) "SPECIAL FACTORS -- Opinion of Financial Advisor"
(b) "SPECIAL FACTORS -- Opinion of Financial Advisor"
(c) "SPECIAL FACTORS -- Opinion of Financial Advisor"
10. Interest in Securities of the Issuer.
</TABLE>
__________________
* Not applicable or answer is negative.
ii
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 13E-3 ITEM RESPONSE / CAPTION IN
NUMBER AND CAPTION PROXY STATEMENT
------------------ ---------------
<S> <C>
(a) "BENEFICIAL OWNERSHIP OF COMMON STOCK"; CERTAIN INFORMATION CONCERNING
MADISON DEARBORN, MERGER SUBSIDIARY AND AFFILIATES"
(b) "SUMMARY -- Special Meeting"; "SUMMARY -- Conflicts
of Interest"; "SPECIAL FACTORS -- Background of the Merger";
"SPECIAL FACTORS -- Conflicts of Interest"
11. Contracts, Arrangements or Understandings "SUMMARY -- Special Meeting";
with Respect to the Issuer's Securities. "THE SPECIAL MEETING -- Vote Required";
"SPECIAL FACTORS -- Conflicts of Interest"
12. Present Intention and Recommendation of
Certain Persons with Regard to the Transaction.
(a) "SUMMARY -- The Special Meeting"; "SUMMARY -- Conflicts
of Interest"; "SPECIAL FACTORS -- Background of the Merger";
"SPECIAL FACTORS -- Conflicts of Interest"
(b) "SPECIAL FACTORS -- Reasons for the Merger and Recommendation
of the Company's Board of Directors"
13. Other Provisions of the Transaction.
(a) "SUMMARY" -- Rights of Dissenting Stockholders"; "SPECIAL FACTORS --
Dissenter's Rights"; "THE MERGER -- Appraisal Rights of Dissenting
Stockholders"
(b) *
(c) *
14. Financial Information.
(a) "SUMMARY -- Summary Financial Information"
(b) *
15. Persons and Assets Employed, Retained or
Utilized.
(a) "SPECIAL FACTORS -- Conflicts of Interest"
(b) "THE SPECIAL MEETING -- Solicitation of Proxies"
16. Additional Information. *
</TABLE>
_________________
* Not applicable or answer is negative.
iii
<PAGE>
Item 1. Issuer and Class of Security Subject to Transaction.
(a) The information set forth in "SUMMARY -- Parties to the Merger"
of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY -- Special Meeting,"
"SUMMARY -- Market Prices for Common Stock and Dividends," "THE SPECIAL MEETING
- -- Record Date" and "THE SPECIAL MEETING -- Quorum" of the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in "SUMMARY -- Market Prices for Common
Stock and Dividends" of the Proxy Statement is incorporated herein by reference.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
Item 2. Identity and Background.
(a)-(g) The information set forth in "SUMMARY -- Parties to the
Merger" and "Certain Information Concerning Madison Dearborn, Merger Subsidiary
and Affiliates" of the Proxy Statement is incorporated herein by reference.
Item 3. Past Contacts, Transactions or Negotiations.
(a)(1) Not applicable.
(a)(2) The information set forth in "SUMMARY -- Conflicts of
Interest," "SPECIAL FACTORS -- Background of the Merger," "SPECIAL FACTORS --
Conflicts of Interest" and "SPECIAL FACTORS -- Effective Time and Consequences
of the Merger" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS -- Conflicts of
Interest" and "SPECIAL FACTORS -- Background of the Merger" of the Proxy
Statement is incorporated herein by reference.
Item 4. Terms of the Transaction.
(a) The information set forth in "SUMMARY -- The Merger," "SUMMARY --
Conflicts of Interest" and "SPECIAL FACTORS" of the Proxy Statement is
incorporated herein by reference.
iv
<PAGE>
(b) The information set forth in "SUMMARY -- Conflicts of Interest,"
"SPECIAL FACTORS -- Background of the Merger" and "SPECIAL FACTORS -- Conflicts
of Interest" of the Proxy Statement is incorporated herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a) Not applicable.
(b) Not applicable.
(c) The information set forth in "SPECIAL FACTORS -- Effective Time
and Consequences of the Merger" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "SUMMARY -- Financing of the Merger"
and "THE MERGER -- Financing" of the Proxy Statement is incorporated herein by
reference.
(e) The information set forth in "SPECIAL FACTORS -- Effective Time
and Consequences of the Merger" of the Proxy Statement is incorporated herein by
reference.
(f) The information set forth in "SUMMARY -- The Merger" and "SPECIAL
FACTORS -- Effective Time and Consequence of the Merger" of the Proxy Statement
is incorporated herein by reference.
(g) Not applicable.
Item 6. Source and Amount of Funds or Other Consideration.
(a) The information set forth in "SUMMARY -- Financing of the Merger"
and "THE MERGER -- Financing" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in "THE MERGER -- Fees and Expenses" of
the Proxy Statement is incorporated herein by reference.
(c)(1) and (2) The information set forth in "SUMMARY -- Financing of
the Merger" and "THE MERGER -- Financing" of the Proxy Statement is incorporated
herein by reference.
(d) Not applicable.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth in "SPECIAL FACTORS -- Madison
Dearborn's Reasons for the Merger" and "SPECIAL FACTORS -- Reasons for the
Merger and Recommendation of the Company's Board of Directors" of the Proxy
Statement is incorporated herein by reference.
v
<PAGE>
(b) The information set forth in "SPECIAL FACTORS -- Background of the
Merger," "SPECIAL FACTORS -- Reasons for the Merger and Recommendation of the
Company's Board of Directors," "SPECIAL FACTORS -- Position of Messrs. Ross and
Smith as to Fairness of Merger," "SPECIAL FACTORS - Opinion of Financial
Advisor" and "SPECIAL FACTORS -- Position of Madison Dearborn as to Fairness of
Merger" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "SPECIAL FACTORS -- Madison
Dearborn's Reasons for the Merger" of the Proxy Statement is incorporated herein
by reference.
(d) The information set forth in "SUMMARY," "SPECIAL FACTORS --
Conflicts of Interest," "SPECIAL FACTORS -- Effective Time and Consequences of
the Merger," "SPECIAL FACTORS -- Federal Income Tax Consequences," "SPECIAL
FACTORS -- Reasons for the Merger and Recommendation of the Company's Board of
Directors" and "SPECIAL FACTORS -- Madison Dearborn's Reasons for the Merger" of
the Proxy Statement is incorporated herein by reference.
Item 8. Fairness of the Transaction.
(a) The information set forth in "SPECIAL FACTORS -- Background of the
Merger," "SPECIAL FACTORS -- Reasons for the Merger and Recommendation of the
Company's Board of Directors," "SPECIAL FACTORS -- Position of Messrs. Ross and
Smith as to Fairness of Merger," "SPECIAL FACTORS - Opinion of Financial
Advisor" and "SPECIAL FACTORS -- Position of Madison Dearborn as to Fairness of
Merger" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS -- Background of the
Merger," "SPECIAL FACTORS -- Reasons for the Merger and Recommendation of the
Company's Board of Directors," "SPECIAL FACTORS -- Position of Messrs. Ross and
Smith as to Fairness of Merger," "SPECIAL FACTORS - Opinion of Financial
Advisor" and "SPECIAL FACTORS -- Position of Madison Dearborn as to Fairness of
Merger" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "SPECIAL MEETING -- Vote Required" of
the Proxy Statement is incorporated herein by reference.
(d) Negative.
(e) The information set forth in "SPECIAL FACTORS -- Reasons for the
Merger and Recommendation of the Company's Board of Directors" of the Proxy
Statement is incorporated herein by reference.
(f) Not applicable.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
vi
<PAGE>
(a) The information set forth in "SPECIAL FACTORS -- Opinion of
Financial Advisor" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS -- Opinion of
Financial Advisor" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "SPECIAL FACTORS -- Opinion of
Financial Advisor" of the Proxy Statement is incorporated herein by reference.
Item 10. Interest in Securities of the Issuer.
(a) The information set forth in "BENEFICIAL OWNERSHIP OF COMMON
STOCK" and "CERTAIN INFORMATION CONCERNING MADISON DEARBORN, MERGER SUBSIDIARY
AND AFFILIATES" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY -- Special Meeting,"
"SUMMARY --Conflicts of Interest," "SPECIAL FACTORS -- Background of the Merger"
and "SPECIAL FACTORS -- Conflicts of Interest" of the Proxy Statement is
incorporated herein by reference.
Item 11. Contracts, Arrangements or Understandings with Respect to the Issuer's
Securities.
The information set forth in "SUMMARY -- Special Meeting," "THE
SPECIAL MEETING -- Vote Required" and "SPECIAL FACTORS -- Conflicts of Interest"
of the Proxy Statement is incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to
the Transaction.
(a) The information set forth in "SUMMARY -- The Special Meeting,"
"SUMMARY -- Conflicts of Interest," "SPECIAL FACTORS -- Background of the
Merger" and "SPECIAL FACTORS -- Conflicts of Interest" of the Proxy Statement is
incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS -- Reasons for the
Merger and Recommendation of the Company's Board of Directors" of the Proxy
Statement is incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in "SUMMARY -- Rights of Dissenting
Stockholders," "SPECIAL FACTORS -- Dissenter's Rights" and "THE MERGER --
Appraisal Rights of Dissenting Stockholders" of the Proxy Statement is
incorporated herein by reference.
vii
<PAGE>
(b) Not applicable.
(c) Not applicable.
Item 14. Financial Information.
(a) The information set forth in "SUMMARY -- Summary Financial
Information" of the Proxy Statement is incorporated herein by reference.
(b) Not applicable.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth in "SPECIAL FACTORS -- Conflicts of
Interest" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "THE SPECIAL MEETING -- Solicitation
of Proxies" of the Proxy Statement is incorporated herein by reference.
Item 16. Additional Information.
Not applicable.
viii
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
November 20, 1997
_________________________________________
(Date)
MADISON DEARBORN CAPITAL PARTNERS II, L.P.
By: Madison Dearborn Partners II, L.P.
Its: General Partner
By: Madison Dearborn Partners, Inc.
Its: General Partner
By: /s/ Benjamin D. Chereskin
-------------------------
Name: Benjamin D. Chereskin
Title: Vice President
MADISON DEARBORN PARTNERS II, L.P.
By: Madison Dearborn Partners, Inc.
Its: General Partner
By: /s/ Benjamin D. Chereskin
-------------------------
Name: Benjamin D. Chereskin
Title: Vice President
MADISON DEARBORN PARTNERS, INC
By: /s/ Benjamin D. Chereskin
-------------------------
Name: Benjamin D. Chereskin
Title: Vice President
TUESDAY MORNING CORPORATION
By: /s/ Mark E. Jarvis
-------------------------
Name: Mark E. Jarvis
Title: Chief Financial Officer
/s/ Lloyd L. Ross
----------------------------------------
Lloyd L. Ross
/s/ Jerry M. Smith
----------------------------------------
Jerry M. Smith
ix
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------- -----------
(a) Commitment letter for bank financing.
(b)(1) Opinion of SBC Warburg Dillon Read Inc. Included
as Appendix "B" to Exhibit (d) hereto.
(b)(2) Report of SBC Warburg Dillon Read Inc.
(c)(1) Agreement and Plan of Merger, dated as of
September 12, 1997, by and among Madison Dearborn
Partners II, L.P., Tuesday Morning Acquisition
Corp. and Tuesday Morning Corporation. Included as
Appendix "A" to Exhibit (d) hereto.
(c)(2) Option agreements, dated as of August 13, 1997, by
and between Madison Dearborn Partners II, L.P. and
each of Lloyd L. Ross and Jerry M. Smith.
Incorporated herein by reference to Exhibit "A" to
the Schedule 13D filed with the Securities and
Exchange Commission on August 25, 1997 by Madison
Dearborn Capital Partners II, L.P., Madison
Dearborn Partners II, L.P. and Madison Dearborn
Partners, Inc.
(d) Preliminary Proxy Statement of Tuesday Morning
Corporation.
(e) Text of Section 262 of the Delaware General
Corporate Law Included as Appendix "C" to Exhibit
(d) hereto.
(f) Not applicable.
<PAGE>
MERRILL LYNCH CAPITAL CORPORATION
World Financial Center
North Tower
250 Vesey Street
New York, New York 10281
October 21, 1997
Madison Dearborn Partners II, L.P.
c/o Madison Dearborn Partners, Inc.
Three First National Plaza
Suite 1330
Chicago, Illinois 60602
Attention: Benjamin D. Chereskin
Re: Credit Facilities Commitment Letter
-----------------------------------
Ladies and Gentlemen:
You have advised Merrill Lynch Capital Corporation ("Merrill Lynch")
that Madison Dearborn Partners, Inc. ("Madison") intends to form a new
corporation ("Newco") which will enter into a merger agreement (the "Merger
Agreement") with Tuesday Morning Corporation, a Delaware corporation ("Company"
or "Borrower") pursuant to which Newco will acquire (the "Acquisition") not less
than 80% (on a fully diluted basis) of the capital stock of Company after giving
effect to the consummation of the transactions described herein. It is
currently anticipated that management of Company would continue their equity
interest in Company after giving effect to the Merger in an amount of capital
stock of Company such that after giving effect to the Merger such management
would continue to have an equity interest in New Company on a fully diluted
basis as of the date of consummation of the Merger in an amount reasonably
acceptable to Merrill Lynch (the "Management Rollover"). Pursuant to the Merger
Agreement, Newco will merge (the "Merger") with and into Company and Company
will be the survivor ("New Company" or "New Borrower"). Pursuant to the Merger
Agreement, the consideration per share to be paid to the holders of Company's
common stock which are cashed out in the Merger shall not exceed $25 per share
and $325 million in the
<PAGE>
-2-
Merger shall not exceed $25 per share and $325 million in the aggregate.
You have advised Merrill Lynch that in connection with the
consummation of the Acquisition (i) Newco will raise gross proceeds of $115
million (less the amount of the Management Rollover) from the issuance by it to
one or more of affiliates of Madison of common equity of Newco or pay-in-kind
preferred equity of Newco having terms and conditions satisfactory to Merrill
Lynch (the "Equity Financing"), (ii) Company will raise gross cash proceeds of
$100 million from the issuance by Company of unsecured senior subordinated notes
(the "Senior Subordinated Notes") on terms and conditions and pursuant to
documentation satisfactory to Merrill Lynch and with no scheduled payments of
principal prior to scheduled maturity (the "Senior Subordinated Financing"), and
(iii) Company will enter into the Credit Facilities described herein. In
addition, upon consummation of the Merger, Company intends to repay all
indebtedness and terminate all commitments to make extensions of credit under
the existing credit facilities of Company and its subsidiaries (the "Existing
Debt") (it being understood that certain other debt, such as trade debt, capital
leases and certain other debt reasonably acceptable to Merrill Lynch (including
the outstanding mortgage debt not to exceed an aggregate principal amount of
$5.0 million) shall remain in place, and the term "Existing Debt" shall not
include any such debt). The Acquisition, the Merger, the Equity Financing, the
Senior Subordinated Financing, the repayment of all debt and cancellation of all
commitments to make extensions of credit under the Existing Debt (the "Existing
Debt Repayment"), and the entering into and borrowings under the Credit
Facilities by the parties herein described are herein referred to as the
"Transactions".
We further understand that the precise structure of the Transactions
will be under continuing consideration, may vary from the foregoing and will be
subject to our mutual agreement.
You have requested that Merrill Lynch commit to provide to the Company
$200 million aggregate principal amount of senior credit facilities (the "Credit
Facilities") to finance the Merger and the Existing Debt Repayment and to pay
certain related fees and expenses, such Credit Facilities comprising (a) two
senior term loan facilities in an aggregate principal amount of $110 million
(the "Term Loan Facilities"), such aggregate principal amount to be allocated
among (i) a Term Loan A Facility in an aggregate principal amount of $40 million
<PAGE>
-3-
(the "Term Loan A Facility"), and (ii) a Term Loan B Facility in an aggregate
principal amount of $70 million (the "Term Loan B Facility"), and (b) a
borrowing base revolving credit facility in an aggregate principal amount of $90
million (the "Revolving Facility"). A portion of the Revolving Facility to be
mutually determined will be available as a letter of credit subfacility.
You have advised Merrill Lynch that immediately after giving effect to
the Transactions, New Company and its subsidiaries will have no indebtedness or
preferred stock outstanding, except the Senior Subordinated Notes, the Credit
Facilities, any pay-in-kind preferred stock of Newco issued as part of the
Equity Financing and certain other existing debt (such as trade debt, capital
leases and outstanding mortgage debt not to exceed an aggregate principal amount
of $5.0 million) disclosed to Merrill Lynch and reasonably acceptable to Merrill
Lynch.
Accordingly, subject to the terms and conditions set forth below,
Merrill Lynch hereby agrees with you as follows:
1. Commitment. Merrill Lynch hereby commits to provide the Credit
Facilities to Company upon the terms and subject to the conditions set forth or
referred to herein, in the fee letter (the "Fee Letter") dated the date hereof
and delivered to you, and in the Summary of Terms and Conditions attached hereto
(and incorporated by reference herein) as Exhibit A (the "Term Sheet"). The
initial extensions of credit under the Credit Facilities will occur
simultaneously with the consummation of the other Transactions.
It is a condition of Merrill Lynch's commitment hereunder that Merrill
Lynch (or at Merrill Lynch's election, one of its affiliates) act as sole and
exclusive arranger of and syndication agent for (the "Arranger") the Credit
Facilities, it being understood and agreed that the Arranger will perform all
functions and exercise all authority (including, without limitation, (a) serving
as sole manager of the syndication effort, (b) selecting counsel for the
Arranger, and (c) negotiating definitive documentation for the Credit Facilities
(the "Credit Documents")) customarily performed and exercised by agent banks in
such capacity. The appointment of any co-agents for the Credit Facilities would
be subject to the prior approval of Merrill Lynch (not to be unreasonably
withheld). The co-agent title and other titles awarded to syndicate
participants would not entail any role with respect to the matters referred to
in this paragraph without the prior consent of Merrill Lynch (not to be
unreasonably withheld). Merrill
<PAGE>
-4-
Lynch may select, after consultation with you, a Lender reasonably acceptable to
you to act as an administrative agent (in such capacity, the "Administrative
Agent") to perform such ministerial and administrative functions as Merrill
Lynch, in its reasonable discretion, may desire.
2. Syndication. Merrill Lynch reserves the right and intends, prior
to or after the execution of the Credit Documents, to syndicate all or a portion
of its commitment to one or more financial institutions reasonably acceptable to
you (Merrill Lynch and such financial institutions being referred to herein as
the "Lenders") that will become parties to the Credit Documents, and in that
connection, promptly following your acceptance of Merrill Lynch's commitment
hereunder, Merrill Lynch will commence the syndication of the Credit Facilities
to such Lenders. Upon your acceptance of the commitment of any Lender to provide
a portion of the Credit Facilities, Merrill Lynch shall be released from a
portion of its commitment hereunder in an aggregate amount equal to 100% of the
commitment of such Lender. You agree that no Lender will receive compensation
outside the terms contained herein and in the Fee Letter in order to obtain its
commitment to participate in the Credit Facilities. It is understood and agreed
that, except as otherwise provided in the Fee Letter, the amount and
distribution of the fees and other compensation referred to herein among the
Lenders and to any Administrative Agent (or any co-agent) will be at Merrill
Lynch's discretion, in consultation with you. It is understood and agreed that
Merrill Lynch will manage all aspects of the syndication (but will consult with
you in such matters), including, without limitation, decisions as to the
selection of potential Lenders reasonably acceptable to you to be approached and
when they will be approached, when their commitments will be accepted, which
Lenders will participate, any naming rights (including the naming of co-agents,
subject to your reasonable approval) and the final allocations of the
commitments among the Lenders (which are likely not to be pro rata across
facilities among Lenders).
You agree actively to assist Merrill Lynch in achieving a timely
syndication that is reasonably satisfactory to Merrill Lynch. The syndication
efforts will be accomplished by a variety of means, including direct contact
during the syndication between senior management (including, but not limited to,
the chief executive officer, chief financial officer and treasurer of Newco
and/or Company) and advisors and affiliates of Newco and/or Company and Madison
and their respective affiliates on the one hand and proposed syndicate Lenders
on the other hand. To assist Merrill Lynch in its syndication ef-
<PAGE>
-5-
forts, you agree that you will, promptly, upon Merrill Lynch's reasonable
request, (a) provide, and cause your affiliates and advisors to provide to
Merrill Lynch all information reasonably deemed necessary by Merrill Lynch to
complete successfully the syndication, including but not limited to, information
and projections (including, without limitation, any updated projections
requested by Merrill Lynch) prepared by you or on your behalf relating to the
transactions contemplated hereby, and (b) reasonably assist, and cause your
affiliates and advisors reasonably to assist Merrill Lynch in the preparation of
a confidential information memorandum and other marketing materials to be used
in connection with the syndication, including making available at reasonable
times and places representatives of Newco and/or Company and Madison and their
respective affiliates and their respective subsidiaries. You also agree to use
your reasonable best efforts to ensure that Merrill Lynch's syndication efforts
benefit from your existing lending relationships. It is understood and agreed
that Merrill Lynch shall be entitled, with your prior written consent, to change
the structure of the Credit Facilities as described herein and in the Term Sheet
(provided that the aggregate principal amount of the Credit Facilities, taken as
a whole, remains the same) if Merrill Lynch deems such action advisable in order
to ensure a successful syndication or an optimal credit structure.
3. Fees. As consideration for Merrill Lynch's commitment hereunder
and its agreement to arrange, manage, structure and syndicate the Credit
Facilities, Company will pay to Merrill Lynch the fees as set forth in the Term
Sheet and in the Fee Letter. All such fees shall be paid by wire transfer of
immediately available funds in United States dollars.
4. Conditions. Merrill Lynch's commitment hereunder is subject to
the negotiation, execution and delivery of definitive Credit Documents
reasonably satisfactory in all respects to Merrill Lynch and its counsel. Such
definitive documentation shall reflect the terms and conditions set forth herein
and in the Term Sheet and contain such other indemnities, covenants,
representations and warranties, events of default, conditions precedent,
security arrangements and other terms and conditions as are reasonably
satisfactory to Merrill Lynch and you. Those matters that are not covered by or
made clear under the provisions hereof or of the Term Sheet are subject to the
approval and agreement of Merrill Lynch and you (it being understood that the
terms and conditions of the Credit Documents shall not be inconsistent with the
terms and conditions set forth herein or in the Term Sheet).
<PAGE>
-6-
Merrill Lynch's commitment hereunder is also subject to (a) no
material adverse change shall have occurred in the loan syndication or
financial, banking or capital market conditions generally from those in effect
on the date hereof that, individually or in the aggregate, in the reasonable
judgment of Merrill Lynch could reasonably be expected to adversely affect the
consummation of the Transactions or the other transactions contemplated by this
Commitment Letter or adversely affect the ability of Merrill Lynch to syndicate
the Credit Facilities; no banking moratorium shall have been declared by federal
or New York State banking authorities and shall be continuing; (b) from the date
hereof through the syndication of the Credit Facilities none of Newco, Company
or any of Company's subsidiaries shall have syndicated or issued, attempted to
syndicate or issue, announced or authorized the announcement of the syndication
or issuance of, or engaged in discussion concerning the syndication or issuance
of (by private or public offering or otherwise), any debt facility or debt
security of Newco, Company, New Company or any of Company's or New Company's
subsidiaries, including renewals thereof, other than the Senior Subordinated
Notes; and (c) the satisfaction of the other terms and conditions set forth or
referred to herein (including, without limitation, those set forth in Sections
1, 2 and 5) and in the Term Sheet. For purposes of this Commitment Letter and
the Term Sheet, the "subsidiaries" of Newco or Company shall be deemed to
include those who will become subsidiaries of Newco or Company in connection
with the Transactions.
5. Information and Investigations. You hereby represent and covenant
that (a) all information and data (excluding financial projections) concerning
Madison, Newco, Company, New Company and Company's or New Company's
subsidiaries, the Transactions and the other transactions contemplated hereby
(the "Information") that have been made or will be prepared by or on behalf of
you or any of your affiliates or authorized representatives or advisors and that
have been or will be made available to Merrill Lynch by you or on your behalf in
connection with the transactions contemplated hereby, taken as a whole, is and
will be complete and correct in all material respects and does not and will not,
taken as a whole, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements contained
therein not misleading in light of the circumstances under which such statements
are made, and (b) all financial projections concerning Newco and New Company and
their respective subsidiaries and the transactions contemplated hereby (the
"Projections") that have been prepared by or on behalf of you or any of your
affiliates or authorized representatives and that have been or will be made
available to
<PAGE>
-7-
Merrill Lynch by you or on behalf of you or any of your affiliates or authorized
representatives or advisors in connection with the transactions contemplated
hereby have been and will be prepared in good faith based upon assumptions
believed by you to be reasonable. You agree to supplement the Information and
the Projections from time to time until the date of execution and delivery of
the Credit Documents (the "Closing Date") and, if requested by Merrill Lynch, to
cause New Company to do the same for a reasonable period thereafter necessary to
complete the syndication of the Credit Facilities so that the representation and
covenant in the preceding sentence remain correct. In arranging the Credit
Facilities, including the syndication thereof, Merrill Lynch will be using and
relying primarily on the Information and the Projections without independent
check or verification thereof.
Merrill Lynch's commitment hereunder is based upon the accuracy and
completeness of the financial and other information provided to us by or on
behalf of you. If Merrill Lynch becomes aware of material facts or information,
or Merrill Lynch otherwise discovers, during its ongoing investigation of the
legal, factual and financial premises on which the commitment herein is based,
material information not previously disclosed to it, or Merrill Lynch discovers
or otherwise learns of new material information or additional material
developments concerning conditions or events previously disclosed to it, that
Merrill Lynch believes (x) has had or could have, individually or in the
aggregate, a material adverse effect on the Transactions or the business,
assets, liabilities (contingent or otherwise), operations, condition (financial
or otherwise), solvency, properties or material agreements of Newco, Company or
New Company, together with Company's or New Company's subsidiaries taken as a
whole, as the case may be (and before and after giving effect to the
Transactions), or (y) would be materially inconsistent with the assumptions
underlying the Projections, then Merrill Lynch (a) shall be entitled to decline
to participate in the financing contemplated hereby or (b) may, in its sole
discretion, suggest alternative financing amounts or structures that ensure
adequate protection for Merrill Lynch and the other Lenders (it being understood
that you are not obligated to agree to any such suggested alternative financing
amounts or structures). In any such event, Merrill Lynch shall not be
responsible or liable for any damages which may be alleged as a result of its
failure, in accordance with the terms of this Commitment Letter, to provide the
Credit Facilities.
6. Indemnification and Contribution. By executing this Commitment
Letter, you agree to indemnify and hold harmless
<PAGE>
-8-
Merrill Lynch and each of the other Lenders and their respective officers,
directors, employees, affiliates, agents and controlling persons (Merrill Lynch
and each such other person being an "Indemnified Party") from and against any
and all losses, claims, damages and liabilities, joint or several, to which any
such Indemnified Party may become subject arising out of or in connection with
or relating to this Commitment Letter, the Fee Letter, the Term Sheet, the
Credit Facilities, the loans under the Credit Facilities, the use of proceeds of
any such loan, any of the Transactions or any related transaction and the
performance by Merrill Lynch or any of its affiliates of the services
contemplated by this Commitment Letter and will reimburse any Indemnified Party
for any and all reasonable expenses (including counsel fees and expenses) as
they are incurred in connection with the investigation of or preparation for or
defense of any pending or threatened claim or any action or proceeding arising
therefrom, whether or not such Indemnified Party is a party and whether or not
such claim, action or proceeding is initiated or brought by or on behalf of
Madison, Newco, Company, New Company, any of Company's or New Company's
subsidiaries or affiliates and whether or not any of the transactions
contemplated hereby are consummated or this Commitment Letter is terminated. You
will not be liable under the foregoing indemnification provision to an
Indemnified Party to the extent that any loss, claim, damage, liability or
expense is found in a final non-appealable judgment by a court of competent
jurisdiction to have resulted from such Indemnified Party's bad faith or gross
negligence. Neither Merrill Lynch nor any other Indemnified Party shall be
responsible or liable to you or any other person for any consequential damages
which may be alleged as a result of this Commitment Letter or any of the
transactions referred to herein.
You agree that, without Merrill Lynch's prior written consent, neither
you nor any of your affiliates or subsidiaries will settle, compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding in respect of which indemnification has been or could be sought
under the indemnification provisions of this Commitment Letter (whether or not
Merrill Lynch or any other Indemnified Party is an actual or potential party to
such claim, action or proceeding), unless such settlement, compromise or consent
(i) includes an unconditional written release in form and substance satisfactory
to the Indemnified Parties of each Indemnified Party from all liability arising
out of such claim, action or proceeding and (ii) does not include any statement
as to or an admission of fault, culpability or failure to act by or on behalf of
any Indemnified Party.
<PAGE>
-9-
You shall not be required to indemnify an Indemnified Party or provide
contribution to any Indemnified Party with respect to any settlement made by an
Indemnified Party without your consent, which consent shall not be unreasonably
withheld, delayed or conditioned. You shall not be required to pay the fees and
expenses of separate counsel for an Indemnified Party after you have undertaken
the defense of the claim with counsel selected by you, which counsel is
reasonably satisfactory to the Indemnified Party unless in the opinion of
counsel to the Indemnified Party the counsel so selected has a conflict of
interest or such selected counsel's representation of the Indemnified Party
would otherwise be inappropriate. In any event, you shall not be required
hereunder to pay the fees and expenses of more than one separate firm (plus
local counsel if required) for all Indemnified Parties.
In the event that an Indemnified Party is requested or required to
appear as a witness in any action brought by or on behalf of or against you or
any of your subsidiaries or affiliates in which such Indemnified Party is not
named as a defendant, you agree to reimburse Merrill Lynch for all reasonable
out-of-pocket expenses incurred by it in connection with such Indemnified
Party's appearing and preparing to appear as such a witness, including, without
limitation, the reasonable fees and expenses of its legal counsel.
The provisions of this Section 6 shall be superseded by the definitive
Credit Documents.
7. Costs and Expenses. By executing this Commitment Letter, you
agree to reimburse Merrill Lynch and its affiliates upon request made from time
to time for their reasonable out-of-pocket expenses (including, without
limitation, expenses of Merrill Lynch's due diligence investigation,
consultants' fees (if such consultants are engaged by Merrill Lynch with your
consent (which consent shall not be unreasonably withheld, delayed or
conditioned)), syndication expenses, appraisal and valuation fees and expenses,
reasonable travel expenses, and the reasonable fees, disbursements and other
charges of counsel) incurred in connection with the Credit Facilities and the
negotiation, preparation, execution and delivery, waiver or modification,
administration, collection and enforcement of this Commitment Letter, the Term
Sheet, the Fee Letter, the Credit Documents and the security arrangements in
connection therewith. The provisions of this Section 7 shall be superseded by
the definitive Credit Documents.
<PAGE>
-10-
8. Confidentiality. You agree that this Commitment Letter, the Term
Sheet, the Fee Letter, the contents of any of the foregoing and Merrill Lynch's
and/or its affiliates' activities pursuant hereto or thereto is confidential and
shall not be disclosed by you to any person without the prior written consent of
Merrill Lynch and any such affiliate, other than your officers, directors,
employees, accountants, attorneys and other advisors, and then only in
connection with the Transactions and on a confidential and need-to-know basis,
except that you may disclose the Commitment Letter and the Term Sheet (but not
the Fee Letter or any matter related to information in the Fee Letter) to
Company on a confidential basis and, following your acceptance hereof (and
payment of any fees due and payable upon such acceptance as set forth in the Fee
Letter), you may disclose this Commitment Letter and the Term Sheet (but not the
Fee Letter or any matter related to any information in the Fee Letter), and you
may make such other public disclosures of the terms and conditions hereof as you
are required by applicable law or compulsory legal process to make. You agree
that you will permit Merrill Lynch to review and approve any reference to
Merrill Lynch in connection with the Credit Facilities or the transactions
contemplated hereby contained in any press release or similar public disclosure
prior to public release.
9. Termination. In the event that (i) you have not accepted this
Commitment Letter by October 25, 1997 or Newco and Company have not executed a
definitive Merger Agreement in form and substance acceptable to Merrill Lynch on
or prior to December 1, 1997; (ii) the initial extensions of credit under the
Credit Facilities do not occur on or before March 31, 1998; (iii) any
circumstance described in clause (a), (b), or (c) of the second paragraph of
Section 4 shall have occurred; (iv) the Merger Agreement is terminated; or (v)
Company accepts an acquisition or recapitalization proposal other than that
contained in the Merger Agreement (as amended from time to time), this
Commitment Letter and Merrill Lynch's commitment hereunder shall terminate (upon
written notice by Merrill Lynch with respect to clause (ii) of this sentence)
unless, at your request, Merrill Lynch shall, in its sole discretion, agree to
an extension. Notwithstanding the foregoing, the reimbursement, indemnification
and confidentiality provisions hereof and of the Term Sheet and the Fee Letter
and Sections 11 and 14 of this Commitment Letter shall survive any termination
of this Commitment Letter or Merrill Lynch's commitment hereunder.
10. Assignment, etc. This Commitment Letter and Merrill Lynch's
commitment hereunder shall not be assignable by either party hereto without the
prior written consent of the
<PAGE>
-11-
other party hereto, and any attempted assignment shall be void and of no effect;
provided, however, that nothing contained in this Section 10 shall prohibit
Merrill Lynch (in its sole discretion) from (i) performing any of its duties
hereunder through any of its affiliates, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and you will owe any related duties (including those set
forth in Section 2 above) to any such affiliate, and (ii) granting
participations in, or selling assignments of all or a portion of, the
commitments or the loans under the Credit Facilities as contemplated in and
subject to the terms of Section 2 of this Commitment Letter and the relevant
provisions of the Term Sheet. This Commitment Letter is intended to be solely
for the benefit of the parties hereto and is not intended to confer any benefits
upon, or create any rights in favor of, any person other than the parties
hereto.
11. GOVERNING LAW. THIS COMMITMENT LETTER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW).
12. Execution in Counterparts. This Commitment Letter may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of this Commitment Letter by
telecopier shall be effective as delivery of a manually executed counterpart of
this Commitment Letter.
13. Amendments, etc. No amendment or waiver of any provision of this
Commitment Letter, nor any consent or approval to any departure therefrom, shall
in any event be effective unless the same shall be in writing and signed by the
parties hereto and then any such waiver, consent or approval shall be effective
only in the specific instance and for the specific purpose for which given. By
executing this Commitment Letter, you acknowledge that this Commitment Letter,
the Term Sheet and the Fee Letter are the only agreements between you and
Merrill Lynch with respect to the Credit Facilities and set forth the entire
understanding of the parties with respect thereto.
14. Waiver of Jury Trial. Each of you and Merrill Lynch (in each
case on its own behalf and, to the extent permitted by applicable law, on behalf
of its shareholders) waives all right to trial by jury in any action, proceeding
or counterclaim (whether based upon contract, tort or otherwise) related to or
arising out of any of the Transactions, the other
<PAGE>
-12-
transactions contemplated by this Commitment Letter, or the performance by
Merrill Lynch or any of its affiliates of the services contemplated by this
Commitment Letter.
15. Public Announcements. You acknowledge that Merrill Lynch may, at
its option and expense, after the consummation of the Merger place an
announcement (in form and substance reasonably satisfactory to you) in such
newspapers and periodicals as it may choose, stating that Merrill Lynch has
acted in the capacity set forth in this Commitment Letter.
16. Notices. Any notice given pursuant to any of the provisions of
this Commitment Letter shall be in writing and shall be mailed or delivered, if
to you, at your address set forth on page one of this Commitment Letter to the
attention of Benjamin D. Chereskin, with a copy to William J. Hunkler, III, also
with a copy to Andrew M. Kaufman, Esq. at Kirkland & Ellis, 200 E. Randolph
Drive, Chicago, Illinois 60601; and if to Merrill Lynch, at the offices of
Merrill Lynch, World Financial Center, North Tower, 250 Vesey Street, New York,
New York 10281, Attention: Brian E. O'Callahan, with a copy to Michael E.
Michetti, Esq., at Cahill Gordon & Reindel, 80 Pine Street, New York, New York
10005.
17. Release of Madison. Upon the execution and delivery by Company
of definitive documentation in respect of the Credit Facilities and the
occurrence of the initial borrowing thereunder and Company's assumption of your
obligations hereunder, you shall be released from your obligations set forth in
this Commitment Letter.
18. Documents Read as an Entirety. Notwithstanding any other
provision set forth herein as in the Fee Letter or the Term Sheet, the parties
hereby agree that this Commitment Letter, the Fee Letter and the Term Sheet are
to be construed together.
[Signature Page Follows]
<PAGE>
-13-
Please confirm that the foregoing correctly sets forth our agreement
of the terms hereof and the Fee Letter by signing and returning to Merrill Lynch
the duplicate copy of this Commitment Letter and the Fee Letter enclosed
herewith. Upon your acceptance hereof, this Commitment Letter shall constitute
a binding agreement between you and Merrill Lynch; provided Merrill Lynch shall
have received your executed duplicate copies not later than 5:00 p.m., New York
City time, on October 25, 1997, at which time Merrill Lynch's commitment
hereunder will expire in the event Merrill Lynch has not received such executed
duplicate originals.
We are pleased to have this opportunity and we look forward to working
with you on this transaction.
This letter amends and restates the Credit Facilities Commitment
Letter dated September 11, 1997 between you and Merrill Lynch and the Term Sheet
attached thereto, and upon execution and delivery hereof such prior Credit
Facilities Commitment letter and prior Term Sheet are terminated and void.
Very truly yours,
MERRILL LYNCH CAPITAL CORPORATION
By:
------------------------------
Name:
Title:
Accepted and agreed to as of
the date first written above:
MADISON DEARBORN PARTNERS II, L.P.
By: MADISON DEARBORN PARTNERS, INC.
------------------------------
Name:
Title:
<PAGE>
CONFIDENTIAL EXHIBIT A
SUMMARY OF TERMS AND CONDITIONS/a/
Borrower: Tuesday Morning Corporation, a Delaware corporation
("Company" or "Borrower").
Arranger: Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") will act as
sole and exclusive arranger, syndication agent and
documentation agent (the "Arranger") for a
syndicate of financial institutions (the
"Lenders").
Administrative Agent: A Lender or other financial institution to be
selected by Merrill Lynch in consultation with
Borrower and reasonably acceptable to Borrower.
Facilities: Credit facilities (the "Credit Facilities") to be
made available to Borrower, such Credit Facilities
comprising:
(A) Term Loan Facilities. Term loan facilities
in an aggregate principal amount of $110 million
(the "Term Loan Facilities"), such aggregate
principal amount to be allocated among (i) a Term
Loan A Facility in an aggregate principal amount
of $40 million (the "Term Loan A Facility"), and
(ii) a Term Loan B Facility in an aggregate
principal amount of $70 million (the "Term Loan B
Facility"). Loans under the Term Loan Facilities
are herein referred to as "Term Loans."
- ------------------------
/a/ Capitalized terms used herein and not defined shall have the meanings
assigned to such terms in the attached Commitment Letter. References herein
to "$" or "US$" are to United States Dollars. For all purposes of this Term
Sheet, the "subsidiaries" of Newco or Company shall be deemed to include
those entities that will become subsidiaries of Newco or Company in
connection with the Transactions.
<PAGE>
-2-
(B) Revolving Facility. Borrowing base revolving
credit facility (the "Revolving Facility") in an
aggregate principal amount of $90 million. Loans
under the Revolving Facility are herein referred
to as "Revolving Loans"; the Term Loans and the
Revolving Loans are herein referred to
collectively as "Loans". A portion of the
Revolving Facility to be mutually determined will
be available to Borrower as a letter of credit
subfacility.
The Arranger will have the right to reallocate
commitment amounts among the facilities in
consultation with and on a basis reasonably
acceptable to Borrower.
After the Closing Date, Borrower may request that
any of the Lenders agree (or to the extent that the
existing Lenders decline to provide the Increased
Facility Amount, new Lenders ("New Lenders")
reasonably acceptable to the Arranger and the
Administrative Agent) to increase the Revolving
Facility by up to $25 million (the "Increased
Facility Amount"), which increase shall not require
the consent of any Lender (other than any Lender
(or New Lender) agreeing to make available the
increase in the Revolving Facility), if no default
or event of default has occurred and is continuing
and the ratio of total debt to EBITDA for the most
recent trailing four quarter period is less than or
equal to a ratio to be negotiated and certain other
credit statistics to be determined are satisfied.
Documentation: Usual for facilities and transactions of this type
and reasonably acceptable to Borrower and the
Arranger. The documentation for the Credit
Facilities will include, among others, a credit
agreement (the "Credit Agreement"), guarantees and
appropriate collateral documents (collectively, the
"Credit Documents"). Newco, Borrower and each of
Borrower's subsidiaries party to the Credit
Documents are herein referred to as the "Credit
Parties."
<PAGE>
-3-
Transactions: Madison Dearborn Partners, Inc. ("Madison") intends
to form a new corporation ("Newco") which will
enter into a merger agreement (the "Merger
Agreement") with Borrower pursuant to which Newco
will acquire (the "Acquisition") not less than 80%
(on a fully diluted basis) of the capital stock of
Borrower after giving effect to the consummation of
the transactions described herein. It is currently
anticipated that management of Borrower would
continue their equity interest in Borrower after
giving effect to the Merger in an amount of capital
stock of Borrower such that after giving effect to
the Merger such management would continue to have
an equity interest in New Borrower (as defined
below) on a fully diluted basis as of the date of
consummation of the Merger in an amount reasonably
acceptable to the Arranger (the "Management
Rollover"). Pursuant to the Merger Agreement, Newco
will merge (the "Merger") with and into Borrower
and Borrower will be the survivor ("New Company" or
"New Borrower"). Pursuant to the Merger Agreement,
the consideration per share to be paid to the
holders of Borrower's common stock which are cashed
out in the Merger shall not exceed $25 per share
and $325 million in the aggregate. In connection
with the consummation of the Acquisition (i) Newco
will raise gross proceeds of $115 million (less the
amount of the Management Rollover) from the
issuance by it to one or more of affiliates of
Madison of common equity of Newco or pay-in-kind
preferred equity of Newco (the "PIK Preferred")
having terms and conditions satisfactory to the
Arranger (the "Equity Financing"), (ii) Borrower
will raise gross cash proceeds of $100 million from
the issuance by Borrower of unsecured senior
subordinated notes (the "Senior Subordinated
Notes") on terms and conditions and pursuant to
documentation satisfactory to the Arranger and with
no scheduled payments of principal prior to
scheduled maturity (the "Senior Subordinated
Financing"), and (iii) Borrower will enter into the
Credit Facilities described herein.
<PAGE>
-4-
In addition, upon consummation of the Merger,
Borrower intends to repay all other indebtedness
and terminate all commitments to make extensions of
credit under the existing credit facilities of
Borrower and its subsidiaries (the "Existing Debt")
(it being understood that certain other debt, such
as trade debt, capital leases and certain other
debt reasonably acceptable to the Arranger
(including the outstanding mortgage debt not to
exceed an aggregate principal amount of $5 million)
shall remain in place and the term "Existing Debt"
shall not include any such debt). The Acquisition,
the Merger, the Equity Financing, the Senior
Subordinated Financing, the repayment of all debt
and cancellation of all commitments to make
extensions of credit under the Existing Debt (the
"Existing Debt Repayment"), and the entering into
and borrowings under the Credit Facilities by the
parties herein described are herein referred to as
the "Transactions".
Availability/Purpose: (A) Term Loan Facilities. Loans under the Term
Loan Facilities shall be available, subject to the
conditions set forth herein, in a single draw on
the date on which the Merger is consummated and all
other conditions to closing have been met (the
"Closing Date"), to finance the Merger and the
Existing Debt Repayment and to pay related fees and
expenses. Amounts borrowed under the Term Loan
Facilities that are repaid or prepaid may not be
reborrowed.
(B) Revolving Facility. The Revolving Facility
will be available, subject to the conditions set
forth herein, for the purposes described above in
the form of revolving loans and letters of credit
on and after the Closing Date until the Revolving
Loan Maturity Date (as defined below under "Final
Maturity and Amortization") in an amount equal to
the lesser of (x) the commitments thereunder then
in effect, and (y) the Borrowing Base then in
effect. Amounts repaid under the Revolving Facility
may, subject to the
<PAGE>
conditions set forth herein, be reborrowed to the
extent of the commitments under the Revolving
Facility then in effect. The "Borrowing Base" shall
be defined in a manner reasonably satisfactory to
Borrower and the Arranger.
Annual Cleandown: For a consecutive 30-day period during each
calendar year beginning in 1998, the aggregate
principal amount of Loans outstanding under the
Revolving Facility shall be reduced to an amount to
be determined.
Termination of The commitments in respect of the Credit Facilities
Commitments: will terminate in their entirety on March 31, 1998
if the initial funding under the Credit Facilities
does not occur on or prior to such date. The unused
commitments in respect of the Term Loan Facilities
shall terminate in their entirety on the Closing
Date immediately after the making of the Term Loans
on such date. Commitments once terminated or
reduced may not be reinstated.
Guarantors: Each of Borrower's and New Borrower's direct and
indirect domestic subsidiaries existing on the
Closing Date or thereafter created or acquired
shall unconditionally guarantee, on a joint and
several basis, all obligations of Borrower (and
after the Merger, of New Borrower) under the Credit
Facilities and under each interest rate protection
agreement entered into with a Lender or an
affiliate thereof.
Each guarantor of any of the Credit Facilities is
herein referred to as a "Guarantor" and its
guarantee is referred to herein as a "Guarantee."
Security: The Credit Facilities, the Guarantees, and the
obligations of Borrower under each interest rate
protection agreement entered into with a Lender or
an affiliate thereof will be secured by (A) a
perfected first priority lien on, and pledge of,
all of the capital stock and intercompany notes of
each of the
<PAGE>
-6-
direct and indirect subsidiaries of Borrower and
New Borrower existing on the Closing Date or
thereafter created or acquired, except that to the
extent that the pledge thereof would cause material
adverse tax consequences, such pledge with respect
to foreign subsidiaries shall be limited to 65% of
the capital stock of "first tier" foreign
subsidiaries, and (B) a perfected first priority
lien on, and security interest in, all of the
tangible and intangible properties and assets
(including all real property interests, contracts
and contract rights) of Borrower and New Borrower
and their respective direct and indirect domestic
subsidiaries existing on the Closing Date or
thereafter created or acquired, except for those
properties and assets which the Arranger shall
determine in its sole discretion that the costs of
obtaining such security interest are excessive in
relation to the value of the security to be
afforded thereby (it being understood that none of
the foregoing shall be subject to any other liens
or security interests, except for certain customary
exceptions to be agreed upon) (all of such
collateral, the "Collateral"). The Credit Documents
will provide for the release at the expense of
Borrower of the lien on the Collateral in respect
of the Credit Facilities upon (x) any sale or
consensual disposition thereof permitted by the
Credit Documents and (y) any mortgage or sale-
leaseback of the existing warehouse as and to the
extent described herein and permitted by the Credit
Documents.
Final Maturity and
Amortization: (A) Term Loan Facilities. The Term Loan A Facility
will mature on the date which is five years after
Closing Date, and the Term Loan B Facility will
mature on the date which is seven years after the
Closing Date. Amounts outstanding under the Term
Loan Facilities will amortize on a quarterly basis
beginning at the end of the first full fiscal
quarter after the Closing Date in aggregate
principal amounts to be determined and
<PAGE>
-7-
acceptable to Borrower and the Arranger.
(B) Revolving Facility. The Revolving Facility will
mature on the date which is five years after the
Closing Date (the "Revolving Loan Maturity Date").
Letters of Credit: Letters of credit under the Revolving Facility
("Letters of Credit") will be issued by a Lender
selected by the Arranger and reasonably
satisfactory to Borrower thereof (in such capacity,
the "L/C Lender"). Each standby letter of credit
shall expire no later than the earlier of (a)
twelve months after its date of issuance or (b) the
fifth business day prior to the Revolving Loan
Maturity Date. Each trade letter of credit shall
expire no later than the earlier of (a) 180 days
after its date of issuance, or (b) the fifth
business day prior to the Revolving Loan Maturity
Date. In the case of any letter of credit,
notwithstanding the foregoing, such Letter of
Credit may continue beyond the Revolving Loan
Maturity Date if the cash collateralization thereof
or other arrangements therefor in each case
reasonably satisfactory to the Administrative Agent
are provided pursuant to documentation reasonably
satisfactory to the Administrative Agent. The
issuance of all Letters of Credit shall be subject
to the customary procedure of the L/C Lender.
Drawings under any Letter of Credit shall be
reimbursed by Borrower thereof on the same business
day. To the extent that Borrower does not reimburse
the L/C Lender on the same business day, there
shall be an automatic draw made under the Revolving
Facility from the Lenders thereunder pro rata
(subject to the conditions set forth in the Credit
Agreement). Absent such a draw, the Lenders under
the Revolving Facility shall be irrevocably
obligated to reimburse the L/C Lender pro rata
based upon their respective commitments, with the
amount of such reimbursement payment being deemed
to be a drawing under the Revolving Facility.
<PAGE>
-8-
Letter of Credit Fees: Letter of Credit fees will be payable on the daily
average undrawn face amount of each Letter of
Credit at a rate per annum equal to the applicable
margin for Revolving Loans which are LIBOR loans in
effect at such time (but in no event less than an
amount to be agreed upon per Letter of Credit),
which fees shall be paid quarterly in arrears, plus
an issuing fee on the face amount of each Letter of
Credit equal to 0.25% per annum (but not less than
an amount to be agreed upon per Letter of Credit)
shall be payable to the L/C Lender for its own
account, which fee shall be paid upon issuance.
Interest Rates and Fees: Interest rates and fees in connection with the
Credit Facilities will be as specified on Annex I
attached hereto.
Borrower will be entitled to make borrowings based
on the ABR plus the applicable margin or LIBOR plus
the applicable margin. Borrower may select interest
periods for LIBOR loans of one, two, three or six
months for LIBOR borrowings. Interest on ABR loans
will be paid quarterly in arrears and interest on
LIBOR loans will be payable at the end of each
interest period and, in the case of any interest
period longer than three months, no less frequently
than three months. Interest on all borrowings shall
be calculated on the basis of the actual number of
days elapsed over a 360-day year in the case of
LIBOR Loans and 365 or 366-day year in the case of
ABR Loans.
Default Rate: The applicable interest rate (including applicable
margin) plus 2.00% per annum.
Mandatory Prepayments/ The Term Loan Facilities will be required
Reductions in Commitments: to be prepaid with (a) 75% of annual Excess Cash
Flow (to be defined) (such percentage to be reduced
to 50% upon achievement of a ratio of total senior
debt to trailing four quarter EBITDA of less than
or equal to 3.50 to 1.0), (b) 100% of the net
proceeds (including casualty insurance proceeds) if
not reinvested within a specified time pe-
<PAGE>
-9-
riod of asset sales and other asset dispositions
for proceeds in excess of a certain threshold to be
mutually agreed (subject to customary exceptions
for inventory, used or obsolete equipment, etc.),
(c) 100% of the net proceeds of the issuance or
incurrence of debt or of any sale and lease-back
for proceeds in excess of a certain threshold to be
mutually agreed, and (d) 50% of the net proceeds
from any issuance of equity securities in any
public offering or private placement or from any
capital contribution. Notwithstanding clause (c) of
the preceding sentence (or clause (b) with respect
to a sale-leaseback), in the event that (i) no
Default or Event of Default shall have occurred and
be continuing or arise therefrom, (ii) Borrower is
in compliance with all covenants under the Credit
Agreement, and (iii) Borrower has achieved certain
credit measures to be mutually agreed upon, then of
the net cash proceeds of up to an amount to be
agreed upon of new indebtedness incurred by
Borrower (or sale-leaseback proceeds) in accordance
with the Credit Agreement and secured by the
existing warehouse facility of Borrower, only 50%
need be applied to prepay the Term Loan Facilities
(and such 50% not so applied may be used by
Borrower in any manner permitted by the Credit
Agreement).
The Credit Documents shall permit, so long as no
Default or Event of Default then exists or would
arise therefrom, the sale of the existing warehouse
facility after the construction or acquisition of a
new warehouse facility so long as the net proceeds
of such sale are applied as follows: (I) Within 30
days some or all of such net proceeds may be
applied either (1) to pay off the amount of any
financing permitted by the Credit Documents
incurred in connection with the acquisition or
construction of, or permanent refinancing of
indebtedness incurred for acquisition or
construction of, the new warehouse facility (the
"New Warehouse Financing") (and such amount so
applied need not be applied to prepay the Term
Loans) or
<PAGE>
-10-
(2) to prepay the Term Loans; (II) Within two
business days after such 30th day an amount of the
net proceeds of the sale of the existing warehouse
facility equal to the remainder, if any, of (1) the
amount of the New Warehouse Financing, less (2) the
amount of such net proceeds of such sale applied
during such 30 day period to repay the New
Warehouse Financing or to prepay the Term Loans
shall be applied to prepay the Term Loans; and
(III) In addition, on such second business day the
Term Loan Portion (as defined below) of any net
proceeds of the sale of the existing warehouse
facility remaining after the foregoing permitted
and required applications (the "Remaining Amount"),
shall be applied to prepay the Term Loans. The
"Term Loan Portion" shall be 50% of the Remaining
Amount if (i) no Default or Event of Default shall
have occurred and be continuing or would arise
therefrom, (ii) Borrower is in compliance with all
covenants under the Credit Documents, and (iii)
Borrower has achieved certain credit measures to be
mutually agreed upon, and shall be 100% of the
Remaining Portion if each of the foregoing
conditions are not satisfied as of such second
business day. If the Term Loan Portion is 50%, then
the remaining 50% of the Remaining Amount may be
used by Borrower in any manner permitted by Credit
Documents.
"Net proceeds" shall be defined in a manner
reasonably acceptable to the Arranger and Borrower
and shall include deductions such as amounts
applied to debt secured by the asset sold, taxes,
costs of sale, underwriting expenses, offering
expenses, etc.
Mandatory prepayments will be applied pro rata
among the Term Loan Facilities based on the
aggregate principal amount of Term Loans then
outstanding under each such Term Loan Facility. Any
application to any Term Loan Facility shall be
applied pro rata to the remaining scheduled
amortization payments under such Term Loan
Facility, as the case may be. Notwithstanding the
foregoing, any holder of
<PAGE>
-11-
Term Loans under the Term Loan B Facility may, to
the extent that Term Loans are outstanding under
the Term Loan A Facility, elect not to have
mandatory prepayments applied to such holder's
Loans under the Term Loan B Facility, in which case
the aggregate amount of such prepayment to be
applied to such holder's Loans under the Term Loan
B Facility shall be applied to the Term Loans under
the Term Loan A Facility pro rata. If no Term Loans
are outstanding under the Term Loan A Facility,
such election to decline prepayments shall not be
available. To the extent that the amount to be
applied to the prepayment of Term Loans exceeds the
aggregate amount of Term Loans then outstanding,
such excess shall be applied to the Revolving
Facility to permanently reduce the commitments
thereunder.
Revolving Loans will be immediately prepaid to the
extent that the aggregate extensions of credit
under the Revolving Facility exceed the lesser of
(x) commitments then in effect under the Revolving
Facility, and (y) the Borrowing Base then in
effect. To the extent that the amount to be applied
to the repayment of the Revolving Loans exceeds the
amount thereof then outstanding, Borrower shall
cash collateralize outstanding Letters of Credit.
Voluntary Prepayments/
Reductions in Commitments: (A) Term Loan Facilities. Borrowings under the
Term Loan Facilities may be prepaid at any time in
whole or in part at the option of Borrower, in a
minimum principal amount and in multiples to be
agreed upon, without premium or penalty except, in
the case of LIBOR borrowings, prepayments not made
on the last day of the relevant interest period.
Voluntary prepayments under the Term Loan
Facilities will be applied pro rata among the Term
Loan Facilities and as to any Term Loan Facility
pro rata against the remaining scheduled
amortization payments under such Term Loan
Facility.
<PAGE>
-12-
Notwithstanding the foregoing, any holder of Term
Loans under the Term Loan B Facility may, to the
extent that Term Loans are outstanding under the
Term Loan A Facility, elect not to have voluntary
prepayments applied to such holder's Loans under
the Term Loan B Facility, in which case the
aggregate amount of such prepayment to be applied
to such holder's Loans under the Term Loan B
Facility shall be applied to the Term Loans under
the Term Loan A Facility. If no Term Loans are
outstanding under the Term Loan A Facility, such
election to decline prepayments shall not be
available.
(B) Revolving Facility. The unutilized portion of
the commitments under the Revolving Facility may be
reduced and loans under the Revolving Facility may
be repaid at any time, in each case, at the option
of Borrower, in a minimum principal amount and in
multiples to be agreed upon, without premium or
penalty (except, in the case of LIBOR borrowings,
prepayments not made on the last day of the
relevant interest period).
Conditions to Effectiveness The effectiveness of the Credit Documents
and to Initial Loans: and the making of the initial Loans shall be
subject to conditions precedent that are usual for
facilities and transactions of this type, to those
specified below and in the Commitment Letter and to
such additional conditions precedent as may
reasonably be required by the Arranger (all such
conditions to be satisfied in a manner reasonably
satisfactory in all respects to the Arranger),
including, but not limited to, execution and
delivery of the Credit Documents reasonably
acceptable in form and substance to the Lenders;
delivery of satisfactory borrowing certificates;
receipt of valid security interests as contemplated
hereby; accuracy of representations and warranties
in all material respects; absence of defaults and
material litigation; evidence of authority;
compliance with laws in all material respects; and
adequate insurance and payment of fees.
<PAGE>
-13-
The effectiveness of the Credit Documents and the
making of the initial Loans will be subject to the
following additional conditions:
(A) The delivery, prior to the Closing Date of (i)
legal opinions in form and substance reasonably
satisfactory to the Arranger, (ii) officers'
certificates, together with the accompanying
charter documents and corporate resolutions, in
form and substance reasonably satisfactory to the
Arranger, (iii) a certificate from the chief
financial officer of Borrower and, at Borrower's
expense (not to exceed 50% thereof up to $25,000),
an opinion of a nationally recognized appraisal
firm or valuation consultant reasonably
satisfactory to the Arranger in form and substance
reasonably satisfactory to the Arranger with
respect to the solvency of each Credit Party
immediately after the consummation of the
Transactions to occur on the Closing Date, and (iv)
other closing documents customary for such
agreements or reasonably requested by the Arranger.
(B) The Board of Directors of Newco and Borrower
shall have authorized and approved the Transactions
and the Arranger shall have received satisfactory
evidence of the same. Newco and Borrower shall have
entered into the Merger Agreement, which shall be
in full force and effect. The terms, conditions and
structure of the Acquisition and the Merger
Agreement, including any amendments thereto (and
the documentation therefor (including all proxy
solicitation materials)) shall be in form and
substance reasonably satisfactory to the Arranger
and the Required Lenders. The Acquisition, the
Merger and the Existing Debt Repayment and the
financing therefor shall be in compliance in all
material respects with all laws and regulations
including any state antitakeover laws applicable to
such transactions. Borrower shall not have any
"poison pill" rights or shall have redeemed such
rights at a nominal price, or the Arranger shall
otherwise be reasonably satisfied that such rights
are null and void as
<PAGE>
-14-
applied to the Merger. The Arranger shall have
received copies, certified by Borrower, of all
filings made with any governmental authority in
connection with the Merger and the other
Transactions. The Merger shall have been
consummated.
(C) All material conditions to the Merger shall
have been satisfied in all material respects, and
not waived, amended, supplemented or otherwise
modified in any material respect except with the
consent of the Arranger and the Required Lenders
(not to be unreasonably withheld or delayed), to
the reasonable satisfaction of the Arranger and the
Required Lenders. The consideration per share of
common stock in the Merger shall not exceed $25 per
share and an aggregate of $325 million for all
shares. The nature and amount of the Management
Rollover shall be reasonably satisfactory to the
Arranger. The Arranger shall have received
satisfactory evidence that fees and expenses in
connection with the Transactions will not exceed
$20 million.
(D) Borrower shall have received aggregate gross
proceeds (i.e., before payment of expenses,
underwriting fees, discounts and the like) of at
least $100 million from the Senior Subordinated
Financing pursuant to agreements, and terms and
conditions thereunder, in form and substance
reasonably satisfactory to the Arranger.
(E) Newco shall have received aggregate gross
proceeds (i.e., before payment of expenses,
underwriting fees, discounts and the like) from the
Equity Financing of at least $115 million pursuant
to agreements, and terms and conditions thereunder,
in form and substance reasonably satisfactory to
the Arranger. The terms and conditions, and the
documentation therefor, of any PIK Preferred shall
be reasonably satisfactory to the Arranger.
(F) Each of the Transactions (other than extensions
of credit under the Credit Facili-
<PAGE>
-15-
ties) shall have been consummated in all material
respects in accordance with the terms hereof and
the terms of documentation therefor (without the
waiver of any material condition unless consented
to by the Arranger and the Required Lenders) that
are in form and substance reasonably satisfactory
to the Arranger.
(G) Immediately after the consummation of the
transactions, Madison shall own at least 80% (on a
fully diluted basis) of the voting common equity of
Borrower and 80% of the economic interest in
Borrower.
(H) All obligations of Borrower and its
subsidiaries with respect to the Existing Debt
shall be repaid in full (or provisions made
therefor satisfactory to the Arranger) and all
lending commitments thereunder terminated to the
reasonable satisfaction of the Arranger with all
security interests in favor of existing lenders
being unconditionally released and evidence thereof
reasonably satisfactory to the Arranger shall have
been provided in writing. The Arranger shall have
received a "pay-off" letter with respect to all
such debt repaid to the extent "pay-off" letters
are customarily issued with respect to such debt.
(I) All requisite third parties and governmental
authorities (domestic and foreign) shall have
approved or consented to the Transactions and the
other transactions contemplated hereby (without the
imposition of any materially burdensome or
materially adverse conditions) and all such
approvals and consents shall be in full force and
effect (or there shall be a plan reasonably
satisfactory to the Arranger for the obtaining
thereof). All applicable waiting periods shall have
expired without any action being taken by any
competent authority which restrains, prevents, or
imposes materially adverse conditions upon the
Transactions.
<PAGE>
-16-
(J) The Arranger shall be reasonably satisfied with
the employment and consultant status (as well as
employment agreements) of Jerry M. Smith (President
and CEO) and Lloyd Ross (Chairman), and the
Arranger shall be reasonably satisfied with the
amount and terms and conditions of current
management's equity interest in Borrower after
giving rise to the transactions.
(K) There shall not have occurred or become known
(i) any material adverse change or any condition or
event that could reasonably be expected to result
in a material adverse change in the business,
assets, liabilities (contingent or otherwise),
operations, condition (financial or otherwise),
solvency, properties, prospects or material
agreements (each, a "Material Adverse Change" (it
being understood that the definition of Material
Adverse Change shall not include "prospects" after
the Closing Date)) of Newco, Borrower or New
Borrower, together with Borrower's or New
Borrower's subsidiaries taken as a whole, as the
case may be (and before and after giving effect to
the Transactions) since December 31, 1996, (ii) any
facts or circumstances discovered by the Lenders in
the course of their ongoing due diligence
investigation of the Transactions, Newco, Borrower,
New Borrower and Borrower's and New Borrower's
subsidiaries after giving effect to the
Transactions, and the other transactions
contemplated hereby, which would be materially
inconsistent with the assumptions underlying the
projections delivered to the Lenders in
syndication, (iii) any transaction (other than the
Transactions) entered into by Newco, Borrower or
any of Borrower's subsidiaries, whether or not in
the ordinary course of business, that, in the
reasonable judgment of the Required Lenders, would
be materially adverse to Newco or Borrower,
together with Borrower's subsidiaries taken as a
whole, or (iv) any dividend or distribution of any
kind declared or paid by Borrower on its capital
stock.
<PAGE>
-17-
(L) There shall not exist any threatened or pending
action, proceeding or counterclaim by or before any
court or governmental, administrative or regulatory
agency or authority, domestic or foreign, (i)
challenging the consummation of any of the
Transactions or which would restrain, prevent or
impose materially burdensome conditions on the
Transactions, individually or in the aggregate, or
any other transaction contemplated hereunder, (ii)
seeking to prohibit the ownership or operation by
Borrower or any of its subsidiaries of all or a
material portion of any of their businesses or
assets or (iii) seeking to obtain, or having
resulted in the entry of, any judgment, order or
injunction that (a) would restrain, prohibit or
impose materially adverse conditions on the ability
of the Lenders to make the Loans under the Credit
Facilities, (b) could be reasonably expected to
result in a Material Adverse Change with respect to
Newco, Borrower or New Borrower, together with
Borrower's or New Borrower's subsidiaries taken as
a whole, as the case may be (and before and after
giving effect to the Transactions), (c) could
reasonably be expected to affect the legality,
validity or enforceability of any Credit Document
or any documents relating thereto or could
reasonably be expected to have a material adverse
effect on the ability of any Credit Party to fully
and timely perform their obligations under the
Credit Documents or the rights and remedies of the
Lenders, or (d) is seeking any material damages as
a result thereof.
(M) The Arranger and the Required Lenders shall be
satisfied (in their reasonable judgment) with the
proposed and actual capitalization and corporate
and organizational structure of Newco, Borrower,
New Borrower and New Borrower's subsidiaries (after
giving effect to the Transactions), including as to
direct and indirect ownership and as to the terms
of the indebtedness and capital stock of Newco, New
Borrower, and their respective subsidiaries.
Immediately after giving ef-
<PAGE>
-18-
fect to the Transactions, New Borrower shall have
no outstanding indebtedness or preferred stock
other than the Loans, the Senior Subordinated
Notes, any PIK Preferred issued as part of the
Equity Financing and certain other debt reasonably
acceptable to the Arranger (such as trade debt,
capital leases and other debt disclosed to the
Arranger (including outstanding mortgage debt not
to exceed an aggregate principal amount of $5.0
million)).
(N) Any material defaults in any material
agreements of Newco, Borrower or New Borrower or
any of Borrower's or New Borrower's subsidiaries
that may result from the Transactions shall have
been resolved or otherwise addressed in a manner
reasonably satisfactory to the Arranger; and no law
or regulation adopted, proposed or applicable after
the date of the Commitment Letter shall be
applicable in the reasonable judgment of the
Arranger that restrains, prevents or imposes
materially adverse conditions upon any material
component of the Transactions or the financing
thereof, including the extensions of credit under
the Credit Facilities.
(O) All other material documentation and agreements
related to the Transactions or which, in the
judgment of the Arranger, affects the extension of
credit under the Credit Facilities in any material
respect shall be in form and substance reasonably
satisfactory to the Arranger; and all material
conditions precedent under all documentation
relating to the consummation of the Transactions
(other than the conditions precedent set forth in
the Credit Agreement) or the financing or
refinancing thereof as the case may be shall have
been satisfied in all material respects (except to
the extent such conditions have been waived with
the prior consent of the Arranger and the Required
Lenders (such consent not to be unreasonably
withheld or delayed)).
<PAGE>
-19-
(P) All loans and other financing to Newco and
Borrower shall be in full compliance with all
applicable requirements of Regulations G, T, U and
X of the Board of Governors of the Federal Reserve
System.
(Q) All accrued fees and expenses then due and
payable (including the reasonable fees and expenses
of counsel to the Lenders, the Arranger and the
Administrative Agent) of the Lenders, the Arranger
and the Administrative Agent in connection with the
Credit Documents shall have been paid.
(R) The Arranger shall have received reasonably
satisfactory third-party environmental reports
(including Phase 1 reports) of Newco, Borrower, New
Borrower and Borrower's and New Borrower's
subsidiaries. The Arranger shall have determined
that reasonably satisfactory insurance relating to
Borrower and its subsidiaries will be in place on
and after the Closing Date.
(S) The Arranger shall be reasonably satisfied as
to the amount and nature of all tax, ERISA,
employee retirement benefit, and other contingent
liabilities to which Newco, Borrower, New Borrower
or any of Borrower's or New Borrower's subsidiaries
may be subject, and the plans of Newco, Borrower,
New Borrower and Borrower's or New Borrower's
subsidiaries with respect thereto.
(T) The Lenders shall have received a reasonably
satisfactory pro forma balance sheet of New
Borrower and its subsidiaries as at the Closing
Date and after giving effect to the Transactions
and the financings contemplated hereby, which pro
forma balance sheet shall be substantially in
conformity with that delivered to the Lenders
during syndication. The Lenders shall have received
projected cash flows and income statements for the
period of seven years following the Closing Date,
which projections shall be (i) based upon
reasonable assumptions made in good faith, (ii)
reasonably satisfactory to
<PAGE>
-20-
the Lenders and (iii) substantially in conformity
with those projections delivered to the Lenders
during syndication. The Lenders shall have received
(i) audited financial statements of Borrower for
1994 through 1996 and (ii) unaudited interim
combined financial statements of Borrower for each
fiscal month and quarterly period ended subsequent
to June 30, 1997 as to which such financial
statements are available, and such financial
statements shall not, in the reasonable judgment of
the Lenders, reflect any Material Adverse Change
with respect to Borrower as compared with the
financial statements or projections previously
furnished to the Lenders.
(U) The Lenders shall have received a reasonably
satisfactory business plan or budget for Borrower
and its subsidiaries after giving effect to the
Transactions for the remainder of the 1997 fiscal
year and the fiscal year 1998.
(V) The Lenders shall have received the results of
a recent lien, tax and judgment search in each of
the jurisdictions and offices where assets of each
of Newco, Borrower and their respective
subsidiaries are located or recorded, and such
search shall reveal no liens on any of their assets
except for liens permitted by the Credit Documents
or liens to be discharged in connection with the
transactions contemplated hereby.
(W) For the trailing four quarter period
immediately prior to the Closing Date Borrower's
EBITDA shall not be less than $33.5 million, and
the Arranger shall have received a satisfactory
officers' certificate certifying as to the same
(including satisfactory schedules and other
supporting data).
(X) The Lenders shall have received the report of
an independent field examination, reasonably
satisfactory in form and substance to the Lenders,
with respect to the inventory of Borrower and its
subsidiaries and shall be reasonably satisfied with
the results thereof
<PAGE>
-21-
(it being understood that Borrower shall not be
responsible for more than $10,000 of expenses for
such field examination).
(Y) The Lenders shall have received such other
legal opinions, corporate documents and other
instruments and/or certificates as the Arranger or
the Required Lenders may reasonably request.
Conditions to All Each extension of credit under the Credit
Extensions of Credit: Facilities will be subject to the (i) absence of
any Default or Event of Default, and (ii) continued
accuracy of representations and warranties in all
material respects (except representations and
warranties which are made only as of a prior date).
Representations and Customary for facilities similar to the Credit
Warranties: Facilities and such additional representations and
warranties as may be reasonably required by the
Arranger, including, but not limited to, no Default
or Event of Default; absence of Material Adverse
Change; receipt of financial statements (including
pro forma financial statements); absence of
undisclosed liabilities or material contingent
liabilities not disclosed in writing to Arranger
prior to the date hereof; compliance with laws;
solvency; no conflicts with laws, charter documents
or agreements; good standing; payment of taxes;
ownership of properties; corporate power and
authority; no burdensome restrictions; ERISA
matters; environmental matters; labor matters;
absence of material litigation; use of proceeds and
margin regulations; no material misstatement or
omission; validity and perfection of security
interests; absence of liens and security interests;
and accuracy of Newco's and Borrower's
representations and warranties in the Merger
Agreement.
Affirmative Covenants: Customary for facilities similar to the Credit
Facilities and such others as may be reasonably
required by the Arranger, including, but not
limited to, maintenance of corporate existence and
rights; compliance with
<PAGE>
-22-
laws; performance of obligations; maintenance of
material rights and privileges; maintenance of
properties in good repair; maintenance of
appropriate and adequate insurance; inspection of
books and properties; payment of taxes and other
liabilities; notice of defaults, litigation and
other adverse action; delivery of financial
statements, financial projections, borrowing base
certificates and compliance certificates; borrowing
base reports and audits; maintenance of interest
rate protection; ERISA compliance; environmental
compliance; and further assurances. The financial
reporting covenant will require monthly, quarterly
and annual financial statements showing comparison
to plan for the current year and actual for the
corresponding period in the prior year, as well as
an annual budget showing plan for each monthly and
quarterly period in the next fiscal year as well as
for such fiscal year. Quarterly and annual
financial statements shall be on a consolidated and
consolidating basis.
Negative Covenants: Customary for facilities similar to the Credit
Facilities and such others as may be reasonably
required by the Arranger, including, but not
limited to, limitation on indebtedness; limitation
on liens; limitation on further negative pledges;
limitation on loans, investments and joint
ventures; limitation on guarantee or other
contingent obligations; limitation on restricted
payments (including dividends, redemptions and
repurchases of equity interests); limitation on
fundamental changes (including limitation on
mergers, acquisitions and asset sales); limitation
on restrictions on amending Credit Documents;
limitation on issuance, sale or other disposition
of subsidiary stock; limitation on capital
expenditures; limitation on operating leases;
limitation on sale-leaseback transactions;
limitation on sale or discount of receivables;
limitation on transactions with affiliates;
limitation on dividend and other payment
restrictions affecting subsidiaries; limitation on
changes in business conducted; limitation on
amendment of
<PAGE>
-23-
documents relating to other indebtedness (including
the Senior Subordinated Notes and the Existing
Debt) and other material documents; limitation on
creation of subsidiaries; and limitation on
prepayment or repurchase of other indebtedness.
The limitation on debt incurrence covenant and the
limitation on lien covenant shall, subject to pro
forma covenant compliance and other conditions to
be mutually agreed, permit (x) the incurrence of a
mortgage on the existing warehouse facility in an
amount to be mutually agreed and (y) the incurrence
of secured New Warehouse Financing in an amount to
be agreed; provided, however, that in each case (x)
and (y) (i) such debt is secured solely by the
relevant warehouse and no other Collateral and (ii)
the amount of the New Warehouse Financing shall be
net of (or reduced by) the aggregate net amount of
the proceeds of the mortgage or sale-leaseback of
the existing warehouse not required to be applied
to the prepayment of the Term Loans.
The limitation on asset sale covenant shall,
subject to no Default or Event of Default then
existing or arising therefrom, permit the sale of
the existing warehouse facility after the
construction or acquisition of a new warehouse
facility, and the proceeds thereof shall be applied
as required by "Mandatory Prepayments/Reductions in
Commitments" above.
The limitation on indebtedness and lien covenant
will permit (x) Indebtedness of Borrower in an
aggregate principal amount that does not exceed an
amount to be negotiated (but in any event not
greater than the Revolving Facility) (the
"Replacement Indebtedness") in the form of
revolving loans and/or letters of credit, and the
guaranty of such Indebtedness by domestic
subsidiaries of Borrower (but only to the extent
such domestic subsidiaries also guaranty the
obligations of Borrower under the Credit Documents
on a pari passu and equal and ratable basis);
provided, however,
<PAGE>
-24-
that the Replacement Indebtedness shall only be
incurred (i) on terms and conditions reasonably
satisfactory to the Lenders holding at least a
majority of the then outstanding principal amount
of Term Loans; (ii) if all Loans and other
extensions of credit under the Revolving Facility
shall have been repaid, or will simultaneously be
repaid, in cash in full and each of the Commitments
under the Revolving Facility, have been permanently
terminated (or have expired); and (iii) if no
default or event of default would result from the
incurrence of the Replacement Indebtedness; and (y)
Liens on the assets of Borrower and any subsidiary
in favor of the lenders of the Replacement
Indebtedness, but only to the extent that such
Liens (i) rank pari passu and equal and ratable (or
are subordinate) to the Liens granted in favor of
the Lenders pursuant to the Credit Documents and
encumber only those assets in which the Lenders
also have been granted a valid and existing Lien
pursuant to the Credit Documents, and (ii) are
spread between the obligations under the Credit
Documents and obligations in respect of the
Replacement Indebtedness on a pari passu basis and
are subject to an intercreditor agreement
reflecting the foregoing and reasonably
satisfactory to the Arranger and the Administrative
Agent and the Lenders holding at least a majority
of the then outstanding principal amount of the
Term Loans.
Financial Covenants: The Credit Facilities will contain financial
covenants appropriate in the context of the
proposed transaction based upon the financial
information provided to the Arranger, including,
but not limited to (definitions and numerical
calculations to be set forth in the Credit
Agreement): minimum interest coverage ratio,
minimum fixed charge coverage ratio, minimum
trailing four quarter EBITDA, and maximum ratio of
total debt to trailing four quarter EBITDA. The
financial covenants contemplated above will be
tested on a quarterly basis and will apply to
Borrower and its subsidiaries on a consolidated
basis. The cov-
<PAGE>
-25-
erage tests will include rental expense on terms
mutually agreed by Borrower and the Arranger.
Interest Rate Management: An amount reasonably designated by the Arranger of
the projected outstandings under the Term Loan
Facilities must be hedged on terms, by such date
and for a period of time as is satisfactory to the
Arranger and Borrower.
Events of Default: Customary for facilities similar to the Credit
Facilities and others to be specified by the
Arranger, including, but not limited to, nonpayment
of principal, interest, fees or other amounts when
due; violation of covenants; failure of any
representation or warranty to be true in all
material respects; cross-default and cross-
acceleration; Change in Control (to be defined);
material adverse change; bankruptcy and insolvency
events; material judgments; ERISA events;
environmental events; change of control under any
other indebtedness; and actual or asserted (by any
Credit Party) invalidity of any Credit Document or
security interest. Events of default will be
subject to customary grace periods to be mutually
agreed upon by Borrower and the Arranger.
Yield Protection and Usual for facilities and transactions of this type,
Increased Costs: including, but not limited to, in respect of
reimbursement of redeployment costs in the case of
prepayments (or conversion into ABR Loans) of LIBOR
Loans other than at the end of an interest period,
taxes (including but not limited to gross-up
provisions for withholding taxes imposed by any
governmental authority), indemnity for breakage
costs, changes in capital requirements, guidelines
or policies or their interpretation or application,
illegality, changes in circumstances, increased
costs as a result of change in law or
administration thereof, as a result of regulatory
guidelines or requests, changes in reserves (to the
extent not included in the interest rate) and other
provisions reasonably deemed necessary by the Ar-
<PAGE>
-26-
ranger or the other Lenders to provide customary
protection for Lenders.
Assignments and No Credit Party may assign its rights or
Participations: obligations in connection with the Credit
Facilities without the prior written consent of all
of the Lenders.
Lenders shall be permitted to assign and
participate Loans, notes and commitments. Non-pro
rata assignments of Loans, notes, and commitments
of the Credit Facilities shall be permitted. Each
assignment (unless to another Lender or its
affiliates) shall be in a minimum amount of $10
million (unless Borrower and the Administrative
Agent otherwise consents or unless the assigning
Lender's exposure is reduced to $0). All
assignments, whether through novation or otherwise,
shall be permitted with Borrower's consent (not to
be unreasonably withheld or delayed), except that
no such consent need be obtained to effect an
assignment to any Lender (or any of its affiliates)
or if any event of default has occurred and is
continuing. Participations shall be permitted
without restriction and participants will have the
same benefits as the original syndicate Lenders
with regard to yield protection and increased
costs, collateral benefits and provision of
information on the Credit Parties (it being
understood that with respect to yield protection
and increased cost provisions, such shall be
applicable to the participant only if the Lender
effecting such participation would have been
entitled thereto). Voting rights of participants
will be limited to proposed increases in amount,
release of all or substantially all Collateral
(except as permitted by the Credit Documents),
decreases in interest rate or fees and extensions
of scheduled final maturity date. In the case of
the Revolving Facility, assignments will require
the consent of the L/C Lender. Assignees will
assume all of the rights and obligations of the
assigning Lender. Assignments to any Credit Party
or any of its af-
<PAGE>
-27-
filiates are prohibited without consent of all of
the Lenders.
Voting: Amendments to and waivers of any provision of any
Credit Document will require the approval of
Lenders holding at least a majority of the
extensions of credit and commitments (the "Required
Lenders"), except that (i) the consent of all
affected Lenders shall be required with respect to
(a) reductions of principal, interest rates or
fees, (b) extensions of scheduled interest payments
or final maturity or termination of commitments,
(c) change in any provisions requiring the consent
of all of the Lenders, (d) any reduction in the
percentage referred to in the definition of
Required Lenders, (e) except as provided in the
Credit Documents, any release of any Guarantor from
its guarantee, and (f) any release of all or
substantially all Collateral securing the Credit
Facilities or the effectiveness of any arrangement
providing that any obligation other than
obligations under the Credit Documents to the
Lenders and the Increased Facility Amount (or
interest rate hedges with Lenders or their
affiliates) will be secured by the collateral
securing the Credit Facilities, (ii) no Lender's
commitment shall be increased without the consent
of such Lender, (iii) subject to clause (i)(b), the
consent of Lenders holding at least 66-2/3% of the
affected extensions of credit and commitments shall
be required with respect to extensions of scheduled
amortization or reductions in the amount of any
amortization payment, and (iv) no waiver or
amendment (or change to the application to
scheduled amortization payments) of the application
of any prepayment as among the Term Loans under the
Term Loan A Facility and the Term Loans under the
Term Loan B Facility may be effected without the
consent of the Lenders holding at least 66-2/3% of
the commitments and/or loans of the affected
tranche. No consent of any Lender other than the
Lender (or New Lender) providing the commitment
therefor shall be required for the Increased
Facility Amount to be part of the
<PAGE>
-28-
Credit Facilities on the terms set forth earlier
herein.
Expenses and In addition to those out-of-pocket expenses
Indemnification: reimbursable under the Commitment Letter, all
reasonable out-of-pocket expenses of the Arranger
and the Administrative Agent (and the Lenders for
enforcement costs and documentary taxes) associated
with the preparation, execution and delivery of any
waiver or modification (whether or not effective)
of, and the enforcement of, any Credit Document
(including the reasonable fees, disbursements and
other charges of counsel for the Arranger and the
Administrative Agent) are to be paid by the Credit
Parties. The Credit Parties will indemnify each of
the Arranger, the Administrative Agent and the
other Lenders and hold them harmless from and
against all costs, expenses (including fees,
disbursements and other charges of counsel) and
liabilities arising out of or relating to any
litigation or other proceeding (regardless of
whether the Arranger, the Administrative Agent or
any such other Lender is a party thereto) that
relate to the Transactions or any transactions
related thereto; provided, however, that none of
the Arranger, the Administrative Agent or any such
other Lender will be indemnified for any cost,
expense or liability to the extent such cost,
expense or liability resulted from such person's
gross negligence or bad faith.
Governing Law and Forum: New York.
Waiver of Jury Trial: All parties to the Credit Agreement waive right to
trial by jury.
Counsel for Arranger: Cahill Gordon & Reindel.
<PAGE>
ANNEX I
-------
Interest Rates and Fees: Borrower will be entitled to make borrowings at
either the LIBOR or ABR, plus (A) with respect to
LIBOR Loans, (i) in the case of Loans under the
Revolving Facility, 2.500% per annum; (ii) in the
case of Loans under the Term Loan A Facility,
2.500% per annum; and (iii) in the case of Loans
under the Term Loan B Facility, 3.000% per annum;
and (B) with respect to ABR Loans, (i) in the case
of Loans under the Revolving Facility, 1.500% per
annum; (ii) in the case of Loans under the Term
Loan A Facility, 1.500% per annum; and (iii) in the
case of Loans under the Term Loan B Facility,
2.000% per annum. A pricing grid showing stepdowns
in such rates for Loans under the Revolving
Facility and the Term Loan A Facility shall be
negotiated based upon improved credit measures. Two
stepdowns in such rates for loans under the Term
Loan B Facility shall be negotiated based on
improved credit measures.
"ABR" means the corporate base rate of interest
announced by the Administrative Agent from time to
time, changing when and as said corporate base rate
changes. The corporate base rate is not necessarily
the lowest rate charged by the Administrative Agent
to its customers.
"LIBOR" means the rate determined by the
Administrative Agent to be available to the Lenders
in the London interbank market for deposits in the
amount of, and for a maturity corresponding to, the
amount of the applicable LIBOR Loan, as adjusted
for maximum statutory reserves.
Commitment fees accrue on the undrawn amount of the
Credit Facilities, commencing on the Closing Date.
The commitment fee in respect of the Credit
Facilities will be 0.50% per annum.
<PAGE>
-2-
All commitment fees will be payable in arrears at
the end of each quarter and upon any termination of
any commitment, in each case for the actual number
of days elapsed over a 365-day year.
<PAGE>
Tuesday Morning
GIFTS. 50% TO 80% OFF EVERYTHING.
Presentation To the Board of Directors
SBC Warburg Dillon Read
September 12, 1997
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation
================================================================================================================
Table of Contents
Tab
---
<S> <C>
Review of Proposed Transaction............................................................. A
Overview of Sale Process....................................................... A-1
Summary Analysis of Offer...................................................... A-2
Financing Structure and Analysis of Feasibility of Proposal.................... A-3
Review of Tuesday Morning.................................................................. B
Historical Financial Performance............................................... B-1
Historical Trading Analysis.................................................... B-2
Projected Business Plan and Strategy........................................... B-3
Preliminary Valuation...................................................................... C
Exhibits
--------
Comparable Company Trading Analysis................................................... 1
Discounted Cash Flow Analysis......................................................... 2
LBO Analysis.......................................................................... 3
Recapitalization Analysis............................................................. 4
Comparable Industry Acquisitions...................................................... 5
Calculation of Estimated Weighted Average Cost of Capital............................. 6
</TABLE>
<PAGE>
Tuesday Morning Corporation
================================================================================
Presentation to the Board of Directors
Review of Proposed Transaction............. A
Overview of Sale Process..............A-1
<PAGE>
Tuesday Morning Corporation / A-1-1
================================================================================
Overview of Sale Process
. In November of 1996 Tuesday Morning retained SBC Warburg Dillon Read Inc.
("SBCWDR") and Hatchett Capital Group ("Hatchett") as financial advisors
to review strategic and financial alternatives for the Company.
. The review of strategic and financial alternatives was motivated by Lloyd
Ross', Chairman and CEO, and Jerry Smith's, President and COO, desire to
retire and liquefy their shareholdings.
. Beginning in March 1997, SBCWDR contacted a total of 26 potential partners
and/or acquirors including 19 corporate buyers and 7 financial buyers.
- Potential corporate buyers included close-out retailers, other discount
retailers, department store retailers and other specialty retailers.
. The Company distributed information memoranda to 10 potential acquirors (5
corporate buyers and 5 financial buyers) who expressed initial interest in
exploring a possible purchase of Tuesday Morning.
[ART] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / A - 1 - 2
================================================================================
Overview of Sale Process
. After discussions with this group of potential acquirers, only one party,
Madison Dearborn Partners, Inc., ("Madison Dearborn") demonstrated
ongoing interest in acquiring the Company.
. In June 1997, the Company provided selected additional financial
information to Madison Dearborn to assist them in developing a financial
analysis of Tuesday Morning.
. On July 15 and July 16, 1997, representatives of Madison Dearborn visited
the Company to meet with management and tour the facilities.
[ART] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / A - 1 - 3
================================================================================
. On July 18, 1997, Madison Dearborn made a preliminary proposal to acquire
the Company for $23.00 per share.
. Pursuant to further negotiations Madison Dearborn increased its offer to
$24.00 per share on July 23, 1997.
. Pursuant to further negotiations, Madison Dearborn increased its offer to
$25.00 per share on August 1, 1997 and indicated it was its final and
best offer.
. On August 14, 1997, Tuesday Morning publicly announced a preliminary
agreement with Madison Dearborn.
- Since the announcement, neither the Company nor any of its advisors
have been contacted by any other party expressing an interest in
acquiring the Company.
[ART] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / A-1-4
================================================================================
Overview of Madison Dearborn
. Madison Dearborn Partners, Inc. is one of the largest management buyout
and special equity investment firms in the United States. Founded in
1993, Madison Dearborn has raised approximately $1.5 billion in two
investment funds. Previously, from 1980 to 1992, the principals of
Madison Dearborn managed the $2 billion buyout fund of First Chicago
Corporation.
. Madison Dearborn's funds have come from a variety of investors including
endowments, public and private pension funds, and financial institutions.
. Since 1980, Madison Dearborn's principals have invested over $1 billion
in more than 100 middle market transactions. Representative past and
current consumer and retail oriented portfolio companies include:
- Beverages & More, Inc. - Intercontinental Art, Inc.
- Consolidated Stores Corporation - Sterling Merchandise Company
- Cornerstone Investment Group, Inc. - The Sports Authority, Inc.
[ART] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation
================================================================================
Presentation to the Board of Directors
Review of Proposed Transaction...............A
Overview of Sale Process.............A - 1
Summary Analysis of Offer............A - 2
<PAGE>
Tuesday Morning Corporation / A - 2- 1
================================================================================
SUMMARY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
<S> <C>
Acquiring Entity: Newco (a corporation owned by
Madison Dearborn Partners, Inc.)
Price per Common Share: $25.00
Percent of Shares to be Acquired: 100%
Consideration: Cash
Offer for Equity/1/: $324.6 million
---------------------------------------------------------------------------
Note 1: Net of proceeds from exercise of options.
</TABLE>
SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / A - 2 - 2
================================================================================
Acquisition Multiples
[_] Based on a purchase price of $25.00 per share, Madison Dearborn would
pay the following acquisition multiples.
<TABLE>
<CAPTION>
================================================================
Valuation
(in millions, except per share data)
<S> <C>
Offer price per share $25.00
Common shares outstanding 11.926
Options/1/ 1.056
-------
Total shares outstanding 12.983
Offer for Equity: $324.6
Plus: Debt assumed/2/ 4.0
Less: Cash/2/ (3.4)
-------
Offer for Net Assets: $325.2
- ----------------------------------------------------------------
</TABLE>
Note 1: Modified treasury stock method. Average option exercise price of $3.97
per share.
Note 2: Company projections as of 9/5/97.
<TABLE>
<CAPTION>
================================================================================
Implied Acquisition Multiples
(in millions, except per share data)
LTM 6/30/97 FY1997E/3/
----------- ----------
<S> <C> <C>
Net Sales $281.6 $320.9
EBITDA/1/ 30.3 39.7
EBIT/2/ 25.3 35.7
Earnings per Share $1.13 $1.34
Book Value 78.3 95.9
Net Asset Value to:
Net Sales 1.2x 1.0x
EBITDA/1/ 10.7 8.2
EBIT/2/ 12.9 9.1
Equity Value to:
Earnings per Share 22.3x 18.7x
Book Value 4.1 3.4
Acquisition premium over unaffected
stock price of $20.375 on 8/13/97 22.7%
- --------------------------------------------------------------------------------
</TABLE>
Note 1: EBITDA equals earnings before interest, taxes, depreciation and
amortization.
Note 2: EBIT equals earnings before interest and taxes.
Note 3: Company projections as of 9/5/97.
SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation
================================================================================
Presentation to the Board of Directors
Review of Proposed Transaction.................... A
Overview of Sale Process................ A-1
Summary Analysis of Offer............... A-2
Financing Structure and Analysis of .... A-3
Feasibility of Proposal
<PAGE>
Tuesday Morning Corporation / A - 3 - 1
================================================================================
FINANCING STRUCTURE
The proposed financing structure to be used in the buyout is outlined below.
<TABLE>
<CAPTION>
================================================================================
Source of Funds
(In millions)
Interest
Amount Rate % % of Total
------ -------- ----------
<S> <C> <C> <C>
New Revolver Borrowings $ 13.5 8.25% 4.0%
Senior Unsecured Debt A 46.0 8.25 13.5%
Senior Unsecured Debt B 60.0 9.00 17.6
Subordinated Debt 100.0 10.75 29.4
Sponsor Equity 115.0 -- 33.8
Due from Officer/1/ 2.7 -- 0.8
Excess Cash On Hand 3.4 -- 0.0
------ ----------
Total Sources $340.6 100.0%
- --------------------------------------------------------------------------------
</TABLE>
Note 1: Unsecured loan due from officer.
<TABLE>
<CAPTION>
=================================================
Uses of Funds
(In millions)
<S> <C>
Purchase of Equity $324.6
Debt Refinanced 0.0
Fees and Expenses 16.0
------
Total Uses $340.6
======
Warrants 0.0%
Management Carry 10.0%
- -------------------------------------------------
</TABLE>
SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / A - 3 - 2
================================================================================
FEASIBILITY ANALYSIS
Pro forma credit statistics under this financing structure follow.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Credit Statistics/1,2/
Pro Forma Projections
--------- -----------------------
1997 1998 1999 2000
--------- ----- ----- -----
<S> <C> <C> <C> <C>
EBIT / Total Interest/3/ 1.5x 1.8x 2.2x 2.6x
EBITDA / Total Interest 1.7 2.0 2.4 2.8
EBITDA-CapEx / Total Interest 1.5 1.8 2.2 2.5
Senior Debt / EBITDA 3.3x 2.7x 2.1x 1.7x
Total Debt / EBITDA 5.9 4.9 4.0 3.3
Total Debt / Total Capitalization 67.1% 65.5% 62.5% 58.3%
Total Equity / Total Capitalization 32.9% 34.5% 37.5% 41.7%
-------------------------------------------------------------------------
</TABLE>
Note 1: Company projections as of 9/5/97.
Note 2: Calculated using estimated annual average revolver balances.
Note 3: EBIT expressed before goodwill amortization.
[LOGO of SBC Warburg Dillon Read]
<PAGE>
Tuesday Morning Corporation / A - 3 - 3
- --------------------------------------------------------------------------------
Equity Return Analysis
Assuming the successful execution of Tuesday Morning's business plan, equity
investors in the Company sponsored by Madison Dearborn can expect returns of
approximately 30% in 5 years.
------------------------------------------------------
Equity Return Analysis/1/
(in millions)
Multiple of FY2002E EBITDA
----------------------------------
7.0x 8.0x 9.0x
----------- ----------- -----------
$77.4 $77.4 $77.4
FY 2002E EBITDA
Total Enterprise Value 541.5 618.8 696.2
Less: Net Debt (139.5) (139.5) (139.5)
----------- ----------- -----------
Net Value to Equity Investors $402.0 $479.3 $556.7
Equity Rate of Return in 2002 25.8% 30.3% 34.2%
- ------------------------------------------------------------------------
Note 1: Company projections as of 9/5/97.
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation
================================================================================
Presentation to the Board of Directors
Review of Proposed Transactions........................ A
Overview of Sale Process....................A - 1
Summary of Terms and Conditions of Offer....A - 2
Financing Structure and Analysis of.........A - 3
Feasibility of Proposal
Review of Tuesday Morning.............................. B
Historical Financial Performance............B - 1
<PAGE>
Tuesday Morning Corporation/B-1-1
================================================================================
Overview of Historical Financial Performance
. Tuesday Morning has grown dramatically over the past five years nearly
doubling the total number of retail stores.
----------------------------------------------------------------------
Stores Operated at Year End
350 -- CAGR: 10.5%
315
300 -- 286
260
250 -- 246
235
200 -- 191
150 --
100 --
50 --
0 --
1992 1993 1994 1995 1996 1997E/1/
----------------------------------------------------------------------
Note 1: Company projections as of 9/5/97.
- --------------------------------------------------------------------------------
Net New Stores 41 44 11 14 26 29
% Change 27.3% 23.0% 4.7% 5.7% 10.0% 10.1%
- --------------------------------------------------------------------------------
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation/B-1-2
================================================================================
Overview of Historical Financial Performance
. Since 1993, comparable-store sales growth has improved significantly.
-----------------------------------------------------------------------
Comparable-Store Sales Growth/1/
<TABLE>
<CAPTION>
Average: 6.0%
<S> <C> <C> <C> <C> <C> <C>
20.0% --
19.0%
15.0% --
14.0%
10.0% --
8.2%
6.4%
5.0% --
4.2%
0.0% -- | | | | | | |
(3.0%)
-5.0% --
1992 1993 1994 1995 1996 1H97
</TABLE>
- --------------------------------------------------------------------------------
Note 1: Company reports.
[LOGO]SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation/B-1-3
================================================================================
Overview of Historical Financial Performance
[_] As a result of these factors net sales has grown from $160.0 million
in 1992 to $320.9 million projected for 1997.
-----------------------------------------------------------------------
Total Sales
(In millions)
$350.0 -- CAGR: (1992-1997): 14.9%
$320.9
$300.0 --
$256.8
$250.0 -- $210.3
$190.1
$200.0 -- $175.8
$150.0 -- $160
$100.0 --
$50.0 --
$0.0 --
1992 1993 1994 1995 1996 1997E/1/
----------------------------------------------------------------------
Note 1: Company projections as of 9/5/97.
- --------------------------------------------------------------------------------
% Growth 29.8% 9.8% 8.1% 10.6% 22.1% 23.1%
- --------------------------------------------------------------------------------
SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / B - 1 - 4
================================================================================
OVERVIEW OF HISTORICAL FINANCIAL PERFORMANCE
[_] Profitability has recovered significantly since 1993, 1997 is expected to
be the third year in a row of record financial performance.
(DESCRIPTION OF GROSS PROFIT AND MARGIN BAR CHART)
---------------------------------------------------
Gross Profit and Margin/1/
(dollars in millions)
CAGR: 15.5%
<TABLE>
<S> <C>
1992....................................... $ 55.5
1993....................................... $ 52.6
1994....................................... $ 63.2
1995....................................... $ 72.8
1996....................................... $ 91.6
1997E/2/................................... $114.0
---------------------------------------------------
</TABLE>
Note 1: Adjusted for UNICAP cost allocation method.
Note 2: Company projections as of 9/5/97.
Scales: $ - to $120
28.0% to 36.0%
(DESCRIPTION OF EBIT AND MARGIN BAR CHART)
---------------------------------------------------
EBIT and Margin
(dollars in millions)
CAGR: 27.6%
<TABLE>
<S> <C>
1992........................................ $10.2
1993........................................ $(1.2)
1994........................................ $ 6.3
1995........................................ $10.4
1996........................................ $21.0
1997E....................................... $35.7
---------------------------------------------------
</TABLE>
Note 1: Company projections as of 9/5/97.
Scales: $(5.0) - to $35.0
-2.0% to 12.0%
(LOGO OF SBC WARBURG DILLON READ)
<PAGE>
Tuesday Morning Corporation/B-1-5
================================================================================
Overview of Historical Financial Performance
. Margins and profitability were negatively impacted in 1993 primarily by
aggressive expansion, poor buying decisions and ineffective inventory
management.
-- Difficulties were heightened due to Lloyd Ross' decision to reduce his
involvement in the business starting in 1992.
. As a result of the difficulties, Lloyd Ross reassumed more active involvement
in the Company in 1994, Jerry Smith became President and many initiatives were
begun to address the Company's weaknesses.
-- Buying practices were changed and certain other senior management changes
were effected.
-- Projects to automate and reengineer warehouse processing and to upgrade
point-of-sale information systems were begun.
-- Electronic article surveillance equipment installations were initiated.
-- Real estate and store operations management moderated the rate of store
growth from 44 in 1993 to 11 in 1994.
-- Buying staff was increased markedly to broaden the product mix and maintain
the limited quantities of merchandise required for successful events.
SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / B - 1 - 6
================================================================================
Overview of Historical Financial Performance
. Since 1993, the Company's financial performance has improved
considerably, resulting from:
-- Better, more accurate pricing and fewer markdowns due to point-of-sale
information systems.
-- More attractive product mix driven by a more focused and experienced
staff of 22 buyers.
-- Substantial operating leverage in warehouse processing and
distribution.
-- Comparable-store sales growth of 14% in 1996, and 19% year-to-date
1997, in part, through execution of the "wave" concept of shipping
new merchandise to stores.
-- Ongoing opportunities to locate new stores in attractive market areas.
[LOGO]SBC Warburg Dillon Read
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation / B-1-7
============================================================================================================================
Comparable Company Financial Analysis
. Compared to the Company's peers, Tuesday Morning's historical financial
performance is generally in line with the industry averages.
- However, as a result of the Company's turnaround, earnings growth is
substantially above the industry.
============================================================================================================================
Operating Statistics - Close-Out Retail Companies
(dollars in millions)
3 Year CAGR Gross Margin EDITDA Margin Operating Margin
------------------- ----------------- --------------- ----------------
LTM Operating 3 Year 3 Year 3 Year
Sales Sales Income LTM Average LTM Average LTM Average
------ ----- --------- ----- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TJX Companies $6,777 48.0% 55.2% 22.8% 21.9% 8.3% 7.2% 6.4% 5.2%
Consolidated Stores 2,920 49.5 39.2 41.4 42.2 8.0 10.2 6.1 8.1
Ross Stores 1,762 15.7 57.1 29.6 28.0 10.2 7.7 8.5 5.8
MacFrugal's Bargains - CloseOuts 797 6.4 (0.7) 43.0 44.0 11.3 10.6 9.1 8.2
Mazel Stores 181 53.6 55.6 33.5 29.5 7.9 8.1 7.5 7.5
- ---------------------------------------------------------------------------------------------------------------------------
Median $1,762 48.0% 55.2% 33.5% 29.5% 8.3% 8.1% 7.5% 7.5%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tuesday Morning $ 282 16.2% 90.4% 35.8% 34.5% 10.5% 7.2% 8.4% 5.2%
Rank 5/6 4/6 1/6 3/6 3/6 2/6 5/6 3/6 5/6
- ---------------------------------------------------------------------------------------------------------------------------
Earnings Estimates/1/
---------------------
Growth 5-Year
1998/1997 Growth
--------- -------
TJX Companies 25.5% 15.8%
Consolidated Stores 20.6 20.1
Ross Stores 15.9 14.8
MacFrugal's Bargains - CloseOuts 16.3 14.0
Mazel Stores 20.3 22.5
- ---------------------------------------------------------------------------------------------------------------------------
Median 20.3% 15.8%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Tuesday Morning 17.9% 20.0%
Rank 4/6 3/6
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: See Exhibit 1 for additional detail.
Note 1: Source: I/B/E/S estimates.
[ART] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation
================================================================================
PRESENTATION TO THE BOARD OF DIRECTORS
<TABLE>
<S> <C>
Review of Proposed Transaction................ A
Overview of Sale Process............. A - 1
Summary Analysis of Offer............ A - 2
Financing Structure and Analysis of
Feasibility of Proposal.............. A - 3
Review of Tuesday Morning..................... B
Historical Financial Performance..... B - 1
Historical Trading Analysis.......... B - 2
</TABLE>
<PAGE>
Tuesday Morning Corporation/B-2-1
================================================================================
Overview of Tuesday Morning's trading statistics
. The Company completed its IPO in March 1986 at $4.44 per share
(split-adjusted).
. Tuesday Morning's stock price reached a low of $2.08 on April 8, 1988,
and a subsequent high of $22.50 on July 22, 1997.
. The Company's 30-day average closing stock price prior to the acquisition
announcement on August 14, 1997 is $20.80. Its 90-day average prior to
announcement is $19.91.
--An offer of $25.00 per share represents a 20.2% premium to the
Company's 30-day average, and a 25.6% premium to the 90-day average.
<TABLE>
<CAPTION>
==============================================================================
Stock Price Performance, IPO to Present
<S> <C> <C> <C> <C> <C> <C> <C> <C>
25
20
15
10
5
0 | | | | | | | | |
3/28/86 8/28/87 1/27/89 6/29/90 11/29/91 4/30/93 9/30/94 3/1/96 8/1/97
------------------------------------------------------------------------------
</TABLE>
[LOGO] SBC Warburg Dillon Read
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation / B - 2 - 2
====================================================================================================================================
COMPARABLE COMPANY TRADING ANALYSIS
[_] Based on the Company's pre-announcement stock price, the Company's
valuation was generally at or below its peers.
================================================================================================================================
Trading Analysis - Close Out Retail Companies
(dollars in millions, except per share data and multiples analysis) Equity Value to: Enterprise Value to:
------------------------------------ -------------------------
Stock Equity LTM CY1997E CY1998E Latest LTM LTM LTM
Price Value EPS EPS/2/ EPS/2/ BV Sales EBITDA EBIT
------ ------ ----- ------- ------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TJX Companies $29.19 $4,655 6.2x 13.3x 10.6x 4.0x 0.7x 8.4x 10.8x
Consolidated Stores 40.00 3,370 34.6 25.5 21.1 4.9 1.3 16.0 21.0
Ross Stores 31.88 1,584 18.0 20.7 17.8 4.5 0.9 8.7 10.3
MacFrugal's Bargains - Close Outs 29.75 745 18.4 19.6 16.8 2.8 0.9 8.3 10.4
Mazel Stores 23.00 211 26.7 26.0 21.6 3.2 1.2 14.9 15.8
- ------------------------------------------------------------------------------------------------------------------------------------
Median $1,584 18.4x 20.7x 17.8x 4.0x 0.9x 8.7x 10.8x
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Tuesday Morning (at sign) 8/13/97 Close $20.38/1/ $243 18.0x 15.2x 12.9x 3.1x 1.0x 9.8x 11.9x
Rank 5/6 4/6 6/6 5/6 5/6 3/6 3/6 3/6
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 1: Pre-announcement stock price.
Note 2: Source: I/B/E/S.
[_] See Exhibit 1 for additional detail.
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation
================================================================================
PRESENTATION TO THE BOARD OF DIRECTORS
REVIEW OF PROPOSED TRANSACTION................... A
OVERVIEW OF SALE PROCESS...............A - 1
SUMMARY ANALYSIS OF OFFER..............A - 2
FINANCING STRUCTURE AND ANALYSIS OF....A - 3
FEASIBILITY OF PROPOSAL
REVIEW OF TUESDAY MORNING........................ B
HISTORICAL FINANCIAL PERFORMANCE.......B - 1
HISTORICAL TRADING ANALYSIS............B - 2
PROJECTED BUSINESS PLAN AND STRATEGY...B - 3
<PAGE>
Tuesday Morning Corporation / B - 3 - 1
================================================================================
OVERVIEW OF FINANCIAL PROJECTIONS
[_] SBCWDR has reviewed Tuesday Morning's financial projections and their
underlying assumptions, including:
- Review of Company projections as of September 9, 1997 prepared by
Tuesday Morning management.
- Discussions with Lloyd Ross, Chairman & CEO, Jerry Smith, President &
COO, and Mark Jarvis, CFO, regarding major assumptions.
[_] Management has indicated that there will be no major changes in the
Company's business plan and strategy if Madison Dearborn acquires
Tuesday Morning.
[_] The following pages summarize certain aspects of the plan.
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / B - 3 - 2
================================================================================
Overview of Financial Projections
. Major assumptions underlying the business plan include:
-- New store openings at a 10% growth rate through 1999, and 35 stores per
year over the balance of the projection period
-- Comparable-store sales growth as follows:
==========================================================
Comparable - Store Sales Growth /1/
<TABLE>
<CAPTION>
1998 1999 2000 Forward
------ ------ ------ -------
<S> <C> <C> <C> <C>
Pre-1997 Stores 5.0% 5.0% 3.0% 3.0%
1997 Stores - 12.0% 8.0% 3.0%
Year 2 Year 3 Year 4 Forward
------ ------ ------ -------
Pre-1997 Stores 20.0% 10.0% 5.0% 3.0%
-----------------------------------------------------------
</TABLE>
Note 1: Company projections as of 9/5/97.
-- Gross margins (pre-UNICAP) at 43.5% consistent with recent historical
experience.
-- EBITDA margin improvements from 12.4% in 1997E to 14.8% in 2002 (vs.
1996 actual of 10.1%).
. These assumptions exceed the Company projections presented by management
at the Company's Annual Shareholders Meeting in May 1997.
[LOGO]SBC Warburg Dillon Read
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation/B-3-3
========================================================================================
Overview of Financial Projections
. SBCWDR compared Tuesday Morning's historical growth and profitability to
that presented in the current business plan.
======================================================================
Selected Comparisons
Historical Projected
1994-1997E 1997E 1996-2002
---------- ----- ---------
<S> <C> <C> <C>
Annual Average Net 20 29 34
New Store Openings
CAGR in New Store Openings 8.6% 10.1% 9.1%
Average Comparable - Store
Sales Growth 10.7% 18.7% 10.5%
Average Sales Growth 15.9% 25.0% 10.2%
Average Gross Margin 42.6% 43.6% 43.6%
Average EBITDA Margin 8.7% 12.4% 13.9%
Average EBIT Margin/1/ 7.0% 11.1% 12.9%
----------------------------------------------------------------------
Sources: Company reports; Company projections as of 9/5/97.
Note 1: Before goodwill amortization in projection period.
</TABLE>
. The projections for the Company are similar in terms of planned growth
and gross margin, but substantially more aggressive in EBITDA and EBIT
margins.
- Margin projected to increase from 12.4% in 1997 to 14.8% in 2002.
- Prior to 1997E, the Company's highest EBITDA margin ever achieved was
12.3% in 1986 (which declined to 10.5% in 1987 and 8.8% in 1988).
[ART] SBC Warburg Dillon Read
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation
==================================================================================================
Presentation to the Board of Directors
<S> <C>
Review of Proposed Transaction............................................................. A
Overview of Sale Process....................................................... A-1
Summary Analysis of Offer...................................................... A-2
Financing Structure and Analysis of Feasibility of Proposal.................... A-3
Review of Tuesday Morning.................................................................. B
Historical Financial Performance............................................... B-1
Historical Trading Analysis.................................................... B-2
Projected Business Plan and Strategy........................................... B-3
Preliminary Valuation...................................................................... C
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation / C - 1
======================================================================================================
Discounted Cash Flow Analysis
. A discounted cash flow analysis of the Company's business plan as
outlined in Section B-3 results in the following values.
============================================================================
Equity Valuation Per Share/1/
(in millions, except per share data)
Discount Rates
----------------------------------
17% 18% 19%
------ ------ ------
<S> <C> <C> <C> <C>
2002 EBITDA 7.0x $25.51 $24.55 $23.64
Multiple 8.0 28.22 27.15 26.13
9.0 30.93 29.74 28.62
----------------------------------------------------------------------------
Note 1: 12.9 million shares.
</TABLE>
. See Exhibit 2 for additional detail
[ART] Warburg Dillon Read
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation / C - 2
======================================================================================================
Discounted Cash Flow Analysis
. A discounted cash flow analysis that incorporates EBITDA margins at the
1997E level over the projection period.
- The Company has not achieved the 12%+ EBITDA margins projected in the
current plan since 1986.
============================================================================
Equity Valuation Per Share/1/
(in millions, except per share data)
Discount Rates
----------------------------------
17% 18% 19%
------ ------ ------
<S> <C> <C> <C> <C>
2002 EBITDA 7.0x $21.36 $20.56 $19.80
Multiple 8.0 23.63 22.73 21.88
9.0 25.89 24.90 23.96
----------------------------------------------------------------------------
Note 1: 12.9 million shares.
</TABLE>
. See Exhibit 2 for additional detail.
[ART] Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / C - 3
- --------------------------------------------------------------------------------
Discounted Cash Flow Analysis
A discounted cash flow analysis that incorporates EBITDA margins that
duplicate 1987 - 1991 levels over the projection period.
<TABLE>
<CAPTION>
----------------------------------------------------------
Equity Valuation Per Share/1/
(in millions, except per share data)
Discount Rates
--------------------------
17% 18% 19%
<S> <C> <C> <C>
------ ------ ------
2002 EBITDA | 7.0x | $14.01 $13.48 $12.98
Multiple | 8.0 | 15.55 14.96 14.39
| 9.0 | 17.09 16.43 15.81
----------------------------------------------------------
</TABLE>
Note 1: 12.9 million shares.
See Exhibit 2 for additional detail.
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / C-4
================================================================================
Leveraged Buyout Analysis
. A leveraged buyout of the Company at purchase prices greater than $25.00
per share yields increasingly weaker credit statistics and lower equity
returns.
<TABLE>
<CAPTION>
============================================================================================
LBO Purchase Price Analysis/1/
Price Per Common Share/2/
---------------------------------
$25.00 $26.00 $27.00 $28.00
------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
1997E EBITDA/Interest 1.7x 1.7x 1.6x 1.6x
1997E EBIT/Interest 1.5 1.5 1.5 1.4
Total Debt/Capitalization 67.1% 66.5% 65.9% 65.4%
Total Debt/EBITDA 5.9x 6.1x 6.2x 6.4x
IRR Assuming of 8.0x Exit Multiple of 2002 EBITDA 30.3% 28.3% 26.5% 24.7%
-------------------------------------------------------------------------------------
</TABLE>
Note 1: Company projections as of 9/5/97.
Note 2: Assumes increase in purchase price is funded 50% with equity and
50% with debt.
. See Exhibit 3 for additional detail.
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation / C - 5
================================================================================
Recapitalization Analysis
[_] An analysis of a leveraged recapitalization of the Company by paying a
one-time cash dividend financed with debt results in lower values.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Recapitalization Valuation Analysis
(in millions, except per share data)
Cash Dividend per Share
-----------------------------------------------
$ 12.00 $ 13.00 $ 14.00 $ 15.00 $ 16.00
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total Cash Dividend $155.8 $168.8 $181.8 $194.7 $207.7
1997E Pro Forma EPS $0.83 $0.77 $0.71 $0.64 $0.58
Assumed P/E Multiple/1/ 15.2x 15.2x 15.2x 15.2x 15.2x
------- ------ ------ ------ ------
Implied Stock Value $12.61 $11.67 $10.74 $9.80 $8.87
------- ------ ------ ------ ------
Total Value per Share $24.61 $24.67 $24.74 $24.80 $24.87
1997E EBIT / Interest Expense 3.6x 3.3x 3.1x 2.9x 2.7x
1997E EBITDA / Interest Expense 4.0 3.8 3.5 3.4 3.2
1997E Total Debt / EBITDA 4.0 4.3 4.7 5.0 5.3
----------------------------------------------------------------------------------
Note 1: Multiple of 1997E earnings prior to announcement of $25.00
offer.
Note 2: See Exhibit 4 for additional detail.
</TABLE>
[_] Other negative qualitative factors may cause the Company's stock to trade
at P/E levels below that indicated above, including:
-- The resulting smaller market capitalization and float of stock
-- Significant financial leverage added to inherent operating leverage of
business due to seasonality
[LOGO] SBC Warburg Dillon Read
<PAGE>
<TABLE>
<CAPTION>
Tuesday Morning Corporation / C - 6
===============================================================================================================
ANALYSIS OF COMPARABLE ACQUISITONS
[_] Reviewing a selection of acquisitions of retailers, by both corporate
and financial buyers, the Tuesday Morning offer price exceeds that of
other recent acquisitions.
===============================================================================================
Comparable Acquisition Analysis - Retail Companies
Offer for Assets to LTM: Offer for Equity to:/1/
------------------------- ---------------------------
Sales EBIT EBITDA LTM Net Inc Book Value
----- ---- ------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Average 0.5x 12.5x 8.1x 21.5x 2.9x
Median 0.5 11.8 8.3 20.8 2.0
High 1.3 19.1 13.3 39.2 6.9
Low 0.2 6.2 4.1 10.0 1.5
# In Calculation 11 11 9 9 9
- --------------------------------------------------------------------------------------------------------------
Tuesday Morning (at sign) $25.00 1.2x 12.9x 10.7x 22.3x 4.1x
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[_] See Exhibit 5 for additional detail.
[LOGO] SBC Warburg Dillon Read
<PAGE>
Tuesday Morning Corporation/C-7
================================================================================
Analysis of Accretion/(Dilution) at Various Purchase Prices
. At $25.00 per share in cash and higher prices, an acquisition of the
Company by a corporate acquiror would be dilutive.
-- Does not reflect any synergies
-- Assumes achievement of 1997 plan
<TABLE>
<CAPTION>
===============================================================================
Accretion (Dilution) Analysis
Purchase Price Range
(in millions) ------------------------------------
$25.00 $25.50 $26.00 $26.50
- ------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
1997E Pretax Income $32.3 $32.3 $32.3 $32.3
Less: Interest Expenses on
Acquisition Debt at 8.5% (27.6) (28.2) (28.7) (29.3)
------ ------ ------ ------
Adjusted Pretax Income 4.7 4.1 3.6 3.0
Less: Taxes (1.9) (1.6) (1.4) (1.2)
------ ------ ------ ------
Net Income 2.8 2.5 2.2 1.8
Goodwill Amortization/1/ (5.9) (6.1) (6.2) (6.4)
------ ------ ------ ------
Pro Forma Net Income ($3.1) ($3.6) ($4.0) ($4.6)
- ---------------------------------------------------------------------
Note 1: Assumes goodwill amortized over 40 years.
. However, no corporate buyer approached the Company with an offer.
</TABLE>
[LOGO] SBC Warburg Dillon Read
<PAGE>
================================================================================
Exhibits
Comparable Company Trading Analysis........ 1
Discounted Cash Flow Analysis.............. 2
LBO Analysis............................... 3
Recapitalization Analysis.................. 4
Comparable Industry Acquisitions........... 5
Calculation of Estimated Weighted Average
Cost of Capital.......................... 6
<PAGE>
<TABLE>
<CAPTION>
Preliminary & Confidential Dillon, Read & Co. Inc.
====================================================================================================================================
Analysis of Selected Deep Discount Retail Companies
---------------------- --------------------------------------
---------------------- --------------------------------------
Tuesday Morning Average Median
- ---------------------------------------- --------------- ------- ------
<S> <C> <C> <C>
CURRENT PRICE DATA
Closing Price as of: 09/05/97 $20.38(11)
52 Week Range: High $24.17
Low 8.67
Price as % of: High 84.3%
Low 235.1%
Indicated Dividend Yield 0.0%
Ticker TUES
Exchange NASD
Fiscal Year End December
Latest Quarter June
- ---------------------------------------- ---------------------- --------------------------------------
FORECASTED EARNINGS DATA
Latest Twelve Months E.P.S. $1.13
Forecast FY + 1 E.P.S.(a) $1.34
Forecast FY + 2 E.P.S.(a) $1.58
Forecast 1997 CY E.P.S.(a) $1.34
Forecast 1998 CY E.P.S.(a) 1.58
% Change CY 1997E vs. 1998E 17.9%
Five Year Growth Rate(a) 20.0%
- ---------------------------------------- ---------------------- --------------------------------------
Shares Outstanding (MM) 11.9
Market Value of Common Equity $243.4
Unlevered Market Value(b) 281.8
- ---------------------------------------- ---------------------- --------------------------------------
MARKET VALUE OF EQUITY TO:
Latest Twelve Months E.P.S. 18.0 x 20.8 x 18.4 x
Forecast FY 1997 E.P.S. 15.2 20.9 20.7
Forecast FY 1998 E.P.S. 12.9 17.4 17.6
Forecast CY 1997 E.P.S. 15.2 x 21.0 x 20.7 x
Forecast CY 1998 E.P.S. 12.9 17.6 17.8
Book Value 3.1 x 3.9 x 4.0 x
- ---------------------------------------- ---------------------- --------------------------------------
UNLEVERED MARKET VALUE TO:
LTM Revenue 1.0 x 1.0 x 0.9 x
LTM Operating Cash Flow (EBITDA)(d) 9.5 11.3 8.7
LTM Operating Income(EBIT) 11.4 13.6 10.8
Latest Net Assets(f) 2.4 3.6 3.5
- ---------------------------------------- ---------------------- --------------------------------------
LATEST TWELVE MONTHS DATA
Total Revenue $281.6 $2,487.4 $1,761.7
Operating Cash Flows(d) 29.7 215.6 179.2
Operating Income 24.7 169.7 150.5
Net Income(c) 14.2 96.0 90.7
- ---------------------------------------- ---------------------- --------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
---------------------------------------------------------------------
MacFrugal's Bargains
Consolidated Stores Close-Outs Mazel Stores
- ---------------------------------------- ------------------- -------------------- ------------
CURRENT PRICE DATA
<S> <C> <C> <C>
Closing Price as of: 09/05/97 $40.00 $29.75 $23.00
52 Week Range: High $41.75 $31.63 $29.25
Low $22.96 20.50 11.75
Price as % of: High 95.8% 94.1% 78.6%
Low 174.2% 145.1 195.7%
Indicated Dividend Yield 0.0% 0.0% 0.0%
Ticker CNS MFI MAZL
Exchange NYSE NYSE NASD
Fiscal Year End January January January
Latest Quarter May May April
- ---------------------------------------- ---------------------------------------------------------------------
FORECASTED EARNINGS DATA
Latest Twelve Months E.P.S. $1.16 $1.62 $0.86
Forecast FY + 1 E.P.S.(a) $1.59 $1.52 $0.88
Forecast FY + 2 E.P.S.(a) 1.92 1.79 1.08
Forecast 1997 CY E.P.S.(a) $1.57 $1.52 $0.88
Forecast 1998 CY E.P.S.(a) 1.89 1.77 1.06
% Change CY 1997E vs. 1998E 20.6% 16.3% 20.3%
Five Year Growth Rate(a) 20.1% 14.0% 22.5%
- ---------------------------------------- ---------------------------------------------------------------------
Shares Outstanding(MM) 84.3 (10) 25.0 9.2
Market Value of Common Equity $3,370.1 $745.1 $210.9
Unlevered Market Value(b) 3,751.4 748.1 213.5
- ---------------------------------------- ---------------------------------------------------------------------
MARKET VALUE OF EQUITY TO:
Latest Twelve Months E.P.S. 34.6 x 18.4 x 26.7 x
Forecast FY 1997 E.P.S. 25.2 19.6 26.1
Forecast FY 1998 E.P.S. 20.8 16.6 21.3
Forecast CY 1997 E.P.S. 25.5 x 19.6 x 26.0 x
Forecast CY 1998 E.P.S. 21.1 16.8 21.6
Book Value 4.9 x 2.8 x 3.2 x
- ---------------------------------------- ---------------------------------------------------------------------
UNLEVERED MARKET VALUE TO:
LTM Revenue 1.3 x 0.9 x 1.2 x
LTM Operating Cash Flow (EBITDA)(d) 16.0 8.3 14.9
LTM Operating Income(EBIT) 21.0 10.4 15.8
Latest Net Assets(f) 3.5 2.8 3.1
- ---------------------------------------- ---------------------------------------------------------------------
LATEST TWELVE MONTHS DATA $2,920.4 $797.0 $180.6
Total Revenue 234.2 90.2 14.3
Operating Cash Flows(d) 178.9 72.1 13.6
Operating Income 100.1 41.8 7.9
Net Income(c)
- ---------------------------------------- ---------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------
-----------------------------------------------
Ross Stores TJX Companies
- ---------------------------------------- ----------- -------------
CURRENT PRICE DATA
<S> <C> <C>
Closing Price as of: 09/05/97 $31.88 $29.19
52 Week Range: High $34.38 $30.75
Low 16.81 15.63
Price as % of: High 92.7% 94.9%
Low 189.6% 186.8%
Indicated Dividend Yield 0.6% 0.7%
Ticker ROST TJX
Exchange NASD NASD
Fiscal Year End January January
Latest Quarter May April
- ---------------------------------------- -----------------------------------------------
FORECASTED EARNINGS DATA
Latest Twelve Months E.P.S. $1.77 $4.68
Forecast FY + 1 E.P.S.(a) $1.54 $2.29
Forecast FY + 2 E.P.S.(a) 1.81 2.80
Forecast 1997 CY E.P.S.(a) $1.54 $2.20
Forecast 1998 CY E.P.S.(a) 1.79 2.76
% Change CY 1997E vs. 1998E 15.9% 25.5%
Five Year Growth Rate(a) 14.8% 15.8%
- ---------------------------------------- -----------------------------------------------
Shares Outstanding(MM) 49.7 159.5 (7)
Market Value of Common Equity $1,584.0 $4,654.8
Unlevered Market Value(b) 1,557.1 4,680.8
- ---------------------------------------- -----------------------------------------------
MARKET VALUE OF EQUITY TO:
Latest Twelve Months E.P.S. 18.0 x 6.2 x
Forecast FY 1997 E.P.S. 20.7 12.7
Forecast FY 1998 E.P.S. 17.6 10.4
Forecast CY 1997 E.P.S. 20.7 x 13.3 x
Forecast CY 1998 E.P.S. 17.8 10.6
Book Value 4.5 x 4.0 x
- ---------------------------------------- -----------------------------------------------
UNLEVERED MARKET VALUE TO:
LTM Revenue 0.9 x 0.7 x
LTM Operating Cash Flow (EBITDA)(d) 8.7 8.4
LTM Operating Income(EBIT) 10.3 10.8
Latest Net Assets(f) 4.8 3.9
- ---------------------------------------- -----------------------------------------------
LATEST TWELVE MONTHS DATA
Total Revenue $1,761.7 $6,777.3
Operating Cash Flows(d) 179.2 559.8
Operating Income 150.5 433.5
Net Income(c) 90.7 239.3
- ---------------------------------------- -----------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preliminary & Confidential Dillon, Read & Co. Inc.
===================================================================================================================================
Analysis of Selected Deep Discount Retail Companies 09/08/97
06:54 PM
--------------- ------------------ -------------------
--------------- ------------------ -------------------
Tuesday Morning Average Median Consolidated Stores
--------------- ------- ------ -------------------
<S> <C> <C> <C> <C>
THREE YEAR GROWTH RATES
Total Revenue 16.2% 34.6% 48.0% 49.5%
Operating Cash Flow (d) 63.3% 37.4% 44.2% 38.4%
Operating Income 90.4% 41.3% 55.2% 39.2%
Net Income (c) 108.4% 39.0% 40.0% 40.0%
- ---------------------------------------- --------------- ------- ------ -------------------
LTM MARGINS, RETURNS &
ASSET UTILIZATION
Gross Margin 35.8% 34.0% 33.5% 41.4%
3 Year Avg. 34.5% 33.1% 29.5% 42.2%
Operating Cash Flow (d) 10.5% 9.1% 8.3% 8.0%
3 Year Avg. 7.2% 8.7% 8.1% 10.2%
Operating Income 8.8% 7.5% 7.5% 6.1%
3 Year Avg. 5.2% 7.0% 7.5% 8.1%
Net Income (c) 5.0% 4.3% 4.4% 3.4%
3 Year Avg. 2.7% 4.2% 4.3% 4.7%
Return on Average Equity 18.2% 17.8% 16.0% 14.6%
Operating Return on Net Assets 21.1% 29.4% 27.2% 16.8%
Inventory Turnover 1.4 x 2.7 x 2.4 x 1.8 x
- ---------------------------------------- --------------- ------- ------ -------------------
LATEST BALANCE SHEET DATA
Net Debt (e) $ 38.4 $ 381.3
Shareholders' Equity 78.3 685.2
Net Assets (f) 116.7 1,066.5
Net Debt/Net Market Capitalization 13.6% 10.2%
Net Debt/Net Book Capitalization 32.9% 35.8%
- ---------------------------------------- --------------- ------- ------ -------------------
OPERATING DATA
Comparable store sales growth 9.5%
LQ 23.0% 7.7%
LFY 14.0% 1798
No. of stores LFY 286 9.0 (3)
Selling sq. ft per store LFY (000s) 7.8 $163.4
Sales per sq. foot of selling space (mm) LFY $122.3 0.5
Inventory per store at FYTD (mm) 0.4
- ---------------------------------------- --------------- ------- ------ -------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------- ------------ ----------- -------------
--------------------- ------------ ----------- -------------
Mac Frugal's Bargains
Close-Outs Mazel Stores Ross Stores TJX Companies
--------------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
THREE YEAR GROWTH RATES 6.4% 53.6% 15.7% 48.0%
Total Revenue 0.7% 51.0% 44.2% 52.5%
Operating Cash Flow (d) -0.7% 55.6% 57.1% 55.2%
Operating Income 0.6% 32.9% 62.7% 59.1%
Net Income (c)
- ---------------------------------------------- ------------------------------------------------------------------------------
LTM MARGINS, RETURNS &
ASSET UTILIZATION
Gross Margin 43.0% 33.5% 29.6% 22.8%
3 Year Avg. 44.0% 29.5% 28.0% 21.9%
Operating Cash Flow (d) 11.3% 7.9% 10.2% 8.3%
3 Year Avg. 10.6% 8.1% 7.7% 7.2%
Operating Income 9.1% 7.5% 8.5% 6.4%
3 Year Avg. 8.2% 7.5% 5.8% 5.2%
Net Income (c) 5.2% 4.4% 5.1% 3.5%
3 Year Avg. 4.3% 5.9% 3.4% 2.6%
Return on Average Equity 16.0% 11.9% 26.0% 20.5%
Operating Return on Net Assets 27.2% 19.7% 46.8% 36.3%
Inventory Turnover 2.4 x 2.4 x 3.0 x 3.8 x
- ---------------------------------------------- ------------------------------------------------------------------------------
LATEST BALANCE SHEET DATA
Net Debt (e) $3.0 $2.5 ($26.9) $26.0
Shareholders' Equity 261.8 66.3 348.7 1,168.0
Net Assets (f) 264.8 68.8 321.8 1,194.0
Net Debt/Net Market Capitalization 0.4% 1.2% -1.7% 0.6%
Net Debt/Net Book Capitalization 1.1% 3.7% -8.4% 2.2%
- ---------------------------------------------- ------------------------------------------------------------------------------
OPERATING DATA
Comparable store sales growth
LQ 13.4% -4.0% 11.0% 5.9% (2)
LFY 4.2% 15.8% 13.0% 7.0%
No. of stores LFY 319 23 309 1136
Selling sq. ft per store LFY (000s) 17.7 8.8 21.6 30.1 (4)
Sales per sq. foot of selling space (mm) LFY $137.2 $533.9 $253.5 $195.7
Inventory per store at FYTD (mm) 0.6 1.8 1.3 1.2
- ---------------------------------------------- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
Preliminary & Confidential Dillon, Read & Co. Inc.
- --------------------------------------------------------------------------------
Analysis of Selected Deep Discount Retail Companies 09/08/97
06:54 PM
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Mac
Frugal's
Bargains
Tuesday Consolidated Close- Mazel Ross TJX
Morning Average Median Stores Outs Stores Stores Companies
- ------------------------------------ ------- --------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues
LTM $281.6 $ 2,920.4 $ 797.0 $180.6 $1,761.7 $6,777.3
FYTD 114.9 594.9 183.5 43.1 442.8 1,560.2
FYTD-1 90.0 322.0 159.1 42.5 370.9 1,472.2
LFY(A) 256.8 2,647.5 772.6 179.9 1,689.8 6,689.4
LFY-1 210.3 1,406.0 704.9 98.1 1,426.4 3,975.1
LFY-2 190.1 1,185.1 682.1 76.3 1,262.5 3,055.6
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LFY Revenue Growth 22.1% 88.3% 9.6% 83.3% 18.5% 68.3%
COGS (as % of revenue) 64.2% 58.6% 57.0% 66.5% 70.4% 77.2%
LTM $180.8 $ 1,711.7 $ 454.5 $120.1 $1,239.6 $5,234.0
FYTD 74.0 356.1 104.9 28.3 309.5 1,202.6
FYTD-1 58.4 186.9 88.7 29.6 264.1 1,167.4
LFY 165.2 1,542.5 438.3 121.4 1,194.1 5,198.8
LFY-1 137.4 811.6 414.6 70.2 1,031.5 3,143.3
LFY-2 126.9 681.2 358.3 55.2 920.3 2,370.7
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
Gross Profit
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LTM $100.9 $ 1,208.7 $ 342.5 $ 60.4 $ 522.1 $1,543.3
FYTD 40.9 238.8 78.6 14.8 133.3 357.5
FYTD-1 31.6 135.1 70.4 12.9 106.9 304.9
LFY 91.6 1,105.0 334.3 58.5 495.7 1,490.6
LFY-1 72.8 594.5 290.3 27.9 394.9 831.9
LFY-2 63.2 503.9 323.7 21.1 342.3 684.9
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
SG&A (as % of revenue) 27.1% 35.3% 33.9% 26.0% 21.1% 16.4%
LTM $ 76.2 $1,029.8% $ 270.3 $ 46.9 $ 371.6 $1,109.7
FYTD 36.3 246.1 68.7 12.2 86.7 273.7
FYTD-1 31.3 124.7 63.0 9.9 76.2 251.2
LFY 71.2 908.5 264.7 44.6(1) 361.2 1,087.1
LFY-1 63.0 475.8 254.4 20.8 320.1 669.9
LFY-2 57.5 402.4 253.1 15.3 287.8 517.4
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
Operating Income
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LTM $ 24.7 $ 178.9 $ 72.1 $ 13.6 $ 150.5 $ 433.5
FYTD 4.6 (7.3) 9.9 2.6 46.7 83.8
FYTD-1 0.3 10.4 7.4 3.0 30.7 53.7
LFY 20.4 196.5 69.7 13.9 134.5 403.5
LFY-1 9.8 118.7 35.9 7.1 74.9 162.0
LFY-2 5.6 101.5 70.6 5.8 54.5 167.4
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
Depreciation & Amortization
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LTM $ 5.0 $ 55.4 $ 18.0 $ 0.7 $ 28.8 $ 126.3
FYTD 2.5 15.1 4.4 0.3 7.3 29.9
FYTD-1 2.4 8.2 4.7 0.2 7.3 30.4
LFY 4.9 48.4 18.3 0.6 28.8 126.8
LFY-1 4.6 30.0 18.2 0.5 27.0 79.2
LFY-2 3.9 26.5 16.0 0.6 24.0 60.6
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
Operating Cash Flow(e)
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LTM $ 29.7 $ 234.2 $ 90.2 $ 14.3 $ 179.2 $ 559.8
FYTD 7.1 7.9 14.3 3.0 53.9 113.7
FYTD-1 2.7 18.6 12.1 3.2 37.9 84.2
LFY 25.3 244.9 87.9 14.6 163.2 530.3
LFY-1 14.4 148.7 54.1 7.6 101.9 241.2
LFY-2 9.5 128.0 86.6 6.4 78.5 228.0
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
Net Income
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LTM $ 14.2 $ 100.1 $ 41.8 $ 7.9 $ 90.7 $ 239.3
FYTD 2.5 (7.3) 6.0 1.5 23.8 48.5
FYTD-1 (0.2) 5.9 3.5 2.1(1) 13.9 23.0
LFY 11.5 113.3 39.3(8) 8.5(1) 80.9 213.8
LFY-1 4.8 70.1 14.6 6.4(1) 43.3 71.9(6)
LFY-2 2.7 57.8 38.9 4.8 30.6(5) 84.5
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
LFY Net Income Growth 141.3% 61.6% 170.2% 32.0% 87.0% 197.3%
- ------------------------------------ ------- --------------- ---------------------------------------------------------------
</TABLE>
<PAGE>
Preliminary & Confidential Dillon, Read & Co. Inc.
- --------------------------------------------------------------------------------
Analysis of Selected Deep Discount Retail Companies 09/08/97
06:54 PM
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Mac
Frugal's
Bargains
Tuesday Consolidated Close- Mazel Ross TJX
Morning Average Median Stores Outs Stores Stores Companies
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder's Equity
- --------------------------------------------
LQ $78.28 $685.21 $261.76 $66.29 $348.65 $1,168.00
LFY 75.53 682.09 252.03 64.76 328.84 1,127.19
LFY-1 63.65 389.56 230.40 12.87 291.52 764.63
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Oper. CF Margin
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Average LFY 7.2% 10.2% 10.6% 8.1% 7.7% 7.2%
LTM 10.5% 8.0% 11.3% 7.9% 10.2% 8.3%
LFY 9.9% 9.3% 11.4% 8.1% 9.7% 7.9%
LFY-1 6.8% 10.6% 7.7% 7.8% 7.1% 6.1%
LFY-2 5.0% 10.8% 12.7% 8.4% 6.2% 7.5%
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Gross Profit Margin
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Average 34.5% 42.2% 44.0% 29.5% 28.0% 21.9%
LTM 35.8% 41.4% 43.0% 33.5% 29.6% 22.8%
LFY 35.7% 41.7% 43.3% 32.5% 29.3% 22.3%
LFY-1 34.6% 42.3% 41.2% 28.4% 27.7% 20.9%
LFY-2 33.2% 42.5% 47.5% 27.6% 27.1% 22.4%
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Oper. Income Margin
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Average 5.2% 8.1% 8.2% 7.5% 5.8% 5.2%
LTM 8.8% 6.1% 9.1% 7.5% 8.5% 6.4%
LFY 7.9% 7.4% 9.0% 7.7% 8.0% 6.0%
LFY-1 4.7% 8.4% 5.1% 7.3% 5.2% 4.1%
LFY-2 3.0% 8.6% 10.4% 7.5% 4.3% 5.5%
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Net Income Margin
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Average 2.7% 4.7% 4.3% 5.9% 3.4% 2.6%
LTM 5.0% 3.4% 5.2% 4.4% 5.1% 3.5%
LFY 4.5% 4.3% 5.1% 4.7% 4.8% 3.2%
LFY-1 2.3% 5.0% 2.1% 6.6% 3.0% 1.8%
LFY-2 1.4% 4.9% 5.7% 6.3% 2.4% 2.8%
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Avg. Return on Equity
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Average 11.4% 17.3% 11.0% 31.6% 19.7% 14.2%
LFY 15.2% 16.6% 15.6% 13.1% 24.6% 19.0%
LFY-1 7.5% 18.0% 6.3% 50.1% 14.8% 9.4%
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Share Data
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
FYTD Avg. Shares Outstanding 12.7 87.7 (10) 25.4 9.2 50.5 169.8 (7)
FYTD-1 Avg. Shares Outstanding 11.8 77.9 (10) 25.7 9.2 51.6 204.5 (7)
LFY Avg. Shares Outstanding 12.3 (9) 84.0 (10) 25.9 9.2 51.4 181.3 (7)
LTM Avg. Shares Outstanding (used in EPS) 12.6 86.49 25.85 9.17 51.12 51.12
- --------------------------------------------
Indicated Dividend per share $0.00 $0.00 $0.00 $0.00 $0.18 $0.20
Latest Book Value per share 6.55 8.13 10.45 7.23 7.02 7.32
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Balance Sheet Data
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
Cash $1.3 $23.4 $11.0 $1.2 $26.9 $397.1
Inventories 128.3 927.8 188.5 49.9 409.0 1,384.4
Net Debt 38.4 381.3 3.0 2.5 (26.9) 26.0
Net Assets 116.7 1,066.5 264.8 68.8 321.8 1,194.0
Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0
Preferred Equity 0.0 0.0 0.0 0.0 0.0 150.0
Common Equity 78.3 685.2 261.8 66.3 348.7 1,168.0
Total Debt 39.8 404.7 14.0 3.7 0.0 273.1
- -------------------------------------------- ------- --------------- ----------------------------------------------------------
</TABLE>
Item Definitions:
- -----------------
(a) Forecasts provided by I/B/E/S Estimates & ZACKS.
(b) Market value of common equity plus book value of net debt.
(c) All net income numbers are from continuing operations, exclude one
time charges and are before NOL's.
(d) Operating cash flow is defined as operating income plus depreciation
and amortization
(e) Net debt equals total debt less cash plus preferred equity plus
minority interest.
(f) Net assets defined as shareholder's equity plus net debt.
Company Notes:
- --------------
(1) Pro forma as adjusted data gives effect to the Company's initial
public offering as of the beginning of all periods presented, excludes
certain non-recurring charge and gives effect to the use of proceeds.
(2) Comparable same store sales growth is a weighted average of comparable
same store sales growth for T.J. Maxx, Marshalls, Winners, T.K. Maxx,
and Homegoods.
(3) Selling sq. ft. per store is a weighted average of closeout and toy
stores.
(4) Selling sq. ft. per store is a weighted average of T.J. Maxx,
Marshalls, Winners, Homegoods, and T.K. Maxx stores.
(5) ROST net income for FY Ended January 28, 1995 excludes a pre-tax
insurance proceed of $10.4mm.
(6) TJX net income for fiscal year ended January 27, 1996 excludes a
pre-tax store closing cost of $35 mm.
(7) Shares outstanding adjusted to reflect 2 for 1 stock split.
(8) MFI net income for fiscal year ended February 2, 1997 excludes a
pre-tax gain on distribution center settlement of $6.2 mm.
(9) Shares outstanding adjusted to reflect 3 for 2 stock split.
(10) Shares outstanding adjusted to reflect 5 for 4 stock split.
(11) TUES stock price as of 08/13/97.
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
Scenario: Management Business Plan
<TABLE>
<CAPTION>
Discounted Cash Flow Valuation
(dollars in millions, except per share data)
----------------------------------------------------------------------------------------------------------------------------------
Free Cash Flow Calculation
Projections
Pro Forma Years Ending Dec. 31,
--------- ------------------------------------------
1997 1998 1999 2000 2001 2002
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenue $320.9 $360.9 $402.0 $439.9 $479.5 $521.3
EBITDA 39.7 46.6 55.1 61.6 69.0 77.1
Depreciation 4.0 4.5 5.1 5.7 6.3 7.0
--------- ------ ------ ------ ------ ------
EBITA (before goodwill amortization) 35.6 42.0 50.0 55.9 62.7 70.2
Tax: Federal & State 13.2 15.6 18.5 20.7 23.2 26.0
--------- ------ ------ ------ ------ ------
EBIATA 22.5 26.5 31.5 35.2 39.5 44.2
Depreciation & Amortization 4.5 5.1 5.7 6.3 7.0
Capital Expenditures (5.2) (5.8) (6.1) (6.5) (7.0)
Change in Net Working Capital (excluding cash) (2.6) (7.1) (6.6) (6.9) (7.3)
------ ------ ------ ------ ------
Free Cash Flow $23.2 $23.7 $28.2 $32.4 $37.0
====== ====== ====== ====== ======
Average
('95-'97) 1996
--------- --------
EBITDA Margin 7.1% 10.1% 12.4% 12.9% 13.7% 14.0% 14.4% 14.8%
EBITA Margin (before goodwill amortization) 7.8% 8.2% 11.1% 11.6% 12.4% 12.7% 13.1% 13.5%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Equity Value Per Share
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Rate
--------------------------------------------------
Less: Total Debt @ 12/31/97 4.0 17.0% 17.5% 18.0% 18.5% 19.0%
------ ------ ------ ------ ------
Total Primary Shares 13.0
7.0 $25.51 $25.02 $24.55 $24.09 $23.64
2002
EBITDA 8.0 $28.22 $27.68 $27.15 $26.63 $26.13
Multiple
9.0 $30.93 $30.33 $29.74 $29.17 $28.62
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- -------------------------------------------------------------------------------
-----------------------------------------------------
Scenario: 1997E EBITDA Margin over Projection Period
-----------------------------------------------------
Discounted Cash Flow Valuation
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Free Cash Flow Calculation
Projections
Pro Forma Year Ending Dec. 31,
---------- -----------------------------------------------
1997 1998 1999 2000 2001 2002
---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue $320.9 $360.9 $402.0 $439.9 $479.5 $521.3
EBITDA
Depreciation 39.7 44.6 49.7 54.4 59.3 64.4
EBITA (before goodwill amortization) 4.0 4.5 5.1 5.7 6.3 7.0
---------- ------- ------- ------- ------- -------
35.6 40.1 44.6 48.7 53.0 57.5
Tax: Federal & State 13.2 14.8 16.5 18.0 19.6 21.3
---------- ------- ------- ------- ------- -------
EBIATA 22.5 25.3 28.1 30.7 33.4 36.2
Depreciation & Amortization 4.5 5.1 5.7 6.3 7.0
Captial Expenditures (5.2) (5.8) (6.1) (6.5) (7.0)
Change in Net Working Capital (excluding cash) (2.6) (7.1) (6.6) (6.9) (7.3)
------- ------- ------- ------- -------
Free Cash Flow $ 21.9 $ 20.3 $ 23.6 $ 26.3 $ 29.0
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Average
('95-'97) 1996
--------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA Margin 7.1% 10.1% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4%
EBITA Margin (before goodwill amortization) 7.8% 8.2% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Equity Value Per Share
Discount Rate
Less: Total Debt @ 12/31/97 4.0 -----------------------------------------------
Total Primary Shares 13.0 17.0% 17.5% 18.0% 18.5% 19.0%
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
2002 7.0 $21.36 $20.96 $20.56 $20.18 $19.80
EBITDA 8.0 $23.63 $23.17 $22.73 $22.30 $21.88
Multiple 9.0 $25.89 $25.39 $24.90 $24.43 $23.96
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
- ------------------------------------------
Scenario: EBITDA Margin Period 1987 - 1991
- ------------------------------------------
Discounted Cash Flow Valuation
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Free Cash Flow Calculation
Projections
Pro Forma Years Ending Dec. 31,
--------- --------------------------------------------------
1997 1998 1999 2000 2001 2002
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $320.9 $360.9 $402.0 $439.9 $479.5 $521.3
EBITDA 39.7 37.9 35.4 39.2 37.4 43.8
Depreciation 4.0 4.5 5.1 5.7 6.3 7.0
--------- ------ ------ ------ ------ ------
EBITA (before goodwill amortization) 35.6 33.4 30.3 33.5 31.1 36.8
Tax: Federal & State 13.2 12.3 11.2 12.4 11.5 13.6
--------- ------ ------ ------ ------ ------
EBIATA 22.5 21.0 19.1 21.1 19.6 23.2
Depreciation & Amortization 4.5 5.1 5.7 6.3 7.0
Capital Expenditures (5.2) (5.8) (6.1) (6.5) (7.0)
Change in Net Working Capital
(excluding cash) (2.6) (7.1) (6.6) (6.9) (7.3)
------ ------ ------ ------ ------
Free Cash Flow $17.7 $11.3 $14.0 $12.5 $16.0
====== ====== ====== ====== ======
Average
('95-'97) 1996
--------- -------
EBITDA Margin 7.1% 10.1% 12.4% 10.5% 8.8% 8.9% 7.8% 8.4%
EBITA Margin
(before goodwill amortization) 7.8% 8.2% 11.1% 9.2% 7.5% 7.6% 6.5% 7.1%
- --------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Equity Value Per Share
Discount Rate
-----------------------------------------------------
Less: Total Debt @ 12/31/97 4.0 17.0% 17.5% 18.0% 18.5% 19.0%
--------- ------ ------ ------ ------
Total Primary Shares 13.0
7.0 $14.01 $13.74 $13.48 $13.23 $12.98
2002
EBITDA 8.0 $15.55 $15.25 $14.96 $14.67 $14.39
Multiple
9.0 $17.09 $16.75 $16.43 $16.11 $15.81
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
09/09/97
- -----------------------
Scenario: MDP Base Case
- -----------------------
<TABLE>
<S> <C>
- -------------------------------------------------------------
Valuation Summary
Common Shares Outstanding 11.926
Treasury Options 1.056
-------
Total Primary Shares 12.983
Offer per Common Share $25.00
Unaffected Price @ 8/13/97 20.38
-------
Premium to Market 22.7%
Offer for Equity $324.6
Plus: Debt Assumed 4.0 (1)
Plus: Revolver Assumed 0.0
Less: Excess Cash on Hand 3.4
-------
Offer for Assets $325.2
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Transaction Multiples 1997E 1998E
----- -----
<S> <C> <C>
Asset Value to:
Net Sales 1.01 x 0.90 x
EBITDA 8.20 6.99
EBIT 9.12 7.75
Net Assets 3.26 0.97
Equity Value to:
Net Income 15.96 x 13.72 x
Book Value 3.39 2.70
- -------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------
Purchase Allocation
<S> <C>
Purchase Price of Equity $324.6
Plus: Transaction Fees 7.0
Less: Write Up of Assets 0.0
Less: Book Value of Equity 95.9
------
Total Goodwill $235.7
Amortization of Goodwill $5.9
Amoritzation Period 40
- -------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------
Fees and Expenses
<S> <C>
Transaction Fees & Expenses 7.0
Financing Fees & Expenses 9.0
-----
Total Fees & Expenses $16.0
Amortization of Financing Fees $1.3
Amortization Period 7
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Sources of Funds
Amount Rate %
------ ------
<S> <C> <C>
New Revolver Borrowings $13.5 8.25%
Senior Unsecured Debt A 46.0 8.25%
Senior Unsecured Debt B 60.0 9.00%
Subordinated Debt 100.0 10.75%
Investor Preferred Equity 115.0 8.00%
Management Common Equity 0.0 ---
Due from Officer 2.7 (2) ---
Excess Cash On Hand 3.4 ---
------
Total Sources $340.6
======
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------
Uses of Funds
<S> <C>
Purchase of Equity $324.6
Debt Refinanced 0.0
Fees and Expenses 16.0
------
Total Uses $340.6
======
Warrants 0.0%
Management Carry 10.0%
- --------------------------------------------------------
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
Pro Forma Capitalization
Estimated Pro Forma % of Total at Year-End
--------- --------- ----------------------------
1997 Adjustments 1997 1997 1998 1999
--------- ----------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Debt
Existing Debt $4.0 $0.0 $4.0 1.2% 1.0% 0.7%
Revolving Credit Facility 0.0 13.5 13.5 4.0% 3.8% 4.7%
Senior Unsecured Debt A 0.0 46.0 46.0 13.6% 11.7% 8.2%
Senior Unsecured Debt B 0.0 60.0 60.0 17.7% 17.8% 17.5%
Subordinated Debt 0.0 100.0 100.0 29.5% 29.9% 29.8%
----- ------ ------ ------ ------
Total 4.0 223.5 66.0% 64.1% 61.0%
Equity
Preferred Equity 0.0 115.0 115.0 34.0% 37.1% 40.0%
Common Equity 95.9 (95.9) 0.0 0.0% -1.2% -1.0%
----- ------ ------ ------ ------
Total 95.9 115.0 34.0% 35.9% 39.0%
Total Capitalization $99.9 $338.5 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Credit Statistics (3) Projections
Pro Forma Year Ending Dec. 31,
--------- ----------------------------------------
1997 1998 1999 2000 2001
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EBIT/Cash Interest (4)(5) 1.52 x 1.81 x 2.20 x 2.56 x 3.05 x
EBITDA/Cash Interest (5) 1.70 2.01 2.43 2.82 3.35
EBITDA-CapX/Cash Interest (5) 1.50 1.78 2.17 2.54 3.04
EBIT/Interest (4) 1.52 x 1.81 x 2.20 x 2.56 x 3.05 x
EBITDA/Interest 1.70 2.01 2.43 2.82 3.35
EBITDA-CapX/Interest 1.50 1.78 2.17 2.54 3.04
Senior Debt/EBITDA 3.29 x 2.68 x 2.11 x 1.65 x 1.34 x
Total Debt/EBITDA 5.91 4.90 3.97 3.30 2.80
Total Debt/Total Capitalization 67.1% 65.5% 62.5% 58.3% 53.8%
Total Debt/Total Equity 2.04 x 1.90 x 1.67 x 1.40 x 1.17 x
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mortgage debt and capital lease balances as of 12/31/97.
(2) Unsecured loan due from officer.
(3) Calculated using average revolver balances.
(4) Before goodwill amortization.
(5) Excludes non-cash interest charges when applicable.
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
- ----------------------------
Scenario: MDP Base Case
- ----------------------------
Internal Rate of Return Analysis
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
Calculation of Equity Cash Out Values
1998 1999 2000 2001 2002
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Projected EBITDA $ 46.5 $ 54.9 $ 61.5 $ 69.1 $ 77.4
7 x EBITDA $ 325.5 $384.5 $430.8 $483.8 $541.5
Asset Value @ Multiples Of: 8 x EBITDA 372.1 439.4 492.3 552.9 618.8
9 x EBITDA 418.6 494.3 553.9 622.0 696.2
Less: Net Debt $ 209.3 $199.4 $184.4 $164.3 $139.5
7 x EBITDA $ 116.2 $185.0 $246.4 $319.5 $402.0
Equity Value @: 8 x EBITDA 162.7 240.0 307.9 388.6 479.3
9 x EBITDA 209.2 294.9 369.5 457.7 556.7
<CAPTION>
3-Year Returns
1997 1998 1999 2000 IRR
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
7 x EBITDA $(115.0) $ 0.0 $ 0.0 $221.7 24.5%
Equity @: 8 x EBITDA (115.0) 0.0 0.0 277.1 34.1%
9 x EBITDA (115.0) 0.0 0.0 332.5 42.5%
7 x EBITDA (100.0) 10.8 10.8 110.8 10.8%
Subordinated Debt @: 8 x EBITDA (100.0) 10.8 10.8 110.8 10.8%
9 x EBITDA (100.0) 10.8 10.8 110.8 10.8%
<CAPTION>
4-Year Returns
1997 1998 1999 2000 2001 IRR
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
7 x EBITDA $(115.0) $ 0.0 $ 0.0 $ 0.0 $287.6 25.8%
Equity @: 8 x EBITDA (115.0) 0.0 0.0 0.0 349.8 32.1%
9 x EBITDA (115.0) 0.0 0.0 0.0 412.0 37.6%
7 x EBITDA (100.0) 10.8 10.8 10.8 110.8 10.7%
Subordinated Debt @: 8 x EBITDA (100.0) 10.8 10.8 10.8 110.8 10.7%
9 x EBITDA (100.0) 10.8 10.8 10.8 110.8 10.7%
<CAPTION>
5-Year Returns
1997 1998 1999 2000 2001 2002 IRR
------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
7 x EBITDA $(115.0) $ 0.0 $ 0.0 $ 0.0 $ 0.0 $361.8 25.8%
Equity @: 8 x EBITDA (115.0) 0.0 0.0 0.0 0.0 431.4 30.3%
9 x EBITDA (115.0) 0.0 0.0 0.0 0.0 501.0 34.2%
7 x EBITDA (100.0) 10.8 10.8 10.8 10.8 110.8 10.8%
Subordinated Debt @: 8 x EBITDA (100.0) 10.8 10.8 10.8 10.8 110.8 10.8%
9 x EBITDA (100.0) 10.8 10.8 10.8 10.8 110.8 10.8%
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Equity Ownership
Equity Pro Forma
Investment Ownership
---------- ---------
<S> <C> <C>
Investor Preferred Equity $115.0 90.0%
Investor Common Equity 0.0 0.0%
Subordinated Debt -- 0.0%
Management Group 10.0%
Common 0.0 0.0%
with Carry 10.0% 10.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SBC Warburg Dillon Read Inc.
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Store Model Forward Years
----------------------------------------------
(dollars in One Two Three Four Five Forward
thousands) ------ ------ ------ ------ ------ -------
Store Net
Sales $0.800 $0.960 $1.056 $1.109 $1.142 NA
% Growth (y-o-y) 20% 10% 5% 3% 3%
Sales Projections Stores ----------------------------------------------------------------------------------------------
(dollars in millions) Opened 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Pre 1997 Store Base 286 $256.8 $304.6 $319.9 $335.9 $345.9 $356.3 $367.0 $378.0 $389.4 $401.0 $413.1 $425.5
18.7% 5.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
1997 Stores 29 16.3 24.6 27.6 29.8 30.7 31.3
51.5% 12.0% 8.0% 3.0% 2.0%
New Stores Opened In:
1998 32 16.4 20.2 22.7 24.5 25.8 26.6 27.4 28.2 29.1 30.0
1999 35 18.4 22.6 25.5 27.4 29.0 29.8 30.7 31.7 32.6
2000 35 18.8 23.2 26.1 28.1 29.7 30.6 31.5 32.5
2001 35 19.3 23.8 26.8 28.8 30.4 31.4 32.3
2002 35 19.8 24.4 27.5 29.6 31.2 32.1
2003 35 20.3 25.0 28.1 30.3 32.0
2004 35 20.8 25.6 28.8 31.0
2005 35 21.3 26.2 29.6
2006 35 21.9 26.9
2007 35 22.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$256.8 $320.9 $360.9 $402.0 $439.9 $479.5 $521.3 $533.2 $578.4 $625.7 $675.1 $726.8
Sales Growth 25.0% 12.5% 11.4% 9.4% 9.0% 8.7% 2.3% 8.5% 8.2% 7.9% 7.7%
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------
Scenario: MDP Base Case
- -----------------------
Projected Pro Projections
Income Statement Actual Forma Year Ending Dec. 31,
------- -------- -----------------------------------------------------------------------------------------
(dollars in millions,
except per share data) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $256.8 $320.9 $360.9 $402.0 $439.9 $479.5 $521.3 $533.2 $578.4 $625.7 $675.1 $726.8
Cost of Sales 165.2 181.0 203.5 226.7 248.1 270.4 294.0 300.7 326.2 352.9 380.8 409.9
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross Profit 91.6 139.9 157.4 175.3 191.8 209.0 227.3 232.5 252.2 272.8 294.3 316.9
SG&A Expense 71.2 104.9 116.1 125.4 135.9 146.2 156.9 160.5 174.1 188.3 203.2 218.8
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating Profit 20.4 35.0 41.3 49.8 55.9 62.8 70.4 72.0 78.1 84.5 91.1 98.1
Other (Income)/Expense (0.6) (0.6) (0.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill Amortization 0.0 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Other
(Income)/Expense (0.6) 5.3 5.2 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9
Earnings Before Interest
& Taxes 21.0 29.8 36.1 44.0 50.0 56.9 64.5 66.1 72.2 78.6 85.2 92.2
Existing Debt 2.8 0.3 0.3 0.2 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Revolving Credit
Facility 0.0 3.1 3.2 3.6 4.0 4.1 4.6 5.7 5.8 6.0 6.6 7.3
Senior Unsecured Debt A 0.0 3.8 3.5 2.8 1.6 0.5 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
Senior Unsecured Debt B 0.0 5.4 5.4 5.3 5.3 5.2 5.2 5.1 5.0 5.0 4.9 4.9
Subordinated Debt 0.0 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Interest Expense 2.8 23.4 23.2 22.6 21.8 20.6 20.6 21.6 21.6 21.8 22.3 22.9
Interest Income 0.3 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.4
Financing Fee
Amortization 0.0 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 0.0 0.0 0.0
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Pretax Income 18.5 5.2 11.8 20.3 27.1 35.3 42.9 43.5 49.6 57.1 63.3 69.7
Tax: Federal & State 7.0 4.1 6.6 9.7 12.2 15.2 18.1 18.3 20.5 23.3 25.6 28.0
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income 11.5 1.1 5.3 10.6 14.9 20.0 24.8 25.2 29.0 33.8 37.7 41.7
Preferred Dividends 9.2 9.2 9.9 10.7 11.6 12.5 13.5 14.6 15.8 17.0 18.4
------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income to Common $11.5 ($8.1) ($3.9) $0.6 $4.2 $8.4 $12.3 $11.7 $14.5 $18.0 $20.6 $23.3
======= ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Average Shares
(millions) 12.3 12.6 12.8 13.1 13.3 13.6 13.9 14.2 14.4 14.7 15.0 15.3
Earnings Per Share $0.93 $0.09 $0.41 $0.81 $1.12 $1.47 $1.79 $1.78 $2.01 $2.29 $2.51 $2.72
- -----------------------------------------------------------------------------------------------------------------------------------
Note: EBITDA $25.9 $39.7 $46.5 $54.9 $61.5 $69.1 $77.4 $79.7 $86.3 $89.4 $96.6 $104.1
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Assumptions
Sales Growth (y-o-y) 22.1% 25.0% 12.5% 11.4% 9.4% 9.0% 8.7% 2.3% 8.5% 8.2% 7.9% 7.7%
Gross Margin 35.7% 43.6% 43.6% 43.6% 43.6% 43.6% 43.6% 43.6% 43.6% 43.6% 43.6% 43.6%
SG&A Expense 27.7% 32.7% 32.2% 31.2% 30.9% 30.5% 30.1% 30.1% 30.1% 30.1% 30.1% 30.1%
Operating Profit Margin 7.9% 10.9% 11.4% 12.4% 12.7% 13.1% 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Other Income
(% of sales) 0.2% 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
EBIT Margin 8.2% 9.3% 10.0% 10.9% 11.4% 11.9% 12.4% 12.4% 12.5% 12.6% 12.6% 12.7%
Interest Income
(% of sales) 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Pretax Profit Margin 7.2% 1.6% 3.3% 5.0% 6.2% 7.4% 8.2% 8.2% 8.6% 9.1% 9.4% 9.6%
Tax Rate 37.8% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0%
Net Income Margin 4.5% 0.3% 1.5% 2.6% 3.4% 4.2% 4.8% 4.7% 5.0% 5.4% 5.6% 5.7%
EPS Growth NM NM 362.7% 96.8% 38.0% 31.9% 21.6% -0.5% 12.9% 14.0% 9.3% 8.6%
Number of Stores 286 315 347 382 417 452 487 522 557 592 627 662
Store Growth (y-o-y) 10.0% 10.1% 10.2% 10.1% 9.2% 8.4% 7.7% 7.2% 6.7% 6.3% 5.9% 5.6%
Sales per Store ($000) $940.5 $1,067.9 $1,090.3 $1,102.9 $1,101.2 $1,103.5 $1,110.3 $1,056.8 $1,072.0 $1,089.0 $1,107.6 $1,127.7
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
- --------------------------------------
Scenario: MDP Base Case
- --------------------------------------
<TABLE>
<CAPTION>
Projected
Actual Estimated Pro Forma Year Ending Dec. 31,
Projected Balance Sheet ------ --------- --------- --------------------------
(dollars in millions) 1996 1997 Adjustments 1997 1998 1999 2000
------ --------- ----------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash & Equivalents $10.8 $8.4 ($3.4) $5.0 $5.0 $5.0 $5.0
Inventory 75.5 90.5 0.0 90.5 96.9 108.0 118.2
Prepaid Expenses 1.0 1.6 0.0 1.6 1.8 2.0 2.2
Other Current Assets 0.7 1.0 0.0 1.0 1.1 1.2 1.3
------ --------- --------- ------ ------ ------
Total Current Assets 88.0 101.4 98.1 104.8 116.2 126.7
Net Property, Plant & Equipment 30.4 31.0 0.0 31.0 31.7 32.4 32.9
Other Non-Current Assets
Goodwill 0.0 0.0 235.7 235.7 229.8 223.9 218.0
Deferred Financing Fees 0.0 0.0 9.0 9.0 7.7 6.4 5.1
Other Non-Current Assets 3.3 3.3 (2.7)(2) 0.6 0.6 0.6 0.6
------ --------- --------- ------ ------ ------
Total Other Non-Current Assets 3.3 3.3 245.3 238.1 230.9 223.7
TOTAL ASSETS $121.8 $135.7 $374.4 $374.6 $379.5 $383.3
====== ========= ========= ====== ====== ======
LIABILITIES & EQUITY
Accounts Payable $22.5 $25.1 $0.0 $25.1 $28.2 $31.4 $34.4
Other Current Liabilities 14.2 8.0 0.0 8.0 9.0 10.1 11.0
------ --------- --------- ------ ------ ------
Total Current Liabilities 36.8 33.1 33.1 37.2 41.4 45.3
Existing Debt (1) 6.6 4.0 0.0 4.0 3.2 2.4 1.6
Revolving Credit Facility 0.0 0.0 13.5 13.5 12.6 15.6 18.1
Senior Unsecured Debt A 0.0 0.0 46.0 46.0 39.1 27.6 11.5
Senior Unsecured Debt B 0.0 0.0 60.0 60.0 59.4 58.5 58.2
Subordinated Debt 0.0 0.0 100.0 100.0 100.0 100.0 100.0
------ --------- --------- ------ ------ ------
Total Debt 6.6 4.0 223.5 214.3 204.4 189.4
Deferred Taxes 2.9 2.8 0.0 2.8 2.8 2.8 2.8
TOTAL LIABILITIES 46.2 39.9 259.4 254.3 248.7 237.6
Preferred Equity 0.0 0.0 115.0 115.0 124.2 134.1 144.9
Common Equity 75.5 95.9 (95.9) 0.0 (3.9) (3.3) 0.9
------ --------- --------- ------ ------ ------
TOTAL EQUITY 75.5 95.9 115.0 120.3 130.8 145.7
TOTAL LIABILITIES & EQUITY $121.8 $135.7 $374.4 $374.6 $379.5 $383.3
====== ========= ========= ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------
check 0 0.000 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Note: Operating Working Capital (excluding cash) $60.0 $62.6 $69.7 $76.3
- ---------------------------------------------------------------------------------------------------------------------------
Operating Assumptions
Inventory Turnover 2.6 x 2.0 x 2.2 x 2.1 x 2.1 x 2.1 x
Avg. Inventory per Store ($000) 223.5 263.5 263.5 273.7 295.2 296.0
Prepaid Expenses (% of sales) 0.4% 0.5% 0.5% 0.5% 0.5% 0.5%
Other Current Assets (% of sales) 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Payables Days Outstanding 32.0 28.5 28.5 28.5 28.5 28.5
Other Current Liabilities (% of sales) 5.5% 2.5% 2.3% 2.5% 2.5% 2.5%
Net Working Capital (% of sales) 20.0% 21.3% 20.2% 21.1% 20.7% 20.2%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Projected
Year Ending Dec. 31,
Projected Balance Sheet ------------------------------------------------------------------
(dollars in millions) 2001 2002 2003 2004 2005 2006 2007
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash & Equivalents $5.0 $17.5 $47.8 $76.3 $104.9 $135.4 $170.4
Inventory 128.8 140.0 143.2 155.3 168.0 181.3 195.2
Prepaid Expenses 2.4 2.6 2.7 2.9 3.1 3.4 3.6
Other Current Assets 1.4 1.6 1.6 1.7 1.9 2.0 2.2
------ ------ ------ ------ ------ ------ ------
Total Current Assets 137.6 161.7 195.3 236.2 277.1 322.1 371.4
Net Property, Plant & Equipment 33.1 33.1 32.5 31.9 35.0 38.0 41.0
Other Non-Current Assets
Goodwill 212.1 206.2 200.3 194.5 188.6 182.7 176.8
Deferred Financing Fees 3.9 2.6 1.3 0.0 0.0 0.0 0.0
Other Non-Current Assets 0.6 0.6 0.6 0.6 0.6 0.6 0.7
------ ------ ------ ------ ------ ------ ------
Total Other Non-Current Assets 216.6 209.4 202.2 195.0 189.1 183.2 177.4
TOTAL ASSETS $387.3 $404.2 $430.0 $463.1 $501.2 $543.4 $589.8
====== ====== ====== ====== ====== ====== ======
LIABILITIES & EQUITY
Accounts Payable $37.4 $40.7 $41.6 $45.2 $48.9 $52.7 $56.7
Other Current Liabilities 12.0 13.0 13.3 14.5 15.6 16.9 18.2
------ ------ ------ ------ ------ ------ ------
Total Current Liabilities 49.4 53.7 55.0 59.6 64.5 69.6 74.9
Existing Debt (1) 0.8 0.0 0.0 0.0 0.0 0.0 0.0
Revolving Credit Facility 10.9 0.0 0.0 0.0 0.0 0.0 0.0
Senior Unsecured Debt A (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
Senior Unsecured Debt B 57.6 57.0 56.4 55.8 55.2 54.6 54.0
Subordinated Debt 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------
Total Debt 169.3 157.0 156.4 155.8 155.2 154.6 154.0
Deferred Taxes 2.8 2.8 2.8 2.8 2.8 2.8 2.8
TOTAL LIABILITIES 221.5 213.5 214.2 218.2 222.5 227.0 231.7
Preferred Equity 156.5 169.0 182.5 197.1 212.9 229.9 248.3
Common Equity 9.5 21.7 33.4 47.8 65.8 86.5 109.8
------ ------ ------ ------ ------ ------ ------
TOTAL EQUITY 165.8 190.6 215.9 244.9 278.7 316.4 358.1
TOTAL LIABILITIES & EQUITY $387.3 $404.2 $430.0 $463.1 $501.2 $543.4 $589.8
====== ====== ====== ====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
check 0 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------
Note: Operating Working Capital (excluding cash) $83.2 $90.4 $92.5 $100.3 $108.5 $117.1 $126.1
- -------------------------------------------------------------------------------------------------------------------------
Operating Assumptions
Inventory Turnover 2.1 x 2.1 x 2.1 x 2.1 x 2.1 x 2.1 x 2.1 x
Avg. Inventory per Store ($000) 296.1 297.3 290.8 285.9 290.3 295.1 300.2
Prepaid Expenses (% of sales) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Other Current Assets (% of sales) 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Payables Days Outstanding 28.5 28.5 28.5 28.5 28.5 28.5 28.5
Other Current Liabilities (% of sales) 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Net Working Capital (% of sales) 20.0% 22.5% 26.9% 33.1% 36.8% 40.4% 43.9%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Existing mortgage debt and capital lease obligations.
(2) Unsecured loans due from officer.
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
- ----------------------------
Scenario: MDP Base Case
- ----------------------------
<TABLE>
<CAPTION>
Pro Projected
Actual Forma Years Ending Dec. 31,
Projected Cash Flow Statement ------ ----- -----------------------------------------------------------------------------
(dollars in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Flow from Operating Activities
Net Income to Common $11.5 $(8.1) $(3.9) $ 0.6 $ 4.2 $ 8.4 $12.3 $11.7 $14.5 $18.0 $20.6 $23.3
Depreciation & Amortization 4.9 4.0 4.5 5.1 5.7 6.3 7.0 7.7 8.2 4.9 5.4 6.0
Increase/(Decrease) in Deferred
Taxes (0.4) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill Amortization 0.0 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9
Financing Fee Amortization 0.0 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 0.0 0.0 0.0
0.0 9.2 9.2 9.9 10.7 11.6 12.5 13.5 14.6 15.8 17.0 18.4
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Cash from Operations 16.1 12.3 17.0 22.8 27.7 33.5 39.0 40.1 44.4 44.6 49.0 53.6
Changes in Working Capital
(Increase)/Decrease in Inventory (23.1) (15.0) (6.4) (11.0) (10.2) (10.6) (11.2) (3.2) (12.1) (12.7) (13.3) (13.9)
(Increase)/Decrease in Prepaid
Expenses (0.1) (0.6) (0.2) (0.2) (0.2) (0.2) (0.2) (0.1) (0.2) (0.2) (0.2) (0.3)
(Increase)/Decrease in Other
Current Assets (0.3) (0.2) (0.1) (0.1) (0.1) (0.1) (0.1) (0.0) (0.1) (0.1) (0.1) (0.2)
(Increase)/Decrease in Other
Assets (0.3) 2.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Increase/(Decrease) in Accounts
Payable 9.8 2.5 3.1 3.2 3.0 3.1 3.3 0.9 3.5 3.7 3.9 4.0
Increase/(Decrease) in Other
Current Liabilities 7.9 (6.2) 1.0 1.0 0.9 1.0 1.0 0.3 1.1 1.2 1.2 1.3
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Change in Working Capital (5.9) (16.7) (2.6) (7.1) (6.6) (6.9) (7.3) (2.1) (7.8) (8.2) (8.6) (9.0)
Total Cash Flow from Operating
Activities $10.1 $(4.4) $14.3 $15.7 $21.2 $26.7 $31.8 $38.0 $36.6 $36.4 $40.4 $44.7
Cash Flow from Investing Activities
Cash Expenditures $(4.7) $(5.2) $(5.8) $(6.1) $(6.5) $(7.0) $(7.1) $(7.5) $(8.0) $(8.5) $(9.0)
Cash Flow from Financing Activities
Scheduled Debt Repayments
Existing Debt (0.8) (0.8) (0.8) (0.8) (0.8) 0.0 0.0 0.0 0.0 0.0
Senior Unsecured Debt A (6.9) (11.5) (16.1) (11.5) 0.0 0.0 0.0 0.0 0.0 0.0
Senior Unsecured Debt B (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6)
Subordinated Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Scheduled Debt Repayments (8.3) (12.9) (17.5) (12.9) (1.4) (0.6) (0.6) (0.6) (0.6) (0.6)
NET CHANGE IN CASH BEFORE REVOLVER 0.8 (3.0) (2.5) 7.2 23.4 30.3 28.4 27.8 31.3 35.0
(Repayment)/Borrowing from Revolver (0.8) 3.0 2.5 (7.2) (10.9) 0.0 0.0 0.0 0.0 0.0
NET CHANGE IN CASH $ 0.0 $ 0.0 $ 0.0 $ 0.0 $12.5 $30.3 $28.4 $27.8 $31.3 $35.0
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
REVOLVER BALANCE 12.6 15.6 18.1 10.9 0.0 0.0 0.0 0.0 0.0 0.0
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- -------------------------------------------------------------------------------
------------------------
Scenario: MDP Base Case
------------------------
Projected Asset Schedule
(dollars in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PP&E Schedule Projections
Actual Pro Forma Year Ending Dec. 31,
------ --------- -------------------------------------------------------------
1996 Adjustments 1997 1998 1999 2000 2001 2002 2003 2004 2005
------ ----------- --------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning PP&E $31.1 $30.4 $31.0 $31.7 $32.4 $32.9 $33.1 $33.1 $32.5 $31.9
Plus: Capital Expenditures 4.2 4.7 5.2 5.8 6.1 6.5 7.0 7.1 7.5 8.0
Less: Depreciation (4.9) (4.0) (4.5) (5.1) (5.7) (6.3) (7.0) (7.7) (8.2) (4.9)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ending PP&E 30.4 31.0 31.7 32.4 32.9 33.1 33.1 32.5 31.9 35.0
Capital Expenditures as % of Sales 1.6% 1.5% 1.4% 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.3%
Depreciation as % of Sales 1.9% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.4% 1.4% 0.8%
</TABLE>
<TABLE>
<CAPTION>
PP&E Schedule Projections
Year Ending Dec. 31,
--------------------
2006 2007
----- -----
<S> <C> <C>
Beginning PP&E $35.0 $38.0
Plus: Capital Expenditures 8.5 9.0
Less: Depreciation (5.4) (6.0)
----- -----
Ending PP&E 38.0 41.0
Capital Expenditures as % of Sales 1.3% 1.2%
Depreciation as % of Sales 0.8% 0.8%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Expenditure Schedule Projections
Year Ending Dec. 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of New Stores 29 32 35 35 35 35 35 35 35 35 35
New Store-related CapX $50,000 per store $1.5 $1.6 $1.8 $1.8 $1.8 $1.8 $1.8 $1.8 $1.8 $1.8 $1.8
Other CapX 1.0% of net sales 3.2 3.6 4.0 4.4 4.8 5.2 5.3 5.8 6.3 6.8 7.3
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 4.7 5.2 5.8 6.1 6.5 7.0 7.1 7.5 8.0 8.5 9.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation Schedule Projections
Year Ending Dec. 31,
Book PP&E Base/ ----------------------------------------------------------------
Life Year New CapX 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
---- ---- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Base
Projected Capital Expenditures 8.0 1996 $30.4 $3.8 $3.8 $3.8 $3.8 $3.8 $3.8 $3.8 $3.8
10.0 1997 4.7 0.2 0.5 0.5 0.5 0.5 0.5 0.5 0.2 0.2 0.2 0.2
1998 5.2 0.3 0.5 0.5 0.5 0.5 0.5 0.5 0.3 0.3 0.3
1999 5.8 0.3 0.6 0.6 0.6 0.6 0.6 0.6 0.3 0.3
2000 6.1 0.3 0.6 0.6 0.6 0.6 0.6 0.6 0.3
2001 6.5 0.3 0.7 0.7 0.7 0.7 0.7 0.7
2002 7.0 0.3 0.7 0.7 0.7 0.7 0.7
2003 7.1 0.4 0.7 0.7 0.7 0.7
2004 7.5 0.4 0.8 0.8 0.8
2005 8.0 0.4 0.8 0.8
2006 8.5 0.4 0.9
2007 9.0 0.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Depreciation $4.0 $4.5 $5.1 $5.7 $6.3 $7.0 $7.7 $8.2 $4.9 $5.4 $6.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Goodwill Schedule Projections
Years Ending Dec. 31,
Pro Forma -----------------------------------------------------------
Amortization Period (Years) 40.0 Adjustments 1997 1998 1999 2000 2001 2002 2003 2004
----------- --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Gross Balance $ 0.0 $ 0.0 $235.7 $229.8 $223.9 $218.0 $212.1 $206.2 $200.3
Additions/(Writeoffs) 235.7 235.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Amortization (5.9) (5.9) (5.9) (5.9) (5.9) (5.9) (5.9) (5.9) (5.9)
------ ------ ------ ------ ------ ------ ------ ------
Ending Gross Balance 235.7 229.8 223.9 218.0 212.1 206.2 200.3 194.5
</TABLE>
<TABLE>
<CAPTION>
Goodwill Schedule Projections
Years Ending Dec. 31,
----------------------
Amortization Period (Years) 2005 2006 2007
------ ------ ------
<S> <C> <C> <C>
Beginning Gross Balance $194.5 $188.6 $182.7
Additions/(Writeoffs) 0.0 0.0 0.0
Amortization (5.9) (5.9) 5.9
------ ------ ------
Ending Gross Balance 188.6 182.7 176.8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Fee Schedule Projections
Years Ending Dec. 31,
Pro Forma -----------------------------------------------------------
Amortization Period (Years) 7.0 Adjustments 1997 1998 1999 2000 2001 2002 2003 2004
----------- --------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning Gross Balance $ 0.0 $ 0.0 $ 9.0 $ 7.7 $ 6.4 $ 5.1 $ 3.9 $ 2.6 $ 1.3
Additions/(Writeoffs) 9.0 9.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Amortization (1.3) (1.3) (1.3) (1.3) (1.3) (1.3) (1.3) (1.3) (1.3)
----- ----- ----- ----- ----- ----- ----- -----
Ending Gross Balance 9.0 7.7 6.4 5.1 3.9 2.6 1.3 0.0
</TABLE>
<TABLE>
<CAPTION>
Financing Fee Schedule Projections
Years Ending Dec. 31,
---------------------
Amortization Period (Years) 2005 2006 2007
---- ---- ----
<S> <C> <C> <C>
Beginning Gross Balance $0.0 $0.0 $0.0
Additions/(Writeoffs) 0.0 0.0 0.0
Amortization 0.0 0.0 0.0
---- ---- ----
Ending Gross Balance 0.0 0.0 0.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
Scenario: MDP Base Case
Projected Financing Schedule
(dollars in millions)
Interest Rates
Existing Mortgage Debt 7.755%
Revolving Credit Facility 8.250%
Senior Unsecured Notes A 8.250%
Senior Unsecured Notes B 9.000%
Subordinated Debt 10.750%
Preferred Equity 8.000%
<TABLE>
<CAPTION>
Projections
Estimated Pro Forma Year Ending December 31,
--------- --------- ------------------------------------------------------------
Financing Type 1997 Adjustments 1997 1998 1999 2000 2001 2002 2003 2004
--------- ----------- --------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Debt
Operating Balance $4.0 0.0 $ 4.0 $ 4.0 $ 3.2 $ 2.4 $ 1.6 $ 0.8 $ 0.0 $ 0.0
Principal Payment 0.0 0.0 0.0 (0.8) (0.8) (0.8) (0.8) (0.8) 0.0 0.0
---- ------ ------ ------ ------ ------ ------ ------ ------
Closing Balance 4.0 4.0 3.2 2.4 1.6 0.8 0.0 0.0 0.0
Interest Payment 0.3 0.3 0.2 0.2 0.1 0.0 0.0 0.0
Principal Repayment % 20.0% 20.0% 20.0% 20.0% 20.0% 0.0% 0.0%
Revolving Credit Facility
Opening Balance $0.0 $ 13.5 $ 13.5 $ 13.5 $ 12.6 $ 15.6 $ 18.1 $ 10.9 $ 0.0 $ 0.0
(Repayment)/Borrowing 0.0 0.0 0.0 (0.8) 3.0 2.5 (7.2) (10.9) 0.0 0.0
---- ------ ------ ------ ------ ------ ------ ------ ------
Closing Balance 0.0 13.5 12.6 15.6 18.1 10.9 0.0 0.0 $ 0.0
Average Revolver Balance $0.0 $ 24.5(1) $ 24.5(1) $ 26.3 $ 29.3 $ 32.0 $ 34.9 $ 38.0 $ 38.8 $ 42.1
Inventory Growth (%) 7.1% 11.4% 9.4% 9.0% 8.7% 2.3% 8.5%
Less: Net Change in Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.5 30.3 28.4
---- ------ ------ ------ ------ ------ ------ ------ ------
Net Average Revolver Balance 0.0 24.5 26.3 29.3 32.0 34.9 50.5 69.2 70.6
Interest Payment 3.1 3.2 3.6 4.0 4.1 4.6 5.7 5.8
Senior Unsecured Debt A
Opening Balance $0.0 $ 46.0 $ 46.0 $ 46.0 $ 39.1 $ 27.6 $ 11.5 ($0.0) ($0.0) ($0.0)
Principal Payment 0.0 0.0 0.0 (6.9) (11.5) (16.1) (11.5) 0.0 0.0 0.0
---- ------ ------ ------ ------ ------ ------ ------ ------
Closing Balance 0.0 46.0 39.1 27.6 11.5 (0.0) (0.0) (0.0) (0.0)
Interest Payment 3.8 3.5 2.8 1.6 0.5 (0.0) (0.0) (0.0)
Principal Repayment % 0.0% 15.0% 25.0% 35.0% 25.0% 0.0% 0.0% 0.0%
Senior Unsecured Debt B
Opening Balance $0.0 $ 60.0 $ 60.0 $ 60.0 $ 59.4 $ 58.8 $ 58.2 $ 57.6 $ 57.0 $ 56.4
Principal Payment 0.0 0.0 0.0 (0.6) (0.6) (0.6) (0.6) (0.6) (0.6) (0.6)
---- ------ ------ ------ ------ ------ ------ ------ ------
Closing Balance 0.0 60.0 59.4 58.8 58.2 57.6 57.0 56.4 55.8
Interest Payment 5.4 5.4 5.3 5.3 5.2 5.2 5.1 5.0
Principal Repayment % 0.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Subordinated Debt
Opening Balance $0.0 $100.0 $100.0 $100.0 $100.0 $100.0 $100.0 $100.0 $100.0 $100.0
Principal Payment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
---- ------ ------ ------ ------ ------ ------ ------ ------
Closing Balance 0.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Interest Payment 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8
Principal Repayment % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Investor Preferred Equity
Opening Balance $0.0 $115.0 $115.0 $115.0 $124.2 $134.1 $144.9 $156.5 $169.0 $182.5
Dividend Payment (PIK) 0.0 9.2 9.2 9.9 10.7 11.6 12.5 13.5 14.6
Additions/(Redemptions) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
---- ------ ------ ------ ------ ------ ------ ------ ------
Closing Balance 0.0 115.0 124.2 134.1 144.9 156.5 169.0 182.5 197.1
Projections
Year Ending December 31,
--------------------------
Financing Type 2005 2006 2007
------ ------ ------
Existing Debt
Operating Balance $ 0.0 $ 0.0 $ 0.0
Principal Payment 0.0 0.0 0.0
------ ------ ------
Closing Balance 0.0 0.0 0.0
Interest Payment 0.0 0.0 0.0
Principal Repayment % 0.0% 0.0% 0.0%
Revolving Credit Facility
Opening Balance $ 0.0 $ 0.0 $ 0.0
(Repayment)/Borrowing 0.0 0.0 0.0
------ ------ ------
Closing Balance 0.0 0.0 0.0
Average Revolver Balance $ 45.6 $ 49.2 $ 52.9
Inventory Growth (%) 8.2% 7.9% 7.7%
Less: Net Change in Cash 27.8% 31.3 35.0
------ ------ ------
Net Average Revolver Balanc 73.3 80.5 88.0
Interest Payment 6.0 6.6 7.3
Senior Unsecured Debt A
Opening Balance ($0.0) ($0.0) ($0.0)
Principal Payment 0.0 0.0 0.0
------ ------ ------
Closing Balance (0.0) (0.0) (0.0)
Interest Payment (0.0) (0.0) (0.0)
Principal Repayment % 0.0% 0.0% 0.0%
Senior Unsecured Debt B
Opening Balance $ 55.8 $ 55.2 $ 54.6
Principal Payment (0.6) (0.6) (0.6)
------ ------ ------
Closing Balance 55.2 54.6 54.0
Interest Payment 5.0 4.9 4.9
Principal Repayment % 1.0% 1.0% 1.0%
Subordinated Debt
Opening Balance $100.0 $100.0 $100.0
Principal Payment 0.0 0.0 0.0
------ ------ ------
Closing Balance 100.0 100.0 100.0
Interest Payment 10.8 10.8 10.8
Principal Repayment % 0.0% 0.0% 0.0%
Investor Preferred Equity
Opening Balance $197.1 $212.9 $229.9
Dividend Payment (PIK) 15.8 17.0 18.4
Additions/(Redemptions) 0.0 0.0 0.0
------ ------ ------
Closing Balance 212.9 229.9 248.3
</TABLE>
(1) Twelve months ending 6/30/97.
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
Leveraged Recapitalization Analysis
(dollars in millions)
<TABLE>
<CAPTION>
Cash Dividend per Share
--------------------------------------------------------------------------------------------
$12.00 $13.00 $14.00 $15.00 $16.00
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Total Cash Dividend $155.8 $168.8 $181.8 $194.7 $207.7
1997E Net Income 20.4 20.4 20.4 20.4 20.4
Less: After Tax Interest Expense
on Debt 9.6 10.4 11.2 12.0 12.8
--------------- --------------- --------------- --------------- ---------------
Pro Forma Net Income 10.8 10.0 9.2 8.4 7.6
Earnings per Share $ 0.83 $ 0.77 $ 0.71 $ 0.64 $ 0.58
1997E Price/Earnings Multiple (1) 15.2 x 15.2 15.2 15.2 15.2
Implied Trading Price Per Share $12.61 $11.67 $10.74 $ 9.80 $ 8.87
Plus: Dividend per Share 12.0 13.0 14.0 15.0 16.0
Implied Total Value Per Share $24.61 $24.67 $24.74 $24.80 $24.87
1997E EBIT/Interest 3.6 x 3.3 x 3.1 x 2.9 x 2.7 x
1997E EBITDA/Interest 4.0 3.8 3.5 3.4 3.2
1997E Total Debt/EBITDA 4.03 4.25 4.68 4.99 5.30
- -----------------------------------------------------------
(1) Multiple of 1997E earnings prior to 8/14/97 acquisition announcement.
</TABLE>
<PAGE>
Selected Comparable Industry Acquisitions
<TABLE>
<CAPTION>
Offer for
Date Assets
Announced Acquiror/Target Business of Target Form ($ mil)
- --------- -------------------------------------- ---------------------------------- ----------- --------
<S> <C> <C> <C> <C>
07/03/97 BAA PLC Owns and operates duty free shops Merger $736.4
Duty Free International Inc.
11/27/96 J.W. Childs (Investor Group) Tractor and hardware stores NA NA
Central Tractor
11/12/96 Leonard Green Partners (Investor Group) Pool supply stores Merger 133.8
Leslie's Poolmart
10/21/96 Brylane LP (The Limited, Inc.) Discount women's clothing catalog Merger 388.3
Chadwick's of Boston Ltd. (TJX Co.) unit of discount retailer
09/09/96 Phar-Mar, Inc. Owns and operates variety stores Stock swap 923.7
ShopKo Stores, Inc.
03/25/96 Consolidated Stores Corp Owns and operates toy and hobby Purchase of 315.0
Kay-Bee Toy & Hobby Shops, Inc. stores assets
01/16/96 Dollar Tree Stores, inc. Owns and operates discount variety Purchase of 62.8
Terrific Promotions, Inc. stores stock
10/13/95 TJX Companies Inc Operates family clothing stores Purchase of 589.9
Marshall's Inc. (Melville Corp) stock
08/15/95 Investor Group Chain of discount women's clothing Purchase of 13.0
TJX Companies Inc-Hit or Miss stores assets
10/27/94 Investor Group Owns and operates discount stores Open market NA
Family Dollar Stores purchase
06/16/93 CostCo Wholesale Corp. Owns and operates membership Merger 2,224.7
Price Co. warehouses
04/16/92 Value City Department Stores Owns and operates discount Purchase of 23.1
Gee Bee Department Stores department stores assets
</TABLE>
<TABLE>
<CAPTION>
Offer for Assets to:
--------------------------------
Latest
Date LTM LTM LTM Net
Announced Acquiror/Target Business of Target Form Revenue EBIT EBITDA Assets
- --------- -------------------------------------- ---------------------------------- -------- ------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
07/03/97 BAA PLC Owns and operates duty free shops Merger 1.26 x 18.22 x 13.34 x 2.54 x
Duty Free International Inc.
11/27/96 J.W. Childs (Investor Group) Tractor and hardware stores NA 0.6 11.8 9.3 NA
Central Tractor
11/12/96 Leonard Green Partners (Investor Group) Pool supply stores Merger 0.7 13.1 9.2 1.9
Leslie's Poolmart
10/21/96 Brylane LP (The Limited, Inc.) Discount women's clothing catalog Merger 0.81 11.35 NA 3.14
Chadwick's of Boston Ltd. (TJX Co.) unit of discount retailer
09/09/96 Phar-Mar, Inc. Owns and operates variety stores Stock 0.45 9.56 6.03 1.10
ShopKo Stores, Inc. swap
03/25/96 Consolidated Stores Corp Owns and operates toy and hobby Purchase 0.29 17.70 NA 1.16
Kay-Bee Toy & Hobby Shops, Inc. stores of assets
01/16/96 Dollar Tree Stores, inc. Owns and operates discount variety Purchase 0.55 13.35 11.11 3.92
Terrific Promotions, Inc. stores of stock
10/13/95 TJX Companies Inc Operates family clothing stores Purchase 0.2 19.1 6.7 0.9
Marshall's Inc. (Melville Corp) of stock
08/15/95 Investor Group Chain of discount women's clothing Purchase NA NA NA NA
TJX Companies Inc-Hit or Miss stores of assets
10/27/94 Investor Group Owns and operates discount stores Open 0.49 6.17 5.29 1.98
Family Dollar Stores market
purchase
06/16/93 CostCo Wholesale Corp. Owns and operates membership Merger 0.28 11.00 8.25 2.56
Price Co. warehouses
04/16/92 Value City Department Stores Owns and operates discount Purchase 0.16 6.42 4.05 NM
Gee Bee Department Stores department stores of assets
</TABLE>
<TABLE>
<CAPTION> Offer for Equity to:
Offer for --------------------
Date Equity LTM Net Book
Announced Acquiror/Target Business of Target Form ($ mil) Income Value
- --------- -------------------------------------- ---------------------------------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
07/03/97 BAA PLC Owns and operates duty free shops Merger $675.3 30.85 x 2.95 x
Duty Free International Inc.
11/27/96 J.W. Childs (Investor Group) Tractor and hardware stores NA NA 20.8 1.7
Central Tractor
11/12/96 Leonard Green Partners (Investor Group) Pool supply stores Merger 100.7 23.0 2.6
Leslie's Poolmart
10/21/96 Brylane LP (The Limited, Inc.) Discount women's clothing catalog Merger 328.0 25.43 5.17
Chadwick's of Boston Ltd. (TJX Co.) unit of discount retailer
09/09/96 Phar-Mar, Inc. Owns and operates variety stores Stock swap 625.5 16.12 1.48
ShopKo Stores, Inc.
03/25/96 Consolidated Stores Corp Owns and operates toy and hobby Purchase of NA NA NA
Kay-Bee Toy & Hobby Shops, Inc. stores assets
01/16/96 Dollar Tree Stores, inc. Owns and operates discount variety Purchase of 54.6 13.28 6.94
Terrific Promotions, Inc. stores stock
10/13/95 TJX Companies Inc Operates family clothing stores Purchase of 599.3 39.2 1.0
Marshall's Inc. (Melville Corp) stock
08/15/95 Investor Group Chain of discount women's clothing Purchase of 13.0 NA NA
TJX Companies Inc-Hit or Miss stores assets
10/27/94 Investor Group Owns and operates discount stores Open market 24.5 9.95 1.98
Family Dollar Stores purchase
06/16/93 CostCo Wholesale Corp. Owns and operates membership Merger 1,666.2 15.05 1.92
Price Co. warehouses
04/16/92 Value City Department Stores Owns and operates discount Purchase of NA NA NA
Gee Bee Department Stores department stores assets
</TABLE>
Source: Securities Data Company
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average 0.53 x 12.52 x 8.14 x 2.14 x 21.52 x 2.86 x
Median 0.49 11.80 8.25 1.96 20.80 1.98
High 1.26 19.09 13.34 3.92 39.17 6.94
Low 0.16 6.17 4.05 0.94 9.95 1.48
# in calc. 11 11 9 9 9 9
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SBC Warburg Dillon Read Inc. Highly Confidential
- --------------------------------------------------------------------------------
Weighted Average Cost of Capital Calculation
(dollars in millions)
Estimation of Unlevered Asset Beta
<TABLE>
<CAPTION>
Net Market Value D/ ME/ Unlevered
Equity Beta(1) Debt(D) Equity (ME) (D+ME) (D+ME) Asset Beta
--------------- ------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Stores 1.30 x $381.3 $3,370.1 10.2% 89.8% 1.19 x
MacFrugal's Bargain-Closeouts 0.90 $ 3.0 $ 745.1 0.4% 99.6% 0.90
Mazel Stores 1.28 $ 2.5 $ 210.9 1.2% 98.8% 1.27
Ross Stores 1.25 $ 3.0 $1,584.0 0.2% 99.8% 1.25
TJX Companies 1.50 $ 26.0 $4,654.8 0.6% 99.4% 1.49
-----------
1.22
</TABLE>
<TABLE>
Estimation of Weighted Average Cost of Capital
D/(D+ME) 0.0% 10.0% 20.0%
--------------- ------- ------------
<S> <C> <C> <C>
Implied Equity Beta (2) 1.22 x 1.32 x 1.43 x
Average Yield 3-Month T-Bills (9/1/97) 5.21% 5.21% 5.21%
Average Yield 30-Year T-Bonds (9/1/97) 6.61% 6.61% 6.61%
Cost of Equity over T-Bills (3) 18.6% 19.7% 20.9%
Cost of Equity over T-Bonds (4) 18.3% 19.3% 20.3%
--------------- ------- ------------
Average Cost of Equity 18.4% 19.5% 20.6%
After-Tax Cost of Debt (5) 5.40% 5.40% 5.40%
Weighted Average Cost of Capital
Based on T-Bills 18.6% 18.3% 17.8%
Based on T-Bonds 18.3% 17.9% 17.3%
--------------- ------- ------------
Average 18.4% 18.1% 17.5%
</TABLE>
- ---------------------------------------
(1) Source: Value Line.
(2) Assumes a debt beta of 0.17 as given by Reilly and Joehnk in The Journal of
Finance, December 1976, Table 1, p. 1394. Unlevered asset beta calculated
as: [(D/(D+ME))* Debt Beta + (ME/(D+ME)) * (Equity Beta]. Equity beta under
the hypothetical capital structures calculated as:[Asset Beta + (D/ME) *
(Asset Beta - Debt Beta)].
(3) Cost of equity over T-bills calculated as: [(Equity Beta* (8.90% + 2.06)) +
5.21%]. The 8.90% figure is the short-horizon expected equity risk premium
(large company stock total returns minus U.S. Treasury bill total returns;
the 2.06% figure is the expected low-capitalization equity size premium for
deciles 7-8; averages based on annual data from 1926 to 1996) according to
SBBI 1997 Yearbook (Ibbotson Associates). The 5.21% figure, our proxy for
the risk-free rate, is the average yield on 30-Year Treasury Bills on
9/1/97.
(4) Cost of equity over T-bonds calculated as:[(Equity Beta* (7.50% + 2.06)) +
6.61%]. The 7.50% figure is the long-horizon expected equity risk premium
(large company stock total returns minus long-term government bond income
returns; the 2.06% figure is the expected low-capitalization equity size
premium for deciles 7-8; averages based on annual data from 1926 to 1996).
according to SBBI 1997 Yearbook (Ibbotson Associates). The 6.61% figure,
our proxy for the risk-free rate, is the average yield on 30-Year Treasury
Bonds on 9/1/97.
(5) Pretax costs of debt were taken as the average yields for different classes
of bonds on Bloomberg on 9/1/97. These were taxed at a rate of 40.0%, which
approximates the average Federal and State tax rates for the period
beginning 1/1/93 under the Tax Reform Act of 1993.
<PAGE>
CONFIDENTIAL FOR USE OF THE COMMISSION ONLY
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
FILE NO. 0-19658
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Materials Pursuant to Rule 14a-11(c) or Rule 14a-12
TUESDAY MORNING CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(Name of Person Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and 0-11
("Rule 0-11").
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share ("Common Stock"), of Tuesday
Morning Corporation.
(2) Aggregate number of securities to which transaction applies:
13,166,544 shares of Common Stock (includes 1,248,863 underlying
options to purchase shares of Common Stock).
(3) Per unit price or other underlying value of transaction computed
pursuant to Rule 0-11: The average of the high and low sale price for
shares of Common Stock on September 19, 1997 on the Nasdaq National
Market was $23.88 per share.
(4) Proposed maximum aggregate value of transaction:
13,166,544 shares of Common Stock x $23.88 per share = $314,417,070.72.
(5) Total fee paid:
$62,883.41 (wired to Mellon Bank, N.A. on September 23, 1997).
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration No.:
(3) Filing Party:
(4) Date Filed:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[TUESDAY MORNING CORPORATION LOGO APPEARS HERE]
November , 1997
Dear Stockholder:
You are cordially invited to attend the Special Meeting of the stockholders
of Tuesday Morning Corporation to be held at the offices of Tuesday Morning,
14621 Inwood Road, Dallas, Texas on December , 1997 at 10:00 a.m. (local
time).
At this important meeting, you will be asked to consider and vote upon a
proposed merger of Tuesday Morning Acquisition Corp., a wholly owned
subsidiary of Madison Dearborn Partners II, L.P., into Tuesday Morning. In the
proposed merger, Tuesday Morning will become a wholly owned subsidiary of an
affiliate of Madison Dearborn and holders of Tuesday Morning common stock will
be entitled to receive $25.00 in cash for each share of their Tuesday Morning
common stock. The enclosed Proxy Statement provides a detailed description of
the matters to be considered at the Special Meeting and extensive information
concerning Tuesday Morning and the proposed merger.
Consummation of the merger is subject to a number of conditions, including
Madison Dearborn obtaining the necessary financing. Accordingly, even if the
stockholders approve the merger, there can be no assurance that the merger
will be consummated.
Each of Jerry M. Smith, President and Chief Operating Officer of the
Company, and myself have entered into agreements with Madison Dearborn under
which Madison Dearborn has the power to vote our 2,753,157 shares or 23.1%
(3,896,757 shares or 29.8% on a fully diluted basis) of the Company's common
stock in favor of the merger.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL
PRESENTED AT THE SPECIAL MEETING.
It is important that your shares be present at the Special Meeting,
regardless of the number you hold. Therefore, please sign, date and return
your proxy card as soon as possible, whether or not you plan to attend. This
will not prevent you from voting your shares in person if you subsequently
choose to attend. As soon as practicable after the effectiveness of the
merger, you will receive instructions for surrendering your Tuesday Morning
share certificates in exchange for $25.00 in cash and a letter of transmittal
to be used for this purpose. You should not submit your share certificates for
exchange until you have received such instructions and the letter of
transmittal.
Sincerely yours,
Lloyd L. Ross
Chairman of the Board and
Chief Executive Officer
<PAGE>
[TUESDAY MORNING CORPORATION LOGO APPEARS HERE]
TUESDAY MORNING CORPORATION
14621 INWOOD ROAD
DALLAS, TEXAS 75244
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER , 1997
----------------
To the holders of Common Stock of
Tuesday Morning Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Tuesday
Morning Corporation (the "Company") will be held at the Company's
headquarters, located at 14621 Inwood Road, Dallas, Texas, on December , 1997
at 10:00 A.M., local time, for the following purposes:
(i) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated September 12, 1997, among the Company,
Madison Dearborn Partners II, L.P., a Delaware limited partnership
("Madison Dearborn"), and Tuesday Morning Acquisition Corp. (the "Merger
Subsidiary"), a Delaware corporation and a wholly owned subsidiary of
Madison Dearborn, pursuant to which (i) the Merger Subsidiary will be
merged into the Company and (ii) each share of common stock of the Company
will be converted automatically into the right to receive $25.00 per share
in cash; and
(ii) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Holders of shares of the Company's common stock have the right to dissent
from the merger and to demand appraisal of, and payment for, their shares of
common stock by following the procedures set forth in Section 262 of the
General Corporation Law of the State of Delaware, a copy of which section is
attached hereto as Appendix C and summarized under "The Merger--Appraisal
Rights of Dissenting Stockholders" in the accompanying Proxy Statement.
The Board of Directors has fixed the close of business on October 28, 1997
as the record date for the determination of stockholders entitled to receive
notice of, and vote at, the Special Meeting and any adjournment thereof.
A form of proxy and a Proxy Statement containing more detailed information
with respect to the matters to be considered at the Special Meeting accompany
and form a part of this notice.
By order of the Board of Directors,
Mark E. Jarvis
Secretary
November , 1997
Dallas, Texas
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE MEETING, HOWEVER, YOU ARE URGED TO COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES. ANY
STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON, EVEN IF THAT
STOCKHOLDER HAS RETURNED A PROXY.
<PAGE>
[TUESDAY MORNING CORPORATION LOGO APPEARS HERE]
TUESDAY MORNING CORPORATION
14621 INWOOD ROAD
DALLAS, TEXAS 75244
----------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER , 1997
----------------
This Proxy Statement is furnished to stockholders of Tuesday Morning
Corporation, a Delaware corporation ("Tuesday Morning" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Special Meeting of Stockholders to be held on December
, 1997, and at any and all adjournments or postponements thereof. Proxies in
the form enclosed will be voted at the Special Meeting, if properly executed,
returned to the Company prior to the meeting and not revoked. The proxy may be
revoked at any time before it is voted by giving written notice to the
Secretary of the Company. This Proxy Statement and the enclosed proxy card are
first being mailed to stockholders of the Company on or about November ,
1997.
At the Special Meeting, holders of the Company's common stock will be asked
to consider and vote upon a proposal to approve and adopt an Agreement and
Plan of Merger, dated September 12, 1997 (the "Merger Agreement"), among
Madison Dearborn Partners II, L.P., a Delaware limited partnership ("Madison
Dearborn"), Tuesday Morning Acquisition Corp. (the "Merger Subsidiary"), a
Delaware corporation and a wholly owned subsidiary of Madison Dearborn, and
the Company, pursuant to which (i) the Merger Subsidiary will be merged (the
"Merger") into the Company and (ii) each share of common stock of the Company
will be converted automatically into the right to receive $25.00 per share in
cash. A copy of the Merger Agreement is attached as Appendix A to the Proxy
Statement.
Only holders of record of common stock at the close of business on October
28, 1997 (the "Record Date") are entitled to notice of, and to vote at, the
Special Meeting. At the close of business on the Record Date, the Company had
issued and outstanding, and entitled to vote at the Special Meeting 12,322,230
shares of common stock.
The presence, either in person or by properly executed proxy, of the holders
of record of a majority of the Company's common stock outstanding on the
Record Date is necessary to constitute a quorum at the Special Meeting.
Approval and adoption of the Merger Agreement requires the affirmative vote of
the holders of record of a majority of the outstanding shares of common stock.
Where stockholders have appropriately specified how their proxies are to be
voted, they will be voted accordingly. Abstentions and broker non-votes will
be counted toward determining whether a quorum is present at the Special
Meeting. Votes submitted as abstentions on the Merger will be counted as votes
against the Merger. Broker non-votes will not count for or against the Merger
at the Special Meeting.
As an inducement to Madison Dearborn to offer to acquire the Company, Lloyd
L. Ross, the Company's Chairman of the Board and Chief Executive Officer, and
Jerry M. Smith, the Company's President and Chief Operating Officer, entered
into option agreements with Madison Dearborn. Under the terms of the option
agreements, Messrs. Ross and Smith granted to Madison Dearborn an option to
purchase all of their shares of the Company's common stock and an irrevocable
proxy to vote their shares at the Special Meeting for the approval of the
Merger Agreement. As a result of these option agreements, Madison Dearborn has
the power to vote 2,753,157 shares or 23.1% (or, giving effect to the exercise
of stock options, 3,896,757 shares or 29.8%) of the Company's outstanding
shares of common stock for approval of the Merger Agreement.
<PAGE>
Holders of shares of the Company's common stock have the right to dissent
from the Merger and to demand appraisal of, and payment for, their shares by
following the procedures set forth in Section 262 of the General Corporation
Law of the State of Delaware, a copy of which section is attached hereto as
Appendix C and summarized under "Special Factors--Dissenter's Rights" and "The
Merger--Appraisal Rights of Dissenting Stockholders" in the accompanying Proxy
Statement.
Consummating the Merger is subject to a number of additional conditions,
including Madison Dearborn obtaining the necessary financing. Accordingly,
even if stockholders approve the Merger, there can be no assurance that the
Merger will be consummated.
The accompanying proxy, unless the stockholder otherwise specifies in the
proxy, will be voted (i) for approval of the Merger Agreement and (ii) at the
discretion of the proxy holders on any other matter that may properly come
before the meeting or any adjournment thereof. Where stockholders have
appropriately specified how their proxies are to be voted, they will be voted
accordingly. If any other matter or business is brought before the Special
Meeting, the proxy holders may vote the proxies in their discretion. The
directors do not know of any such other matter or business.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT.
(ii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF PROXY STATEMENT................................................ 3
Parties to the Merger................................................... 3
Special Meeting......................................................... 3
Merger.................................................................. 4
Reasons for the Merger and Recommendation of the Company's Board of
Directors.............................................................. 4
Opinion of Financial Advisor............................................ 5
Effective Time of the Merger............................................ 5
Conflicts of Interest................................................... 5
Rights of Dissenting Stockholders....................................... 6
Federal Income Tax Consequences......................................... 7
Accounting Treatment.................................................... 7
Financing of the Merger................................................. 7
Conditions of the Merger................................................ 7
No Solicitation......................................................... 7
Termination............................................................. 8
Termination Fee......................................................... 9
Exchange of the Company Stock Certificates.............................. 9
Market Prices for Common Stock and Dividends............................ 9
Summary Financial Information........................................... 10
THE SPECIAL MEETING....................................................... 13
General................................................................. 13
Record Date; Quorum..................................................... 13
Vote Required........................................................... 13
Proxies................................................................. 13
Other Matters to be Considered.......................................... 13
Solicitation of Proxies................................................. 14
SPECIAL FACTORS........................................................... 15
Background of the Merger................................................ 15
Reasons for the Merger and Recommendation of the Company's Board of
Directors.............................................................. 17
Position of Messrs. Smith and Ross as to Fairness of the Merger......... 19
Opinion of Financial Advisor............................................ 20
Position of Madison Dearborn as to Fairness of the Merger............... 25
Madison Dearborn's Reasons for the Merger............................... 25
Conflicts of Interest................................................... 25
Effective Time and Consequences of the Merger........................... 28
Federal Income Tax Consequences......................................... 29
Dissenter's Rights...................................................... 30
THE MERGER................................................................ 31
Exchange of Certificates Representing the Common Stock.................. 31
Treatment of Outstanding Options........................................ 32
Conditions to Merger.................................................... 32
Amendment of the Merger Agreement; Waiver of Conditions................. 32
Conduct of Business Pending the Merger.................................. 33
No Solicitation......................................................... 33
Termination of Merger Agreement......................................... 34
Fees and Expenses....................................................... 34
Representations and Warranties.......................................... 35
Certain Regulatory Matters.............................................. 36
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Indemnification........................................................ 36
Directors' and Officers' Insurance..................................... 36
Financing.............................................................. 37
Appraisal Rights of Dissenting Stockholders............................ 37
CERTAIN INFORMATION CONCERNING MADISON DEARBORN, MERGER SUBSIDIARY AND
AFFILIATES.............................................................. 40
BENEFICIAL OWNERSHIP OF COMMON STOCK..................................... 42
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING............................ 43
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 43
DOCUMENTS INCORPORATED BY REFERENCE...................................... 43
Appendix A-AGREEMENT AND PLAN OF MERGER.................................. A-1
Appendix B-OPINION OF SBC WARBURG DILLON READ INC........................ B-1
Appendix C-SECTION 262 OF THE DELAWARE GENERAL CORPORATE LAW............. C-1
</TABLE>
2
<PAGE>
SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained elsewhere in this
Proxy Statement. The summary is necessarily incomplete and selective and is
qualified in its entirety by the more detailed information contained in this
Proxy Statement, including the appendices hereto. Stockholders are urged to
read this Proxy Statement and its appendices in their entirety before voting.
PARTIES TO THE MERGER
The Company. The Company operates under the name "Tuesday Morning" a chain of
315 deep discount retail stores in 33 states. As a deep discount retailer, the
Company purchases closeout merchandise at prices generally ranging from 10% to
50% of normal wholesale prices and sells the merchandise at prices that are 50%
to 80% lower than retail prices generally charged by department and specialty
stores. Merchandise offered by Tuesday Morning stores primarily consists of
crystal, dinnerware, silver serving pieces, gourmet housewares, bathroom,
bedroom and kitchen accessories, linens and domestics, Christmas trim, luggage,
toys, stationery and silk plants. The Company's strategy is to target middle
and upper income customers, to offer high quality merchandise and to open its
stores for seven annual "sales events" that last from four to seven weeks,
while closing them for the remaining weeks of the year. Tuesday Morning stores
are not in use when there are no sales events, other than to house inventory
and to restock for the next sales event.
The Company's principal executive offices are located at 14621 Inwood Road,
Dallas, Texas 75244, and its telephone number is (972) 387-3562.
Madison Dearborn. Madison Dearborn is the general partner of Madison Dearborn
Capital Partners II, L.P. (the "Fund"), a $925 million investment fund raised
in 1996. Prior to the consummation of the Merger, Madison Dearborn will assign
its rights under the Merger Agreement to the Fund. The general partner of
Madison Dearborn is Madison Dearborn Partners, Inc. ("Partners"), a private
equity firm based in Chicago which invests primarily in management buyouts and
special equity transactions involving middle-market companies. Partners manages
a portfolio in excess of $2 billion, including the Fund and Madison Dearborn
Capital Partners, L.P., a $550 million investment fund raised in 1993. Through
its investment funds, Partners focuses on investments in several specific
sectors, including consumer, industrial, communications, natural resources and
health care services.
Madison Dearborn's principal executive offices are located at Three First
National Plaza, Suite #3800, Chicago, Illinois 60602, and its telephone number
is (312) 895-1000. See "Certain Information Concerning Madison Dearborn, Merger
Subsidiary and Affiliates."
Merger Subsidiary. The Merger Subsidiary was recently formed by Madison
Dearborn for effecting the Merger and has not conducted any prior business. The
Merger Subsidiary's principal executive offices are located at the offices of
Madison Dearborn. See "Certain Information Concerning Madison Dearborn, Merger
Subsidiary and Affiliates."
SPECIAL MEETING
Place and Purpose. The Special Meeting of the stockholders of the Company
will be held at the Company's corporate offices, 14621 Inwood Road, Dallas,
Texas 75244 on December , 1997 at 10:00 a.m. (local time). At the Special
Meeting, the Company's stockholders will be asked to consider and vote upon the
approval and adoption of the Merger Agreement attached hereto as Appendix A.
Record Date; Quorum. Only stockholders of record of the Company at the close
of business on the Record Date will be entitled to notice of, and to vote at,
the Special Meeting. On the Record Date, there were 12,322,230 shares of the
Company's common stock outstanding and entitled to vote at the Special Meeting.
Each holder of
3
<PAGE>
shares of the Company's common stock is entitled to one vote for each such
share so held, exercisable in person or by properly executed and delivered
proxy, at the Special Meeting. The presence of the holders of at least a
majority of the shares of the Company's common stock outstanding on the Record
Date, whether present in person or by properly executed and delivered proxy,
will constitute a quorum for purposes of the Special Meeting.
Vote Required. The affirmative vote of the holders of record of at least a
majority of the outstanding shares of the Company's common stock entitled to
vote at the Special Meeting is necessary to approve and adopt the Merger
Agreement. Where stockholders have appropriately specified how their proxies
are to be voted, they will be voted accordingly. Abstentions and broker non-
votes will be counted toward determining whether a quorum is present at the
Special Meeting. Votes submitted as abstentions on the Merger will be counted
as votes against the Merger. Broker non-votes will not count for or against the
Merger at the Special Meeting.
As an inducement to Madison Dearborn to offer to acquire the Company, Lloyd
L. Ross, the Company's Chairman of the Board and Chief Executive Officer, and
Jerry M. Smith, the Company's President and Chief Operating Officer, entered
into option agreements (the "Option Agreements") on August 13, 1997 with
Madison Dearborn. Under the terms of the Option Agreements, Messrs. Ross and
Smith granted to Madison Dearborn an option to purchase all of their shares of
the Company's common stock for $25.00 per share in cash and an irrevocable
proxy to vote their shares at the Special Meeting for the approval of the
Merger Agreement. As a result of the Option Agreements, Madison Dearborn has
the power to vote 2,753,157 shares or 23.1% (or, giving effect to the exercise
of stock options, 3,896,757 shares or 29.8%) of the Company's outstanding
shares of common stock for approval of the Merger Agreement.
MERGER
Pursuant to the Merger, the Merger Subsidiary will be merged into the Company
and the Company will become a subsidiary of the Fund. Upon completion of the
Merger, each share of the Company's common stock will be converted into the
right to receive $25.00 in cash (the "Merger Consideration"). Shares of the
Company's common stock held by stockholders who perfect their appraisal rights
under Delaware law and certain shares owned by certain members of the Company's
management (the "Unconverted Shares") will not be converted into the Merger
Consideration upon completion of the Merger.
As a result of the Merger, the entire equity interest in the Company will be
owned by the Fund and certain members of the Company's management. The
stockholders of the Company (other than certain members of the Company's
management) will no longer have any interest in, and will not be stockholders
of, the Company, and therefore will not participate in its future earnings and
growth. Instead, each such holder of the Company's common stock will have the
right to receive $25.00 in cash, without interest, for each share held (other
than the Unconverted Shares). Following the Merger, the Fund, as well as
certain management members, will have the opportunity to benefit from any
earnings and growth of the Company, and will bear the risk of any decrease in
the Company's value. Following the Merger, the Company's common stock will no
longer be traded on the Nasdaq National Market, price quotations will no longer
be available and the registration of the Company's common stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated.
REASONS FOR THE MERGER AND RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
In reaching its determination to recommend the Merger, the Company's Board of
Directors consulted with the Company's management, as well as its legal and
financial advisors, and considered a number of factors. Among the factors that
the Company's Board of Directors considered were (i) the belief that the Merger
provides the best means for the Company's stockholders to maximize the value of
their holdings; (ii) information relating to the financial performance,
prospects and business operations of the Company; (iii) reports from management
4
<PAGE>
and legal advisors on specific terms of the Merger Agreement; (iv) the belief
that the Merger Agreement does not unreasonably preclude a third party from
proposing an alternative transaction; (v) the opinion of SBC Warburg Dillon
Read Inc. ("SBC Warburg Dillon Read"), dated September 12, 1997, that the
consideration to be received by holders of the Company's common stock is fair
to such holders from a financial point of view; (vi) the premium the Merger
Consideration represents over (A) the price per share of the Company's common
stock on the day before the Company announced that Madison Dearborn had
expressed an interest in acquiring the Company and (B) the historical trading
price of the Company's common stock; and (vii) the desire of Messrs. Ross and
Smith to retire and achieve liquidity for their shares of the Company's common
stock. See "Special Factors--Reasons for the Merger and Recommendation of the
Company's Board of Directors."
The Company's Board of Directors has determined that the terms of the Merger
Agreement, which were established through arm's-length bargaining with Madison
Dearborn, and the transactions contemplated thereby, including the Merger, are
fair to, and in the best interests of, the Company and its stockholders.
ACCORDINGLY, THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY STOCKHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
SBC Warburg Dillon Read has delivered its written opinion to the Company's
Board of Directors that, as of September 12, 1997 (the date the Board of
Directors approved the Merger Agreement), the Merger Consideration was fair,
from a financial point of view, to the holders of the Company's common stock.
SBC Warburg Dillon Read will be paid a fee upon consummation of the Merger. See
"Special Factors--Opinion of Financial Advisor."
SBC Warburg Dillon Read is an internationally recognized investment banking
and financial advisory firm. SBC Warburg Dillon Read, as part of its investment
banking and financial advisory business, is continually 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 estate, corporate and other purposes.
A copy of SBC Warburg Dillon Read's opinion, which sets forth the assumptions
made, procedures followed, matters considered, limitations on and scope of the
review by SBC Warburg Dillon Read, is attached as Appendix B to this Proxy
Statement. The Company's stockholders are encouraged to read such opinion in
its entirety. See "Special Factors--Opinion of Financial Advisor."
EFFECTIVE TIME OF THE MERGER
It is currently contemplated that the Merger will be consummated as soon as
practicable after the Special Meeting and satisfaction of all closing
conditions under the Merger Agreement (including receipt of financing). The
Merger will be effective upon the filing of Certificate of Merger with the
Secretary of State of Delaware (the "Effective Time").
CONFLICTS OF INTEREST
In considering the recommendations of the Company's Board of Directors, the
Company stockholders should be aware that certain members of management have
interests in the Merger that are in addition to the interests of the Company
stockholders generally and which may create potential conflicts of interest.
See "Special Factors--Conflicts of Interest."
Consulting and Employment Agreements. A condition to Madison Dearborn's
obligations under the Merger Agreement is that Mr. Ross execute a two-year
consulting agreement and Mr. Smith execute a three-year
5
<PAGE>
employment agreement. Although these agreements will not be executed until the
Effective Time, the parties have agreed to a summary of proposed terms that was
delivered by Madison Dearborn to Messrs. Ross and Smith in connection with the
execution of the Merger Agreement. The proposed terms of Mr. Ross's consulting
agreement generally provide that he will serve as Chairman of the Company's
Board of Directors and will receive annual compensation of $250,000 per year
(along with benefits at his current level) with an expected time commitment for
Mr. Ross of 60 days per year.
The summary terms of Mr. Smith's employment agreement provides that he will
serve as the Company's President and Chief Executive Officer as well as a
director for three years after the Merger. Mr. Smith will receive an annual
base salary of $475,000 per year, subject to possible increases, and a maximum
bonus opportunity of up to 50% of his base salary, and he will continue to
receive his current benefits and perquisites.
Equity Investment. In the Merger, Lloyd L. Ross, Chief Executive Officer and
Chairman of the Board of Directors of the Company, Jerry M. Smith, President
and Chief Operating Officer and a director of the Company, and certain other
members of the Company's management (the "Management Group") will invest
approximately $5.5 million, $1.3 million and $0.7 million, respectively, in
shares of junior preferred stock and common stock of the surviving corporation
of the Merger (the "Surviving Corporation"). As a result of such investments,
following the Merger, such members of the Company's management will own, in the
aggregate, approximately $7.1 million liquidation value of the junior preferred
stock of the Surviving Corporation and approximately 7.8% of the Surviving
Corporation's common stock outstanding immediately after the Merger. The
opportunity to obtain such an equity interest in the Surviving Corporation may
have presented the members of the Management Group with actual or potential
conflicts of interest in connection with the Merger.
The Fund will acquire a number of shares representing approximately 88.8% of
the Surviving Corporation's common stock outstanding immediately after the
Merger and approximately $80.8 million liquidation value of the junior
preferred stock of the Surviving Corporation for an aggregate purchase price of
$85.4 million. See "Special Factors--Conflicts of Interest--Equity Investment."
Treatment of Stock Options. Under the terms of the Merger Agreement, all
outstanding options granted under the Company's Restated Incentive Stock Option
Plan and Non-Qualified Stock Option Plan (the "Option Plans"), whether or not
exercisable, will be cancelled. The holders of the options will be entitled to
receive (subject to applicable withholding taxes) an amount in cash equal to
the product of (i) the difference between $25.00 and exercise price of such
option and (ii) the number of shares of the Company's common stock subject to
such options. Members of the Company's management who own options will receive
this option consideration as a result of the Merger.
Indemnification. The Merger Agreement also provides for certain
indemnification and insurance arrangements for the officers and directors of
the Company. See "The Merger--Indemnification."
RIGHTS OF DISSENTING STOCKHOLDERS
Subject to certain other conditions, a stockholder of record of the Company
who does not vote his or her shares of the Company's common stock in person or
by proxy in favor of the Merger and who files with the Company a written
objection to the Merger before the vote at the Special Meeting of stockholders
of the Company, stating that his or her right to dissent will be exercised if
the Merger is effective and giving his or her name and address, will be
eligible to make a written demand on the Company for appraisal rights following
the consummation of the Merger. Neither a proxy nor a vote opposing or
abstaining from the Merger will constitute a written objection to the Merger. A
stockholder who files a written objection will not be entitled to appraisal
rights unless such stockholder also makes a written demand following the
consummation of the Merger and takes certain other steps in the manner required
by Delaware law. A vote in favor of the Merger, in person or by proxy, will
constitute a waiver of appraisal rights. See "The Merger--Appraisal Rights of
Dissenting Stockholders."
6
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The receipt of cash by a stockholder in exchange for his or her shares of the
Company's common stock pursuant to the Merger or the exercise of dissenters'
rights will, in each case, constitute a taxable transaction to such stockholder
for federal income tax purposes and may also be a taxable transaction under
applicable state, local and foreign tax laws. In general, a stockholder will
recognize gain or loss equal to the difference between $25.00 per share and
such stockholder's adjusted tax basis in the shares exchanged.
All stockholders should read carefully the discussion in "Special Factors--
Certain Federal Income Tax Consequences" and other sections of this Proxy
Statement. They are urged to consult their own tax advisors as to the specific
consequences to them of the Merger under federal, state, local and any other
applicable tax laws.
ACCOUNTING TREATMENT
The Merger will be accounted for as a recapitalization for accounting
purposes.
FINANCING OF THE MERGER
It is estimated that approximately $415 million (less cash and cash
equivalents of the Company) will be required to consummate the Merger and
provide current and future working capital for the Company. The principal
sources for financing the Merger will be provided by (i) an equity investment
of $117.9 million consisting of (A) an $85.4 million investment by the Fund
(comprised of $4.6 million of common stock and $80.8 million of junior
preferred stock), (B) a $7.5 million investment by certain members of
management of the Company (comprised of $0.4 million in common stock and $7.1
million in junior preferred stock) and (C) a $25.0 million investment by
certain unaffiliated investors in units consisting of senior exchangeable
redeemable preferred stock and common stock, (ii) the sale of senior
subordinated notes ($100 million) and (iii) a credit facility with senior
lenders including a $90.0 million revolving credit facility (which, subject to
certain conditions, can be increased up to $115 million) and term loans ($110
million). Madison Dearborn has received financing letters from various sources
to provide this financing, but these letters are subject to numerous
conditions. See "The Merger--Financing."
CONDITIONS OF THE MERGER
Each party's obligation to effect the Merger is subject to the satisfaction
of a number of conditions, most of which may be waived by a specified party or
parties. The most significant conditions to consummating the Merger include (i)
obtaining the vote of holders of a majority of the outstanding shares of the
Company's common stock, (ii) obtaining all consents and approvals, (iii)
Madison Dearborn receiving the debt financing contemplated by the financing
letters provided to Madison Dearborn, copies of which have been delivered to
the Company's Board of Directors, (iv) the representations and warranties of
the parties being true and correct in all material respects as of the Effective
Time of the Merger except for certain changes that are specifically permitted,
and (v) holders of no more than 5% of the Company's common stock having
perfected their dissenters' rights. See "The Merger--Conditions." Even if the
stockholders approve the Merger, there can be no assurance that the Merger will
be consummated.
NO SOLICITATION
The Merger Agreement provides that neither the Company nor any of its
representatives will directly or indirectly (i) initiate, solicit, or encourage
or take any other action to facilitate any proposal that constitutes, or could
reasonably be expected to lead to, any Acquisition Proposal (as defined below);
(ii) provide any information to any person or entity concerning the Company
(other than information generally provided in the ordinary course of its
business); or (iii) enter into or negotiate with any person to obtain an
Acquisition Proposal or agree to or endorse any Acquisition Proposal. The
Company has agreed to notify Madison Dearborn of the
7
<PAGE>
relevant details relating to inquiries and proposals which it may receive and
to provide Madison Dearborn with a copy of any inquiry or proposal. The Board
of Directors of the Company, however, is not prohibited from responding to any
unsolicited written, bona fide Acquisition Proposal if (A) the Board of
Directors, after consultation with SBC Warburg Dillon Read, determines in good
faith that such Acquisition Proposal is reasonably capable of being completed
on the terms proposed and would, if consummated, result in a transaction more
favorable to the Company's stockholders than the Merger; (B) the Board of
Directors, after consultation with its independent legal counsel, determines in
good faith that such action is necessary for the Board of Directors to comply
with its fiduciary duties to stockholders under applicable law; (C) prior to
taking such action, the Company (x) provides reasonable prior notice to Madison
Dearborn to the effect that it is taking such action and (y) receives from such
person or entity an executed confidentiality agreement in reasonably customary
form; and (D) the Company advises Madison Dearborn as to all of the relevant
details relating to any such discussions or negotiations. The Merger Agreement
defines the term "Acquisition Proposal" as any of the following transactions
(other than the Merger) involving the Company or any of its subsidiaries: (i)
any merger, consolidation, share exchange, recapitalization, business
combination or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of all or substantially all of
the assets of the Company and its subsidiaries, taken as a whole, in a single
transaction or series of transactions; (iii) any tender offer or exchange offer
for all or substantially all of the outstanding shares of capital stock of the
Company or the filing of a registration statement under the Securities Act in
connection with such offer; or (iv) any public announcement of a proposal, plan
or intention to do any of the foregoing or any agreement to engage in any of
the foregoing. See "The Merger--No Solicitation."
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned, at any time
prior to the Effective Time, whether before or after the approval by the
Company's stockholders, (i) by the mutual consent of Madison Dearborn and the
Company; (ii) by either the Company or Madison Dearborn, so long as such party
is not in material breach of its obligations under the Merger Agreement, if
there has been a breach of any representations, warranties, covenants or
agreements of the other party made in the Merger Agreement which breach is not
cured within five business days of notice of such breach; (iii) by either
Madison Dearborn or the Company if all conditions to that party's obligation to
consummate the Merger have not been satisfied or waived by March 11, 1998,
unless such failure of consummation is due to the failure of the terminating
party; (iv) by either Madison Dearborn or the Company if the consummation of
the Merger would violate any nonappealable final order of court or other
competent authority; or (v) by Madison Dearborn if a "triggering event" occurs.
A "Triggering Event" is defined under the Merger Agreement as an event where
(i) (1) the Company's Board of Directors (A) withdraws or modifies, in a manner
adverse to Madison Dearborn or the Merger Subsidiary, its recommendation of the
Merger Agreement or the Merger or (B) fails to confirm its recommendation of
the Merger Agreement or the Merger within two business days after a written
request by Madison Dearborn to do so after the occurrence of an Acquisition
Proposal; (2) the Board approves, endorses or recommends to the stockholders of
the Company an Acquisition Proposal; (3) the Company enters into an agreement
(other than a confidentiality agreement as contemplated by the Merger
Agreement) with respect to an Acquisition Proposal; (4) any person or group
(other than Madison Dearborn, the Merger Subsidiary or any of their affiliates)
acquires shares of the Company's common stock after the date of the Merger
Agreement which, when added to shares already owned by such person or group,
constitutes a majority of the outstanding shares of the Company's common stock
or a tender or exchange offer for shares commences and such offer ultimately
results in a person or group owning a majority of the outstanding shares; or
(5) (A) an Acquisition Proposal is made and (B) the Company fails to call and
hold a stockholders meeting to approve the Merger Agreement and the Merger as
promptly as is reasonably practicable having regard to the expected timing of
the financing of the Merger and, in any event, on or prior to March 6, 1998
(such time period shall be extended by an amount of time equal, in the
reasonable judgment of the Company, to any delays beyond the reasonable control
of the
8
<PAGE>
Company in obtaining any required regulatory approvals in connection with the
transactions contemplated by the Merger Agreement); or (ii) the termination of
the Merger Agreement in accordance with the terms thereof following a material
and willful breach by the Company of any covenant or agreement set forth in the
Merger Agreement, which breach could reasonably be expected to aid or encourage
an Acquisition Proposal and is not cured within ten business days following
receipt by the Company of notice of such breach. See "The Merger--Termination
of Merger Agreement."
TERMINATION FEE
If a Triggering Event has not occurred and the Merger Agreement is terminated
(other than a termination by the Company arising from a breach by Madison
Dearborn of its obligations), then the Company will reimburse Madison Dearborn
for its out-of-pocket expenses up to $1 million. If the Merger Agreement is
terminated and a Triggering Event occurs, then the Company will pay to Madison
Dearborn the sum of $9.75 million, up to $1 million of documented expenses
(other than expenses related to Madison Dearborn's financing letters) and an
additional $1 million for expenses incurred in connection with obtaining
Madison Dearborn's financing letters and commitments. These amounts will be
payable upon termination of the Merger Agreement. See "The Merger--Fees and
Expenses."
EXCHANGE OF THE COMPANY STOCK CERTIFICATES
As soon as practicable after the Effective Time, instructions and a letter of
transmittal will be furnished to all the Company's stockholders for use in
exchanging their stock certificates for the Merger Consideration. STOCKHOLDERS
OF THE COMPANY SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL
SUCH INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED. See "The Merger--
Exchange of Certificates Representing the Common Stock."
MARKET PRICES FOR COMMON STOCK AND DIVIDENDS
The Company's common stock is traded on the Nasdaq National Market (symbol:
TUES). The following table sets forth the high and low sales prices for the
periods indicated. The stock prices have been adjusted to give effect to a
three-for-two stock dividend effective June 17, 1997.
<TABLE>
<CAPTION>
CALENDAR YEAR HIGH LOW
------------- ------ ------
<S> <C> <C>
1995
First Quarter............................................... $ 4.50 $ 3.59
Second Quarter.............................................. 4.59 3.67
Third Quarter............................................... 4.33 3.67
Fourth Quarter.............................................. 4.25 3.42
1996
First Quarter............................................... $ 5.75 $ 3.67
Second Quarter.............................................. 9.42 5.67
Third Quarter............................................... 9.83 7.33
Fourth Quarter.............................................. 16.09 11.25
1997
First Quarter............................................... $22.00 $12.50
Second Quarter.............................................. 24.00 17.17
Third Quarter............................................... 24.25 19.00
Fourth Quarter (through November , 1997....................
</TABLE>
9
<PAGE>
On August 13, 1997, the last trading day prior to the issuance of a press
release by the Company stating that it had received a proposal from Madison
Dearborn for the purchase of the Company, the closing price per share of the
Company's common stock as reported by Nasdaq was $20.38. On September 12, 1997,
the last trading day prior to the announcement of the execution of the Merger
Agreement, the closing price per share of the Company's common stock as
reported by Nasdaq was $22.63. On November , 1997, the last trading day prior
to printing of this Proxy Statement, the closing price per share of the
Company's common stock as reported by Nasdaq was $ .
The Company's credit agreement with its senior lender prohibits the payment
of cash dividends on the Company's common stock.
At the Record Date, there were approximately 4,200 beneficial holders of the
Company's common stock of which 419 were holders of record.
SUMMARY FINANCIAL INFORMATION
The following tables set forth selected financial information for the Company
for each of the five fiscal years in the period ended December 31, 1996 and for
the nine months ended September 30, 1996 and 1997. Such information should be
read in conjunction with the historical financial statements of the Company and
the notes thereto which are incorporated herein by reference. Selected
financial information for the Company as of and for the six months ended
September 30, 1996 and 1997 has been derived from the unaudited historical
financial statements and, in the opinion of the Company's management, includes
all adjustments (consisting only of normal recurring adjustments) that are
considered necessary for a fair presentation of the operating results for such
interim periods. Results for the interim periods are not necessarily indicative
of results for the full year.
10
<PAGE>
TUESDAY MORNING CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $160,075 $175,790 $190,081 $210,265 $256,756 $133,563 $179,058
Cost of sales........... 104,581 123,148 126,931 137,427 165,189 88,199 112,620
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 55,494 52,642 63,150 72,838 91,567 50,364 66,438
Selling, general and
administrative
expenses............... 45,315 54,895 57,523 63,040 71,167 48,134 56,193
Net interest income
(expense) and other
income................. 36 (319) (1,611) (2,534) (1,892) (1,518) (1,660)
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
income taxes and
cumulative effect of
changes in accounting
principles............. 10,215 (2,572) 4,016 7,264 18,508 712 8,585
Income tax expense
(benefit) (note 8)..... 3,643 (956) 1,365 2,491 6,992 256 3,219
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
cumulative effect of
changes in accounting
principles............. $ 6,572 $ (1,616) $ 2,651 $ 4,773 $ 11,516 $ 456 5,366
Cumulative effect to
December 31, 1992 of
change in accounting
for income taxes....... -- 564 -- -- -- -- --
Cumulative effect to
December 31, 1991 of
change in accounting
for inventories (net of
tax)................... 1,599 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)..... $ 8,171 $ (1,052) $ 2,651 $ 4,773 $ 11,516 $ 456 $ 5,366
======== ======== ======== ======== ======== ======== ========
NET EARNINGS (LOSS) PER
COMMON SHARE AND SHARE
EQUIVALENTS:
Earnings (loss) before
cumulative effect of
changes in accounting
principles............. $ 0.48 $ (0.13) $ 0.23 $ 0.40 $ 0.93 $ 0.04 $ 0.43
Cumulative effect of
change in accounting
for income tax......... -- 0.05 -- -- -- -- --
Cumulative effect of
change in accounting
for inventories........ 0.11 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings per share
and share equivalents.. $ 0.59 $ (0.08) $ 0.23 $ 0.40 $ 0.93 $ 0.04 $ 0.43
======== ======== ======== ======== ======== ======== ========
SELECTED BALANCE SHEET
DATA (AT PERIOD END):
Working capital......... 48,053 36,765 32,593 39,115 49,568 80,367 109,205
Current ratio........... 3.22 2.61 2.55 2.86 2.29 3.14 2.98
Ratio of earnings to
fixed charges.......... 1.68 0.21 1.05 1.93 2.95 0.98 1.71
Cash and cash
equivalents............ 1,527 1,728 4,535 6,276 10,754 599 3,029
Inventories............. 64,498 53,551 46,815 52,367 75,493 114,347 159,687
Total assets............ 97,175 88,967 89,403 94,243 121,757 151,668 199,215
Mortgage debt and
capital lease,
excluding current
installments........... 8,893 7,595 6,773 6,622 4,976 5,282 4,048
Shareholders' equity.... 64,564 55,724 58,630 63,648 75,528 64,103 81,213
OTHER DATA:
Number of stores at
period end............. 190 235 246 260 286 276 304
Comparable store sales
increases.............. 8.2% (3.0)% 4.2% 6.4% 14.0% 12.0% 19.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
SELECTED PER SHARE DATE (AT PERIOD END):
Book value............................... $ 6.13 $ 6.47
Cash dividends........................... -0- -0-
Weighted average common shares and share
equivalents outstanding................. 12,322 12,556
</TABLE>
11
<PAGE>
In connection with Madison Dearborn's review of the Company and in the course
of the negotiations between the Company and Madison Dearborn described in
"Special Factors--Background to Merger," the Company provided Madison Dearborn
with certain non-public business and financial information. The non-public
information provided by the Company included certain projections of the
Company's future operating performance. The Company's projections (the "Company
Projections") do not give effect to the Merger or the financing thereof.
The Company does not as a matter of course publicly disclose projections as
to future revenues or earnings. The Company Projections were not prepared with
a view to public disclosure and are included in the Proxy Statement only
because such information was made available to Madison Dearborn in connection
with its due diligence investigation of the Company. Accordingly, it is
expected that there will be differences between actual and projected results,
and actual results may be materially different than those set forth below. The
Company Projections were not prepared with a view to compliance with the
published guidelines of the Commission regarding projections, nor were they
prepared in accordance with the guidelines established by the American
Institute of Certified Public Accountants for preparation and presentation of
financial projections. The material assumptions underlying the Company
Projections are as follows: (i) an increase of 10% in the number of stores
operated by the Company in each of fiscal 1997 and 1998; (ii) an increase in
comparable store sales growth of 14% and 4% in fiscal 1997 and 1998,
respectively; (iii) a decrease in operating expenses of .2% as a percentage of
sales due to achieving greater operating efficiencies in fiscal 1997 and 1998;
(iv) a constant level of interest expense as a percentage of sales; and (v)
share and share equivalents of 13 million for fiscal 1997 and 13.5 million in
fiscal 1998. These forward-looking statements reflect numerous assumptions made
by the Company's management. In addition, factors such as industry performance,
general business, economic, regulatory and market and financial conditions, all
of which are difficult to predict, may cause the Company Projections or the
underlying assumptions to be inaccurate. Accordingly, there can be no assurance
that the Company Projections will be realized, and actual results may be
materially greater or less than those contained in the Company Projections.
The inclusion of the Company Projections herein should not be regarded as an
indication that Madison Dearborn or the Company or their respective financial
advisors considered or consider the Company Projections to be a reliable
prediction of future events, and the Company Projections should not be relied
upon as such. None of the Company, Madison Dearborn or any of their financial
advisors intends to update or otherwise revise the Company Projections to
reflect circumstances existing after the date when made or to reflect the
occurrence of future events even in the event that any or all of the
assumptions underlying the Company Projections are shown to be in error.
The Company has provided to Madison Dearborn the following Company
Projections: net sales of $321 million and $359 million, net earnings of $21.5
million and $24.2 million and net earnings per share of $1.65 and $1.79 for
fiscal 1997 and 1998, respectively.
Madison Dearborn took this information, together with its own analysis, into
account in determining to enter into the Merger Agreement.
12
<PAGE>
THE SPECIAL MEETING
GENERAL
The Special Meeting of the Stockholders of the Company will be held at the
Company's corporate offices, 14621 Inwood Road, Dallas, Texas, on December ,
1997 at 10:00 a.m. (local time) to (i) consider and vote upon the approval and
adoption of the Merger Agreement and (ii) transact such other business as may
properly come before the Special Meeting or any adjournment thereof.
The Company's Board of Directors has unanimously approved the Merger
Agreement and the transactions contemplated thereby and has determined that
such transactions are in the best interests of the Company and its
stockholders. The Company's Board of Directors unanimously recommends that the
Company's stockholders vote for approval and adoption of the Merger Agreement.
RECORD DATE; QUORUM
Only stockholders of record of the Company at the close of business on the
Record Date will be entitled to notice of, and to vote at, the Special
Meeting. On the Record Date, there were 12,322,230 shares of the Company's
common stock outstanding and entitled to vote at the Special Meeting. Each
holder of shares of the Company's common stock outstanding on the Record Date
is entitled to one vote for each such share so held, exercisable in person or
by properly executed and delivered proxy, at the Special Meeting. The presence
of the holders of at least a majority of the shares of the Company's common
stock outstanding on the Record Date, whether present in person or by properly
executed and delivered proxy, will constitute a quorum for purposes of the
Special Meeting.
VOTE REQUIRED
The affirmative vote of the holders of record of at least a majority of the
outstanding shares of the Company's common stock entitled to vote at the
Special Meeting is necessary to approve and adopt the Merger Agreement.
Messrs. Ross and Smith who collectively held, as of the Record Date, 2,753,157
shares of the Company's common stock or approximately 23.1% (or, giving effect
to the exercise of stock options, 3,896,757 shares or 29.8%) of the
outstanding shares of the Company's common stock have granted to Madison
Dearborn a proxy to vote such shares in favor of approving and adopting the
Merger Agreement. Where stockholders have appropriately specified how their
proxies are to be voted, they will be voted accordingly. Abstentions and
broker non-votes will be counted toward determining whether a quorum is
present at the Special Meeting. Votes submitted as abstention on the Merger
Agreement will be counted as votes against the Merger Agreement. Broker non-
votes will not count for or against the Merger Agreement at the Special
Meeting.
PROXIES
Stockholders are requested to complete, date and sign the accompanying form
of proxy and return it promptly to the Company in the enclosed postage-paid
envelope.
Any stockholder giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted at the Special Meeting. A later
dated proxy or written notice of revocation given prior to the vote at the
Special Meeting to the Secretary of the Company will serve to revoke such
proxy. Also, a stockholder who attends the Special Meeting in person may, if
he or she wishes, vote by ballot at the Special Meeting, thereby cancelling
any proxy previously given. Mere presence at the Special Meeting will not
serve to revoke any proxy previously given.
OTHER MATTERS TO BE CONSIDERED
The Company's Board of Directors is not aware of any other matter which will
be brought before the Special Meeting. If, however, other matters are
presented, proxies will be voted in accordance with the discretion of the
holders of such proxies.
13
<PAGE>
SOLICITATION OF PROXIES
In addition to the use of mails, proxies may be solicited by persons
regularly employed by the Company, by personal interview, telephone and
telegraph. Such persons will receive no additional compensation for such
services, but will be reimbursed for any out-of-pocket expenses incurred by
them in connection with such services. Arrangements may also be made with
brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of shares of the
Company's common stock held of record by such persons, and the Company may
reimburse such persons for reasonable out-of-pocket expenses incurred by them
in connection therewith.
14
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
In November 1996, the Company first met with SBC Warburg Dillon Read and
Hatchett Capital Group, Inc. ("Hatchett") to discuss their financial advisory
services. This meeting and the subsequent engagement of SBC Warburg Dillon
Read and Hatchett on January 28, 1997 was motivated by the desire of Mr. Ross,
the Company's Chairman and Chief Executive Officer, and Mr. Smith, the
Company's President and Chief Operating Officer, to lessen their active
involvement in the Company in order to eventually retire and to ultimately
achieve liquidity for their shares of the Company's common stock. Among the
strategic alternatives discussed among the Company, SBC Warburg Dillon Read
and Hatchett was the merger or sale of the Company, a public offering of the
shares of the Company's common stock owned by Messrs. Ross and Smith and
periodic sales of the common stock owned by Messrs. Ross and Smith. Because of
the prominent role of Messrs. Ross and Smith in the Company, the Company
believed that a public offering of the shares owned by Messrs. Ross and Smith
or periodic sales of their shares might ultimately depress the trading price
of the Company's common stock. Of these alternatives, the Company decided that
a merger or sale of the Company would be preferable because only this type of
a transaction would benefit all of the Company's stockholders. Because the
Company's common stock was trading at historically high prices, the Company
further believed that a merger or sale at or above market prices would offer
the Company's stockholders a means of achieving liquidity at a fair price.
Beginning in March 1997, SBC Warburg Dillon Read contacted a total of 26
potential partners and acquirors, including 19 industry buyers and seven
financial buyers, to determine their interest in purchasing the Company.
Although certain potential partners and acquirors contacted by SBC Warburg
Dillon Read indicated an interest in pursuing a transaction at less than
market prices, Madison Dearborn demonstrated the only firm interest in
acquiring the Company at or above market prices.
Following initial discussions with representatives from SBC Warburg Dillon
Read, in May 1997, Madison Dearborn expressed an interest in obtaining
additional financial information to complete a financial analysis of the
Company in order to determine whether it would be interested in acquiring the
Company. The Company and Madison Dearborn entered into a confidentiality
agreement, and the Company provided Madison Dearborn additional financial
information. During July and August 1997, representatives of Madison Dearborn
met in Dallas with management of the Company and toured the Company's
facilities. In addition, the parties and their legal and financial advisors
had numerous discussions to discuss the structure and the timing of a
potential transaction.
In July 1997, Madison Dearborn told the Company and SBC Warburg Dillon Read
that it was considering making a cash offer to purchase the Company that
placed a value of $23.00 per share on the Company's common stock. During the
period between July 18, 1997 and early August, the Company and its financial
advisors and Madison Dearborn continued to discuss the terms of a proposed
transaction, principally the purchase price, and Madison Dearborn eventually
increased the purchase price for the proposed transaction to $25.00 per share.
During the week of August 3, 1997, management of the Company contacted the
Company's Board of Directors and informed them that Madison Dearborn was
considering making a preliminary proposal to purchase the Company for $25.00
per share in cash, subject to a number of conditions, including completion of
a due diligence review by Madison Dearborn of the Company's operations and
financial condition. At the end of the week of August 3rd, Madison Dearborn
sent to the Company proposed drafts of a preliminary offer letter to be
executed by the Company and Option Agreements to be executed by each of
Messrs. Ross and Smith.
After reaching a preliminary agreement on price, Messrs. Ross and Smith and
the Company's legal and financial advisors negotiated with Madison Dearborn
and its legal advisors various other aspects of the proposed transaction. A
significant issue was Madison Dearborn's requirement that Messrs. Ross and
Smith enter into the Option Agreements. Messrs. Ross and Smith discussed these
agreements with the Company's legal and financial advisors who then in turn
negotiated the agreements with Madison Dearborn and its legal advisors.
Another material issue was Madison Dearborn's requirement that the Company pay
a portion of Madison Dearborn's expenses in order to proceed with an
evaluation of a definitive offer. The parties agreed to structure this
provision so that the Company's expense sharing commitment would be in two
stages, with a lower amount to be paid if Madison Dearborn did not make a
definitive offer and a greater amount if Madison Dearborn made a definitive
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offer. Because of the Company's larger expense reimbursement commitment upon a
definitive offer, the Company and its advisors negotiated with Madison
Dearborn the general terms of a definitive offer, including that the offer
must be made to all of the Company's stockholders and that a definitive offer
had to be made by September 30, 1997. Another material issue was Madison
Dearborn's condition that its obligation to consummate a transaction would be
subject to a obtaining the requisite financing. Because of this condition, the
Company required Madison Dearborn to obtain letters from its proposed
financing sources at the time the preliminary offer letter was presented to
the Company. Madison Dearborn also required Mr. Smith to contribute $1 million
of equity in the Company after the Merger. Mr. Smith and the Company's legal
advisors required that Mr. Smith's equity would be contributed on a tax free
basis.
The preliminary offer letter generally provided that Madison Dearborn must
determine whether to make a definitive proposal to purchase the Company by
September 30, 1997. The preliminary offer letter further provided that any
definitive proposal must include the following terms, among others: (i) all
holders of the Company's common stock and options (whether or not the options
were vested) would receive $25.00 per share in cash; (ii) Madison Dearborn and
its affiliates must invest at least $115 million in equity in the proposed
transaction; (iii) the Company's representations and warranties contained in
any definitive agreement would not survive the closing; (iv) the Company's
directors and officers insurance would continue for six years after the
closing, subject to a limit on the amount of the premium paid; (v) Mr. Ross
would continue with the Company as Chairman of the Board and would be engaged
as a consultant for two years; (vi) Mr. Smith would serve as the Company's
Chief Executive Officer for three years; (vii) the definitive acquisition
agreement would provide for a break-up fee equal to the 3% of the
consideration to be paid to the Company's shareholders and optionees along
with provisions for reimbursing Madison Dearborn's expenses; and (viii) the
Company would be provided with financing letters for the remainder of the
financing for the proposed acquisition although the definitive agreement would
be subject to financing. In addition, the preliminary offer letter also
required that the Company reimburse Madison Dearborn for expenses incurred
after the date of the preliminary offer letter in the amount of $250,000 if
Madison Dearborn did not make a definitive proposal by September 30, 1997. The
amount of the Company's expense reimbursement provision would be increased to
$1,000,000 if Madison Dearborn made a definitive proposal.
In addition to the preliminary offer letter, Madison Dearborn also required
that Messrs. Ross and Smith enter into the Option Agreements with respect to
the 3,896,757 shares of the Company's common stock beneficially owned by them
(including 1,143,600 shares issuable to Messrs. Ross and Smith upon the
exercise of outstanding options granted to them). The Option Agreements
granted Madison Dearborn an option to purchase all (but not less than all) of
the shares owned by Messrs. Ross and Smith for $25.00 per share in cash. In
connection with the Option Agreements, Messrs. Ross and Smith granted Madison
Dearborn an irrevocable proxy to vote their shares at any meeting for the
purpose of approving the proposed acquisition of the Company by Madison
Dearborn, or considering any issue or matter relating to such acquisition or
any matter which would adversely effect the proposed acquisition. The option
and related proxy granted to Madison Dearborn in the Option Agreements
terminates on March 11, 1998 or, if an Acquisition Proposal is made or
announced, on September 7, 1998, or upon the termination of the Merger
Agreement arising from a breach of the Merger Agreement by Madison Dearborn or
the entry of a final non-appealable order enjoining the acquisition of the
Company by Madison Dearborn.
The Company's Board of Directors met on August 13, 1997 to consider the
preliminary offer letter from Madison Dearborn. The Company's Board of
Directors engaged in a lengthy discussion of the terms of the proposed
transaction and its benefits, costs and risks to the Company's stockholders.
Although the Board of Directors believed that $25 in cash was a fair purchase
price particularly due to the expressed intent of Messr. Ross and Smith to
eventually retire, the Board was concerned that the Company's financial
performance would be materially and adversely impacted if the Company had to
bear a portion of Madison Dearborn's costs and expenses and the Merger did not
occur. The Company discussed with its financial advisors the likelihood of
Madison Dearborn making a definitive proposal and consummating the acquisition
of the Company. After listening to oral presentations from the Company's
management and legal and financial advisors, the Company's Board of Directors
voted to approve the preliminary proposal offer letter, and the preliminary
offer letter and the Option Agreements were executed.
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Between August 14th and September 11, representatives of Madison Dearborn
and its legal and accounting advisors, along with representatives of potential
lenders, met with management of the Company and completed a due diligence
review of the Company's business and operations. In early September, Madison
Dearborn informed the Company that it had decided to make a definitive
proposal to acquire the Company.
During the week of September 7th, representatives of Madison Dearborn and
the Company negotiated the terms of the Merger Agreement, subject to the
approval of the Board of Directors of the Company. At a meeting on September
12th, the Board of Directors of the Company met to discuss the Merger
Agreement. After discussing the terms of the Merger Agreement with the
Company's management and legal advisors and reviewing, analyzing and
discussing the fairness opinion of SBC Warburg Dillon Read, the Company's
Board of Directors voted unanimously to approve the Merger Agreement. On
September 12th, executive officers of the Company and Madison Dearborn
executed the Merger Agreement.
During the August 13th and September 12th Board of Directors meetings,
members of the Company's Board of Directors were aware of Madison Dearborn's
condition to the consummation of the proposed transaction that Mr. Smith
contribute $1.0 million of equity to the Surviving Corporation. The Board of
Directors was also aware of the terms of the Option Agreements which granted
to Madison Dearborn the option to purchase all of the shares of the Company's
common stock owned by Messrs. Ross and Smith for $25.00 per share. At the time
of the Board meetings, Mr. Ross did not intend to contribute any of his shares
to the Surviving Corporation. The Board of Directors knew that the financial
terms of the proposed Merger were determined prior to the time that Messrs.
Ross and Smith decided to contribute a relatively small portion of their total
share holdings (6.9% and 7.5%, respectively) to the Surviving Corporation, and
the Board had received the opinion of SBC Warburg Dillon Read that the Merger
Consideration to be received by the Company's shareholders was fair from a
financial point of view. At the September 12th Board meeting, the Board of
Directors, including the three uninterested directors, unanimously approved
the Merger. Because of these reasons, the Board of Directors of the Company
believes that the approval of the Merger was procedurally fair to shareholders
of the Company.
In October 1997, Mr. Ross decided to contribute approximately 220,000 shares
of the Company's common stock to the Merger Subsidiary. These shares will be
converted into approximately 5.7% of the Surviving Corporation's common stock
after the Effective Time and approximately $5.2 million liquidation value of
junior preferred stock.
REASONS FOR THE MERGER AND RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Company's Board of Directors has determined that the terms of the Merger
Agreement, which were established through arm's-length bargaining with Madison
Dearborn, and the transactions contemplated thereby, are fair to, and in the
best interests of, the Company and its stockholders. Accordingly, the
Company's Board of Directors has unanimously approved the Merger Agreement and
unanimously recommends that the stockholders vote for approval and adoption of
the Merger Agreement and the approval of the terms of the Merger. In reaching
its determination, the Company's Board of Directors consulted with the
Company's management, as well as its legal and financial advisors, and
considered and weighed the following material matters:
(i) An assessment of the Company's strategic alternatives, which include
remaining a publicly owned independent company. In this regard, the Board
of Directors concluded, following extensive analysis and discussion with
its legal and financial advisors and among the directors, that the terms of
the Merger Agreement provide the best means for holders of the Company's
common stock to maximize the value of their holdings;
(ii) Information relating to the financial performance, prospects and
business operations of the Company;
(iii) The terms and conditions of the Merger Agreement, including the
right of the Company to negotiate and provide information to third parties
under certain circumstances. If the Merger Agreement is terminated after an
Acquisition Proposal, the Company would be obligated to pay Madison
Dearborn $9.75 million and up to $2 million of documented expenses and
fees. The Company's Board of Directors did not view these obligations as
unreasonably precluding any third party from proposing an alternative
transaction
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and concluded that entering into the Merger Agreement given the available
strategic alternatives was in the best interests of the Company;
(iv) The presentation of the Company's financial advisor, SBC Warburg
Dillon Read, and its opinion to the effect that, as of September 12, 1997,
and based upon the assumptions made, matters considered and limits of
review as set forth in such opinion, the consideration to be received by
the holders of shares of the Company's common stock pursuant to the Merger
Agreement was fair to such holders from a financial point of view; for a
summary of SBC Warburg Dillon Read's opinion, including the assumptions
made, matters considered and limits of review, see "--Opinion of Financial
Advisors";
(v) The recent trading price of the Company's common stock and that the
Merger Consideration represents a premium of approximately 22.7% over the
closing sales price of $20.38 for the Company's common stock on Nasdaq on
August 14, 1997, the day before the Company announced the Madison Dearborn
proposal, a premium of 20.2% and 25.6%, respectively, over the 30 and 90
trading average from such date, and a price higher than the highest
historical trading price for the Company's common stock;
(vi) The prices paid in other recent comparable acquisition transactions;
and
(vii) The risk that the expressed desires of Messrs. Smith and Ross to
ultimately retire and to eventually achieve liquidity could create
uncertainty regarding the future performance of the Company and put
pressure on the price of the Company's common stock in the absence of a
similar transaction.
In connection with its deliberations at its August 13 and September 12, 1997
meetings, the Company's Board of Directors was aware of the potential benefits
to be received in the Merger by Mr. Smith and other members of the Company's
senior management, as described under "--Conflicts of Interest."
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the Company's Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination, each
of which was viewed as supportive of its conclusion that the terms of the
Merger Agreement are fair to, and in the best interests of, the Company and
its stockholders.
THE COMPANY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AND RELATED MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
POSITION OF MESSRS. ROSS AND SMITH AS TO FAIRNESS OF THE MERGER
During the negotiations between the Company and Madison Dearborn in July and
August, the parties reached a preliminary agreement that the proposed
transaction would be a cash offer by Madison Dearborn to acquire all of the
Company's shares for $25.00 per share. After the basic financial terms of the
proposed transaction were agreed to by the Company and Madison Dearborn, the
parties negotiated the other terms of the proposed transaction. After several
of the other issues were determined, Madison Dearborn required Mr. Smith to
contribute at least 40,000 shares or $1.0 million of equity to the Surviving
Corporation. Although Mr. Smith desired to retire and achieve liquidity for
his shares, Mr. Smith agreed to continue to have an equity investment in the
Surviving Corporation at the insistence of Madison Dearborn in order to
facilitate the proposed transaction.
Mr. Ross, at the time of the meetings of the Board of Directors on August
13th and September 12th, did not intend to contribute any of his shares of the
Company's common stock to the Surviving Corporation and instead desired to
receive the $25.00 per share Merger Consideration for all of his equity
holdings in the Company. Madison Dearborn approached Mr. Ross after the
September 12th meeting and asked Mr. Ross to contribute a portion of his
shares to the Surviving Corporation. Mr. Ross initially rejected Madison
Dearborn's proposal. Because Mr. Ross desired to retire and to achieve
liquidity for his shares, Mr. Ross did not want to be an equity holder in the
Surviving Corporation, which will be a private corporation with substantially
more indebtedness than the Company currently maintains. In October, Madison
Dearborn improved the terms of Mr. Ross's
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continuing interest in the Surviving Corporation by proposing to restructure
Mr. Ross's note payable to the Company and by causing the Fund to agree to be
jointly liable for the redemption of the Redeemable Preferred (as defined).
See "--Conflicts of Interest." Although Mr. Ross desired to achieve liquidity
for his shares of the Company's common stock, Mr. Ross agreed to contribute a
portion of his equity to the Surviving Corporation because of the financial
terms offered by Madison Dearborn for his investment and his desire to assist
Madison Dearborn in obtaining funding of the Merger Consideration to be paid
to the Company's shareholders.
The equity contribution to the Surviving Corporation by Messrs. Ross and
Smith represents approximately 6.9% and 7.5%, respectively, of their
beneficial ownership of the Company's common stock. As a result, Messrs. Ross
and Smith are converting substantially all of their shares into cash on the
same terms as the Company's shareholders who are not members of the Management
Group. At the time the Company and Madison Dearborn agreed to the financial
terms of the Merger, Messrs. Ross and Smith intended to sell all of their
shares of common stock to Madison Dearborn. In addition, Messrs. Ross and
Smith have granted to Madison Dearborn the right under the Option Agreements
to purchase all of their shares for $25.00 per share in cash. If Madison
Dearborn exercised its right to purchase the shares of Messrs. Ross and Smith
under the Option Agreements, then Messrs. Ross and Smith would not be able to
have a continuing equity interest in the Surviving Corporation.
Messrs. Ross and Smith in agreeing to contribute a portion of their equity
ownership in the Company to the Surviving Corporation have been cognizant that
a condition to Madison Dearborn's obligation to consummate the Merger is its
receipt of financing for the Merger. The Management Group's contribution of
equity to the Surviving Corporation reduces the amount of consideration that
Madison Dearborn needs to finance at the Effective Time. Messrs. Ross and
Smith, who as members of the Board of Directors of the Company participated in
the August 13th and September 12th meetings, believe that the proposed Merger
is fair to the shareholders of the Company other than the Management Group
because of the foregoing reasons and the factors listed under "--Reasons for
the Merger and Recommendation of the Company's Board of Directors."
OPINION OF FINANCIAL ADVISOR
SBC Warburg Dillon Read has rendered its written opinion to the Board of
Directors that, as of September 12, 1997, the Merger Consideration to be
received by the holders of the Company's common stock pursuant to the Merger
Agreement was fair, from a financial point of view, to such holders. SBC
Warburg Dillon Read was retained by the Board of Directors to express an
opinion as to the fairness, from a financial point of view, to the holders of
the Company's common stock of the Merger Consideration to be received by such
holders. SBC Warburg Dillon Read did not address the Company's business
decision to proceed with the Merger and did not make any recommendation to the
Board of Directors or to the stockholders of the Company with respect to any
approval of the Merger. SBC Warburg Dillon Read will not update its opinion
prior to the closing of the Merger.
The full text of the opinion of SBC Warburg Dillon Read which sets forth,
among other things, assumptions made, procedures followed, matters considered
and limits on the review undertaken by SBC Warburg Dillon Read, is attached as
Appendix B to this Proxy Statement. Holders of the Company's common stock are
urged to read the opinion in its entirety. THE SBC WARBURG DILLON READ OPINION
IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO THE
HOLDERS OF THE COMPANY'S COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE TUESDAY
MORNING SPECIAL MEETING. The summary set forth in this Proxy Statement of the
opinion of SBC Warburg Dillon Read is qualified in its entirely by reference
to the full text of the opinion attached hereto as Appendix B.
In arriving at its opinion, SBC Warburg Dillon Read: (i) reviewed the Merger
Agreement; (ii) reviewed certain publicly available business and historical
financial information relating to the Company; (iii) reviewed certain
management estimates for fiscal years 1997 and 1998 and financial projections
prepared and approved by management of the Company based on estimates
developed by Madison Dearborn (the "Projections"); (iv) reviewed certain
publicly available analyst financial forecasts relating to the Company; (v)
reviewed certain financial information and other data provided to SBC Warburg
Dillon Read by the Company that is not publicly
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available relating to the business and prospects of the Company; (vi) conducted
discussions with members of the senior management of the Company with respect
to the operations, financial condition, history and prospects of the Company;
(vii) reviewed publicly available financial and stock market data with respect
to certain other companies in lines of business that SBC Warburg Dillon Read
believed to be generally comparable to those of the Company; (viii) reviewed
the historical market prices of the Company's common stock; and (ix) compared
the financial terms of the Merger with the financial terms of certain other
transactions that SBC Warburg Dillon Read believed to be generally comparable
to the Merger. No limitations were imposed by the Company with respect to the
investigations made or the procedures followed by SBC Warburg Dillon Read in
rendering its opinion.
In conducting its review and arriving at its opinion, as contemplated under
the terms of its engagement by the Company, SBC Warburg Dillon Read relied,
without independent investigation, upon the accuracy and completeness of all
financial and other information provided to it or publicly available, and did
not assume any responsibility in any respect for the accuracy, completeness or
reasonableness of, or any obligation to verify, the same or to conduct any
appraisal of assets. Without limiting the generality of the foregoing, SBC
Warburg Dillon Read relied upon the management of the Company as to the
reasonableness and achievability of the financial and operating Projections
(and the assumptions and bases therefor) provided to SBC Warburg Dillon Read,
and SBC Warburg Dillon Read assumed that such Projections reflected the best
currently available estimates and judgments of the management of the Company
and that such Projections would be realized in the amounts and in the time
periods estimated by the management of the Company. In rendering its opinion,
SBC Warburg Dillon Read did not make or seek to obtain any evaluations or
appraisals of the Company's assets.
SBC Warburg Dillon Read also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions as well as its experience in securities valuation. SBC Warburg
Dillon Read's opinion was necessarily based upon economic, market and other
conditions as they existed and could be evaluated on the date thereof and the
information made available to SBC Warburg Dillon Read through the date thereof.
In connection with rendering its opinion to the Board of Directors, SBC
Warburg Dillon Read performed a variety of financial analyses which are
summarized below. SBC Warburg Dillon Read believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without consideration of all factors and analyses,
could create a misleading view of the analyses and the processes underlying SBC
Warburg Dillon Read's opinion. SBC Warburg Dillon Read arrived at its opinion
based on the results of all the analyses it undertook assessed as a whole, and
it did not draw conclusions from or with regard to any one method of analysis.
The preparation of a fairness opinion is a complex process involving subjective
judgments, and is not necessarily susceptible to partial analyses or summary
description. None of the analyses performed by SBC Warburg Dillon Read was
assigned a greater significance by SBC Warburg Dillon Read than any other. With
respect to the comparable company analysis and comparable transaction analysis
summarized below, no public company utilized as a comparison is identical to
the Company, and such analyses necessarily involve complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the acquisition or public
trading values of the companies concerned. The Projections furnished by
management of the Company contained in or underlying SBC Warburg Dillon Read's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such Projections. The Company does
not ordinarily publicly disclose internal management estimates of the type
furnished to SBC Warburg Dillon Read in connection with its review of the
financial terms of the Merger. The Projections were based on numerous variables
and assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Estimates of
values of companies or assets do not purport to be appraisals or necessarily
reflect the prices at which companies or their securities actually may be sold.
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The following is a brief summary of the analyses performed by SBC Warburg
Dillon Read in connection with its opinion dated September 12, 1997:
Overview of Sale Process. SBC Warburg Dillon Read reviewed with the Board
of Directors the process that resulted in the proposal by Madison Dearborn
to acquire all of the outstanding shares of the Company's common stock in
the Merger. SBC Warburg Dillon Read noted that, in January 1997, the
Company retained SBC Warburg Dillon Read and Hatchett as financial advisors
to review strategic and financial alternatives. This review of strategic
and financial alternatives was motivated by the desires of Lloyd Ross,
Chairman and Chief Executive Officer, and Jerry Smith, President and Chief
Operating Officer, to eventually retire and liquefy their shareholdings.
SBC Warburg Dillon Read reported that, beginning in March 1997, it
contacted a total of 26 potential partners and acquirors, consisting of 19
potential corporate buyers and seven potential financial buyers. Of these
26 potential buyers, Madison Dearborn demonstrated the strongest ongoing
interest in acquiring the Company. SBC Warburg Dillon Read further reported
that Madison Dearborn made a preliminary proposal in July 1997 for a cash
offer to purchase the Company that placed a value of $23 per share on the
common stock, and that, following negotiations with the Company and SBC
Warburg Dillon Read, Madison Dearborn eventually increased its offer to
$25.00 per share. Madison Dearborn characterized its $25.00 per share offer
as its final and best offer. On August 14, 1997, the Company publicly
announced a preliminary agreement with Madison Dearborn at $25.00 per
share. SBC Warburg Dillon Read briefly noted that Madison Dearborn is one
of the largest management buyout and special equity investment firms in the
United States. Founded in 1993, Madison Dearborn has raised approximately
$1.5 billion in two investment funds.
Summary Analysis of Offer. SBC Warburg Dillon Read noted that the Madison
Dearborn offer was $25.00 per share of the Company's common stock, and that
Madison Dearborn proposed to acquire all outstanding shares for cash,
indicating a total offer for equity (equity value) of $324.6 million.
Through its negotiations with Madison Dearborn, the Company, and not SBC
Warburg Dillon Read, determined the amount of consideration to be paid by
Madison Dearborn per share of the Company's common stock. Pursuant to the
Merger Agreement, Madison Dearborn also will assume $4.0 million of the
Company indebtedness which, after giving effect to $3.4 million of cash to
be acquired in the Merger, indicated an offer for net assets (net asset
value) of $325.2 million. SBC Warburg Dillon Read summarized various
analyses by noting that the purchase price of $25.00 per share indicated: a
multiple of net asset value to net sales of 1.2x for the 12 months ended
June 30, 1997 and 1.0x for the estimated 12 months ending December 31,
1997; a multiple of net asset value to EBITDA of 10.9x for the 12 months
ended June 30, 1997 and 8.2x for the estimated 12 months ending December
31, 1997; a multiple of net asset value to EBIT of 13.2x for the 12 months
ended June 30, 1997 and 9.1x for the estimated 12 months ending December
31, 1997; a multiple of equity value to earnings per share of 22.1x for the
12 months ended June 30, 1997 and 18.7x for the estimated 12 months ending
December 31, 1997; and a multiple of equity value to book value of 4.1x at
June 30, 1997 and 3.4x at estimated December 31, 1997. Finally, SBC Warburg
Dillon Read noted that the purchase price of $25.00 per share represented
an acquisition premium of 22.7% over the Company's unaffected stock price
of $20.375 on August 13, 1997.
Financing Structure and Analysis of Feasibility of Proposal. SBC Warburg
Dillon Read analyzed Madison Dearborn's proposed financing structure for
the Merger. SBC Warburg Dillon Read reported that Madison Dearborn proposed
to finance approximately 33.8% of the total costs of the Merger, including
transaction fees and expenses, with sponsor equity, and approximately 29.4%
with subordinated debt. Substantially all the remaining sources of funds
would be secured senior debt or revolving bank debt. SBC Warburg Dillon
Read analyzed certain pro forma credit statistics under this financing
structure for pro forma 1997, noting that EBITDA for pro forma 1997 would
be 1.7x total interest charges, that senior debt would be 3.3x EBITDA, that
total debt would be 5.9x EBITDA and that total equity would be 32.9% of
total capitalization. SBC Warburg Dillon Read also analyzed similar credit
statistics for projected 1998, 1999 and 2000.
Analysis of Historical Financial Performance. SBC Warburg Dillon Read
analyzed the Company's growth over the five-year period ending December 31,
1997, showing a 10.5% compound annual growth
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rate in stores operated at year end. SBC Warburg Dillon Read also analyzed
comparable-store sales growth, showing an average 6.0% growth in the period
from 1993 through December 31, 1996, and net sales growth, showing a
compound annual growth rate of 14.9% for the period from 1992 through
estimated 1997. SBC Warburg Dillon Read noted that profitability has
recovered significantly since 1993, with 1997 expected to be the third year
in a row of record financial performance. SBC Warburg Dillon Read's
analysis indicated that gross profit increased at a compound annual growth
rate of 15.5%, and EBIT increased at a compound annual growth rate of
27.8%, from 1992 through estimated 1997. SBC Warburg Dillon Read also
discussed the relatively poor operating results experienced in 1993 and the
initiatives undertaken by management since then to improve results,
including the return to more active management of Lloyd Ross.
Comparable Company Financial Analysis. SBC Warburg Dillon Read analyzed
the Company's historical financial performance compared with a group of
five close-out retail companies (TJX Companies, Consolidated Stores, Ross
Stores, MacFrugal's Bargains and Mazel Stores) that SBC Warburg Dillon Read
considered to be reasonably comparable to the Company. Among other things,
this analysis showed that the Company's three-year compound annual growth
rate in sales ranked fourth out of the six close-out retail companies. In
addition, the Company ranked third out of six in gross margin for the 12
months ended June 30, 1997 and for the average of the last three fiscal
years, and third out of six in analysts' estimates of five-year growth
rates. Summarizing, SBC Warburg Dillon Read noted that, compared to this
peer group, the Company's historical financial performance is generally in
line with industry averages.
Historical Trading Analysis. SBC Warburg Dillon Read analyzed the trading
statistics for the Company's common stock from its initial public offering
at $4.44 (adjusted for stock splits) in March 1986 to the present, noting
that the common stock reached a low price of $2.08 on April 8, 1988 and a
high price of $22.50 on July 22, 1997. SBC Warburg Dillon Read noted that
the 30-day average closing price for the common stock for the period ended
August 13, 1997 (the day prior to the public announcement of the Merger)
was $20.80 and for the 90-day period prior to the announcement of the
Merger was $19.91. The $25.00 per share price offered by Madison Dearborn
represented a 20.2% premium to the 30-day average and a 25.6% premium to
the 90-day average.
Comparable Company Trading Analysis. SBC Warburg Dillon Read analyzed
historical stock prices for the Company and the group of five close-out
retail companies (TJX Companies, Consolidated Stores, Ross Stores,
MacFrugal's Bargains and Mazel Stores). This analysis showed that, based on
the Company's pre-announcement stock price, the common stock generally
traded at or below the stocks of the peer group companies. Based on the
closing price of $20.38 on August 13, 1997, the day prior to the public
announcement of the Merger, the Company's common stock on an equity value
basis traded at 18.0x last 12 months earnings per share, ranking fourth out
of six companies (which ranged from a high of 34.6x to a low of 6.2x), and
ranked fifth out of six as a multiple of both estimated 1997 and projected
1998 earnings per share. On an enterprise value basis, the Company's common
stock, based on the closing price of $20.38 on August 13, 1997, the day
prior to the public announcement of the Merger, traded at 1.0x last 12
months sales, 9.8x last 12 months EBITDA and 11.9x last 12 months EBIT, in
each case ranking third out of six companies.
Analysis of Projected Business Plan and Strategy. SBC Warburg Dillon Read
observed that the financial projections contained in its analysis were
prepared and approved by management of the Company based on estimates
developed by Madison Dearborn. The Company had not independently developed
five-year projections. SBC Warburg Dillon Read further observed that
management has indicated that there will be no major changes in the
Company's business plan and strategy if Madison Dearborn acquires the
Company. The major assumptions underlying the business plan included: new
store openings at a 10% growth rate through 1999 and 35 stores per year
over the balance of the projection period; comparable store sales growth of
5.0% in 1998 and 1999 declining to 3.0% in 2000 and thereafter for pre-1997
stores, of 12.0% in 1999 and declining to 8.0% in 2000 and to 3.0%
thereafter for 1997 stores and of 20.0% in year two, 10.0% in year three,
5.0% in year four and 3.0% thereafter for post-1997 stores; gross margins
consistent with recent historical experience; and EBITDA margin
improvements from 12.4% for estimated 1997 to 14.8% in 2002 (compared to an
actual EBITDA margin of 10.1% in 1996). SBC Warburg Dillon
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Read also compared the Company's historical growth and profitability to
that presented in the current business plan, noting that the projections
are similar in terms of planned growth and gross margin, but contain higher
projected EBITDA and EBIT margins.
Leveraged Buyout Analysis. SBC Warburg Dillon Read analyzed possible
leveraged buyout purchase prices, utilizing management's projections as
discussed above. SBC Warburg Dillon Read noted that purchase prices greater
than $25.00 per share would increase required borrowings to a level which
would be less attractive to potential lenders and equity sponsors.
Discounted Cash Flow Analysis. SBC Warburg Dillon Read performed
discounted cash flow analyses to determine the present value per share of
the Company's common stock under various scenarios of financial
performance. The first scenario showed the potential value of the Company
in 2002, discounted to the present, utilizing the assumptions contained in
the Projections if the Company did not consummate the Merger. For purposes
of this analysis, SBC Warburg Dillon Read utilized discount rates ranging
from 17.0% to 19.0% and terminal value multiples ranging from 7.0x to 9.0x
to apply to projected EBITDA for 2002. This analysis indicated a range of
values from $23.64 to $30.93, compared to the Merger price of $25.00 per
share. SBC Warburg Dillon Read also performed a discounted cash flow
analysis to determine the present value per share of the Company's common
stock with the Projections adjusted to assume that EBITDA margins remain at
the 12.4% level estimated for 1997 over the projection period, instead of
rising to 14.8% in 2002. For purposes of this analysis, SBC Warburg Dillon
Read again utilized discount rates ranging from 17.0% to 19.0% and terminal
value multiples ranging from 7.0x to 9.0x to apply to projected EBITDA for
2002. This analysis indicated a range of values from $19.80 to $25.89,
compared to the Merger price of $25.00 per share. Finally, SBC Warburg
Dillon Read also performed a discounted cash flow analysis to determine the
present value per share of the Company's common stock assuming
implementation of the Company's business plan adjusted to assume that
EBITDA margins duplicate the levels (ranging from 10.5% to 7.8%) actually
experienced during the period from 1987 to 1991, the five-year period
following its achievement of a 12.3% EBITDA margin in 1986. For purposes of
this analysis, SBC Warburg Dillon Read again utilized discount rates
ranging from 17.0% to 19.0% and terminal value multiples ranging from 7.0x
to 9.0x to apply to projected EBITDA for 2002. This analysis indicated a
range of values from $12.98 to $17.09 compared to the Merger Consideration
of $25.00 per share.
Recapitalization Analysis. SBC Warburg Dillon Read performed a
recapitalization analysis to determine a range of values for the Company
assuming a leveraged recapitalization, instead of the Merger, accomplished
by paying a one-time cash dividend financed with debt. For purposes of this
analysis, SBC Warburg Dillon Read utilized a cash dividend per share
ranging from $12.00 to $16.00, computed estimated 1997 pro forma earnings
per share from the Company's business plan and applied an assumed
price/earnings multiple of 15.2x (the actual price/earnings multiple for
estimated 1997 earnings prior to the public announcement of the Merger).
This analysis indicated, among other things, an implied stock value of
$12.61 at a cash dividend of $12.00 per share, and an implied stock value
of $8.87 at a cash dividend of $16.00 per share. The values per share
produced by this analysis ranged from $24.61 to $24.87. SBC Warburg Dillon
Read noted that the 15.2x price/earnings multiple may overstate the implied
stock value following a leveraged recapitalization due to the increased
leverage and reduced market capitalization of the Company.
Analysis of Comparable Transactions. SBC Warburg Dillon Read analyzed 11
other acquisition transactions in the retail sector over the past five
years (the "comparable transactions"). This analysis, which was based on
publicly available information for the 12 months preceding the announcement
of the relevant comparable transaction, showed that the purchase price of
$25.00 per share in the Merger represented an offer for assets to last 12
months sales, EBIT and EBITDA of 1.2x, 12.9x and 10.7x, respectively,
compared to average multiples for the comparable transactions of 0.5x,
12.5x and 8.1x, respectively, median multiples of 0.5x, 11.8x and 8.3x,
respectively, high multiples of 1.3x, 19.1x and 13.3x, respectively, and
low multiples of 0.2x, 6.2x and 4.1x, respectively. This analysis also
showed that the purchase price of $25.00 per share in the Merger
represented an offer for equity to last 12 months net income and book value
of 22.3x and 4.1x, respectively, compared to average multiples for the
comparable transactions of 21.5x and 2.9x, respectively, median multiples
of 20.8x and 2.0x, respectively, high
23
<PAGE>
multiples of 39.2x and 6.9x, respectively, and low multiples of 10.0x and
1.5x, respectively. SBC Warburg Dillon Read noted that no transaction
reviewed was identical to the Merger and that, accordingly, any analysis of
comparable transaction necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics
of the parties to the transactions being compared.
The Company retained SBC Warburg Dillon Read as its financial advisor based
upon the recognized experience and expertise of SBC Warburg Dillon Read's
corporate finance group in general and its retail sector in particular. SBC
Warburg Dillon Read is an internationally recognized investment banking and
advisory firm. SBC Warburg Dillon Read, as part or its investment banking and
advisory business, is continually 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 estate, corporate
and other purposes. In the ordinary course of its business, SBC Warburg Dillon
Read trades the securities of the Company and, accordingly, at any time may
hold a long or short position in such securities.
The Company, SBC Warburg Dillon Read and Hatchett have entered into a letter
agreement, dated January 23, 1997, relating to the services to be provided by
SBC Warburg Dillon Read in connection with the Merger. Pursuant to this letter
agreement, SBC Warburg Dillon Read and Hatchett will be entitled to a combined
fee of 1.5% of the Merger value upon the closing of the Merger and to
reimbursement for reasonable expenses, including the fees and disbursements of
its counsel. In addition, the Company has agreed to indemnify SBC Warburg
Dillon Read against certain liabilities, including liabilities under the
federal securities laws.
The opinion of SBC Warburg Dillon Read shall be made available for inspection
and copying at the principal executive offices of the Company during its
regular business hours by any interested equity security holder of the Company
or his representative who has been so designated in writing. A copy of the
opinion of SBC Warburg Dillon Read will be transmitted by the Company to any
interested equity security holder of the Company or his representative who has
been so designated in writing upon written request and at the expense of the
requesting security holder.
POSITION OF MADISON DEARBORN AS TO FAIRNESS OF THE MERGER
Madison Dearborn, as the party proposing to acquire the Company, did not
participate in the deliberations of the Company's Board of Directors regarding
or receive advise from the Company's financial advisors as to the fairness of
the Merger to the Company's unaffiliated security holders. As a result, Madison
Dearborn is not in a position to specifically adopt the conclusions of the
Board of Directors as to such matter. However, based upon its own knowledge
from its due diligence investigation and publicly available information
regarding the Company and its understanding from discussions with senior
management of the Company regarding the factors considered by the Board of
Directors referred to in "Reasons for the Merger and Recommendation of the
Company's Board of Directors," Madison Dearborn also believes that the Merger
is fair to the Company's unaffiliated security holders. For the reasons
discussed above, Madison Dearborn is not in the same position as the Board of
Directors to determine which factors would be most important in assessing such
fairness, but, from its more limited perspective, those which it considers of
greater importance are the recent and historical market prices of the Company's
common stock and the risk that the expressed desires of Messrs. Smith and Ross
to ultimately retire and to eventually achieve liquidity could create
uncertainty regarding the future performance of the Company and put pressure on
the price of the Company's common stock in the absence of a similar
transaction.
MADISON DEARBORN'S REASONS FOR THE MERGER
Madison Dearborn's purpose for engaging in the Merger is to acquire the
Company. Madison Dearborn regards the acquisition of the Company as an
attractive investment opportunity because it believes that the Company's future
business prospects are favorable, that there are growth opportunities in the
Company's business and that the anticipated high consolidated debt-to-equity
ratio of the Company after the Merger may allow the value of the Company's
equity to increase more rapidly on a percentage basis than would the value of
the equity in an otherwise identical corporation with a larger equity base and
relatively less debt. This assessment
24
<PAGE>
is based upon publicly available information regarding the Company, Madison
Dearborn's due diligence investigation of the Company discussed under
"Background of the Merger" and Madison Dearborn's experience in investing in
companies engaged in retailing. While Madison Dearborn believes that there will
be significant opportunities associated with its investment in the Company,
there are also substantial risks that such opportunities may not be fully
realized.
The acquisition of the Company has been structured as a merger in order to
permit the acquisition of all of the Company's common stock and to preserve the
Company's corporate identity and existing contractual arrangements with third
parties. Madison Dearborn considered structuring the acquisition as a tender
offer for the Company's common stock but did not pursue this alternative
because, unlike a merger, it would not necessarily permit the acquisition of
all of the common stock and the timing of such an offer would not have
coincided as well as the merger structure with the expected timing of financing
being obtained for the acquisition.
CONFLICTS OF INTEREST
In considering the recommendations of the Company's Board of Directors, the
Company's stockholders should be aware that certain members of management and
of the Company's Board of Directors have interests in the Merger beyond the
interests of the stockholders generally which may create potential conflicts of
interest.
Equity Investment. It is important to Madison Dearborn that the Company's key
personnel continue to manage and operate the Company following the Merger and
that they have meaningful incentives, including ownership interests, to make
the Company financially successful. Accordingly, the Management Group will
invest in shares of preferred stock and common stock of the Surviving
Corporation.
The Management Group is expected to consist of Lloyd L. Ross, Chief Executive
Officer and Chairman of the Board of Directors of the Company; Jerry M. Smith,
President and Chief Operating Officer and a director of the Company; Mark E.
Jarvis, Senior Vice President and Chief Financial Officer of the Company; G.
Michael Anderson, Senior Vice President, Buying Group; and certain others. As
of the Record Date, the Management Group beneficially owned an aggregate of
approximately 3,945,596 shares of the Company's common stock (including shares
issuable upon exercise of stock options) constituting approximately 31.8% of
the Company's common stock then outstanding.
Since 1994, Lloyd L. Ross has borrowed funds from the Company from time to
time. Mr. Ross's borrowings, which bear interest at the prime rate, are
anticipated to have a balance, including accrued interest, of approximately
$2.9 million as of the Effective Time. In 1992, Jerry M. Smith received a loan
for the purchase of Company stock which, including accrued interest, is
anticipated to have a balance of approximately $189,000 as of the Effective
Time. Mr. Smith's loan also bears interest at the prime rate. The Fund has
agreed with Messrs. Ross and Smith that such loans need not be repaid by them
at the Effective Time. The maturity date of each such loan will be extended to
the seventh anniversary of the Effective Time except in certain circumstances
described below. In addition, the interest rate of each such loan will be
changed, as of the Effective Time, from the prime rate of interest to the mid-
term applicable federal rate as defined in Internal Revenue Code Section
1274(d).
In the Merger, the Management Group will invest, in the aggregate, $7.5
million in shares of junior preferred stock and common stock of the Surviving
Corporation. Prior to the Merger, the Management Group will contribute shares
of the Company's common stock to Merger Subsidiary in the following amounts:
approximately $5.5 million in the case of Mr. Ross, approximately $1.3 million
in the case of Mr. Smith and a total of approximately $0.7 million from the
other members of the Management Group. Members of the Management Group will
exercise stock options to the extent that they do not already own shares
necessary to obtain the shares to be contributed.
In the Merger, Mr. Ross's ownership position in the Merger Subsidiary will be
converted into shares of the Surviving Corporation's common stock (expected to
represent approximately 5.7% of the total outstanding
25
<PAGE>
immediately after the Merger) and approximately $5.2 million liquidation value
of the Surviving Corporation's non-voting redeemable preferred stock (the
"Redeemable Preferred"). Cumulative dividends will accrue on the Redeemable
Preferred at the rate of 8.0% per annum. The Surviving Corporation will have
the option to redeem the Redeemable Preferred at any time (without premium or
penalty) and will be required to redeem the Redeemable Preferred upon the
earlier of (i) the 13th anniversary or (ii) a Sale of the Company (as defined
in the certificate of incorporation of the Surviving Corporation). Mr. Ross
will have the right, 24 months after the Effective Time, to put his Redeemable
Preferred to the Surviving Corporation or the Fund for an amount equal to
liquidation value plus any accrued but unpaid dividends. If Mr. Ross exercises
the put, he will be required to transfer his shares of the Surviving
Corporation's common stock to the Surviving Corporation or the Fund, as the
case may be, for no additional consideration and his loan will become due and
payable to the Surviving Corporation or the Fund, as the case may be, at such
time. Mr. Ross's loan will also become due and payable at such time when the
Surviving Corporation exercises its option to redeem his shares of the
Redeemable Preferred.
In the Merger, Mr. Smith's ownership position in the Merger Subsidiary will
be converted into shares of the Surviving Corporation's common stock (expected
to represent approximately 1.4% of the total outstanding immediately after the
Merger) and approximately $1.2 million liquidation value of the Redeemable
Preferred. Approximately 24.0% of his shares of the Redeemable Preferred will
be subject to the same put rights and obligations as those described above for
Mr. Ross. Mr. Smith's loan will become due and payable at such time when Mr.
Smith exercises his put or the Surviving Corporation exercises its option to
redeem his shares of the Redeemable Preferred. In addition, at the Effective
Time, Mr. Smith will receive a stock option grant exercisable for 3% of the
Company's outstanding stock after the Merger on a fully diluted basis which
will vest over a three-year period on a daily basis.
In the Merger, the ownership position in the Merger Subsidiary of the rest of
the Management Group, including those of Messrs. Jarvis and Anderson, will be
converted into shares of the Surviving Corporation's common stock and non-
voting non-redeemable preferred stock (the "Perpetual Preferred"). The common
stock to be received by such members of the Company's management will represent
approximately 0.8% of the total outstanding immediately after the Merger. They
will receive shares of the Perpetual Preferred having liquidation values, in
the aggregate, of $0.7 million. Cumulative dividends will accrue on the
Perpetual Preferred at the annual rate of 8.0% of the liquidation value per
share thereof through the 12th anniversary of the Closing, and at the annual
rate of 12.0% of the liquidation value per share thereof thereafter if, but
only if, the Company has not offered to redeem such shares prior to such time.
As a result of the transactions described above, following the Merger, the
Management Group will own, in the aggregate, approximately $6.4 million
liquidation value of the Redeemable Preferred, $0.7 million liquidation value
of the Perpetual Preferred and approximately 7.8% of the Surviving
Corporation's common stock outstanding immediately after the Merger.
The opportunity to obtain such an equity interest in the Surviving
Corporation may have presented the members of the Management Group with actual
or potential conflicts of interest in connection with the Merger.
The Fund will acquire a number of shares representing approximately 88.8% of
the Surviving Corporation's common stock outstanding immediately after the
Merger and approximately $80.8 million liquidation value of the Redeemable
Preferred of the Surviving Corporation for an aggregate purchase price of $85.4
million. See "Financing of the Merger." The Fund will render certain management
and advisory services to the Surviving Corporation for which it will receive
from the Surviving Corporation a fee in the amount of $350,000 per year.
In connection with the Merger, the Fund and the management shareholders of
the Surviving Corporation will enter into a shareholders agreement which will
provide for, among other things, restrictions on transfer, "drag-along" and
"tag-along" rights, registration rights and an agreement by the parties to vote
their shares to elect Mr. Smith as a director of the Surviving Corporation.
Under the shareholders' agreement, Mr. Smith will be able to participate in any
future public offerings of the Company's common stock to the same extent as
Madison Dearborn, and his shares will be subject to certain resale provisions.
After Mr. Smith's employment
26
<PAGE>
terminates, he will be able to sell his equity interest in the Company (other
than the portion of his interest putable to Madison Dearborn) to the Company at
its fair market value with the purchase price being paid over a four-year
period, subject to corporate law restrictions and restrictions imposed by the
Company's lenders.
Option Agreements. On August 13, 1997, Messrs. Ross and Smith executed the
Option Agreements which granted to Madison Dearborn an option to purchase all
(but not less than all) of their shares of the Company's common stock for
$25.00 per share in cash. In addition, under the terms of the Option
Agreements, Messrs. Ross and Smith granted Madison Dearborn an irrevocable
proxy to vote their shares at any meeting for the purpose of approving the
proposed acquisition of the Company by Madison Dearborn, or considering any
issue or matter relating to such acquisition or any matter which would
adversely effect the proposed acquisition. The Option Agreements terminate on
March 11, 1998 or, if an Acquisition Proposal is made or announced, September
7, 1998 or upon the termination of the Merger Agreement arising from a breach
of the Merger Agreement by Madison Dearborn or the entry of a final non-
appealable order enjoining the acquisition of the Company by Madison Dearborn.
Employment and Consulting Agreements. A condition to Madison Dearborn's
obligations under the Merger Agreement is that Mr. Ross execute a two-year
consulting agreement and Mr. Smith execute a three-year employment agreement.
Although these agreements will not be executed until the Effective Time, the
parties have agreed to a summary of proposed terms that was delivered by
Madison Dearborn to Messrs. Ross and Smith in connection with the execution of
the Merger Agreement. The proposed terms of Mr. Ross's consulting agreement
provide that he will serve as Chairman of the Company's Board of Directors and
will facilitate the Company's relationships with third parties and suppliers.
Mr. Ross's consulting agreement will provide an annual compensation of $250,000
per year (along with benefits at his current level) with an expected time
commitment for Mr. Ross of 60 days per year. The consulting agreement for Mr.
Ross will contain noncompete and nonsolicitation covenants and confidentiality
provisions.
The summary terms of Mr. Smith's employment agreement provides that he will
serve as the Company's President and Chief Executive Officer as well as a
director for three years after the Merger. Mr. Smith will receive an annual
base salary of $475,000 per year, subject to possible increases, and a maximum
bonus opportunity of up to 50% of his base salary, and he will continue to
receive his current benefits and perquisites. Mr. Smith's employment consulting
agreement will contain noncompete and nonsolicitation covenants and
confidentiality provisions.
Treatment of Stock Options. Certain executive officers of the Company hold
options to purchase the Company's common stock granted under the Option Plans.
Under the terms of the Merger Agreement, all options granted under the Option
Plans (whether or not exercisable) will be canceled at or about the Effective
Time, and the holders of the options will be entitled to receive (subject to
applicable withholding taxes) an amount in cash equal to the product of (i) the
difference between $25.00 and the exercise price of such option and (ii) the
number of shares of the Company's common stock subject to such option. As of
November 15, 1997, there were options outstanding to purchase an aggregate of
1,248,863 shares of the Company's common stock at a weighted average exercise
price of $3.97 per share.
27
<PAGE>
The following table sets forth information as to the options outstanding on
November 15, 1997, for which cash payment will be received upon consummation of
the Merger, and the proceeds to be received upon termination of such options by
the directors and executive officers of the Company:
<TABLE>
<CAPTION>
OUTSTANDING CASH PAYMENT TO BE
OPTIONS FOR WHICH CASH RECEIVED UPON
NAME PAYMENT WILL BE RECEIVED CONSUMMATION OF THE MERGER
---- ------------------------ --------------------------
<S> <C> <C>
Lloyd L. Ross........... 450,000 $ 9,742,500
Jerry M. Smith.......... 646,040 13,447,928
Mark E. Jarvis.......... 20,250 376,312
Michael Anderson........ 5,650 104,996
James A. Mabry.......... -0- -0-
H. Russell Potts, Jr.... -0- -0-
William C. Saunders..... -0- -0-
All directors and
executive officers as a
group
(7 persons)............ 1,121,940 $23,671,736
</TABLE>
Director and Officer Indemnification and Insurance. The Company agreed in the
Merger Agreement to indemnify after the Effective Time the Company's and any of
its subsidiaries' current and former officers and directors for any losses,
claims, damages, costs and other liabilities or claims made against such
persons because they were a director or officer of the Company to the fullest
extent permitted by Delaware corporate law. In addition, the Merger Agreement
provides that for six years after the Effective Time, the Company will maintain
its current directors' and officers' liability insurance for the benefit of its
directors and officers (or substitute policies of at least the same coverage
and containing terms not materially adverse to the indemnified parties);
provided, however, Madison Dearborn is not required to pay an annual premium in
excess of 200% of the last annual premium paid by the Company prior to the date
of the Merger Agreement.
EFFECTIVE TIME AND CONSEQUENCES OF THE MERGER
If approved by the requisite vote of the stockholders of the Company and if
all other conditions to the consummation of the Merger are satisfied or waived,
the Merger will become effective, unless the Merger Agreement is terminated as
provided therein, upon the making of certain filings with the Secretary of
State of the State of Delaware pursuant to the Delaware General Corporation Law
("DGCL"). At the Effective Time, the Merger Subsidiary will be merged with and
into the Company, which will be the Surviving Corporation in the Merger, and
the separate corporate existence and identity of the Merger Subsidiary will
cease. The corporate existence and identity of the Company will continue
unaffected by the Merger, although it will become a subsidiary of the Fund.
It is currently contemplated that the Effective Time of the Merger will occur
as promptly as practicable after the approval of the Merger by the Company's
stockholders at the Special Meeting, subject to the conditions described under
"Merger--Conditions to Merger."
As a result of the Merger, the entire equity interest in the Company will be
owned by the Fund and the Management Group. The stockholders of the Company
(other than the Management Group) will no longer have any interest in, and will
not be stockholders of, the Company, and therefore will not participate in its
future earnings and growth. Instead, each such holder of the Company's common
stock will have the right to receive $25.00 in cash, without interest, for each
share held (other than the Unconverted Shares). Following the Merger, the Fund,
as well as the Management Group, will have the opportunity to benefit from any
earnings and growth of the Company, and will bear the risk of any decrease in
the Company's value. Following the Merger, the Company's common stock will no
longer be traded on the Nasdaq National Market, price quotations will no longer
be available and the registration of the Company's common stock under the
Exchange Act will be terminated.
At the Effective Time, the present board of directors of the Company, other
than Messr. Smith and Ross, will be replaced with individuals selected by the
Fund. The Madison Dearborn representatives who will serve as
28
<PAGE>
directors of the Company as of the Effective Time are: William J. Hunckler,
III, Benjamin D. Chereskin and Robin P. Selati. Messrs. Hunckler and Chereskin
have been Vice Presidents of Partners since co-founding the firm in 1993.
Prior to 1993, both of them were with First Chicago Venture Capital. Mr.
Selati has been with Partners since 1993 and prior to that was with Alex.
Brown & Sons Incorporated. Messrs. Hunckler, Chereskin and Selati are all
citizens of the United States. The officers of the Company will be the
officers of the Surviving Corporation after the Effective Time.
Madison Dearborn expects that, following consummation of the Merger, the
business and operations of the Company will be continued substantially as they
are currently being conducted. The board of directors and management of the
Company will, however, continue to evaluate the Company's business,
operations, corporate structure and organization and will make such changes as
they deem appropriate.
As a result of the borrowings to be incurred to finance the Merger and the
Company's post-Merger operations, the consolidated indebtedness of the Company
following the Effective Time will be substantially greater than current
levels. In addition, the interest rates on the new indebtedness are expected
to be higher than the Company's current rates, and the covenants applicable to
the new indebtedness are expected to be more restrictive than current
covenants. As a result, the Company's financial and operating flexibility will
be reduced.
FEDERAL INCOME TAX CONSEQUENCES
A stockholder who exchanges the shares of the Company's common stock for
cash pursuant to the Merger or exercises appraisal rights will recognize gain
or loss equal to the difference between the cash received in the Merger or
pursuant to the exercise of appraisal rights and such stockholder's adjusted
tax basis in the shares exchanged. Gain or loss recognized will be treated as
a long-term capital gain or loss if the shares are held as capital assets and
if the shares of the Company's common stock exchanged have a holding period of
more than one year at the Effective Time. Even if the gain or loss is treated
as a long-term capital gain or loss, the tax rate will vary depending on the
holding period.
THE FOREGOING PARAGRAPH PRESENTS THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. THE FOREGOING DISCUSSION DOES NOT DISCUSS TAX
CONSEQUENCES UNDER THE LAWS OF STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER
JURISDICTION OR TAX CONSEQUENCES TO CATEGORIES OF STOCKHOLDERS THAT MAY BE
SUBJECT TO SPECIAL RULES, SUCH AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES,
INSURANCE COMPANIES, FINANCIAL INSTITUTIONS AND DEALERS IN STOCKS AND
SECURITIES. THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO A STOCKHOLDER
WHO ACQUIRED HIS SHARES OF THE COMPANY'S COMMON STOCK PURSUANT TO THE EXERCISE
OF STOCK OPTIONS OR OTHERWISE AS COMPENSATION. EACH HOLDER OF SHARES OF THE
COMPANY'S COMMON STOCK IS URGED TO OBTAIN, AND SHOULD RELY UPON, HIS OWN TAX
ADVICE.
DISSENTER'S RIGHTS
The DGCL affords holders of the Company's common stock who dissent and
object to the Merger Agreement the right to demand to be paid the fair value
of their shares. In order to perfect such statutory rights, certain procedures
as outlined in Section 262 of the DGCL must be followed, including filing a
written objection to the Merger Agreement with the Company prior to the time
the vote on the Merger Agreement is taken. See "The Merger--Appraisal Rights
of Dissenting Stockholders."
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<PAGE>
THE MERGER
The terms and conditions of the Merger are set forth in the Merger
Agreement, the text of which is attached to this Proxy Statement as Appendix
A. The summary of the Merger Agreement contained in this Proxy Statement does
not purport to be complete and is qualified in its entirety by reference to
the complete text of such document.
At the time the Merger becomes effective, the Merger Subsidiary will be
merged with and into the Company in accordance with Delaware law. As a result
of the Merger, the separate corporate existence of the Merger Subsidiary
(which was formed solely for the purposes of the Merger and has not engaged in
any operations or business) will cease, and the Company will continue its
existence as a separate subsidiary of the Fund.
Upon the consummation of the Merger, each share of the Company's common
stock (other than the Unconverted Shares) will be converted into the right to
receive $25.00 in cash.
EXCHANGE OF CERTIFICATES REPRESENTING THE COMMON STOCK
Instructions with regard to the surrender of the Company's stock
certificates, together with a letter of transmittal to be used for this
purpose, will be mailed to the Company's stockholders as promptly as
practicable after the Effective Time. In order to receive the Merger
Consideration, the stockholders of the Company will be required to surrender
their stock certificates after the Effective Time, together with a duly
completed and executed letter of transmittal, to a paying agent (the "Paying
Agent") selected by Madison Dearborn. Promptly after the Effective Time, the
cash amount of the Merger Consideration will be deposited in trust with the
Paying Agent. Upon receipt of such stock certificates and letter of
transmittal, the Paying Agent will deliver the Merger Consideration to the
registered holder or his transferee of the shares of the Company's common
stock. No interest will be paid or accrued on the amounts payable upon the
surrender of stock certificates.
STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL
THE INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED.
If the Merger Consideration is to be delivered to a person other than the
person in whose name the certificate for the shares of the Company's common
stock surrendered in exchange therefor is registered, it will be a condition
of such payment of such Merger Consideration that the stock certificate so
surrendered be properly endorsed and otherwise in proper form for transfer,
and that the person requesting such payment (i) pay in advance any transfer or
other taxes required by reason of the payment of the Merger Consideration to a
person other than the registered holder of the stock certificate surrendered
or (ii) establish to the satisfaction of the Paying Agent that such tax has
been paid or is not applicable.
After the Effective Time, there will be no further transfers on the stock
transfer books of the Company of the shares of the Company's common stock that
were outstanding immediately prior to the Effective Time. If a certificate
representing such shares is presented for transfer, subject to compliance with
the requisite transmittal procedures, it will be cancelled and exchanged for
the Merger Consideration.
Each certificate representing shares of the Company's common stock
immediately prior to the Effective Time (other than the Unconverted Shares)
will, at the Effective Time, be deemed for all purposes to represent only the
right to receive the Merger Consideration into which the shares of the
Company's common stock represented by such certificate were converted in the
Merger.
Any Merger Consideration delivered or made available to the Paying Agent and
not exchanged for stock certificates within 180 days after the Effective Time
will be returned by the Paying Agent to the Company, which will thereafter act
as Paying Agent. None of Madison Dearborn, the Fund, the Company or the Paying
Agent will be liable to a holder of shares of the Company's common stock for
any of the Merger Consideration delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
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TREATMENT OF OUTSTANDING OPTIONS
The Merger Agreement provides that all options outstanding under the
Incentive Option Plans, whether or not exercisable, shall be cancelled at the
Effective Time. Holders of the options will be entitled to receive (subject to
applicable withholding taxes) an amount in cash equal to the product of (i)
the difference between $25.00 and the exercise price of such option and (ii)
the number of shares of the Company's common stock subject to such option. As
of September 22, 1997, there were options outstanding to purchase an aggregate
of 1,248,863 shares of the Company's common stock at a weighted average
exercise price of $3.97 per share. Some options held by the Management Group
will be exercised. See "Special Factors--Conflicts of Interest."
CONDITIONS TO MERGER
Each party's obligation to effect the Merger is subject to the satisfaction
of a number of conditions, most of which may be waived by a specified party or
parties. These conditions include the Merger Agreement and the Merger being
approved and adopted by the affirmative vote of the holders of a majority of
the Company's common stock and no temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger being in effect
In addition, the obligations of Madison Dearborn and the Merger Subsidiary
to effect the Merger are subject to the satisfaction of additional conditions,
which include the following: (i) the representations and warranties of the
Company in the Merger Agreement are generally true and correct as of the
Effective Time, except as otherwise contemplated by the Merger Agreement and
except in those instances where the aggregate amounts represented by all
breaches (other than breaches for which the Company has obtained the consent
of Madison Dearborn and the Merger Subsidiary) of such representations and
warranties are not likely to result in a material adverse effect on the
Company; (ii) Madison Dearborn and the Merger Subsidiary shall have received
the debt financing for the transactions contemplated by the Merger Agreement
on terms substantially as outlined in certain financing letters obtained by
Madison Dearborn in connection with the execution of the Merger; (iii) Mr.
Ross shall have entered into a two-year consulting agreement with the Company
on terms consistent with the letter dated September 12, 1997 from Madison
Dearborn to him, and Mr. Jerry M. Smith shall have entered into a three-year
employment agreement with the Company on terms consistent with the letter
dated September 12, 1997 from Madison Dearborn to him and shall have made the
investment in the Merger Subsidiary as contemplated by such letters; (iv) the
Company and its subsidiaries shall have obtained all material consents needed
to consummate the Merger; and (v) holders of no more than 5.0% of the
Company's outstanding shares of common stock seek to perfect then statutory
appraisal rights.
In addition, the obligation of the Company to effect the Merger is subject
to the satisfaction of certain additional conditions which include the
representations and warranties of Madison Dearborn and the Merger Subsidiary
set forth in the Merger Agreement being true and correct as of the Effective
Time, except as otherwise contemplated by the Merger Agreement.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER OF CONDITIONS
The respective Boards of Directors of Madison Dearborn, the Merger
Subsidiary and the Company may, by written agreement, at any time before or
after the approval of the Merger Agreement by the Company's stockholders,
amend the Merger Agreement, provided that after such stockholder approval no
amendment or modification may be made that would materially adversely affect
the rights of the Company's stockholders without the further approval of such
stockholders. Each party may, to the extent legally permitted, extend the time
for the performance of any of the obligations of any other party to the Merger
Agreement, waive any inaccuracies in the representations or warranties of any
other party contained in the Merger Agreement, waive compliance or performance
by any other party with any covenants, agreements or obligations contained in
the Merger Agreement or waive the satisfaction of any condition that is
precedent to its performance under the Merger Agreement.
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CONDUCT OF BUSINESS PENDING THE MERGER
The Company has agreed that during the period from the date of the Merger
Agreement to the Effective Time, except as otherwise provided in the Merger
Agreement or consented to by Madison Dearborn, each of the Company and its
subsidiaries will conduct its business in the usual, regular, and ordinary
course of business substantially the same manner as conducted prior to the
date of the Merger Agreement and will use all reasonable efforts to preserve
intact its business organization, keep available the services of its current
officers and employees and preserve relationships with customers, suppliers
and others having material business dealings with it to the end that its
goodwill and ongoing business shall not be impaired in any material respect at
the Effective Time. The Company has further agreed that it will not or permit
its subsidiaries to take certain enumerated actions which include the
following: (i) declare or pay any dividends on or make any other distributions
in respect of any of its capital stock; (ii) acquire or agree to acquire any
assets of any corporation, partnership, association, or other business
organization or division thereof, except for the purchase of inventory and
supplies in the ordinary course of business; (iii) sell, lease, encumber or
otherwise dispose of, or agree to sell, lease (whether such lease is an
operation or capital lease), encumber, or otherwise dispose of, any of its
assets (including, without limitation, any capital stock or other ownership
interest of any subsidiary of the Company) except for sales of inventory in
the ordinary course of business consistent with past practice; (iv) take or
agree or commit to take any action that is reasonably likely to result in any
of the Company's representations or warranties contained in the Merger
Agreement being untrue in any material respects or any of the Company's
covenants contained in the Merger Agreement or any of the conditions to the
Merger not being satisfied in all material respects; (v) without the prior
written consent of Madison Dearborn, (A) grant any increases in the
compensation of any of its directors, officers, or key employees, (B) pay or
agree to pay any pension, retirement allowance or other employee benefit not
required or contemplated to be paid prior to the Effective Time by any of the
existing benefit plans or employee arrangements as in effect on the date of
the Merger Agreement to any such director, officer or key employee, whether
past or present, (C) enter into any new, or materially amend any existing,
employment, severance, or termination agreement with any such director,
officer, or key employee or, (D) except as may be required by law, become
obligated under any new employee benefit plan or employee arrangement, which
was not in existence on the date of the Merger Agreement, or amend any such
plan or arrangement in existence on the date of the Merger Agreement if such
amendment would have the effect of materially enhancing any benefits
thereunder; (vi) assume or incur any indebtedness for borrowed money or
guarantee any such indebtedness, issue or sell any debt securities or warrants
or rights to acquire any debt securities of the Company or any of its
subsidiaries or guarantee any debt securities of others (other than borrowings
under the Company's existing revolving credit facility in the ordinary course
of business consistent with past practice) or enter into any operating or
capital lease (other than entering into operating leases in connection with
leasing additional retail space in the ordinary course of business consistent
with past practice) or create any mortgages, liens, security interests or
other encumbrances on the property of the Company or any of its subsidiaries,
or enter into any "keep well" or other agreement or arrangement to maintain
the financial condition of another person; (vii) enter into, modify, rescind,
terminate, waive, release or otherwise amend in any material respect any of
the terms or provisions of any material contract; or (viii) incur any capital
expenditures in excess of $100,000 except for capital expenditures
contemplated by the Company's budget previously supplied to Madison Dearborn.
NO SOLICITATION
The Merger Agreement provides that neither the Company nor any of its
representatives will directly or indirectly (i) initiate, solicit, or
encourage or take any other action to facilitate any proposal that
constitutes, or could reasonably be expected to lead to, any Acquisition
Proposal, (ii) provide any information to any person or entity concerning the
Company (other than information generally provided in the ordinary course of
its business) or (iii) enter into or negotiate with any person to obtain an
Acquisition Proposal or agree to or endorse any Acquisition Proposal. The
Company agreed to notify Madison Dearborn of the relevant details relating to
inquiries and proposals which it may receive and to provide Madison Dearborn
with a copy of any inquiry or proposal. The Board of Directors of the Company,
however, is not prohibited from responding to any unsolicited written, bona
fide Acquisition Proposal if (A) the Board of Directors, after consultation
with SBC Warburg
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Dillon Read, determines in good faith that such Acquisition Proposal is
reasonably capable of being completed on the terms proposed and would, if
consummated, result in a transaction more favorable to the Company's
stockholders than the Merger, (B) the Board of Directors, after consultation
with its independent legal counsel, determines in good faith that such action
is necessary for the Board of Directors to comply with its fiduciary duties to
stockholders under applicable law, (C) prior to taking such action, the
Company (x) provides reasonable prior notice to Madison Dearborn to the effect
that it is taking such action and (y) receives from such person or entity an
executed confidentiality agreement in reasonably customary form, and (D) the
Company advises Madison Dearborn as to all of the relevant details relating to
any such discussions or negotiations.
TERMINATION OF MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned, at any time
prior to the Effective Time, whether before or after the approval by the
Company's stockholders, (i) by the mutual consent of Madison Dearborn and the
Company; (ii) by Madison Dearborn if there has been a material
misrepresentation or breach of warranty in the representations and warranties
of the Company made in the Merger Agreement or there has been a material
failure by the Company to comply with its obligations under the Merger
Agreement; (iii) by the Company if there has been a material misrepresentation
or breach of warranty in the representations and warranties of Madison
Dearborn made in the Merger Agreement or there has been a material failure by
Madison Dearborn to comply with its obligations under the Merger Agreement;
(iv) by either Madison Dearborn or the Company if all conditions to that
party's obligation to consummate the Merger have not been satisfied or waived
by March 12, 1998, unless such failure of consummation is due to the failure
of the terminating party to perform or observe the covenants, agreements, and
conditions of the Merger Agreement to be performed or observed by it; (v) by
either Madison Dearborn or the Company if the consummation of the Merger would
violate any nonappealable final order, decree or judgment of any court or
governmental body or agency having competent jurisdiction; or (vi) by Madison
Dearborn if a "Triggering Event" occurs or as it terminates the Merger
Agreement under certain other circumstances.
If Madison Dearborn or the Company terminates the Merger Agreement as
provided above, there will be no liability on the part of any party or its
officers, directors or stockholders, except as described in "Fees and
Expenses" below.
FEES AND EXPENSES
The Merger Agreement provides that all costs and expenses in connection with
the Merger Agreement and the transactions contemplated thereby shall be paid
by the party incurring such expense, except as otherwise provided in the
Merger Agreement and except with respect to claims for damages incurred as a
result of the breach of the Merger Agreement. In addition, the Company has
agreed to pay Madison Dearborn a fee equal to $9,750,000 upon (i) the
termination of the Merger Agreement in accordance with the terms thereof in
the event of any of the following Triggering Events: (1) the Board shall have
(A) withdrawn or modified, in a manner adverse to Madison Dearborn or the
Merger Subsidiary, its recommendation of the Merger Agreement or the Merger or
(B) failed to confirm its recommendations of the Merger Agreement or the
Merger within two business days after a written request by Madison Dearborn to
do so after the occurrence of an Acquisition Proposal; (2) the Board shall
have approved, endorsed or recommended to the stockholders of the Company an
Acquisition Proposal; (3) the Company shall have entered into an agreement
(other than a confidentiality agreement as contemplated by the Merger
Agreement) with respect to an Acquisition Proposal; (4) any person or group
(other than Madison Dearborn, the Merger Subsidiary or any of their
affiliates) shall have acquired shares of the Company's common stock after the
date of the Merger Agreement which, when added to shares already owned by such
person or group, constitute a majority of the outstanding shares or a tender
or exchange offer for shares shall have been commenced and such offer
ultimately results, including after the termination of the Merger Agreement,
in a person or group owning a majority of the outstanding shares; or (5) (A)
an Acquisition Proposal is made and (B) the Company fails to call and hold a
stockholders meeting to approve the Merger Agreement and the Merger as
promptly as is reasonably practicable having regard to the expected timing of
the financing of the Merger and, in any event, on or prior to March 6, 1998
(such time period may be extended by an amount of
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time equal, in the reasonable judgment of the Company, to any delays beyond
the reasonable control of the Company in obtaining any required regulatory
approvals in connection with the transactions contemplated by the Merger
Agreement); or (ii) the termination of the Merger Agreement in accordance with
its terms following a material and willful breach by the Company of any
covenant or agreement set forth in the Merger Agreement, which breach could
reasonably be expected to aid or encourage an Acquisition Proposal and shall
not have been cured within ten business days following receipt by the Company
of notice of such breach.
Upon any termination of the Merger Agreement (other than a termination by
the Company, so long as it is not then in material breach of its obligations
under the Merger Agreement, in the event that there has been a breach of any
representation, warranty, covenant or agreement by Madison Dearborn, which
breach has not been cured within five business days following receipt by
Madison Dearborn of notice of such breach), the Company has agreed to pay to
Madison Dearborn (not later than one business day after receipt of reasonable
documentation therefor and in no event prior to January 2, 1998) such amounts
as may be necessary to reimburse Madison Dearborn and the Merger Subsidiary
for their reasonable out-of-pocket fees and expenses incurred or paid by or on
behalf of Madison Dearborn or the Merger Subsidiary to third parties in
connection with the Merger or the consummation of any of the transactions
contemplated by the Merger Agreement, including all costs and reasonable fees
and expenses of counsel, investment banking firms, accountants, experts and
consultants, provided that (x) reimbursement for such fees and expenses is to
be limited to $1,000,000 and (y) reimbursement under this sentence does not
cover fees incurred or paid by or on behalf of Madison Dearborn or the Merger
Subsidiary under the financing letters obtained by Madison Dearborn and the
Merger Subsidiary to provide debt financing for the transactions contemplated
by the Merger Agreement. In addition, in the event the payment becomes due
under the preceding sentence, the Company has agreed to pay to Madison
Dearborn (not later than one business day after receipt of reasonable
documentation therefor) all fees and expenses incurred or paid by or on behalf
of Madison Dearborn or the Merger Subsidiary under the financing letters,
provided that reimbursement for fees and expenses under this sentence is to be
limited to $1,000,000. The Company has agreed to, in any event, pay the amount
requested (subject to the limits in the preceding two sentences) within one
business day of receipt of reasonable documentation from Madison Dearborn. The
amounts payable to Madison Dearborn and the Merger Subsidiary under this
paragraph are to be in addition to (and not an offset against) the amount (if
any) payable to Madison Dearborn under the preceding paragraph.
Estimated fees and expenses in connection with the Merger and related
transactions (assuming consummation thereof) are as follows:
<TABLE>
<S> <C>
Financial advisor fees....................................... $ 5,000,000
Senior lender fees........................................... $ 3,500,000
Legal fees................................................... $ 1,000,000
Accounting fees.............................................. $ 350,000
Filing fees, printing costs and other expenses............... $ 250,000
-----------
TOTAL...................................................... $10,150,000
</TABLE>
The Surviving Corporation will pay all or a portion of these costs out of
the proceeds of the financing.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties, including representations and warranties by the Company with respect
to its corporate existence and power, capital structure, corporate
authorization, noncontravention, consents and approvals, SEC filings,
information supplied, compliance with applicable laws, litigation, taxes,
pension and benefit plans and ERISA, absence of certain changes or events,
absence of undisclosed material liabilities, opinion of financial advisor,
vote required, labor matters, intangible property, environmental matters, real
property, board recommendation, material contracts, related party
transactions, indebtedness, liens, and other matters.
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Madison Dearborn and the Merger Subsidiary have also made certain
representations and warranties with respect to corporate or partnership
existence and power, corporate or partnership authorization, consent and
approvals, noncontravention, information supplied, board recommendation,
financing, and other matters.
CERTAIN REGULATORY MATTERS
Consummation of the Merger is conditioned upon receipt by Madison Dearborn
and the Company of such regulatory and other approvals as are required under
applicable law. Other than matters described below, Madison Dearborn and the
Company know of no such regulatory or other approvals required by law.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), certain acquisition transactions, including the proposed Merger, may
not be consummated unless certain information has been furnished to the
Federal Trade Commission (the "FTC") and the Antitrust Division of the Justice
Department (the "Antitrust Division") and certain waiting period requirements
have expired or been terminated. In accordance with the HSR Act, Madison
Dearborn and the Company each filed Notification and Report Forms and certain
supplementary materials with the Antitrust Division and the FTC for review in
connection with the proposed Merger. The FTC granted early termination of the
waiting period under the HSR Act on November 3, 1997.
INDEMNIFICATION
The Merger Agreement provides that the Company will, and from and after the
Effective Time indemnify, defend and hold harmless each person who was at the
date of the Merger Agreement, or had been at any time prior to the date of the
Merger Agreement or who becomes prior to the Effective Time, an officer or
director of the Company (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses (including attorneys' fees and expenses),
liabilities or judgments or amounts paid in settlement with the approval of
the indemnifying party (which approval shall not be unreasonably withheld) of
or in connection with any threatened or actual claim, action, suit, proceeding
or investigation based in whole or in part on or arising in whole or in part
on, or arising in whole or in part out of the fact that such person is or was
a director or officer of the Company or any of its subsidiaries whether
pertaining to any matter existing or occurring at or prior to the Effective
Time and whether asserted or claimed prior to, or at or after, the Effective
Time ("Indemnified Liabilities"), including all Indemnified Liabilities based
in whole or in part on, or arising in whole or in part out of, or pertaining
to the Merger Agreement or the transactions contemplated thereby, in each
case, to the full extent a corporation is permitted under the DGCL to
indemnify its own directors or officers, as the case may be, and the Company
will pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law. All
rights to indemnification, including provisions relating to advances of
expenses incurred in defense of any action or suit, existing in favor of the
Indemnified Parties with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect for
a period of not less six years from the Effective Time; provided, however,
that all rights to indemnification in respect of any Indemnified Liabilities
asserted or made within such period shall continue until the disposition of
such Indemnified Liabilities.
DIRECTORS' AND OFFICERS' INSURANCE
For a period of six years after the Effective Time, the Company shall cause
to be maintained in effect the current policies of directors' and officers'
liability insurance maintained by the Company and its subsidiaries (provided
that Madison Dearborn may substitute therefor policies of at least the same
coverage and containing terms and conditions which are not materially less
advantageous to the Indemnified Parties) with respect to matters arising
before the Effective Time, provided that Madison Dearborn shall not be
required to pay an annual premium for such insurance in excess of 200% of the
last annual premium paid by the Company prior to the date of the Merger
Agreement, but in such case shall purchase as much coverage as possible for
such amount.
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FINANCING
It is estimated that approximately $415 million (net of cash and cash
equivalents of the Company) will be required to consummate the Merger and
provide current and future working capital for the Company. The principal
sources for financing the Merger will be provided by (i) an equity investment
of $117.9 million consisting of (A) an $85.4 million investment by the Fund
(comprised of $4.6 million of common stock and $80.8 million of junior
preferred stock), (B) a $7.5 million of investment by certain members of
management of the Company (comprised of $0.4 million in common stock and $7.1
million in junior preferred stock) and (C) a $25.0 million investment by
certain unaffiliated investors in units consisting of senior exchangeable
redeemable preferred stock and common stock, (ii) the sale of senior
subordinated notes ($100 million) and (iii) a credit facility with senior
lenders including a $90 million revolving credit facility (which, subject to
certain conditions, can be increased up to $115 million) and term loans ($110
million). The senior subordinated notes will be unsecured obligations, will
mature on the tenth anniversary of issuance, will bear interest at a fixed
rate to be determined and will be redeemable by the issuer commencing in 2002
at prices to be determined. Borrowings under the credit facility will be
secured by substantially all of the Surviving Corporation's assets. The
revolving credit facility will terminate on the fifth anniversary of the
closing. $40 million of the term loans will mature on the fifth anniversary of
the closing, and the remaining $70 million will mature on the seventh
anniversary of the closing, subject to mandatory amortization prior to
maturity from excess cash flow and certain other sources. Interest on
borrowings under the credit facility will, in the event a LIBOR pricing option
is exercised, range from 2.5% to 3% over LIBOR, and, in the event a corporate
base rate pricing option is exercised, range from 1.5% to 2% over the
corporate base rate. Closing of the financing is subject to the satisfaction
of numerous conditions.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Holders of shares of the Company's common stock are entitled to appraisal
rights under Section 262 of the DGCL ("Section 262"). Section 262 is reprinted
in its entirety as Appendix C to this Proxy Statement. All references in
Section 262 and in this summary to a "stockholder" are to the record holder of
the shares of the Company's common stock as to which appraisal rights are
asserted. A person having a beneficial interest in shares of the Company's
common stock that are held of record in the name of another person, such as a
broker or nominee, must act promptly to cause the record holder to follow the
steps summarized below properly and in a timely manner to perfect whatever
appraisal rights the beneficial owner may have.
The following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Appendix C.
THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO
WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO BECAUSE FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET
FORTH HEREIN AND THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the Company, before the taking of the vote on the Merger at the
Special Meeting, a written demand for appraisal of his shares of the Company's
common stock. The demand must reasonably inform the Company of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares of the Company's common stock. This written demand for
appraisal of the shares of the Company's common stock must be in addition to
and separate from any proxy or vote against the Merger. Voting against,
abstaining from voting or failing to vote on the Merger will not constitute a
demand for appraisal within the meaning of Section 262. Any stockholder
electing to demand his appraisal rights will not be granted appraisal rights
under Section 262 if such stockholder has either voted in favor of the Merger
or consented thereto in writing (including by granting the proxy solicited by
this Joint Proxy Statement or by returning a signed proxy without specifying a
vote against the Merger or a direction to abstain from such vote).
Additionally, appraisal rights will not be granted under Section 262 if the
stockholder does not continuously hold through the Effective Time his shares
of the Company's common stock with respect to which he demands appraisal.
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<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
MADISON DEARBORN PARTNERS II, L.P.,
TUESDAY MORNING ACQUISITION CORP.
AND
TUESDAY MORNING CORPORATION
DATED AS OF SEPTEMBER 12, 1997
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of September 12, 1997 (this
"Agreement"), is made and entered into by and among Madison Dearborn Partners
II, L.P., a Delaware limited partnership ("Parent"), Tuesday Morning
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and Tuesday Morning Corporation, a Delaware corporation (the
"Company").
WHEREAS, the general partner of Parent and the respective Boards of
Directors of Sub and the Company have approved the acquisition of the Company
by Parent, by means of the merger (the "Merger") of Sub with and into the
Company, upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, pursuant to those certain option agreements (the "Option
Agreements"), dated as of August 13, 1997, by and between Parent and each of
Messrs. Lloyd L. Ross and Jerry M. Smith (the "Stockholders"), Parent has
acquired an option (the "Option") to purchase 3,896,757 shares of common
stock, par value $0.01 per share, of the Company ("Shares" or "Company Common
Stock") held by the Stockholders (including 1,143,600 Shares issuable to the
Stockholders upon exercise of stock options), which Shares are currently being
held in escrow by NationsBank of Texas, N.A.;
WHEREAS, Parent, Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the consummation thereof;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
The Merger
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law,
as amended (the "DGCL"), Sub shall be merged with and into the Company at the
Effective Time. At the Effective Time, the separate corporate existence of Sub
shall cease, and the Company shall continue as the surviving corporation and a
direct wholly owned subsidiary of Parent (Sub and the Company are sometimes
hereinafter referred to as "Constituent Corporations" and, as the context
requires, the Company is sometimes hereinafter referred to as the "Surviving
Corporation"), and shall continue under the name "Tuesday Morning
Corporation."
1.2 Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1, and subject to the satisfaction or waiver of the conditions set forth in
Article VI, the closing of the merger (the "Closing") shall take place at
10:00 a.m., Chicago time, on the first business day after satisfaction and/or
waiver of all of the conditions set forth in Article VI (the "Closing Date"),
at the offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois
60601, unless another date, time or place is agreed to in writing by the
parties hereto.
1.3 Effective Time of the Merger. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by
filing a certificate of merger (the "Certificate of Merger") with the
Secretary of State of the State of Delaware, as provided in the DGCL, on the
Closing Date. The Merger shall become effective upon such filing or at such
time thereafter as is provided in the Certificate of Merger (the "Effective
Time").
1.4 Effects of the Merger.
(a) The Merger shall have the effects as set forth in the applicable
provisions of the DGCL.
A-1
<PAGE>
(b) The directors of Sub and the officers of the Company immediately prior
to the Effective Time shall, from and after the Effective Time, be the initial
directors and officers of the Surviving Corporation until their successors
have been duly elected or appointed and qualified, or until their earlier
death, resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and Bylaws.
(c) The Certificate of Incorporation of the Company shall be amended and
restated in its entirety as set forth on Exhibit A hereto, and, from and after
the Effective Time, such amended and restated Certificate of Incorporation
shall be the Certificate of Incorporation of the Surviving Corporation, until
duly amended in accordance with the terms thereof and the DGCL.
(d) The Bylaws of the Company shall be amended and restated in their
entirety as set forth on Exhibit B hereto and, from and after the Effective
Time, such amended and restated Bylaws shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by applicable law, the
Certificate of Incorporation or the Bylaws.
ARTICLE II
Effect of the Merger on the Capital Stock of the Constituent Corporations;
Exchange of Certificates
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder of shares of Company Common
Stock or any holder of shares of capital stock of Sub:
(a) Capital Stock of Sub. Each share of the capital stock of Sub issued
and outstanding immediately prior to the Effective Time shall be converted
into and become one fully paid and nonassessable share of Common Stock, par
value $0.01 per share, of the Surviving Corporation or such other equity
securities of the Surviving Corporation as Parent shall specify.
(b) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of
Company Common Stock and all other shares of capital stock of the Company
that are owned by the Company and all shares of Company Common Stock and
other shares of capital stock of the Company owned by Parent or Sub shall
be canceled and retired and shall cease to exist and no consideration shall
be delivered or deliverable in exchange therefor.
2.2 Conversion of Securities. At the Effective Time, by virtue of the Merger
and without any action on the part of Sub, the Company or the holders of any
of the shares thereof:
(a) (i) Subject to the other provisions of this Section 2.2, each share
of Company Common Stock issued and outstanding immediately prior to the
Effective Time (excluding shares owned, directly or indirectly (other than
the shares covered by the Option), by the Company or by Parent, Sub or any
other Subsidiary of Parent and Dissenting Shares (as defined in Section
2.6)) shall be converted into the right to receive $25.00 per share, net to
the seller in cash, payable to the holder thereof, without any interest
thereon (the "Merger Consideration"), upon surrender and exchange of the
Certificate (as defined in Section 2.3) representing such share of Company
Common Stock. As used in this Agreement, the word "Subsidiary", with
respect to any party, means any corporation, partnership, joint venture or
other organization, whether incorporated or unincorporated, of which: (i)
such party or any other Subsidiary of such party is a general partner; (ii)
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation, partnership,
joint venture or other organization is held by such party or by any one or
more of its Subsidiaries, or by such party and any one or more of its
Subsidiaries; or (iii) at least 25% of the equity, other securities or
other interests is, directly or indirectly, owned or controlled by such
party or by any one or more of its Subsidiaries, or by such party and any
one or more of its Subsidiaries.
(ii) All such shares of Company Common Stock, when converted as provided
in Section 2.2(a)(i), no longer shall be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
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Certificate previously evidencing such Shares shall thereafter represent
only the right to receive the Merger Consideration. The holders of
Certificates previously evidencing Shares outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to the
Company Common Stock except as otherwise provided herein or by law and,
upon the surrender of Certificates in accordance with the provisions of
Section 2.3, shall only represent the right to receive for their Shares,
the Merger Consideration, without any interest thereon.
2.3 Payment for Shares.
(a) Paying Agent. Prior to the Effective Time, Sub shall appoint a United
States bank or trust company reasonably acceptable to the Company to act as
paying agent (the "Paying Agent") for the payment of the Merger Consideration,
and Sub shall deposit or shall cause to be deposited with the Paying Agent in
a separate fund established for the benefit of the holders of shares of
Company Common Stock, for payment in accordance with this Article II, through
the Paying Agent (the "Payment Fund"), immediately available funds in amounts
necessary to make the payments pursuant to Section 2.2(a)(i) and this Section
2.3 to holders (other than the Company or Parent, Sub or any other Subsidiary
of Parent, or holders of Dissenting Shares). The Paying Agent shall, pursuant
to irrevocable instructions, pay the Merger Consideration out of the Payment
Fund.
The Paying Agent shall invest portions of the Payment Fund as Parent directs
in obligations of or guaranteed by the United States of America, in commercial
paper obligations receiving the highest investment grade rating from both
Moody's Investors Services, Inc. and Standard & Poor's Corporation, or in
certificates of deposit, bank repurchase agreements or banker's acceptances of
commercial banks with capital exceeding $1,000,000,000 (collectively,
"Permitted Investments"); provided, however, that the maturities of Permitted
Investments shall be such as to permit the Paying Agent to make prompt payment
to former holders of Company Common Stock entitled thereto as contemplated by
this Section. The Surviving Corporation shall cause the Payment Fund to be
promptly replenished to the extent of any losses incurred as a result of
Permitted Investments. All earnings on Permitted Investments shall be paid to
the Surviving Corporation. If for any reason (including losses) the Payment
Fund is inadequate to pay the amounts to which holders of shares of Company
Common Stock shall be entitled under this Section 2.3, the Surviving
Corporation shall in any event be liable for payment thereof. The Payment Fund
shall not be used for any purpose except as expressly provided in this
Agreement.
(b) Payment Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall instruct the Paying Agent to
mail to each holder of record (other than the Company or Parent, Sub or any
other Subsidiary of Parent) of a Certificate or Certificates which,
immediately prior to the Effective Time, evidenced outstanding shares of
Company Common Stock (the "Certificates"), (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent, and shall be in such form and have such
other provisions as the Surviving Corporation reasonably may specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for payment therefor. Upon surrender of a Certificate for
cancellation to the Paying Agent together with such letter of transmittal,
duly executed, and such other customary documents as may be required pursuant
to such instructions, the holder of such Certificate shall be entitled to
receive in respect thereof cash in an amount equal to the product of (x) the
number of shares of Company Common Stock represented by such Certificate and
(y) the Merger Consideration, and the Certificate so surrendered shall
forthwith be canceled. Absolutely no interest shall be paid or accrued on the
Merger Consideration payable upon the surrender of any Certificate. If payment
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 otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment to a person other
than the registered holder of the surrendered Certificate or established to
the satisfaction of the Surviving Corporation that such tax has been paid or
is not applicable. Until surrendered in accordance with the provisions of this
Section 2.3(b), each Certificate (other than Certificates representing Shares
owned by the Company or Parent, Sub or any other Subsidiary of Parent), shall
represent for all purposes only the right to receive the Merger Consideration.
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(c) Termination of Payment Fund; Interest. Any portion of the Payment Fund
which remains undistributed to the holders of Company Common Stock for 180
days after the Effective Time shall be delivered to the Surviving Corporation
upon demand, and any holders of Company Common Stock who have not theretofore
complied with this Article II and the instructions set forth in the letter of
transmittal mailed to such holder after the Effective Time shall thereafter
look only to the Surviving Corporation for payment of the Merger Consideration
to which they are entitled. All interest accrued in respect of the Payment
Fund shall inure to the benefit of and be paid to the Surviving Corporation.
(d) No Liability. Neither Parent nor the Surviving Corporation shall be
liable to any holder of shares of Company Common Stock for any cash from the
Payment Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
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
transfer of shares of Company Common Stock thereafter on the records of the
Company. On or after the Effective Time, any certificates presented to the
Paying Agent or Parent for any reason shall be converted into the Merger
Consideration.
2.5 Stock Option Plans. At or about the Effective Time, the holders of then
outstanding options to purchase Shares under the Company's Restated Incentive
Stock Option Plan and Non-Qualified Stock Option Plan (the "Stock Option
Plans"), whether or not then exercisable (collectively, the "Employee
Options"), shall, in cancellation and settlement thereof, receive for each
Share subject to such Employee Option an amount (subject to any applicable
withholding tax) in cash equal to the difference between the Merger
Consideration and the per Share exercise price of such Employee Option to the
extent such difference is a positive number (such amount being hereinafter
referred to as, the "Option Consideration"). Upon receipt of the Option
Consideration, the Employee Option shall be canceled. The surrender of an
Employee Option to the Company in exchange for the Option Consideration shall
be deemed a release of any and all rights the holder had or may have had in
respect of such Employee Option. Prior to the Closing, the Company shall
obtain all necessary consents or releases from holders of Employee Options
under the Stock Option Plans and take all such other lawful action as may be
necessary to give effect to the transactions contemplated by this Section 2.5.
The Stock Option Plans shall terminate as of the Effective Time, and the
provisions in any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of the
Company or any Subsidiary thereof shall be canceled as of the Effective Time.
Prior to the Closing, the Company shall take all action necessary to (i)
ensure that, following the Effective Time, no participant in the Stock Option
Plans or any other plans, programs or arrangements shall have any right
thereunder to acquire equity securities of the Company, the Surviving
Corporation or any Subsidiary thereof and (ii) terminate all such plans,
programs and arrangements.
2.6 Dissenting Shares. Notwithstanding any other provisions of this
Agreement to the contrary, shares of Company Common Stock that are outstanding
immediately prior to the Effective Time and which are held by stockholders who
shall have not voted in favor of the Merger or consented thereto in writing
and who shall have demanded properly in writing appraisal for such shares in
accordance with Section 262 of the DGCL (collectively, the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Merger Consideration. Such stockholders instead shall be entitled to receive
payment of the appraised value of such shares of Company Common Stock held by
them in accordance with the provisions of such Section 262 of the DGCL, except
that all Dissenting Shares held by stockholders who shall have failed to
perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares of Company Common Stock under such Section 262 of the
DGCL shall thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Merger Consideration upon surrender in the manner
provided in Section 2.3, of the Certificate or Certificates that, immediately
prior to the Effective Time, evidenced such shares of Company Common Stock.
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ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of the Company. The Company represents
and warrants to Parent and Sub as follows:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation,
has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, and is duly
qualified to do business as a foreign corporation and in good standing to
conduct business in each jurisdiction in which the business it is
conducting, or the operation, ownership or leasing of its properties, makes
such qualification necessary, other than in such jurisdictions where the
failure so to qualify would not (i) have a Material Adverse Effect (as
defined below) with respect to the Company or (ii) impair in any material
respect the ability of the Company to consummate the transactions
contemplated by this Agreement. The Company has heretofore delivered to
Parent complete and correct copies of its and its Subsidiaries' respective
Certificates of Incorporation and Bylaws. All Subsidiaries of the Company
and their respective jurisdictions of incorporation or organization are
identified on Schedule 3.1(a). As used in this Agreement: a "Material
Adverse Effect" shall mean, with respect to any party, the result of one or
more events, changes or effects which, individually or in the aggregate,
would have a material adverse effect on the business, operations, results
of operations, assets, condition (financial or otherwise) or prospects of
such party and its Subsidiaries, taken as a whole.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of the Company consists of 20,000,000 Shares and 2,000,000 shares of
preferred stock, par value $1.00 per share (the "Preferred Stock"). As of
the date hereof: (i) 12,346,974 Shares are issued and 11,917,681 Shares are
outstanding; (ii) no shares of Preferred Stock are issued and outstanding;
and (iii) 1,248,863 Shares are reserved for issuance pursuant to Employee
Options outstanding under the Stock Option Plans. Except for the issuance
of Shares pursuant to the exercise of outstanding Employee Options, there
are no employment, executive termination or similar agreements providing
for the issuance of Shares. No Shares are held by the Company, and no
Shares are held by any Subsidiary of the Company. No bonds, debentures,
notes or other instruments or evidence of indebtedness having the right to
vote (or convertible into, or exercisable or exchangeable for, securities
having the right to vote) on any matters on which the Company stockholders
may vote ("Company Voting Debt") are issued or outstanding. All outstanding
Shares are validly issued, fully paid and nonassessable and are not subject
to preemptive or other similar rights. Except as set forth on Schedule
3.1(b), all outstanding shares of capital stock of the Subsidiaries of the
Company are owned by the Company or a direct or indirect Subsidiary of the
Company, free and clear of all liens, charges, encumbrances, claims and
options of any nature. Except as set forth in this Section 3.1(b), there
are outstanding: (i) no shares of capital stock, Company Voting Debt or
other voting securities of the Company; (ii) no securities of the Company
or any Subsidiary of the Company convertible into, or exchangeable or
exercisable for, shares of capital stock, Company Voting Debt or other
voting securities of the Company or any Subsidiary of the Company; and
(iii) no options, warrants, calls, rights (including preemptive rights),
commitments or agreements to which the Company or any Subsidiary of the
Company is a party or by which it is bound, in any case obligating the
Company or any Subsidiary of the Company to issue, deliver, sell, purchase,
redeem or acquire, or cause to be issued, delivered, sold, purchased,
redeemed or acquired, additional shares of capital stock or any Company
Voting Debt or other voting securities of the Company or of any Subsidiary
of the Company, or obligating the Company or any Subsidiary of the Company
to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. Except as set forth on Schedule 3.1(b), since June
30, 1997, the Company has not (i) granted any options, warrants or rights
to purchase shares of Company Common Stock or (ii) amended or repriced any
Employee Option or the Stock Option Plans. The Company has previously
delivered to Parent a complete and correct list of all outstanding options,
warrants and rights to purchase shares of Company Common Stock and the
exercise prices relating thereto. Except for the Option Agreements, there
are not as of the date hereof and there will not be at the Effective Time
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any stockholder agreements, voting trusts or other agreements or
understandings to which the Company is a party or by which it is bound
relating to the voting of any shares of the capital stock of the Company
which will limit in any way the solicitation of proxies by or on behalf of
the Company from, or the casting of votes by, the stockholders of the
Company with respect to the Merger. There are no restrictions on the
Company to vote the stock of any of its Subsidiaries.
(c) Authority; No Violations; Consents and Approvals.
(i) The Company has all requisite corporate power and authority to
enter into this Agreement and, subject to the approval of this
Agreement and the Merger by the holders of a majority of the
outstanding Shares ("Company Stockholder Approval"), to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part
of the Company, subject to the Company Stockholder Approval. This
Agreement has been duly executed and delivered by the Company and,
subject to the Company Stockholder Approval, constitutes a valid and
binding obligation of the Company enforceable in accordance with its
terms and conditions except that the enforcement hereof may be limited
by (a) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
(ii) Except as set forth on Schedule 3.1(c)(ii), the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby by the Company will not conflict with, or result in
any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration (including pursuant to any put right) of any obligation or
the loss of a material benefit under, or the creation of a lien,
pledge, security interest or other encumbrance on assets or property,
or right of first refusal with respect to any asset or property (any
such conflict, violation, default, right of termination, cancellation
or acceleration, loss, creation or right of first refusal, a
"Violation"), pursuant to, (A) any provision of the Certificate of
Incorporation or Bylaws of the Company or any of its Subsidiaries or
(B) except as to which requisite waivers or consents have been obtained
and assuming the consents, approvals, authorizations or permits and
filings or notifications referred to in paragraph (iii) of this Section
3.1(c) are duly and timely obtained or made and the Company Stockholder
Approval has been obtained, result in any Violation of (1) any loan or
credit agreement, note, mortgage, deed of trust, indenture, lease,
Benefit Plan (as defined in Section 3.1(i)), Company Permit (as defined
in Section 3.1(f)), or any other agreement, obligation, instrument,
concession, franchise, or license or (2) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company
or any of its Subsidiaries or their respective properties or assets
(collectively, "Laws"). The Board of Directors of the Company has taken
all actions necessary under the DGCL, including approving the
transactions contemplated by this Agreement, to ensure that Section 203
of the DGCL does not, and will not, apply to the transactions
contemplated in this Agreement.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, notice to, or permit from any
court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (a "Governmental
Entity"), is required by or with respect to the Company or any of its
Subsidiaries in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for: (A) the filing of a pre-
merger notification and report form by the Company under the Hart-
Scott-Rodino Antitrust improvements Act of 1976, as amended (the "HSR
Act"), and the expiration or termination of the applicable waiting
period thereunder; (B) the filing with the United States Securities and
Exchange Commission (the "SEC") of (x) a proxy statement in definitive
form relating to a meeting of the holders of Company Common Stock to
approve the Merger (such proxy statement as amended or supplemented
from time to time being hereinafter referred to as the "Proxy
Statement") and (y) such reports under and such other compliance with
the Exchange Act and the rules and regulations thereunder as may be
required in connection with this Agreement and the transactions
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contemplated hereby; (C) the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware; (D) such filings and
approvals as may be required by any applicable state securities, "blue
sky" or takeover laws; and (E) such filings in connection with any
state or local tax which is attributable to the beneficial ownership of
the Company's or its Subsidiaries' real property, if any (collectively,
the "Gains and Transfer Taxes").
(d) SEC Documents. The Company has delivered to Parent a true and
complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the SEC since January
1, 1994 and prior to the date of this Agreement (the "Company SEC
Documents"), which are all the documents (other than preliminary material)
that the Company was required to file with the SEC since such date. As of
their respective dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC promulgated thereunder applicable to such
Company SEC Documents, and none of the Company SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements of the Company included in the Company SEC
Documents complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles ("GAAP") applied
on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements,
as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present
in accordance with applicable requirements of GAAP (subject, in the case of
the unaudited statements, to normal, recurring adjustments, which will not
be material, either individually or in the aggregate) the consolidated
financial position of the Company and its consolidated Subsidiaries as of
their respective dates and the consolidated results of operations and the
consolidated cash flows of the Company and its consolidated Subsidiaries
for the periods presented therein.
(e) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, on the date it is first mailed to the holders of the
Company Common Stock or at the Effective Time, 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. If, at any
time prior to the Effective Time, any event with respect to the Company or
any of its Subsidiaries, or with respect to other information supplied by
the Company for inclusion in the Proxy Statement, shall occur which is
required to be described in an amendment of, or a supplement to, the Proxy
Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of the Company. The Proxy Statement,
insofar as it relates to the Company or its Subsidiaries or other
information supplied by the Company for inclusion therein will comply as to
form, in all material respects, with the provisions of the Exchange Act or
the rules and regulations thereunder.
(f) Compliance with Applicable Laws. The Company and its Subsidiaries
hold all material permits, licenses, variances, exemptions, orders,
franchises and approvals of all Governmental Entities necessary for the
lawful conduct of their respective businesses (the "Company Permits"). The
Company and its Subsidiaries are in compliance in all material respects
with the terms of the Company Permits (a list of which is set forth on
Schedule 3.1(f)). Except as disclosed in Schedule 3.1(f), the Company and
its Subsidiaries have complied in all material respects with all applicable
laws, ordinances and regulations of all Governmental Entities. As of the
date of this Agreement, no investigation or review by any Governmental
Entity with respect to the Company or any of its Subsidiaries is pending
or, to the knowledge of the Company, threatened.
(g) Litigation. Except as set forth on Schedule 3.1(g), there is no suit,
action or proceeding pending or, to the knowledge of the Company,
threatened against or affecting the Company or any Subsidiary of the
Company ("Company Litigation"), nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against the Company or any Subsidiary of the Company ("Company
Order").
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(h) Taxes. Except as set forth on Schedule 3.1(h) hereto:
(i) All Tax Returns required to be filed by or with respect to the
Company and each of its Subsidiaries have been duly and timely filed,
and all such Tax Returns are true, correct and complete in all material
respects. The Company and each of its Subsidiaries has duly and timely
paid (or there has been paid on its behalf) all Taxes that are due, or
claimed or asserted by any taxing authority to be due, from or with
respect to it. With respect to any period for which Taxes are not yet
due with respect to the Company or any Subsidiary, the Company and each
of its Subsidiaries has made due and sufficient current accruals for
such Taxes in accordance with GAAP in the most recent financial
statements contained in the Company SEC Documents. The Company and each
of its Subsidiaries has made (or there has been made on its behalf) all
required estimated Tax payments sufficient to avoid any material
underpayment penalties. The Company and each of its Subsidiaries has
withheld and paid all Taxes required by all applicable laws to be
withheld or paid in connection with any amounts paid or owing to any
employee, creditor, independent contractor or other third party.
(ii) There are no outstanding agreements, waivers, or arrangements
extending the statutory period of limitation applicable to any claim
for, or the period for the collection or assessment of, material Taxes
due from or with respect to the Company or any of its Subsidiaries for
any taxable period. No audit or other proceeding by any court,
governmental or regulatory authority, or similar person is pending or,
to the knowledge of the Company, threatened in regard to any Taxes due
from or with respect to the Company or any of the Subsidiaries or any
Tax Return filed by or with respect to the Company or any of its
Subsidiaries. No assessment of Taxes is proposed against the Company or
any of its Subsidiaries or any of their assets.
(iii) No election under Section 338 of the Code has been made or
filed by or with respect to the Company or any of its Subsidiaries. No
consent to the application of Section 341(f)(2) of the Code (or any
predecessor provision) has been made or filed by or with respect to the
Company or any of its Subsidiaries or any of their assets. None of the
Company or any of its Subsidiaries has agreed to make any adjustment
pursuant to Section 481(a) of the Code (or any predecessor provision)
by reason of any change in any accounting method, and there is no
application pending with any taxing authority requesting permission for
any changes in any accounting method of the Company or any of its
Subsidiaries. None of the assets of the Company or any of its
Subsidiaries is or will be required to be treated as being owned by any
person (other than the Company or its Subsidiaries) pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954,
as amended and in effect immediately before the enactment of the Tax
Reform Act of 1986.
(iv) None of the Company or any of its Subsidiaries is a party to, is
bound by, or has any obligation under, any Tax sharing agreement, Tax
allocation agreement or similar contract.
(v) There is no contract, agreement, plan or arrangement covering any
person that, individually or collectively, could give rise to the
payment of any amount that would not be deductible by the Company or
any of its Subsidiaries by reason of Section 280G of the Code.
(vi) Schedule 3.1(h) accurately sets forth (i) the amount of all
deferred intercompany gains for purposes of Treasury Regulation section
1.1502-13 (including any predecessor regulation) with respect to the
Company and its Subsidiaries; and (ii) the amount of any excess loss
account with respect to the stock of each of the Subsidiaries for
purposes of Treasury Regulation section 1.1502-19 (including any
predecessor regulation).
(vii) The term "Code" shall mean the internal Revenue Code of 1986,
as amended. The term "Taxes" shall mean all taxes, charges, fees,
levies, or other similar assessments or liabilities, including (a)
income, gross receipts, ad valorem, premium, excise, real property,
personal property, sales, use, transfer, withholding, employment,
payroll, and franchise taxes imposed by the United States of America,
or by any state, local, or foreign government, or any subdivision,
agency, or other similar person of the United States or any such
government; and (b) any interest, fines, penalties, assessments, or
additions to taxes resulting from, attributable to, or incurred in
connection with any Tax or any
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contest, dispute, or refund thereof. The term "Tax Returns" shall mean
any report, return, or statement required to be supplied to a taxing
authority in connection with Taxes.
(i) Pension And Benefit Plans; ERISA.
(i) Schedule 3.1(i)(i) sets forth a complete and correct list of:
(A) all "employee benefit plans", as defined in Sections 3(3) and
4(b)(4) of ERISA, under which Company or any of its Subsidiaries has
any obligation or liability, contingent or otherwise ("Benefit Plans");
and
(B) all employment or consulting agreements, and all bonus or other
incentive compensation, deferred compensation, salary continuation
during any absence from active employment for disability or other
reasons, severance, sick days, stock award, stock option, stock
purchase, tuition assistance, club membership, employee discount,
employee loan, or vacation pay agreements, policies or arrangements
which the Company or any of its Subsidiaries maintains or has any
obligation or liability (contingent or otherwise) and each of which has
a cost to the Company or any of its Subsidiaries in excess of $10,000
for any year (the "Employee Arrangements").
(ii) with respect to each Benefit Plan and Employee Arrangement, a
complete and correct copy of each of the following documents (if
applicable) has been delivered to Parent or its representatives: (i) the
most recent plan and related trust documents, and all amendments thereto;
(ii) the most recent summary plan description, and all related summaries of
material modifications thereto; (iii) the most recent Form 5500 (including
schedules and attachments); (iv) the most recent IRS determination letter;
(v) the most recent actuarial reports (including for purposes of Financial
Accounting Standards Board report no. 87, 106 and 112).
(iii) The Company and its Subsidiaries have not during the preceding six
years had any obligation or liability (contingent or otherwise) with
respect to a Benefit Plan which is described in Section 3(35), 3(37),
4(b)(4), 4063 or 4064 of ERISA.
(iv) The Benefit Plans and their related trusts intended to qualify under
Sections 401(a) and 501(a) of the Code, respectively, are qualified under
such sections. Any voluntary employee benefit association which provides
benefits to current or former employees of the Company and its
Subsidiaries, or their beneficiaries, is and has been qualified under
Section 501(c)(9) of the Code.
(v) All contributions or other payments required to have been made by the
Company or any of its Subsidiaries to or under any Benefit Plan or Employee
Arrangement by applicable law or the terms of such Benefit Plan or Employee
Arrangement (or any agreement relating thereto) have been timely and
properly made.
(vi) The Benefit Plans and Employee Arrangements have been maintained and
administered in all material respects in accordance with their terms and
applicable laws.
(vii) Except as disclosed in Schedule 3.1(i)(vii), there are no pending
or, to the best knowledge of the Company, threatened actions, claims or
proceedings against or relating to any Benefit Plan or Employee Arrangement
other than routine benefit claims by persons entitled to benefits
thereunder.
(viii) Except as disclosed in Schedule 3.1(i)(viii), the Company and its
Subsidiaries do not maintain or have an obligation to contribute to retiree
life or retiree health plans which provide for continuing benefits or
coverage for current or former officers, directors or employees of the
Company or any of its Subsidiaries except (i) as may be required under Part
6 of Title I of ERISA) and at the sole expense of the participant or the
participant's beneficiary or (ii) a medical expense reimbursement account
plan pursuant to Section 125 of the Code.
(ix) Except as disclosed in Schedule 3.1(i)(ix) none of the assets of any
Benefit Plan is directly invested in stock of the Company or any of its
affiliates, or property leased to or jointly owned by the Company or any of
its affiliates.
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(x) Except as disclosed in Schedule 3.1(i)(x) or in connection with
equity compensation, neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will (A)
result in any payment becoming due to any employee (current, former or
retired) of the Company and its Subsidiaries, (B) increase any benefits
under any Benefit Plan or Employee Arrangement or (C) result in the
acceleration of the time of payment of, vesting of or other rights with
respect to any such benefits.
(xi) The Company and its Subsidiaries have no liability (contingent or
otherwise) under Section 4069 of ERISA by reason of a transfer of an
underfunded pension plan.
(j) Absence of Certain Changes or Events. Since June 30, 1997, the
business of the Company and its Subsidiaries has been carried on only in
the ordinary and usual course and no event or events has or have occurred
that (either individually or in the aggregate) has had, or could have, a
Material Adverse Effect on the Company.
(k) No Undisclosed Liabilities. Except as specifically and individually
set forth on Schedule 3.1(k) or the other schedules hereto (specific
reference to which shall be made on Schedule 3.1(k)), there are no
liabilities of the Company or any Subsidiary of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable or
otherwise, that are material to the Company and its Subsidiaries considered
as a whole other than: (i) liabilities reflected on the Company's audited
financial statements (together with the related notes thereto) filed with
the Company's Annual Statement on Form 10-K for the year ended December 31,
1996 (as filed with the SEC) or unaudited financial statements contained in
the Company's Quarterly Report on Form 10-Q for the quarters ended March
31, 1997 and June 30, 1997 (such audited and unaudited financial statements
being referred to herein as the "Company Financial Statements"); and (ii)
liabilities under this Agreement.
(l) Opinion of Financial Advisor. The Company has received the opinion of
SBC Warburg Dillon Read Inc., (the "Financial Advisor") dated September 12,
1997, to the effect that, as of the date hereof, the Merger Consideration
to be received by the holders of Company Common Stock in the Merger is fair
from a financial point of view to such holders, a signed, true and complete
copy of which opinion shall be delivered to Parent, and such opinion has
not been withdrawn or modified. True and complete copies of all agreements
and understandings between the Company or any of its affiliates and the
Financial Advisor relating to the transactions contemplated by this
Agreement are attached hereto as Schedule 3.1(l).
(m) Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock is the only vote of the
holders of any class or series of the Company's capital stock necessary
(under applicable law or otherwise) to approve the Merger, this Agreement
and the transactions contemplated hereby.
(n) Labor Matters.
(i) Neither the Company nor any of its Subsidiaries is a party to any
labor or collective bargaining agreement, and no employees of the Company
or any of its Subsidiaries are represented by any labor organization.
Within the preceding three years, there have been no representation or
certification proceedings, or petitions seeking a representation
proceeding, pending or, to the knowledge of the Company, threatened to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority. Within the preceding three years, to the
knowledge of the Company, there have been no organizing activities
involving the Company or any of its Subsidiaries with respect to any group
of employees of the Company or any of its Subsidiaries.
(ii) There are no strikes, work stoppages, slowdowns, lockouts, material
arbitrations or material grievances or other material labor disputes
pending or, to the knowledge of the Company, threatened against or
involving the Company or any of its Subsidiaries. There are no unfair labor
practice charges, grievances or complaints pending or, to the knowledge of
the Company, threatened by or on behalf of any employee or group of
employees of the Company or any of its Subsidiaries.
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(iii) Except as set forth on Schedule 3.1(g), there are no complaints,
charges or claims against the Company or any of its Subsidiaries pending
or, to the knowledge of the Company, threatened to be brought or filed with
any governmental authority, arbitrator or court based on, arising out of,
in connection with, or otherwise relating to the employment or termination
of employment of any individual by the Company or any of its Subsidiaries.
(iv) Each of the Company and its Subsidiaries is in material compliance
with all laws, regulations and orders relating to the employment of labor,
including all such laws, regulations and orders relating to wages, hours,
collective bargaining, discrimination, civil rights, safety and health,
workers, compensation and the collection and payment of withholding and/or
social security taxes and any similar tax.
(v) Since January 1, 1996, there has been no "mass layoff" or "plant
closing" (as defined by the Worker Adjustment Retraining and Notification
Act of 1988, as amended ("WARN Act") with respect to the Company or any of
its Subsidiaries.
(o) Intangible Property. Except as set forth on Schedule 3.1(o) attached
hereto, each of the Company and its subsidiaries owns or has a right to use
each material trademark, trade name, patent, service mark, brand mark,
brand name, computer program, database, industrial design and copyright
owned, used or useful in connection with the operation of its businesses,
including any registrations thereof and pending applications therefor, and
each license or other contract relating thereto (collectively, the "Company
Intangible Property"), free and clear of any and all liens, claims or
encumbrances. Schedule 3.1(o) hereto sets forth a complete list of the
Company Intangible Property. The use of the Company Intangible Property by
the Company or its Subsidiaries does not conflict with, infringe upon,
violate or interfere with or constitute an appropriation of any right,
title, interest or goodwill, including any intellectual property right,
trademark, trade name, patent, service mark, brand mark, brand name,
computer program, database, industrial design, copyright or any pending
application therefor of any other person.
(p) Environmental Matters.
(i) For purposes of this Agreement:
(A) "Environmental Costs and Liabilities" means any and all
losses, liabilities, obligations, damages, fines, penalties,
judgments, actions, claims, costs and expenses (including fees,
disbursements and expenses of legal counsel, experts, engineers and
consultants and the costs of investigation and feasibility studies
and the costs to clean up, remove, treat, or in any other way
address any Hazardous Materials) arising from or under any
Environmental Law.
(B) "Environmental Law" means any applicable law regulating or
prohibiting Releases of Hazardous materials into any part of the
natural environment, or pertaining to the protection of natural
resources, the environment and public and employee health and safety
from Hazardous Materials including the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") (42 U.S.C. (S)
9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
(S) 1801 et seq.), the Resource Conservation and Recovery Act (42
U.S.C. (S) 6901 et seq.), the Clean Water Act (33 U.S.C. (S) 1251 et
seq.), the Clean Air Act (33 U.S.C. (S) 7401 et seq.), the Toxic
Substances Control Act (15 U.S.C. (S) 7401 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. (S) 136 et
seq.), and the Occupational Safety and Health Act (29 U.S.C. (S) 651
et seq.) ("OSHA") and the regulations promulgated pursuant thereto,
and any such applicable state or local statutes, including the
Industrial Site Recovery Act ("IRSA"), and the regulations
promulgated pursuant thereto, as such laws have been and may be
amended or supplemented through the Closing Date;
(C) "Hazardous Material" means any substance, material or waste
which is regulated by any public or governmental authority in the
jurisdictions in which the applicable party or its Subsidiaries
conducts business, or the United States, including any material or
substance which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or
"restricted hazardous waste," "contaminant," "toxic waste" or "toxic
substance" under any provision of Environmental Law and shall also
include petroleum, petroleum products, asbestos, polychlorinated
biphenyls and radioactive materials;
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(D) "Release" means any release, spill, effluent, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching,
or migration into the environment, or into or out of any property; and
(E) "Remedial Action" means all actions, including any expenditures,
required by a governmental entity or required under any Environmental
Law, or voluntarily undertaken to (I) clean up, remove, treat, or in
any other way ameliorate or address any Hazardous Materials or other
substance in the environment; (II) prevent the Release or threat of
Release, or minimize the further Release of any Hazardous Material so
it does not endanger or threaten to endanger the public health or
welfare or the environment; (III) perform pre-remedial studies and
investigations or post-remedial monitoring and care pertaining or
relating to a Release; or (IV) bring the applicable party into
compliance with any Environmental Law.
(ii) (A) The operations of the Company and its Subsidiaries have been
and, as of the Closing Date, will be, in compliance with all
Environmental Laws;
(B) The Company and its Subsidiaries have obtained and will, as of
the Closing Date, maintain all permits required under applicable
Environmental Laws for the continued operations of their respective
businesses, except such permits the lack of which would not materially
impair the ability of the Company and its Subsidiaries to continue
operations;
(C) The Company and its Subsidiaries are not subject to any
outstanding written orders from, or written agreements with, any
Governmental Entity or other person respecting (I) Environmental Laws,
(II) Remedial Action or (III) any Release or threatened Release of a
Hazardous Material;
(D) The Company and its Subsidiaries have not received any written
communication alleging, with respect to any such party, the violation
of or liability under any Environmental Law, which violation or
liability is outstanding;
(E) Neither the Company nor any of its Subsidiaries has any
contingent liability in connection with the Release of any Hazardous
Material into the environment (whether on-site or off-site) which would
be reasonably likely to result in the Company and its Subsidiaries
incurring Environmental Costs and Liabilities in excess of $100,000;
(F) The operations of the Company or its Subsidiaries do not involve
the transportation, treatment, storage or disposal of hazardous waste,
as defined and regulated under 40 C.F.R. Parts 260-270 (in effect as of
the date of this Agreement) or any state equivalent;
(G) Except as set forth on Schedule 3.1(p) attached hereto, to the
knowledge of the Company, there is not now nor has there been in the
past, on or in any owned property of the Company or its Subsidiaries
any of the following: (I) any underground storage tanks or surface
impoundments, (II) any asbestos-containing materials in friable form or
(III) any polychlorinated biphenyls; and
(H) No judicial or administrative proceedings or governmental
investigations are pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries alleging the
violation of or seeking to impose liability pursuant to any
Environmental Law.
(q) Real Property.
(i) The Company has previously provided to Parent a list of all of
the real property owned in fee by the Company and its Subsidiaries.
Each of the Company and its Subsidiaries has good and marketable title
to each parcel of real property owned by it free and clear of all
mortgages, pledges, liens, encumbrances and security interests, except
(1) those reflected or reserved against in the balance sheet of the
Company dated as of December 31, 1996, (2) taxes and general and
special assessments not in default and payable without penalty and
interest, (3) statutory liens arising or incurred in the ordinary
course of business with respect to which the underlying obligations are
not delinquent and (4) liens which are not substantial in character,
amount or extent and which do not detract from the value, or interfere
with the present use, of the property subject thereto or affected
thereby.
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(ii) The Company has previously provided to Parent a list setting forth
each lease, sublease or other agreement (collectively, the "Real Property
Leases") under which the Company or any of its Subsidiaries uses or
occupies or has the right to use or occupy, now or in the future, any real
property. Each Real Property Lease is valid, binding and in full force and
effect, all rent and other sums and charges payable by the Company and its
Subsidiaries as tenants thereunder are current, no termination event or
condition or uncured default of a material nature on the part of the
Company or any Subsidiary of the Company or, to the Company's knowledge,
the landlord, exists under any Real Property Lease. Each of the Company and
its Subsidiaries has a good and valid leasehold interest in each parcel of
real property leased by it free and clear of all mortgages, pledges, liens,
encumbrances and security interests, except (1) those reflected or reserved
against in the balance sheet of the Company dated as of December 31, 1996,
(2) taxes and general and special assessments not in default and payable
without penalty and interest, (3) statutory liens arising or incurred in
the ordinary course of business with respect to which the underlying
obligations are not delinquent and (4) liens which are not substantial in
character, amount or extent and which do not detract from the value, or
interfere with the present use, of the property subject thereto or affected
thereby.
(r) Board Recommendation. The Board of Directors of the Company, at a
meeting duly called and held, has by the vote of those directors
participating (i) determined that this Agreement and the transactions
contemplated hereby, including the Merger, are fair to and in the best
interests of the stockholders of the Company and has approved the same, and
(ii) resolved to recommend that the holders of the shares of Company Common
Stock approve this Agreement and the transactions contemplated herein,
including the Merger.
(s) Material Contracts. The Company has delivered to Parent (i) true and
complete copies of all written contracts, agreements, commitments,
arrangements, leases (including with respect to personal property),
policies and other instruments to which it or any of its Subsidiaries is a
party or by which it or any such Subsidiary is bound which require payments
to be made in excess of $1,000,000 per year (other than purchase orders
entered into in the ordinary course of business, real estate leases or
agreements listed in any of the other disclosure schedules attached hereto)
(collectively, "Material Contracts") and (ii) a written description of each
Material Contract that has not been reduced to writing. Each of the
Material Contracts is listed on Schedule 3.1(s). Neither the Company nor
any of its Subsidiaries is, or has received any notice or has any knowledge
that any other party is, in default in any material respect under any such
Material Contract; and there has not occurred any event or events that with
the lapse of time or the giving of notice or both would constitute such a
material default.
(t) Related Party Transactions. Except as set forth in the Company SEC
Documents, no director, officer, "affiliate" or "associate" (as such terms
are defined in Rule 12b-2 under the Exchange Act) of the Company or any of
its Subsidiaries (i) has borrowed any monies from or has outstanding any
indebtedness or other similar obligations to the Company or any of its
Subsidiaries; (ii) owns any direct or indirect interest of any kind in, or
is a director, officer, employee, partner, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to participate
in the management, operations or profits of, any person or entity which is
(A) a competitor, supplier, customer, distributor, lessor, tenant, creditor
or debtor of the Company or any of its Subsidiaries, (B) engaged in a
business related to the business of the Company or any of its Subsidiaries,
or (C) participating in any transaction to which the Company or any of its
Subsidiaries is a party; or (iii) is otherwise a party to any contract,
arrangement or understanding with the Company or any of its Subsidiaries.
(u) Indebtedness. Except as set forth on Schedule 3.1(u) hereto (or
otherwise disclosed in the Company Financial Statements), neither the
Company nor any of its Subsidiaries has any outstanding indebtedness for
borrowed money or representing the deferred purchase price of property or
services or similar liabilities or obligations, including any guarantee in
respect thereof ("Indebtedness"), or is a party to any agreement,
arrangement or understanding providing for the creation, incurrence or
assumption thereof.
(v) Liens. Except as set forth on Schedule 3.1(v) (or otherwise disclosed
in the Company Financial Statements), neither the Company nor any of its
Subsidiaries has granted, created, or suffered to exist with
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respect to any of its assets, any mortgage, pledge, charge, hypothecation,
collateral assignment, lien, encumbrance or security agreement of any kind
or nature whatsoever, except for statutory liens arising or incurred in the
ordinary course of business with respect to which the underlying
obligations are not delinquent and liens which are not substantial in
character, amount or extent and which do not detract from the value, or
interfere with the present use, of the property subject thereto or affected
thereby.
(w) Suppliers. There has been no material deterioration in the relations
of the Company and its Subsidiaries with any of their material suppliers
since June 30, 1997.
(x) Disclosure. Neither this Section 3 nor any schedule, attachment,
written statement, document, certificate or other item supplied to Parent
by or on behalf of the Company with respect to the transactions
contemplated by this Agreement contains any untrue statement of a material
fact or omits a material fact necessary to make each statement contained
herein or therein not misleading.
3.2 Representations and Warranties of Parent and Sub. Parent and Sub
represent and warrant to the Company as follows:
(a) Organization, Standing and Power. Parent is a limited partnership and
Sub is a corporation, and each is duly organized, validly existing and in
good standing under the laws of its state of organization, has all
requisite power and authority to own, lease and operate its properties and
to carry on its business as now being conducted, and is duly qualified to
do business as a foreign partnership or corporation and in good standing to
conduct business in each jurisdiction in which the business it is
conducting, or the operation, ownership or leasing of its properties, makes
such qualification necessary, other than in such jurisdictions where the
failure so to qualify could not have a Material Adverse Effect with respect
to Parent.
(b) Authority; No Violations; Consents and Approvals.
(i) Each of Parent and Sub has all requisite partnership or corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary partnership or corporate action on
the part of Parent and Sub. This Agreement has been duly executed and
delivered by each of Parent and Sub and assuming this Agreement constitutes
the valid and binding agreement of the Company, constitutes a valid and
binding obligation of Parent and Sub enforceable in accordance with its
terms and conditions except that the enforcement hereof may be limited by
(a) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a proceeding
at law or in equity).
(ii) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by each of Parent and Sub will not
result in any Violation pursuant to any provision of the respective
Partnership Agreement or Certificate of Incorporation or Bylaws of Parent
or Sub (as applicable) or, except as to which requisite waivers or consents
have been obtained and assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in paragraph (iii) of this
Section 3.2(b) are duly and timely obtained or made, and the Company
Stockholder Approval has been obtained, result in any Violation of any loan
or credit agreement, note, mortgage, indenture, lease, or other agreement,
obligation, instrument, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Parent or
Sub or their respective properties or assets.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, notice to, or permit from any Governmental
Entity, is required by or with respect to Parent or Sub in connection with
the execution and delivery of this Agreement by each of Parent and Sub or
the consummation by each of Parent or Sub of the transactions contemplated
hereby, except for: (A) filings under the HSR Act; (B) the filing with the
SEC of such reports under and such other compliance with the Exchange Act
and the rules and regulations thereunder, as may be required in connection
with this Agreement and the transactions contemplated hereby; (C) the
filing of the Certificate of Merger with the Secretary of State of the
State of Delaware; (D) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws; and (E) such
filings in connection with any Gains and Transfer Taxes.
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(c) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub for inclusion in the Proxy Statement will, at the
date it is first mailed to the Company's stockholders or at the Effective
Time, 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. If, at any time prior to the Effective Time, any
event with respect to Parent or Sub, or with respect to information
supplied by Parent or Sub for inclusion in the Proxy Statement, shall occur
which is required to be described in an amendment of, or a supplement to,
any of such documents, such event shall be so described to the Company.
(d) Financing. Parent and Sub have delivered to the Company a true and
complete copy of the letters obtained by Parent and Sub from Merrill Lynch
& Co., Inc. to provide debt financing for the transactions contemplated
hereby (the "Financing Letters"). Parent and its Affiliates will provide
$115,000,000 in equity financing for the transactions contemplated hereby.
(e) Due Diligence. Parent and Sub acknowledge that they and their
representatives have conducted an independent due diligence investigation
of the Company and its Subsidiaries prior to the execution of this
Agreement and will continue to do so. At the time of the execution of this
Agreement, the officers of Parent are not aware of facts which would
currently entitle Parent and Sub to decline to effect the Merger pursuant
to Section 6.2(a). Parent and Sub agree to confirm to the Company in
writing at the time the Proxy Statement is mailed to the Company's
stockholders that such officers are not aware of any such facts.
ARTICLE IV
Covenants Relating to Conduct of Business
4.1 Covenants of the Company. During the period from the date of this
Agreement and continuing until the Effective Time, the Company agrees as to
the Company and its Subsidiaries that (except as expressly contemplated or
permitted by this Agreement, or to the extent that Parent shall otherwise
consent in writing):
(a) Ordinary Course. Each of the Company and its Subsidiaries shall carry
on its businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and shall use all
reasonable efforts to preserve intact its present business organization,
keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having
material business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect at the Effective
Time.
(b) Dividends; Changes in Stock. The Company shall not, nor shall it
permit any of its Subsidiaries to: (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock; (ii)
split, combine or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock; or (iii) repurchase or
otherwise acquire, or permit any Subsidiary to purchase or otherwise
acquire, any shares of its capital stock, except as required by the terms
of its securities outstanding on the date hereof.
(c) Issuance of Securities. The Company shall not, nor shall it permit
any of its Subsidiaries to, (i) grant any options, warrants or rights, to
purchase shares of Company Common Stock, (ii) amend the terms of or reprice
any option or amend the terms of the Stock Option Plans, or (iii) issue,
deliver or sell, or authorize or propose to issue, deliver or sell, any
shares of its capital stock of any class or series, any Company Voting Debt
or any securities convertible into, or any rights, warrants or options to
acquire, any such shares, Company Voting Debt or convertible securities,
other than the issuance of Shares upon the exercise of Employee Options
that are outstanding on the date hereof.
(d) Governing Documents. The Company shall not amend or propose to amend
its Certificate of Incorporation or Bylaws, except as contemplated hereby.
(e) No Solicitation. From and after the date hereof until the termination
of this Agreement, neither the Company or any of its Subsidiaries, nor any
of their respective officers, directors, employees,
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representatives, agents or affiliates (including any investment banker,
advisor attorney or accountant retained by any of the above) (such
officers, directors, employees, representatives, agents, affiliates,
investment bankers, attorneys and accountants being referred to herein,
collectively, as "Representatives"), will, directly or indirectly, (i)
initiate, solicit or encourage (including by way of furnishing information
or assistance), or take any other action to facilitate, any inquiries or
the making of any proposal that constitutes, or could reasonably be
expected to lead to, any Acquisition Proposal (as defined below), (ii)
provide any information to any other person or entity concerning the
Company (other than information which the Company provides to other persons
in the ordinary course of its business, so long as the Company has no
reason to believe that such information will be used to make or evaluate an
Acquisition Proposal, or as required by law) or (iii) enter into or
maintain or continue discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain an Acquisition Proposal or agree
to or endorse any Acquisition Proposal; and neither the Company nor any of
its Subsidiaries will authorize or permit any of its Representatives to
take any such action, and the Company shall notify Parent orally (within
one business day) and in writing (as promptly as practicable) of all of the
relevant details relating to, and all material aspects of, all inquiries
and proposals which it or any of its Subsidiaries or any of their
respective Representatives may receive relating to any of such matters,
including the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact, and, if such inquiry or proposal is in
writing, the Company shall deliver to Parent a copy of such inquiry or
proposal as promptly as practicable; provided, however, that nothing
contained in this Section 4.1(e) shall prohibit the Board of Directors of
the Company from responding to any unsolicited written, bona fide
Acquisition Proposal if, and only to the extent that, (A) the Board of
Directors of the Company, after consultation with and based upon the advice
of its Financial Advisor, determines in good faith that such Acquisition
Proposal is reasonably capable of being completed on the terms proposed and
would, if consummated, result in a transaction more favorable to the
Company's stockholders than the transaction contemplated herein, (B) the
Board of Directors of the Company, after consultation with and based upon
the advice of independent legal counsel (who may be the Company's regularly
engaged independent legal counsel), determines in good faith that such
action is necessary for the Board of Directors of the Company to comply
with its fiduciary duties to stockholders under applicable law, (C) prior
to taking such action, the Company (x) provides reasonable prior notice to
Parent to the effect that it is taking such action and (y) receives from
such person or entity an executed confidentiality agreement in reasonably
customary form, and (D) the Company shall promptly and continuously advise
Parent as to all of the relevant details relating to, and all material
aspects, of any such discussions or negotiations.
For purposes of this Agreement, "Acquisition Proposal" shall mean any of
the following (other than the transactions among the Company, Parent and
Sub contemplated hereunder) involving the Company or any of its
Subsidiaries: (i) any merger, consolidation, share exchange,
recapitalization, business combination, or other similar transaction; (ii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of all or substantially all of the assets of the Company and its
Subsidiaries, taken as a whole, in a single transaction or series of
transactions; (iii) any tender offer or exchange offer for all or
substantially all of the outstanding shares of capital stock of the Company
or the filing of a registration statement under the Securities Act in
connection therewith; or (iv) any public announcement of a proposal, plan
or intention to do any of the foregoing or any agreement to engage in any
of the foregoing.
(f) No Acquisitions. The Company shall not, nor shall it permit any of
its Subsidiaries to, merge or consolidate with, or acquire any equity
interest in, any corporation, partnership, association or other business
organization, or enter into an agreement with respect thereto. The Company
shall not acquire or agree to acquire any assets of any corporation,
partnership, association or other business organization or division
thereof, except for the purchase of inventory and supplies in the ordinary
course of business.
(g) No Dispositions. Other than sales of inventory in the ordinary course
of business consistent with past practice, the Company shall not, nor shall
it permit any of its Subsidiaries to, sell, lease, encumber or otherwise
dispose of, or agree to sell, lease (whether such lease is an operating or
capital lease), encumber or otherwise dispose of, any of its assets
(including any capital stock or other ownership interest of any Subsidiary
of the Company).
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(h) Governmental Filings. The Company shall promptly provide Parent (or
its counsel) with copies of all filings made by the Company with the SEC or
any other state or federal Governmental Entity in connection with this
Agreement and the transactions contemplated hereby.
(i) No Dissolution, Etc. The Company shall not authorize, recommend,
propose or announce an intention to adopt a plan of complete or partial
liquidation or dissolution of the Company or any of its Subsidiaries.
(j) Other Actions. The Company will not nor will it permit any of its
Subsidiaries to take or agree or commit to take any action that is
reasonably likely to result in any of the Company's representations or
warranties hereunder being untrue in any material respect or in any of the
Company's covenants hereunder or any of the conditions to the Merger not
being satisfied in all material respects.
(k) Certain Employee Matters. The Company and its Subsidiaries shall not
(without the prior written consent of Parent): (i) grant any increases in
the compensation of any of its directors, officers or key employees; (ii)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required or contemplated to be paid prior to the Effective Time
by any of the existing Benefit Plans or Employee Arrangements as in effect
on the date hereof to any such director, officer or key employee, whether
past or present; (iii) enter into any new, or materially amend any
existing, employment or severance or termination agreement with any such
director, officer or key employee; or (iv) except as may be required to
comply with applicable law, become obligated under any new Benefit Plan or
Employee Arrangement, which was not in existence on the date hereof, or
amend any such plan or arrangement in existence on the date hereof if such
amendment would have the effect of materially enhancing any benefits
thereunder.
(l) Indebtedness; Agreements.
(i) The Company shall not, nor shall the Company permit any of its
Subsidiaries to, assume or incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of the Company or any
of its Subsidiaries or guarantee any debt securities of others (other
than borrowings under the Company's existing revolving credit facility
in the ordinary course of business consistent with past practice) or
enter into any operating or capital lease (other than entering into
operating leases in connection with leasing additional retail space in
the ordinary course of business consistent with past practice) or
create any mortgages, liens, security interests or other encumbrances
on the property of the Company or any of its Subsidiaries, or enter
into any "keep well" or other agreement or arrangement to maintain the
financial condition of another person.
(ii) The Company shall not, nor shall the Company permit any of its
Subsidiaries to, enter into, modify, rescind, terminate, waive, release
or otherwise amend in any material respect any of the terms or-
provisions of any Material Contract.
(m) Accounting. The Company shall not take any action, other than in the
ordinary course of business, consistent with past practice or as required
by the SEC or by law, with respect to accounting policies, procedures and
practices.
(n) Capital Expenditures. The Company and its Subsidiaries shall not
incur any capital expenditures in excess of $100,000, except for capital
expenditures contemplated by the Company's budget previously supplied to
Parent.
(o) Requisite Consents. The Company and its Subsidiaries shall use all
commercially reasonable efforts to (i) obtain consents from third parties
to the consummation of the Merger and the transactions contemplated thereby
and hereby, which consents are material to the business of the Company (the
"Requisite Consents") and (ii) ensure that such Requisite Consents are in
full force and effect as of the Closing Date.
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ARTICLE V
Additional Agreements
5.1 Preparation of the Proxy Statement; Company Stockholders Meeting.
(a) As soon as practicable following the date hereof, the Company and Parent
shall prepare the Proxy Statement. The Company will, as soon as practicable
following the date hereof, file the Proxy Statement with the SEC. The Company
will use all commercially reasonable efforts to respond to all SEC comments
with respect to the Proxy Statement and to cause the Proxy Statement to be
mailed to the Company's stockholders at the earliest practicable date.
(b) The Company will, as soon as practicable following the date hereof, duly
call, give notice of, convene and hold a meeting of the Company's stockholders
for the purpose of approving this Agreement and the transactions contemplated
hereby. At such stockholders meeting, Parent shall cause all of the shares of
Company Common Stock then owned by Parent and Sub to be voted in favor of the
Merger.
(c) Sub shall promptly submit this Agreement and the transactions
contemplated hereby for approval and adoption by Parent, as its sole
stockholder, by written consent.
5.2 Access to Information. Upon reasonable notice, each of the Company or
Parent, as the case may be, shall (and shall cause each of its Subsidiaries
to) afford to the officers, employees, accountants, counsel and other
representatives of the other party (including, in the case of Parent and Sub,
potential financing sources and their employees, accountants, counsel and
other representatives), access, during normal business hours during the period
prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, such party shall (and shall
cause each of its Subsidiaries to) furnish promptly to the other party,
(a) copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to SEC requirements and
(b) all other information concerning its business, properties and personnel as
such other party may reasonably request. The Confidentiality Agreement
previously entered into between Parent and the Company (the "Confidentiality
Agreement") shall apply with respect to information furnished thereunder or
hereunder and any other activities contemplated thereby.
5.3 Settlements. Neither the Company nor any of its Subsidiaries shall
effect any settlements of any legal proceedings arising out of or related to
the execution, delivery or performance of this Agreement or the consummation
of any of the transactions contemplated hereby without the prior written
consent of Parent.
5.4 Fees and Expenses.
(a) Except as otherwise provided in this Section 5.4 and except with respect
to claims for damages incurred as a result of the breach of this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.
(b) The Company agrees to pay Parent a fee in immediately available funds
equal to $9,750,000 upon:
(i) the termination of this Agreement under Section 7.1(d) in the event
that any of the following events shall occur (each, a "Trigger Event"):
(1) the Board of Directors of the Company shall have (A) withdrawn or
modified, in a manner adverse to Parent or Sub, its recommendation of
the Agreement or the Merger or (B) failed to confirm its recommendation
of the Agreement or the Merger within two business days after a written
request by Parent to do so after the occurrence of an Acquisition
Proposal;
(2) the Board of Directors of the Company shall have approved,
endorsed or recommended to the stockholders of the Company an
Acquisition Proposal;
(3) the Company shall have entered into an agreement (other than a
confidentiality agreement as contemplated by Section 4.1(e)) with
respect to an Acquisition Proposal;
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(4) any Person or group (other than Parent, Sub or any of their
Affiliates) shall have acquired Company Common Stock after the date of
this Agreement which, when added to Company Common Stock already owned
by such Person or group, constitutes a majority of the outstanding
Company Common Stock or a tender or exchange offer for Company Common
Stock shall have been commenced and such offer ultimately results,
including after the termination of this Agreement, in a Person or group
owning a majority of the outstanding Company Common Stock; or
(5) (A) an Acquisition Proposal is made and (B) the Company fails to
call and hold a stockholders meeting to approve the Agreement and the
Merger as promptly as is reasonably practicable having regard to the
expected timing of the financing of the Merger and, in any event, on or
prior to the 175th calendar day after the date hereof (such time period
shall be extended by an amount of time equal, in the reasonable
judgment of the Company, to any delays beyond the reasonable control of
the Company in obtaining any required regulatory approvals in
connection with the transactions contemplated hereby); or
(ii) the termination of this Agreement under Section 7.1(b) following a
material and willful breach by the Company of any covenant or agreement set
forth in this Agreement, which breach could reasonably be expected to aid
or encourage an Acquisition Proposal and shall not have been cured within
ten business days following receipt by the Company of notice of such
breach.
(c) Upon any termination of this Agreement (other than a termination by the
Company under Section 7.1(b)(i) hereof), the Company shall pay to Parent (not
later than one business day after receipt of reasonable documentation therefor
and in no event prior to January 2, 1998) such amounts as may be necessary to
reimburse Parent and Sub for their reasonable out-of-pocket fees and expenses
incurred or paid by or on behalf of Parent or Sub to third parties in
connection with the Merger or the consummation of any of the transactions
contemplated by this Agreement, including all costs and reasonable fees and
expenses of counsel, investment banking firms, accountants, experts and
consultants, provided that (x) reimbursement for such fees and expenses shall
be limited to $1,000,000 and (y) reimbursement under this sentence shall not
cover fees incurred or paid by or on behalf of Parent or Sub under the
Financing Letters. In addition, in the event the payment becomes due under
Section 5.4(b), the Company shall pay to Parent (not later than one business
day after receipt of reasonable documentation therefor) all fees and expenses
incurred or paid by or on behalf of Parent or Sub under the Financing Letters,
provided that reimbursement for fees and expenses under this sentence shall be
limited to $1,000,000. The Company shall in any event pay the amount requested
(subject to the limits in the preceding two sentences) within one business day
of receipt of reasonable documentation from Parent. The amounts payable to
Parent and Sub under this Section 5.4(c) shall be in addition to (and not an
offset against) the amount (if any) payable to Parent under Section 5.4(b).
(d) Any amounts due under this Section 5.4 that are not paid when due shall
bear interest at the rate of 12% per annum from the date due through and
including the date paid.
5.5 Brokers or Finders. (a) The Company represents, as to itself, its
Subsidiaries and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any
broker's or finders fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement, except the
Financial Advisor and Hatchett Capital Group, Inc., whose fees and expenses
will be paid by the Company in accordance with the Company's agreements with
such firms (copies of which have been delivered by the Company to Parent prior
to the date of this Agreement).
(b) Parent represents, as to itself, its Subsidiaries and its affiliates,
that no agent, broker, investment banker, financial advisor or other firm or
person is or will be entitled to any broker's or finders fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement.
5.6 Indemnification; Directors' and Officers' Insurance.
(a) The Company shall, and from and after the Effective Time, the Surviving
Corporation shall, indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who
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becomes prior to the Effective Time, an officer or director of the Company or
any of its Subsidiaries (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses (including attorneys' fees and expenses),
liabilities or judgments or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be unreasonably
withheld) of or in connection with any threatened or actual claim, action,
suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director or
officer of the Company or any of its Subsidiaries whether pertaining to any
matter existing or occurring at or prior to the Effective Time and whether
asserted or claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), including all Indemnified Liabilities based in whole or in part
on, or arising in whole or in part out of, or pertaining to this Agreement or
the transactions contemplated hereby, in each case to the full extent a
corporation is permitted under the DGCL to indemnify its own directors or
officers as the case may be (and the Company and the Surviving Corporation, as
the case may be, will pay expenses in advance of the final disposition of any
such action or proceeding to each Indemnified Party to the full extent
permitted by law). Without limiting the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Parties (whether arising before or after the Effective Time), the
Company shall defend the Indemnified Parties in such matter with counsel of
the Company's choosing and the Indemnified Parties will use all reasonable
efforts to assist in the vigorous defense of any such matter. In no event will
the Company or the Surviving Corporation be liable for any settlement effected
without its prior written consent which consent shall not unreasonably be
withheld. Any Indemnified Party wishing to claim indemnification under this
Section 5.6, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Company (or after the Effective Time,
the Surviving Corporation) (but the failure so to notify shall not relieve a
party from any liability which it may have under this Section 5.6 except to
the extent such failure prejudices such party), and shall deliver to the
Company (or after the Effective Time, the Surviving Corporation) the
undertaking contemplated by Section 145(e) of the DGCL. The Company and Sub
agree that the foregoing rights to indemnification, including provisions
relating to advances of expenses incurred in defense of any action or suit,
existing in favor of the Indemnified Parties with respect to matters occurring
through the Effective Time, shall survive the Merger and shall continue in
full force and effect for a period of not less than six years from the
Effective Time; provided, however, that all rights to indemnification in
respect of any Indemnified Liabilities asserted or made within such period
shall continue until the disposition of such Indemnified Liabilities.
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries (provided that Parent may substitute therefor policies of at
least the same coverage and containing terms and conditions which are not
materially less advantageous to the Indemnified Parties) with respect to
matters arising before the Effective Time, provided that Parent shall not be
required to pay an annual premium for such insurance in excess of 200% of the
last annual premium paid by the Company prior to the date hereof, but in such
case shall purchase as much coverage as possible for such amount. The last
annual premium paid by the Company was $105,000.
(c) The provisions of this Section 5.6 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his heirs and his
personal representatives and shall be binding on all successors and assigns of
Sub, the Company and the Surviving Corporation.
5.7 Commercially Reasonable Efforts. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all commercially
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, under applicable
laws and regulations or otherwise, to consummate and make effective the
transactions contemplated by this Agreement, subject to the Company
Stockholder Approval, including cooperating fully with the other party,
including by provision of information and making of all necessary filings in
connection with, among other things, approvals under the HSR Act. In case at
any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either of the Constituent Corporations, the
proper officers and directors of each
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party to this Agreement shall take all such necessary action. Without limiting
the generality of the foregoing, the Company agrees to cooperate with Parent's
and Sub's efforts to secure the financing contemplated by the Financing
Letters, such cooperation to include providing such information to Parent's
and Sub's financing sources as Parent or Sub may reasonably request and making
available management and such other employees of the Company as Parent and Sub
may reasonably request to participate in any marketing and sales efforts
relating to sales of securities in connection with the Financing Letters.
5.8 Conduct of Business of Sub. During the period of time from the date of
this Agreement to the Effective Time, Sub shall not engage in any activities
of any nature except as provided in or contemplated by this Agreement.
5.9 Publicity. The parties will consult with each other and will mutually
agree upon any press release or public announcement pertaining to the Merger
and shall not issue any such press release or make any such public
announcement prior to such consultation and agreement, except as may be
required by applicable law, in which case the party proposing to issue such
press release or make such public announcement shall use reasonable efforts to
consult in good faith with the other party before issuing any such press
release or making any such public announcement.
5.10 Withholding Rights. Sub and the Surviving Corporation, as applicable,
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock such amounts as Sub or the Surviving Corporation, as applicable, is
required to deduct and withhold with respect to the making of such payment
under the Code or any provision of state, local or foreign tax law. To the
extent that amounts are so withheld by Sub or the Surviving Corporation, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by Sub or the Surviving
Corporation, as applicable.
ARTICLE VI
Conditions Precedent
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the affirmative vote of the holders of a majority
of the outstanding Shares entitled to vote thereon.
(b) HSR Act. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have
expired, and no restrictive order or other requirements shall have been
placed on the Company, Parent, Sub or the Surviving Corporation in
connection therewith.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
use all commercially reasonable efforts to have any such decree, ruling,
injunction or order vacated.
(d) Statutes. No statute, rule, order, decree or regulation shall have
been enacted or promulgated by any government or governmental agency or
authority which prohibits the consummation of the Merger.
6.2 Conditions of Obligations of Parent and Sub. The obligations of Parent
and Sub to effect the Merger are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Parent
and Sub:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct as of the
date of this Agreement and as of the Closing Date as
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though made on and as of the Closing Date, except as otherwise contemplated
by this Agreement and except in those instances where the aggregate amounts
represented by all breaches (other than breaches for which the Company has
obtained the consent of Parent and Sub) of such representations and
warranties are not likely to result in a Material Adverse Effect on the
Company; and Parent shall have received a certificate signed on behalf of
the Company by the chief executive officer and by the chief financial
officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by the
chief executive officer and by the chief financial officer of the Company
to such effect.
(c) Financing. Parent and Sub shall have received the debt financing for
the transactions contemplated hereby on terms substantially as outlined in
the Financing Letters.
(d) Employment Matters. Lloyd L. Ross shall have entered into a two-year
consulting agreement with the Surviving Corporation on terms consistent
with the letter dated September 12, 1997 from Parent to him. Jerry M. Smith
shall have entered into a three-year employment agreement with the
Surviving Corporation on terms consistent with the letter dated September
12, 1997 from Parent to him and shall have made the investment in Sub as
contemplated therein.
(e) No Litigation. There shall be no action, suit or proceeding pending
against Parent, Sub or the Company seeking to restrain or enjoin the
Merger, or seeking a material amount of damages in connection with the
Merger, which action, suit or proceeding has, in the opinion of legal
counsel to Parent, a reasonable possibility of success.
(f) Consents. The Company and the Subsidiaries shall have obtained all of
Requisite Consents.
(g) Dissenting Shares. No more than five percent (5.0%) of the shares of
Company Common Stock outstanding immediately prior to the Effective Time
shall be Dissenting Shares.
6.3 Conditions of Obligations of the Company. The obligation of the Company
to effect the Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by the
Company:
(a) Representations and Warranties. The representations and warranties of
Parent and Sub set forth in this Agreement shall be true and correct as of
the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, except as otherwise contemplated
by this Agreement, and the Company shall have received a certificate signed
on behalf of Parent by the chief executive officer and by the chief
financial officer of Parent to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
the Company shall have received a certificate signed on behalf of Parent by
the Chief Executive officer and by the Chief Financial Officer of Parent to
such effect.
ARTICLE VII
Termination and Amendment
7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company or by Parent:
(a) by mutual written consent of the Company and Parent, or by mutual
action of their respective Boards of Directors;
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(b) by either the Company or Parent (i) so long as such party is not then
in material breach of its obligations hereunder, if there has been a breach
of any representation, warranty, covenant or agreement on the part of the
other set forth in this Agreement which breach has not been cured within
five business days following receipt by the breaching party of notice of
such breach, or (ii) if any permanent injunction or other order of a court
or other competent authority preventing the consummation of the Merger
shall have become final and non-appealable;
(c) by either the Company or Parent, so long as such party is not then in
material breach of its obligations hereunder, if the Merger shall not have
been consummated on or before the 180th calendar day following the date
hereof; provided, that the right to terminate this Agreement under this
Section 7.1(c) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in
the failure of the Merger to occur on or before such date; or
(d) by Parent in the event that a Trigger Event has occurred under
Section 5.4(b) prior to the Closing.
7.2 Effect of Termination. In the event of termination of this Agreement by
either the Company or Parent as provided in Section 7.1, this Agreement shall
forthwith become void and there shall be no liability or obligation on the
part of Parent, Sub or the Company or their respective affiliates, officers,
directors or shareholders except (i) with respect to (A) this Section 7.2, (B)
the second sentence of Section 5.2 and (C) Section 5.4, and (ii) to the extent
that such termination results from the material breach by a party hereto of
any of its representations or warranties, or of any of its covenants or
agreements, in each case, as set forth in this Agreement.
7.3 Amendment. Subject to applicable law, this Agreement may be amended,
modified or supplemented only by written agreement of Parent, Sub and the
Company at any time prior to the Effective Date with respect to any of the
terms contained herein; provided, however, that, after this Agreement is
approved by the Company's stockholders, no such amendment or modification
shall reduce the amount or change the form of consideration to be delivered to
the holders of Shares.
7.4 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by mutual action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto; (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto; and (iii) 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. The failure of any party hereto to assert any of its rights hereunder
shall not constitute a waiver of such rights.
ARTICLE VIII
General Provisions
8.1 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Article II and Section 5.6
hereof. The Confidentiality Agreement shall survive the execution and delivery
of this Agreement, and the provisions of the Confidentiality Agreement shall
apply to all information and material delivered by any party hereunder.
8.2 Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, and shall be deemed
to be given, dated and received when so delivered personally, telegraphed or
telecopied or, if mailed, five business days after the date of mailing to the
following address or telecopy number, or to such other address or addresses as
such person may subsequently designate by notice given hereunder:
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(a)if to Parent or Sub, to:
Madison Dearborn Partners II, L.P.
Three First National Plaza
Chicago, Illinois 60602
Attn: Benjamin D. Chereskin
Telephone: (312) 732-5115
Telecopy: (312) 732-4098
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: Carter W. Emerson, P.C.
Telephone: (312) 861-2000
Telecopy: (312) 861-2200
(b) if to the Company, to:
Tuesday Morning Corporation
14621 Inwood Rd.
Dallas, Texas 75244
Attn: Jerry M. Smith
Telephone: (972) 450-8267
Telecopy: (972) 387-2344
with copies to:
Crouch & Hallet, L.L.P.
717 N. Harwood Suite 1400
Dallas, TX 775201
Attn: Bruce Hallett
Telephone: (214) 953-0053
Telecopy: (214) 953-0576
8.3 Interpretation. When a reference is made in this Agreement to Sections,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the word "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available.
8.4 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.
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement (together with the Confidentiality Agreement and any
other documents and instruments referred to herein) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof and,
except as provided in Section 5.6, is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
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8.6 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.
8.7 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 (a) Sub may assign, in its sole discretion, any or
all of its rights, interests and obligations hereunder to (i) any newly-formed
direct wholly-owned Subsidiary of Parent or Sub or (ii) any institutional
lender who provides funds to Parent, Sub or the Surviving Corporation for the
consummation of the transactions contemplated hereby and (b) Parent may
assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to Madison Dearborn Capital Partners II, L.P. or any
subsidiary of the type contemplated in clause (a)(i) above. 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.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
PARENT:
Madison Dearborn Partners II, L.P.
By: Madison Dearborn Partners, Inc.
/s/ Benjamin Chereskin
By: _________________________________
Benjamin D. Chereskin
SUB:
Tuesday Morning Acquisition Corp.
/s/ Benjamin D. Chereskin
By: _________________________________
Benjamin D. Chereskin
Vice President
COMPANY:
Tuesday Morning Corporation
/s/ Lloyd L. Ross
By: _________________________________
Lloyd L. Ross
Chief Executive Officer
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APPENDIX B
Board of Directors
Tuesday Morning Corporation
14621 Inwood Road
Dallas, TX 75244
September 12, 1997
Gentlemen:
We understand that Madison Dearborn Partners II. L.P., a Delaware limited
partnership ("Madison Dearborn"), is undertaking a transaction whereby a
wholly-owned subsidiary of Madison Dearborn will be merged with and into
Tuesday Morning Corporation, a Delaware corporation ("Tuesday Morning" or the
"Company"), pursuant to the terms of an Agreement and Plan of Reorganization
and the exhibits thereto, dated as of September 12, 1997 (the "Merger
Agreement"), such that Tuesday Morning becomes a wholly-owned subsidiary of
Madison Dearborn (the "Transaction"). Pursuant to the Transaction, each
outstanding share of Tuesday Morning Common Stock, $0.01 par value (the
"Tuesday Morning Common Stock"), shall be converted into $25.00 per share (the
"Consideration"), net to the seller in cash. The terms and conditions of the
Transaction are more fully set forth in the Merger Agreement.
You have requested our opinion as to whether the Consideration to be
received by the holders of Tuesday Morning Common Stock (the "Holders") in the
Transaction is fair to such Holders, from a financial point of view.
SBC Warburg Dillon Read Inc. has acted as financial advisor to the Board of
Directors of Tuesday Morning in connection with the Transaction and will
receive a fee upon the consummation thereof. In the ordinary course of
business, we have traded securities of Tuesday Morning for our own account and
for the accounts of our customers and, accordingly, may at any time hold a
long or short position in such securities.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to Tuesday Morning, (ii) reviewed certain management estimates for
fiscal years 1997 and 1998 and financial projections prepared and approved by
management of the Company based on estimates developed by Madison Dearborn,
(iii) reviewed certain publicly available analyst financial forecasts relating
to Tuesday Morning, (iv) reviewed certain financial information and other data
provided to us by Tuesday Morning that is not publicly available relating to
the business and prospects of Tuesday Morning, (v) conducted discussions with
members of the senior management of Tuesday Morning with respect to the
operations, financial condition, history and prospects of the Company, (vi)
reviewed publicly available financial and stock market data with respect to
certain other companies in lines of business we believe to be generally
comparable to those of Tuesday Morning, (vii) reviewed the historical market
prices of the Tuesday Morning Common Stock, (viii) compared the financial
terms of the Transaction with the financial terms of certain other
transactions which we believe to be generally comparable to the Transaction,
(ix) reviewed the Merger Agreement, and (x) conducted such other financial
studies, analyses, and investigations, and considered such other information
as we deemed necessary or appropriate.
In conducting our review and arriving at our opinion, we have relied,
without independent investigation, upon the accuracy and completeness of all
financial and other information provided to us or publicly available, and we
have not assumed any responsibility in any respect for the accuracy,
completeness or reasonableness of, or any obligation to verify, the same or to
conduct any appraisal of assets. Without limiting the generality of the
foregoing, we have relied with your consent upon the management of Tuesday
Morning as to the reasonableness and achievability of the financial and
operating forecasts and assumed that such forecasts and projections reflect
the best currently available estimates and judgments of management and that
such forecasts and projections will be realized in the amounts and in the time
periods currently estimated by management. Our opinion necessarily
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is based upon economic, market and other conditions as they exist and can be
evaluated on the date hereof and the information made available to us through
the date hereof.
It is understood that this letter is for the benefit and use of the Board of
Directors of Tuesday Morning in connection with its consideration of the
Transaction and may not be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose without our prior written consent, except that this opinion may be
included in its entirety in any filing with the Securities and Exchange
Commission in connection with the Transaction. This letter addresses only the
fairness, from a financial point of view, to the Holders of the Consideration
to be paid in the Transaction pursuant to the Merger Agreement, does not
address any other aspect of the Transaction and should not be construed as any
recommendation or advice to the Board of Directors to approve the Merger or to
any Holder to vote or take any other action in favor of the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the Holders in the
Transaction is fair to such Holders from a financial point of view.
Very truly yours,
SBC Warburg Dillon Read Inc.
/s/ SBC Warburg Dillon Read Inc.
By: _________________________________
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251 (other than a merger effected pursuant to
(S) 251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or
(S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
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date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
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(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PROXY
TUESDAY MORNING CORPORATION
The undersigned hereby (a) acknowledges receipt of the Notice of Special
Meeting of Stockholders of Tuesday Morning Corporation (the "Company") to be
held on December , 1997 at 10:00 a.m., local time, and the Proxy Statement in
connection therewith, and (b) appoints Lloyd L. Ross and Jerry M. Smith, and
each of them, his proxies with full power of substitution and revocation, for
and in the name, place and stead of the undersigned, to vote upon and act with
respect to all of the shares of Common Stock of the Company standing in the
name of the undersigned or with respect to which the undersigned is entitled to
vote and act at said meeting or at any adjournment thereof, and the undersigned
directs that his proxy be voted as follows:
1. PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF MERGER, DATED SEPTEMBER 12,
1997, BY AND AMONG THE COMPANY, MADISON DEARBORN PARTNERS II, L.P. AND A
SUBSIDIARY OF MADISON DEARBORN PARTNERS II. L.P.
[_] FOR [_] AGAINST [_] ABSTAIN
2. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
[_] FOR [_] AGAINST [_] ABSTAIN
<PAGE>
If more than one of the proxies listed on the reverse side shall be present
in person or by substitute at the meeting or any adjournment thereof, the
majority of said proxies so present and voting, either in person or by
substitute, shall exercise all of the powers hereby given.
THIS PROXY WILL BE VOTED AND WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE NAMED PROPOSAL.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all
that said proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
DATED: ___________________________, 1997
________________________________________
SIGNATURE
________________________________________
(SIGNATURE IF HELD JOINTLY)
PLEASE DATE THE PROXY AND SIGN YOUR
NAME EXACTLY AS IT APPEARS HEREON.
WHERE THERE IS MORE THAN ONE OWNER,
EACH SHOULD SIGN. WHEN SIGNING AS AN
ATTORNEY, ADMINISTRATOR, EXECUTOR,
GUARDIAN OR TRUSTEE, PLEASE ADD YOUR
TITLE AS SUCH. IF EXECUTED BY A
CORPORATION, THE PROXY SHOULD BE SIGNED
BY A DULY AUTHORIZED OFFICER. PLEASE
SIGN THE PROXY AND RETURN IT PROMPTLY
WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING. YOU MAY NEVERTHELESS VOTE IN
PERSON IF YOU DO ATTEND.
