-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Q6jvXTpJg1HlC0kfKfmhK/0c4BGwbazyA5tEAUfcWpBjvhjo82pwrRFusf3J/FPg vn25y4JYjqvydSVL+vMIRw== 0000912057-94-002240.txt : 19940708 0000912057-94-002240.hdr.sgml : 19940708 ACCESSION NUMBER: 0000912057-94-002240 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19940707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAELS STORES INC CENTRAL INDEX KEY: 0000740670 STANDARD INDUSTRIAL CLASSIFICATION: 5945 IRS NUMBER: 751943604 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-53639 FILM NUMBER: 94537944 BUSINESS ADDRESS: STREET 1: 5931 CAMPUS CIRCLE DR CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2147147000 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261 S-3/A 1 S-3D/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1994 REGISTRATION NO. 33-53639 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MICHAELS STORES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1943604 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
5931 CAMPUS CIRCLE DRIVE IRVING, TEXAS 75063 P.O. BOX 619566 DFW, TEXAS 75261-9566 (214) 714-7000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) R. DON MORRIS 5931 CAMPUS CIRCLE DRIVE IRVING, TEXAS 75063 (214) 714-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: CHARLES D. MAGUIRE, JR. KENNETH L. STEWART JACKSON & WALKER, L.L.P. FULBRIGHT & JAWORSKI L.L.P. 901 Main Street 2200 Ross Avenue Suite 6000 Suite 2800 Dallas, Texas 75202 Dallas, Texas 75201
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 6, 1994 1,886,213 Shares Common Stock ($.10 PAR VALUE) -------------- OF THE 1,886,213 SHARES OF COMMON STOCK, $.10 PAR VALUE ("COMMON STOCK"), OF MICHAELS STORES, INC. ("MICHAELS" OR THE "COMPANY") OFFERED HEREBY, 1,500,000 SHARES ARE BEING SOLD BY THE COMPANY AND 386,213 ARE BEING SOLD BY THE SELLING STOCKHOLDERS NAMED HEREIN UNDER "SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. OF THE 1,886,213 SHARES OF COMMON STOCK BEING OFFERED, 1,508,970 SHARES ARE INITIALLY BEING OFFERED IN THE UNITED STATES AND CANADA (THE "U.S. SHARES") BY THE U.S. UNDERWRITERS (THE "U.S. OFFERING") AND 377,243 SHARES ARE INITIALLY BEING CONCURRENTLY OFFERED OUTSIDE THE UNITED STATES AND CANADA (THE "INTERNATIONAL SHARES") BY THE MANAGERS (THE "INTERNATIONAL OFFERING" AND, TOGETHER WITH THE U.S. OFFERING, THE "COMMON STOCK OFFERING"). THE OFFERING PRICE AND UNDERWRITING DISCOUNTS OF THE U.S. OFFERING AND THE INTERNATIONAL OFFERING ARE IDENTICAL. THE CLOSING OF THE U.S. OFFERING IS A CONDITION TO THE CLOSING OF THE INTERNATIONAL OFFERING AND VICE VERSA. ON JULY 6, 1994, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $31 3/4 PER SHARE. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS ---------------- ---------------- ---------------- ---------------- PER SHARE................................ $ $ $ $ TOTAL(2)................................. $ $ $ $ (1) BEFORE DEDUCTION OF EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ . (2) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AND THE MANAGERS AN OPTION, EXERCISABLE BY CS FIRST BOSTON CORPORATION, FOR 30 DAYS FROM THE DATE OF THIS PROSPECTUS TO PURCHASE A MAXIMUM OF 282,932 ADDITIONAL SHARES TO COVER OVER-ALLOTMENTS OF SHARES. IF THE OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ , UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $ , AND PROCEEDS TO COMPANY WILL BE $ .
-------------- THE U.S. SHARES ARE OFFERED BY THE SEVERAL U.S. UNDERWRITERS WHEN, AS AND IF ISSUED BY THE COMPANY, DELIVERED TO AND ACCEPTED BY THE U.S. UNDERWRITERS AND SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT THE U.S. SHARES WILL BE READY FOR DELIVERY ON OR ABOUT , 1994. CS First Boston Robertson, Stephens & Company Nomura Securities International, Inc. THE DATE OF THIS PROSPECTUS IS JULY , 1994. [map] IN CONNECTION WITH THIS OFFERING, CS FIRST BOSTON CORPORATION ON BEHALF OF THE U.S. UNDERWRITERS AND THE MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN U.S. UNDERWRITERS AND MANAGERS (AND SELLING GROUP MEMBERS, IF ANY) AND THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. (SEE "UNDERWRITING.") 2 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission may be inspected and copied at the office of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. This Prospectus does not contain all of the information set forth in the Registration Statement on Form S-3 and exhibits thereto (collectively, the "Registration Statement") that the Company filed with the Commission in connection with the sale of the securities offered hereby under the Securities Act of 1933, as amended (the "Securities Act"), to which Registration Statement reference is hereby made. Copies of such Registration Statement are available from the Commission. The terms "Michaels" and the "Company" when used herein shall mean Michaels Stores, Inc. and its subsidiaries. The Company's principal executive offices are located at 5931 Campus Circle Drive, Irving, Texas, and its mailing address is P.O. Box 619566, DFW, Texas 75261-9566 and the Company's telephone number is (214) 714-7000. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents have been filed with the Commission by the Company and are incorporated herein by reference and made a part hereof as of their respective dates: (i) Annual Report on Form 10-K for the year ended January 30, 1994; (ii) definitive Proxy Statement, dated April 25, 1994, relating to the Company's Annual Meeting of Stockholders held on May 24, 1994; (iii) Current Report on Form 8-K filed May 23, 1994, as amended by Form 8-K/A filed June 23, 1994 and Form 8-K/A filed June 30, 1994; (iv) Quarterly Report on Form 10-Q for the quarter ended May 1, 1994; and (v) Registration Statement on Form 8-A (No. 0-11822), effective as of September 11, 1991 and any amendments filed thereto. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the Common Stock Offering shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing thereof. Any statement contained herein or in a document incorporated or deemed incorporated by reference herein shall be deemed to be modified or superseded for all purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide, without charge, to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference in this Prospectus (other than exhibits and schedules thereto, unless such exhibits or schedules are specifically incorporated by reference into the information that this Prospectus incorporates). Written or telephonic requests for copies should be directed to Michaels' principal office: Michaels Stores, Inc., P.O. Box 619566, DFW, Texas 75261-9566, Attention: Investor Relations (telephone: (214) 714-7100). 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS INTENDED TO HIGHLIGHT CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE STATEMENT OF ALL MATERIAL INFORMATION IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION HEREIN AND IN THE DOCUMENTS INCORPORATED BY REFERENCE. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE U.S. UNDERWRITERS' AND THE MANAGERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE COMPANY Michaels Stores, Inc. ("Michaels" or the "Company") is the nation's leading retailer dedicated to serving the arts, crafts and decorative items marketplace. Michaels stores offer a wide selection of competitively priced items, including general crafts, wearable art, silk and dried flowers, picture framing materials and services, art and hobby supplies, and party, seasonal and holiday merchandise. The Company's stores average approximately 15,500 square feet of selling space and offer an assortment of over 30,000 stock keeping units ("SKUs"). Michaels' merchandising strategy is to provide a broad selection of products in an appealing store environment with superior customer service, including in-store "how-to" demonstrations, project samples displayed throughout the store and instructional classes for adults and children. Prior to the recently completed acquisition (the "Leewards Acquisition") of Leewards Creative Crafts, Inc. ("Leewards"), Michaels operated 270 stores in 36 states and Canada. As a result of the Leewards Acquisition, the Company intends to add approximately 80 Leewards store locations net of anticipated Leewards store closings. In addition, Michaels may close up to 10 overlapping Michaels stores. On a pro forma basis for the Leewards Acquisition, Michaels' sales for the fiscal year ended January 30, 1994 would have been approximately $780 million. In addition to the Leewards stores and the 25 stores acquired earlier this year, Michaels currently anticipates opening approximately 55 new store locations in 1994, of which 25 have been opened, and approximately 50 to 60 new stores during 1995. Over the past five fiscal years, the Company's sales have grown from $290 million to $620 million. This sales growth resulted from increases in comparable store sales in each year since 1989 and an increase in the Company's store locations from 122 to 220 at the end of the most recent fiscal year. In addition, operating income over the past five fiscal years has increased from $15 million to $41 million. RECENT ACQUISITIONS On July 6, 1994, Michaels acquired Leewards, an Illinois-based arts and crafts retailer with approximately 100 stores located primarily in the midwestern and northeastern United States. The acquisition consideration consisted of approximately $7.9 million in cash and 1,257,279 shares of Common Stock including 386,213 shares which are being sold by the Leewards stockholders to the public in this Common Stock Offering. Upon consummation of the Leewards Acquisition, Michaels also repaid approximately $39.6 million of Leewards' indebtedness. The Leewards Acquisition establishes Michaels' presence in a number of new markets, including the northeastern United States, a market in which Michaels did not previously have a significant presence, and significantly expands its presence in several existing markets. In connection with the Leewards Acquisition, Michaels expects to close approximately 20 Leewards stores and may close up to 10 Michaels stores due to overlapping locations. See "Recent Developments -- Recent Acquisitions," "Leewards Acquisition" and "Selling Stockholders." In February 1994, the Company acquired Treasure House Stores, Inc. ("Treasure House"), a chain of nine arts and crafts stores operating primarily in the Seattle market, for 280,000 shares of Michaels Common Stock. In April 1994, the Company acquired the affiliated arts and crafts store chains of Oregon Craft & Floral Supply Co. ("Oregon Craft & Floral"), with eight stores located primarily in the Portland, Oregon area, and H&H Craft & Floral Supply Co. ("H&H Craft & Floral"), with eight stores located in southern California, for a total of 455,000 shares of Michaels Common Stock. The Treasure House stores have been converted to the Michaels format and the Oregon Craft & Floral and H&H Craft & Floral stores are being converted to the Michaels format with grand openings scheduled for July through August of this year. The Company believes that these acquisitions have significantly increased its presence in Oregon and Washington and further strengthened its position in southern California. See "Recent Developments -- Recent Acquisitions." 4 INTEGRATION OF LEEWARDS The Company has designed a ten-week transition plan to reconfigure the Leewards stores to be more consistent with the merchandising strategy of Michaels. In order to minimize disruption to the Company's business, this plan will be implemented by the Leewards field organization under the supervision of Michaels' management using detailed plans developed by Michaels. Key aspects of this plan include: - Revising and enhancing the product mix to correlate to Michaels' merchandising strategy; - Converting merchandise ordering and management information systems; - Eliminating redundant overhead; - Retraining employees to provide the level of customer service found in Michaels stores and to improve operational efficiencies; and - Closing approximately 20 Leewards and possible closing of up to 10 Michaels store locations to eliminate overlapping stores. The continuing 80 Leewards stores will be converted to the Michaels store format beginning with a four-week phase to eliminate incompatible merchandise. The second phase will involve the arrival of new merchandise and the reformatting of the stores to the Michaels prototype. This will be accomplished department by department, with the stores remaining open for business throughout the process. The Company anticipates completing the plan prior to the busy fall/Christmas selling season. See "Leewards Acquisition -- Integration of Leewards." THE COMMON STOCK OFFERING
U.S. INTERNATIONAL OFFERING OFFERING TOTAL ------------ ------------ ----------- Shares of Common Stock Offered: By the Company.................................. 1,200,000 300,000 1,500,000 By the Selling Stockholders..................... 308,970 77,243 386,213 ------------ ------------ ----------- Total(1).................................... 1,508,970 377,243 1,886,213 ------------ ------------ ----------- ------------ ------------ -----------
Common Stock to be Outstanding: After the Leewards Acquisition(2)..... 18,750,212 shares After the Leewards Acquisition and the Common Stock Offering(2)............. 20,250,212 shares Use of Proceeds......................... Payment of outstanding bank debt, including indebtedness incurred in connection with the Leewards Acquisition. See "Use of Proceeds." Nasdaq National Market Symbol........... MIKE - ------------------------ (1) Pursuant to an agreement between the U.S. Underwriters and the Managers, some or all of the shares underwritten by the Managers may be sold by the Managers to the U.S. Underwriters for resale in the United States and Canada, and some or all of the shares underwritten by the U.S. Underwriters may be sold by the U.S. Underwriters to the Managers for resale outside the United States and Canada. See "Underwriting." (2) Reflects shares outstanding as of July 6, 1994, including the issuance of 1,257,279 shares of Common Stock in the Leewards Acquisition. Excludes shares held by wholly-owned subsidiaries of the Company. See "Recent Developments -- Recent Acquisitions," "Leewards Acquisition" and "Description of Capital Stock."
5 SUMMARY FINANCIAL AND STORE DATA (IN THOUSANDS, EXCEPT STORE DATA AND PER SHARE AMOUNTS)
FISCAL YEAR (1) QUARTER ENDED ------------------------------------------------------------------- --------------------------------- 1993 MAY 1, 1994 -------------------- ---------------------- PRO MAY 2, PRO 1989 1990 1991 1992 ACTUAL FORMA(2) 1993 ACTUAL FORMA(2) -------- -------- ----------- -------- -------- --------- -------- -------- ----------- STATEMENT OF INCOME DATA: Net sales.............. $289,754 $362,028 $410,899 $493,159 $619,688 $780,302 $112,961 $159,798 $199,305 Operating income....... 14,900 20,694 25,643 34,263 41,356 44,395 5,962 9,071 9,598 Weighted average shares outstanding assuming full dilution......... 10,645 10,229 12,411 16,853 19,809 21,066 17,131 17,856 19,113 Earnings per common share assuming full dilution.............. $0.00 $0.57 $0.87(3) $1.21 $1.52 $1.41 $0.22 $0.28 $0.25 STORE DATA: Stores open at period end................... 122 137 140 168 220 299(4) 180 259 338(4) Average sales per square foot (5)....... $193 $206 $213 $226 $218 $206 $ 45 $ 44 $ 43 Comparable store sales increase (6).......... 6% 9% 9% 7% 3% 3% 2% 10% 8%
MAY 1, 1994 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA (7) AS ADJUSTED(8) --------- -------------- -------------- BALANCE SHEET DATA: Working capital..................................................... $ 169,726 $ 136,949 $ 181,731 Total assets........................................................ 463,119 601,024 601,024 Convertible subordinated notes...................................... 97,750 97,750 97,750 Shareholders' equity................................................ 206,596 246,515 291,297 - ------------------------------ (1) The Company operates on a 52/53 week fiscal year ending on the Sunday closest to January 31. For example, references to "fiscal 1993" mean the fiscal year ended January 30, 1994. Fiscal 1990 included 53 weeks; all other fiscal years set forth above included 52 weeks. (2) On a pro forma basis to reflect the consummation of the Leewards Acquisition. See "Pro Forma Combined Financial Information." Fiscal 1993 pro forma amounts do not reflect the acquisitions of Treasure House, Oregon Craft & Floral or H&H Craft & Floral by the Company in February and April 1994 as such acquisitions were not material in the aggregate. (3) Before extraordinary item of $3.8 million, or $0.31 per common and common equivalent share, relating to the redemption premium paid for the early retirement of the Company's 12.75% Senior Subordinated Notes, which had an effective interest rate of 15.8%, and the accelerated amortization of related debt issuance costs. (4) Includes Leewards stores and Michaels stores open at period end net of 20 Leewards stores anticipated to be closed. (5) Calculated for stores open the entire period and based on selling square footage. (6) Stores are included in the calculation of comparable store sales for the first full month following the one-year anniversary of the completion of the grand opening sales period, which is generally the fourteenth month after the store opening. The sales amounts for each store included in the calculation represent the sales for the same number of months for each period compared. The increase for fiscal 1990 was calculated on a comparable 52-week period. (7) Pro forma for the Leewards Acquisition. In connection with the Leewards Acquisition, the consideration paid to Leewards' stockholders consisted of the issuance of 1,257,279 shares of Common Stock and cash of approximately $7.9 million. (8) Pro forma for the Leewards Acquisition and as adjusted for the Common Stock Offering. In connection with the Leewards Acquisition, the consideration paid to Leewards' stockholders consisted of the issuance of 1,257,279 shares of Common Stock and cash of approximately $7.9 million.
6 RECENT DEVELOPMENTS RECENT ACQUISITIONS On July 6, 1994, the Company acquired Leewards, an Illinois-based arts and crafts retailer with approximately 100 stores located primarily in the midwestern and northeastern United States. The acquisition consideration consisted of approximately $7.9 million in cash and 1,257,279 shares of Common Stock, including 386,213 shares which are being sold by the Leewards stockholders to the public in this Common Stock Offering. Upon consummation of the Leewards Acquisition, Michaels also repaid the indebtedness under Leewards' bank credit facility and subordinated notes in the aggregate amount of approximately $39.6 million. The Leewards stockholders have agreed that, other than the shares being sold in this Common Stock Offering, they will not engage in a public distribution of the shares of Common Stock they acquire in connection with the Leewards Acquisition for a period of 90 days from the date of this Prospectus. See "Leewards Acquisition," "Pro Forma Combined Financial Information," "Selling Stockholders" and "Underwriting." In February 1994, the Company acquired Treasure House, a chain of nine arts and crafts stores operating primarily in the Seattle market, for 280,000 shares of Michaels Common Stock. In April 1994, the Company acquired the affiliated arts and crafts store chains of Oregon Craft & Floral, with eight stores located primarily in the Portland, Oregon area, and H&H Craft & Floral, with eight stores located in southern California, for a total of 455,000 shares of Michaels Common Stock. The Treasure House stores have been converted to the Michaels format and the Oregon Craft & Floral and the H&H Craft and Floral stores are being converted to the Michaels format with grand openings scheduled for July through August of this year. The Company believes that these acquisitions have significantly increased its presence in Oregon and Washington and further strengthened the Company's position in southern California. OPERATING RESULTS FOR FIRST QUARTER Michaels reported record first quarter earnings for the quarter ended May 1, 1994 of $5.0 million, or $0.28 per share, compared to $3.8 million, or $0.22 per share for the first quarter of fiscal 1993. The earnings increase can be attributed to a 41% increase in net sales to $159.8 million, including a 10% increase in comparable store sales, and a 52% increase in operating income to $9.1 million. Operating income as a percentage of net sales increased to 5.7% in the fiscal 1994 first quarter from 5.3% in the year earlier period. Earnings for the 1994 first quarter included one-time transaction costs, severance costs and duplicate pre-merger general and administrative costs associated with the acquisition of Treasure House during the quarter, which was accounted for as a pooling of interests and, accordingly, had its sales and earnings included in the Company's results as of the beginning of the quarter. Without these one-time costs totaling $0.02 per share, earnings per share would have been $0.30 for the quarter, an increase of 36% over the year earlier period. The Oregon Craft & Floral and H&H Craft and Floral acquisitions were purchase transactions that closed near the end of the quarter and thus had no significant effect on the Company's results for the quarter. A significant portion of the Company's growth has resulted from and will continue to be dependent on the addition of new stores and the increased sales volume and profitability from such stores. There can be no assurance that revenue growth will continue or that rates of growth will be as favorable as those achieved in recent periods. ANTICIPATED STORE CLOSING AND CONVERSION COSTS Subsequent to the Leewards Acquisition, Michaels expects to close approximately 20 Leewards stores and may close up to 10 existing Michaels stores in connection with the elimination of stores in overlapping markets. In addition, Michaels will integrate and reconfigure the remaining 80 Leewards stores to be more consistent with the merchandising strategy of Michaels. The Company has made no final decision as to which Michaels stores, if any, are to be closed pending the evaluation of anticipated store performance and the completion of lease negotiations. The costs associated with the closing of any Michaels stores, which the Company believes will not exceed $7 million on a pre-tax basis, as well as certain costs of reconfiguring the 80 continuing Leewards stores, will be charged to earnings in the 7 period such decisions are made and the related costs are estimable. The costs of closing the acquired Leewards store locations will be included as an adjustment to the purchase price of the Leewards Acquisition. See "Pro Forma Combined Financial Information." NEW CREDIT FACILITY In June 1994, Michaels entered into a new three-year, unsecured $150 million revolving credit facility to replace its former $100 million revolving credit facility. THE COMPANY OVERVIEW Michaels is the nation's leading retailer dedicated to serving the arts, crafts and decorative items marketplace. Michaels stores offer a wide selection of competitively priced items, including general crafts, wearable art, silk and dried flowers, picture framing materials and services, art and hobby supplies, and party, seasonal and holiday merchandise. Michaels' merchandising strategy is to provide a broad selection of products in an appealing store environment with superior customer service, including in-store "how-to" demonstrations, project samples displayed throughout the store and instructional classes for adults and children. The Company's primary customers are women aged 25 to 54 with above average median household incomes, and the Company believes that repeat customers account for a substantial portion of its sales. The average sale is approximately $13.75. Prior to the Leewards Acquisition, Michaels operated 270 stores in 36 states and Canada. As a result of the Leewards Acquisition, the Company intends to add approximately 80 Leewards store locations (net of anticipated Leewards store closings). In addition, Michaels may close up to 10 overlapping Michaels stores. On a pro forma basis for the Leewards Acquisition, Michaels' sales for fiscal 1993 would have been approximately $780 million. See "Leewards Acquisition" and "Pro Forma Combined Financial Information." NEW STORE EXPANSION In addition to the Leewards stores and the 25 stores acquired earlier this year, Michaels currently anticipates opening approximately 55 new stores in the United States and Canada during fiscal 1994, of which 25 have been opened. The Company intends to add 50 to 60 new stores during fiscal 1995. Although the Company has traditionally met or exceeded its new store opening targets, there can be no assurance that the Company will be able to meet its store opening targets in the future. Michaels'expansion strategy is to give priority to adding stores in existing markets or clustering stores in new markets in order to enhance economies of scale associated with advertising, distribution, field supervision and other regional expenses. Management believes that few of its existing markets are saturated, and that many attractive new markets are available to the Company for expansion. The anticipated development of Michaels stores in 1995 and the rate at which stores are developed thereafter will depend upon a number of factors, including the success of existing Michaels stores and the stores added pursuant to the Leewards Acquisition, the availability of suitable store sites, the availability of suitable acquisition candidates and the ability to hire and train qualified managers. The Company intends to continue to review acquisition opportunities in existing and new markets. The Company has no arrangements or understandings pending with respect to any acquisitions other than Leewards. In October 1993, the Company opened its first Michaels Craft and Floral Warehouse store ("CFW") using a newly-developed "warehouse superstore" format. It is anticipated that each store following the CFW format will occupy approximately 30,000 to 40,000 square feet of selling space, carry a wider selection of certain categories of merchandise than the typical store, and generally offer merchandise at "everyday" discounted retail prices. To achieve a lower cost structure than a typical Michaels store, the Company's CFW format is premised on reduced occupancy expenses per square foot and less extensive advertising programs. In addition, the CFW format utilizes new computer 8 systems that provide full point-of-sale scanning and automated receiving of merchandise, and eliminates the retail price marking of individual products. The Company plans to open four or five additional CFW stores during 1994, of which three have been opened, and may accelerate the opening of such stores in the future if the format continues to be favorably received by consumers. MERCHANDISING Michaels' merchandising strategy is to provide a broad selection of products in an appealing store environment with superior customer service. The commitment to customer service is evidenced through in-store "how-to" demonstrations, project samples displayed throughout each store, and instructional classes for adults and children. The typical Michaels store offers an assortment of over 30,000 SKUs. In general, each store offers products from ten departments. Nine of the departments offer essentially the same type of merchandise throughout the year, although the products may vary from season to season. The merchandise offered by these nine departments includes general craft materials, wearable art, silk and dried flowers, picture framing materials and services, fine art materials, hobby items, party items, needlecraft items and ribbon. In addition to these nine departments, the Company regularly features seasonal merchandise. Seasonal merchandise is ordered for several holidays, including Valentine's Day, Easter, Mother's Day, Halloween and Thanksgiving, in addition to the Christmas season. For example, seasonal merchandise for the Christmas season includes trees, wreaths, candles, lights and ornaments. Included in seasonal merchandise is promotional merchandise that is offered with the intention of generating customer traffic. The following table shows sales by the largest departments as a percentage of total sales for fiscal 1992 and 1993:
PERCENTAGE OF SALES -------------------- DEPARTMENT 1992 1993 - ------------------------------------------------------------------------------------ --------- --------- General craft materials and wearable art............................................ 22% 21% Silk and dried flowers and plants................................................... 18 21 Picture framing..................................................................... 14 15 Seasonal and promotional items...................................................... 15 14 Fine art materials.................................................................. 11 11 Hobby, party, needlecraft and ribbon................................................ 20 18 --- --- Total............................................................................. 100% 100% --- --- --- ---
CUSTOMER SERVICE Michaels believes that customer service is critically important to its merchandising strategy. Many of the craft supplies sold in Michaels stores can be assembled into unique end-products with an appropriate amount of guidance and direction. Michaels has hundreds of displays in every store in an effort to stimulate new project ideas, and supplies project sheets with detailed instructions on how to assemble the products. In addition, many sales associates are craft enthusiasts with the experience to help customers with ideas and instructions. The Company also offers free demonstrations and inexpensive classes in stores as a means of promoting new craft ideas. Michaels believes that the in-store "how-to" demonstrations, instructional classes, knowledgeable sales associates, and customer focus groups have allowed the Company to better understand and serve its customers. In addition, the Company measures its customer service in each store at least four times a year through a "mystery shopper" program. ADVERTISING The Company believes that its advertising promotes craft and hobby project ideas among its customers. Traditionally, the Company has focused on circular and newspaper advertising. The Company has found full-color circular advertising, primarily as an insert to newspapers but also through direct mail or on display within its stores, to be the most effective medium of advertising. 9 Such circulars advertise numerous products in order to emphasize the wide selection of products available at Michaels stores. The Company believes that advertising efficiencies associated with the clustering of its stores in its markets together with its ability to advertise through circulars and newspapers approximately once a week in each of its markets provides the Company with an advantage over its smaller competitors. The Company has generally limited television advertising to network television in those major markets in which it had clusters of stores or in which it was adding new stores. Beginning with the 1994 fall/Christmas season, the Company expects to implement a marketing program coordinating national cable television, including The Discovery Channel-TM-, Lifetime Television, and USA Network-R-, and circular advertisements together with project booklets, in-store demonstrations, and new point-of-sale techniques. More than one-half of the $4.5 million cost of this new marketing program will be underwritten by Michaels' vendors. Michaels intends to allocate a portion of its network television budget to this program. STORE OPERATIONS The Company's 270 stores prior to the Leewards Acquisition averaged approximately 15,500 square feet of selling space, although newer stores average approximately 17,000 square feet of selling space. Net sales for fiscal 1993 averaged approximately $3.2 million per store for stores open the entire fiscal year and $218 per square foot of selling space. Store sites are selected based upon meeting certain economic, demographic and traffic criteria and upon the Company's strategy of clustering stores in markets where certain operating efficiencies can be achieved. The Michaels stores currently in operation are located primarily in strip shopping centers in areas with easy access and ample parking. Michaels has developed a standardized procedure which enables the Company to efficiently open new stores and integrate them into its information and distribution systems. The Company develops the floor plan and inventory layout, and organizes the advertising and promotions in connection with the opening of each new store. In addition, Michaels maintains an experienced store opening staff to provide new store personnel with in-store training. Michaels generally opens new stores during the period from February through October because new store personnel require significant in-store training prior to the first Christmas selling season for each such store. Costs for opening stores at particular locations depend upon the type of building and general cost levels in the area. In fiscal 1993, the average net cost to the Company of opening a new store was approximately $535,000 per store, which included leasehold improvements, furniture, fixtures and equipment, and pre-opening expenses. The Company used more existing real estate, versus build-to-suit locations, in fiscal 1993 resulting in an average cost of opening a new store that was $160,000 higher than historical levels due to the increased level of leasehold improvements. This increase was offset, in part, by lower rent rates. The initial inventory investment associated with each new store in fiscal 1993 was approximately $320,000 to $740,000 depending on the time of year in which the store was opened. The initial inventory investment in new stores is offset, in part, by extended vendor terms and allowances. The cost for new store openings, excluding initial inventory investments, in fiscal 1993 was approximately $29 million and the cost for new store openings in fiscal 1994 is estimated to be approximately $30 million. PURCHASING AND DISTRIBUTION The Company's purchasing strategy is to negotiate directly with its vendors in order to take advantage of volume purchasing discounts and improve control over product mix and inventory. For certain substantial product lines, the Company negotiates directly with a number of major manufacturers to shorten the distribution chain. Although this requires an increased inventory investment in the warehouse, it results in substantial savings and allows the Company to develop products specifically formulated to Michaels' design and quality standards. Approximately 90% of the merchandise is acquired from vendors on the Company's "approved list." Of this merchandise, approximately one-half is received by the stores from the Company's distribution centers and one-half is received directly 10 from vendors. In addition, each store has the flexibility to purchase approximately 10% of its merchandise directly from local vendors, which allows the store managers to tailor the products offered in their stores to local tastes and trends. All store purchases are monitored by district and regional managers. The Company currently operates three distribution centers which supply the stores with certain merchandise, including substantially all seasonal and promotional items. The Company's distribution centers are located in Irving, Texas, Buena Park, California, and Lexington, Kentucky. The Company also operates a bulk warehouse in Phoenix, Arizona, which allows the Company to store bulk purchases of seasonal and promotional merchandise prior to distribution. Michaels stores receive deliveries from the distribution centers generally once a week. In fiscal 1993, over 85% of the products sold in Michaels stores were purchased from manufacturers or distributors located in the United States and the remainder from manufacturers or distributors located in the Far East and Mexico. Goods manufactured in the Far East generally require long lead times and are ordered four to six months in advance of delivery. Such products are either imported directly by the Company or acquired from distributors based in the United States. In all cases, purchases are denominated in U.S. dollars (or Canadian dollars for purchases of certain items delivered directly to stores in Canada). INVENTORY CONTROL/MANAGEMENT INFORMATION SYSTEMS Michaels' management information systems include automated point-of-sale, merchandising, distribution and financial applications. All orders from the stores to the Company's distribution centers are processed electronically to ensure timely delivery of distribution center sourced inventory. The Company's point-of-sale system captures sales information by department. Due to the large number of inexpensive items in the stores, the non-fashion nature of the merchandise, and the long lead times involved for ordering seasonal goods (up to nine months), the Company does not currently capture item-level sales information, inventory or margin electronically in all stores. Sales trend tracking combines item level point-of-sale scanning data from the CFW stores with point-of-sale department-level sales from all other stores, weekly test counts of certain SKUs in 40 selected stores, and regular communication from store managers through the district and regional managers. Inventory and margins are monitored on a perpetual basis in the distribution centers and in the stores via physical inventories at least quarterly in groups of 30 to 40 stores and a year-end complete physical count in most stores. The Company believes that these procedures and automated systems, together with its other control processes, allow Michaels to effectively manage and monitor its inventory levels and margin performance. The Company has in recent months increased its inventory levels as a result of a number of factors, including planned expansion through new or acquired stores, increased direct sourcing (see "Purchasing and Distribution" above), larger average store sizes, and better in-stock positions resulting from the implementation of a radio frequency reordering system at the store level. Also, the Company retained some excess inventory from the 1993 holiday selling season to be held for sale in 1994. Primarily as a result of these factors, inventory per square foot increased 10% to $57 at the end of the first quarter of 1994 from $52 at the end of the first quarter of 1993. COMPETITION Michaels is the largest nationwide retailer dedicated to serving the arts and crafts marketplace. The specialty arts, crafts and decorative item retail business is highly competitive. Michaels competes primarily with regional and local merchants that tend to specialize in particular aspects of arts and crafts, other nationwide retailers of craft items and related merchandise, and mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts, crafts, picture framing and seasonal products. The Company believes that its stores compete based on price, quality and variety of merchandise assortment, and customer service, such as instructional demonstrations. Michaels believes the combination of its broad selection of products, emphasis on customer service, loyal customer base, and capacity to advertise frequently in all of its markets provides the Company with a competitive advantage. 11 LEEWARDS ACQUISITION OVERVIEW On July 6, 1994 the Company acquired Leewards, an Illinois-based arts and crafts retailer with approximately 100 stores located primarily in the midwestern and northeastern United States. The Leewards stores, which average approximately 14,000 square feet of selling space, are similar in both size and type of location to the average Michaels store. The Company believes that the Leewards Acquisition provides it with an opportunity to accelerate its nationwide expansion strategy in the fragmented arts and crafts retailing industry. The Leewards Acquisition establishes Michaels' presence in a number of new markets, particularly in the northeastern United States, including Pennsylvania, Massachusetts, and New Jersey, and significantly expands its presence in several existing markets, including northern California, Illinois, Florida, Michigan, Missouri, Minnesota and New York. In connection with the Leewards Acquisition, Michaels expects to close approximately 20 Leewards stores and may close up to 10 Michaels stores due to overlapping locations. In connection with the Leewards Acquisition, Michaels has designed a plan that is intended to increase the sales and profitability of the Leewards stores. The plan includes reconfiguring the layout and staffing of the acquired stores and increasing the average inventory level at the Leewards stores to be more consistent with Michaels' fundamental merchandising strategy of providing a broad selection of products through separate in-store departments with a commitment to superior customer service. The Company believes that the Leewards stores will also benefit from the addition of art supplies and party goods departments, the strengthening of its custom floral and custom framing services, extensive in-store promotional activities and the implementation of Michaels' targeted advertising strategies. In addition, Michaels expects the Leewards stores to benefit from Michaels' centralized purchasing and nationwide distribution network. Michaels also believes that it will realize cost savings through the elimination of duplicate corporate overhead in connection with the acquisition, and that it will benefit from increased purchasing power with its suppliers. For the fiscal year ended January 1994, the average sales of the Leewards stores open for the full fiscal year were $2.1 million compared to the average sales for Michaels stores open for the full year during the same period of $3.2 million. The average profitability per Leewards store has also historically trailed the average profitability of Michaels stores. However, Michaels believes that the Leewards Acquisition provides the Company with many attractive retail store locations, and that Michaels' plan to convert the Leewards stores to the Michaels format and to implement Michaels' merchandising strategies will result in increased sales and profitability in the acquired stores. Michaels' objective for fiscal 1994 with respect to the continuing Leewards stores is to increase average sales per store and to increase operating margins to a level achieved by Michaels stores during their first full fiscal year of operation. If these objectives, together with the cost savings described in the preceding paragraph, are achieved in fiscal 1994 and maintained in fiscal 1995, the Company believes the consummation of the Leewards Acquisition and the Common Stock Offering at a public offering price of $31 3/4 would not have a dilutive impact on the per share earnings in fiscal 1994, excluding the impact of the anticipated charge to earnings in connection with the possible closing of certain Michaels stores, if any, and the conversion of Leewards stores, or in fiscal 1995. See "Recent Developments -- Anticipated Store Closing and Conversion Costs." Although management currently believes these results can be achieved, no assurance can be given that sales volumes or operating margins at the continuing Leewards store locations will be improved or that the cost savings will be realized. The consideration for the Leewards Acquisition consisted of approximately $7.9 million in cash and 1,257,279 shares of Common Stock, including 386,213 shares which are being sold by the Leewards stockholders to the public in this Common Stock Offering. The merger consideration exceeds the net tangible assets of Leewards by approximately $58 million. The Company believes that the economic benefits expected to be derived from the Leewards Acquisition, including gain in market share, immediate presence in new markets and future earnings supports the payment of such consideration. Michaels also repaid the indebtedness under Leewards' bank credit facility and subordinated 12 notes in the aggregate amount of approximately $39.6 million upon the closing of the Leewards Acquisition. See "Pro Forma Combined Financial Information." Leewards' outstanding indebtedness at the time of closing consisted of (i) approximately $22.3 million under Leewards' existing credit facility due August 19, 1994 with a current interest rate of 9.0% and (ii) approximately $17.3 million under Leewards' outstanding 13.5% Senior Subordinated Notes due 2000. INTEGRATION OF LEEWARDS The Company has designed a ten-week transition plan to reconfigure the Leewards stores to be more consistent with the merchandising strategy of Michaels. In order to minimize disruption to the Company's business, this plan will be implemented by the Leewards field organization under the supervision of Michaels' management using detailed plans developed by Michaels. Key aspects of this plan include: - Revising and enhancing the product mix to correlate to Michaels' merchandising strategy; - Converting merchandise ordering and management information systems; - Eliminating redundant overhead; - Retraining employees to provide the level of customer service found in Michaels stores and to improve operational efficiencies; and - Closing approximately 20 Leewards and possible closing of up to 10 Michaels store locations to eliminate overlapping stores. The continuing 80 Leewards stores will be converted to the Michaels store format beginning with a four-week phase to eliminate incompatible merchandise. The second phase will involve the arrival of new merchandise and the reformatting of the stores to the Michaels prototype. This will be accomplished department by department, with the stores remaining open for business throughout the process. The reformatting of the Leewards stores will include the addition of art supplies and party goods departments, the strengthening of the custom floral and custom framing services and the expansion of other departmental assortments to correlate with Michaels' standard store format. Michaels' merchandise ordering systems will be installed during this time and other in-store systems will be converted to Michaels' systems. Upon completion of the store conversion plan, Leewards' distribution facilities will be closed as Michaels' existing distribution facilities have adequate capacity to service the remaining Leewards stores. The Company believes that the cost to implement the integration of the Leewards stores, including the cost of the physical conversion of the stores, retraining employees, converting merchandise ordering and management information systems, and providing new inventory will be approximately $33 million to $35 million. In addition, the Company expects that it will incur costs of approximately $13 million to $24 million in connection with lease termination and store closing costs, severance payments, and closing of Leewards' corporate office and distribution center. The Company anticipates completing the plan prior to the busy fall/Christmas selling season. During the last year, the Company increased its upper level management capabilities by adding a Vice President -- Store Operations, Vice President -- Store Development and Corporate Operations, Vice President -- Information Systems and Vice President -- Real Estate. In addition, the Company expects to retain a number of the field managers from the Leewards organization to supplement the Company's existing field management. During the conversion process, the Leewards field organization will be strengthened by an increase in district and regional management to provide close supervision. The Company believes that these additions to its management structure, together with the additional Michaels field management that has been trained to implement the Company's 1994 growth plan, will provide Michaels with sufficient management capabilities to absorb the 80 Leewards stores in addition to the approximately 55 new stores to be opened and 25 stores already acquired by Michaels during 1994. The Company believes this process will permit the conversion of the Leewards stores without disruption of the existing Michaels field management or operations during the busy 13 fall/Christmas selling season. After the conversion and integration of the Leewards stores is complete, the entire Michaels field organization will be reorganized with permanent assignments based on the combined entities. Although the Company has not previously completed an acquisition of similar size to the Leewards Acquisition, the Company believes that its substantial experience in opening new stores and recent experience in incorporating acquired stores into the Michaels format and systems will facilitate the integration of the Leewards stores into the Company's existing structure. Nonetheless, there can be no assurance that the Company will successfully complete the integration of the Leewards stores prior to the busy fall/Christmas selling season. If the integration of the Leewards stores is not successfully completed, it could have an adverse effect on future operating results of the Company. USE OF PROCEEDS The net proceeds to the Company from the Common Stock Offering are estimated to be approximately $44.8 million (approximately $53.4 million assuming the over-allotment option is exercised in full), assuming a public offering price of $31 3/4 per share and after deducting the estimated underwriting discounts and commissions and offering expenses. The Company intends to use all of the net proceeds to reduce bank debt, which increased by approximately $51.2 million as a result of borrowings to fund cash required in connection with the Leewards Acquisition. The Company's outstanding revolving bank debt at July 6, 1994 was approximately $95 million with a current interest rate of 5.8%. The Company's new bank debt agreement expires in June 1997. See "Recent Developments -- New Credit Facility" and "Leewards Acquisition." Pending the use of such proceeds for the above purposes, the net proceeds initially will be invested in short-term interest bearing securities or mutual funds which invest in such securities. The Company's practice in the past has been to place its cash balances in a broad range of investment and non- investment grade securities including equity securities and financial instruments of various maturities. If attractive opportunities present themselves, the Company may continue this investment practice in the future. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. 14 CAPITALIZATION The following table sets forth (i) the capitalization of the Company as of May 1, 1994, (ii) the capitalization on a pro forma basis for the Leewards Acquisition, and (iii) the capitalization on a pro forma basis for the Leewards Acquisition and as adjusted for the issuance of the shares of Common Stock being offered hereby. See "Leewards Acquisition" and "Use of Proceeds."
MAY 1, 1994 ------------------------------------------- PRO FORMA AS ADJUSTED ACTUAL PRO FORMA (1) (1)(2) -------- --------------- --------------- (IN THOUSANDS) Short-term bank debt (3).............................................................. $ 56,000 $102,649 $ 57,867 -------- --------------- --------------- -------- --------------- --------------- Convertible subordinated notes........................................................ $ 97,750 $ 97,750 $ 97,750 Shareholders' equity: Common stock, $0.10 par value, 50,000,000 shares authorized, 17,462,331 shares issued and outstanding, 18,719,610 shares issued and outstanding pro forma and 20,219,610 shares issued and outstanding pro forma as adjusted..................... 1,746 1,872 2,022 Additional paid-in capital.......................................................... 126,126 165,919 210,551 Retained earnings................................................................... 78,724 78,724 78,724 -------- --------------- --------------- Total shareholders' equity.......................................................... 206,596 246,515 291,297 -------- --------------- --------------- Total capitalization.................................................................. $304,346 $344,265 $389,047 -------- --------------- --------------- -------- --------------- --------------- - ------------------------ (1) On a pro forma basis to reflect the consummation of the Leewards Acquisition for 1,257,279 shares of Common Stock and approximately $7.9 million in cash, the refinancing of approximately $35 million of Leewards' indebtedness which was outstanding as of May 1, 1994 and the incurrence of certain transaction costs. (2) On a pro forma basis to reflect the receipt by the Company of approximately $44.8 million in net proceeds from the Common Stock offered hereby at an assumed offering price of $31 3/4 after deducting the estimated underwriting discounts and commissions and offering expenses. (3) Subsequent to May 1, 1994, the Company sold a portion of its marketable and other securities and used the proceeds to retire short-term bank debt. As of July 6, 1994, short-term bank debt was approximately $95 million (which includes borrowings used to refinance the outstanding Leewards indebtedness).
15 PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Common Stock of Michaels is quoted through The Nasdaq National Market under the symbol "MIKE." The following table sets forth, for the periods indicated, the high and low sales prices per share of the Common Stock, as reported by The Nasdaq National Market through July 6, 1994.
HIGH LOW ------- ------- FISCAL YEAR ENDED JANUARY 31, 1993: First Quarter.................................................................. $26 $19 Second Quarter................................................................. 23 1/2 16 1/2 Third Quarter.................................................................. 29 3/4 20 1/2 Fourth Quarter................................................................. 34 3/4 24 5/8 FISCAL YEAR ENDED JANUARY 30, 1994: First Quarter.................................................................. $34 $26 1/4 Second Quarter................................................................. 33 25 1/4 Third Quarter.................................................................. 39 26 3/8 Fourth Quarter................................................................. 36 1/2 31 7/8 FISCAL YEAR ENDED JANUARY 29, 1995: First Quarter.................................................................. $44 3/4 $31 Second Quarter (through July 6, 1994).......................................... 46 1/2 31 1/2
On July 6, 1994, the reported last sale price of the Common Stock as reported by The Nasdaq National Market was $31 3/4 per share. Michaels has never paid dividends on its Common Stock. The Company's current policy is to retain earnings for use in the Company's business and the financing of its growth. However, such policy is subject to the discretion of the Board of Directors. The Company's credit facility contains certain restrictions on the Company's ability to pay dividends. 16 SELECTED FINANCIAL AND STORE DATA The selected financial data presented below are derived from the financial statements of the Company for the five fiscal years ended January 30, 1994 which were audited by Ernst & Young, independent auditors, and from unaudited financial statements for the quarters ended May 2, 1993 and May 1, 1994, respectively. The data should be read in conjunction with the financial statements and the related notes incorporated by reference in this Prospectus. The Company believes that all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation thereof have been made to the unaudited financial data. The results for the quarter ended May 1, 1994 are not necessarily indicative of the results of the full year. Certain amounts in prior years have been reclassified to conform with the presentation for the current year. The following unaudited pro forma statement of income data have been prepared as if the Leewards Acquisition occurred at the beginning of fiscal 1993. The following unaudited pro forma combined balance sheet data have been prepared as if the Leewards Acquisition occurred on May 1, 1994. The unaudited pro forma financial data do not purport to represent the financial position or results of operations which would have occurred had such transaction been consummated on the dates indicated or the Company's financial position or results of operations for any future date or period. These unaudited pro forma financial data should be read in conjunction with the historical financial statements of the Company and Leewards.
FISCAL YEAR (1) QUARTER ENDED ---------------------------------------------------------- ---------------------------- 1993 MAY 1, 1994 ------------------ ------------------ PRO MAY 2, PRO 1989 1990 1991 1992 ACTUAL FORMA(2) 1993 ACTUAL FORMA(2) -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT STORE DATA AND PER SHARE AMOUNTS) STATEMENT OF INCOME DATA: Net sales.......................... $289,754 $362,028 $410,899 $493,159 $619,688 $780,302 $112,961 $159,798 $199,305 Cost of sales and occupancy expense........................... 195,864 246,656 274,375 323,577 403,869 511,067 73,279 103,511 130,987 Selling, general and administrative expense........................... 78,990 94,678 110,881 135,319 174,463 224,840 33,720 47,216 58,720 -------- -------- -------- -------- -------- -------- -------- -------- -------- Operating income................... 14,900 20,694 25,643 34,263 41,356 44,395 5,962 9,071 9,598 Interest expense................... 9,896 9,739 6,971 263 6,378 8,042 1,522 2,026 2,535 Other (income) and expense, net.... 4,444 1,213 913 538 (7,666) (7,031) (1,735) (1,031) (986) -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and extraordinary item................ 560 9,742 17,759 33,462 42,644 43,384 6,175 8,076 8,049 Provision for income taxes......... 547 3,887 7,020 13,084 16,357 17,227 2,377 3,109 3,222 -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before extraordinary item... 13 5,855 10,739 20,378 26,287 26,157 3,798 4,967 4,827 Extraordinary item(3).............. -- -- 3,843 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income......................... $ 13 $ 5,855 $ 6,896 $ 20,378 $ 26,287 $ 26,157 $ 3,798 $ 4,967 $ 4,827 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Earnings per common share assuming full dilution..................... $ 0.00 $ 0.57 $ 0.87(4) $ 1.21 $ 1.52 $ 1.41 $ 0.22 $ 0.28 $ 0.25 Weighted average shares outstanding assuming full dilution............ 10,645 10,229 12,411 16,853 19,809 21,066 17,131 17,856 19,113 STORE DATA: Stores open at period end.......... 122 137 140 168 220 299(5) 180 259 338(5) Average sales per square foot(6)... $ 193 $ 206 $ 213 $ 226 $ 218 $ 206 $ 45 $ 44 $ 43 Comparable store sales increase(7)....................... 6% 9% 9% 7% 3% 3% 2% 10% 8% BALANCE SHEET DATA (AT END OF PERIOD): Working capital.................... $ 58,680 $ 44,080 $ 74,786 $104,462 $181,816 $ -- $103,134 $169,726 $136,949 Total assets....................... 150,817 144,238 180,913 322,099 397,830 -- 321,868 463,119 601,024 Total long-term debt............... 73,168 52,983 -- 97,750 97,750 -- 97,750 97,750 97,750 Shareholders' equity............... 40,377 46,615 126,299 155,277 185,415 -- 159,075 206,596 246,515 - ------------------------------ (1) The Company operates on a 52/53 week fiscal year ending on the Sunday closest to January 31. For example, references to "fiscal 1993" mean the fiscal year ended January 30, 1994. Fiscal 1990 included 53 weeks; all other fiscal years set forth above included 52 weeks. (2) On a pro forma basis to reflect the consummation of the Leewards Acquisition. See "Pro Forma Combined Financial Information." Fiscal 1993 pro forma amounts do not reflect the acquisitions of Treasure House, Oregon Craft & Floral or H&H Craft & Floral by the Company in February and April 1994 as such acquisitions were not material in the aggregate. (3) Extraordinary item relates to the redemption premium paid for the early retirement of the Company's 12.75% Senior Subordinated Notes, which had an effective interest rate of 15.8%, and the accelerated amortization of related debt issuance costs. (4) Before extraordinary item of $3.8 million, or $0.31 per common and common equivalent share, relating to the redemption premium paid for the early retirement of the Company's 12.75% Senior Subordinated Notes, which had an effective interest rate of 15.8%, and the accelerated amortization of related debt issuance costs. (5) Includes Michaels and Leewards stores open at period end net of 20 Leewards stores anticipated to be closed. (6) Calculated for stores open the entire period and based on selling square footage. (7) Stores are included in the calculation of comparable store sales for the first full month following the one-year anniversary of the completion of the grand opening sales period, which is generally the fourteenth month after the store opening. The sales amounts for each store included in the calculation represent the sales for the same number of months for each period compared. The increase for fiscal 1990 was calculated on a comparable 52-week period.
17 PRO FORMA COMBINED FINANCIAL INFORMATION The accompanying unaudited pro forma combined statements of income of the Company for the year ended January 30, 1994 and the quarter ended May 1, 1994 have been prepared as if the Leewards Acquisition, which will be accounted for by the purchase method of accounting, occurred on February 1, 1993, the beginning of fiscal year 1993. The accompanying unaudited pro forma combined balance sheet of the Company as of May 1, 1994 has been prepared as if the Leewards Acquisition occurred on that date. The historical financial information of the Company and Leewards has been derived from the respective historical financial statements incorporated by reference or included herein. Certain amounts in the statements of operations of Leewards for fiscal year 1993 and the quarter ended May 1, 1994 included in the pro forma combined statements of income have been reclassified to conform to the method of presentation used by Michaels. The pro forma adjustments are preliminary and are based upon available information and assumptions that management of the Company believes are reasonable. The unaudited pro forma combined financial statements do not purport to represent the financial position or results of operations which would have occurred had such transactions been consummated on the dates indicated or the Company's financial position or results of operations for any future date or period. These unaudited pro forma financial statements should be read in conjunction with the historical financial statements of the Company and Leewards. The pro forma combined financial statements do not include the financial statements of 1) Treasure House, which was acquired by the Company in February 1994 and will be accounted for using the pooling-of-interests method of accounting, or 2) Oregon Craft & Floral and H&H Craft & Floral, which were acquired as of May 1, 1994 and will be accounted for using the purchase method of accounting, since the acquisitions are not considered material, individually or in the aggregate, to the operating results or financial position of the Company. Sales of Treasure House were approximately $15.6 million and $3.8 million for the year ended January 30, 1994 and the quarter ended May 1, 1994, respectively. Combined sales of Oregon Craft & Floral and H&H Craft & Floral for the same periods were approximately $41.8 million and $7.4 million, respectively. 18 PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 30, 1994 (UNAUDITED)
PRO PRO FORMA FORMA MICHAELS LEEWARDS ADJUSTMENTS TOTAL -------- -------- ------------ -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales....................................................................... $619,688 $191,136 $(30,522)(A) $780,302 Cost of sales and occupancy expense............................................. 403,869 130,638 (21,537)(A) 511,067 (1,903)(B) Selling, general and administrative expense..................................... 174,463 57,000 (8,515)(A) 224,840 443(C) 1,449(D) -------- -------- ------------ -------- Operating income................................................................ 41,356 3,498 (459) 44,395 Interest expense................................................................ 6,378 3,439 (1,775)(E) 8,042 Other (income) and expense, net................................................. (7,666) 635 (7,031) -------- -------- ------------ -------- Income before income taxes...................................................... 42,644 (576) 1,316 43,384 Provision for income taxes...................................................... 16,357 (236) 1,106(F) 17,227 -------- -------- ------------ -------- Net income before non-recurring charge (J)...................................... $ 26,287 $ (340) $ 210 $ 26,157 -------- -------- ------------ -------- -------- -------- ------------ -------- Earnings per common and common equivalent share................................. $ 1.53 $ 1.41 Earnings per common share -- assuming full dilution............................. $ 1.52 $ 1.41 Weighted average common and common equivalent shares............................ 17,231 1,257 18,488 Weighted average shares assuming full dilution.................................. 19,809 1,257 21,066
See accompanying Notes to Pro Forma Combined Financial Statements. 19 PRO FORMA COMBINED STATEMENT OF INCOME FOR THE QUARTER ENDED MAY 1, 1994 (UNAUDITED)
PRO PRO FORMA FORMA MICHAELS LEEWARDS ADJUSTMENTS TOTAL -------- -------- ------------ -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales....................................................................... $159,798 $ 46,507 $ (7,000)(A) $199,305 Cost of sales and occupancy expense............................................. 103,511 33,207 (5,112)(A) 130,987 (619)(B) Selling, general and administrative expense..................................... 47,216 14,332 (1,856)(A) 58,720 (1,334)(C) 362(D) -------- -------- ------------ -------- Operating income................................................................ 9,071 (1,032) 1,559 9,598 Interest expense................................................................ 2,026 994 (485)(E) 2,535 Other (income) and expense, net................................................. (1,031) 45 (986) -------- -------- ------------ -------- Income before income taxes...................................................... 8,076 (2,071) 2,044 8,049 Provision for income taxes...................................................... 3,109 (849) 962(F) 3,222 -------- -------- ------------ -------- Net income before non-recurring charge (J)...................................... $ 4,967 $ (1,222) $ 1,082 $ 4,827 -------- -------- ------------ -------- -------- -------- ------------ -------- Earnings per common and common equivalent share................................. $ 0.28 $ 0.25 Earnings per common share -- assuming full dilution............................. $ 0.28 $ 0.25 Weighted average common and common equivalent shares............................ 17,785 1,257 19,042 Weighted average shares assuming full dilution.................................. 17,856 1,257 19,113
See accompanying Notes to Pro Forma Combined Financial Statements. 20 PRO FORMA COMBINED BALANCE SHEET INFORMATION MAY 1, 1994 (UNAUDITED) ASSETS
PRO PRO FORMA FORMA MICHAELS LEEWARDS ADJUSTMENTS TOTAL -------- -------- ------------ -------- (IN THOUSANDS) Current assets: Cash and equivalents.............................................................. $ 2,867 $ 3,217 $ -- $ 6,084 Marketable and other securities................................................... 67,734 -- -- 67,734 Merchandise inventories........................................................... 230,406 48,833 (6,770)(H) 272,469 Deferred income taxes............................................................. -- 523 (523)(H) 15,355 15,355(H) Prepaid expenses and other........................................................ 21,971 5,785 (1,211)(H) 26,545 -------- -------- ------------ -------- Total current assets............................................................ 322,978 58,358 6,851 388,187 -------- -------- ------------ -------- Property and equipment, net......................................................... 87,840 18,454 (3,757)(H) 102,537 Costs in excess of net assets of acquired operations, net........................... 43,954 -- 57,948(H) 101,902 Other assets........................................................................ 8,347 6,387 (6,336)(H) 8,398 -------- -------- ------------ -------- $463,119 $ 83,199 $ 54,706 $601,024 -------- -------- ------------ -------- -------- -------- ------------ -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................. $ 47,741 $ 9,551 $ -- $ 57,292 Short-term bank debt.............................................................. 56,000 18,118 7,903(G) 102,649 3,667(G) 16,961(I) Subordinated debentures........................................................... -- 16,961 (16,961)(I) -- Income taxes payable.............................................................. 4,252 -- 1,682(H) 5,934 Accrued liabilities and other..................................................... 45,259 14,572 25,532(H) 85,363 -------- -------- ------------ -------- Total current liabilities....................................................... 153,252 59,202 38,784 251,238 -------- -------- ------------ -------- Convertible subordinated notes...................................................... 97,750 -- -- 97,750 Deferred income taxes and other..................................................... 5,521 2,852 (2,852)(H) 5,521 -------- -------- ------------ -------- Total long-term liabilities..................................................... 103,271 2,852 (2,852) 103,271 -------- -------- ------------ -------- Redeemable preferred stock.......................................................... -- 29,845 (29,845)(H) -- Shareholders' equity: Common stock...................................................................... 1,746 2 (2)(H) 1,872 126(G) Additional paid-in capital........................................................ 126,126 733 (733)(H) 165,919 39,793(G) Retained earnings................................................................. 78,724 (9,435) 9,435(H) 78,724 -------- -------- ------------ -------- Total shareholders' equity...................................................... 206,596 (8,700) 48,619 246,515 -------- -------- ------------ -------- $463,119 $ 83,199 $ 54,706 $601,024 -------- -------- ------------ -------- -------- -------- ------------ --------
See accompanying Notes to Pro Forma Combined Financial Statements. 21 NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) Adjustments to the pro forma combined statement of income to reflect the consummation of the Leewards Acquisition as of February 1, 1993 are as follows: (A) To eliminate revenues and related operating expenses of 20 overlapping Leewards stores to be closed subsequent to the consummation of the Leewards Acquisition. Revenues are expected to increase in nearby Michaels stores; however, the anticipated revenue increase has not been reflected. (B) To eliminate nonrecurring costs, primarily rental and related occupancy costs, associated with the Leewards distribution center, net of incremental costs to be incurred at the Company's distribution center. Upon consummation of the Leewards Acquisition and completion of the conversion of the Leewards stores, the Leewards distribution center is to be closed. (C) To adjust selling, general and administrative expense to (i) account for pre-opening costs incurred by Leewards consistent with the Company's accounting policy whereby pre-opening costs are expensed in the fiscal year in which the store opens by increasing (decreasing) expense by $2.0 million and $(840,000) for the year ended January 30, 1994 and the quarter ended May 1, 1994, respectively, and (ii) eliminate nonrecurring costs, primarily salaries and related benefits, associated with reductions of Leewards corporate personnel and other costs of approximately $1.6 million and $494,000 for the year ended January 30, 1994 and the quarter ended May 1, 1994, respectively. (D) To amortize costs in excess of net assets acquired over a 40-year period on a straight-line basis. The Company will assess the recoverability of costs in excess of net assets acquired annually based on existing facts and circumstances. The Company will measure the recoverability of this asset on an on-going basis based on projected earnings before interest, depreciation and amortization, on an undiscounted basis. Should the Company's assessment indicate an impairment of this asset in the future, an appropriate write-down will be recorded. (E) To reduce the interest expense on the Leewards indebtedness consisting of approximately $17 million of subordinated debentures and short-term borrowings (average outstanding borrowings approximated $11.5 million for the year ended January 30, 1994 and $16.8 million for the quarter ended May 1, 1994) from their stated rates of 13.5% and 7.75%, respectively, to 4.9%, which rate approximates the Company's incremental borrowing rate for both of the periods presented. In connection with the Leewards Acquisition, the Leewards subordinated debentures and short-term borrowings are required to be repaid. (F) To reflect the tax effects applicable to the above entries, exclusive of the amortization of costs in excess of net assets acquired, at a 40% effective tax rate. Adjustments to the pro forma balance sheet to reflect the consummation of the Leewards Acquisition as of May 1, 1994 are as follows: (G) To record the costs of the Leewards Acquisition. Cash payments and shares issued are based on a five day average stock price and closing stock price on July 5, 1994 of $33.80 and $31.75, respectively. 1. Cash consideration paid (funded with short- term bank debt) $ 7,903 2. Shares issued in connection with the Leewards Acquisition (1,257,279 shares) 39,919 3. Liabilities incurred by Leewards in connection with the Leewards Acquisition by Michaels $ 2,867 4. Transaction costs 800 3,667 --------- --------- Total acquisition costs $ 51,489 --------- ---------
22 NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (H) To adjust the carrying values of the net assets acquired to estimated fair value as of May 1, 1994 and to accrue various liabilities assumed in connection with the Leewards Acquisition. 1. Write-down inventories to liquidate incompatible merchandise of Leewards $ 6,770 2. Write-off deferred pre-opening costs to conform Leewards' accounting policy to that of Michaels 1,211 3. Write-off tradenames and other deferred costs of Leewards 6,336 4. Accrue costs of closing Leewards' corporate office and distribution center (including lease termination costs, severance pay and other costs) and costs associated with the anticipated closing of certain Leewards' stores (accrued closing costs relate only to Leewards' stores) 25,532 5. Write-off of the carrying values of leasehold improvements related to facilities to be closed and other adjustments to state other property and equipment at estimated fair value 3,757 6. Record deferred tax assets related to the above adjustments (15,355) 7. Eliminate net deferred tax liabilities of Leewards as of the Leewards Acquisition date (2,329) 8. Record income tax liabilities assumed by Michaels in connection with the Leewards Acquisition related primarily to the termination of the LIFO method of inventory valuation for tax reporting purposes, net of the tax benefits related to certain transaction costs 1,682 9. Eliminate redeemable preferred stock and common stockholders' deficit of Leewards as of the Leewards Acquisition date (21,145) --------- Excess of fair value of liabilities over net assets acquired 6,459 Total acquisition costs 51,489 --------- Costs in excess of the net assets acquired $ 57,948 --------- ---------
(I) To reflect additional borrowings on Michaels' credit facility to fund the required repayment of the Leewards subordinated notes in connection with the Leewards Acquisition. (J) The Company intends to implement a plan to reconfigure the Leewards stores to be more consistent with the merchandising strategy of Michaels. The Company expects to incur a one-time pretax charge in connection with the reconfiguration of the Leewards stores of approximately $3.2 million. 23 SELLING STOCKHOLDERS The following table sets forth certain information regarding the Selling Stockholders' beneficial ownership of the Company's Common Stock and as adjusted to reflect the sale by the Company and the Selling Stockholders of the Common Stock offered pursuant to the Common Stock Offering:
SHARES BENEFICIALLY OWNED PRIOR TO THE COMMON STOCK SHARES BENEFICIALLY OWNED AFTER OFFERING THE COMMON STOCK OFFERING --------------------- NUMBER OF SHARES -------------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT(1) BEING OFFERED NUMBER PERCENT(1) - ---------------------------------------- --------- ---------- ---------------- ------------------- ---------- The Teachers' Retirement System of the State of Illinois...................... 261,277 1.5% 52,250 209,027 1.1% Frontenac Venture V Limited Partnership............................ 179,982 1.0 36,000 143,982 * GIPEN & Co.............................. 40,004 * 40,004 -- * MONY Life Insurance Company of America................................ 13,309 * 13,309 -- * The Mutual Life Insurance Company of New York................................... 168,967 * 168,967 -- * John A. Popple.......................... 32,932 * 16,466 16,466 * Prudential-Bache Capital Partners II, L.P.................................... 58,435 * 29,217 29,218 * The Prudential Insurance Company of America................................ 271,935 1.6 30,000 241,935 1.3 -- -- --------- -------- -------- Total................................. 1,026,841 5.8% 386,213 640,628 3.4% -- -- -- -- --------- -------- -------- --------- -------- -------- - ------------------------ * less than 1% (1) Percentage based on the Company's Common Stock outstanding.
Each of the Selling Stockholders acquired the shares listed in the table above pursuant to the Leewards Acquisition in exchange for shares of capital stock of Leewards owned by it. Pursuant to the merger agreement with Leewards, Michaels agreed that in the event Michaels engaged in an underwritten public offering of Common Stock after the merger the Leewards stockholders would be offered the opportunity to include in the underwritten public offering the shares of Common Stock received by them in the merger. The Leewards stockholders have indicated that they will sell up to 386,213 shares in the Common Stock Offering. This right to include shares will expire upon consummation of the Common Stock Offering. The Company is obligated to cause a "shelf" registration to be filed on behalf of Leewards' stockholders and to cause the registration statement to remain effective for a period of three years following the closing of the acquisition with respect to the shares of Michaels Common Stock issued to the Leewards stockholders but not sold in the Common Stock Offering. All of Leewards' stockholders who received shares of Common Stock in the acquisition have agreed not to offer, sell, pledge or otherwise dispose of, directly or indirectly, any shares of Common Stock received in connection with the acquisition without the prior written consent of CS First Boston Corporation for a period of 90 days after the date of this Prospectus, except for the shares being sold in this Common Stock Offering and except that such stockholders may dispose of such shares in a transaction not involving a public distribution if the transferee executes a similar agreement. See "Underwriting." DESCRIPTION OF CAPITAL STOCK Michaels is authorized to issue 50,000,000 shares of Common Stock, par value $0.10 per share, and 2,000,000 shares of Preferred Stock, par value $0.10 per share. As of July 6, 1994, 17,492,933 24 shares of Common Stock were outstanding (excluding 50,779 shares held by wholly-owned subsidiaries of the Company) and no shares were held in treasury, and no shares of Preferred Stock were outstanding. The outstanding shares of Common Stock are, and the shares offered hereby will be, when issued, fully paid and nonassessable. COMMON STOCK Holders of the Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders. Shares of Common Stock do not have cumulative voting rights, which means that the holders of a majority of the shares voting for the election of the Board of Directors can elect all members of the Board of Directors. Upon any liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to receive pro rata all of the assets of the Company available for distribution to shareholders, subject to any prior rights of holders of any outstanding Preferred Stock. Shareholders do not have any preemptive rights to subscribe for or purchase any stock, obligations, warrants or other securities of the Company. Holders of record of shares of Common Stock are entitled to receive dividends when and if declared by the Board of Directors out of funds of the Company legally available therefor. Michaels has never paid dividends on its Common Stock. The Company's present policy is to retain earnings for the foreseeable future for use in the Company's business and the financing of its growth. However, such policy is subject to the discretion of the Board of Directors. The Company's credit facility contains certain restrictions on the Company's ability to pay dividends. PREFERRED STOCK The Board of Directors of the Company is authorized to issue Preferred Stock in one or more series and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of the Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company. TRANSFER AGENT The transfer agent for the Common Stock is Society National Bank. CERTAIN SPECIAL FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS The following is a general discussion of certain special United States federal income and estate tax considerations relevant to non-United States holders of the Common Stock, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. As used herein, "non-United States holder" means a corporation, individual or partnership that is, as to the United States, a foreign corporation, a nonresident alien individual or a foreign partnership, and any estate or trust if such estate or trust is not subject to United States taxation on income from sources without the United States that is not effectively connected with the conduct of a trade or business within the United States. This discussion is based upon the Code, Treasury Regulations, IRS rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or different interpretations. This discussion does not purport to deal with all aspects of federal income and estate taxation that may be relevant to a particular non-United States holder's decision to purchase the Common Stock. 25 ALL PROSPECTIVE NON-UNITED STATES HOLDERS OF THE COMMON STOCK ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMMON STOCK. DIVIDENDS Dividends paid to a non-United States holder of the Common Stock will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Currently, dividends paid to an address in a foreign country are presumed to be paid to a resident of such country in determining the applicability of a treaty for such purposes. However, proposed Treasury Regulations which have not been finally adopted would require non-United States holders to satisfy certain certification and other requirements to obtain the benefit of any applicable income tax treaty providing for a lower rate of withholding tax on dividends. Except as may be otherwise provided in an applicable income tax treaty, a non-United States holder will be taxed at ordinary federal income tax rates (on a net income basis) on dividends that are effectively connected with the conduct of a trade or business of such non-United States holder within the United States and might not be subject to the withholding tax described above. If such non-United States holder is a foreign corporation, it may also be subject to a United States branch profits tax at a 30% rate or such lower rate as may be specified by any applicable income tax treaty. Non-United States holders must comply with certain certification and disclosure requirements to claim treaty benefits or an exemption from withholding tax under the foregoing rules. DISPOSITION OF COMMON STOCK Non-United States holders generally will not be subject to United States federal income tax in respect of gain recognized on a disposition of the Common Stock unless (i) the gain is effectively connected with a trade or business conducted by the non-United States holder within the United States (in which case the branch profits tax described under "Dividends" above may also apply if the holder is a foreign corporation), (ii) in the case of a non-United States holder who is a nonresident alien individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the disposition and either the income from the disposition is attributable to an office or other fixed place of business maintained by the holder in the United States or the holder has a "tax home" in the United States (within the meaning of the Code), or (iii) the Company is or has been a "United States real property holding corporation" and certain other requirements are met. The Company does not believe it has been or is currently, and does not anticipate becoming, a United States real property holding corporation. FEDERAL ESTATE TAXES Common Stock that is owned or treated as being owned by a non-United States holder who is a natural person (as determined for United States federal estate tax purposes) at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Common Stock that has been transferred by such a non-United States holder in a "generation-skipping transfer" may be subject to a generation-skipping transfer tax in addition to estate tax. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING United States information reporting requirements and 31% backup withholding tax generally will not apply to dividends paid on the Common Stock if the dividends are subject to either the 30% withholding tax or such lower rate as may be specified by an applicable income tax treaty, or are exempt from such withholding tax under the rules discussed above relating to dividends that are effectively connected with the conduct of a trade or business of such holder within the United States, or are paid to a non-United States holder at an address outside the United States provided that the holder certifies to its non-United States status on the appropriate form and the payer has no actual knowledge that the holder is a United States person. As a general matter, information reporting and 26 backup withholding will also not apply to a payment of the proceeds of a sale effected outside the United States of Common Stock by a foreign office of a foreign broker. However, information reporting requirements (but under current proposed Treasury regulations not backup withholding) will apply to a payment of the proceeds of a sale effected outside the United States of Common Stock by a foreign office of a broker that (i) is a United States person, (ii) is a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, or (iii) is a "controlled foreign corporation" (generally, a foreign corporation controlled by United States shareholders) with respect to the United States, unless the broker has documentary evidence in its records that the holder is a non-United States holder and certain conditions are met, or the holder otherwise establishes an exemption. Payment by a United States office of a broker of the proceeds of a sale of Common Stock is subject to both backup withholding and information reporting unless the holder certifies to the payor in the manner required as to its non-United States status under penalties of perjury or otherwise establishes an exemption. A non-United States holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing an appropriate claim for refund with the IRS. 27 UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated , 1994 (the "U.S. Underwriting Agreement"), the underwriters named below (the "U.S. Underwriters"), for whom CS First Boston Corporation, Robertson, Stephens & Company, L.P. and Nomura Securities International, Inc. are acting as representatives (the "Representatives"), have severally but not jointly agreed to purchase from the Company and the Selling Stockholders the following respective numbers of U.S. Shares:
NUMBER OF UNDERWRITER U.S. SHARES - ------------------------------------------------------------------------------------------ ------------ CS First Boston Corporation............................................................... Robertson, Stephens & Company, L.P........................................................ Nomura Securities International, Inc...................................................... ------------ Total................................................................................. 1,508,970 ------------ ------------
The U.S. Underwriting Agreement provides that the obligations of the U.S. Underwriters are subject to certain conditions precedent and that the U.S. Underwriters will be obligated to purchase all the U.S. Shares offered hereby if any are purchased. The U.S. Underwriting Agreement provides that, in the event of a default by a U.S. Underwriter, in certain circumstances, the purchase commitments of non-defaulting U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be terminated. The Company and the Selling Stockholders have entered into a Subscription Agreement (the "Subscription Agreement") with the Managers of the International Offering (the "Managers") providing for the concurrent offer and sale of the International Shares outside the United States and Canada. The closing of the U.S. Offering is a condition to the closing of the International Offering and vice versa. The Managers named below have, pursuant to the Subscription Agreement, severally and not jointly, agreed with the Company and the Selling Stockholders to subscribe and pay for the following respective numbers of International Shares:
NUMBER OF INTERNATIONAL MANAGER SHARES - ------------------------------------------------------------------------------------------ ------------ CS First Boston Limited................................................................... Robertson, Stephens & Company, L.P........................................................ Nomura International plc.................................................................. ------------ Total................................................................................. 377,243 ------------ ------------
The Subscription Agreement provides that the obligations of the Managers are such that, subject to certain conditions precedent, the Managers will be obligated to purchase all the International Shares if any are purchased. The Subscription Agreement provides that, in the event of a default by a Manager, in certain circumstances the purchase commitments of the non-defaulting managers may be increased or the Subscription Agreement may be terminated. 28 The Company has granted to the U.S. Underwriters and the Managers an option, exercisable by CS First Boston Corporation, expiring at the close of business on the 30th day after the date of the initial public offering of the Common Stock offered hereby, to purchase up to 282,932 additional shares at the public offering price, less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. The U.S. Underwriters and the Managers may exercise such option only to cover over-allotments in the sale of the shares of Common Stock offered hereby. To the extent that this option to purchase is exercised, each U.S. Underwriter and each Manager will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares being sold to the U.S. Underwriters and the Managers as the number of U.S. Shares set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of U.S. Shares in such table and as the number set forth next to such Manager's name in the corresponding table in the prospectus relating to the International Offering bears to the total number of International Shares in such table. The Company and the Selling Stockholders have been advised by the Representatives that the U.S. Underwriters propose to offer the U.S. Shares in the United States and Canada to the public initially at the public offering price set forth on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concession of $ per share, that the Underwriters and such dealers may allow a discount of $ per share on sales to certain other dealers, and that after the initial public offering, the public offering price and concession and discount to dealers may be changed by the Representatives. In connection with the Common Stock Offering, CS First Boston Corporation and certain of the U.S. Underwriters, Managers and selling group members (if any) and their respective affiliates may engage in passive market making transactions in the Common Stock on The Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act during a period before commencement of offers or sales of the Common Stock offered hereby. The passive market making transactions must comply with applicable volume and price limits and be identified as such. The public offering price, the aggregate underwriting discounts and commissions per share and per share concession and discount to dealers for the U.S. Offering and the concurrent International Offering will be identical. Pursuant to an Agreement between the U.S. Underwriters and the Managers (the "Agreement Between") relating to the Common Stock Offering, changes in the public offering price, concession and discount to dealers will be made only upon the mutual agreement of CS First Boston Corporation, as representative of the U.S. Underwriters, and CS First Boston Limited ("CSFBL"), on behalf of the Managers. Pursuant to the Agreement Between, each of the U.S. Underwriters has agreed that, as part of the distribution of the U.S. Shares and subject to certain exceptions, (a) it is not purchasing any shares of Common Stock for the account of anyone other than a U.S. or Canadian Person (as defined below) and (b) it has not offered or sold, and will not offer to sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the Common Stock to any person outside the United States or Canada or to anyone other than a U.S. or Canadian Person nor to any dealer who does not so agree. Each of the Managers has agreed or will agree that, as part of the distribution of the International Shares and subject to certain exceptions, (i) it is not purchasing any shares of Common Stock for the account of any U.S. or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the Common Stock in the United States or Canada or to any U.S. or Canadian Person nor to any dealer who does not so agree. The foregoing limitations do not apply to stabilization transactions or to transactions between the U.S. Underwriters and the Managers pursuant to the Agreement Between. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, possessions and other areas subject to its jurisdiction, "Canada" means Canada, its provinces, territories, possessions and other areas subject to its jurisdiction, and "U.S. or Canadian Person" means a citizen or resident of the United States or Canada, or a corporation, partnership or other entity created or organized in or under the laws of the United States or 29 Canada (other than a foreign branch of such an entity) or an estate or trust the income of which is subject to United States or Canadian federal income taxation, regardless of its source of income, and includes any United States or Canadian branch of a non-U.S. or non-Canadian Person. Pursuant to the Agreement Between, sales may be made between the U.S. Underwriters and the Managers of such number of shares of Common Stock as may be mutually agreed upon. The price of any shares so sold will be the initial public offering price, less such amount as may be mutually agreed upon by CS First Boston Corporation, as representative of the U.S. Underwriters, and CSFBL, on behalf of the Managers, but not exceeding the selling concession applicable to such shares. To the extent there are sales between the U.S. Underwriters and the Managers pursuant to the Agreement Between, the number of shares of Common Stock initially available for sale by the U.S. Underwriters or by the Managers may be more or less than the amount appearing on the cover page of this Prospectus. There are no limits on the number of shares of Common Stock that may be sold between the U.S. Underwriters and the Managers. Neither the U.S. Underwriters nor the Managers are obligated to purchase from the other any unsold shares of Common Stock. This Prospectus may also be used in connection with resales of International Shares in the United States by dealers. The Company and certain of its directors, executive officers and shareholders have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any additional shares of its Common Stock or securities convertible or exchangeable into or exercisable for any shares of its Common Stock without the prior written consent of CS First Boston Corporation for a period of 90 days after the date of this Prospectus other than (a) issuances and sales by the Company of Common Stock in accordance with the terms of certain of the Company's benefit plans, (b) issuances of Common Stock by the Company upon the conversion of securities or the exercise of warrants outstanding at the date of this Prospectus and (c) the filing of a registration statement to permit the resale of shares of Common Stock by the Leewards stockholders. See "Selling Stockholders." The stockholders of Leewards have agreed not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of Common Stock received in connection with the acquisition without the prior written consent of CS First Boston Corporation for a period of 90 days after the date of this Prospectus except for the shares being sold in this Common Stock Offering and except that such stockholders may dispose of such shares in a transaction not involving a public distribution if the transferee executes a similar agreement. The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the Managers against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the U.S. Underwriters and the Managers may be required to make in respect thereof. Certain of the U.S. Underwriters and Managers and their affiliates have from time to time performed, and continue to perform, various investment banking and commercial banking services for the Company, for which customary compensation has been received. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Common Stock in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock. 30 REPRESENTATIONS OF PURCHASERS Each purchaser of Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company, the Selling Stockholders and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text under "Resale Restrictions." RIGHTS OF ACTION AND ENFORCEMENT The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. Federal securities laws. All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of Common Stock to whom the SECURITIES ACT (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Common Stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #88/5, a copy of which may be obtained from the Company. Only one such report must be filed in respect of Common Stock acquired on the same date and under the same prospectus exemption. LEGAL MATTERS The validity of the Common Stock offered hereby and the issuance thereof have been passed upon for the Company by Jackson & Walker, L.L.P., Dallas, Texas and for the Underwriters by Fulbright & Jaworski L.L.P., Dallas, Texas. Michael C. French, a partner in Jackson & Walker, L.L.P., is a director of the Company. EXPERTS The consolidated financial statements of Michaels Stores, Inc. appearing or incorporated by reference in the Company's Annual Report on Form 10-K for the year ended January 30, 1994, have been audited by Ernst & Young, independent auditors, as set forth in their report thereon incorporated by reference therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Leewards Creative Crafts, Inc. at January 30, 1994 and January 31, 1993, and for each of the years ended January 30, 1994, and January 31, 1993 appearing elsewhere herein have been audited by Deloitte & Touche, independent auditors, as set forth in their report thereon appearing elsewhere herein, which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Agreement and Plan of Merger whereby Leewards Creative Crafts, Inc. will become a subsidiary of Michaels Stores, Inc., and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 31 LEEWARDS CREATIVE CRAFTS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE --------- INDEPENDENT AUDITORS' REPORT............................................................................... F-2 FINANCIAL STATEMENTS FOR THE YEARS ENDED JANUARY 31, 1993, JANUARY 30, 1994 AND (UNAUDITED) FOR THE THREE MONTHS ENDED MAY 2, 1993 AND MAY 1, 1994 Balance Sheets........................................................................................... F-3 Statements of Operations................................................................................. F-5 Statements of Redeemable Preferred Stock and Common Stockholders' Equity................................. F-6 Statements of Cash Flows................................................................................. F-7 Notes to Financial Statements............................................................................ F-8
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Leewards Creative Crafts, Inc. Elgin, Illinois We have audited the accompanying balance sheets of Leewards Creative Crafts, Inc. as of January 31, 1993 and January 30, 1994 and the related statements of operations, of redeemable preferred stock and common stockholders' equity, and of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Leewards Creative Crafts, Inc. as of January 31, 1993 and January 30, 1994 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 11, the Company has entered into an Agreement and Plan of Merger (the "Agreement") whereby it will become a wholly owned subsidiary of Michaels Stores, Inc. ("Michaels"). The Agreement also provides that simultaneously with the merger closing, Michaels shall cause the Company to repay its long-term debt. DELOITTE & TOUCHE Chicago, Illinois March 4, 1994 (May 11, 1994 as to Note 11) F-2 LEEWARDS CREATIVE CRAFTS, INC. BALANCE SHEETS (IN 000'S EXCEPT SHARE DATA) ASSETS
JANUARY 31, JANUARY 30, MAY 1, 1993 1994 1994 ----------- ----------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents.................................... $ 2,619 $ 2,946 $ 3,217 Accounts receivable, net of allowance for doubtful accounts of $3, $2 and $2, respectively.............................. 654 1,372 1,008 Merchandise inventories...................................... 37,530 53,090 48,833 Prepaid expenses and other current assets.................... 2,745 3,898 4,777 Deferred income taxes........................................ 495 343 523 ----------- ----------- ----------- Total current assets..................................... 44,043 61,649 58,358 PROPERTY AND EQUIPMENT: Land......................................................... 733 732 732 Buildings and improvements................................... 972 987 1,009 Leasehold improvements....................................... 5,169 6,918 6,975 Machinery and equipment...................................... 13,860 20,822 20,731 Construction in progress..................................... 20 84 397 ----------- ----------- ----------- 20,754 29,543 29,844 Less accumulated depreciation and amortization............... 8,631 10,598 11,390 ----------- ----------- ----------- Property and equipment -- net............................ 12,123 18,945 18,454 OTHER ASSETS: Trade name, less accumulated amortization of $719, $871 and $908, respectively.......................................... 5,340 5,188 5,151 Other intangibles, less accumulated amortization of $11,113, $11,557 and $11,629, respectively........................... 1,040 596 524 Deferred financing costs, less accumulated amortization of $2,299, $2,687 and $2,740, respectively..................... 892 656 603 Notes receivable............................................. -- 70 -- Miscellaneous assets......................................... 7 7 109 ----------- ----------- ----------- Total other assets....................................... 7,279 6,517 6,387 ----------- ----------- ----------- TOTAL.......................................................... $ 63,445 $ 87,111 $ 83,199 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-3 LEEWARDS CREATIVE CRAFTS, INC. BALANCE SHEETS (IN 000'S EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
JANUARY 31, JANUARY 30, MAY 1, 1993 1994 1994 ----------- ----------- ----------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable............................................. $ 9,147 $ 15,157 $ 9,551 Accrued expenses............................................. 11,193 12,851 13,673 Taxes other than income taxes................................ 798 712 899 Current maturities of long-term debt......................... 7,348 17,602 20,195 Long-term debt classified as current (Note 4)................ -- 14,884 14,884 Income taxes payable......................................... 1,098 -- -- ----------- ----------- ----------- Total current liabilities................................ 29,584 61,206 59,202 LONG-TERM DEBT................................................. 16,961 -- -- DEFERRED INCOME TAXES.......................................... 3,926 3,538 2,852 ----------- ----------- ----------- Total liabilities........................................ 50,471 64,744 62,054 COMMITMENTS AND CONTINGENCIES (Note 10) REDEEMABLE PREFERRED STOCK: Class A Cumulative Exchangeable Senior Preferred Stock, $0.01 par value; shares authorized: 1993 -- 2,135; 1994 -- 4,000; shares outstanding: 1993 -- 2,135; 1994 -- 2,349............ 9 10 68 Class B Cumulative Exchangeable Senior Preferred Stock, $0.01 par value; shares authorized: 1993 -- 2,514; 1994 -- 4,700; shares outstanding: 1993 -- 2,514; 1994 -- 2,765............ 10 11 80 Exchangeable Preferred Stock, $0.01 par value; shares authorized: 1993 -- 393,472; 1994 -- 800,000; shares outstanding: 1993 -- 393,472; 1994 -- 427,322 and 470,054, respectively................................................ 255 325 4 Class C Senior Convertible Preferred Stock, $0.01 par value; 562,500 shares authorized: 549,629 shares outstanding....... 5 5 5 Class D Senior Convertible Preferred Stock, $0.01 par value; shares authorized: 1994 -- 194,050; shares outstanding, 194,035..................................................... -- 2 2 Class E Senior Convertible Preferred Stock, $0.01 par value; shares authorized and outstanding: 1994 -- 129,712.......... -- 1 1 Undesignated Preferred Stock, $0.01 par value; shares authorized and outstanding: 1993 -- 2,039,379; 1994 -- 1,605,038; 0 shares issued.................................. Additional paid-in capital................................... 18,579 29,229 29,685 ----------- ----------- ----------- Total redeemable preferred stock......................... 18,858 29,583 29,845 COMMON STOCKHOLDERS' DEFICIENCY: Common stock, $0.01 par value; shares authorized: 1993 -- 2,800,000; 1994 -- 4,000,000; shares outstanding: 78,281.... 1 1 1 Class B Common Stock, $0.01 par value; shares authorized: 1993 -- 200,000; 1994 -- 300,000; shares outstanding: 73,275...................................................... 1 1 1 Class C Common Stock, $0.01 par value; shares authorized: 1994 -- 600,000; 0 shares issued............................ Additional paid-in capital................................... 746 733 733 Deficit...................................................... (6,632) (7,951) (9,435) ----------- ----------- ----------- Common stockholders' deficiency.......................... (5,884) (7,216) (8,700) ----------- ----------- ----------- TOTAL.......................................................... $ 63,445 $ 87,111 $ 83,199 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-4 LEEWARDS CREATIVE CRAFTS, INC. STATEMENTS OF OPERATIONS (IN 000'S)
YEAR ENDED QUARTER ENDED ------------------------ -------------------- JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1993 1994 1993 1994 ----------- ----------- --------- --------- (UNAUDITED) NET SALES....................................................... $ 169,014 $ 190,261 $ 39,064 $ 46,246 COST OF SALES................................................... 86,431 99,093 19,615 24,252 ----------- ----------- --------- --------- 82,583 91,168 19,449 21,994 OPERATING EXPENSES: Selling and delivery.......................................... 63,845 76,219 16,288 19,483 General and administrative.................................... 5,754 6,900 1,511 1,801 Amortization of deferred pre-opening expenses................. 1,092 1,387 105 840 Depreciation and amortization................................. 3,431 3,549 834 954 ----------- ----------- --------- --------- 74,122 88,055 18,738 23,078 ----------- ----------- --------- --------- OPERATING EARNINGS (LOSS)....................................... 8,461 3,113 711 (1,084) OTHER INCOME (EXPENSE): Restructuring expenses (Notes 1, 4 and 6)..................... (1,632) (24) -- (12) Gain (loss) on asset disposal................................. 503 (226) -- 19 Other......................................................... 22 -- -- -- Interest expense: Related parties............................................. (2,137) (2,285) (572) (572) Other....................................................... (1,759) (1,154) (218) (422) ----------- ----------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES............................... 3,458 (576) (79) (2,071) INCOME TAXES Currently payable............................................. 1,159 93 -- -- Deferred income taxes (benefit)............................... 394 (329) (32) (849) ----------- ----------- --------- --------- 1,553 (236) (32) (849) ----------- ----------- --------- --------- NET INCOME (LOSS)............................................... $ 1,905 $ (340) $ (47) $ (1,222) ----------- ----------- --------- --------- ----------- ----------- --------- ---------
See notes to financial statements. F-5 LEEWARDS CREATIVE CRAFTS, INC. STATEMENTS OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (IN 000'S)
REDEEMABLE PREFERRED STOCK ------------------------------------------------------------------------------------------------- EXCHANGEABLE ADDITIONAL EXCHANGEABLE EXCHANGEABLE PREFERRED CONVERTIBLE CONVERTIBLE CONVERTIBLE PAID-IN CLASS A CLASS B STOCK CLASS C CLASS D CLASS E CAPITAL ------------ ------------ ------------ ----------- ----------- ----------- ---------- BALANCE, FEBRUARY 2, 1992..... $ 439 $ 759 $ 371 $-- -$- -$- $ 5,890 Amortization of issuance fees....................... -- -- -- -- -- -- 56 Class A, Class B and exchangeable preferred dividends accrued.......... 330 390 447 -- -- -- -- Sale of Class C preferred stock...................... -- -- -- $ 30 -- -- 10,146 Sale of common stock........ -- -- -- -- -- -- -- Repurchase and cancellation of outstanding shares...... -- -- -- -- -- -- -- Paid-in-kind dividend....... (760) (1,139) (563) -- -- -- 2,462 Reverse split-common stock and Class C preferred...... -- -- -- (25) -- -- 25 Repurchase options.......... -- -- -- -- -- -- -- Net income.................. -- -- -- -- -- -- -- ------ ------------ ------ ----------- ----- ----- ---------- BALANCE, JANUARY 31, 1993..... 9 10 255 5 -- -- 18,579 Amortization of issuance fees....................... -- -- -- -- -- -- 104 Class A, Class B and Exchangeable preferred dividends accrued.......... 215 252 408 -- -- -- -- Sale of Class D preferred stock...................... -- -- -- -- 2 -- 5,840 Sale of Class E preferred stock...................... -- -- -- -- -- 1 3,903 Paid-in-kind dividend, May 1, 1993.................... -- -- (338) -- -- -- 338 Repurchase options.......... -- -- -- -- -- -- -- Paid-in-kind dividend, January 15, 1994........... (214) (251) -- -- -- -- 465 Net loss.................... -- -- -- -- -- -- -- ------ ------------ ------ ----------- ----- ----- ---------- BALANCE, JANUARY 30, 1994 10 11 325 5 2 1 29,229 (UNAUDITED): Net loss.................... -- -- -- -- -- -- -- Amortization of issuance fees....................... -- -- -- -- -- -- 29 Class A, Class B and Exchangeable preferred dividends accrued.......... 58 69 106 -- -- -- -- Paid-in-kind dividend, May 1, 1994.................... -- -- (427) -- -- -- 427 ------ ------------ ------ ----------- ----- ----- ---------- BALANCE, MAY 1, 1994.......... $ 68 $ 80 $ 4 $ 5 $ 2 $ 1 $29,685 ------ ------------ ------ ----------- ----- ----- ---------- ------ ------------ ------ ----------- ----- ----- ---------- COMMON STOCKHOLDERS' EQUITY -------------------------------------- CLASS ADDITIONAL COMMON B PAID-IN STOCK COMMON CAPITAL DEFICIT ------ ------ ---------- ------- BALANCE, FEBRUARY 2, 1992..... $5 $5 $1,190 $(7,314) Amortization of issuance fees....................... -- -- -- (56) Class A, Class B and exchangeable preferred dividends accrued.......... -- -- -- (1,167) Sale of Class C preferred stock...................... -- -- -- -- Sale of common stock........ -- -- 100 -- Repurchase and cancellation of outstanding shares...... (1) -- (527) -- Paid-in-kind dividend....... -- -- -- -- Reverse split-common stock and Class C preferred...... (3) (4) 7 -- Repurchase options.......... -- -- (24) -- Net income.................. -- -- -- 1,905 -- -- ---------- ------- BALANCE, JANUARY 31, 1993..... 1 1 746 (6,632) Amortization of issuance fees....................... -- -- -- (104) Class A, Class B and Exchangeable preferred dividends accrued.......... -- -- -- (875) Sale of Class D preferred stock...................... -- -- -- -- Sale of Class E preferred stock...................... -- -- -- -- Paid-in-kind dividend, May 1, 1993.................... -- -- -- -- Repurchase options.......... -- -- (13) -- Paid-in-kind dividend, January 15, 1994........... -- -- -- -- Net loss.................... -- -- -- (340) -- -- ---------- ------- BALANCE, JANUARY 30, 1994 1 1 733 (7,951) (UNAUDITED): Net loss.................... -- -- -- (1,222) Amortization of issuance fees....................... -- -- -- (29) Class A, Class B and Exchangeable preferred dividends accrued.......... -- -- -- (233) Paid-in-kind dividend, May 1, 1994.................... -- -- -- -- -- -- ---------- ------- BALANCE, MAY 1, 1994.......... $1 $1 $ 733 $(9,435) -- -- -- -- ---------- ------- ---------- -------
See notes to financial statements. F-6 LEEWARDS CREATIVE CRAFTS, INC. STATEMENTS OF CASH FLOWS (IN 000'S)
YEAR ENDED QUARTER ENDED ------------------------- -------------------- JANUARY 31, JANUARY 30, MAY 2, 1993 1994 1993 MAY 1, 1994 ----------- ----------- ------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................................ $ 1,905 $ (340) $ (47) $ (1,222) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization.......................................... 3,290 3,549 834 954 Deferred income taxes.................................................. 503 (236) (64) (1,209) Loss (gain) on disposal of fixed assets................................ (503) 226 -- (19) Changes in: Accounts receivable.................................................. 521 (718) (202) 707 Merchandise inventories.............................................. 6,969 (15,560) (272) 4,257 Prepaid expenses and other current assets............................ 1,303 (1,153) 47 (879) Accounts payable..................................................... (11,952) 6,010 306 (5,606) Accrued expenses and other liabilities............................... (448) 4 (2,475) (447) Taxes other than income.............................................. (46) (86) 100 187 Notes receivable..................................................... 88 (70) -- -- Miscellaneous assets................................................. (1) -- (154) (32) ----------- ----------- ------- ----------- Net cash flows from operating activities........................... 1,629 (8,374) (1,927) (3,309) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment....................................... (1,141) (9,670) (872) (282) Proceeds from sale of property........................................... 1,503 57 -- -- ----------- ----------- ------- ----------- Net cash flows from investing activities........................... 362 (9,613) (872) (282) CASH FLOWS FROM FINANCING ACTIVITIES: Financing fees paid for restructuring revolving and term credit agreements.............................................................. (433) (152) (8) -- Proceeds from issuance of stock.......................................... 10,276 9,746 -- -- Repurchase of stock...................................................... (551) (13) -- -- Issuance of subordinated debt accrual notes.............................. 2,077 -- -- -- Net borrowings (repayments) under revolving credit agreement............. (13,934) 8,177 2,375 2,593 Increase in checks outstanding........................................... 474 556 3 1,269 ----------- ----------- ------- ----------- Net cash flows from financing activities........................... (2,091) 18,314 2,370 3,862 ----------- ----------- ------- ----------- NET INCREASE (DECREASE) IN CASH............................................ (100) 327 (429) 271 CASH AND CASH EQUIVALENTS -- Beginning of year............................. 2,719 2,619 2,619 2,946 ----------- ----------- ------- ----------- CASH AND CASH EQUIVALENTS -- End of year................................... $ 2,619 $ 2,946 $ 2,190 $ 3,217 ----------- ----------- ------- ----------- ----------- ----------- ------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest: Related parties........................................................ $ -- $ 2,290 $ -- $ -- ----------- ----------- ------- ----------- ----------- ----------- ------- ----------- Other.................................................................. $ 1,804 $ 1,130 $ 270 $ 496 ----------- ----------- ------- ----------- ----------- ----------- ------- ----------- Cash paid during the year for income taxes............................... $ 188 $ 1,103 $ 25 $ 19 ----------- ----------- ------- ----------- ----------- ----------- ------- -----------
See notes to financial statements. F-7 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES: QUARTERLY FINANCIAL STATEMENTS BASIS OF PRESENTATION -- The accompanying financial statements and related footnote disclosures of Leewards Creative Crafts, Inc. (the "Company") as of May 1, 1994 and for the three months then ended and for the three months ended May 2, 1993 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, which are of a normal and recurring nature necessary for the fair presentation of financial position, results of operations and cash flows. The results of operations for the three months ended May 1, 1994 and May 2, 1993 are not necessarily indicative of the results which may be expected for the entire year. OPERATIONS AND RESTRUCTURING The Company engages in the retail sale of craft and home decor products. The Company maintained the following number of Company-operated and franchised stores at:
COMPANY- OPERATED FRANCHISES TOTAL --------------- --------------- ----- January 31, 1993......................................................... 85 2 87 January 30, 1994......................................................... 99 3 102
During the year ended January 31, 1993, the Company effected a restructuring of its debt (Note 4), capital structure (Note 6) and ongoing operations. Costs associated with these efforts, other than those directly associated with the debt and capital restructurings, are included in restructuring expenses. Such expenses include store closing, severance and other costs incurred in connection with these efforts. FISCAL YEAR-END -- The Company's fiscal year-end is the Sunday closest to January 31. CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash; amounts due from major credit card companies, which are collected within 1 to 2 days after date of sale; and highly liquid investments which, at time of purchase, have maturities of three months or less. MERCHANDISE INVENTORIES -- Merchandise inventories are stated at the lower of last-in, first-out (LIFO) cost or market. During the year ended January 31, 1993, LIFO inventories were reduced from levels at the beginning of the year, which reduction of LIFO inventory quantities had no material effect on 1993 operating earnings. Inventories at January 31, 1993, January 30, 1994, May 2, 1993 and May 1, 1994 were valued at market which was lower than LIFO cost. PRE-OPENING COSTS -- Pre-opening costs incurred for the opening of retail locations are deferred and amortized over 12 months, commencing in the month after the location opens. Unamortized deferred pre-opening costs included in prepaid expenses were $97,000 and $2,208,000 at January 31, 1993 and January 30, 1994, respectively. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the respective assets, which are as follows: Buildings and improvements.................. 25-30 years Leasehold improvements...................... Shorter of lease term or 10 years Machinery and equipment..................... 3-10 years
INTANGIBLE ASSETS -- Intangible assets, primarily the trade name, and favorable lease agreements, are reported net of accumulated amortization. The assets are being amortized on a straight-line basis over their useful lives which range from 3 to 40 years. INCOME TAXES -- The Company adopted SFAS No. 109, "Accounting for Income Taxes," in the year ended January 31, 1993 and, accordingly, computes deferred taxes using the liability method. F-8 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED) Deferred tax assets and liabilities are recorded based on differences between the financial statements and income tax basis of assets and liabilities and the tax rate in effect when these differences are expected to reverse. 2. ACCRUED EXPENSES Accrued expenses include the following (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 --------------- --------------- Outstanding checks................................................... $ 4,339 $ 4,895 Accrued payroll...................................................... 2,970 2,396 Other................................................................ 3,884 5,560 --------------- --------------- Total................................................................ $ 11,193 $ 12,851 --------------- --------------- --------------- ---------------
3. INCOME TAXES The provision (benefit) for income taxes consists of the following (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 --------------- --------------- Current: Federal............................................................ $ 829 State.............................................................. 330 $ 93 ------- ------ 1,159 93 ------- ------ Deferred: Federal............................................................ 310 (273) State.............................................................. 84 (56) ------- ------ 394 (329) ------- ------ Total provision (benefit) for income taxes........................... $ 1,553 $ (236) ------- ------ ------- ------
Provision for deferred taxes results from temporary differences in the recognition of revenue and expense for financial statement and tax purposes. Temporary differences arise principally from the following (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 --------------- --------------- Amortization of intangibles.......................................... $ (285) $ (203) Deferred store pre-opening costs..................................... (321) 708 Accrued liabilities.................................................. 137 (294) Inventory capitalization............................................. 205 (416) Inventory reserves................................................... 118 127 Depreciation......................................................... 183 343 State taxes and effect of changes in state tax rates................. 109 70 Alternative minimum tax.............................................. 171 (47) Net operating loss................................................... (667) Other................................................................ 77 50 ------ ------ Total................................................................ $ (394) $ (329) ------ ------ ------ ------
F-9 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INCOME TAXES (CONTINUED) The difference between the statutory federal income tax rate and the effective tax rate is as follows:
JANUARY 31, JANUARY 30, 1993 1994 ------------- ------------- Statutory federal income tax rate.......................................... 34.0% (34.0)% State taxes, net of federal benefit........................................ 6.1 (6.9) Deferred tax adjustment.................................................... 4.8 -- ----- ----- Effective income tax rate.................................................. 44.9% (40.9)% ----- ----- ----- -----
At January 31, 1993 and January 30, 1994, the components of the deferred income tax liability and asset were as follows (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- Deferred tax liability: Intangibles.............................................................. $ 2,558 $ 2,368 Property and equipment................................................... 1,487 1,894 Other, net............................................................... (119) (54) Net operating loss carryforward.......................................... -- (670) ----------- ----------- Total.................................................................. $ 3,926 $ 3,538 ----------- ----------- ----------- ----------- Deferred tax asset: Inventory................................................................ $ 337 Accrued expenses......................................................... $ 487 860 Prepaid expenses......................................................... (184) (1,129) AMT credit carryforward.................................................. 91 218 Other -- net............................................................. 101 57 ----------- ----------- Total.................................................................. $ 495 $ 343 ----------- ----------- ----------- -----------
At January 30, 1994, the Company has $218,000 of AMT credits available for carryforward to future years and an NOL carryforward of $1,635,000 which expires in 2009. 4. LONG-TERM DEBT Long-term debt consists of (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- Revolving and term loan(a)................................................. $ 7,348 $ 15,525 Subordinated debentures(b),(c)............................................. 16,961 16,961 ----------- ----------- Total long-term debt (See Note 11)......................................... 24,309 32,486 Less current maturities.................................................... (7,348) (32,486) ----------- ----------- Total.................................................................... $ 16,961 $ -- ----------- ----------- ----------- -----------
(a) In August 1988, the Company entered into a secured revolving credit and term loan agreement (the "agreement") which enabled the Company to borrow up to a maximum of $25,000,000. On June 13, 1990, the Company restructured the agreement to provide for additional borrowings up to $32,000,000 through August 19, 1993. On April 2, 1993 the borrowing limit was reduced to $29,920,000. F-10 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT (CONTINUED) Borrowings outstanding under the agreement are (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- Revolving loans............................................................ $ 4,235 $ 14,067 Term loan.................................................................. 3,113 1,458 ----------- ----------- Total.................................................................... $ 7,348 $ 15,525 ----------- ----------- ----------- -----------
The borrowings under the agreement are collateralized by the assets of the Company. Interest is payable monthly based on the rate of interest publicly announced by Citibank in New York, New York as Citibank's "base rate" ("Base Rate"). In the year ended January 30, 1994, the interest rate was Base Rate plus 2% for the period from February 1, 1993 to April 2, 1993 and Base Rate plus 1.75% for the period from April 3, 1993 to January 30, 1994. During the prior year ended January 31, 1993, the interest rate was Base Rate plus 5% for the period from February 3, 1992 to June 22, 1992 and Base Rate plus 2% for the period from June 23, 1992 to January 31, 1993. In the year ended January 30, 1994, the interest rate fluctuated between 7.75% and 8.0% and was 7.75% at year-end; in the prior year, the rate fluctuated between 8.0% and 11.5% and was 8.0% at year-end. Under the revolving credit loan, as restructured, the full availability of this credit line is contingent on the cost of collateralized inventory, less certain adjustments. Commitment fees on the revolving loan are one-half of one percent of the average daily unused portion of the total facility, payable monthly. The term loan, as restructured, requires quarterly principal payments of $413,750 and the balance on August 19, 1994. The Company is in the preliminary stages of negotiating a new and expanded credit facility. In consideration for expanding the credit facility, the Company paid a one-time fee of $200,000 and issued warrants to Citicorp to purchase 3,250 shares of Class B Common Stock, par value $0.01 per share, subject to adjustment under certain antidilution provisions. The warrants are exercisable from the date of issuance at $141.65 per share and expire the later of June 13, 1995 or upon full payment of the credit facility. The agreement has covenants providing for mandatory prepayment provisions and requiring the Company to meet specified financial ratios and income tests. Such tests include, but are not limited to, net worth and earnings before interest, depreciation and taxes. The covenants impose limitations on, among other things, the amount of capital expenditures for each year, creating or incurring liens, and selling assets or granting guarantees, and prohibit declaring or paying dividends on common stock unless specifically permitted under the terms of the agreement. The Company has received waivers for all events of noncompliance with such covenants during the fiscal year ended January 31, 1993. The Company was not in compliance with all covenants at January 30, 1994 and at May 1, 1994. Accordingly, at those dates, all amounts outstanding under the agreement were due on demand (See Note 11). (b) In August 1988, the Company sold $14,884,000 of subordinated debentures to a related party. Interest is payable semi-annually at 13.5%. Annual principal payments of $3,742,000 begin May 15, 1997 and the remaining balance is due May 15, 2000. Included in interest expense are $2,285,000 and $2,137,000 for the years ended January 30, 1994 and January 31, 1993, respectively, for the indebtedness. The debentures contain covenants, including limitations on indebtedness, liens, and the incurrence of other subordinated indebtedness, and restrict payments such as dividends on common stock. The Company has received waivers for all events of noncompliance with such covenants during the F-11 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT (CONTINUED) fiscal year ended January 31, 1993. At January 30, 1994, and at May 1, 1994, because of cross default provisions with respect to the agreement referred to in (a) above, all amounts outstanding at those dates under the subordinated debentures also were due on demand and have been classified as currently payable (See Note 11). (c) RESTRUCTURING -- On June 22, 1992, the subordinated debentures were restructured and amended to provide, among other things, for the interest payments due on May 15 and November 15, 1992 to be made in the form of additional promissory notes ("accrual notes") in the principal amount of the interest payable at each date. The accrual notes bear interest at 13.5% per annum, payable semi-annually, and $1,038,000 was due on March 15, 1994 with the balance due on November 15, 1994. All amounts due under these debentures remain unpaid at May 1, 1994. In addition, an acquirer of the Class C Senior Convertible Stock (Note 6) acquired $5,000,000 of the subordinated debentures. Scheduled principal maturities of long-term debt classified as current for fiscal years subsequent to January 30, 1994 are as follows (in 000's):
YEARS ENDED - --------------------------------------------------------------------------------------------- February 1, 1998............................................................................. $ 3,742 January 31, 1999............................................................................. 3,742 Thereafter................................................................................... 7,400 --------- Total........................................................................................ $ 14,884 --------- ---------
Unamortized deferred financing costs of $892,000 and $656,000 at January 31, 1993 and January 30, 1994, respectively, consist of professional and commitment fees incurred in connection with the Company's revolving and term loan facility and subordinated debentures. Such costs are being amortized on a straight-line basis over the terms of the related debt. 5. PENSION PLAN The Company has a defined benefit pension plan for its hourly workers with benefits based on a fixed dollar rate per year of service. The plan assets are invested primarily in short-term bonds and in equity securities. The Company's funding policy is to contribute annually the minimum amount required by the applicable Internal Revenue Code regulation. In April 1992, as part of a series of cost reductions, the Company froze the hourly pension plan. As a result, there will be no new entrants to the plan and no additional benefits accruing to current participants beyond those earned as of the date the plan was frozen. F-12 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. PENSION PLAN (CONTINUED) The following presents the funded status of the plan (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 ----------- ----------- Actuarial present value of benefit obligation: Estimated accumulated benefit obligation, including vested benefits......... $ 1,866 $ 2,076 ----------- ----------- ----------- ----------- Estimated accumulated vested obligation....................................... $ 1,709 $ 1,857 ----------- ----------- ----------- ----------- Projected benefit obligation.................................................. $ (1,866) $ (2,076) Plan assets at market value................................................... 2,012 2,084 ----------- ----------- Plan assets in excess of projected benefit obligation......................... 146 8 Unrecognized prior service cost............................................... 16 13 Unrecognized net gain......................................................... (234) (75) ----------- ----------- Accrued pension cost.......................................................... $ (72) $ (54) ----------- ----------- ----------- -----------
Pension expense includes the following components (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 ------------ ------------ Interest cost on projected benefit obligation................................ $ 142 $ 143 Actual return on assets..................................................... (102) (151) Net amortization and deferral............................................... (59) (9) ------ ------ Net periodic pension income................................................. $ (19) $ (17) ------ ------ ------ ------ Actuarial assumptions: Discount rate............................................................... 8.0% 7.25% Asset rate of return........................................................ 8.0% 8.0%
The Company has a trusteed profit-sharing plan, providing employees a deferred compensation (401(k)) provision and Company matching provision. Under the plan, eligible employees are permitted to contribute up to 15% of gross compensation into the plan, and the Company will match each employee contribution up to 4% of gross compensation at a rate established by the Board of Directors. The Company and its employees made the following contributions to the plan during the years ended (in 000's):
JANUARY 31, JANUARY 30, 1993 1994 ------------- ------------- Employee contributions........................................................ $ 672 $ 752 Company matching contributions................................................ 117 141 ----- ----- Total profit-sharing contributions............................................ $ 789 $ 893 ----- ----- ----- -----
6. REDEEMABLE PREFERRED AND COMMON STOCK a. EXCHANGEABLE PREFERRED STOCK -- Each share of Exchangeable Preferred Stock is exchangeable for subordinated debentures due May 2, 2003 at the option of the Company, but, if not exchanged, must be redeemed at that date or upon sale of the Company, if earlier. The exchange rate and redemption price is $10.00 per share. b. CLASS A AND CLASS B CUMULATIVE EXCHANGEABLE SENIOR PREFERRED STOCK -- On June 13, 1990, the Company authorized and issued 1,375 shares each of Class A and Class B 30% Cumulative Exchangeable Senior Preferred Stock, $0.01 par value per share, for $1,000 per share. Each share of F-13 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED) Class A and Class B preferred stock is, at the option of the Company, exchangeable for subordinated debentures due May 2, 2003, but if not exchanged, must be redeemed on that date or upon sale of the Company, if earlier. The exchange rate and redemption price is $1,000 per share. On June 22, 1992, the terms of the preferred stock were amended to reduce the annual dividend rate on the Class A and Class B Cumulative Exchangeable Senior Preferred Stock to 10% annually ($100 per share) from 30% annually ($300 per share), payable on January 15, and to reduce the dividend rate on the Exchangeable Preferred Stock to 10% annually ($1.00 per share) from 14% annually ($1.40 per share), payable on May 1. All dividends in arrears as of June 22, 1992 on the preferred shares were paid in kind in lieu of cash payments. For so long as the Class C, Class D, and Class E Preferred Stock is outstanding, future dividends on the Class A and Class B Cumulative Exchangeable Senior Preferred Stock and Exchangeable Preferred Stock must be paid in kind. Accrued and undeclared dividends at January 30, 1994 and January 31, 1993 were as follows (in 000's):
1993 1994 --------- --------- Class A Cumulative Exchangeable Senior Preferred Stock.................................. $ 9 $ 10 Class B Cumulative Exchangeable Senior Preferred Stock.................................. 10 11 Exchangeable Preferred Stock............................................................ 251 321
Such accrued and undeclared dividends have been added to the carrying values of the stock to which they accrue. Issuance fees totalling approximately $287,000 related to the Redeemable Preferred Stock were deducted from the related paid-in capital at the time of issuance of these shares. Such fees are being amortized over the period ending May 2, 2003. c. CLASS C SENIOR CONVERTIBLE PREFERRED STOCK -- On June 22, 1992, the Company issued 549,629 shares of Class C Senior Convertible Preferred Stock ("Class C Preferred Stock"), par value $0.01 per share, for $10,561,700. The Class C Preferred Stock is convertible into common stock at the option of the holder on a one-for-one basis. If unconverted, the Class C Preferred Stock must be redeemed on June 15, 1999 or upon sale of the Company, if earlier. The initial redemption price is $19.22 per share, increasing 10.0% per annum. Issuance fees totalling approximately $386,000 related to the Class C Senior Convertible Preferred Stock were deducted from the related paid-in capital at the time of issuance of these shares. Such fees are being amortized over the period ending June 15, 1999. d. CLASS D AND CLASS E SENIOR CONVERTIBLE PREFERRED STOCK -- On May 28, 1993, the Company issued 194,035 and 129,712 shares of Class D and Class E Senior Convertible Stock, respectively ("Class D and Class E Preferred Stock"), par value $0.01 per share, for $6,000,000 and $4,010,000, respectively. The Class D and Class E Preferred Stock is convertible into common stock at the option of the holder on a one-for-one basis. If unconverted, the Class D and Class E Preferred Stock must be redeemed on June 15, 1999 or upon sale of the Company, if earlier. The initial redemption price is $30.92 per share, increasing 10.0% per annum. Issuance fees totalling approximately $158,000 and $106,000, respectively, related to the Class D and Class E Preferred Stock, were deducted from the related paid-in capital at the time of issuance of these shares. Such fees are being amortized over the period ending June 15, 1999. The Class C, Class D and Class E Preferred Stock rank pari passu and are senior to the Exchangeable Preferred Stock and Class A and Class B Cumulative Exchangeable Senior Preferred Stock. F-14 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED) e. COMMON STOCK -- Common stockholders have voting rights. Class B Common Stock is non-voting and convertible into common stock at the option of the stockholder at a conversion rate of 4.88884 shares of common stock for each share of Class B Common Stock. Class C Common Stock is nonvoting and convertible into common stock at the option of the stockholder at a conversion rate of 1 share of common stock for each share of Class C Common Stock. 7. STOCK SPLIT On September 18, 1992, the Company amended and restated its charter which, among other things, reduced the number of preferred shares authorized for issuance to 3,000,000 and reduced the number of common shares authorized for issuance to 3,000,000. In addition, a reverse stock split of the Company's common stock, Class B Common Stock, and Class C Senior Convertible Preferred Stock was accomplished, whereby one share was issued to replace each 5.333332 shares outstanding at the date of the split. All share and per share data, for the year ended January 31, 1993, has been restated to reflect this split. 8. STOCK OPTIONS (ALL DATA REFLECTS THE STOCK SPLIT DESCRIBED IN NOTE 7) In January 1989, the Company adopted a compensatory stock option plan (the "1989 Plan"). Under the 1989 Plan, the Company granted restricted stock options to purchase 41,759 shares of common stock at an exercise price of $2.00 or $19.22 per share to key executives and employees. The right to exercise a stock option was contingent upon the Company's achieving a cumulative earnings level within four years of the date of the Plan or upon length of service. Options are exercisable within ten years of the date of the grant. In addition, in June and December 1992, the Company granted certain key executives 71,875 restricted stock options at an exercise price of $19.22. The right to exercise these options is contingent upon the Company's achieving a cumulative earnings target through January 29, 1995. Options are exercisable within ten years of date of the grant. In August 1993, the Company adopted an additional compensatory stock option plan (the "1993 Plan"). Under the 1993 Plan, the Company granted restricted options to purchase 58,500 shares of common stock at an exercise price of $19.22 or $30.92 per share to key executives, directors and employees. The right to exercise these options is contingent upon the Company's achieving a cumulative earnings target through January 29, 1995. Options are exercisable within ten years of the date of grant. The following summarizes activity in the plans for the years ended:
JANUARY 31, JANUARY 30, 1993 1994 --------------- --------------- Shares authorized.................................................... 113,634 172,134 --------------- --------------- Outstanding shares granted, beginning of year........................ 50,000 111,258 Shares granted....................................................... 79,475 39,300 Shares canceled...................................................... (18,217) (7,204) --------------- --------------- Outstanding shares granted, end of year.............................. 111,258 143,354 --------------- --------------- Shares available for grant........................................... 2,376 28,780 --------------- --------------- --------------- ---------------
Options for approximately 43,237 and 45,770 shares of common stock are vested at January 31, 1993 and January 30, 1994, respectively. 9. LEASES The Company leases certain store premises and computer equipment. Certain leases contain renewal options. The store leases generally provide that the Company shall pay for property taxes, insurance and common area maintenance. F-15 LEEWARDS CREATIVE CRAFTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. LEASES (CONTINUED) Future minimum rentals required under noncancelable operating leases which have an original term of more than one year are as follows at January 30, 1994 (in 000's):
YEAR ENDED - --------------------------------------------------------------------------------- January 29, 1995................................................................. $ 18,146 January 28, 1996................................................................. 17,252 February 2, 1997................................................................. 15,822 February 1, 1998................................................................. 14,131 January 31, 1999................................................................. 11,701 Thereafter....................................................................... 40,542 ----------- Total............................................................................ $ 117,594 ----------- -----------
Rental expense for operating leases was $13,547,000 and $15,882,000 for the years ended January 31, 1993 and January 30, 1994, respectively. Certain store leases have percentage rent lease provisions. Percentage rent paid totalled $182,000 and $258,000 for the years ended January 31, 1993 and January 30, 1994, respectively. 10. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a number of claims encountered in the normal course of business. Management believes, based on advice of counsel, that the ultimate outcome of all these matters will have no material adverse effect on the Company. The Company had arranged for letters of credit totalling $153,000 and $343,000 as of January 31, 1993 and January 30, 1994, respectively, to secure inventory purchases. 11. SUBSEQUENT EVENT On May 10, 1994, the Company entered into an Agreement and Plan of Merger (the "Agreement") whereby it will merge with a subsidiary of Michaels Stores, Inc. ("Michaels") and thereby become a wholly owned subsidiary of Michaels. The merger is expected to close in July, 1994. The Agreement also provides that simultaneously with the closing, Michaels shall cause the Company to repay its long-term debt. F-16 - ------------------------------------------- - ------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. -------------- TABLE OF CONTENTS
PAGE ------- Available Information................................................. 3 Incorporation of Certain Documents by Reference....................... 3 Prospectus Summary.................................................... 4 Recent Developments................................................... 7 The Company........................................................... 8 Leewards Acquisition.................................................. 12 Use of Proceeds....................................................... 14 Capitalization........................................................ 15 Price Range of Common Stock and Dividends............................. 16 Selected Financial and Store Data..................................... 17 Pro Forma Combined Financial Information.............................. 18 Selling Stockholders.................................................. 24 Description of Capital Stock.......................................... 24 Certain Special Federal Tax Considerations For Non-United States Holders.............................................................. 25 Underwriting.......................................................... 28 Notice to Canadian Residents.......................................... 30 Legal Matters......................................................... 31 Experts............................................................... 31 Index to Financial Statements......................................... F-1
1,886,213 Shares Common Stock ($.10 par value) PROSPECTUS CS First Boston Robertson, Stephens & Company Nomura Securities International, Inc. - ------------------------------------ - ------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses to be incurred in connection with the issuance and distribution of the Common Stock covered by this Registration Statement, all of which will be paid by Michaels Stores, Inc. (the "Registrant"), are as follows: Printing, Shipping and Engraving Expenses................................ $ 250,000 Accounting Fees and Expenses............................................. 220,000 Legal Fees and Expenses of Qualification under State Securities Laws..... 20,000 Legal Fees and Expenses.................................................. 125,000 Transfer Agent and Registrar Fees and Expenses........................... 10,000 SEC Registration Fee..................................................... 50,788 NASD filing fee.......................................................... 15,463 Miscellaneous............................................................ 8,749 --------- Total.................................................................. $ 700,000 --------- --------- - ------------------------ * To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify its directors and officers or former directors or officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers. Such law provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's certificate of incorporation, bylaws, any agreement or otherwise. Reference is made to Article Nine of the Registrant's Restated Certificate of Incorporation, as amended, Exhibit 4.1 of this Registration Statement, which provides for indemnification of directors and officers. Reference is made to Article IX of the Registrant's Bylaws, Exhibit 4.2 to this Registration Statement, which provides for indemnification of directors and officers. In addition, the Registrant has entered into Indemnity Agreements with certain of its directors and executive officers. The Registrant has procured insurance that purports (i) to insure it against certain costs of indemnification that may be incurred by it pursuant to the provisions referred to above or otherwise and (ii) to insure the directors and officers of the Registrant against certain liabilities incurred by them in the discharge of their functions as directors and officers except for liabilities arising from their own malfeasance. ITEM 16. EXHIBITS. The following is a list of all exhibits filed as a part of this Registration Statement on Form S-3, including those incorporated herein by reference.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------------------------------- 1.1 -- Underwriting Agreement.(1) 1.2 -- Subscription Agreement.(1) 2.1 -- Agreement and Plan of Merger among Michaels Stores, Inc. LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(2)
II-1
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------------------------------- 2.2 -- First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(3) 2.3 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores, Inc., Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc.(4) 2.4 -- Amendment No. 1 to Stock Purchase Agreement.(4) 2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other parties listed therein.(2) 2.6 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, among Michaels Stores, Inc. and the other parties listed therein.(2) 4.1 -- Restated Certificate of Incorporation of Michaels Stores, Inc.(5) 4.2 -- Bylaws of Michaels Stores, Inc. as amended and restated.(6) 4.3 -- Form of Common Stock Certificate.(6) 4.4 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant.(7) 4.5 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between The First Dallas Group, Ltd. and Michaels Stores, Inc.(7) 4.6 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas Investments -- Michaels I, Ltd. and Michaels Stores, Inc.(7) 4.7 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985 between First Dallas Investments -- Michaels I, Ltd., The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr. and Michaels Stores, Inc.(8) 4.8 -- Amendment to Common Stock and Warrant Agreement dated September 1, 1992 between Michaels Stores, Inc., The Andrew David Sparrow Wyly Trust, Charles J. Wyly, Jr., The Martha Caroline Wyly Trust, The Charles Joseph Wyly, III Trust, The Emily Ann Wyly Trust, The Jennifer Lynn Wyly Trust, Donald R. Miller, Jr., Evan A. Wyly, The Laurie Louise Wyly Trust, The Lisa Lynn Wyly Trust, The Sam Wyly and Rosemary Wyly Children's Trust No. 1 of 1965 fbo Kelly Wyly and Tallulah, Ltd.(5) 4.9 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and NationsBank of Texas, N.A., as Trustee, including the form of 4 3/4%/6 3/4% Step-up Convertible Subordinated Note, included therein.(7) 5 -- Opinion of Jackson & Walker.(2) 8 -- None. 12 -- None. 15 -- None. 23.1 -- Consent of Ernst & Young.(1) 23.2 -- Consent of Deloitte & Touche.(1) 23.3 -- Consent of Jackson & Walker (included in the opinion of Jackson & Walker, L.L.P. filed as Exhibit 5 to this Registration Statement). 24 -- Power of Attorney.(2) 25 -- None. 26 -- None. 27 -- None. 28 -- None. 99 -- Credit Agreement dated as of June 17, 1994 among Michaels Stores, Inc., NationsBank of Texas, N.A. and the other lenders signatory thereto.(2) - ------------------------ (1) Filed herewith.
II-2 (2) Previously filed. (3) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994 and incorporated herein by reference. (4) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-52311) and incorporated herein by reference. (5) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. (6) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1994 and incorporated herein by reference. (7) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1993 and incorporated herein by reference. (8) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-9456) and incorporated herein by reference.
ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, State of Texas on the 6th day of July, 1994. MICHAELS STORES, INC. By: /s/ JACK E. BUSH* -------------------------------------- Jack E. Bush PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLE DATE - ----------------------------------- ------------------------- ---------------- Chairman of the Board of /s/ SAM WYLY* Directors and Chief - ----------------------------------- Executive Officer July 6, 1994 Sam Wyly (Principal Executive Officer) /s/ CHARLES J. WYLY, JR.* - ----------------------------------- Vice Chairman of the July 6, 1994 Charles J. Wyly, Jr. Board of Directors /s/ JACK E. BUSH* President, Chief - ----------------------------------- Operating Officer and July 6, 1994 Jack E. Bush Director /s/ WILLIAM O. HUNT* - ----------------------------------- Director July 6, 1994 William O. Hunt - ----------------------------------- Director Richard E. Hanlon - ----------------------------------- Director F. Jay Taylor /s/ MICHAEL C. FRENCH* - ----------------------------------- Director July 6, 1994 Michael C. French /s/ EVAN C. WYLY* - ----------------------------------- Director July 6, 1994 Evan C. Wyly /s/ DONALD R. MILLER, JR.* Vice President -- Market - ----------------------------------- Development, and July 6, 1994 Donald R. Miller, Jr. Director Executive Vice President /s/ R. DON MORRIS* and Chief Financial - ----------------------------------- Officer (Principal July 6, 1994 R. Don Morris Financial and Accounting Officer) *By: /s/ MARK V. BEASLEY - ----------------------------------- Mark V. Beasley, ATTORNEY-IN-FACT II-5 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF EXHIBIT PAGE - ----------- --------------------------------------------------------------------------------------------- ------------ 1.1 -- Underwriting Agreement.(1) 1.2 -- Subscription Agreement.(1) 2.1 -- Agreement and Plan of Merger among Michaels Stores, Inc. LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(2) 2.2 -- First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(3) 2.3 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores, Inc., Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc.(4) 2.4 -- Amendment No. 1 to Stock Purchase Agreement.(4) 2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other parties listed therein.(2) 2.6 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, among Michaels Stores, Inc. and the other parties listed therein.(2) 4.1 -- Restated Certificate of Incorporation of Michaels Stores, Inc.(5) 4.2 -- Bylaws of Michaels Stores, Inc. as amended and restated.(6) 4.3 -- Form of Common Stock Certificate.(6) 4.4 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant.(7) 4.5 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between The First Dallas Group, Ltd. and Michaels Stores, Inc.(7) 4.6 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas Investments -- Michaels I, Ltd. and Michaels Stores, Inc.(7) 4.7 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985 between First Dallas Investments -- Michaels I, Ltd., The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr. and Michaels Stores, Inc.(8) 4.8 -- Amendment to Common Stock and Warrant Agreement dated September 1, 1992 between Michaels Stores, Inc., The Andrew David Sparrow Wyly Trust, Charles J. Wyly, Jr., The Martha Caroline Wyly Trust, The Charles Joseph Wyly, III Trust, The Emily Ann Wyly Trust, The Jennifer Lynn Wyly Trust, Donald R. Miller, Jr., Evan A. Wyly, The Laurie Louise Wyly Trust, The Lisa Lynn Wyly Trust, The Sam Wyly and Rosemary Wyly Children's Trust No. 1 of 1965 fbo Kelly Wyly and Tallulah, Ltd.(5) 4.9 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and NationsBank of Texas, N.A., as Trustee, including the form of 4 3/4%/6 3/4% Step-up Convertible Subordinated Note, included therein.(7) 5 -- Opinion of Jackson & Walker.(2) 8 -- None. 12 -- None. 15 -- None. 23.1 -- Consent of Ernst & Young.(1)
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF EXHIBIT PAGE - ----------- --------------------------------------------------------------------------------------------- ------------ 23.2 -- Consent of Deloitte & Touche.(1) 23.3 -- Consent of Jackson & Walker (included in the opinion of Jackson & Walker, L.L.P. filed as Exhibit 5 to this Registration Statement). 24 -- Power of Attorney.(2) 25 -- None. 26 -- None. 27 -- None. 28 -- None. 99 -- Credit Agreement dated as of June 17, 1994 among Michaels Stores, Inc., NationsBank of Texas, N.A. and the other lenders signatory thereto.(2) - ------------------------ (1) Filed herewith. (2) Previously filed. (3) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994 and incorporated herein by reference. (4) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-52311) and incorporated herein by reference. (5) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. (6) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1994 and incorporated herein by reference. (7) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1993 and incorporated herein by reference. (8) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-9456) and incorporated herein by reference.
DESCRIPTION OF GRAPHIC: Inside front cover Map of the United States showing the locations of the Company's stores as of June 17, 1994, stores added through acquisitions on the West coast and stores expected to be added through the acquisition of Leewards (net of closings). EX-1.1 2 UNDERWRITING AGREEMENT Exhibit 1.1 DRAFT 7/6/94 ______________ Shares MICHAELS STORES, INC. Common Stock UNDERWRITING AGREEMENT July __, 1994 CS FIRST BOSTON CORPORATION ROBERTSON, STEPHENS & COMPANY, L.P. NOMURA SECURITIES INTERNATIONAL, INC. As Representatives of the Several Underwriters, c/o CS First Boston Corporation, Park Avenue Plaza, New York, N. Y. 10055 Dear Sirs: 1. INTRODUCTORY. Michaels Stores, Inc., a Delaware corporation ("Company"), proposes to issue and sell to the several Underwriters named in Schedule B hereto (the "Underwriters") _______________ shares of its Common Stock, $0.10 par value ("Common Stock"), and the persons and entities listed in Schedule A hereto (the "Selling Stockholders") propose severally to sell to the several Underwriters an aggregate of _______________ shares of Common Stock of the Company (such shares of Common Stock to be sold by the Company and the Selling Stockholders are herein collectively called the "U.S. Firm Shares"). The Company also proposes to issue and sell to the Underwriters and the Managers (as defined below), at the option of CS First Boston Corporation as Representative of the Underwriters, an aggregate of not more than _______________ additional shares of its Common Stock (the "Optional Shares") as set forth below. The U.S. Firm Shares and the Optional Shares that may be sold to the Underwriters (the "U.S. Optional Shares") are herein collectively called the "U.S. Shares." It is understood that the Company and the Selling Stockholders are concurrently entering into a Subscription Agreement, dated the date hereof (the "Subscription Agreement"), with CS First Boston Limited ("CSFBL") and the other managers named therein (the "Managers"), relating to the concurrent offering and sale of __________ shares of Common Stock ("International Firm Shares", which together with the Optional Shares that may be sold to the Managers by the Company (the "International Optional Shares") are herein collectively called the "International Shares") outside the -1- United States and Canada (the "International Offering"). The U.S. Firm Shares and the International Firm Shares are herein collectively called the "Firm Shares." The U.S. Shares and the International Shares are herein collectively called the "Offered Shares." To provide for the coordination of their activities, the Underwriters and the Managers have entered into an Agreement Between the U.S. Underwriters and the Managers which permits them, among other things, to sell the Offered Shares to each other for purposes of resale. The Company hereby agrees with the several Underwriters as follows: 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS. (a) The Company represents and warrants to, and agrees with, the several Underwriters that: (i) A registration statement (No. 33-53639) relating to the Offered Shares, including a form of prospectus relating to the U.S. Shares, has been filed with the Securities and Exchange Commission ("Commission") and either (A) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If the Company does not propose to amend such registration statement and if any post-effective amendment to such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent such amendment has been declared effective by the Commission. For purposes of this Agreement, "Effective Time" means (A) if the Company has advised you that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission, or (B) if the Company has advised you that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. "Effective Date" means the date of the Effective Time. Such registration statement, as amended at the Effective Time, including all material incorporated by reference therein and including all information (if any) deemed to be a part of such registration statement as of the Effective Time pursuant to Rule 430A(b) under the Act, is hereinafter referred to as the "Registration Statement", and the form of prospectus relating to the U.S. Shares, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in the Registration Statement, including all material incorporated by reference in such prospectus, is hereinafter referred to as the "U.S. Prospectus", and the final form of prospectus relating to the International Shares, which is identical to the U.S. Prospectus except for the outside front cover page, the inside front cover page, the text under the captions "Underwriting" and "Subscription and Sale" in the U.S. Prospectus and the form of prospectus relating to the International Shares, respectively, and the outside back cover page (copies of such pages having been heretofore delivered by the Company to CFSB on behalf of the Managers), -2- including all material incorporated by reference in such prospectus, is hereinafter referred to as the "International Prospectus." The U.S. Prospectus and the International Prospectus are hereinafter collectively referred to as the "Prospectuses." For purposes of the "lock-up" letters to be executed by the Selling Stockholders and others in connection herewith, the term "Prospectus" shall mean the U.S. Prospectus. (ii) If the Effective Time is prior to the execution and delivery of this Agreement: (A) on the Effective Date, the Registration Statement conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) on the date of this Agreement, the Registration Statement conforms, and at the time of filing of the U.S. Prospectus pursuant to Rule 424(b), the Registration Statement and the U.S. Prospectus will conform, in all material respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time is subsequent to the execution and delivery of this Agreement: on the Effective Date, the Registration Statement and the U.S. Prospectus will conform in all material respects to the requirements of the Act and the Rules and Regulations, and neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences do not apply to statements in or omissions from the Registration Statement or Prospectuses based upon written information furnished to the Company by any Underwriter through you or by any Manager through CSFBL specifically for use therein. (iii) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, except for (a) certain registration rights set forth in Article VII of that certain Common Stock and Warrant Agreement dated as of October 16, 1984, by and between Michaels Stores, Inc. and Peoples Restaurants, Inc. (the "Registration Rights"), all of which Registration Rights, pursuant to the terms of that certain Third Amendment to the Common Stock and Warrant Agreement dated September 1, 1992 (the "Third Amendment") are now held by the Prior Assignees (as defined in the Third Amendment), Tallulah, Ltd., the Christiana Trust and the Andrew Trust (as more fully described in the Third Amendment) and all of which Registration Rights have been waived with respect to the transactions contemplated by this Agreement, (b) the registration rights provided in that -3- certain Agreement and Plan of Merger dated as of May 10, 1994 between the Company, LWA Acquisition Corporation and Leewards Creative Crafts, Inc. ("Leewards"), as amended to date (the "Merger Agreement"), (c) registration rights provided in the Stock Purchase Agreement, dated as of February 16, 1994 among the Company, Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc., as amended by Amendment No. 1 to Stock Purchase Agreement, and (d) registration rights provided in the Agreement and Plan of Merger, dated as of March 3, 1994 among the Company and the other parties listed therein, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, relating to the acquisition of the affiliated store chains of Oregon Craft & Floral Supply Co. and H&H Craft and Floral Supply Co., which registration rights described in (b), (c) and (d) have been fully complied with and provided to the persons and entities entitled thereto. (iv) Except as disclosed in the Prospectuses, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against any Underwriter for a brokerage commission, finders fee or other like payment in connection with the U.S. Offering, the International Offering or the acquisition of Leewards by the Company pursuant to the Merger Agreement (the "Leewards Acquisition"). (b) Each Selling Stockholder, severally and not jointly, represents and warrants with respect to himself, herself or itself, to, and agrees with, the several Underwriters that: (i) Such Selling Stockholder has and on the Closing Date hereinafter mentioned will have valid and unencumbered title to the shares of Common Stock to be sold by such Selling Stockholder and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the shares of the Common Stock to be sold by such Selling Stockholder hereunder; and upon the delivery of and payment for the U.S. Firm Shares hereunder the several Underwriters will acquire valid and unencumbered title to the shares of the Common Stock to be sold by such Selling Stockholder, except for liens, claims, charges and other encumbrances, if any, created by or through any Underwriter. (ii) If the Effective Time is prior to the execution and delivery of this Agreement: (A) on the Effective Date, the Registration Statement, to the extent it relates to such Selling Stockholder, conformed in all respects to the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) on the date of this Agreement, the Registration Statement, to the extent it relates to such Selling Stockholder, conforms, and at the time of filing of the U.S. Prospectus pursuant to Rule 424(b), the Registration Statement and the U.S. Prospectus, to the extent they relate to such Selling Stockholder, will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents, to the extent they relate to such -4- Selling Stockholder, includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time is subsequent to the execution and delivery of this Agreement: on the Effective Date, the Registration Statement and the U.S. Prospectus, to the extent they relate to such Selling Stockholder, will conform in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents, to the extent they relate to such Selling Stockholder, will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences apply to such Selling Stockholder only to the extent that any statements in or omissions from the Registration Statement or Prospectuses are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder specifically for use therein. (iii) Except as disclosed in the Prospectuses, there are no contracts, agreements or understandings between such Selling Stockholder and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finders fee or other like payment in connection with the U.S. Offering or the International Offering. 3. PURCHASE, SALE AND DELIVERY OF U.S. SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and each Selling Stockholder agrees, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company and each Selling Stockholder, at a purchase price of $__________ per share, the respective numbers of U.S. Firm Shares (rounded up or down, as determined by you in your discretion, in order to avoid fractions) obtained by multiplying the number of U.S. Firm Shares to be sold by the Company or the number of U.S. Firm Shares set forth opposite the name of such Selling Stockholder in Schedule A hereto, as the case may be, by a fraction the numerator of which is the number of U.S. Firm Shares set forth opposite the name of such Underwriter in Schedule B hereto and the denominator of which is the total number of U.S. Firm Shares. Certificates in negotiable form for the shares of the Common Stock to be sold by the Selling Stockholders hereunder will be placed in custody, for delivery under this Agreement, pursuant to agreements entitled Custody Agreement and Power of Attorney (the "Custody Agreement and Power of Attorney") made with the Company as custodian ("Custodian") and _________________________ and ________________________ as attorneys-in-fact for the Selling Stockholders (the "Attorneys-in-Fact"). Each Selling Stockholder agrees that the shares represented by the certificates held in custody for the Selling Stockholders under such Custody Agreement and Power of Attorney are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Stockholders for such custody are to that extent irrevocable, and that the obligations of the Selling Stockholders hereunder shall not be terminated by operation of law, whether by the death of any individual Selling Stockholder or the occurrence -5- of any other event, or in the case of a trust, by the death of any trustee or trustees or the termination of such trust. If any individual Selling Stockholder or any such trustee or trustees should die, or if any other such event should occur, or if any of such trusts should terminate, before the delivery of the Common Stock hereunder, certificates for such shares of Common Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death or other event or termination had not occurred, regardless of whether or not the Custodian shall have received notice of such death or other event or termination. The Company and the Custodian will deliver the U.S. Firm Shares to you for the accounts of the Underwriters, at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055, (or, if requested by the Underwriters, through the Depository Trust Corporation system) against payment of the purchase price therefor by certified or official bank check or checks in New York Clearing House (next day) funds drawn to the order of Michaels Stores, Inc., in the case of ___________ U.S. Firm Shares and to each Selling Stockholder in the case of the U.S. Firm Shares being sold by such Selling Stockholder, at the office of Jackson & Walker L.L.P., Dallas, Texas, at 10:00 A.M., New York time, on _______________, _______________, 1994, or at such other date and time not later than seven full business days thereafter as you and the Company determine, such time and date being herein referred to as the "First Closing Date." The certificates for the U.S. Firm Shares so to be delivered will be in definitive form, in such denominations and registered in such names as you request and will be made available for checking and packaging at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055 at least 24 hours prior to the First Closing Date. Delivery to the Attorneys-in-Fact, or to either of them, of the check payable to any Selling Stockholder shall be deemed delivery of such check to such Selling Stockholder for purposes of this Agreement. In addition, upon written notice from CS First Boston Corporation from time to time given to the Company not more than 30 days subsequent to the date of the initial public offering of the U.S. Firm Shares, the Underwriters and the Managers may purchase all or less than all of the Optional Shares, which in the case of the Underwriters shall be at the purchase price per share to be paid for the U.S. Firm Shares. Unless otherwise agreed between you and CSFBL, the Optional Shares to be so purchased by the Underwriters shall be in the same proportion as the U.S. Firm Shares bear to the Firm Shares. The Company agrees to sell to the Underwriters the number of such U.S. Optional Shares specified in such notice and the Underwriters agree, severally and not jointly, to purchase such U.S. Optional Shares. Such U.S. Optional Shares shall be purchased for the account of each Underwriter in the same proportion as the number of U.S. Firm Shares set forth opposite such Underwriter's name in Schedule B hereto bears to the total number of U.S. Firm Shares (subject to adjustment by you to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the U.S. Firm Shares. No Optional Shares shall be sold or delivered unless the U.S. Firm Shares and the International Firm Shares previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Shares or any portion thereof may be surrendered and terminated at any time upon notice by you on behalf of the Underwriters and the Managers to the Company. -6- The time for the delivery of and payment for the U.S. Optional Shares (or any part thereof), being herein referred to as an "Option Closing Date" (which may be the First Closing Date) (the First Closing Date and each Option Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by you but shall be not later than seven (7) business days after written notice of election to purchase Optional Shares is given. The Company will deliver the U.S. Optional Shares to you for the accounts of the several Underwriters, at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055, against payment of the purchase price therefor by certified or official bank check or checks in New York Clearing House (next day) funds drawn to the order of Michaels Stores, Inc., at the office of Jackson & Walker L.L.P., Dallas, Texas. The certificates for the U.S. Optional Shares will be in definitive form, in such denominations and registered in such names as you request upon reasonable notice prior to the Option Closing Date with respect to such shares and will be made available for checking and packaging at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055 at a reasonable time in advance of the Option Closing Date with respect to such shares. 4. OFFERING BY UNDERWRITERS. It is understood that the several Underwriters propose to offer the U.S. Shares for sale to the public as set forth in the U.S. Prospectus. 5. CERTAIN AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. (i) The Company agrees with the several Underwriters that: (a) If the Effective Time is prior to the execution and delivery of this Agreement, the Company will file the U.S. Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by you, subparagraph, (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifth business day after the Effective Date. The Company will advise you promptly of any such filing pursuant to Rule 424(b). (b) The Company will advise you promptly of any proposal to amend or supplement the registration statement as filed or the related prospectus or the Registration Statement or the Prospectuses and will not effect such amendment or supplementation without your consent, which consent shall not be unreasonably withheld; and the Company will also advise you promptly of the effectiveness of the Registration Statement (if the Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of the Registration Statement or the Prospectuses and of the institution by the Commission of any stop order proceedings in respect of the Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectuses as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make -7- the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend either or both of the Prospectuses to comply with the Act, the Company, subject to paragraph (b) above, promptly will prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither your consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its security holders an earnings statement covering a period of at least 12 months beginning after the Effective Date which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes the Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to you copies of the Registration Statement (four of which will be signed and will include all exhibits), each related preliminary prospectus, the U.S. Prospectus and all amendments and supplements to such documents, in each case as soon as available and in such quantities as you reasonably request. (f) The Company will arrange for the qualification of the Offered Shares for sale under the laws of such jurisdictions in the United States as you designate and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five years hereafter, the Company will furnish to you and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to you (i) as soon as available, a copy of each report or definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other publicly available information concerning the Company as you may reasonably request. (h) The Company will pay all expenses incident to the performance of its obligations under this Agreement and will reimburse the Underwriters for any expenses (including fees and disbursements of counsel) incurred by them in connection with qualifications of the Offered Shares for sale under the laws of such jurisdictions in the United States as you designate and the printing of memoranda relating thereto, for the filing fee of the National Association of Securities Dealers, Inc. relating to the Offered Shares and for expenses incurred in distributing preliminary prospectuses and the U.S. Prospectus (including any amendments and supplements thereto) to the Underwriters. -8- (i) The Company shall use its reasonable efforts to cause the conditions to the obligations of the several Underwriters to purchase and pay for the U.S. Firm Shares on the First Closing Date and the U.S. Optional Shares on each Option Closing Date to be satisfied on or prior to the applicable Closing Date. (ii) Each Selling Stockholder agrees: (a) to deliver to you on or prior to the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof); and (b) to use its reasonable efforts to cause the conditions to the obligations of the several Underwriters to purchase and pay for the U.S. Firm Shares on the First Closing Date, to the extent such conditions relate to such Selling Stockholder, to be satisfied on or prior to the First Closing Date. 6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the U.S. Firm Shares on the First Closing Date and the U.S. Optional Shares on each Option Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders herein, to the accuracy of the statements of Company officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company, the Selling Stockholders and the Custodian of their obligations hereunder and to the following additional conditions precedent (provided that the conditions set forth herein that relate to the Selling Stockholders shall not constitute conditions to the obligations of the several Underwriters to purchase Optional Shares on any Option Closing Date that is other than the First Closing Date): (a) You shall have received a letter, dated the date of delivery thereof (which, if the Effective Time is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to the Effective Time), of Ernst & Young confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating in effect that: (i) in their opinion the financial statements and schedules examined by them and included or incorporated by reference in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have made a review of the unaudited financial statements of the Company and its consolidated subsidiaries included in -9- the Registration Statement in accordance with standards established by the American Institute of Certified Public Accountants, as indicated in their reports attached to such letter; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company and its consolidated subsidiaries, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements of the Company and its consolidated subsidiaries included in the Registration Statement do not comply in form in all material respects with applicable accounting requirements of the Act and the related published Rules and Regulations; (B) at the date of the latest available balance sheet of the Company and its consolidated subsidiaries read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries, or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets of the Company and its consolidated subsidiaries, as compared with amounts shown on the latest balance sheet of the Company and its consolidated subsidiaries included in the Prospectuses; or (C) for the period from the closing date of the latest income statement of the Company and its consolidated subsidiaries included in the Prospectuses to the closing date of the latest available income statement of the Company and its consolidated subsidiaries read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement of the Company and its consolidated subsidiaries included in the Prospectuses, in consolidated net sales or net operating income of the Company and its consolidated subsidiaries or in the total or per share amount of consolidated net income of the Company and its consolidated subsidiaries; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectuses disclose have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statement (in each case to the extent that such dollar amounts, percentages and other financial information are -10- derived from the general accounting records of the Company and its consolidated subsidiaries subject to the internal controls of the Company's and its consolidated subsidiaries' accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, if the Effective Time is subsequent to the execution and delivery of this Agreement, "Registration Statement" shall mean the registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to the Effective Time, and "Prospectuses" shall mean the prospectus included in the Registration Statement and the related draft of the International Prospectus. All financial statements and schedules included in material incorporated by reference into the U.S. Prospectus shall be deemed included in the Registration Statement for purposes of this subsection. (b) You shall have received a letter, dated the date of delivery thereof (which, if the Effective Time is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to the Effective Time), of Deloitte & Touche confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating in effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have made a review of the unaudited financial statements of Leewards and its consolidated subsidiaries included in the Registration Statement in accordance with standards established by the American Institute of Certified Public Accountants, as indicated in their reports attached to such letter; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of Leewards and its consolidated subsidiaries, inquiries of officials of Leewards who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: -11- (A) the unaudited financial statements of Leewards and its consolidated subsidiaries included in the Registration Statement do not comply as to form in all material respects with applicable accounting requirements of the Act and the related published Rules and Regulations; (B) at the date of the latest available balance sheet of Leewards and its consolidated subsidiaries read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of Leewards and its subsidiaries consolidated, or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets of Leewards and its consolidated subsidiaries, as compared with amounts shown on the latest balance sheet of Leewards and its consolidated subsidiaries included in the Prospectuses; or (C) for the period from the closing date of the latest income statement of Leewards and its consolidated subsidiaries included in the Prospectuses to the closing date of the latest available income statement of Leewards and its consolidated subsidiaries read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement of Leewards and its consolidated subsidiaries included in the Prospectuses, in consolidated net sales or net operating income of Leewards and its consolidated subsidiaries or in the total or per share amount of consolidated net income of Leewards and its consolidated subsidiaries; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectuses disclose have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statement (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of Leewards and its consolidated subsidiaries subject to the internal controls of Leewards' and its consolidated subsidiaries' accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, if the Effective Time is subsequent to the execution and delivery of this Agreement, "Registration Statement" shall mean -12- the registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to the Effective Time, and "Prospectuses" shall mean the prospectus included in the Registration Statement and the related draft of the International Prospectus. All financial statements and schedules included in material incorporated by reference into the U.S. Prospectus shall be deemed included in the Registration Statement for purposes of this subsection. (c) If the Effective Time is not prior to the execution and delivery of this Agreement, the Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by you. If the Effective Time is prior to the execution and delivery of this Agreement, the U.S. Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company, any Selling Stockholder, or you, shall be contemplated by the Commission. (d) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting particularly the business or properties of the Company or its subsidiaries which, in the reasonable judgment of a majority in interest of the Underwriters including you, materially impairs the investment quality of the Offered Shares; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or on The Nasdaq Stock Market or the over-the-counter market; (iv) any banking moratorium declared by Federal or New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency, if, in the reasonable judgment of a majority in interest of the Underwriters including you, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the sale of and payment for the U.S. Shares. (e) You shall have received an opinion, dated such Closing Date, of Jackson & Walker, L.L.P., counsel for the Company, to the effect that: -13- (i) The Company and each subsidiary of the Company that is incorporated under the laws of one of the United States has been duly incorporated and is an existing corporation in good standing under the laws of its jurisdiction of incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectuses; and the Company and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which it owns or leases substantial properties or in which the conduct of its business requires such qualifications, except where the failure to be so qualified would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and the subsidiaries taken as a whole; (ii) The Offered Shares delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued and conform to the description thereof contained in the Prospectuses; when purchased and issued pursuant to the terms of this Agreement the Offered Shares being delivered on such Closing Date by the Company will be, and all other Offered Shares and all other outstanding shares of the Common Stock of the Company are, fully paid and nonassessable; and the stockholders of the Company have no preemptive rights with respect to the Offered Shares pursuant to any applicable statute, rule or regulation or to the Certificate of Incorporation or bylaws of the Company, and to such counsel's knowledge no preemptive rights with respect to the Offered Shares exist, whether pursuant to the items listed above, pursuant to contract or otherwise; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, except for (a) the Registration Rights, which pursuant to the terms of the Third Amendment are now held by the Prior Assignees (as defined in the Third Amendment), Tallulah, Ltd., the Christiana Trust and the Andrew Trust (as more fully described in the Third Amendment), all of which Registration Rights have been waived with respect to the transactions contemplated by this Agreement, (b) the registration rights provided in the Merger Agreement, (c) registration rights provided in the Stock Purchase Agreement, dated as of February 16, 1994 among the Company, Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc., as amended by Amendment No. 1 to Stock Purchase Agreement, and (d) registration rights provided in the Agreement and Plan of Merger, dated as of March 3, 1994 among the Company and the other parties listed therein, as amended by Amendment No. 1 to -14- Agreement and Plan of Merger, dated as of March 31, 1994, relating to the acquisition of the affiliated store chains of Oregon Craft & Floral Supply Co. and H&H Craft and Floral Supply Co., which registration rights described in (b), (c) and (d) have been fully complied with and provided to the persons and entities entitled thereto. (iv) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement or the Subscription Agreement in connection with the issuance or sale of the Offered Shares, except such as have been obtained and made under the Act and such as may be required under state securities laws; (v) The execution, delivery and performance of this Agreement and the Subscription Agreement and the consummation of the transactions contemplated herein and therein will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (A) any statute, any rule, regulation or order (excluding orders that specifically name and are directed to the Company and are unknown to such counsel and excluding the specific matters under the Act, the Rules, the Regulations and Rule 10(b)5 under the Securities Exchange Act of 1934 that are covered by paragraph (vi) below, the only opinions being expressed with respect to such matters being set forth in paragraph (vi) below) which a lawyer experienced in the public offering of securities would recognize as applicable to a transaction of the type covered by this Agreement of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or the charter or bylaws of the Company or any subsidiary of the Company or (B) to the knowledge of such counsel, any agreement or instrument to which the Company or any subsidiary of the Company is a party or by which the Company or any subsidiary of the Company is bound or to which any of the properties of the Company or any subsidiary of the Company are subject, and the Company has full power and authority to authorize, issue and sell the Offered Shares as contemplated by this Agreement and the Subscription Agreement; (vi) The Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the U.S. Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and the Registration Statement and the U.S. Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all -15- material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that either the Registration Statement or the Prospectuses, or any amendment or supplement thereto, as of their respective effective or issue dates, contained any untrue statement of a material fact or omitted to state any material fact required pursuant to the Act, the Rules or the Regulations to be stated therein or necessary to make the statements therein not misleading; the descriptions in the Registration Statement and Prospectuses of statutes, legal and governmental proceedings (other than statutes, legal or governmental proceedings related to the securities laws of any jurisdiction other than the United States) and contracts and other documents are accurate and fairly present the information required to be shown pursuant to the Act, the Rules or the Regulations; and such counsel do not know of any legal or governmental proceedings required pursuant to the Act, the Rules or the Regulations to be described in the Registration Statement or the Prospectuses which are not described as required pursuant to the Act, the Rules and the Regulations or of any contracts or documents of a character required pursuant to the Act, the Rules or the Regulations to be described in the Registration Statement or Prospectuses or to be filed as exhibits to the Registration Statement which are not described and filed as required pursuant to the Act, the Rules and the Regulations; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained, by incorporation by reference or otherwise, in the Registration Statement or the Prospectuses; (vii) This Agreement and the Subscription Agreement have been duly authorized, executed and delivered by the Company; and (viii)The merger of a wholly-owned subsidiary of the Company with and into Leewards described in the Merger Agreement (the "Merger") has been effected, and a Certificate of Merger covering such Merger has been filed with the necessary government authorities. (f) You shall have received an opinion, dated the Closing Date, of counsel for each of the Selling Stockholders (which counsel may be in-house counsel of such Selling Stockholder), to the effect that: (i) Such Selling Stockholder has valid and unencumbered title to the Common Stock sold by such Selling Stockholder pursuant to this Agreement and has full right, power and authority to sell, assign, transfer and deliver such Common Stock hereunder; and, assuming that the several Underwriters have purchased such shares of Common Stock in good faith and without notice of any defect in title thereto, the several Underwriters have acquired valid and unencumbered title to the Common Stock purchased by them from such Selling Stockholder hereunder, except for liens, claims, charges and other encumbrances created by or through any Underwriter; -16- (ii) To the knowledge of such counsel, no consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by such Selling Stockholder for the consummation of the transactions contemplated by this Agreement or the Custody Agreement and Power of Attorney in connection with the sale of the Common Stock sold by such Selling Stockholder hereunder, except such as may be required under the Act or state securities laws; (iii) The execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule or regulation which a lawyer experienced in the public offering of securities would recognize as applicable to a transaction of the type covered by this Agreement (assuming all consents, approvals, authorizations, or orders of or filings with any governmental agency or body required under the Act or state securities laws have been obtained or made), or the charter or bylaws of such Selling Stockholder which is a corporation, the partnership agreement of any Selling Stockholder that is a partnership, or the trust instrument of any Selling Stockholder that is a trust, or, to the knowledge of such counsel, any order of any governmental agency or body or any court having jurisdiction over such Selling Stockholder or any of its properties or, to the knowledge of such counsel, any agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the properties of such Selling Stockholder is subject; (iv) This Agreement and the Subscription Agreement have been duly authorized, executed and delivered by such Selling Stockholder; and (v) The Custody Agreement and Power of Attorney to which such Selling Stockholder is a party has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement, enforceable against such Selling Stockholder in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws of general applicability affecting the rights of creditors and to principles of equity, except that no opinion need be expressed with respect to section 4.H. or 5.A.(2) of such Custody Agreement and Power of Attorney. To the extent that any of such opinions relate to the state law of any state in which such counsel is not admitted to practice, such counsel may rely on opinions of local counsel in such state if the local counsel is reasonably acceptable to the Underwriters and their counsel and the opinions of the local counsel are also addressed to the Underwriters and specifically state that the Underwriters are permitted to rely on such opinions. -17- (g) You shall have received from Fulbright & Jaworski, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Shares, the Registration Statement, the Prospectuses and other related matters as you may require, and the Company and the Selling Stockholders shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (h) You shall have received a certificate, dated such Closing Date, of the President or any Vice-President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that the representations and warranties of the Company in this Agreement are true and correct in all material respects, that the Company has, in all material respects, complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date, that no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission and that, subsequent to the dates of the most recent financial statements in the Prospectuses, there has been no material adverse change in the financial position or results of operation of the Company and its subsidiaries except as set forth in or contemplated by the Prospectuses or as described in such certificate. (i) You shall have received letters, dated such Closing Date, of Ernst & Young and Deloitte & Touche which meet the requirements of subsections (a) and (b), respectively, of this Section, except that the specified dates referred to in such subsections will be a date not more than five days prior to such Closing Date for the purposes of this subsection. (j) On such Closing Date, the Managers shall have purchased the International Firm Shares or the International Optional Shares, as the case may be, pursuant to the Subscription Agreement. (k) Each Selling Stockholder that has delivered supplemental instructions as contemplated by clause 1.F of the Custody Agreement and Power of Attorney to which such Selling Stockholder is a party shall have delivered to you an original of such supplemental instructions with the signature of such Selling Stockholder thereon guaranteed by a commercial bank or trust company in the United States or by a member firm of the New York Stock Exchange. The Company and the Selling Stockholders will furnish you with such conformed copies of such opinions, certificates, letters and documents as you reasonably request. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any -18- material fact contained in the Registration Statement, the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through you specifically for use therein. (b) Each Selling Stockholder, severally and not jointly, will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the U.S. Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance on and conformity with written information furnished to the Company by such Selling Stockholder specifically for use therein, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. Such Selling Stockholder shall not be liable under this Section 7 or for any breach of, or inaccuracy contained in, the representations and warranties of such Selling Stockholder contained in Section 2(b) of this Agreement for an amount in excess of the purchase price received by such Selling Stockholder from the Underwriters hereunder, less the amount of damages which such Selling Stockholder has otherwise been required to pay under this Section 7 or otherwise. The indemnity agreements contained in this paragraph (b) are subject to the condition that, insofar as they relate to any such untrue statement or omission or alleged untrue statement or omission made in a preliminary prospectus but eliminated or remedied in the U.S. Prospectus, such indemnity agreements shall not inure to the benefit of any Underwriter from whom the person asserting such loss, claim, damage or liability purchased Common Stock if a copy of the U.S. Prospectus was not furnished to such person at or prior to the time such action is required by the Act. (c) Each Underwriter will, severally and not jointly, indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, -19- the U.S. Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through you specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. (d) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity has or could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the U.S. Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall -20- be deemed to be in the same proportion as the total net proceeds from the offering of the U.S. Shares (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Selling Stockholder shall be required to contribute any amount unless such loss, claim, damage or liability arises out of an untrue statement or alleged untrue statement made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder specifically for use in the Registration Statement or the Prospectus. Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no Selling Stockholder shall be required to contribute any amount in excess of the amount by which the total purchase price received by such Selling Stockholder from the Underwriters hereunder exceeds the amount of damages which such Selling Stockholder has otherwise been required to pay under this Section 7 or otherwise. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Stockholders under this Section shall be in addition to any liability which the Company and the Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default in their obligations to purchase U.S. Shares hereunder on either the First Closing Date or the Option Closing Date and the aggregate number of shares of U.S. Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of U.S. Shares that the Underwriters are -21- obligated to purchase on such Closing Date, you may make arrangements satisfactory to the Company and the Selling Stockholders for the purchase of such U.S. Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the U.S. Shares that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of U.S. Shares with respect to which such default or defaults occur exceeds 10% of the total number of shares of U.S. Shares that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such U.S. Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders, except as provided in Section 9 (provided that if such default occurs with respect to U.S. Optional Shares after the First Closing Date, this Agreement will not terminate as to the U.S. Firm Shares). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers, the Selling Stockholders and the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, any Selling Stockholder or the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the U.S. Shares. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the U.S. Shares by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Selling Stockholders and the Underwriters pursuant to Section 7 shall remain in effect, and if any shares of U.S. Shares have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the U.S. Shares by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(d), the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the U.S. Shares. 10. NOTICES. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to you at, c/o CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055, Attention: Investment Banking Department-Transactions Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 5931 Campus Circle Drive, Las Colinas Business Park, Irving, Texas 75063, Attention: Jack E. Bush, with a courtesy copy to Charles D. Maguire, Jr., Jackson & Walker, L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202, or, if sent to the Selling Stockholders or any -22- of them, will be mailed, delivered or telegraphed and confirmed to such Selling Stockholder at the address set forth under such Selling Stockholder's name on Schedule A; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective personal representatives and successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. REPRESENTATION OF UNDERWRITERS AND SELLING STOCKHOLDERS. You will act, and acknowledge that you are authorized to act, for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by you jointly or by CS First Boston Corporation will be binding upon all the Underwriters. In accordance with the Custody Agreement and Power of Attorney, _________________________ will act for the Selling Stockholders in connection with the transactions contemplated by this Agreement, and any action under or in respect of this Agreement taken by _________________________ will be binding upon all Selling Stockholders. 13. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 15. TELECOPY EXECUTION AND DELIVERY. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto, and an executed copy of this Agreement may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties hereto agree to execute and deliver an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof. 16. COMPLETION OF DISTRIBUTION. The Underwriters agree that they will inform the Company when they have completed the distribution of the U.S. Shares contemplated by this Agreement in order to permit the Company to perform its obligations hereunder, including those obligations imposed by Section 5(c). If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us one of the counterparts hereof, whereupon it will become -23- a binding agreement between the Company, the Selling Stockholders and the several Underwriters in accordance with its terms. Very truly yours, MICHAELS STORES, INC. By: ------------------------------------ Title: ---------------------------------- SELLING STOCKHOLDERS: By _________________________ as attorney-in-fact for each of the Selling Stockholders listed below pursuant to authority granted in the Custody Agreement and Power of Attorney. ------------------------------------------- Alan Altschuler Stephen J. Berman EMP & Co. Frontenac Venture V Limited Partnership GIPEN & Co. Alan L. Magdovitz MONY Life Insurance Company of America The Mutual Life Insurance Company of New York John A. Popple Prudential-Bache Capital Partners I, L.P. Prudential-Bache Capital Partners II, L.P. The Prudential Insurance Company of America John E. Welsh, III -24- The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CS FIRST BOSTON CORPORATION ROBERTSON, STEPHENS & COMPANY, L.P. NOMURA SECURITIES INTERNATIONAL, INC. Acting on behalf of themselves and as the Representatives of the several Underwriters. By: CS FIRST BOSTON CORPORATION By: ------------------------------------- Title: ----------------------------------- -25- SCHEDULE A Total Number of Selling Stockholders Shares to be Sold -------------------- ----------------- Alan Altschuler ............................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 Stephen J. Berman ..........................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 EMP & Co. ..................................................._________________ c/o Ms. Laura Pearl Harris Trust and Savings Bank Frontenac Company 208 S. LaSalle Street, Room 1900 Chicago, IL 60604 Frontenac Venture V Limited Partnership ....................._________________ c/o Mr. Roger McEniry Frontenac Company 208 S. LaSalle Street, Room 1900 Chicago, IL 60604 GIPEN & Co. ................................................._________________ c/o Ms. Suzanne Walton MONY Financial Services 1740 Broadway Mail Drop 11-6 New York, NY 10019 Alan L. Magdovitz ..........................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 MONY Life Insurance Company of America ......................_________________ c/o Ms. Suzanne Walton MONY Financial Services 1740 Broadway Mail Drop 11-6 New York, NY 10019 -26- SCHEDULE A CONTINUED Total Number of Selling Stockholders Shares to be Sold -------------------- ----------------- The Mutual Life Insurance Company of New York ..............._________________ c/o Ms. Suzanne Walton MONY Financial Services 1740 Broadway Mail Drop 11-6 New York, NY 10019 John A. Popple .............................................._________________ Leewards Creative Crafts, Inc. 1200 St. Charles Street Elgin, Illinois 60120 Prudential-Bache Capital Partners I, L.P. ..................._________________ c/o Mr. Stephen J. Berman Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 Prudential-Bache Capital Partners II, L.P. .................._________________ c/o Mr. Stephen J. Berman Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 The Prudential Insurance Company of America ................._________________ c/o Mr. David Descalzi Prudential Corporate Funding 4 Gateway Center, 9th Floor Newark, NJ 07102-4069 John E. Welsh, III .........................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 Total.......................................... ================== -27- SCHEDULE B Total Number of U.S. Firm Shares Underwriter To be Purchased ----------- ---------------- CS First Boston Corporation ................................._________________ Robertson, Stephens & Company, L.P. ........................._________________ Nomura Securities International, Inc. ......................._________________ Total.................................................._________________ - 28 - EX-1.2 3 SUBSCRIPTION AGREEMENT Exhibit 1.2 DRAFT 7/6/94 ______________ Shares MICHAELS STORES, INC. Common Stock SUBSCRIPTION AGREEMENT London, England July ___, 1994 CS FIRST BOSTON LIMITED ROBERTSON, STEPHENS & COMPANY, L.P. NOMURA INTERNATIONAL PLC c/o CS First Boston Limited ("CSFBL"), One Cabot Square London England E14 4QJ Dear Sirs: 1. INTRODUCTORY. Michaels Stores, Inc., a Delaware corporation ("Company"), proposes to issue and sell to the several Managers named in Schedule B hereto (the "Managers") _______________ shares of its Common Stock, $0.10 par value ("Common Stock"), and the persons and entities listed in Schedule A hereto (the "Selling Stockholders") propose severally to sell to the several Managers an aggregate of _______________ shares of Common Stock of the Company (such shares of Common Stock to be sold by the Company and the Selling Stockholders are herein collectively called the "International Firm Shares"). The Company also proposes to issue and sell to the U.S. Underwriters (as defined below) and the Managers, at the option of CS First Boston Corporation as Representative of the U.S. Underwriters, an aggregate of not more than _______________ additional shares of its Common Stock (the "Optional Shares") as set forth below. The International Firm Shares and the Optional Shares that may be sold to the Managers (the "International Optional Shares") are herein collectively called the "International Shares." It is understood that the Company and the Selling Stockholders are concurrently entering into an Underwriting Agreement, dated the date hereof (the "Underwriting Agreement"), with certain United States underwriters listed in Schedule A thereto (the "U.S. Underwriters"), for whom CS First Boston Corporation, Robertson, Stephens & Company, L.P., and Nomura Securities International, Inc. are acting as representatives (the "U.S. Representatives"), relating to the concurrent offering and sale of __________ shares of Common Stock ("U.S. Firm Shares", which together with the Optional Shares -1- that may be sold to the U.S. Underwriters by the Company (the "U.S. Optional Shares") are herein collectively called the "U.S. Shares") in the United States and Canada (the "U.S. Offering"). The U.S. Firm Shares and the International Firm Shares are herein collectively called the "Firm Shares." The U.S. Shares and the International Shares are herein collectively called the "Offered Shares." To provide for the coordination of their activities, the U.S. Underwriters and the Managers have entered into an Agreement Between the U.S. Underwriters and the Managers which permits them, among other things, to sell the Offered Shares to each other for purposes of resale. The Company hereby agrees with the several Managers as follows: 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS. (a) The Company represents and warrants to, and agrees with, the several Managers that: (i) A registration statement (No. 33-53639) relating to the Offered Shares, including a form of prospectus relating to the U.S. Shares, has been filed with the Securities and Exchange Commission ("Commission") and either (A) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If the Company does not propose to amend such registration statement and if any post-effective amendment to such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent such amendment has been declared effective by the Commission. For purposes of this Agreement, "Effective Time" means (A) if the Company has advised CSFBL that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission, or (B) if the Company has advised CSFBL that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. "Effective Date" means the date of the Effective Time. Such registration statement, as amended at the Effective Time, including all material incorporated by reference therein and including all information (if any) deemed to be a part of such registration statement as of the Effective Time pursuant to Rule 430A(b) under the Act, is hereinafter referred to as the "Registration Statement", and the form of prospectus relating to the U.S. Shares, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in the Registration Statement, including all material incorporated by reference in such prospectus, is hereinafter referred to as the "U.S. Prospectus", and the final form of prospectus relating to the International Shares, which is identical to the U.S. Prospectus except for the outside front cover page, the inside front cover page, the text under the captions "Underwriting" and "Subscription and Sale" in the U.S. Prospectus and the form of prospectus relating to the International Shares, respectively, and the outside back cover page (copies of such pages having been -2- heretofore delivered by the Company to CSFBL on behalf of the Managers), including all material incorporated by reference in such prospectus, is hereinafter referred to as the "International Prospectus." The U.S. Prospectus and the International Prospectus are hereinafter collectively referred to as the "Prospectuses." For purposes of the "lock-up" letters to be executed by the Selling Stockholders and others in connection herewith, the term "Prospectus" shall mean the U.S. Prospectus. (ii) If the Effective Time is prior to the execution and delivery of this Agreement: (A) on the Effective Date, the Registration Statement conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) on the date of this Agreement, the Registration Statement conforms, and at the time of filing of the U.S. Prospectus pursuant to Rule 424(b), the Registration Statement and the U.S. Prospectus will conform, in all material respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time is subsequent to the execution and delivery of this Agreement: on the Effective Date, the Registration Statement and the U.S. Prospectus will conform in all material respects to the requirements of the Act and the Rules and Regulations, and neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences do not apply to statements in or omissions from the Registration Statement or Prospectuses based upon written information furnished to the Company by any U.S. Underwriter through the U.S. Representatives or by any Manager through CSFBL specifically for use therein. (iii) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, except for (a) certain registration rights set forth in Article VII of that certain Common Stock and Warrant Agreement dated as of October 16, 1984, by and between Michaels Stores, Inc. and Peoples Restaurants, Inc. (the "Registration Rights"), all of which Registration Rights, pursuant to the terms of that certain Third Amendment to the Common Stock and Warrant Agreement dated September 1, 1992 (the "Third Amendment") are now held by the Prior Assignees (as defined in the Third Amendment), Tallulah, Ltd., the Christiana Trust and the Andrew Trust (as more fully described in the Third Amendment) and all of which Registration Rights have been waived with respect to the transactions -3- contemplated by this Agreement, (b) the registration rights provided in that certain Agreement and Plan of Merger dated as of May 10, 1994 between the Company, LWA Acquisition Corporation and Leewards Creative Crafts, Inc. ("Leewards"), as amended to date (the "Merger Agreement"), (c) registration rights provided in the Stock Purchase Agreement, dated as of February 16, 1994 among the Company, Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc., as amended by Amendment No. 1 to Stock Purchase Agreement, and (d) registration rights provided in the Agreement and Plan of Merger, dated as of March 3, 1994 among the Company and the other parties listed therein, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, relating to the acquisition of the affiliated store chains of Oregon Craft & Floral Supply Co. and H&H Craft and Floral Supply Co., which registration rights described in (b), (c) and (d) have been fully complied with and provided to the persons and entities entitled thereto. (iv) Except as disclosed in the Prospectuses, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against any Manager for a brokerage commission, finders fee or other like payment in connection with the International Offering, the U.S. Offering or the acquisition of Leewards by the Company pursuant to the Merger Agreement (the "Leewards Acquisition"). (b) Each Selling Stockholder, severally and not jointly, represents and warrants with respect to himself, herself or itself, to, and agrees with, the several Managers that: (i) Such Selling Stockholder has and on the Closing Date hereinafter mentioned will have valid and unencumbered title to the shares of the Common Stock to be sold by such Selling Stockholder and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the shares of the Common Stock to be sold by such Selling Stockholder hereunder; and upon the delivery of and payment for the International Firm Shares hereunder the several Managers will acquire valid and unencumbered title to the shares of the Common Stock to be sold by such Selling Stockholder, except for liens, claims, charges and other encumbrances, if any, created by or through any Underwriter. (ii) If the Effective Time is prior to the execution and delivery of this Agreement: (A) on the Effective Date, the Registration Statement, to the extent it relates to such Selling Stockholder, conformed in all respects to the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) on the date of this Agreement, the Registration Statement, to the extent it relates to such Selling Stockholder, conforms, and at the time of filing of the U.S. Prospectus pursuant to Rule 424(b), the Registration Statement and the U.S. Prospectus, to the extent they relate to such Selling Stockholder, will conform, in all respects to the requirements of the Act and the Rules and -4- Regulations, and neither of such documents nor the International Prospectus, to the extent they relate to such Selling Stockholder, includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time is subsequent to the execution and delivery of this Agreement: on the Effective Date, the Registration Statement and the U.S. Prospectus, to the extent they relate to such Selling Stockholder, will conform in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents nor the International Prospectus, to the extent they relate to such Selling Stockholder, will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences apply to such Selling Stockholder only to the extent that any statements in or omissions from the Registration Statement or Prospectuses are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder specifically for use therein. (iii) Except as disclosed in the Prospectuses, there are no contracts, agreements or understandings between such Selling Stockholder and any person that would give rise to a valid claim against the Company or any Manager for a brokerage commission, finders fee or other like payment in connection with the International Offering or the U.S. Offering. 3. PURCHASE, SALE AND DELIVERY OF INTERNATIONAL SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and each Selling Shareholder agrees, severally and not jointly, to sell to each Manager, and each Manager agrees, severally and not jointly, to purchase from the Company and each Selling Shareholder, at a purchase price of U.S. $__________ per share (representing the offering price of U.S. $__________ per share less a selling concession of U.S. $__________ per share), the respective numbers of International Firm Shares (rounded up or down, as determined by you in your discretion, in order to avoid fractions) obtained by multiplying the number of International Firm Shares to be sold by the Company or the number of International Firm Shares set forth opposite the name of such Selling Stockholder in Schedule A hereto, as the case may be, by a fraction the numerator of which is the number of International Firm Shares set forth opposite the name of such Manager in Schedule B hereto and the denominator of which is the total number of International Firm Shares. Certificates in negotiable form for the shares of the Common Stock to be sold by the Selling Stockholders hereunder will be placed in custody, for delivery under this Agreement, pursuant to agreements entitled Custody Agreement and Power of Attorney (the "Custody Agreement and the Power of Attorney") made with the Company as custodian ("Custodian") and ________________________ and _________________________ as attorneys-in-fact for the Selling Stockholders (the "Attorneys-in-Fact"). Each Selling Stockholder agrees that the shares represented by the certificates held in custody for the Selling Stockholders under such Custody Agreement and Power of Attorney are -5- subject to the interests of the Managers hereunder, that the arrangements made by the Selling Stockholders for such custody are to that extent irrevocable, and that the obligations of the Selling Stockholders hereunder shall not be terminated by operation of law, whether by the death of any individual Selling Stockholder or the occurrence of any other event, or in the case of a trust, by the death of any trustee or trustees or the termination of such trust. If any individual Selling Stockholder or any such trustee or trustees should die, or if any other such event should occur, or if any of such trusts should terminate, before the delivery of the Common Stock hereunder, certificates for such shares of Common Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death or other event or termination had not occurred, regardless of whether or not the Custodian shall have received notice of such death or other event or termination. The Company and the Custodian will deliver the International Firm Shares to CSFBL for the accounts of the Managers, at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055, (or, if requested by CSFBL, through the Depository Trust Corporation system) against payment of the purchase price therefor by certified or official bank check or checks in New York Clearing House (next day) funds drawn to the order of Michaels Stores, Inc., in the case of ________ International Firm Shares and to each Selling Stockholder in the case of the International Firm Shares being sold by such Selling Stockholder, at the office of Jackson & Walker L.L.P., Dallas, Texas, at 10:00 A.M., New York time, on _______________, _______________, 1994, or at such other date and time not later than seven full business days thereafter as CSFBL and the Company determine, such time and date being herein referred to as the "First Closing Date." The certificates for the International Firm Shares so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBL requests and will be made available for checking and packaging at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055 at least 24 hours prior to the First Closing Date. Delivery to the Attorneys-in-Fact, or to either of them, of the check payable to any Selling Stockholder shall be deemed delivery of such check to such Selling Stockholder for purposes of this Agreement. In addition, upon written notice from CS First Boston Corporation from time to time given to the Company not more than 30 days subsequent to the date of the initial public offering of the U.S. Firm Shares, the U.S. Underwriters and the Managers may purchase all or less than all of the Optional Shares, which in the case of the Managers shall be at the purchase price per share to be paid for the International Firm Shares. Unless otherwise agreed between the U.S. Representatives and CSFBL, the Optional Shares to be so purchased by the Managers shall be in the same proportion as the International Firm Shares bear to the Firm Shares. The Company agrees to sell to the Managers the number of such International Optional Shares specified in such notice and the Managers agree, severally and not jointly, to purchase such International Optional Shares. Such International Optional Shares shall be purchased for the account of each Manager in the same proportion as the number of International Firm Shares set forth opposite such Manager's name in Schedule B hereto bears to the total number of International Firm Shares (subject to adjustment by CSFBL to eliminate fractions) and may be purchased by the Managers only for the purpose of covering -6- over-allotments made in connection with the sale of the International Firm Shares. No Optional Shares shall be sold or delivered unless the U.S. Firm Shares and the International Firm Shares previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Shares or any portion thereof may be surrendered and terminated at any time upon notice by CS First Boston Corporation on behalf of the U.S. Underwriters and the Managers to the Company. The time for the delivery of and payment for the International Optional Shares (or any part thereof), being herein referred to as an "Option Closing Date" (which may be the First Closing Date) (the First Closing Date and each Option Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by the U.S. Representatives but shall be not later than seven (7) business days after written notice of election to purchase U.S. Optional Shares is given. The Company will deliver the International Optional Shares to CSFBL for the accounts of the several Managers, at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055, against payment of the purchase price therefor by certified or official bank check or checks in New York Clearing House (next day) funds drawn to the order of Michaels Stores, Inc., at the office of Jackson & Walker L.L.P., Dallas, Texas. The certificates for the International Optional Shares will be in definitive form, in such denominations and registered in such names as CSFBL requests upon reasonable notice prior to the Option Closing Date with respect to such shares and will be made available for checking and packaging at the office of CS First Boston Corporation, Park Avenue Plaza, New York, New York 10055 at a reasonable time in advance of the Option Closing Date with respect to such shares. The Company will pay to the Managers as aggregate compensation for their commitments hereunder and for their services in connection with the purchase of the International Shares and the management of the offering thereof, if the sale and delivery of the International Shares to the Managers provided herein is consummated, an amount equal to U.S. $_______________ per International Share, which may be divided among the Managers in such proportions as they may determine. Such payment will be made on the First Closing Date in the case of the International Firm Shares and on the Option Closing Date in the case of the International Optional Shares sold to the Managers, in each case by way of deduction by the Managers of said amount from the purchase price for the International Shares referred to above. 4. OFFERING BY MANAGERS. It is understood that the several Managers propose to offer the International Shares for sale to the public as set forth in the International Prospectus. In connection with the distribution of the International Shares, the Managers, through a stabilizing manager, may over-allot or effect transactions on any exchange, in any over-the-counter market or otherwise, which stabilize or maintain the market prices of the International Shares at levels other than those which might otherwise prevail, but in such event and in relation thereto, the Managers will act for themselves and not as agents of the Company, and any loss resulting from over-allotment and stabilization will be borne, and any profit arising therefrom will be beneficially retained, by the Managers. Such stabilizing, if commenced, may be discontinued at any time. -7- 5. CERTAIN AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. (i) The Company agrees with the several Managers that: (a) If the Effective Time is prior to the execution and delivery of this Agreement, the Company will file the U.S. Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by the U.S. Representatives, subparagraph, (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifth business day after the Effective Date. The Company will advise CSFBL promptly of any such filing pursuant to Rule 424(b). (b) The Company will advise CSFBL promptly of any proposal to amend or supplement the registration statement as filed or the related prospectus or the Registration Statement or the Prospectuses and will not effect such amendment or supplementation without CSFBL's consent, which consent shall not be unreasonably withheld; and the Company will also advise CSFBL promptly of the effectiveness of the Registration Statement (if the Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of the Registration Statement or the Prospectuses and of the institution by the Commission of any stop order proceedings in respect of the Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectuses as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend either or both of the Prospectuses to comply with the Act, the Company, subject to paragraph (b) above, promptly will prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBL's consent to, nor the Managers' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its security holders an earnings statement covering a period of at least 12 months beginning after the Effective Date which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes the Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. -8- (e) The Company will furnish to CS First Boston Corporation copies of the Registration Statement (four of which will be signed and will include all exhibits), each preliminary prospectus relating to the International Shares, the International Prospectus and all amendments and supplements to such documents, in each case as soon as available and in such quantities as CSFBL reasonably requests. (f) During the period of five years hereafter, the Company will furnish to CSFBL and, upon request, to each of the other Managers, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to CSFBL (i) as soon as available, a copy of each report or definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other publicly available information concerning the Company as CSFBL may reasonably request. (g) The Company will pay all expenses incident to the performance of its obligations under this Agreement and will reimburse the Managers for any expenses (including fees and disbursements of counsel) incurred by them in connection with the filing with the National Association of Securities Dealers, Inc. relating to the Offered Shares and for expenses incurred in distributing preliminary prospectuses relating to the International Shares and the International Prospectus (including any amendments and supplements thereto) to the Managers. (h) The Company will indemnify and hold harmless the Managers against any documentary, stamp or similar issue tax, including any interest and penalties, on the creation, issue and sale of the Offered Shares and on the execution and delivery of this Agreement. All payments to be made by the Company hereunder shall be made without withholding or deduction for or on account of any present or future taxes, duties or governmental charges whatsoever unless the Company is compelled by law to deduct or withhold such taxes, duties or charges. In that event, the Company shall pay such additional amounts as may be necessary in order that the net amounts received after such withholding or deduction shall equal the amounts that would have been received if no withholding or deduction had been made. (i) Except for filings with the Ministry of Finance in Japan that were coordinated by the Representatives, no action has been or, prior to the completion of the distribution of the Offered Shares, will be taken by the Company in any jurisdiction outside the United States and Canada that would permit a public offering of the Offered Shares, or possession or distribution of the International Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus issued in connection with the offering of the Offered Shares or any other offering material, in any country or jurisdiction where action for that purpose is required. -9- (j) The Company shall use its reasonable efforts to cause the conditions to the obligations of the several Managers to purchase and pay for the International Firm Shares on the First Closing Date and the International Optional Shares on each Option Closing Date to be satisfied on or prior to the applicable Closing Date. (ii) Each Selling Stockholder agrees: (a) to deliver to CSFBL on or prior to the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof); and (b) to use its reasonable efforts to cause the conditions to the obligations of the several Managers to purchase and pay for the International Firm Shares on the First Closing Date, to the extent such conditions relate to such Selling Stockholder, to be satisfied on or prior to the First Closing Date. 6. CONDITIONS OF THE OBLIGATIONS OF THE MANAGERS. The obligations of the several Managers to purchase and pay for the International Firm Shares on the First Closing Date and the International Optional Shares on each Option Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders herein, to the accuracy of the statements of Company officers and the Selling Stockholders made pursuant to the provisions hereof, to the performance by the Company, the Selling Stockholders and the Custodian of their obligations hereunder and to the following additional conditions precedent (provided that the conditions set forth herein that relate to the Selling Stockholders shall not constitute conditions to the obligations of the several Managers to purchase Optional Shares on any Option Closing Date that is other than the First Closing Date): (a) CSFBL shall have received a letter, dated the date of delivery thereof (which, if the Effective Time is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to the Effective Time), of Ernst & Young confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating in effect that: (i) in their opinion the financial statements and schedules examined by them and included or incorporated by reference in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; -10- (ii) they have made a review of the unaudited financial statements of the Company and its consolidated subsidiaries included in the Registration Statement in accordance with standards established by the American Institute of Certified Public Accountants, as indicated in their reports attached to such letter; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company and its consolidated subsidiaries, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements of the Company and its consolidated subsidiaries included in the Registration Statement do not comply in form in all material respects with applicable accounting requirements of the Act and the related published Rules and Regulations; (B) at the date of the latest available balance sheet of the Company and its consolidated subsidiaries read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries, or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets of the Company and its consolidated subsidiaries, as compared with amounts shown on the latest balance sheet of the Company and its consolidated subsidiaries included in the Prospectuses; or (C) for the period from the closing date of the latest income statement of the Company and its consolidated subsidiaries included in the Prospectuses to the closing date of the latest available income statement of the Company and its consolidated subsidiaries read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement of the Company and its consolidated subsidiaries included in the Prospectuses, in consolidated net sales or net operating income of the Company and its consolidated subsidiaries or in the total or per share amount of consolidated net income of the Company and its consolidated subsidiaries; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectuses disclose have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information -11- contained in the Registration Statement (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its consolidated subsidiaries subject to the internal controls of the Company's and its consolidated subsidiaries' accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, if the Effective Time is subsequent to the execution and delivery of this Agreement, "Registration Statement" shall mean the registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to the Effective Time, and "Prospectuses" shall mean the prospectus included in the Registration Statement and the related draft of the International Prospectus. All financial statements and schedules included in material incorporated by reference into the U.S. Prospectus shall be deemed included in the Registration Statement for purposes of this subsection. (b) CSFBL shall have received a letter, dated the date of delivery thereof (which, if the Effective Time is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to the Effective Time), of Deloitte & Touche confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating in effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have made a review of the unaudited financial statements of Leewards and its consolidated subsidiaries included in the Registration Statement in accordance with standards established by the American Institute of Certified Public Accountants, as indicated in their reports attached to such letter; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of Leewards and its consolidated subsidiaries, inquiries of officials of Leewards who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: -12- (A) the unaudited financial statements of Leewards and its consolidated subsidiaries included in the Registration Statement do not comply in form in all material respects with applicable accounting requirements of the Act and the related published Rules and Regulations; (B) at the date of the latest available balance sheet of Leewards and its consolidated subsidiaries read by such accountants, or at a subsequent specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of Leewards and its subsidiaries consolidated, or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets of Leewards and its consolidated subsidiaries, as compared with amounts shown on the latest balance sheet of Leewards and its consolidated subsidiaries included in the Prospectuses; or (C) for the period from the closing date of the latest income statement of Leewards and its consolidated subsidiaries included in the Prospectuses to the closing date of the latest available income statement of Leewards and its consolidated subsidiaries read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement of Leewards and its consolidated subsidiaries included in the Prospectuses, in consolidated net sales or net operating income of Leewards and its consolidated subsidiaries or in the total or per share amount of consolidated net income of Leewards and its consolidated subsidiaries; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectuses disclose have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statement (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of Leewards and its consolidated subsidiaries subject to the internal controls of Leewards' and its consolidated subsidiaries' accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, if the Effective Time is subsequent to the execution and delivery of this Agreement, "Registration Statement" shall mean -13- the registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to the Effective Time, and "Prospectuses" shall mean the prospectus included in the Registration Statement and the related draft of the International Prospectus. All financial statements and schedules included in material incorporated by reference into the U.S. Prospectus shall be deemed included in the Registration Statement for purposes of this subsection. (c) If the Effective Time is not prior to the execution and delivery of this Agreement, the Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBL. If the Effective Time is prior to the execution and delivery of this Agreement, the U.S. Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company, any Selling Stockholder or CSFBL, shall be contemplated by the Commission. (d) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) a change in United States or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the reasonable judgment of CSFBL, be likely to prejudice materially the success of the proposed issue, sale or distribution of the International Shares, whether in the primary market or in respect of dealings in the secondary market; (ii) any change, or any development involving a prospective change, in or affecting particularly the business or properties of the Company or its subsidiaries which, in the reasonable judgment of CSFBL, materially impairs the investment quality of the Offered Shares; (iii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iv) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or on The Nasdaq Stock Market or the over-the-counter market; (v) any banking moratorium declared by Federal or New York authorities; or (vi) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency, if, in the reasonable judgment of CSFBL, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the sale of and payment for the International Shares. -14- (e) CSFBL shall have received an opinion, dated such Closing Date, of Jackson & Walker, L.L.P., counsel for the Company, to the effect that: (i) The Company and each subsidiary of the Company that is incorporated under the laws of one of the United States has been duly incorporated and is an existing corporation in good standing under the laws of its jurisdiction of incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectuses; and the Company and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which it owns or leases substantial properties or in which the conduct of its business requires such qualifications, except where the failure to be so qualified would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and the subsidiaries taken as a whole; (ii) The Offered Shares delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued and conform to the description thereof contained in the Prospectuses; when purchased and issued pursuant to the terms of this Agreement the Offered Shares being delivered on such Closing Date by the Company will be, and all other Offered Shares and all other outstanding shares of the Common Stock of the Company are, fully paid and nonassessable; and the stockholders of the Company have no preemptive rights with respect to the Offered Shares pursuant to any applicable statute, rule or regulation or to the Certificate of Incorporation or bylaws of the Company, and to such counsel's knowledge no preemptive rights with respect to the Offered Shares exist, whether pursuant to the items listed above, pursuant to contract or otherwise; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, except for (a) the Registration Rights, which pursuant to the Third Amendment are now held by the Prior Assignees (as defined in the Third Amendment), Tallulah, Ltd., the Christiana Trust and the Andrew Trust (as more fully described in the Third Amendment), all of which Registration Rights have been waived with respect to the transactions contemplated by this Agreement, (b) the registration rights provided in the Merger Agreement, (c) registration rights provided in the Stock Purchase Agreement, dated as of February 16, 1994 among the Company, Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc., as amended by Amendment No. 1 to Stock Purchase Agreement, and (d) registration -15- rights provided in the Agreement and Plan of Merger, dated as of March 3, 1994 among the Company and the other parties listed therein, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, relating to the acquisition of the affiliated store chains of Oregon Craft & Floral Supply Co. and H&H Craft and Floral Supply Co., which registration rights described in (b), (c) and (d) have been fully complied with and provided to the persons and entities entitled thereto. (iv) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement or the Subscription Agreement in connection with the issuance or sale of the Offered Shares, except such as have been obtained and made under the Act and such as may be required under state securities laws; (v) The execution, delivery and performance of this Agreement and the Subscription Agreement and the consummation of the transactions contemplated herein and therein will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (A) any statute, any rule, regulation or order (excluding orders that specifically name and are directed to the Company and are unknown to such counsel and excluding the specific matters under the Act, the Rules, the Regulations and Rule 10(b)5 under the Securities Exchange Act of 1934 that are covered by paragraph (vi) below, the only opinions being expressed with respect to such matters being set forth in paragraph (vi) below) which a lawyer experienced in the public offering of securities would recognize as applicable to a transaction of the type covered by this Agreement of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or the charter or bylaws of the Company or any subsidiary of the Company or (B) to the knowledge of such counsel, any agreement or instrument to which the Company or any subsidiary of the Company is a party or by which the Company or any subsidiary of the Company is bound or to which any of the properties of the Company or any subsidiary of the Company are subject, and the Company has full power and authority to authorize, issue and sell the Offered Shares as contemplated by this Agreement and the Subscription Agreement; (vi) The Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the U.S. Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are -16- pending or contemplated under the Act, and the Registration Statement and the U.S. Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that either the Registration Statement or the Prospectuses, or any amendment or supplement thereto, as of their respective effective or issue dates, contained any untrue statement of a material fact or omitted to state any material fact required pursuant to the Act, the Rules or the Regulations to be stated therein or necessary to make the statements therein not misleading; the descriptions in the Registration Statement and Prospectuses of statutes, legal and governmental proceedings (other than statutes, legal or governmental proceedings related to the securities laws of any jurisdiction other than the United States) and contracts and other documents are accurate and fairly present the information required to be shown pursuant to the Act, the Rules or the Regulations; and such counsel do not know of any legal or governmental proceedings required pursuant to the Act, the Rules or the Regulations to be described in the Registration Statement or Prospectuses which are not described as required pursuant to the Act, the Rules and the Regulations or of any contracts or documents of a character required pursuant to the Act, the Rules or the Regulations to be described in the Registration Statement or Prospectuses or to be filed as exhibits to the Registration Statement which are not described and filed as required pursuant to the Act, the Rules and the Regulations; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained, by incorporation by reference or otherwise, in the Registration Statement or the Prospectuses; (vii) This Agreement and the Subscription Agreement have been duly authorized, executed and delivered by the Company; and (viii)The merger of a wholly-owned subsidiary of the Company with and into Leewards described in the Merger Agreement (the "Merger") has been effected, and a Certificate of Merger covering such Merger has been filed with the necessary government authorities. (f) You shall have received an opinion, dated the Closing Date, of counsel for each of the Selling Stockholders (which counsel may be in-house counsel of such Selling Stockholder), to the effect that: (i) Such Selling Stockholder has valid and unencumbered title to the Common Stock sold by such Selling Stockholder pursuant to this Agreement and has full right, power and authority to sell, assign, transfer and deliver such Common Stock hereunder; and, assuming that the several Underwriters have purchased such shares of Common Stock in good faith and without notice of any defect in title thereto, the several Managers have acquired valid and unencumbered title to the Common -17- Stock purchased by them from such Selling Stockholder hereunder, except for liens, claims, charges and other encumbrances created by or through any Manager; (ii) To the knowledge of such counsel, no consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by such Selling Stockholder for the consummation of the transactions contemplated by this Agreement or the Custody Agreement and Power of Attorney in connection with the sale of the Common Stock sold by such Selling Stockholder hereunder, except such as may be required under the Act or state securities laws; (iii) The execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, rule or regulation which a lawyer experienced in the public offering of securities would recognize as applicable to a transaction of the type covered by this Agreement (assuming all consents, approvals, authorizations, or orders of or filings with any governmental body or agency required under the Act or state securities laws have been obtained or made), or the charter or bylaws of such Selling Stockholder which is a corporation, the partnership agreement of any Selling Stockholder that is a partnership, or the trust instrument of any Selling Stockholder that is a trust, or, to the knowledge of such counsel, any order of any governmental agency or body or any court having jurisdiction over such Selling Stockholder or any of its properties or, to the knowledge of such counsel, any agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the properties of such Selling Stockholder is subject; (iv) This Agreement and the Underwriting Agreement have been duly authorized, executed and delivered by such Selling Stockholder; and (v) The Custody Agreement and Power of Attorney to which such Selling Stockholder is a party has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement, enforceable against such Selling Stockholder in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws of general applicability affecting the rights of creditors and to principles of equity, except that no opinion need be expressed with respect to section 4.H. or 5.A.(2) of such Custody Agreement and Power of Attorney. To the extent that any of such opinions relate to the state law of any state in which such counsel is not admitted to practice, such counsel may rely on -18- opinions of local counsel in such state if the local counsel is reasonably acceptable to the Underwriters and their counsel and the opinions of the local counsel are also addressed to the Underwriters and specifically state that the Underwriters are permitted to rely on such opinions. (g) CSFBL shall have received from Fulbright & Jaworski, United States counsel for the Managers, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Shares, the Registration Statement, the Prospectuses and other related matters as CSFBL may require, and the Company and the Selling Stockholders shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (h) CSFBL shall have received a certificate, dated such Closing Date, of the President or any Vice-President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that the representations and warranties of the Company in this Agreement are true and correct in all material respects, that the Company has, in all material respects, complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date, that no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission and that, subsequent to the dates of the most recent financial statements in the Prospectuses, there has been no material adverse change in the financial position or results of operation of the Company and its subsidiaries except as set forth in or contemplated by the Prospectuses or as described in such certificate. (i) CSFBL shall have received letters, dated such Closing Date, of Ernst & Young and Deloitte & Touche which meet the requirements of subsections (a) and (b), respectively, of this Section, except that the specified dates referred to in such subsections will be a date not more than five days prior to such Closing Date for the purposes of this subsection. (j) On such Closing Date, the U.S. Underwriters shall have purchased the U.S. Firm Shares or the U.S. Optional Shares, as the case may be, pursuant to the Underwriting Agreement. (k) Each Selling Stockholder that has delivered supplemental instructions as contemplated by clause 1.F of the Custody Agreement and Power of Attorney to which such Selling Stockholder is a party shall have delivered to you an original of such supplemental instructions with the signature of such Selling Stockholder thereon guaranteed by a commercial bank or trust company in the United States or by a member firm of the New York Stock Exchange. The Company and the Selling Stockholders will furnish CSFBL with such conformed copies of such opinions, certificates, letters and documents as CSFBL reasonably requests. -19- 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and hold harmless each Manager against any losses, claims, damages or liabilities, joint or several, to which such Manager may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectuses, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Manager for any legal or other expenses reasonably incurred by such Manager in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Manager through CSFBL specifically for use therein. (b) Each Selling Stockholder, severally and not jointly, will indemnify and hold harmless each Manager against any losses, claims, damages or liabilities, to which such Manager may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the International Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance on and conformity with written information furnished to the Company by such Selling Stockholder specifically for use therein, and will reimburse each Manager for any legal or other expenses reasonably incurred by such Manager in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. Such Selling Stockholder shall not be liable under this Section 7 or for any breach of, or inaccuracy contained in, the representations and warranties of such Selling Stockholder contained in Section 2(b) of this Agreement for an amount in excess of the purchase price received by such Selling Stockholder from the Managers hereunder, less the amount of damages which such Selling Stockholder has otherwise been required to pay under this Section 7 or otherwise. The indemnity agreements contained in this paragraph (b) are subject to the condition that, insofar as they relate to any such untrue statement or omission or alleged untrue statement or omission made in a preliminary prospectus but eliminated or remedied in the International Prospectus, such indemnity agreements shall not inure to the benefit of any Manager from whom the person asserting such loss, claim, damage or liability purchased Common Stock if a copy of the International Prospectus was not furnished to such person at or prior to the time such action is required. -20- (c) Each Manager will, severally and not jointly, indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the International Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Manager through CSFBL specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. (d) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity has or could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Managers on the other from the offering of the International Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such -21- proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Managers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Managers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the International Shares (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Managers. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders or the Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Selling Stockholder shall be required to contribute any amount unless such loss, claim, damage or liability arises out of an untrue statement or alleged untrue statement made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder specifically for use in the Registration Statement or the Prospectus. Notwithstanding the provisions of this subsection (e), no Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Manager has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no Selling Stockholder shall be required to contribute any amount in excess of the amount by which the total purchase price received by such Selling Stockholder from the Managers hereunder exceeds the amount of damages which such Selling Stockholder has otherwise been required to pay under this Section 7 or otherwise. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Managers' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Stockholders under this Section shall be in addition to any liability which the Company and the Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Manager within the meaning of the Act; and the obligations of the Managers under this Section shall be in addition to any liability which the respective Managers may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. -22- 8. DEFAULT OF MANAGERS. If any Manager or Managers default in their obligations to purchase International Shares hereunder on either the First Closing Date or the Option Closing Date and the aggregate number of shares of International Shares that such defaulting Manager or Managers agreed but failed to purchase does not exceed 10% of the total number of shares of International Shares that the Managers are obligated to purchase on such Closing Date, CSFBL may make arrangements satisfactory to the Company and the Selling Stockholders for the purchase of such International Shares by other persons, including any of the Managers, but if no such arrangements are made by such Closing Date the non-defaulting Managers shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the International Shares that such defaulting Managers agreed but failed to purchase on such Closing Date. If any Manager or Managers so default and the aggregate number of shares of International Shares with respect to which such default or defaults occur exceeds 10% of the total number of shares of International Shares that the Managers are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBL, the Company and the Selling Stockholders for the purchase of such International Shares by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Manager, the Company or the Selling Stockholders, except as provided in Section 9 (provided that if such default occurs with respect to International Optional Shares after the First Closing Date, this Agreement will not terminate as to the International Firm Shares). As used in this Agreement, the term "Manager" includes any person substituted for an Manager under this Section. Nothing herein will relieve a defaulting Manager from liability for its default. 9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers, the Selling Stockholders and the several Managers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Manager, any Selling Stockholder or the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the International Shares. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the International Shares by the Managers is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Selling Stockholders and the Managers pursuant to Section 7 shall remain in effect, and if any shares of International Shares have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the International Shares by the Managers is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iv), (v) or (vi) of Section 6(d), the Company will reimburse the Managers for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the International Shares. -23- 10. NOTICES. All communications hereunder will be in writing and, if sent to the Managers, will be mailed, delivered or telegraphed and confirmed to CSFBL at, c/o CS First Boston Limited, One Cabot Square, London England E14 4QJ, Attention: Corporate Secretary, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 5931 Campus Circle Drive, Las Colinas Business Park, Irving, Texas 75063, Attention: Jack E. Bush, with a courtesy copy to Charles D. Maguire, Jr., Jackson & Walker, L.L.P., 901 Main Street, Suite 6000, Dallas, Texas 75202, or, if sent to the Selling Stockholders or any of them, will be mailed, delivered or telegraphed and confirmed to such Selling Stockholder at the address set forth under such Selling Stockholder's name on Schedule A; provided, however, that any notice to a Manager pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Manager. 11. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective personal representatives and successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. REPRESENTATION OF MANAGERS AND SELLING STOCKHOLDERS. CSFBL will act, and acknowledge that you are authorized to act, for the several Managers in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by CSFBL will be binding upon all the Managers. In accordance with the Custody Agreement and Power of Attorney, _________________________ will act for the Selling Stockholders in connection with the transactions contemplated by this Agreement, and any action under or in respect of this Agreement taken by _________________________ will be binding upon all Selling Stockholders. 13. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 15. TELECOPY EXECUTION AND DELIVERY. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto, and an executed copy of this Agreement may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties hereto agree to execute and deliver an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof. 16. COMPLETION OF DISTRIBUTION. CSFBL agrees that it will inform the Company when the Managers have completed the distribution of the International Shares contemplated by this Agreement in order to permit the Company to perform its obligations hereunder, including those obligations imposed by Section 5(c). -24- If the foregoing is in accordance with CSFBL's understanding of our agreement, kindly sign and return to us one of the counterparts hereof, whereupon it will become a binding agreement between the Company, the Selling Stockholders and the several Managers in accordance with its terms. Very truly yours, MICHAELS STORES, INC. By: ------------------------------------ Title: --------------------------------- SELLING STOCKHOLDERS: By _________________________ as attorney-in-fact for each of the Selling Stockholders listed below pursuant to authority granted in the Custody Agreement and Power of Attorney. ---------------------------------------- Alan Altschuler Stephen J. Berman EMP & Co. Frontenac Venture V Limited Partnership GIPEN & Co. Alan L. Magdovitz MONY Life Insurance Company of America The Mutual Life Insurance Company of New York John A. Popple Prudential-Bache Capital Partners I, L.P. Prudential-Bache Capital Partners II, L.P. The Prudential Insurance Company of America John E. Welsh, III -25- The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CS FIRST BOSTON LIMITED ROBERTSON, STEPHENS & COMPANY, L.P. NOMURA INTERNATIONAL PLC By: ------------------------------- Title: ----------------------------- - ----------------------------------- - ----------------------------------- - ----------------------------------- Each by its duly authorized attorney-in-fact By: -------------------------------- -26- SCHEDULE A Total Number of Selling Stockholders Shares to be Sold -------------------- ----------------- Alan Altschuler ............................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 Stephen J. Berman ..........................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 EMP & Co. ..................................................._________________ c/o Ms. Laura Pearl Harris Trust and Savings Bank Frontenac Company 208 S. LaSalle Street, Room 1900 Chicago, IL 60604 Frontenac Venture V Limited Partnership ....................._________________ c/o Mr. Roger McEniry Frontenac Company 208 S. LaSalle Street, Room 1900 Chicago, IL 60604 GIPEN & Co. ................................................._________________ c/o Ms. Suzanne Walton MONY Financial Services 1740 Broadway Mail Drop 11-6 New York, NY 10019 Alan L. Magdovitz ..........................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 MONY Life Insurance Company of America ......................_________________ c/o Ms. Suzanne Walton MONY Financial Services 1740 Broadway Mail Drop 11-6 New York, NY 10019 -27- SCHEDULE A CONTINUED Total Number of Selling Stockholders Shares to be Sold -------------------- ----------------- The Mutual Life Insurance Company of New York ..............._________________ c/o Ms. Suzanne Walton MONY Financial Services 1740 Broadway Mail Drop 11-6 New York, NY 10019 John A. Popple .............................................._________________ Leewards Creative Crafts, Inc. 1200 St. Charles Street Elgin, Illinois 60120 Prudential-Bache Capital Partners I, L.P. ..................._________________ c/o Mr. Stephen J. Berman Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 Prudential-Bache Capital Partners II, L.P. .................._________________ c/o Mr. Stephen J. Berman Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 The Prudential Insurance Company of America ................._________________ c/o Mr. David Descalzi Prudential Corporate Funding 4 Gateway Center, 9th Floor Newark, NJ 07102-4069 John E. Welsh, III .........................................._________________ Seaport Capital, Inc. 99 Wall Street, 6th Floor New York, NY 10005 Total.......................................... ================= -28- SCHEDULE B Total Number of International Firm Shares Manager to be Purchased ------- --------------- CS First Boston Limited ....................................._________________ Robertson, Stephens & Company, L.P. ........................._________________ Nomura International plc ...................................._________________ Total........................................ ================= - 29 - EX-23.1 4 CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial and Store Data" and "Experts" in the Pre-Effective Amendment No. 3 to the Registration Statement on Form S-3 (No. 33-53639) and related Prospectus of Michaels Stores, Inc. and to the incorporation by reference therein of our reports dated February 28, 1994, with respect to the consolidated financial statements and schedules of Michaels Stores, Inc. included or incorporated by reference in its Annual Report (Form 10-K) for the year ended January 30, 1994 filed with the Securities and Exchange Commission. ERNST & YOUNG Dallas, Texas July 6, 1994 EX-23.2 5 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Pre-Effective Amendment No. 3 to Registration Statement No. 33-53639 of Michaels Stores, Inc. on Form S-3 of our report dated March 4, 1994 (May 11, 1994 as to Note 11) on the audit of the financial statements of Leewards Creative Crafts, Inc. (the "Company") as of and for the years ended January 30, 1994 and January 31, 1993, which expresses an unqualified opinion and includes an explanatory paragraph relating to the Agreement and Plan of Merger whereby the Company will become a subsidiary of Michaels Stores, Inc., appearing in the Prospectus, which is part of such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE Chicago, Illinois July 6, 1994 -----END PRIVACY-ENHANCED MESSAGE-----