-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fuve2pHBglxtgNg311Ltk+XbS4AtkkmbQaLEBW5zanEZKvvcfOUnJjB2uXmo026h gnPsLt8hc+h8Rff5farCnw== 0000740670-97-000002.txt : 19970618 0000740670-97-000002.hdr.sgml : 19970618 ACCESSION NUMBER: 0000740670-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970503 FILED AS OF DATE: 19970617 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAELS STORES INC CENTRAL INDEX KEY: 0000740670 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 751943604 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11822 FILM NUMBER: 97625145 BUSINESS ADDRESS: STREET 1: 8000 BENT BRANCH DR STREET 2: PO BOX 619566 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2147147000 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 3, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number 0-11822 __________________________ 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) 8000 Bent Branch Drive, Irving, Texas 75063 P.O. Box 619566, DFW, Texas 75261-9566 (Address of principal executive offices including zip code) (972) 409-1300 (Registrant's telephone number, including area code) _______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding as of Title June 9, 1997 Common stock, par value $.10 per share 26,152,399 MICHAELS STORES, INC. FORM 10-Q Part I - FINANCIAL INFORMATION Item 1. Financial Statements MICHAELS STORES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share data) (Unaudited)
ASSETS May 3, February 1, 1997 1997 ________ ________ Current assets: Cash and equivalents $ 77,309 $ 59,069 Merchandise inventories 370,681 351,208 Income taxes receivable and deferred income taxes 13,774 15,207 Prepaid expenses and other 13,305 12,059 ________ ________ Total current assets 475,069 437,543 ________ ________ Property and equipment, at cost 298,038 294,022 Less accumulated depreciation (113,673) (104,943) ________ ________ 184,365 189,079 ________ ________ Costs in excess of net assets of acquired operations, net 139,729 140,697 Deferred income taxes 11,758 10,550 Other assets 3,383 6,566 ________ ________ 154,870 157,813 ________ ________ $814,304 $784,435 ________ ________ ________ ________ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $115,117 $104,966 Accrued liabilities and other 85,502 92,765 ________ ________ Total current liabilities 200,619 197,731 ________ ________ Senior notes 125,000 125,000 Convertible subordinated notes 96,940 96,940 Other long-term liabilities 31,107 31,962 ________ ________ Total long-term liabilities 253,047 253,902 ________ ________ 453,666 451,633 ________ ________ Commitments and contingencies Shareholders' equity: Common stock, 26,032,984 shares outstanding 2,603 2,369 Additional paid-in capital 296,122 271,405 Retained earnings 61,913 59,028 ________ ________ Total shareholders' equity 360,638 332,802 ________ ________ $814,304 $784,435 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Three Months _______________________ May 3, April 28, 1997 1996 ________ _________ Net sales $321,318 $301,875 Cost of sales and occupancy expense 220,128 205,067 Selling, general and administrative expense 91,884 88,970 ________ ________ Operating income 9,306 7,838 Interest expense 5,742 3,710 Other income, net (1,549) (267) ________ ________ Income before income taxes 5,113 4,395 Provision for income taxes 1,943 1,670 ________ ________ Net income $ 3,170 $ 2,725 ________ ________ ________ ________ Earnings per common and common equivalent share $.12 $.12 ____ ____ ____ ____ Weighted average common and common equivalent shares outstanding 26,303 22,459 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months _______________________ May 3, April 28, 1997 1996 ________ _________ Operating activities: Net income $ 3,170 $ 2,725 Adjustments: Depreciation 9,945 7,763 Amortization 1,056 1,046 Other (60) 149 Change in assets and liabilities: Merchandise inventories (19,473) (11,035) Prepaid expenses and other (1,245) 727 Deferred income taxes and other 285 3,628 Accounts payable 10,151 5,895 Accrued liabilities and other (6,546) (9,304) ________ ________ Net change in assets and liabilities (16,828) (10,089) ________ ________ Net cash provided by (used in) operating activities (2,717) 1,594 ________ _________ Investing activities: Additions to property and equipment (5,427) (7,779) Net proceeds from sales of investments 3,386 - ________ ________ Net cash used in investing activities (2,041) (7,779) ________ ________ Financing activities: Net borrowings under bank credit facilities - (13,700) Payment of other long-term liabilities (996) - Proceeds from issuance of common stock and other 23,994 24,925 ________ ________ Net cash provided by financing activities 22,998 11,225 ________ ________ Net increase in cash and equivalents 18,240 5,040 Cash and equivalents at beginning of year 59,069 2,870 ________ ________ Cash and equivalents at end of period $ 77,309 $ 7,910 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended May 3, 1997 (Unaudited) Note A ______ The accompanying consolidated financial statements are unaudited (except for the Consolidated Balance Sheet as of February 1, 1997) and, in the opinion of management, reflect all adjustments that are necessary for a fair presentation of financial position and results of operations for the three months ended May 3, 1997. All of such adjustments are of a normal and recurring nature. Because of the seasonal nature of the Company's business, the results of operations for the three months ended May 3, 1997 are not indicative of the results to be expected for the entire year. Note B ______ Earnings per share data are based on the weighted average number of shares outstanding, including common stock equivalents and other dilutive securities when applicable. The assumed conversion of the convertible subordinated notes was anti-dilutive for each period presented and was therefore not included in the calculation of fully diluted earnings per share data. Note C ______ In August 1995, two lawsuits were filed by certain security holders against the Company and certain present and former officers and directors seeking class action status on behalf of purchasers of the Company's Common Stock between February 1, 1995 and August 23, 1995. Among other things, the plaintiffs allege that misstatements and omissions by defendants relating to projected and historical operating results, inventory and other matters involving future plans resulted in an inflation of the price of the Company's Common Stock during the period between February 1, 1995 and August 23, 1995. The plaintiffs seek on behalf of the class an unspecified amount of compensatory damages and reimbursement for the plaintiffs' fees and expenses. The United States District Court for the Northern District of Texas consolidated the two lawsuits on November 16, 1995. The Court certified a class on March 24, 1997 and discovery is proceeding. The Company believes that it has meritorious defenses to this action and intends to defend itself vigorously. A lawsuit was commenced against the Company and several other parties on September 19, 1994 in the Superior Court of Stanislaus County, California, on behalf of a former employee, Naomi Snyder, her child, and her husband. The complaint alleges that the former employee and her then-unborn child were exposed to excessive levels of carbon monoxide in one of the Company's stores caused by a propane gas powered floor buffer which was operated by an outside cleaning service, resulting, among other things, in severe and permanent injuries to the child. Plaintiffs' Statement of Damages, filed on or about January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled the plaintiff's pleadings did not state a cause of action against the Company upon which relief could be granted. However, the ruling by the trial court was overturned by the Court of Appeals of the State of California, Fifth Appellate District, on September 23, 1996. On or about November 1, 1996 the Company filed its petition for review with the California Supreme Court requesting a review of the appellate decision. Review was granted on December 23, 1996. Should the California Supreme Court sustain the appellate court ruling and remand the case to the trial court, the Company believes it has meritorious defenses to this action and will defend itself vigorously. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the litigation described above, is uncertain, and there can be no assurance that future costs related to such litigation would not be material to the Company's financial position or results of operations. Note D ______ The FASB has issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, which is effective for financial statements issued after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this new standard is not expected to have a material impact on the disclosure of earnings per share in the financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General _______ Certain statements contained in this section which are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, customer demand and trends in the arts and crafts industry, related inventory risks due to shifts in customer demand, the effect of economic conditions, the impact of competitors' locations or pricing, the availability of acceptable real estate locations for new stores, difficulties with respect to new information system technologies, supply constraints or difficulties, and the results of financing efforts. Results of Operations _____________________ The following table shows the percentage of net sales that each item in the Consolidated Statements of Operations represents. This table should be read in conjunction with the following discussion and with the Company's financial statements, including the notes:
For the Quarter Ended ___________________ May 3, April 28, 1997 1996 ______ _________ Net sales 100.0% 100.0% Cost of sales and occupancy expense 68.5 67.9 Selling, general and administrative expense 28.6 29.5 _____ _____ Operating income 2.9 2.6 Interest expense 1.8 1.2 Other income, net (0.5) (0.1) _____ _____ Income before income taxes 1.6 1.5 Provision for income taxes 0.6 0.6 _____ _____ Net income 1.0% 0.9% _____ _____ _____ _____
Three months ended May 3, 1997 compared to the ______________________________________________ three months ended April 28, 1996 _________________________________ Net sales in the first quarter of fiscal 1997 increased $19.4 million, or 6%, over the first quarter of fiscal 1996. The results for the first quarter of fiscal 1997 included sales from 7 new Michaels stores (net of 8 closures) that were opened during the twelve month period ended May 3, 1997. During the first quarter, sales of the new stores accounted for an increase of $4.7 million. Same store sales increased 4% in the first quarter of fiscal 1997 compared to the first quarter of fiscal 1996 which contributed $14.7 million to the net sales increase. The improvement in same store sales performance is due to strong performance in the Company's core categories as a result of updated planograms put into place last summer and improved in-stock positions in top selling and hot items. Cost of sales and occupancy expense, as a percentage of net sales, for the first quarter of fiscal 1997 increased by 0.6% compared to the first quarter of fiscal 1996. This increase was due to higher occupancy costs and higher distribution costs. The increase in occupancy costs is primarily attributable to rent reserves established for the Company's 1997 store relocation program and rent increases from the 1996 relocation and expansion program. Distribution costs increased due to the Company's investment last year in an upgraded warehouse network and the related systems. As the Company improves its utilization of this increased capacity, return on the investment will yield improved gross margins. Selling, general and administrative expense, as a percentage of net sales, decreased by 0.9% in the first quarter of fiscal 1997 compared to the first quarter of 1996. The Company saved $4 million in advertising costs versus last year, as well as showed improved expense leverage in nearly all categories of store operating expenses with the exception of depreciation which reflects the impact of its increased investment in the POS system. Liquidity and Capital Resources _______________________________ Cash flow from operations of negative $2.7 million was used during the first quarter of fiscal 1997 compared to positive $1.6 million of cash flow from operations generated during the first quarter of fiscal 1996. These results are consistent with the Company's pattern of building inventory and opening and relocating stores early in the fiscal year. Inventories per Michaels store decreased 3% to $793,000 at May 3, 1997 compared to $816,000 last year. The Company's trade payable leverage improved to 31% from 28% last year reflecting the fresher nature of the Company's inventory and the improved utilization of terms through the centralization of payables. Borrowings outstanding under the Company's bank credit agreement ("Credit Agreement"), which expires in June 1999, were $73.5 million at the end of the first quarter of fiscal 1996. There were no borrowings outstanding at May 3, 1997, reflecting net proceeds of $120.9 million received during June 1996 from the issuance of Senior Notes used to reduce the amount of borrowings under the credit facility. The Company is in compliance with all covenants in the Credit Agreement as of May 3, 1997. The Company opened three Michaels stores and closed seven during the first three months of fiscal 1997. Capital expenditures for the newly opened stores amounted to approximately $400,000. Additional capital expenditures of approximately $5.0 million during the quarter related primarily to the relocation or remodelling of approximately 12 existing stores, and for various systems enhancements. The Company expects capital expenditures during the remainder of fiscal 1997 to total approximately $26 to $32 million, relating primarily to costs for new stores, store relocations and remodeling, merchandising and other information systems and various other projects. In addition, the Company may incur interim construction costs during the remainder of fiscal 1997 of up to $12 million for the relocation in 1998 of one of its distribution centers. At May 3, 1997, the Company had working capital of $274.5 million compared to $239.8 million at February 1, 1997. The Credit Agreement provides for an unsecured line of credit of up to $100 million. Management believes that the Company's available cash, funds generated by operations and funds available under the Credit Agreement should be sufficient to finance continuing operations and sustain current growth plans. Management believes that the Company can finance an annual store expansion of 12% to 15% (on a square footage basis) from internally generated cash flow. MICHAELS STORES, INC. FORM 10-Q Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.1 - Separation Agreement effective January 21, 1997 between Michaels Stores, Inc. and R. Don Morris. Exhibit 10.2 - Michaels Stores, Inc. 1997 Stock Option Plan. Exhibit 11 - Computation of Earnings Per Common Share for the Three Months Ended May 3, 1997. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the period covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICHAELS STORES, INC. By: /s/ Bryan M. DeCordova _______________________ Bryan M. DeCordova Executive Vice President- Chief Financial Officer (Principal Financial Officer) Dated: June 17, 1997 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE 10.1 Separation Agreement effective January 21, 1997 between Michaels Stores, Inc. and R. Don Morris. 10.2 Michaels Stores, Inc. 1997 Stock Option Plan. 11 Computation of Earnings Per Common Share for the Three Months Ended May 3, 1997. 27 Financial Data Schedule EXHIBIT 11 MICHAELS STORES, INC. Computation of Earnings Per Common Share Three Months Ended May 3, 1997 (Unaudited)
Weighted Average Outstanding Equivalent Shares _______________________________________ Total Fully Outstanding Primary Diluted ___________ __________ __________ Outstanding at beginning of year 23,690,926 23,690,926 23,690,926 Shares issued during quarter 2,342,058 1,538,208 1,538,208 __________ __________ Weighted average common shares outstanding 25,229,134 25,229,134 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 842,269 1,074,347 __________ __________ __________ Total outstanding common shares 26,032,984 26,071,403 26,303,481 __________ __________ __________ __________ __________ __________ Earnings per common and common equivalent share $.12 $.12 ____ ____ ____ ____
EX-27 2
5 0000740670 MICHAELS STORES, INC. 1000 3-MOS JAN-31-1998 MAY-03-1997 77,309 0 0 0 370,681 475,069 298,038 113,673 814,304 200,619 221,940 0 0 2,603 358,035 814,304 321,318 321,318 220,128 312,012 (1,549) 0 5,742 5,113 1,943 3,170 0 0 0 3,170 .12 .12
EX-10.1 3 EXHIBIT 10.1 AGREEMENT THIS AGREEMENT ("Agreement") is entered into effective as of January 21, 1997, between MICHAELS STORES, INC. ("Michaels") and R. DON MORRIS ("Morris"). WHEREAS, Morris has been an employee and officer of Michaels and in such capacities has performed services for Michaels; and WHEREAS, Morris wishes to retire from the positions he holds with Michaels; and WHEREAS, the parties wish to set forth in full their agreement regarding certain matters; NOW, THEREFORE, in consideration of the covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: Section 1. Resignation as Officer; Continued Employment. Morris hereby resigns as an officer of Michaels and from any position he holds with Michaels and any subsidiary of Michaels (including without limitation fiduciary appointments), effective as of March 24, 1997. Morris shall remain a non-officer employee of Michaels from March 25, 1997 through September 30, 1997, and for his services as such shall be compensated at a rate equal to his current base salary, subject to all applicable or customary tax, benefits and insurance premium withholding requirements, and in accordance with Michaels' customary payroll practices, for such period. During the period of such continued employment, Michaels will provide Morris with office space, furniture and equipment reasonably adequate to facilitate his performance of the duties of such employment, and will provide standard utilities and local telephone service at the location of such office space. Morris will promptly reimburse Michaels for any out of pocket expenses (excluding the allocated costs of rent, utilities and local telephone service) incurred in connection with such office space, furniture and equipment (including without limitation the costs of supplies and long distance telephone charges) which exceed $500 in any month during such period. Any charges incurred by Morris in connection with any cellular or car telephone shall be at his sole expense. Section 2. Effectiveness. Upon the expiration of the 7-day revocation period described in Section 25 below, this Agreement will become effective as of the date first set forth above, unless Morris revokes the Agreement during such revocation period. If the Agreement becomes effective, it may not thereafter be revoked by either party. Section 3. Benefits. (a) Retirement/Death Benefits. Subject to the terms of Section 13 below, Michaels agrees to pay Morris monthly retirement and/or death benefits of $15,000, subject to all applicable or customary tax, benefits and insurance premium withholding requirements (including without limitation Morris' (or his current eligible dependents') share of the cost of health care benefits as provided in Section 3(b) below), beginning on October 1, 1997 and continuing on the first day of each month thereafter until the later to occur of (i) Morris' death or (ii) September 1, 2012. If Morris dies before September 1, 2012, the payments under this Section shall be to such beneficiary as designated in writing to Michaels by Morris, or, if no beneficiary has been so designated, such payments shall be paid to Morris' estate. The retirement/death benefits provided for in this Section are agreed to with the expectation that Michaels will obtain a benefit from the agreements contained in Section 13 below. (b) Health Care Benefits. Michaels will permit Morris and his current eligible dependents to participate in Michaels' medical plan on substantially the same basis as senior executive employees and their eligible dependents participate in such medical plan from time to time. If such continued participation is not possible for any reason, Michaels will purchase health insurance coverage for Morris and his current eligible dependents that provides, to the extent practicable, reasonably comparable benefits. Such medical plan participation or insurance coverage will terminate with respect to Morris upon the earliest to occur of (i) August 6, 2004, (ii) the date of Morris' death or (iii) the date on which Morris becomes eligible to receive similar benefits from another person or entity; and will terminate with respect to any current eligible dependent on the earliest to occur of (A) the date on which the dependent ceases to be an eligible dependent (as determined under the terms of the Michaels medical plan in effect from time to time), (B) the date on which the dependent becomes eligible to receive Medicare or similar benefits from another person or entity or (C) September 30, 2012. Notwithstanding anything to the contrary contained herein, beginning on October 1, 1997 the cost of such benefits, whether provided under the Michaels medical plan or other insurance coverage, based on COBRA rates applicable to senior executive employees from time to time, shall be shared equally by Michaels and Morris (or his current eligible dependents, as the case may be). In the event that any monthly retirement/death benefit provided for in Section 3(a) above is reduced pursuant to the terms of Section 13 below to an amount less than Morris' (or his current eligible dependents') share of the cost of the health care benefits provided hereunder for such month, then such shortfall will be paid by Michaels on Morris' (or his current eligible dependents') behalf, and the Reduction Amount (as defined in Section 13), and the $1,570,000 maximum total reduction specified in Section 13, shall both be increased by an amount equal to the amount of such shortfall so paid by Michaels. (c) Whole Life Insurance Policy Premiums. Michaels will pay to Morris the current monthly premium for 55 months with respect to that certain Whole Life - Adjustable Insurance Policy issued by Northwestern Mutual Life Insurance Company ("Northwestern"), dated October 2, 1991, Policy Number 11 917 570, beginning with the premium due in June 1997, subject to all applicable withholding requirements. (d) Split-Dollar Insurance. Michaels and Morris are parties to that certain Contributory Split-Dollar Insurance Agreement dated February 28, 1990 (the "Split-Dollar Agreement"). Michaels hereby forgives and discharges the loan to Morris described in Article Three of the Split-Dollar Agreement, and will execute and deliver to Morris a reassignment of the Insurance Contract (as defined in Article One of the Split-Dollar Agreement) or a release of the original collateral assignment of the Insurance Contract. It is acknowledged and agreed that Michaels will make no further payments under or with respect to the Split-Dollar Agreement or the Insurance Contract. (e) Liability Insurance. Michaels will cause Morris to continue to be covered under a policy of officers' and directors' liability insurance with respect to Morris' prior services as an executive officer of Michaels which will provide coverage that is comparable to that provided to other individuals serving as executive officers of Michaels during the period of such prior service by Morris. (f) Automobile. Morris may continue to use the automobile leased for his use by Michaels and currently in his possession until the expiration of the applicable lease in December 1997, whereupon Michaels will enable Morris to purchase such automobile at the purchase price stated in such lease. During the term of such lease, Michaels shall continue to make all rent payments required thereunder. Morris will be solely liable for all operating costs associated with such automobile, including without limitation fuel, oil, parts (other than parts required in connection with any routine maintenance in accordance with the manufacturer's recommended maintenance schedule), tires and paint, but excluding insurance premiums and the costs of routine maintenance in accordance with the manufacturer's recommended maintenance schedule, which will continue to be paid by Michaels. (g) AAirpass. Michaels hereby transfers and assigns to Morris its interest in and to the American Airlines AAirpass (the "AAirpass") purchased for his use by Michaels and currently in his possession. Morris hereby assumes full responsibility for all current and future charges, fees and assessments incurred under or with respect to the AAirpass, agrees to indemnify Michaels and hold it harmless from and against any and all such charges, fees and assessments and agrees promptly to execute and deliver a standard American Airlines form of Assumption Agreement relating to the AAirpass. (h) Tax Information. Michaels will use reasonable efforts to provide to Morris information which is in Michaels' possession or subject to its control and which is requested by Morris in connection with the preparation of his personal tax returns. Section 4. Assistance with Litigation. Morris will make himself available and will assist Michaels and its affiliates in connection with any litigation in which Michaels or any of its affiliates is now or may become involved, including without limitation that certain action styled Steven Kalodner, et al. v. Michaels Stores, Inc., et al. pending in the United States District Court for the Northern District of Texas, Dallas Division. Any reasonable costs and expenses incurred by Morris in providing such assistance will be promptly reimbursed, or paid in advance, by Michaels. Section 5. Taxes. Morris shall promptly pay and be solely liable for all income and other taxes and charges imposed on Morris as a result of payments made or other benefits provided to him pursuant to this Agreement. Section 6. Return of Property. Morris shall promptly return to Michaels all property of Michaels in Morris' possession or subject to his control, except that Morris shall be entitled to keep as his personal property (a) the personal computer and related equipment and software currently located in his office at Michaels and (b) two fax machines currently located at his residences. As between Morris and Michaels, Morris will be solely liable for all charges incurred for periods after March 24, 1997 in connection with any property, services or benefits whatsoever, including without limitation charges incurred in connection with any cellular or car telephone, except as otherwise specifically provided in this Agreement. Section 7. Advice in Writing. Michaels hereby advises Morris to consult with an attorney of his choice prior to signing this Agreement. Section 8. Period of Consideration. It is acknowledged and agreed that Morris has at least twenty-one (21) days to consider whether to execute this Agreement. Section 9. Voluntary Act. Morris represents and agrees that he has thoroughly discussed all aspects of this Agreement with his attorney, that Morris is fully aware of his right to discuss any and all aspects of this matter with an attorney of his choice, that he has carefully read and fully understands all of the provisions of this Agreement, and that he is voluntarily entering into this Agreement. Section 10. Release. Except for Michaels' continuing obligations under this Agreement, Morris, his representatives, heirs, successors and assigns do hereby completely release and forever discharge Michaels, its parent, affiliated and subsidiary corporations and entities, and its current and former officers, directors, shareholders, agents, employees, attorneys, successors and assigns from all claims, rights, demands, actions, liabilities, causes of action and obligations of any kind whatsoever, whether known or unknown, suspected or unsuspected, which Morris may now have or has ever had against them (collectively, "Claims") including, but not limited to, Claims of age discrimination under the Age Discrimination in Employment Act of 1967, as amended. Section 11. Confidential Information. Morris agrees to hold confidential, and not to disclose to any person, firm, corporation or agency, any trade secret information gained in the course of his employment with, or engagement as a consultant by, Michaels concerning Michaels and/or any of its affiliates, subsidiaries, parents, predecessors or related entities and any confidential information concerning Michaels or any of its affiliates, subsidiaries, parents, predecessors or related entities, except if such disclosure is required by law or legal process. Confidential information shall include, without limitation, information concerning financial affairs, business plans, proprietary statistics, reports, pricing information, customer or supplier data or contracts, but shall not include information that is or becomes publicly available other than as a result of Morris' violation of his obligations hereunder or information that is or becomes available to Morris on a non-confidential basis from another source not bound, to Morris' knowledge, by any contractual, fiduciary or other obligation of confidentiality owed to Michaels or any of its affiliates, subsidiaries, parents, predecessors or related entities. Section 12. Non-Interference with Business Relationships. Morris agrees that, for a period of 18 months from the effective date of this Agreement, Morris will not solicit, entice or otherwise induce any employee of Michaels (or of any franchisee, subsidiary or affiliate of Michaels) to leave the employ of Michaels (or of any such franchisee, subsidiary or affiliate) for any reason whatsoever; nor will Morris directly or indirectly hire or aid, assist or abet any other person or entity in soliciting or hiring any employee of Michaels (or of any such franchisee, subsidiary or affiliate); nor will Morris otherwise intentionally interfere with any contractual or other business relationship between Michaels (or any such franchisee, subsidiary or affiliate) and any other person or entity. Section 13. Stock Options. Morris and Michaels acknowledge and agree that the options held by Morris as of the date hereof (the "Options") to purchase a total of 283,250 shares of Michaels' Common Stock (the "Common Stock"), granted to him pursuant to the terms of Michaels' Key Employee Stock Compensation Program, shall survive Morris' retirement and the termination of Morris' employment and may be exercised in whole or in part by Morris, subject to all of the other terms and conditions of the Options, including without limitation the vesting and termination provisions thereof. The retirement/death benefits provided for in Section 3(a) hereof will be reduced (up to a maximum total reduction of $1,570,000) by an amount (the "Reduction Amount") equal to 33 percent of the difference between (a) the aggregate fair market value of the shares of Common Stock received by Morris upon exercise of the Options, measured at the date(s) of exercise ("Fair Market Value"), and (b) the aggregate price paid by Morris to Michaels to exercise the Options (the "Exercise Price"), but only to the extent such difference exceeds $1,000,000. The Reduction Amount will be applied to reduce the next monthly retirement/death benefit to be paid after the exercise of any of the Options results in the cumulative Fair Market Value exceeding the cumulative Exercise Price by at least $1,000,000, then to each succeeding monthly payment obligation until the total Reduction Amount has been exhausted or the $1,570,000 maximum total reduction has been reached. For example: If the Fair Market Value of 200,000 shares of Common Stock received by Morris upon his first exercise of Options is $4,500,000 ($22.50 per share) and the Exercise Price of such Options is $2,500,000 ($12.50 per share), then the Reduction Amount is calculated as follows: $4,500,000 (2,500,000) 2,000,000 (1,000,000) 1,000,000 x 33% Reduction Amount: $ 330,000 In this example, the next following 22 monthly payments provided for in Section 3(a) above will be reduced to zero. Furthermore, additional monthly payments will be reduced upon Morris' subsequent exercise of additional Options by amounts equal to the difference between the Fair Market Value of the additional shares so acquired and the Exercise Price of such additional Options. If, at the time an Option is exercised, the shares of Common Stock are admitted to trading on a national securities exchange for which sale prices are regularly reported, the Fair Market Value of the shares covered by such Option shall be the last reported trade price of the Common Stock on that exchange on the date of exercise. For purposes of the preceding sentence, the term "national securities exchange" shall include without limitation the National Association of Securities Dealers Automated Quotation System and the over-the-counter market. In the event that Morris assigns or transfers any of the Options or any interest therein, Morris will be deemed for purposes of this Section to have exercised such Options on the date of such assignment or transfer, to have received the shares of Common Stock covered thereby and to have paid the Exercise Price of such Options. Notwithstanding anything to the contrary contained herein, the Reduction Amount, and the $1,570,000 maximum total reduction specified above, shall both be subject to increase as provided in Section 3(b) above. Section 14. Equitable Remedies. Morris expressly affirms and recognizes that this Agreement contains obligations which, in the event of his breach thereof, afford Michaels no adequate remedy at law. As a result thereof, in the event of Morris' breach, or threatened breach, of any term or provision contained in this Agreement, Morris agrees that Michaels shall be entitled to both temporary and permanent injunctive relief. The right of Michaels to such relief shall not be construed to prevent Michaels from pursuing, either consecutively or concurrently, any and all other legal or equitable remedies available to it for such breach or threatened breach, specifically including without limitation the recovery of monetary damages. Section 15. Expenses of Counsel. Each party agrees that he or it, respectively, will pay and be solely responsible for all legal and other fees and expenses incurred by him or it in connection with the negotiation, preparation and execution of this Agreement. In the event either party in any respect breaches the terms and conditions of this Agreement, or threatens to do the same, and in the event that it becomes necessary for the other party to employ legal counsel to enforce any provision of this Agreement or to seek or obtain relief through legal proceedings on account of such breach or threatened breach of this Agreement, the breaching party (or the party threatening to breach this Agreement) shall pay to the other party reasonable attorneys' fees, as well as all court costs, disbursements and other expenses of any nature whatsoever, which such other party may expend or incur in connection with the enforcement of this Agreement or of any rights and remedies provided by this Agreement. Section 16. Non-Denigration. Michaels and Morris agree that it or he will not criticize, denigrate or otherwise speak adversely against the other in regard to past or present activities. Section 17. Amendment. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by both of the parties hereto. Section 18. Assignment. Neither this Agreement nor any right or obligation created hereby shall be assignable by either party hereto, without the express written permission of the other party, except by operation of law, including, but not limited to, the applicable laws of descent and distribution. Section 19. Entire Agreement. This Agreement contains the entire agreement of the parties and supersedes any and all other agreements between the parties hereto with respect to the subject matter hereof. Section 20. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS. Section 21. Invalid Provisions. If any provision hereof is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and yet be legal, valid and enforceable. Section 22. Headings. The headings, captions and arrangements used herein are for convenience only and shall not be deemed to limit, amplify or modify the terms hereof, nor affect the meaning thereof. Section 23. Multiple Counterparts. This Agreement has been executed in a number of identical counterparts, all of which constitute, collectively, one agreement; but in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart. Section 24. Parties Bound. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective representatives, heirs, successors and permitted assigns. Section 25. Revocation Period. It is expressly agreed that for seven (7) days following execution of this Agreement by Morris, Morris may revoke this Agreement; it is further expressly agreed by the parties that this Agreement shall not become effective or enforceable until the seven (7) day revocation period described above has expired without Morris' having exercised his right to revoke this Agreement. EXECUTED effective as of the date first set forth above. MICHAELS STORES, INC. By: ____________________________________ Sam Wyly Chairman of the Board of Directors ____________________________________ R. Don Morris EX-10.2 4 EXHIBIT 10.2 MICHAELS STORES, INC. 1997 STOCK OPTION PLAN Michaels Stores, Inc., a Delaware corporation (the "Company"), hereby establishes the Michaels Stores, Inc. 1997 Stock Option Plan (the "Plan"), effective as of June 6, 1997. 1. Purpose. The purpose of the Plan is to attract and retain the best available talent and encourage the highest level of performance by executive officers, key employees, directors, advisors and consultants, and to provide them with incentives to put forth maximum efforts for the success of the Company's business, in order to serve the best interests of the Company and its stockholders. All options granted under the Plan are intended to be nonstatutory stock options. 2. Definitions. The following terms, when used in the Plan with initial capital letters, will have the following meanings: (a) "Act" means the Securities Exchange Act of 1934 as in effect from time to time. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as in effect from time to time. (d) "Common Stock" means the common stock, par value $.10 per share, of the Company or any security into which such common stock may be changed by reason of any transaction or event of the type described in Paragraph 7. (e) "Date of Grant" means the date specified by the Stock Option Committee or the Board, as applicable, on which a grant of Stock Options will become effective (which date will not be earlier than the date on which such committee or the Board takes action with respect thereto). (f) "Market Value per Share" means the fair market value per share of the Common Stock on the Date of Grant as determined by the Stock Option Committee or the Board, as applicable. (g) "Option Price" means the purchase price per share payable on exercise of a Stock Option. (h) "Participant" means a person who is selected by the Stock Option Committee or the Board, as applicable, to receive Stock Options under Paragraph 5 of the Plan and who is at that time (i) an executive officer or other key employee of the Company or any Subsidiary, (ii) an advisor or consultant to the Company or any Subsidiary, or (iii) a member of the Board. (i) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act as such Rule is in effect from time to time. (j) "Stock Option Committee" means the 1997 Stock Option Plan Committee, which is a committee of the Board whose members are appointed by the Board from time to time. All of the members of the Special Stock Option Committee, which may not be less than two, are intended at all times to qualify as "outside directors" within the meaning of Section 162(m) of the Code, and as "Non-Employee Directors" within the meaning of Rule 16b-3; provided, however, that the failure of a member of such committee to so qualify shall not be deemed to invalidate any Stock Option granted by such committee. (k) "Stock Option" means the right to purchase one or more shares of Common Stock upon exercise of an option granted pursuant to Paragraph 5. (l) "Subsidiary" means any corporation, partnership, joint venture or other entity in which the Company owns or controls, directly or indirectly, not less than 50% of the total combined voting power or equity interests represented by all classes of stock issued by such corporation, partnership, joint venture or other entity. 3. Shares Available Under Plan. The shares of Common Stock which may be issued under the Plan will not exceed in the aggregate 6,800,000 shares, subject to adjustment as provided in this Paragraph 3. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing. (a) Any shares of Common Stock which are subject to Stock Options that are terminated unexercised, forfeited or surrendered or that expire for any reason will again be available for issuance under the Plan. (b) If, as of the close of business on the last day of each fiscal quarter of the Company following the effective date of the Plan, the sum of (i) the total number of shares of Common Stock previously issued upon the exercise of Stock Options, (ii) the total number of shares of Common Stock then subject to outstanding Stock Options, and (iii) the total number of shares of Common Stock then remaining available for future Stock Option grants under the Plan (such sum being the "Plan Shares") is less than 20% of the total number of shares of Common Stock then outstanding computed on a fully diluted basis (such total number being the "Outstanding Shares"), the number of shares of Common Stock available for issuance under the Plan will be increased (but not decreased) so that the number of Plan Shares will be equal to 20% of the number of Outstanding Shares. For purposes of the foregoing adjustment, all outstanding Stock Options and stock options granted under other Company plans will be treated as fully exercised in computing the number of outstanding shares of Common Stock on a fully diluted basis, without regard to whether such stock options are then fully exercisable. (c) The shares available for issuance under the Plan also will be subject to adjustment as provided in Paragraph 7. 4. Individual Limitation on Stock Options. The maximum aggregate number of shares of Common Stock with respect to which Stock Options may be granted to any Participant during any single calendar year will not exceed 1,500,000 shares. 5. Grants of Stock Options. The Stock Option Committee or the Board may from time to time authorize grants to any Participant of Stock Options upon such terms and conditions as such committee or the Board, as applicable, may determine in accordance with the provisions set forth below. (a) Each grant will specify the number of shares of Common Stock to which it pertains. (b) Each grant will specify the Option Price, which will not be less than 100% of the Market Value per Share on the Date of Grant. (c) Successive grants may be made to the same Participant whether or not any Stock Options previously granted to such Participant remain unexercised. (d) Each grant will specify the required period or periods (if any) of continuous service by the Participant with the Company or any Subsidiary and/or any other conditions to be satisfied before the Stock Options or installments thereof will become exercisable, and any grant may provide, or may be amended to provide, for the earlier exercise of the Stock Options in the event of a change in control of the Company (as defined in the stock option agreement evidencing such grant or in any agreement referred to in such stock option agreement) or in the event of any other similar transaction or event. (e) Each Stock Option granted pursuant to this Paragraph 5 may be made subject to such transfer restrictions as the Stock Option Committee or the Board, as applicable, may determine. (f) Each grant will be evidenced by a stock option agreement executed on behalf of the Company by the Chief Executive Officer (or another officer designated by the Stock Option Committee or the Board, as applicable) and delivered to the Participant and containing such further terms and provisions, consistent with the Plan, as such committee or the Board, as applicable, may approve. 6. Payment. The Option Price will be payable, as required by the Stock Option Committee or the Board in such Committee's or the Board's sole discretion, as applicable, (i) in cash or by check acceptable to the Company, (ii) by the transfer to the Company of shares of Common Stock owned by the Participant for at least six months (or, with the consent of the Stock Option Committee or the Board, as applicable, for less than six months) having an aggregate fair market value per share at the date of exercise equal to the aggregate Option Price, (iii) by authorizing the Company to withhold a number of shares of Common Stock otherwise issuable to the Participant having an aggregate fair market value per share on the date of exercise equal to the aggregate Option Price, (iv) in any other form of valid consideration or (v) by a combination of such methods of payment; provided, however, that the payment methods described in clauses (ii) and (iii) will not be available at any time that the Company is prohibited from purchasing or acquiring such shares of Common Stock. The Stock Option Committee or the Board, as applicable, may permit deferred payment of the Option Price from the proceeds of sale through a bank or broker of some or all of the shares to which such exercise relates. 7. Adjustments. The Stock Option Committee or the Board may make or provide for such adjustments in the maximum number of shares specified in Paragraph 3, in the number of shares of Common Stock covered by outstanding Stock Options granted hereunder, in the Option Price applicable to any such Stock Options, and/or in the kind of shares covered thereby (including shares of another issuer), as such committee or the Board, as applicable, in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of Participants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. In the event the Stock Option Committee shall disagree with the Board with respect to the foregoing adjustments, the Board's determination will be final and conclusive. Any fractional shares resulting from the foregoing adjustments will be eliminated. 8. Withholding of Taxes. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any benefit realized by an optionee under the Plan, or is requested by an optionee to withhold additional amounts with respect to such taxes, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the realization of such benefit that the optionee make arrangements satisfactory to the Company for payment of the balance of such taxes required or requested to be withheld. In addition, if permitted by the Stock Option Committee or the Board, an optionee may elect to have any withholding obligation of the Company satisfied with shares of Common Stock that would otherwise be transferred to the optionee on exercise of the Stock Option. 9. Administration of the Plan. (a) The Plan will be administered by the Stock Option Committee and the Board. For purposes of any action taken by the Stock Option Committee or the Board, whichever is applicable, a majority of the members will constitute a quorum, and the action of the members present at any meeting at which a quorum is present, or acts unanimously approved in writing, will be the acts of the Stock Option Committee or the Board. (b) The Stock Option Committee and the Board have the full authority and discretion to administer the Plan and to take any action that is necessary or advisable in connection with the administration of the Plan, including without limitation the authority and discretion to interpret and construe any provision of the Plan or of any agreement, notification or document evidencing the grant of a Stock Option. The interpretation and construction by the Stock Option Committee or the Board, as applicable, of any such provision and any determination by the Stock Option Committee or the Board pursuant to any provision of the Plan or of any such agreement, notification or document will be final and conclusive; provided, that in the event the Stock Option Committee shall disagree with the Board with respect to such interpretation, construction or determination, the Board's determination will be final and conclusive. No member of the Stock Option Committee or the Board will be liable for any such action or determination made in good faith. (c) Notwithstanding any provision of the Plan to the contrary, the Stock Option Committee will have the exclusive authority and discretion to take any action required or permitted to be taken under the provisions of Paragraph 7, Paragraph 9(a), Paragraph 9(b), Paragraph 10(a) and Paragraph 10(b) with respect to Stock Options granted under the Plan that are intended to comply with the requirements of Section 162(m) of the Code. 10. Amendments, Etc. (a) The Stock Option Committee or the Board, as applicable, may, without the consent of the optionee, amend any agreement evidencing a Stock Option granted under the Plan, or otherwise take action, to accelerate the time or times at which the Stock Option may be exercised, to extend the expiration date of the Stock Option, to waive any other condition or restriction applicable to such Stock Option or to the exercise of such Stock Option, to reduce the exercise price of such Stock Option, to amend the definition of a change in control of the Company (if such a definition is contained in such agreement) to expand the events that would result in a change in control of the Company and to add a change in control provision to such agreement (if such provision is not contained in such agreement) and may amend any such agreement in any other respect with the consent of the optionee. (b) The Plan may be amended from time to time by the Board or any duly authorized committee thereof. In the event any law, or any rule or regulation issued or promulgated by the Internal Revenue Service, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., any stock exchange upon which the Common Stock is listed for trading, or any other governmental or quasi-governmental agency having jurisdiction over the Company, the Common Stock or the Plan, requires the Plan to be amended, or in the event Rule 16b-3 is amended or supplemented (e.g., by addition of alternative rules) or any of the rules under Section 16 of the Act are amended or supplemented, in either event to permit the Company to remove or lessen any restrictions on or with respect to Stock Options, the Stock Option Committee and the Board each reserves the right to amend the Plan to the extent of any such requirement, amendment or supplement, and all Stock Options then outstanding will be subject to such amendment. (c) The Plan may be terminated at any time by action of the Board. The termination of the Plan will not adversely affect the terms of any outstanding Stock Option. (d) The Plan will not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate a Participant's employment or other service at any time. MICHAELS STORES, INC. By ___________________________ Name: R. Michael Rouleau Title: President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----