-----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, RFFD8rj+QkobYd7wX3k5e4yLkd+UcaKDQXfgYX8nA7k+H/mLz8rV4NGZKb8CezT/ MmAW1S+ovqOBakDJLrOS6A== 0000912057-95-002989.txt : 19950502 0000912057-95-002989.hdr.sgml : 19950502 ACCESSION NUMBER: 0000912057-95-002989 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19950129 FILED AS OF DATE: 19950501 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: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11822 FILM NUMBER: 95533350 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 10-K405 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES X EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JANUARY 29, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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) 5931 CAMPUS CIRCLE DRIVE IRVING, TEXAS 75063 P.O. BOX 619566 DFW, TEXAS 75261-9566 (Address of principal executive offices, including zip code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS Common Stock, Par Value $.10 Per Share ------------------------ 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _X_ As of April 21, 1995, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $514,112,918, based on the closing price of the Registrant's Common Stock on such date, $29.25, as reported on the NASDAQ National Market System. As of April 21, 1995, 21,409,185 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 29, 1995 are incorporated by reference into Part II of this report, and portions of the Proxy Statement for the Annual Meeting of Shareholders of the Registrant to be held during 1995 are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. GENERAL Michaels Stores, Inc. (the "Company") is the largest nationwide specialty retailer of arts, crafts and decorative items, operating a chain of 395 arts and crafts stores under the name "Michaels" and 71 specialty framing and art supply stores under the name "Aaron Brothers." The Company's 466 stores are dispersed over 41 states, Puerto Rico and one Canadian province. 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 average sale is approximately $14.25. The Company's primary customers are women aged 25 to 54 with above average median household incomes, and the Company believes repeat customers account for a substantial portion of its sales. The Company was incorporated in 1983 as the successor to a Colorado corporation which commenced operations in 1962. MERCHANDISING PRODUCT SELECTION The Michaels store 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 the store, and instructional classes for adults and children. Each Michaels store offers an assortment of over 30,000 stock keeping units ("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 is as follows: - General craft materials, including those for stenciling, doll making, jewelry making, woodworking, wall decor, tole painting, and plaster; - Wearable art, including adult's and children's garments, fabric paints, embellishments, jewels and sequins, transfers and appliques; - Silk flowers, dried flowers and artificial plants sold separately or in ready-made and custom floral arrangements, all accessories needed for floral arranging, wedding millinery and floral items, and other items for personalizing home decor, such as wreaths, containers, baskets, candles, and potpourri; - Picture framing materials and services, including ready-made frames and custom framing, mat boards, glass, backing materials and related supplies, framed art and photo albums; - Fine art materials, representing a number of major brand lines and including items such as pastels, water colors, oil paints, acrylics, easels, brushes, paper and canvas; - Hobby items, including finished doll houses and miniature furniture, wooden and plastic model kits and related supplies, and paint-by-number kits; - Party needs, including paper party goods, gift wrap, candy making and cake decorating supplies, invitations, greeting cards, balloons and candy; - Needlecraft items, including stitchery supplies, hand-knitting yarns, needles, canvas and related supplies for needlepoint, embroidery and cross stitching, knitting, crochet, rug making kits, and quilts and afghans, which are sold separately or in kits; - Ribbon, including satins, laces, florals and other styles sold both in bolts and by the yard. In addition to the nine departments described above, the Company regularly features seasonal merchandise. Seasonal merchandise is ordered for several holiday periods, including Valentine's Day, 1 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 the seasonal department is promotional merchandise that is offered with the intention of generating customer traffic. The following table shows sales by department as a percent of total sales for fiscal 1994, 1993 and 1992:
PERCENT OF SALES ------------------------------------- DEPARTMENT 1994 1993 1992 - ----------------------------------------------------------------------------- ----------- ----------- ----------- Silk and dried flowers and plants............................................ 22% 21% 18% General craft materials and wearable art..................................... 20 21 22 Picture framing.............................................................. 15 15 14 Seasonal and promotional items............................................... 14 14 15 Fine art materials........................................................... 10 11 11 Hobby, party, needlecraft and ribbon......................................... 19 18 20 --- --- --- Total.................................................................... 100% 100% 100% --- --- --- --- --- ---
During the Christmas selling season, up to 25% of floor and shelf space in a typical store is devoted to Christmas crafts, Christmas decorating and gift making merchandise. Because of the project-oriented nature of these products, the Company's peak Christmas selling season extends from October through December. Accordingly, a fully developed seasonal merchandising program, including inventory, merchandise layout and instructional ideas, is implemented in each store beginning in July of each year. This program requires additional inventory accumulation so that each store is fully stocked during the peak season. Sales of all merchandise typically increase during the Christmas selling season because of increased customer traffic. The Company believes that merchandise centered around other traditional holidays, such as Valentine's Day, Easter and Halloween, is becoming more popular and is a growing contributor to sales. The Michaels selling floor strategy is developed centrally and implemented at the store level through the use of "planograms" which provide store managers with detailed descriptions and illustrations with respect to store layout and merchandise presentation. Planograms are also used to cluster various products which can be combined to create individual projects. CUSTOMER SERVICE The Company 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. Accordingly, 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 product. In addition, many sales associates are craft enthusiasts who are able to help customers with ideas and instructions. The Company also offers free demonstrations and inexpensive classes in stores as a means of promoting new craft ideas. The Company 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 its stores at least four times a year through a "Mystery Shopper" program and continuously through customer comment cards. PURCHASING AND DISTRIBUTION The Company's purchasing strategy is to negotiate centrally with its vendors in order to take advantage of volume purchasing discounts and improve control over product mix and inventory. Approximately 90% of the merchandise is acquired by the stores from vendors on the Company's "approved list." Of this merchandise, approximately one-half is received from the Company's distribution centers and one-half is received directly from vendors. In addition, most stores have the 2 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. Additionally, the Company is planning a fourth distribution center in Jacksonville, Florida to become operational in June 1995. The Company also operates a 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 through an internal distribution network using leased trucks. Substantially all of the products sold in Michaels stores are manufactured in the United States, the Far East and Mexico. Goods manufactured in the Far East generally require long lead times and are ordered four to six months in advance of delivery. Such products are either imported directly by the Company or acquired from distributors based in the United States. In all cases, purchases are denominated in U.S. dollars (or Canadian dollars for purchases of certain items delivered directly to stores in Canada). ADVERTISING The Company believes that its advertising promotes craft and hobby project ideas among its customers. The Company focuses on circular and newspaper advertising. The Company has found circular advertising, primarily as an insert to newspapers but also through direct mail or on display within its stores, to be the most effective medium of advertising. Such circulars advertise numerous products in order to emphasize the wide selection of products available at Michaels stores. The Company believes that its ability to advertise through circulars and newspapers approximately once a week in each of its markets provides the Company with an advantage over its smaller competitors. The Company has from time to time conducted advertising campaigns on a limited number of cable television networks reaching a nationwide audience, and may continue to do so in the future. STORE OPERATIONS The Company's 395 Michaels stores average approximately 15,600 square feet of selling space, although newer stores average approximately 17,000 square feet of selling space. Net sales for fiscal 1994 averaged approximately $3,180,000 per store (for stores open the entire fiscal year) and $204 per square foot of selling space. Store sites are selected based upon meeting certain economic, demographic and traffic criteria or for clustering stores in markets where certain operating efficiencies can be achieved. The Michaels stores currently in operation are located primarily in strip shopping centers in areas with easy access and ample parking. Typically, a Michaels store is managed by a store manager and one to three assistant store managers, depending on the sales volume of the store. The Company's vice president of operations, five regional managers and thirty-eight district managers are responsible for the supervision and operation of the stores. The Company believes this organizational structure enhances the communication among the individual stores and between the stores and corporate headquarters. In addition, the Company believes that the training and experience of its managers and assistant managers are vital to the success of its stores, and therefore conducts extensive training programs for such personnel. STORE EXPANSION The Company currently anticipates adding approximately 70 to 75 Michaels stores in the United States, Puerto Rico and Canada during 1995, of which 15 have been opened as of April 28, 1995. The Company's expansion strategy is to give priority to adding stores in existing markets in order to enhance economies of scale associated with advertising, transportation, field supervision, and other regional expenses. Management believes that few of its existing markets are saturated and that there are many attractive new markets available to the Company. The anticipated development of Michaels 3 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, the availability of suitable store sites, the availability of suitable acquisition candidates, and the ability to hire and train qualified managers. In February 1994, the Company acquired Treasure House Stores, Inc., an arts and crafts chain of nine stores operating primarily in the Seattle market. In April 1994, the Company acquired a group of companies operating eight stores (primarily in Portland, Oregon) under the Oregon Craft and Floral Supply Co. name and eight stores (in southern California) under the H&H Craft and Floral Supply Co. name. In July 1994, the Company acquired Leewards Creative Crafts, Inc., an arts and crafts retailer with 98 stores located in the midwestern and northeastern United States. These acquisitions have created a dominant position for the Company in those markets. The Company intends to continue to review acquisition opportunities in existing and new markets. The Company operates five Michaels Craft and Floral Warehouse stores ("CFW") using a "warehouse superstore" format developed in 1993. The typical store following the CFW format occupies up to 40,000 square feet of selling space and generally offers merchandise at discounted retail prices. In order to maintain a lower cost structure than a conventional craft store, the CFW store offers fewer customer service amenities and utilizes new computer systems that provide full point-of-sale scanning, automated receiving of merchandise, and that eliminate the need for retail price marking of individual product. The Company plans to open two to three additional CFW stores during 1995. The Company has developed a standardized procedure which allows for the efficient opening of new stores and their integration into the Company's information and distribution systems. 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, the Company maintains a qualified store opening staff to provide new store personnel with in-store training. Accordingly, the Company generally opens new stores during the period from February through October because new store personnel require significant in-store training prior to entering the Christmas selling season. In March 1995, the Company purchased Aaron Brothers Holdings, Inc., which operates a chain of 71 stores located predominantly in California. The stores, which average 7,000 selling square feet and carry about 6,500 SKUs, specialize in frames, framing materials, custom framing services and art supplies. The Company feels that the Aaron Brothers format complements the Michaels conventional store strategy and will allow the Company to enter new areas such as urban areas or malls, in which the conventional Michaels store is inappropriate, and to access new customers beyond the Michaels target market. INVENTORY CONTROL/MANAGEMENT INFORMATION SYSTEMS The Company's 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 warehouse-sourced inventory. The Company's point-of-sale system generally 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 five CFW stores and approximately 20 Michaels stores with point-of-sale department-level sales from other stores, weekly test counts of certain SKUs in certain 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 conducted throughout the year in groups of 30 to 40 stores and a year-end complete physical count in all 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. 4 Inventory per store increased approximately 5% during 1994. Management has attributed the increase in part to early acceptance of new imported spring merchandise coupled with an increased purchase (on a per store basis) of certain domestic spring merchandise that sold out quickly one year ago. The Company intends to manage its inventories during the next year such that inventory per store in January 1996 may be lower than it was in January 1995. In conjunction with the centralization of certain merchandising, financial and operational functions in 1991, the Company developed a Five-Year Information Technology Plan designed to satisfy the Company's growing management information needs. The enhancements provided for in this Plan that have been implemented include improved ordering capabilities in the stores using radio frequency and bar-code scanning technologies, item-level scanning and automated receiving for the CFW stores and a select group of conventional stores, the implementation of electronic data interchange with key vendors, a sophisticated warehouse replenishment system, and additional automation in the distribution centers also using radio frequency and bar-code scanning technologies. Additional near-term enhancements will include the implementation of merchandise assortment planning and "planogramming" capabilities and a broader base of stores performing item-level scanning. COMPETITION The Company is the largest nationwide specialty retailer dedicated to serving the arts and crafts marketplace. The specialty retail business is highly competitive. The Company competes primarily with other nationwide retailers of craft items and related merchandise, regional and local merchants that tend to specialize in particular aspects of arts and crafts, and mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts, crafts, picture framing and seasonal products. The Company believes that its stores compete based on price, quality and variety of merchandise assortment, and customer service, such as instructional demonstrations. The Company believes the combination of its broad selection of products, emphasis on customer service, loyal customer base, and capacity to advertise frequently in its markets provides the Company with a competitive advantage. SERVICE AND TRADE MARKS The name "Michaels" and the Michaels logo are both federally registered service marks held by an affiliate of the Company. The name "Aaron Brothers" and the Aaron Brothers logo are federally registered trademarks. FRANCHISES The Company has granted to Dupey Management Corporation the right to open royalty-free, licensed Michaels stores in an eight-county area in north Texas which includes the Dallas-Fort Worth area. EMPLOYEES As of March 27, 1995, approximately 17,440 persons were employed by the Company, approximately 7,860 of whom were employed on a part-time basis. The number of part-time employees is substantially increased during the Christmas selling season. Of the Company's full-time employees, approximately 1,120 are engaged in various executive, operating, training and administrative functions in the Company's corporate office, distribution centers and bulk warehouse, and the remainder are engaged in store operations. 5 EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - -------------------- --- ----------------------------------------------------------------- Sam Wyly 60 Chairman of the Board of Directors and Chief Executive Officer Charles J. Wyly, Jr. 61 Vice Chairman of the Board of Directors Jack E. Bush 60 Director, President and Chief Operating Officer R. Don Morris 55 Executive Vice President and Chief Financial Officer Douglas B. Sullivan 44 Executive Vice President David E. Bolen 43 Executive Vice President Robert H. Rudman 44 Executive Vice President and Chief Merchandising Officer
Mr. Sam Wyly became a director of the Company in July 1984 and was elected Chairman of the Board in October 1984. In 1963, Mr. Wyly founded University Computing Company, a computer software and services company, and served as President or Chairman from 1963 until February 1979. Mr. Wyly co-founded Earth Resources Company, an oil refining and silver and gold mining company, and served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and his brother, Charles J. Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse chain in 1967. It grew to approximately 600 restaurants by 1989, during which time he served as Chairman. Mr. Wyly currently serves as Chairman of Sterling Software, Inc., a computer software company that he co-founded in 1981, and as President of Maverick Capital, Ltd., an investment fund management company. Sam Wyly is the father of Evan A. Wyly, a director of the Company. Mr. Charles J. Wyly, Jr. became a director of the Company in October 1984 and Vice Chairman of the Board of Directors in February 1985. Mr. Wyly served as an officer and director of University Computing Company from 1964 to 1975, including President from 1969 to 1973. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources Company, and Charles J. Wyly, Jr. served as Chairman of the Board from 1968 to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse chain from 1967 to 1989. Mr. Wyly is a co-founder and currently serves as Vice Chairman of the Board of Directors of Sterling Software, Inc. and as Chairman of Maverick Capital, Ltd., an investment fund management company. Charles J. Wyly, Jr. is the father-in-law of Donald R. Miller, Jr., a director and Vice President-Market Development of the Company. Mr. Bush became a director of the Company and was elected President and Chief Operating Officer in August 1991. Prior to joining the Company, Mr. Bush was Executive Vice President - Operations and Stores for Ames Department Stores, Inc. Before joining Ames in 1990, Mr. Bush was President, Chief Operating Officer and a director of Rose's Stores, Inc., a discount store chain. From 1980 to 1985, he served as Vice President-Southern Zone Manager for Zayre Corporation. Previously, Mr. Bush spent 22 years with J.C. Penney Company, where he held a variety of executive positions in merchandising, operations, marketing, strategic planning, specialty businesses, discount stores and business development. Mr. Morris became Executive Vice President and Chief Financial Officer of the Company in August 1990. From January 1990 until August 1990 he was Senior Vice President-Finance and Chief Financial Officer. From April 1988 until January 1990, Mr. Morris was a director, President and Chief Executive Officer of Frostcollection, Inc. Prior to April 1988, Mr. Morris was Partner-In-Charge of the Accounting and Audit and the Merger and Acquisition Departments of the Dallas, Texas office of Arthur Young & Company. Mr. Sullivan became Executive Vice President of the Company in August 1990. From March 1988 until August 1990, he was Senior Vice President-Real Estate. Prior to his joining the Company, Mr. Sullivan had served with Family Dollar Stores, Inc. for 11 years, most recently as Vice President-Real Estate. 6 Mr. Bolen joined the Company as Executive Vice President in July 1994. From January 1987 until July 1994, he held the positions of Vice President of Stores and more recently Executive Vice President and Chief Operating Officer with Leewards Creative Crafts, Inc. Prior to Leewards, Mr. Bolen held various positions with Gemco and Zayre Corporation, principally in store operations. Mr. Rudman became Executive Vice President and Chief Merchandising Officer of the Company in September 1994. He joined the Company in October 1991 as Senior Vice President-Merchandising and Marketing. From October 1990 until October 1991, he was Director of Merchandising for Best Products, a catalog showroom retailer. From September 1989 until October 1990, Mr. Rudman was Senior Vice President-Merchandising/Marketing and Distribution for Silk Greenhouse, Inc., a chain of retail silk floral and accessory stores which filed a petition under federal bankruptcy laws in November 1990. From May 1988 until September 1989, he served as Vice President-Non-Foods Merchandise for Pace Membership Club, prior to which time he was Vice President and Divisional Merchandise Manager of McCrory's, a chain of variety stores. ITEM 2. PROPERTIES. The Company's Michaels stores generally are situated in strip shopping centers located near malls and on well-traveled roads. Almost all stores are in leased premises with lease terms generally ranging from five to ten years. The base rental rates generally range from $75,000 to $175,000 per year. Rental expense for stores open during the full 12-month period of fiscal 1994 averaged $142,000. The leases are generally renewable, with increases in lease rental rates. A majority of the existing leases contain provisions pursuant to which the lessor has provided leasehold improvements to prepare for opening. However, the Company has been paying and anticipates continuing to pay for a larger portion of future improvements directly as opposed to financing them through the lessor. During 1993, the Company purchased a total of seven properties (consisting of six parcels of land and seven buildings) at a cost of $8.8 million, generally acquiring such properties by bidding for them in reorganization proceedings of other retail companies. Three of the properties have since been sold and leased back for a specified period of time and certain of the remaining properties are being marketed for sale. It is the Company's present intention to acquire land and/or buildings only in unusual circumstances where the economics of the transactions appear favorable to the Company and the locations involved fit into the Company's expansion strategy. 7 The following table indicates the number of the Company's stores located in each state, province, or commonwealth.
NUMBER OF STORES -------------------------------- STATE MICHAELS AARON BROTHERS - ------------------------------------------------------------------ ----------- ------------------- Alabama........................................................... 5 Alaska............................................................ 1 Arizona........................................................... 11 4 Arkansas.......................................................... 3 California........................................................ 77 65 Colorado.......................................................... 9 Connecticut....................................................... 1 Florida........................................................... 14 Georgia........................................................... 16 Illinois.......................................................... 21 Indiana........................................................... 9 Iowa.............................................................. 6 Kansas............................................................ 3 Kentucky.......................................................... 3 Louisiana......................................................... 4 Maryland.......................................................... 1 Massachusetts..................................................... 8 Michigan.......................................................... 17 Minnesota......................................................... 9 Mississippi....................................................... 1 Missouri.......................................................... 11 Nebraska.......................................................... 1 Nevada............................................................ 4 2 New Hampshire..................................................... 2 New Jersey........................................................ 7 New Mexico........................................................ 2 New York.......................................................... 10 North Carolina.................................................... 10 Ohio.............................................................. 19 Oklahoma.......................................................... 7 Ontario........................................................... 8 Oregon............................................................ 9 Pennsylvania...................................................... 9 Puerto Rico....................................................... 2 Rhode Island...................................................... 1 South Carolina.................................................... 4 Tennessee......................................................... 8 Texas............................................................. 34 Utah.............................................................. 4 Virginia.......................................................... 5 Washington........................................................ 12 West Virginia..................................................... 1 Wisconsin......................................................... 6 -- --- Total........................................................... 395 71 -- -- --- ---
The Company leases a 210,000 square foot building in Irving, Texas for use as a distribution center and as the Company's corporate headquarters, and leases four nearby facilities for supplemental warehouse and office space. The Company also leases a 400,000 square foot building in Buena Park, 8 California for use as a distribution center and leases a 350,000 square foot building in Lexington, Kentucky for the same purpose. In addition, the Company leases a 160,000 square foot building in Phoenix, Arizona for use as a bulk warehouse facility. Further, the Company has entered into a lease on a 500,000 square foot facility in Jacksonville, Florida, which will become operational as a distribution center in June 1995. ITEM 3. LEGAL PROCEEDINGS. The Company is a defendant from time to time in routine lawsuits incidental to its business. The Company believes that none of such current proceedings, individually or in the aggregate, will have a materially adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Michaels Common Stock began trading in the over-the-counter market in May 1984 and was quoted through the NASDAQ National Market System from May 21, 1985 until December 10, 1986. From December 10, 1986 until September 3, 1991, the Common Stock was traded on the American Stock Exchange. Since September 3, 1991, the Common Stock has been quoted through the NASDAQ National Market System under the symbol "MIKE." The following table sets forth the high and low sales prices of the Company's Common Stock for each quarterly period within the two most recent fiscal years.
FISCAL 1994 HIGH LOW - ------------------------------------------------------------ ------- ------- First....................................................... $44 3/4 $31 Second...................................................... 46 1/2 30 1/2 Third....................................................... 45 29 1/2 Fourth...................................................... 45 3/4 32 1/4
FISCAL 1993 HIGH LOW - ------------------------------------------------------------ ------- ------- First....................................................... $34 $26 1/4 Second...................................................... 33 25 1/4 Third....................................................... 39 26 3/8 Fourth...................................................... 36 1/2 31 7/8
On April 21, 1995, the last reported sale price of the Common Stock on the NASDAQ National Market System was $29.25, and as of such date there were approximately 1,155 holders of record of the Common Stock. The Company's present plan is to retain earnings for the foreseeable future for use in the Company's business and the financing of its growth. The Company did not pay any dividends on its Common Stock during fiscal 1993 and 1994. ITEM 6. SELECTED FINANCIAL DATA. The selected financial information required by this item is included in the Company's 1994 Annual Report to Shareholders (the "1994 Annual Report") under the heading "Financial Highlights." Such information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is included in the Company's 1994 Annual Report on pages 17 and 18 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such information is incorporated herein by reference. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this item are included in this Annual Report on Form 10-K, or are included in the Company's 1994 Annual Report and are incorporated herein by reference, as indicated in the following Index to Financial Statements.
INDEX TO FINANCIAL STATEMENTS AND 1994 ANNUAL FINANCIAL STATEMENT SCHEDULES REPORT PAGE - ------------------------------------------------------------------------------------------ ----------------- Report of Independent Auditors............................................................ 26 Consolidated Balance Sheets at January 29, 1995 and January 30, 1994.................................................... 19 Consolidated Statements of Income for the fiscal years ended January 29, 1995, January 30, 1994 and January 31, 1993.................................................... 20 Consolidated Statements of Cash Flows for the fiscal years ended January 29, 1995, January 30, 1994 and January 31, 1993.................................................... 21 Consolidated Statements of Shareholders' Equity for the fiscal years ended January 29, 1995, January 30, 1994 and January 31, 1993..................................................................... 22 Notes to Consolidated Financial Statements................................................ 23
All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the directors of the company is set forth in the Proxy Statement to be delivered to shareholders in connection with the Company's Annual Meeting of Shareholders to be held on June 6, 1995 (the "Proxy Statement") under the heading "Election of Directors," which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under the heading "Executive Officers of the Registrant" in Item 1 of this report, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information concerning executive compensation is set forth in the Proxy Statement under the heading "Management Compensation", which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Principal Shareholders and Management Ownership," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Certain Transactions", which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Financial Statements: The financial statements filed as a part of this report are listed in the "Index to Financial Statements and Financial Statement Schedules" at Item 8. (2) Financial Statement Schedules: The financial statement schedules filed as a part of this report are listed in the "Index to Financial Statements and Financial Statement Schedules" at Item 8. (3) Exhibits: The exhibits filed as a part of this report are listed under "Exhibits" at subsection (c) of this Item 14. (b) Reports of Form 8-K: No report on Form 8-K was filed on behalf of the Registrant during the last quarter of the period covered by this report. (c) Exhibits: 2.1 -- Agreement and Plan of Merger, dated as of May 10, 1994, among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(13) 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.(14)
11 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.(15) 2.4 -- Amendment No. 1 to Stock Purchase Agreement(15) 2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other parties listed therein.(13) 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.(13) 2.7 -- Stock Purchase Agreement, dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., ABAM Investors Limited Partnership, and Michaels Stores, Inc.(1) 3.1 -- Bylaws of the Registrant, as amended and restated.(8) 3.2 -- Restated Certificate of Incorporation of the Registrant.(3) 4.1 -- Form of Common Stock Certificate.(4) 4.2 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant.(10) 4.3 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between the First Dallas Group, Ltd. and Michaels Stores, Inc.(10) 4.4 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas Investments-Michaels I, Ltd. and Michaels Stores, Inc.(10) 4.5 -- 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.(2) 4.6 -- 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.(10) 10.1 -- Asset Purchase and Territorial Development Agreement dated March 25, 1983 among Dupey Enterprises, Inc., Dupey Management Corporation, Michael and Patricia Dupey Family Trust, Mike Dupey and Patty Dupey.(5) 10.2 -- Amendment to Asset Purchase and Territorial Development Agreement dated March 30, 1985.(10) 10.3 -- Release and Settlement Agreement dated February 15, 1988 between Dupey Management Corporation, Michael J. Dupey, Patricia Dupey, Michaels Stores, Inc. and B.B. Tuley.(8) 10.4 -- Michaels Stores, Inc. Employees 401(k) Plan.(8) 10.5 -- Michaels Stores, Inc. Employees 401(k) Trust.(6) 10.6 -- Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and directors of the Registrant.(10) 10.7 -- Form of Employment Agreement between Michaels Stores, Inc. and certain directors of the Registrant.(7)(12) 10.8 -- Form of Consulting Agreement between Michaels Stores, Inc. and certain directors of the Registrant.(7)(12) 10.9 -- Form of Employment Agreement between Michaels Stores, Inc. and certain key executives of the Registrant.(7)(12) 10.10 -- Michaels Stores, Inc. Employees Stock Purchase Plan.(9) 10.11 -- Michaels Stores, Inc. Key Employee Stock Compensation Program, as amended effective February 25, 1992.(3)(12) 10.12 -- Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan dated August 1, 1992.(3)(12)
12 10.13 -- Form of Non-Statutory Stock Option Agreement covering options granted to certain directors and consultants of the Company other than pursuant to the Michaels Stores, Inc. Key Employee Stock Compensation Program and the Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan.(10)(12) 10.14 -- Credit Agreement dated June 24, 1993 between Michaels Stores, Inc. and NationsBank of Texas, N.A.(11) 10.15 -- Amendment to Credit Agreement dated as of December 31, 1993.(8) 10.16 -- Amendment to Credit Agreement dated as of March 31, 1994.(8) 10.17 -- Credit Agreement dated April 29, 1994, between Michaels Stores, Inc. and NationsBank of Texas, N.A. (the "Credit Agreement").(8) 10.18 -- First Amendment to Credit Agreement dated April 26, 1995.(1) 10.19 -- Michaels Stores, Inc. 1994 Non-Statutory Stock Option Plan dated March 31, 1994.(1) 11 -- Computation of Earnings Per Common Share.(1) 13 -- Portions of 1994 Annual Report to Shareholders that are incorporated by reference into Items 6, 7 and 8 of this Annual Report on Form 10-K.(1) 21.1 -- Subsidiaries of Michaels Stores, Inc.(1) 23 -- Consent of Ernst & Young LLP.(1) 27 -- Financial Data Schedule.(1) - ------------------------ (1) Filed herewith. (2) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-9456) and incorporated herein by reference. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. (4) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 2-89370) and incorporated herein by reference. (5) Previously filed as an Exhibit to the Peoples Restaurants, Inc. Registration Statement on Form S-1 (No. 2-85737) and incorporated herein by reference. (6) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-11985) 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 29, 1989 and refiled herewith. (8) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 30, 1994 and incorporated herein by reference. (9) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended February 2, 1992 and incorporated herein by reference. (10) 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. (11) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993 and incorporated herein by reference. (12) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c). (13) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-53639) and incorporated herein by reference. (14) 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. (15) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-52311) and incorporated herein by reference.
13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: April 28, 1995 By: /s/ SAM WYLY -------------------------------------- Sam Wyly CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Chairman of the Board of /s/ SAM WYLY Directors and Chief Executive - -------------------------------------- Officer (Principal Executive April 28, 1995 Sam Wyly Officer) /s/ CHARLES J. WYLY, JR. - -------------------------------------- Vice Chairman of the Board of April 28, 1995 Charles J. Wyly, Jr. Directors /s/ JACK E. BUSH - -------------------------------------- President, Chief Operating April 28, 1995 Jack E. Bush Officer and Director Executive Vice President and /s/ R. DON MORRIS Chief Financial Officer - -------------------------------------- (Principal Financial and April 28, 1995 R. Don Morris Accounting Officer) /s/ EVAN A. WYLY - -------------------------------------- Vice President and Director April 28, 1995 Evan A. Wyly - -------------------------------------- Director William O. Hunt /s/ F. JAY TAYLOR - -------------------------------------- Director April 28, 1995 F. Jay Taylor - -------------------------------------- Director Richard E. Hanlon /s/ DONALD R. MILLER, JR. - -------------------------------------- Vice President-Market April 28, 1995 Donald R. Miller, Jr. Development, and Director /s/ MICHAEL C. FRENCH - -------------------------------------- Director April 28, 1995 Michael C. French
14 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION OF EXHIBIT PAGE - ------ ---------------------- ------------ 2.1 -- Agreement and Plan of Merger, dated as of May 10, 1994, among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc.(13) 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.(14) 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.(15) 2.4 -- Amendment No. 1 to Stock Purchase Agreement(15) 2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other parties listed therein.(13) 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.(13) 2.7 -- Stock Purchase Agreement, dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., ABAM Investors Limited Partnership, and Michaels Stores, Inc.(1) 3.1 -- Bylaws of the Registrant, as amended and restated.(8) 3.2 -- Restated Certificate of Incorporation of the Registrant.(3) 4.1 -- Form of Common Stock Certificate.(4) 4.2 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant.(10) 4.3 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between the First Dallas Group, Ltd. and Michaels Stores, Inc.(10) 4.4 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas Investments-Michaels I, Ltd. and Michaels Stores, Inc.(10)
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION OF EXHIBIT PAGE - ------ ---------------------- ------------ 4.5 -- 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.(2) 4.6 -- 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.(10) 10.1 -- Asset Purchase and Territorial Development Agreement dated March 25, 1983 among Dupey Enterprises, Inc., Dupey Management Corporation, Michael and Patricia Dupey Family Trust, Mike Dupey and Patty Dupey.(5) 10.2 -- Amendment to Asset Purchase and Territorial Development Agreement dated March 30, 1985.(10) 10.3 -- Release and Settlement Agreement dated February 15, 1988 between Dupey Management Corporation, Michael J. Dupey, Patricia Dupey, Michaels Stores, Inc. and B.B. Tuley.(8) 10.4 -- Michaels Stores, Inc. Employees 401(k) Plan.(8) 10.5 -- Michaels Stores, Inc. Employees 401(k) Trust.(6) 10.6 -- Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and directors of the Registrant.(10) 10.7 -- Form of Employment Agreement between Michaels Stores, Inc. and certain directors of the Registrant.(7)(12) 10.8 -- Form of Consulting Agreement between Michaels Stores, Inc. and certain directors of the Registrant.(7)(12) 10.9 -- Form of Employment Agreement between Michaels Stores, Inc. and certain key executives of the Registrant.(7)(12) 10.10 -- Michaels Stores, Inc. Employees Stock Purchase Plan.(9) 10.11 -- Michaels Stores, Inc. Key Employee Stock Compensation Program, as amended effective February 25, 1992.(3)(12) 10.12 -- Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan dated August 1, 1992.(3)(12) 10.13 -- Form of Non-Statutory Stock Option Agreement covering options granted to certain directors and consultants of the Company other than pursuant to the Michaels Stores, Inc. Key Employee Stock Compensation Program and the Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan.(10)(12) 10.14 -- Credit Agreement dated June 24, 1993 between Michaels Stores, Inc. and NationsBank of Texas, N.A. (the "Credit Agreement").(11)
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION OF EXHIBIT PAGE - ------ ---------------------- ------------ 10.15 -- Amendment to Credit Agreement dated as of December 31, 1993.(8) 10.16 -- Amendment to Credit Agreement dated as of March 31, 1994.(8) 10.17 -- Credit Agreement dated April 29, 1994, between Michaels Stores, Inc. and NationsBank of Texas, N.A. (the "Credit Agreement").(8) 10.18 -- First Amendment to Credit Agreement dated April 26, 1995.(1) 10.19 -- Michaels Stores, Inc. 1994 Non-Statutory Stock Option Plan dated March 31, 1994.(1) 11 -- Computation of Earnings Per Common Share.(1) 13 -- Portions of 1994 Annual Report to Shareholders that are incorporated by reference into Items 6, 7 and 8 of this Annual Report on Form 10-K.(1) 21.1 -- Subsidiaries of Michaels Stores, Inc.(1) 23 -- Consent of Ernst & Young LLP.(1) 27 -- Financial Data Schedule.(1) - ------------------------ (1) Filed herewith. (2) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-9456) and incorporated herein by reference. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. (4) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 2-89370) and incorporated herein by reference. (5) Previously filed as an Exhibit to the Peoples Restaurants, Inc. Registration Statement on Form S-1 (No. 2-85737) and incorporated herein by reference. (6) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-11985) 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 29, 1989 and refiled herewith. (8) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 30, 1994 and incorporated herein by reference. (9) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended February 2, 1992 and incorporated herein by reference. (10) 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. (11) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993 and incorporated herein by reference. (12) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c). (13) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-53639) and incorporated herein by reference. (14) 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. (15) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-52311) and incorporated herein by reference.
EX-2.7 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT ACQUISITION OF AARON BROTHERS HOLDINGS, INC. BY MICHAELS STORES, INC. TABLE OF CONTENTS ARTICLE I. Definitions Section 1.01. Definitions . . . . . . . . . . . . . . . . . . 1 ARTICLE II. Purchase and Sale Section 2.01. Purchase and Sale of Stock. . . . . . . . . . . 5 Section 2.02. Purchase Price. . . . . . . . . . . . . . . . . 5 Section 2.03. Escrow. . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III. Representations and Warranties Section 3.01. Ownership of the Stock. . . . . . . . . . . . . 6 Section 3.02. Organization and Good Standing; Qualification . 6 Section 3.03. Capitalization. . . . . . . . . . . . . . . . . 6 Section 3.04. Corporate Records . . . . . . . . . . . . . . . 7 Section 3.05. Authorization and Validity. . . . . . . . . . . 7 Section 3.06. Subsidiaries. . . . . . . . . . . . . . . . . . 7 Section 3.07. No Violation. . . . . . . . . . . . . . . . . . 8 Section 3.08. Consents. . . . . . . . . . . . . . . . . . . . 8 Section 3.09. Financial Statements. . . . . . . . . . . . . . 8 Section 3.10. Liabilities and Obligations . . . . . . . . . . 9 Section 3.11. Employee Matters. . . . . . . . . . . . . . . . 9 Section 3.12. Employee Benefit Plans. . . . . . . . . . . . . 11 Section 3.13. Absence of Certain Changes. . . . . . . . . . . 13 Section 3.14. Title; Leased Assets. . . . . . . . . . . . . . 15 Section 3.15. Commitments . . . . . . . . . . . . . . . . . . 15 Section 3.16. Adverse Agreements. . . . . . . . . . . . . . . 17 Section 3.17. Insurance . . . . . . . . . . . . . . . . . . . 17 Section 3.18. Patents, Trademarks, Service Marks and Copyrights. . . . . . . . . . . . . . . . . . . 18 Section 3.19. Trade Secrets and Customer Lists. . . . . . . . 19 Section 3.20. Taxes . . . . . . . . . . . . . . . . . . . . . 19 Section 3.21. Compliance with Laws. . . . . . . . . . . . . . 21 Section 3.22. Finder's Fee. . . . . . . . . . . . . . . . . . 21 Section 3.23. Litigation. . . . . . . . . . . . . . . . . . . 21 Section 3.24. Accuracy of Information Furnished . . . . . . . 22 Section 3.25. Condition of Fixed Assets . . . . . . . . . . . 22 Section 3.26. Inventory . . . . . . . . . . . . . . . . . . . 22 Section 3.27. Books of Account. . . . . . . . . . . . . . . . 22 Section 3.28. Corporate Name. . . . . . . . . . . . . . . . . 22 Section 3.29. Distributions and Repurchases . . . . . . . . . 23 Section 3.30. Banking Relations . . . . . . . . . . . . . . . 23 Section 3.31. Ownership Interests of Interested Persons . . . 23 Section 3.32. Investments in Competitors. . . . . . . . . . . 23 Section 3.33. Environmental Matters . . . . . . . . . . . . . 23 Section 3.34. Certain Payments. . . . . . . . . . . . . . . . 24 Section 3.35. HSR Act . . . . . . . . . . . . . . . . . . . . 24 Section 3.36. No Knowledge of Default . . . . . . . . . . . . 25 ARTICLE IV. Representations and Warranties of the Shareholder Section 4.01. No Violation. . . . . . . . . . . . . . . . . . 25 ARTICLE V. Representations and Warranties of Michaels Section 5.01. Organization and Good Standing. . . . . . . . . 25 Section 5.02. Authorization and Validity. . . . . . . . . . . 25 Section 5.03. No Violation. . . . . . . . . . . . . . . . . . 26 Section 5.04. Finder's Fee. . . . . . . . . . . . . . . . . . 26 Section 5.05. [Intentionally Omitted] . . . . . . . . . . . . 26 Section 5.06. Corporate Approvals . . . . . . . . . . . . . . 26 Section 5.07. HSR Act . . . . . . . . . . . . . . . . . . . . 26 Section 5.08. Consent . . . . . . . . . . . . . . . . . . . . 26 Section 5.09. No Knowledge of Default . . . . . . . . . . . . 26 ARTICLE VI. The Company's and the Shareholder's Covenants Section 6.01. Consummation of Agreement . . . . . . . . . . . 27 Section 6.02. Business Operations . . . . . . . . . . . . . . 27 Section 6.03. Access. . . . . . . . . . . . . . . . . . . . . 27 Section 6.04. Material Change . . . . . . . . . . . . . . . . 27 Section 6.05. [Intentionally Omitted] . . . . . . . . . . . . 27 Section 6.06. Employee Matters. . . . . . . . . . . . . . . . 28 Section 6.07. Employee Benefit Plans and Taxes. . . . . . . . 28 Section 6.08. Contracts . . . . . . . . . . . . . . . . . . . 28 Section 6.09. Changes in Inventory. . . . . . . . . . . . . . 29 Section 6.10. Capital Assets; Payments of Liabilities . . . . 29 Section 6.11. Mortgages, Liens and Guaranties . . . . . . . . 29 Section 6.12. No Negotiation with Others. . . . . . . . . . . 29 Section 6.13. Distributions and Repurchases . . . . . . . . . 29 ARTICLE VII. Michaels' Covenants Section 7.01. Consummation of Agreement . . . . . . . . . . . 30 ARTICLE VIII. Michaels' Conditions Precedent Section 8.01. Representations and Warranties. . . . . . . . . 30 Section 8.02. Covenants and Conditions. . . . . . . . . . . . 30 Section 8.03. Legal Opinion . . . . . . . . . . . . . . . . . 30 Section 8.04. Proceedings . . . . . . . . . . . . . . . . . . 30 Section 8.05. Resignations of Directors and Officers. . . . . 30 Section 8.06. Code Section 1445(b)(3) Affidavit . . . . . . . 31 Section 8.07. Release of Claims . . . . . . . . . . . . . . . 31 Section 8.08. Closing Deliveries. . . . . . . . . . . . . . . 31 Section 8.09. Revolving Portion of Bank Debt. . . . . . . . . 31 ARTICLE IX. The Company's and the Shareholder's Conditions Precedent Section 9.01. Representations and Warranties. . . . . . . . . 31 Section 9.02. Covenants and Conditions. . . . . . . . . . . . 31 Section 9.03. Proceedings . . . . . . . . . . . . . . . . . . 32 Section 9.04. Closing Deliveries. . . . . . . . . . . . . . . 32 Section 9.05. Opinion . . . . . . . . . . . . . . . . . . . . 32 ARTICLE X. Closing Deliveries Section 10.01. Deliveries of the Company and the Shareholder . 32 Section 10.02. Deliveries of Michaels. . . . . . . . . . . . . 34 ARTICLE XI. Post-Closing Matters Section 11.01. Further Instruments of Transfer . . . . . . . . 34 Section 11.02. [Intentionally Omitted] . . . . . . . . . . . . 35 Section 11.03. [Intentionally Omitted] . . . . . . . . . . . . 35 Section 11.04. Bankruptcy Proceedings. . . . . . . . . . . . . 35 Section 11.05. Davis Cases . . . . . . . . . . . . . . . . . . 35 ARTICLE XII. Remedies Section 12.01. Indemnification . . . . . . . . . . . . . . . . 35 Section 12.02. Indemnification by Michaels . . . . . . . . . . 38 Section 12.03. Conditions of Indemnification . . . . . . . . . 38 Section 12.04. Waiver. . . . . . . . . . . . . . . . . . . . . 39 Section 12.05. Exclusivity of Remedies . . . . . . . . . . . . 39 Section 12.06. Costs, Expenses and Legal Fees. . . . . . . . . 39 Section 12.07. Specific Performance. . . . . . . . . . . . . . 40 Section 12.08. Tax Effect of Indemnification . . . . . . . . . 40 ARTICLE XIII. Termination Section 13.01. Termination . . . . . . . . . . . . . . . . . . 40 ARTICLE XIV. Miscellaneous Section 14.01. Amendment . . . . . . . . . . . . . . . . . . . 41 Section 14.02. Assignment. . . . . . . . . . . . . . . . . . . 41 Section 14.03. Parties In Interest; No Third Party Beneficiaries . . . . . . . . . . . . . . . . . 41 Section 14.04. Entire Agreement. . . . . . . . . . . . . . . . 41 Section 14.05. Severability. . . . . . . . . . . . . . . . . . 42 Section 14.06. [Intentionally Omitted].. . . . . . . . . . . . 42 Section 14.07. Governing Law . . . . . . . . . . . . . . . . . 42 Section 14.08. Captions. . . . . . . . . . . . . . . . . . . . 42 Section 14.09. Gender and Number . . . . . . . . . . . . . . . 42 Section 14.10. Reference to Agreement. . . . . . . . . . . . . 42 Section 14.11. Confidentiality; Publicity and Disclosures. . . 42 Section 14.12. Notice. . . . . . . . . . . . . . . . . . . . . 43 Section 14.13. [Intentionally Omitted] . . . . . . . . . . . . 44 Section 14.14. Service of Process. . . . . . . . . . . . . . . 44 Section 14.15. Counterparts. . . . . . . . . . . . . . . . . . 44 SCHEDULES Schedule A - Ownership of Stock Schedule 2.02(c) - Form of Closing Statement Schedule 2.03 - Form of Escrow Agreement Disclosure Schedule Schedule 8.03 - Form of Company and Shareholder Legal Opinion Schedule 8.05 - Schedule of Company Resignations Schedule 8.06 - Tax Affidavit Schedule 8.07 - Form of Release and Waiver Schedule 9.05 - Form of Michaels Legal Opinion Schedule 10.01(m) - Form of Noncompetition and Confidentiality Agreement Schedule 10.01(r) - Side Letter Agreement STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement"), dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., a Delaware corporation (the "Company"), ABAM Investors Limited Partnership, a Cayman Islands limited partnership (which is the holder of all of the outstanding capital stock of the Company) (the "Shareholder"), and Michaels Stores, Inc., a Delaware corporation ("Michaels"), W I T N E S S E T H : ------------------- WHEREAS, the Shareholder holds all of the issued and outstanding shares of capital stock of the Company, as set forth on Schedule A (the "Stock"), and desires to sell, and Michaels desires to purchase, the Stock; NOW, THEREFORE, in consideration of the mutual representations, warranties and covenants herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: (a) "Aaron Brothers" shall mean Aaron Brothers, Inc., a Delaware corporation. (b) "Art Marts" shall mean Aaron Brothers Art Marts, Inc., a Delaware corporation. (c) "Audited Statements" shall have the meaning set forth in Section 3.09. (d) "Bank Debt" shall mean, as of the close of business on the Closing Date, the outstanding obligations of Aaron Brothers to Lender pursuant to the Credit Agreement, such amount to include the principal amount of the indebtedness, and any accrued and unpaid interest, unpaid fees, expenses and any other obligations which may be owed by Aaron Brothers to Lender thereunder and are required to be paid. (e) "Bankruptcy Code" shall have the meaning set forth in Section 11.04. (f) "best knowledge", "have no knowledge of", or "do not know of" and similar phrases shall mean (i) in the case of a natural person, the particular fact was known, or not known, as the context requires, to such person after diligent investigation, reasonable under the circumstances, and inquiry by such person, reasonable under the circumstances, and (ii) in the case of an entity, the particular fact was known, or not known, as the context requires, to any Executive of such entity after diligent investigation and inquiry by the appropriate personnel of such entity. (g) "Cash Compensation" shall have the meaning set forth in Section 3.11(a). (h) "Cash Consideration" shall have the meaning set forth in Section 2.02(b). (i) "CERCLA" shall have the meaning set forth in Section 3.33(a). (j) "Closing" shall mean the closing of the transactions contemplated by this Agreement, which shall occur at 10:00 a.m., local time, on the Closing Date in the offices of Siller Wilk & Mencher LLP, 747 Third Avenue, New York, New York 10017, or at such other time and place as shall be mutually agreed in writing by the parties hereto. (k) "Closing Date" shall mean March 8, 1995 or such other date as may be mutually agreed in writing, but in no event later than March 17, 1995. (l) "Closing Statement" shall have the meaning set forth in Section 2.02(c). (m) "Code" shall mean the Internal Revenue Code of 1986, as amended. (n) "Commitments" shall have the meaning set forth in Section 3.15(a). (o) "Company Common Stock" shall have the meaning set forth in Section 3.03. (p) "Company Preferred Stock" shall have the meaning set forth in Section 3.03. (q) "Compensation Plans" shall have the meaning set forth in Section 3.11(b). (r) "Confidentiality Agreement" means the confidentiality agreement executed by Michaels in favor of the Company and the Subsidiaries. (s) "Controlled Group" shall have the meaning set forth in Section 3.12(g). (t) "Credit Agreement" shall mean that certain Credit and Security Agreement, dated March 31, 1988, as amended, by and between Lender and Aaron Brothers. (u) "Damages" shall have the meaning set forth in Section 12.01. (v) "Davis Cases" shall mean (i) Princeton Gateway Associates, Ltd. v. Aaron Brothers Art Marts, Inc. et. al., Superior Court of New Jersey, Law Division--Morris County, Docket No. MRS-L-2985-92 and (ii) Aaron Brothers, Inc. v. William G. Davis, et. al., Superior Court of California, Los Angeles County, Case No. BC059508. -2- (w) "Disclosure Schedule" means the disclosure schedule prepared by the Company and delivered to Michaels pursuant to this Agreement. (x) "Employee Benefit Plans" shall have the meaning set forth in Section 3.12(a). (y) "Employee Policies and Procedures" shall have the meaning set forth in Section 3.11(d). (z) "Employment Agreements" shall have the meaning set forth in Section 3.11(c). (aa) "Environmental Laws" shall have the meaning set forth in Section 3.33(a). (ab) "ERISA" shall have the meaning set forth in Section 3.12(a). (ac) "Escrow Agent" shall have the meaning set forth in Section 2.03. (ad) "Escrow Agreement" shall have the meaning set forth in Section 2.03. (ae) "Escrow Deposit" shall have the meaning set forth in Section 2.03. (af) "Escrowed Amount" shall mean $1,500,000. (ag) "Executive" shall mean any of Messrs. George P. Orban, Anthony J. Cincotta, William F. McLeod, Norman Hullinger and Stephen I. Siller, and Ms. Betty Smith. (ah) "Financial Statements" shall have the meaning set forth in Section 3.09. (ai) "Fixed Assets" shall have the meaning set forth in Section 3.25. (aj) "GAAP" shall mean generally accepted accounting principles, consistently applied. (ak) "herein", "hereof" and "hereto" shall have the meanings set forth in Section 14.10. (al) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. (am) "indemnifying party" and "party to be indemnified" shall have the meanings set forth in Section 12.03. (an) "Lender" shall mean MNC Credit Corp. or its successors and assigns under the Credit Agreement. -3- (ao) "Material Adverse Change" shall mean, as regards the Company or any Subsidiary, or all of them, a material adverse change in the condition (financial or otherwise), operations, assets or liabilities, of the Company and its Subsidiaries, taken as a whole. (ap) "Material Adverse Effect" shall mean, as regards the Company or any Subsidiary, or all of them, a material adverse effect on the condition (financial or otherwise), operations, assets or liabilities, of the Company and its Subsidiaries, taken as a whole. (aq) "ordinary course of business" means the usual and customary way in which the Company or any Subsidiary, as the case may be, has conducted its business since January 31, 1994. (ar) "Overall Foreign Loss" shall have the meaning set forth in Section 3.20(p). (as) "Personal Property" shall have the meaning set forth in Section 3.14(b). (at) "Proprietary Rights" shall have the meaning set forth in Section 3.18(a). (au) "Purchase Price" shall have the meaning set forth in Section 2.02(a). (av) "RCRA" shall have the meaning set forth in Section 3.33(a). (aw) "Real Property" shall have the meaning set forth in Section 3.14(a). (ax) "Safe Harbor Lease" shall have the meaning set forth in Section 3.20(i). (ay) "Securities Act" shall mean the Securities Act of 1933, as amended. (az) "Subsidiary" shall mean any corporation, partnership, joint venture or other legal entity of which the Company owns, directly or indirectly, 100% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity; and shall include within the meaning of the term each Subsidiary, as defined above, of any Subsidiary of the Company. (ba) "Superfund" shall have the meaning set forth in Section 3.33(d). (bb) "Tax" or "Taxes" shall mean all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees assessments or changes of any kind whatever, together with any interest and penalties, additions to tax or additional amounts with respect thereto. -4- (bc) "tax exempt entity" shall have the meaning set forth in Section 3.20(j). (bd) "Unaudited Statements" shall have the meaning set forth in Section 3.09. (be) "United States Real Property Interest" shall have the meaning set forth in Section 3.20(l). (bf) "Year-End Statements" shall have the meaning set forth in Section 3.09. ARTICLE II. PURCHASE AND SALE SECTION 2.01. PURCHASE AND SALE OF STOCK. Subject to and upon the terms and conditions contained herein, at the Closing, the Shareholder shall sell, transfer, assign, convey and deliver to Michaels, free and clear of all adverse claims, security interests, liens, claims and encumbrances, and Michaels shall purchase, accept and acquire from the Shareholder, the Stock. SECTION 2.02. PURCHASE PRICE. (a) TOTAL PURCHASE PRICE. The total purchase price for the Stock (the "Purchase Price") shall be an amount equal to the following: $25,000,000 minus the amount of the Bank Debt. (b) NATURE OF CONSIDERATION. The Purchase Price shall be delivered in cash ("Cash Consideration"). (c) COMPUTATION OF PURCHASE PRICE. At the Closing, the Company shall deliver to Michaels a certificate setting forth the amount of the Bank Debt. At the Closing, Michaels shall then complete the Closing Statement, in the form attached hereto as Schedule 2.02(c), computing the Purchase Price subject to the escrow arrangement set forth in Section 2.03 below. SECTION 2.03. ESCROW. At the Closing, Michaels shall deposit in escrow cash equal to the Escrow Amount (the "Escrow Deposit"), pursuant to the terms of an Escrow Agreement (the "Escrow Agreement") in the form set forth in Schedule 2.03, to be entered into among the Stockholder, the Representative (as therein defined), Michaels and Jackson & Walker, L.L.P., as escrow agent (the "Escrow Agent"). The Escrow Deposit shall be released from escrow, after provisions for any Damages for which Michaels may be entitled to indemnified pursuant to Article XII of this Agreement in accordance with the terms of the Escrow Agreement. -5- ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDER The Company and the Shareholder jointly and severally represent and warrant that the following are true and correct as of the date hereof: SECTION 3.01. OWNERSHIP OF THE STOCK. Except as set forth in Section 3.01 of the Disclosure Schedule, the Shareholder owns, beneficially and of record, good title to the Stock, which constitutes all of the issued and outstanding capital stock of the Company, free and clear of all security interests, liens, adverse claims, encumbrances, equities, proxies, options or shareholders' agreements. At the Closing, the Shareholder will convey to Michaels good and valid title to all of the issued and outstanding capital stock of the Company, free and clear of any security interests, liens, adverse claims, encumbrances, equities, proxies, options, shareholders' agreements or restrictions. SECTION 3.02. ORGANIZATION AND GOOD STANDING; QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, with all requisite corporate power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The Company is duly qualified and licensed to do business and is in good standing in all jurisdictions where the nature of its business makes such qualification necessary, which jurisdictions are listed in Section 3.02 of the Disclosure Schedule, except where the failure to be qualified or licensed would not have a Material Adverse Effect. The Company does not have any assets, employees or offices in any state other than the states listed in Section 3.02 of the Disclosure Schedule and other than as otherwise disclosed in Section 3.02. SECTION 3.03. CAPITALIZATION. The authorized capital stock of the Company consists of (i) 150,000 shares of common stock, par value $0.01 per share (the "Company Common Stock"), of which 1 share is issued and outstanding, and (ii) 100,000 shares of preferred stock, par value $0.01 per share ("Company Preferred Stock"), of which 10,000 shares are issued and outstanding, and no shares of such capital stock are held in the treasury of the Company. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable. Except as set forth in Section 3.03 of the Disclosure Schedule, there exist no options, warrants, subscriptions or other rights to purchase, or securities convertible into or exchangeable for, the capital stock of the Company. Except as set forth in Section 3.03 of the Disclosure Schedule, neither the Shareholder nor the Company is a party to or bound by, nor do they have any knowledge of, any agreement, instrument, arrangement, contract, obligation, commitment or understanding of any character, whether written or oral, express or implied, relating to the sale, assignment, encumbrance, conveyance, transfer or delivery of any capital stock of the Corporation. No shares of capital stock of the Company have been issued or disposed of in violation of the preemptive rights of any of the Company's -6- shareholders. All accrued dividends on the capital stock of the Company, whether or not declared, have been paid in full. SECTION 3.04. CORPORATE RECORDS. The copies of the Certificate of Incorporation and all amendments thereto and the Bylaws, as amended, of the Company and each of its Subsidiaries that have been delivered to Michaels are true, correct and complete copies thereof, as in effect on the date hereof. To the best knowledge of the Company with respect to matters before April 6, 1988, the minute books of the Company and each of its Subsidiaries, copies of which have been delivered or made available to Michaels, contain accurate minutes of all meetings of, and accurate consents to all actions taken without meetings by, the Board of Directors (and any committees thereof) and the shareholders of the Company and each of its Subsidiaries since the formation of the Company or such Subsidiary. SECTION 3.05. AUTHORIZATION AND VALIDITY. The execution, delivery and performance by the Company of this Agreement and the other agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the Company and the Shareholder. This Agreement and each other agreement to be executed by the Company or the Shareholder in connection herewith have been or will be as of the Closing Date duly executed and delivered by the Company and the Shareholder and constitute or will constitute legal, valid and binding obligations of the Company and the Shareholder, as the case may be, enforceable against the Company and the Shareholder in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies (whether enforcement is sought by an action or proceeding in equity or at law). Except as set forth in Section 3.05 of the Disclosure Schedule, the sale of the Stock by the Shareholder to Michaels will not impair the ability or authority of the Company or any of its Subsidiaries to carry on its business as now conducted in any material respect. SECTION 3.06. SUBSIDIARIES. The Company does not own, directly or indirectly, any of the capital stock of any other corporation or any equity, profit sharing, participation or other interest in any corporation, partnership, joint venture or other entity, except the Subsidiaries listed in Section 3.06 of the Disclosure Schedule. Except as set forth in Section 3.06 of the Disclosure Schedule, each Subsidiary is duly organized and validly existing in good standing under the laws of the state in which it is incorporated, and except as set forth in Section 3.06 of the Disclosure Schedule, is duly qualified to do business and in good standing in each jurisdiction wherein failure to qualify to do business could adversely affect the Subsidiary. The Company has delivered to Michaels true, complete and correct copies of the Certificate of Incorporation and Bylaws of each Subsidiary, as in effect on the date hereof. The authorized capital of each Subsidiary is set forth in Section 3.06 of the Disclosure Schedule. All issued and outstanding shares of capital stock of each Subsidiary are duly authorized and validly issued and outstanding, fully paid and nonassessable and are owned by the Company free and clear of all security interests, liens, adverse claims, encumbrances, equities, proxies, options or shareholders' agreements. There are in existence no outstanding options, warrants or similar rights granted by any Subsidiary, or any agreements to which any Subsidiary is a party, for the -7- issuance or sale by it of any securities except to the Company. Except as set forth in Section 3.06 of the Disclosure Schedule, each Subsidiary has obtained or duly applied for all such material licenses, permits and certificates from government agencies and authorities as are necessary to the conduct of its business which, if not obtained, could result in a Material Adverse Effect, and the consummation of the transactions contemplated hereby will not result in the loss or impairment of, or any default under, any such license, permit or certificate. SECTION 3.07. NO VIOLATION. Except as set forth in Section 3.07 of the Disclosure Schedule, neither the execution, delivery or performance of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby, in each case by the Company or the Shareholder, will (i) conflict with, or result in a violation or breach of the terms, conditions or provisions of, or constitute a default under, the Certificate of Incorporation or Bylaws of the Company or any Subsidiary or any agreement, indenture or other instrument under which the Company or any Subsidiary is bound or to which the Stock or any of the assets of the Company or capital stock or any of the assets of any Subsidiary are subject, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon the Stock or any of the assets of the Company or the capital stock or any of the assets of any Subsidiary, or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company, the Stock or the assets of the Company or the capital stock or any of the assets of any Subsidiary, which conflict or violation would have a Material Adverse Effect. SECTION 3.08. CONSENTS. Except as set forth in Section 3.08 of the Disclosure Schedule, no consent, authorization, approval, permit or license of, or filing with, any governmental or public body or authority, any lender or lessor or any other person or entity is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or the agreements contemplated hereby, on the part of the Company or the Shareholder, except where the failure to obtain any such consent, authorization, approval, permit or license, or to make any such filing, could not have a Material Adverse Effect. SECTION 3.09. FINANCIAL STATEMENTS. The Company has furnished to Michaels the audited consolidated balance sheet and related audited consolidated statements of operations, retained earnings and cash flows for the year ended January 31, 1994, including the notes thereto (the "Audited Statements"), as well as unaudited consolidated balance sheets and related unaudited consolidated statements of operations and cash flows for the eleven months ended January 1, 1995 (the "Unaudited Statements") (collectively, the "Financial Statements"). Except as set forth in Schedule 3.09 of the Disclosure Schedule, the Financial Statements are in accordance with the books and records of the Company and the Subsidiaries, fairly present the consolidated financial condition and results of operations of the Company and the Subsidiaries as of the dates and for the periods indicated and have been prepared in conformity with GAAP; provided, however, that the Unaudited Statements are subject to normal year-end adjustments, do not contain footnote disclosures and are not audited. The Company has also furnished to Michaels the unaudited consolidated balance sheet and related unaudited consolidated statements -8- of operations, shareholder's equity and cash flows for the year ended January 29, 1995, excluding notes thereto (the "Year-End Statements"). The Year-End Statements are in accordance with the books and records of the Company and the Subsidiaries, fairly present the consolidated financial position and results of operations and the cash flows of the Company and the Subsidiaries as of the date and for the period indicated, and have been prepared in accordance with GAAP. Except as set forth in Schedule 3.09 of the Disclosure Schedule, there will not be any material changes in the Year-End Statements in connection with the audit thereof by Price Waterhouse, the Company's independent auditors. SECTION 3.10. LIABILITIES AND OBLIGATIONS. Other than those set forth in Section 3.10 of the Disclosure Schedule or reflected in the Financial Statements or the Year End Statements, there are no material liabilities or obligations of the Company or any Subsidiary, accrued, contingent or otherwise which arose outside of the ordinary course of business and which are not fully covered by insurance (except for any applicable deductible). Except as set forth in Section 3.10 of the Disclosure Schedule, all reserves shown in the Financial Statements are appropriate, reasonable and sufficient to provide for losses thereby contemplated. Except as set forth in the Financial Statements or in Section 3.10 of the Disclosure Schedule, neither the Company nor any Subsidiary is liable upon or with respect to, or obligated in any other way to provide funds in respect of or to guarantee or assume in any manner, any debt, obligation or dividend of any person, corporation, association, partnership, joint venture, trust or other entity, other than of the Company or any Subsidiary, and neither the Company, any Subsidiary nor the Shareholder know of any basis for the assertion of any other claims or liabilities of any nature or in any amount which claim or liability, if imposed on the Company or any Subsidiary, would have a Material Adverse Effect. SECTION 3.11. EMPLOYEE MATTERS. (a) CASH COMPENSATION. Section 3.11(a) of the Disclosure Schedule contains a complete and accurate list of the names, titles and cash compensation, including without limitation wages, salaries, bonuses (discretionary and formula) and other cash compensation (the "Cash Compensation") of all employees of the Company and the Subsidiaries who are currently compensated at a rate in excess of $50,000 per year and who earned in excess of such amount during the Company's or such Subsidiary's preceding fiscal year. In addition, Section 3.11(a) of the Disclosure Schedule contains a complete and accurate description of (i) all increases in Cash Compensation of employees of the Company and the Subsidiaries during the current and immediately preceding fiscal years of the Company and (ii) any promised increases in Cash Compensation of employees of the Company and the Subsidiaries that have not yet been effected in excess of 4% of base compensation. (b) COMPENSATION PLANS. Section 3.11(b) of the Disclosure Schedule contains a complete and accurate list of all compensation plans, arrangements or practices (the "Compensation Plans") sponsored by the Company or the Subsidiaries or to which the Company or any Subsidiary contributes on behalf of its employees, other than Employee Benefit Plans listed in Section 3.12(a) of the Disclosure Schedule. The Compensation Plans include without -9- limitation plans, arrangements or practices that provide for severance pay, deferred compensation, incentive, bonus or performance awards, and stock ownership or stock options. The Company has provided or made available to Michaels a copy of each written Compensation Plan and a written description of each unwritten Compensation Plan. Except as set forth in Section 3.11 of the Disclosure Schedule, each of the Compensation Plans can be terminated or amended at will by the Company or its Subsidiaries. (c) EMPLOYMENT AGREEMENTS. Section 3.11(c) of the Disclosure Schedule contains a complete and accurate list of all employment agreements (the "Employment Agreements") to which the Company or any Subsidiary is a party with respect to its employees. The Employment Agreements include without limitation employee leasing agreements, employee services agreements and noncompetition agreements. The Company has provided or made available to Michaels a copy of each written Employment Agreement and a written description of each unwritten Employment Agreement. (d) EMPLOYEE POLICIES AND PROCEDURES. Section 3.11(d) of the Disclosure Schedule contains a complete and accurate list of all employee manuals, policies, procedures and work-related rules (the "Employee Policies and Procedures") that presently apply to employees of the Company or any Subsidiary. The Company has provided or made available to Michaels a copy of all written Employee Policies and Procedures and a written description of all unwritten Employee Policies and Procedures. Each of the Employee Policies and Procedures can be amended or terminated at will by the Company or the appropriate Subsidiary, as the case may be. (e) UNWRITTEN AMENDMENTS. No unwritten amendments have been made, whether by oral communication, pattern of conduct or otherwise, with respect to any Compensation Plans, Employment Agreements or Employee Policies and Procedures. (f) LABOR COMPLIANCE. Except as set forth in Section 3.11(f) of the Disclosure Schedule, the Company and each Subsidiary: (i) has been and is in material compliance with all laws, rules, regulations and ordinances respecting employment and employment practices, terms and conditions of employment and wages and hours (including those relating to workers' compensation benefits), and (ii) is not liable for any arrears of wages or penalties for failure to comply with any of the foregoing matters set forth in (i) above. Except as set forth in Section 3.11 of the Disclosure Schedule, since April 6, 1988, neither the Company nor any Subsidiary has engaged in any unfair labor practice or discriminated on the basis of race, color, religion, sex, national origin, age, disability or handicap in its employment conditions or practices which would have a Material Adverse Effect. -10- Except as set forth in Section 3.11(f) of the Disclosure Schedule, there are presently no (i) unfair labor practice charges or complaints or racial, color, religious, sex, national origin, age, disability or handicap discrimination charges or complaints pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary before any federal, state or local court, board, department, commission or agency nor, to the knowledge of the Company, does any basis therefor exist or (ii) existing or, to the knowledge of the Company, threatened labor strikes, disputes, grievances, controversies or other labor troubles affecting the Company or any Subsidiary, nor does any basis therefor exist. (g) UNIONS. Neither the Company nor any Subsidiary has, since April 6, 1988, ever been a party to any agreement with any union, labor organization or collective bargaining unit. No employees of the Company or any Subsidiary are represented by any union, labor organization or collective bargaining unit in connection with their employment with the Company or any Subsidiary. To the best knowledge of the Company, except as set forth in Section 3.11(g) of the Disclosure Schedule, the employees of the Company and the Subsidiaries have no intention to and have not, since April 6, 1988, to the knowledge of the Company threatened to organize or join a union, labor organization or collective bargaining unit. (h) ALIENS. All employees of the Company and the Subsidiaries are citizens of, or are authorized to be employed in, the United States. SECTION 3.12. EMPLOYEE BENEFIT PLANS. (a) IDENTIFICATION. Section 3.12(a) of the Disclosure Schedule contains a complete and accurate list of all employee benefit plans (the "Employee Benefit Plans") (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) sponsored by the Company or any Subsidiary or to which the Company or any Subsidiary contributes on behalf of its employees and all Employee Benefit Plans previously sponsored or contributed to on behalf of its employees within the three years preceding the date hereof. The Company has provided or made available to Michaels copies of all plan documents, determination letters, pending determination letter applications, trust instruments, insurance contracts, administrative services contracts, annual reports, actuarial valuations, summary plan descriptions, administrative forms and other documents that constitute a part of or are incident to the administration of the Employee Benefit Plans. Each of the Employee Benefit Plans can be terminated or amended at will by the Company or the appropriate Subsidiary, as the case may be, subject to COBRA and any other applicable requirements of ERISA or any other law. No unwritten amendment exists with respect to any Employee Benefit Plan. -11- (b) ADMINISTRATION. Each Employee Benefit Plan has been administered and maintained in all material respects in compliance with all laws, rules and regulations. (c) EXAMINATIONS. No Employee Benefit Plan is currently the subject of an audit, investigation, enforcement action or other similar proceeding conducted by any state or federal agency. (d) PROHIBITED TRANSACTIONS. Since April 6, 1988, no prohibited transactions (within the meaning of Section 4975 of the Code) have occurred with respect to any Employee Benefit Plan. (e) CLAIMS AND LITIGATION. No threatened (to the best knowledge of the Company) or pending claims, suits or other proceedings exist with respect to any Employee Benefit Plan other than normal benefit claims filed by participants or beneficiaries. (f) QUALIFICATION. The Company or the appropriate Subsidiary has received a favorable determination letter or ruling from the Internal Revenue Service for each existing Employee Benefit Plan intended to be qualified within the meaning of Section 401(a) of the Code and/or tax-exempt within the meaning of Section 501(a) of the Code. To the best knowledge of the Company, no proceedings exist or have been threatened that could result in the revocation of any such favorable determination letter or ruling. (g) FUNDING STATUS. No accumulated funding deficiency (within the meaning of Section 412 of the Code), whether waived or unwaived, exists with respect to any Employee Benefit Plan or any plan sponsored by any member of a controlled group (within the meaning of Section 412(n)(6)(B) of the Code) in which the Company or any Subsidiary is a member (a "Controlled Group"). With respect to each Employee Benefit Plan subject to Title IV of ERISA, the assets of each such plan are at least equal in value to the present value of accrued benefits determined on an ongoing basis as of the date hereof. With respect to each Employee Benefit Plan described in Section 501(c)(9) of the Code, the assets of each such plan are at least equal in value to the present value of accrued benefits as of the date hereof. (h) EXCISE TAXES. Neither the Company nor any Subsidiary or any member of a Controlled Group has any liability to pay excise taxes with respect to any Employee Benefit Plan under applicable provisions of the Code or ERISA. (i) MULTIEMPLOYER PLANS. Neither the Company nor any Subsidiary nor any member of a Controlled Group is or, to the best knowledge of the Company, since April 6, 1988, ever has been obligated to contribute to a multiemployer plan within the meaning of Section 3(37) of ERISA. (j) PBGC. No facts or circumstances exist that would result in the imposition of liability against the Company by the Pension Benefit Guaranty Company as a result of any act or omission by the Company, any Subsidiary or any member of a Controlled Group. No report- -12- able event (within the meaning of Section 4043 of ERISA) for which the notice requirement has not been waived has occurred with respect to any Employee Benefit Plan subject to the requirements of Title IV of ERISA. (k) MEDICAL AND DENTAL CARE CLAIMS. Section 3.12(k) of the Disclosure Schedule contains a complete and accurate list of all claims made (without identifying specific individuals) under any medical or dental care plan or commitment offered by the Company or any Subsidiary to its employees involving hospitalization, medical or dental care claims that have exceeded $10,000 per year for an individual since the implementation of and relating to the Company's new medical plan on April 1, 1994. (l) RETIREES. Neither the Company nor any Subsidiary has any obligation or commitment to provide medical, dental or life insurance benefits to or on behalf of any of its employees who may retire or any of its former employees who have retired from employment with the Company or any Subsidiary. SECTION 3.13. ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.13 of the Disclosure Schedule, since January 29, 1995, neither the Company nor any Subsidiary has (a) suffered any Material Adverse Change, whether or not caused by any deliberate act or omission of the Company, any Subsidiary or the Shareholder; (b) contracted for the purchase of any capital assets having a cost in excess of $10,000 or paid any capital expenditures in excess of $10,000; (c) incurred any indebtedness for borrowed money or issued or sold any debt securities outside of the ordinary course of business; (d) incurred or discharged any liabilities or obligations except in the ordinary course of business; provided, however, neither the Company nor any Subsidiary has paid any legal fees; (e) paid any amount on any indebtedness prior to the due date, forgiven or cancelled any debts or claims or released or waived any rights or claims; provided, however, neither the Company nor any Subsidiary has (i) paid any principal on the term loan portion of the Bank Debt and (ii) paid any amount of principal on the revolving portion of the Bank Debt except in the ordinary course of business; (f) mortgaged, pledged or subjected to any security interest, lien, lease or other charge or encumbrance any of its properties or assets, other than after-acquired property which is subject to a lien in favor of the Lender in accordance with the Credit Agreement; (g) suffered any damage or destruction to or loss of any assets (whether or not covered by insurance) that could have a Material Adverse Effect; -13- (h) acquired or disposed of any assets except in the ordinary course of business; (i) written up or written down the carrying value of any of its assets; (j) changed the costing system or depreciation methods of accounting for its assets; (k) waived any material rights or forgiven any material claims; (l) lost or terminated any employee, customer or supplier, the loss or termination of which has or could have a Material Adverse Effect; (m) increased the compensation of any director, officer, key employee or consultant or paid any bonuses to any of the foregoing; (n) increased the compensation of any employee except in the ordinary course of business; provided, however, neither the Company nor any Subsidiary has paid any bonuses to any employee; (o) made any payments to or loaned any money to any person or entity referred to in Section 3.31; (p) formed or acquired or disposed of any interest in any corporation, partnership, joint venture or other entity; (q) redeemed, purchased or otherwise acquired, or sold, granted or otherwise disposed of, directly or indirectly, any of its capital stock or securities or any rights to acquire such capital stock or securities, or agreed to change the terms and conditions of any such stock, securities or rights; (r) entered into any agreement with any person or group, or modified or amended in any material respect the terms of any such existing agreement, except in the ordinary course of business; (s) entered into, adopted or amended any Employee Benefit Plan; or (t) entered into any other commitment or transaction or experienced any other event that is material to this Agreement or to any of the other agreements and documents executed or to be executed pursuant to this Agreement or to the transactions contemplated hereby or thereby, or that has materially and adversely affected, or could materially and adversely affect, the condition (financial or otherwise), operations, assets, liabilities, business or prospects of the Company or the appropriate Subsidiary. -14- SECTION 3.14. TITLE; LEASED ASSETS. (a) REAL PROPERTY. Neither the Company nor any of the Subsidiaries owns any real property. The leased real property referred to in Section 3.14(c) below constitutes the only real property used in the conduct of the business of the Company and the Subsidiaries. (b) PERSONAL PROPERTY. Except as set forth in Section 3.14(b) of the Disclosure Schedule, the Company and the Subsidiaries have good and valid title to all tangible and intangible personal property owned by them (collectively, the "Personal Property"). The Personal Property and the leased personal property referred to in Section 3.14(c) below constitute the only personal property used in the conduct of the business of the Company and the Subsidiaries. (c) LEASES. A list and brief description of all leases of real and personal property to which the Company or any Subsidiary is a party, either as lessor or lessee, are set forth in Schedule 3.14(c). Except as set forth in Section 3.14(c) of the Disclosure Schedule, all such leases are valid and enforceable in all material respects in accordance with their respective terms except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. (d) RIGHT TO USE ASSETS. Except for those assets acquired since January 29, 1995, which, other than inventory acquired in the ordinary course of business, store fixtures costing approximately $45,000, Tarzana store roof repairs costing approximately $20,000, and other assets that have a purchase price of $10,000 or less, individually, not to exceed $50,000 in the aggregate, are listed in Schedule 3.14(d), all tangible and intangible assets used in the conduct of the business of the Company and the Subsidiaries are reflected in the Financial Statements in a manner that is in conformity with GAAP (except to the extent GAAP does not require any such assets to be so reflected in the Financial Statements). Either the Company or a Subsidiary owns, leases or otherwise possesses a right to use all assets used in the conduct of the business of the Company or such Subsidiary, except where the failure to have such right would not have a Material Adverse Effect. SECTION 3.15. COMMITMENTS. (a) COMMITMENTS; DEFAULTS. Except as set forth in Section 3.15 of the Disclosure Schedule, neither the Company nor any Subsidiary has entered into, nor is the Stock, the assets or the business of the Company or any Subsidiary bound by, whether or not in writing, any (i) partnership or joint venture agreement; (ii) deed of trust, mortgage or other security agreement; (iii) guaranty or suretyship, indemnification or contribution agreement or performance bond; -15- (iv) employment, consulting or compensation agreement or arrangement, including the election or retention in office of any director or officer; (v) labor or collective bargaining agreement; (vi) debt instrument, loan agreement or other obligation relating to indebtedness for borrowed money or money lent or to be lent to another; (vii) deed or other document evidencing an interest in or contract to purchase or sell real property; (viii) agreement with dealers or sales or commission agents, public relations or advertising agencies, accountants or attorneys outside the ordinary course of business; (ix) lease of real or personal property, whether as lessor, lessee, sublessor or sublessee; (x) agreement between the Company or any Subsidiary and any affiliate of the Company; (xi) agreement relating to any material matter or transaction in which an interest is held by a person or entity that is an affiliate of the Company; (xii) any agreement for the acquisition of services, supplies, equipment, fixtures or other personal property and involving more than $50,000 in the aggregate or purchase orders for inventory exceeding approximately $2,425,000 in the aggregate; (xiii) powers of attorney; (xiv) contracts containing noncompetition covenants; (xv) any other contract or arrangement that involves either an unperformed commitment in excess of $25,000 or that is not terminable on less than 30 days notice; (xvi) agreement relating to any material matter or transaction in which an interest is held by any person or entity referred to in Section 3.31; (xvii) agreement providing for the purchase from a supplier of all or substantially all of the requirements of the Company or any Subsidiary of a particular product or service; or -16- (xviii) any other agreement or commitment not made in the ordinary course of business or that is material to the business or financial condition of the Company or any Subsidiary. All of the foregoing are hereinafter collectively referred to as the "Commitments." True, correct and complete copies of the written Commitments, and true, correct and complete written descriptions of the oral Commitments, have heretofore been delivered or made available to Michaels. Except as set forth in Section 3.15(a) of the Disclosure Schedule, there are no existing defaults, events of default or events, occurrences, acts or omissions that, with the giving of notice or lapse of time or both, would constitute defaults by the Company or any Subsidiary, and no penalties have been incurred nor are amendments pending, with respect to the Commitments which are leases of real property. No material defenses, off-sets or counterclaims with respect to the Commitments have been asserted or, to the best knowledge of the Company and the Shareholder, may be made by any party thereto, nor has the Company or any Subsidiary waived any rights thereunder, except as described in Section 3.15 of the Disclosure Schedule. Neither the Company nor any Subsidiary has received written notice of any default with respect to any material Commitment. (b) NO CANCELLATION OR TERMINATION OF COMMITMENT. Except as contemplated hereby, neither the Company nor any Subsidiary nor the Shareholder has received written notice of any plan or intention of any other party to any Commitment to exercise any right to cancel or terminate any Commitment, and neither the Company nor any Subsidiary nor the Shareholder knows of any fact that would justify the exercise of such a right. Neither the Company nor any Subsidiary nor the Shareholder currently contemplates, or has reason to believe any other person or entity currently contemplates, any amendment or change to any Commitment. Except as listed in Schedule 3.15, none of the suppliers of the Company or any Subsidiary has refused, or communicated that it will or may refuse, to supply goods or services, as the case may be, or has communicated that it will or may substantially reduce the amounts of goods or services that it is willing to sell to, the Company or any Subsidiary. SECTION 3.16. ADVERSE AGREEMENTS. Except as set forth in Section 3.16 of the Disclosure Schedule, neither the Company nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree, rule or regulation that has, or so far as the Company or the Shareholder can now foresee, may in the future, assuming the Company was continued to be owned by the Shareholder, have a Material Adverse Effect. SECTION 3.17. INSURANCE. The Company and the Subsidiaries carry property, liability, workers' compensation and such other types of insurance as is customary in the industry of the insured. A list and brief description of all insurance policies of the Company and the Subsidiaries are set forth in Section 3.17 of the Disclosure Schedule. All of such policies are valid and enforceable policies, insure the operations of Aaron Brothers and Art Marts, as appropriate, and to the best knowledge of the Company, are issued by insurers of recognized responsibility in amounts and against such risks and losses as is customary in the industry of the -17- insured. Such insurance has been since April 6, 1988 and shall be outstanding and duly in force without interruption up to and including the Closing Date. True, complete and correct copies of all such policies and/or binders have been provided or made available to Michaels on or prior to the date hereof. SECTION 3.18. PATENTS, TRADEMARKS, SERVICE MARKS AND COPYRIGHTS. (a) OWNERSHIP. The Company and each Subsidiary own all patents, trademarks, service marks and copyrights, if any, necessary to conduct its business, or possesses adequate licenses or other rights, if any, therefor, without any conflict with the rights of others except any such conflict which would not, individually or in the aggregate, have a Material Adverse Effect. Set forth in Section 3.18 of the Disclosure Schedule is a true and correct description of the following (the "Proprietary Rights"): (i) all trademarks, tradenames, service marks and other trade designations, including common law rights which are known to the Company, registrations and applications therefor, and all patents, copyrights and applications currently owned, in whole or in part, by the Company or any Subsidiary with respect to the business of the Company and the Subsidiaries, and all licenses, royalties, assignments and other similar agreements relating to the foregoing to which the Company or any Subsidiary is a party (including expiration date if applicable); and (ii) all agreements relating to technology, know-how or processes that the Company or any Subsidiary is licensed or authorized to use by others, or which it licenses or authorizes others to use. (b) CONFLICTING RIGHTS OF THIRD PARTIES. The Company (or the appropriate Subsidiary) has the sole and exclusive right to use the Proprietary Rights without infringing or violating the rights of any third parties in any material respect. Use of the Proprietary Rights does not require the consent of any other person and the Proprietary Rights are freely transferable. No claim has been asserted by any person to the ownership of or right to use any Proprietary Right or challenging or questioning the validity or effectiveness of any license or agreement constituting a part of any Proprietary Right, and neither the Company nor the Shareholder knows of any valid basis for any such claim. Each of the Proprietary Rights is valid and subsisting, has not been cancelled, abandoned or otherwise terminated and, if applicable, has been duly issued or filed. (c) CLAIMS OF OTHER PERSONS. The Company and the Shareholder have no knowledge of any claim that, or inquiry as to whether, any product, activity or operation of the Company or any Subsidiary infringes upon or involves, or has resulted in the infringement of, any proprietary right of any other person, corporation or other entity; and no proceedings have been instituted, are pending or, to the best knowledge of the Company, are threatened that challenge the rights of the Company or any Subsidiary with respect thereto which, if asserted, could have -18- a Material Adverse Effect. The Company has not given and is not bound by any agreement of indemnification for any Proprietary Right as to any property manufactured, used or sold by it. SECTION 3.19. TRADE SECRETS AND CUSTOMER LISTS. Either the Company or the appropriate Subsidiary has the right to use, free and clear of any claims or rights of others except claims or rights specifically set forth in Section 3.19 of the Disclosure Schedule or other claims which would not have a Material Adverse Effect, all trade secrets, customer lists and proprietary information required for the marketing of all merchandise and services formerly (since April 6, 1988) or presently sold or marketed by the Company or such Subsidiary. Neither the Company nor any Subsidiary is using or in any way making use of any confidential information or trade secrets of any third party, including without limitation any past or present employee of the Company or any Subsidiary, except with the consent of such third party. SECTION 3.20. TAXES. (a) FILING OF TAX RETURNS. The Company and each Subsidiary has duly and timely filed (or has available extensions of time to file) with the appropriate governmental agencies all income, excise, corporate, franchise, property, sales, use, payroll, withholding, ad valorem, transfer, employment, stamp, occupation, windfall profits and other tax returns (including information returns) and reports required to be filed by the United States or any state or any political subdivision thereof or any foreign jurisdiction ("Tax Returns"). All such Tax Returns, which are not closed by virtue of the applicable statute of limitations, are complete and accurate and properly reflect the Taxes of the Company and each Subsidiary for the periods covered thereby. (b) PAYMENT OF TAXES. Except as set forth in Section 3.20 of the Disclosure Schedule, the Company and each Subsidiary have paid or accrued all Taxes that have become due with respect to any returns that it has filed and any assessments of which it is aware. Neither the Company nor any Subsidiary is delinquent in the payment of any Tax, assessment or governmental charge. (c) NO PENDING DEFICIENCIES, DELINQUENCIES, ASSESSMENTS OR AUDITS. Except as set forth in Section 3.20 of the Disclosure Schedule, no Tax deficiency or delinquency has been asserted against the Company or any Subsidiary. There is no unpaid assessment, proposal for additional Taxes, deficiency or delinquency in the payment of any of the Taxes of the Company or any Subsidiary that is presently due. There is no taxing authority audit of the Company or any Subsidiary pending or, to the best knowledge of the Company, each Subsidiary and the Shareholders, threatened, and the results of any completed audits are properly reflected in the Financial Statements. Neither the Company nor any Subsidiary has violated any federal, state, local or foreign Tax law except where such violation would not have a Material Adverse Effect. (d) NO EXTENSION OF LIMITATION OR ASSESSMENT PERIOD. Neither the Company nor any Subsidiary has granted an extension to any taxing authority of the limitation period during -19- which any Tax liability may be assessed or collected or agreed to any extension of the time with respect to a Tax assessment or deficiency. (e) ALL WITHHOLDING REQUIREMENTS SATISFIED. All monies required to be withheld by the Company and each Subsidiary and paid to governmental agencies for all Taxes (including any amounts required to be withheld pursuant to Sections 1441-1446 of the Code) have been (i) collected or withheld and either paid to the respective governmental agencies or set aside in accounts for such purpose or (ii) properly reflected in the Financial Statements. (f) TAX LIENS. There are no liens for Taxes upon any assets of the Company or any Subsidiary. (g) TAX LIABILITY IN FINANCIAL STATEMENTS. Except as set forth in Section 3.20 of the Disclosure Schedule, the liabilities (including deferred Taxes) shown in the Financial Statements for Taxes are and will be adequate accruals and have been and will be accrued in a manner consistent with the practices utilized for accruing Tax liabilities in the Company's and the Subsidiaries' most recently completed Tax year and take into account net operating losses, investment credits and other carryovers for periods ended prior to the Closing Date. (h) FOREIGN PERSON. Neither the Company nor any Subsidiary is a foreign person, as such term is referred to in Section 1445(f)(3) of the Code. (i) SAFE HARBOR LEASE. None of the assets of the Company or any Subsidiary constitute property that Michaels, or any affiliate of Michaels, will be required to treat as being owned by another person pursuant to the "Safe Harbor Lease" provisions of Section 168(f)(8) of the Code prior to repeal by the Tax Equity and Fiscal Responsibility Act of 1982. (j) TAX EXEMPT ENTITY. None of the assets of the Company or any Subsidiary are or will be subject to a lease to a "tax exempt entity" as such term is defined in Section 168(h)(2) of the Code. (k) COLLAPSIBLE COMPANY. Neither the Company nor any Subsidiary have, since April 6, 1988, consented, and the Shareholders will not permit the Company or any Subsidiary to elect, to have the provisions of Section 341(f)(2) of the Code apply to it. (l) UNITED STATES REAL PROPERTY INTEREST. Neither the Stock nor any other interest in the Company is a "United States real property interest" within the meaning of Section 897(c) of the Code. (m) REQUEST FOR RULINGS. There are no outstanding requests for rulings with any taxing or revenue authority that would affect the operations of the Company and its Subsidiaries. -20- (n) CLOSING AGREEMENTS. Neither the Company nor any Subsidiary has executed, become subject to or entered into any closing agreement pursuant to Section 7121 of the Code or any similar or predecessor provision thereof under the Code of other law. (o) CHANGE IN ACCOUNTING METHOD. Except as set forth in Section 3.20 of the Disclosure Schedule, neither the Company, nor any Subsidiary has received approval to make, or agreed to or otherwise adopted, a change in accounting method which could materially affect any whole or partial taxable period of the Company or any Subsidiary ending after the Closing Date. Except as set forth in Section 3.20 of the Disclosure Schedule, neither the Company nor any Subsidiary is required to include in income any adjustment under Section 481(a) of the Code or any similar provision of state or local law and neither the Company nor any Subsidiary has an application pending with any taxing authority requesting permission for a change in accounting method. (p) OTHER TAX MATTERS. Neither the Company nor any Subsidiary owns any interest in any entity that is characterized as a partnership under the Code. Neither the Company nor any Subsidiary has made any payments, is obligated to make any payments or is a party to any agreement that does or could obligate them or any assignee of such an agreement to make any payments that are or would not be deductible under Section 280G of the Code. Neither the Company nor any Subsidiary has sustained an "overall foreign loss" within the meaning of Section 904(f) of the Code. The Company and each of its Subsidiaries have not participated in or cooperated with any "international boycott" within the meaning of Section 999 of the Code. SECTION 3.21. COMPLIANCE WITH LAWS. Except as set forth in Section 3.21 of the Disclosure Schedule, the Company and each of the Subsidiaries has complied with all laws, regulations and licensing requirements and has filed with the proper authorities all necessary statements and reports, except where the failure to so comply or file would not have a Material Adverse Effect. To the best knowledge of the Company and, except as set forth in Section 3.21 of the Disclosure Schedule, there are no existing violations by the Company, any Subsidiaries or the Shareholder of any federal, state or local law or regulation that could affect the property or business of the Company and the Subsidiaries. The Company and each of the Subsidiaries possesses all necessary licenses, franchises, permits and governmental authorizations to conduct its business as now conducted, all of which are listed in Section 3.21 of the Disclosure Schedule, except where the failure to possess any such licenses, franchises, permits or government authorizations would not have a Material Adverse Effect. SECTION 3.22. FINDER'S FEE. Neither the Company nor any Subsidiary nor the Shareholder has incurred any obligation for any finder's, broker's or agent's fee in connection with the transactions contemplated hereby. SECTION 3.23. LITIGATION. Except as described in Section 3.23 of the Disclosure Schedule, there are no legal actions or administrative proceedings or investigations instituted, or to the best knowledge of the Company or the Shareholder threatened, or filed but not served, against or affecting, or that could affect, the Company, any Subsidiary, any of the Stock, or the -21- business of the Company or any Subsidiary. Except as set forth in Section 3.23 of the Disclosure Schedule, neither the Company nor any Subsidiary nor the Shareholder are (i) subject to any continuing court or administrative order, writ, injunction or decree applicable specifically to the Company or any Subsidiary or to their respective business, assets, operations or employees or (ii) in default with respect to any such order, writ, injunction or decree. Neither the Company, any Subsidiary nor the Shareholder know of any basis for any such action, proceeding or investigation which, if instituted, could have a Material Adverse Effect. SECTION 3.24. ACCURACY OF INFORMATION FURNISHED. All information furnished and made available to Michaels by the Company, any Subsidiary or any Shareholder hereby or in connection with the transactions contemplated hereby is true, correct and complete in all material respects. Such information, to the best knowledge of the Company and the Shareholder, states in all material respects all facts required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements are made and taken together with all information furnished or made available to Michaels, true, correct and complete. SECTION 3.25. CONDITION OF FIXED ASSETS. All of the furniture, fixtures, structures and equipment (the "Fixed Assets"), when taken as a whole, which is owned by the Company and the Subsidiaries and is reflected in the Financial Statements and is used by the Company or a Subsidiary in its business are, in the aggregate and considering their age, in good condition and repair for their intended use in the ordinary course of business, reasonable wear and tear and ordinary course breakdowns excepted, and conform in all material respects with all applicable ordinances, regulations and other laws and there are no known material latent defects therein. SECTION 3.26. INVENTORY. Except as set forth in Section 3.26 of the Disclosure Schedule, all of the inventory owned by the Company and the Subsidiaries is in good, current, standard and merchantable condition and is not obsolete or defective. Inventories are valued on the books and records of the Company at the lower of cost (on a FIFO basis with a LIFO adjustment) or market. Purchase commitments for merchandise are not in excess of normal requirements based on the Company's and the Subsidiaries' historical business needs and present market conditions and, taken as a whole, are not at prices in excess of market prices. SECTION 3.27. BOOKS OF ACCOUNT. Except as set forth in Section 3.27 of the Disclosure Schedule, since April 6, 1988, the books of account of the Company and the Subsidiaries have been kept accurately in the ordinary course of business, the transactions entered therein represent bona fide transactions and the revenues, expenses, assets and liabilities of the Company and the Subsidiaries have been properly recorded in such books. SECTION 3.28. CORPORATE NAME. There are no actions, suits or proceedings pending, or to the best knowledge of the Company or the Shareholder threatened, against or affecting the Company or any Subsidiary that could result, in any material respect, in any impairment of the right of the Company or any such Subsidiary to use the names "Aaron Brothers Holdings, Inc.," "Aaron Brothers Art Marts, Inc.", "Aaron Brothers, Inc." and "Aaron Brothers." The use of the names "Aaron Brothers Holdings, Inc.," "Aaron Brothers Art Marts, Inc.", "Aaron -22- Brothers, Inc." and "Aaron Brothers" does not infringe the rights of any third party nor, to the knowledge of the Company, are they confusingly similar with the corporate name of any third party. After the Closing Date, no person or business entity other than the Company and the Subsidiaries will, to the knowledge of the Company, be authorized, directly or indirectly, to use the names "Aaron Brothers Holdings, Inc.," "Aaron Brothers Art Marts, Inc.", "Aaron Brothers, Inc." and "Aaron Brothers" or any name confusingly similar thereto. SECTION 3.29. DISTRIBUTIONS AND REPURCHASES. No distribution, payment or dividend of any kind has been declared or paid by the Company or any Subsidiary on any of its capital stock at any time since April 6, 1988. No repurchase of any of the capital stock of the Company or any Subsidiary has been approved or effected by the Company or any Subsidiary at any time since April 6, 1988. SECTION 3.30. BANKING RELATIONS. Set forth in Section 3.30 of the Disclosure Schedule is a complete and accurate list of all arrangements that the Company and the Subsidiaries have with any bank or other financial institution, indicating with respect to each relationship the type of arrangement maintained (such as checking account, borrowing arrangements, safe deposit box, etc.) and the person or persons authorized in respect thereof. SECTION 3.31. OWNERSHIP INTERESTS OF INTERESTED PERSONS. Except as set forth in Section 3.31 of the Disclosure Schedule, no officer, supervisory employee, director or shareholder of the Company or any Subsidiary, or their respective spouses or children, to the best of the Company's knowledge, owns directly or indirectly, on an individual or joint basis, any material interest in, or serves as an officer or director of, any supplier of the Company or any Subsidiary, or any organization that has a material contract or arrangement with the Company or any Subsidiary. SECTION 3.32. INVESTMENTS IN COMPETITORS. No Shareholder owns directly or indirectly any interests or has any investment in any corporation, business or other person that is a competitor of the Company or any Subsidiary. SECTION 3.33. ENVIRONMENTAL MATTERS. (a) ENVIRONMENTAL LAWS. Except as set forth in Section 3.33 of the Disclosure Schedule, neither the Company nor any Subsidiary nor any of their respective assets is currently in violation of, or subject to any existing, pending or, to the knowledge of the Company, threatened investigation or inquiry by any governmental authority or to any remedial obligations under, any laws or regulations pertaining to health or the environment (hereinafter sometimes collectively called "Environmental Laws"), which could have a Material Adverse Effect, including without limitation (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Sections 9601 ET SEQ.), as amended from time to time ("CERCLA") (including without limitation as amended pursuant to the Superfund Amendments and Reauthorization Act of 1986), and regulations promulgated under CERCLA, (ii) the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Sections 6901 ET SEQ.), as amended from time to -23- time ("RCRA"), and regulations promulgated thereunder, (iii) statutes, rules or regulations, whether federal, state or local, relating to asbestos or polychlorinated biphenyls, and (iv) the provisions contained in any similar state statutes or regulations relating to environmental matters applicable to the Company or any Subsidiary, and this representation and warranty would continue to be true and correct following disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the assets and operations of the Company and the Subsidiaries. (b) USE OF ASSETS. Except as set forth in Section 3.33 of the Disclosure Schedule, the assets of the Company and the Subsidiaries have not, since April 6, 1988, been used in a manner that would be in violation of any of the Environmental Laws, including without limitation CERCLA, RCRA, and any similar state statutes or regulations relating to environmental matters applicable to the Company or any Subsidiary, which violation could have a Material Adverse Effect. (c) PERMITS. Neither the Company nor any Subsidiary has obtained or is required to obtain, and neither the Company nor any Subsidiary has any knowledge of any reason Michaels will be required to obtain, any permits, licenses or similar authorizations to construct, occupy, operate or use any buildings, improvements, fixtures and equipment owned or leased by the Company or any Subsidiary by reason of any Environmental Laws, which, if not obtained, could have a Material Adverse Effect. (d) SUPERFUND LIST. None of the assets owned or, to the best of the Company's knowledge, leased by the Company or any Subsidiary are on any federal or state "Superfund" list or subject to any environmentally related liens which, if so listed, could have a Material Adverse Effect. SECTION 3.34. CERTAIN PAYMENTS. To the best knowledge of the Company and the Shareholder, neither the Company nor the Shareholder nor any director, officer or employee of the Company or any Subsidiary has paid or caused to be paid, directly or indirectly, since April 6, 1988, in connection with the business of the Company or any Subsidiary: (a) to any government or agency thereof or any agent of any supplier or customer any bribe, kick-back or other similar payment; or (b) any illegal contribution to any political party or candidate (other than from personal funds of directors, officers or employees not reimbursed by their respective employers or as otherwise permitted by applicable law). SECTION 3.35. HSR ACT. The "ultimate parent entity" of the Company has filed a Premerger Notification and Report Form required under the HSR Act with respect to the transactions contemplated by this Agreement and has not received any requests for additional information. The applicable waiting period under the HSR Act has expired. -24- SECTION 3.36. NO KNOWLEDGE OF DEFAULT. To the best knowledge of the Company, any of the Subsidiaries and the Shareholder, neither the Company, the Subsidiaries, nor the Shareholder is aware of any facts or circumstances that would serve as the basis for a claim by the Company, any of the Subsidiaries or the Shareholder against Michaels of a material breach of any of the representations and warranties of Michaels contained in this Agreement. The Company, the Subsidiaries and the Shareholder shall be deemed to have waived in full any breach of any of Michaels' representations and warranties of which the Company, any of the Subsidiaries or the Shareholder has such awareness to its best knowledge at the Closing. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER The Shareholder represents and warrants that the following are true and correct as of the date hereof and will be true and correct through the Closing Date as if made on that date: SECTION 4.01. NO VIOLATION. Neither the execution, delivery or performance of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with, or result in a violation or breach of the terms, conditions or provisions of, or constitute a default under the agreement of limited partnership of Shareholder or any agreement, indenture or other instrument under which Shareholder is bound, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon the Stock, or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Shareholder or the Stock. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF MICHAELS Michaels represents and warrants that the following are true and correct as of the date hereof and will be true and correct through the Closing Date as if made on that date: SECTION 5.01. ORGANIZATION AND GOOD STANDING. Michaels is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, with all requisite corporate power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. SECTION 5.02. AUTHORIZATION AND VALIDITY. The execution, delivery and performance by Michaels of this Agreement and the other agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by Michaels. This Agreement and each other agreement contemplated hereby have been or will -25- be as of the Closing Date duly executed and delivered by Michaels and constitute or will constitute legal, valid and binding obligations of Michaels, enforceable against Michaels in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies (whether enforcement is sought by an action or proceeding in equity or by law). SECTION 5.03. NO VIOLATION. Neither the execution, delivery or performance of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with, or result in a violation or breach of the terms, conditions or provisions of, or constitute a default under, the Certificate of Incorporation or Bylaws of Michaels or any agreement, indenture or other instrument under which Michaels is bound or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Michaels or the properties or assets of Michaels. SECTION 5.04. FINDER'S FEE. Michaels has not incurred any obligation for any finder's, broker's or agent's fee in connection with the transactions contemplated hereby. SECTION 5.05. [INTENTIONALLY OMITTED]. SECTION 5.06. CORPORATE APPROVALS. The Board of Directors of Michaels has approved and authorized the execution and delivery of this Agreement and the transactions contemplated hereby, and no other corporate or shareholder action is required by Michaels with respect thereto. SECTION 5.07. HSR ACT. Michaels has filed a Premerger Notification and Report Form required under the HSR Act with respect to the transactions contemplated by this Agreement and has not received any requests for additional information. The applicable waiting period under the HSR Act has expired. SECTION 5.08. CONSENT. No consent, authorization, approval, permit or license of, or filing with, any governmental or public body or authority, any lender or lessor or any other person or entity is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or the agreements contemplated hereby on the part of Michaels, where the failure to obtain any such consent, authorization, approval, permit or license, or to make any such filing, could have a material adverse effect on Michaels' ability to consummate the transactions contemplated in, and perform its obligations under, this Agreement. SECTION 5.09. NO KNOWLEDGE OF DEFAULT. To the best knowledge of Michaels and except as brought to the attention of the Company, its Subsidiaries or the Shareholder and reflected in Schedule 5.09 of the Disclosure Schedule, Michaels is not aware of any facts or circumstances that would serve as the basis for a claim by Michaels against the Shareholder of a material breach of any of the representations and warranties of the Company or the Shareholder contained in this Agreement. Michaels shall be deemed to have waived in full any breach of any of the -26- Company's or the Shareholder's representations and warranties of which Michaels has such awareness to its best knowledge at the Closing unless Michaels has brought such issues to the attention of the Company, its Subsidiaries or the Shareholder prior to Closing which issues are set forth in Schedule 5.09 of the Disclosure Schedule. ARTICLE VI. THE COMPANY'S AND THE SHAREHOLDER'S COVENANTS The Company and the Shareholder jointly and severally agree that between the date hereof and the Closing: SECTION 6.01. CONSUMMATION OF AGREEMENT. The Company and the Shareholder shall use their reasonable best efforts to cause the consummation of the transactions contemplated hereby in accordance with their terms and conditions. SECTION 6.02. BUSINESS OPERATIONS. The Company and the Subsidiaries shall operate their businesses in the ordinary course. SECTION 6.03. ACCESS. The Company and the Shareholder shall permit Michaels and its authorized representatives full access to, and make available for inspection, all of the assets and business of the Company and the Subsidiaries, including their respective employees and suppliers, and permit Michaels and its authorized representatives to inspect and make copies of all documents, records and information with respect to the affairs of the Company and the Subsidiaries as Michaels and its representatives may request, all for the sole purpose of permitting Michaels to become familiar with the business and assets and liabilities of the Company and the Subsidiaries, the foregoing to be upon reasonable prior notice and subject to the terms of the Confidentiality Agreement. SECTION 6.04. MATERIAL CHANGE. The Company and the Shareholder shall promptly inform Michaels in writing of (a) any notice of, or other communication relating to, a default or event that, with notice or lapse of time, or both, would become a default, received by the Company, or any Subsidiary, subsequent to the date of this Agreement and prior to the Closing Date, under any Commitment material to the Company's or any Subsidiary's financial condition, properties, business or results of operations and to which the Company or any Subsidiary is subject; and (b) any Material Adverse Change that, if known to the Company or any Subsidiary prior to the date of the Disclosure Schedule, would have been required to have been disclosed in the Disclosure Schedule. Notwithstanding the disclosure to Michaels of any such material adverse change, the Company and the Shareholder shall not be relieved of any indemnification obligations for, nor shall the providing of such information by the Company to Michaels be deemed a waiver by Michaels of, the breach of any representation or warranty of the Company and the Shareholder contained in this Agreement. SECTION 6.05. [INTENTIONALLY OMITTED]. -27- SECTION 6.06. EMPLOYEE MATTERS. Neither the Company nor any Subsidiary shall, without the prior written approval of Michaels, except as disclosed in the Disclosure Schedule or as required by law: (a) increase the Cash Compensation of any director, officer, consultant or employee of the Company or any Subsidiary; (b) adopt, amend or terminate any Compensation Plan; (c) adopt, amend or terminate any Employment Agreement; (d) adopt, amend or terminate any Employee Policies and Procedures; (e) institute, settle or dismiss any employment litigation; (f) enter into, modify, amend or terminate any agreement with any union, labor organization or collective bargaining unit; or (g) take any action with respect to any past or present employee of the Company or any Subsidiary that could, in the judgment of the Company before the Closing, have a Material Adverse Effect. SECTION 6.07. EMPLOYEE BENEFIT PLANS AND TAXES. Neither the Company nor any Subsidiary shall, without the prior written approval of Michaels, except as required by law: (a) adopt, amend or terminate any Employee Benefit Plan; (b) take any action that would deplete the assets of any Employee Benefit Plan, other than payment of benefits in the ordinary course to participants and beneficiaries; (c) fail to pay any premium or contribution due or with respect to any Employee Benefit Plan, after taking into account any grace periods; (d) fail to file any return or report with respect to any Employee Benefit Plan after taking into account extensions to do the same; (e) take any action that could materially and adversely affect any Employee Benefit Plan; or (f) make any new elections, or any changes in current elections, with respect to Taxes. SECTION 6.08. CONTRACTS. Except with Michaels' prior written consent, neither the Company nor any Subsidiary shall waive any right or cancel any contract, debt or claim nor -28- assume or enter into any contract, lease, license, obligation, indebtedness, commitment, purchase or sale except in the ordinary course of business and except with respect to the Bank Debt. SECTION 6.09. CHANGES IN INVENTORY. Neither the Company nor any Subsidiary shall alter the physical contents or character of its inventory or the mixture of products in its inventory so as to affect the nature of its business in any material respect. SECTION 6.10. CAPITAL ASSETS; PAYMENTS OF LIABILITIES. Neither the Company nor any Subsidiary shall, without the prior written approval of Michaels (i) acquire or dispose of any capital asset having an initial cost of $25,000 or more or (ii) discharge or satisfy any lien or encumbrance or pay or perform any obligation or liability other than (a) liabilities and obligations reflected in the Financial Statements or in the Year-End Statements or (b) current liabilities and obligations incurred in the ordinary course of business since January 29, 1995 (and, in either case (a) or (b) above, only as required by the express terms of the agreement or other instrument pursuant to which the liability or obligation was incurred) or (c) any one or more of the litigations referred to in Section 3.23 of the Disclosure Schedule in amounts in excess of reserves set forth in the Year-End Statements plus any other amounts that may be set forth in Section 3.23 of the Disclosure Schedule. SECTION 6.11. MORTGAGES, LIENS AND GUARANTIES. Neither the Company nor any Subsidiary shall, without the prior written approval of Michaels, enter into or assume any mortgage, pledge, conditional sale or other title retention agreement, permit any security interest, lien, encumbrance or claim of any kind to attach to any of its assets, whether now owned or hereafter acquired, or guarantee or otherwise become contingently liable for any obligation of another, except obligations arising by reason of endorsement for collection and other similar transactions in the ordinary course of business, or make any capital contribution or investment in any corporation, business or other person. SECTION 6.12. NO NEGOTIATION WITH OTHERS. Neither the Company nor any Shareholder shall initiate, solicit or participate in negotiations with (and the Company and the Shareholder shall use their best efforts to prevent any affiliate, shareholder, director, officer, employee or other representative or agent of the Company from initiating, negotiating with, soliciting or participating in negotiations with) directly or indirectly any third party or providing any confidential information or data to any third party with respect to the sale of the business of the Company or any Subsidiary or any transaction inconsistent with those contemplated hereby. SECTION 6.13. DISTRIBUTIONS AND REPURCHASES. No distribution, payment or dividend of any kind will be declared or paid by the Company or any Subsidiary, nor will any repurchase of any of the Stock be approved or effected. -29- ARTICLE VII. MICHAELS' COVENANTS Michaels agrees that between the date hereof and the Closing: SECTION 7.01. CONSUMMATION OF AGREEMENT. Michaels shall use its reasonable best efforts to cause the consummation of the transactions contemplated hereby in accordance with their terms and conditions. ARTICLE VIII. MICHAELS' CONDITIONS PRECEDENT Except as may be waived in writing by Michaels, the obligations of Michaels hereunder are subject to the fulfillment at or prior to the Closing Date of each of the following conditions: SECTION 8.01. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company and the Shareholder contained herein shall have been true and correct in all respects when initially made and shall be true and correct in all respects as of the Closing Date; and Michaels shall have received a certificate of the Company's Chairman, President, any of its Vice Presidents or its Secretary, and of the Shareholder, dated as of the Closing Date, to the foregoing effect. SECTION 8.02. COVENANTS AND CONDITIONS. The Company and the Shareholder shall have performed and complied with all covenants and conditions required by this Agreement to be performed and complied with by the Company and the Shareholder prior to the Closing Date; and Michaels shall have received a certificate of the Company's Chairman, President, any of its Vice Presidents or its Secretary, and of the Shareholder, dated as of the Closing Date, to the foregoing effect. SECTION 8.03. LEGAL OPINION. Counsel to the Company and the Shareholder shall have delivered to Michaels its opinion, dated as of the Closing Date, in the form of Schedule 8.03. SECTION 8.04. PROCEEDINGS. No action, proceeding or order by or in any court or governmental body or agency shall have been instituted or entered to restrain or prohibit the carrying out of the transactions contemplated hereby. SECTION 8.05. RESIGNATIONS OF DIRECTORS AND OFFICERS. Michaels shall have received the resignations of the directors and officers of the Company and all Subsidiaries as set forth in Schedule 8.05, or a certification of the Secretary of the Company and the Secretary of each of the Subsidiaries that each such officer and director has been removed from each such office. -30- SECTION 8.06. CODE SECTION 1445(b)(3) AFFIDAVIT. Michaels shall have received an affidavit in the form of Schedule 8.06 of the Company signed under penalty of perjury by the president of the Company and dated not more than 20 days prior to the Closing Date. The notice required by Treasury Regulation Section 1.897-2 has been properly delivered by the Company to the service and a copy of the notice evidencing delivery shall be received by Michaels as of the Closing Date. SECTION 8.07. RELEASE OF CLAIMS. Michaels shall have received duly executed documents in the form of Schedule 8.07, pursuant to which the Shareholder and each officer and director releases, relinquishes and waives any and all claims, demands, causes of action, suits, judgments or controversies of any kind whatsoever, whether known or unknown, that such Shareholder may have against the Company and/or the Subsidiaries as of the Closing Date, for any reason whatsoever, including without limitation claims by such Shareholder against the Company and/or the Subsidiaries with respect to dividends, violation of preemptive rights, or payment of salaries or other compensation; provided, however, such releases shall not apply to payment of salaries for officers, claims under existing contracts and shall not apply to indemnification obligations in favor of such officers and directors. SECTION 8.08. CLOSING DELIVERIES. Michaels shall have received all documents referred to in Section 10.01. SECTION 8.09. REVOLVING PORTION OF BANK DEBT. The revolving portion of the Bank Debt shall not be less than $4,500,000. ARTICLE IX. THE COMPANY'S AND THE SHAREHOLDER'S CONDITIONS PRECEDENT Except as may be waived in writing by the Company and the Shareholder, the obligations of the Company and the Shareholder hereunder is subject to fulfillment at or prior to the Closing Date of each of the following conditions: SECTION 9.01. REPRESENTATIONS AND WARRANTIES. The representations and warranties of Michaels contained herein shall be true and correct in all respects as of the Closing Date; and Michaels shall have delivered to the Company and the Shareholder a certificate of Michaels' President or any of its Vice Presidents, dated as of the Closing Date, to the foregoing effect. SECTION 9.02. COVENANTS AND CONDITIONS. Michaels shall have performed and complied in all material respects with all covenants and conditions required by this Agreement to be performed and complied with by it prior to the Closing Date; and Michaels shall have delivered to the Company and the Shareholder a certificate of Michaels' President or any of its Vice Presidents, dated as of the Closing Date, to the foregoing effect. -31- SECTION 9.03. PROCEEDINGS. No action, proceeding or order by or in any court or governmental body or agency shall have been instituted or entered to restrain or prohibit the carrying out of the transactions contemplated hereby. SECTION 9.04. CLOSING DELIVERIES. The Company or the Shareholder, as the case may be, shall have received all documents referred to in Section 10.02. SECTION 9.05. OPINION. Counsel to Michaels shall have delivered to the Company and the Shareholder its opinion, dated as of the Closing Date, in the form of Schedule 9.05. ARTICLE X. CLOSING DELIVERIES SECTION 10.01. DELIVERIES OF THE COMPANY AND THE SHAREHOLDER. At the Closing, the Company and the Shareholder shall deliver to Michaels the following, all of which shall be in the forms set forth in Schedules to this Agreement or in forms reasonably acceptable to counsel for Michaels: (a) certificates representing all of the Stock, duly endorsed and in proper form for transfer to Michaels by delivery under applicable law, or accompanied by duly executed instruments of transfer in blank; (b) a copy of resolutions of the Board of Directors of the Company and any corporate Shareholder authorizing the execution, delivery and performance of this Agreement and all related documents and agreements, each certified by the Secretary of that corporation as being true and correct copies of the originals thereof subject to no modifications or amendments; (c) a certificate of the Chairman, the President, any Vice President or the Secretary of the Company, and of the Shareholder, dated the Closing Date, as to the truth and correctness of the representations and warranties of the Company and the Shareholder, respectively, contained herein on and as of the Closing Date, except for changes permitted or contemplated hereby; (d) a certificate of the Chairman, the President, any Vice President or the Secretary of the Company, and of the Shareholder, dated the Closing Date, (i) as to the performance of and compliance by the Company and the Shareholder, respectively, with all covenants contained herein on and as of the Closing Date and (ii) certifying that all conditions precedent of the Company and the Shareholder, respectively, to the Closing have been satisfied or waived; (e) a certificate of the Secretary of the Company certifying as to the incumbency of the directors and officers of the Company and as to the signatures of such directors and officers who have executed documents delivered at the Closing on behalf of the Company; -32- (f) a certificate, dated within 30 days of the Closing Date, of the Secretary of State of Delaware establishing that the Company is in existence, has paid all franchise taxes and otherwise is in good standing to transact business in its state of incorporation; (g) certificates, dated within 30 days of the Closing Date, of the Secretaries of State of the states in which the Company is qualified to do business, to the effect that the Company is qualified to do business and is in good standing as a foreign corporation in each of such states; (h) a certificate, dated within 30 days of the Closing Date, of the Secretary of State of Delaware establishing that Art Marts, Inc. is in existence, has paid all franchise taxes and otherwise is in good standing to transact business in its state of incorporation; (i) certificates, dated within 30 days of the Closing Date, of the Secretaries of State of the states in which Art Marts, Inc. is qualified to do business, to the effect that the Company is qualified to do business and is in good standing as a foreign corporation in each of such states; (j) a certificate, dated within 30 days of the Closing Date, of the Secretary of State of Delaware establishing that Aaron Brothers is in existence, has paid all franchise taxes and otherwise is in good standing to transact business in its state of incorporation; (k) certificates, dated within 30 days of the Closing Date, of the Secretaries of State of the states in which Aaron Brothers is qualified to do business, to the effect that the Company is qualified to do business and is in good standing as a foreign corporation in each of such states; (l) an opinion of Siller, Wilk & Mencher, LLP, counsel to the Company and the Shareholder, dated as of the Closing Date, in the form attached as Schedule 8.03. (m) an executed Noncompetition and Confidentiality Agreement between each of (i) the Shareholder, (ii) George P. Orban, (iii) Anthony J. Cincotta, (iv) Betty Smith, (v) Norman Hullinger, (vi) William McLeod and Michaels in substantially the form attached as Schedule 10.01(m); (n) the resignations or removal of the directors and officers of the Company and the Subsidiaries as required by this Agreement; (o) the affidavit referred to in Section 8.06; (p) executed documents in the form of Schedule 8.07 attached hereto, provided that each such person receives a reciprocal release from the Company and such Subsidiary in favor of the Shareholder and each such officer and director; (q) executed Escrow Agreement from the Stockholder in the form of Schedule 2.03; and -33- (r) an executed side letter agreement concerning certain indemnification matters to be entered into by and between Michaels and Shareholder in the form of Schedule 10.01(r). SECTION 10.02. DELIVERIES OF MICHAELS. At the Closing, Michaels shall deliver the following to the Company or the appropriate party: (a) the Cash Consideration (less the cash, if any, placed in escrow) as set forth on the Closing Statement in immediately available funds; (b) a copy of the resolutions of the Board of Directors of Michaels authorizing the execution, delivery and performance of this Agreement and all related documents and agreements, each certified by Michaels' Secretary as being true and correct copies of the originals thereof subject to no modifications or amendments; (c) a certificate of the President or any Vice President of Michaels, dated the Closing Date, as to the truth and correctness of the representations and warranties of Michaels contained herein on and as of the Closing Date; (d) a certificate of the President or any Vice President of Michaels, dated the Closing Date, (i) as to the performance of and compliance by Michaels with all covenants contained herein on and as of the Closing Date and (ii) certifying that all conditions precedent of Michaels to the Closing have been satisfied; (e) a certificate of the Secretary of Michaels certifying as to the incumbency and signatures of the officers of Michaels who have executed documents delivered at the Closing on behalf of Michaels; (f) a certificate, dated within 30 days of the Closing Date, of the Secretary of State of Michaels' state of incorporation, establishing that Michaels is in existence, has paid all state taxes and otherwise is in good standing to transact business in such state; (g) an opinion of Jackson & Walker, L.L.P., counsel to Michaels, dated as of the Closing Date, substantially in the form of Schedule 9.05; and (h) an executed Escrow Agreement from Michaels. ARTICLE XI. POST-CLOSING MATTERS SECTION 11.01. FURTHER INSTRUMENTS OF TRANSFER. Following the Closing, at the request of the other, each of Michaels and the Shareholder shall deliver any further instruments of transfer and take all reasonable action as may be necessary or appropriate to (i) vest in Michaels good title to the Stock and (ii) carry out more effectively the provisions of this -34- Agreement and to establish and protect the rights created in favor of the parties hereunder or thereunder. SECTION 11.02. [INTENTIONALLY OMITTED]. SECTION 11.03. [INTENTIONALLY OMITTED]. SECTION 11.04. BANKRUPTCY PROCEEDINGS. For a period lasting thirteen months after the Closing Date, Michaels shall not cause or permit the filing of a voluntary petition under the United States Bankruptcy Code (the "Bankruptcy Code") on behalf of the Company or a Subsidiary, and in the event an involuntary petition under the Bankruptcy Code is filed against the Company or a Subsidiary, Michaels shall cause that entity to oppose entry of an order for relief and timely file a motion to dismiss the involuntary petition. SECTION 11.05. DAVIS CASES. The Company and its Subsidiaries will transfer all of their respective right, title and interest in and to the Davis Cases to Shareholder or Shareholder's designee. The Company will pay all legal fees and expenses incurred through the Closing Date except those legal fees of Siller, Wilk & Mencher, LLP and will pay all costs, expenses, damages, or amounts paid in settlement in an amount not to exceed $50,000 in connection with the resolution or disposition of the Davis Cases (including without limitation reasonable fees and expenses of Robinson, St. John & Wayne, New Jersey counsel and actual, reasonable expenses of Siller, Wilk & Mencher, LLP, but excluding any fees of Siller, Wilk & Mencher, LLP). To the extent the Shareholder or Shareholder's designee is awarded or recovers any damages, fees or costs in connection with the disposition or resolution of the Davis Cases, such amount shall first be provided to the Company or its Subsidiaries to reimburse them for any costs, expenses or damages incurred and paid after the Closing Date pursuant to this Section 11.05. Shareholder or Shareholder's designee will agree to assume all liability in excess of $50,000 incurred in connection with the disposition of the Davis Cases. ARTICLE XII. REMEDIES SECTION 12.01. INDEMNIFICATION. (a) INDEMNIFICATION FROM ESCROW DEPOSIT. Subject to the terms and conditions of this Article, and limited in all cases to the Escrow Deposit, the Shareholder agrees to indemnify, defend and hold Michaels and its directors, officers, employees, agents, attorneys and affiliates harmless from and against all losses, claims, obligations, demands, assessments, penalties, liabilities, costs, damages, reasonable attorneys' fees and expenses in each case, to the extent not insured (collectively, "Damages"), asserted against or incurred by such indemnitees by reason of or resulting from the following: -35- (i) all Damages incurred by Michaels by reason of or resulting from a breach of any representation, warranty or covenant of the Company or the Shareholder which is contained (A) herein, or in any exhibit, schedule or certificate delivered hereunder, or (B) in any agreement executed in connection with the transactions contemplated hereby; (ii) all Damages incurred by the Company, its Subsidiaries or Michaels by reason of or resulting from any defaults, events of default or events, occurrences, acts or omissions that, with the giving of notice or lapse of time or both, which occurrences, acts or omissions the landlord asserts in writing constitute defaults by the Company or its Subsidiaries under any real property leases, which default was existing on or before the Closing Date except as a result of the transactions contemplated by this Agreement because of lease provisions relating to radius clauses, change-in-control provisions, non-assignment clauses or similar lease terms which are violated as a result of the consummation of the transactions contemplated by this Agreement or the ownership and the combined operation of the stores by Michaels or the Company and its Subsidiaries immediately after the transactions contemplated by this Agreement; (iii) the amount of $100,000 per each store location for the Hermosa Beach and Stockton store locations if (A) the landlord at either store location asserts that under the relevant lease (x) the landlord's consent to the indirect change in control of the tenant is required or (y) a deemed assignment of the lease has occurred, and (B) consent to such change in control or assignment is required and (C) in either case the landlord fails to grant such consent and the result is the Company or any Subsidiary no longer occupies the premises; (iv) all Damages incurred by the Company, its Subsidiaries or Michaels after the date hereof by reason of or resulting from the assets and facilities of the Company or its Subsidiaries presently being in violation of any Environmental Laws that are not disclosed in the Disclosure Schedules to the extent that the Damages incurred with respect to such facilities or any one store or corporate headquarters location exceeds $2,500 at such location and the remediation costs incurred are reasonable; provided, however, to the extent that (A) a lease agreement provides the Company or its Subsidiaries with indemnity from the landlord with respect to violations of Environmental Laws, the Company or its Subsidiaries will first pursue its rights under the indemnity, (B) a lease agreement provides the Company or its Subsidiaries with indemnity from the landlord with respect to violations of Environmental Laws and a contractual right of offset, the Company or its Subsidiaries will first pursue its rights under the offset, and (C) neither the Company, its Subsidiaries, Michaels nor their affiliates will report existing violations of Environmental Laws to governmental authorities unless it is obligated by law to do so; -36- (v) all Damages incurred in connection with the letter agreement entered into by and between Trenwith Capital, Inc. and Aaron Brothers, Inc. dated August 29, 1994; (vi) all Damages incurred with respect to any claims made by North American Capital with respect to fees based upon the extension of the Bank Debt by the Lenders; (vii) all Damages incurred in excess of $50,000 incurred by the Company, its Subsidiaries or Michaels, after the Closing Date including, without limitation, legal fees of Siller, Wilk & Mencher, LLP and legal fees and expenses of Robinson, St. John & Wayne in connection with the Davis Cases; (viii) all Damages incurred by the Company, its Subsidiaries or Michaels if, after the date hereof and before April 30, 1996, any of the partners of the Shareholder other than George P. Orban, Retail Enterprises, Inc., Anthony J. Cincotta, Norman Hullinger, William F. McLeod and Betty Smith, directly or indirectly, for themselves or on behalf of any corporation, person, firm, partnership, association or other entity, engage in or participate in any business which engages in competition with the business conducted by Aaron Brothers at the date the transactions contemplated by this Agreement are consummated; provided however, that this provision shall not prohibit a partner of the Shareholder, directly or indirectly, from holding an aggregate equity interest of less than 1%, or such partner and his affiliates holding less than 5%, in any business engaged in the direct or indirect competition with the business conducted by Aaron Brothers at the date the transactions contemplated by this Agreement are consummated; and (ix) all Damages not covered by insurance (and net of any applicable deductible payments which shall be paid by the Company or its Subsidiaries) incurred by the Company or any of its Subsidiaries in connection with litigation brought by the following plaintiffs (none of which claims to the best knowledge of the Company are workers' compensation claims): Kimberly Myers, Maria Angelica Kulch, Goldie Yim Ting, Lizabeth Shahinian, Zerlene Ratzlaff, Rosa Bumpus, Dorothea Hawkins, Phyllis Oster, Nelson & Rexon, John Powell and La Mesa Community Redevelopment Agency. (b) INDEMNIFICATION LIMITATIONS. Notwithstanding the provisions of Section 12.01(a), (i) Michaels shall not be entitled to such indemnification unless, and only to the extent that, the aggregate amount of all Damages incurred by the Company, Art Marts and Aaron Brothers together or Michaels shall exceed the amount which is $100,000 in the aggregate, and (ii) no claim for Damages under Section 12.01(a) shall be made after April 30, 1996. The $100,000 limitation contained in Section 12.01(b)(i) above shall not apply to Damages incurred pursuant to Section 12.01(a)(vii) above. -37- SECTION 12.02. INDEMNIFICATION BY MICHAELS. Subject to the terms and conditions of this Article, Michaels hereby agrees to indemnify, defend and hold the Company and the Shareholder and its or their respective directors, officers, partners (and their officers and directors), agents, attorneys and affiliates harmless from and against all Damages asserted against or incurred by any of such indemnitees by reason of or resulting from a breach of any representation, warranty or covenant of Michaels contained herein or in any exhibit, schedule or certificate delivered hereunder, or in any agreement executed in connection with the transactions contemplated hereby. SECTION 12.03. CONDITIONS OF INDEMNIFICATION. The respective obligations and liabilities of the Company and the Shareholder and Michaels (the "indemnifying party") to the other (the "party to be indemnified") under Sections 12.01 and 12.02 with respect to claims resulting from the assertion of liability by third parties shall be subject to the following terms and conditions: (a) Within 20 days (or such earlier time as might be required to avoid prejudicing the indemnifying party's position) after receipt of notice of commencement of any action evidenced by service of process or other legal pleading, the party to be indemnified shall give the indemnifying party written notice thereof together with a copy of such claim, process or other legal pleading, and the indemnifying party shall have the right to undertake the defense thereof by representatives of its own choosing and at its own expense (provided that until the dollar indemnification threshold set forth in Section 12.01(b) is exceeded, the Company under Michaels' ownership, shall pay such expenses if the indemnifying party is the Shareholder); provided that the party to be indemnified may participate in the defense with counsel of its own choice, the fees and expenses of which counsel shall be paid by the party to be indemnified unless (i) the indemnifying party has agreed in writing to pay such fees and expenses, (ii) the indemnifying party has failed to assume the defense of such action or (iii) the named parties to any such action (including any impleaded parties) include both the indemnifying party and the party to be indemnified and the party to be indemnified has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the indemnifying party (in which case, if the party to be indemnified informs the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of the party to be indemnified, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the party to be indemnified, which firm shall be designated in writing by the party to be indemnified). (b) In the event that the indemnifying party, by the 30th day after receipt of notice of any such claim (or, if earlier, by the 10th day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the party to be indemnified will (upon -38- further notice to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party and at the indemnifying party's expense, subject to the right of the indemnifying party to assume the defense of such claims at any time prior to settlement, compromise or final determination thereof. (c) Notwithstanding the foregoing, the indemnifying party shall not settle any claim without the consent of the party to be indemnified, which consent shall not be unreasonably withheld, unless such settlement involves only the payment of money and the claimant provides to the party to be indemnified a release from all liability in respect of such claim. If the settlement of the claim involves more than the payment of money, the indemnifying party shall not settle the claim without the prior consent of the party to be indemnified, which consent shall not be unreasonably withheld. If an indemnified party withholds such consent, the indemnifying party's obligation to the indemnified party with respect to such claim shall be further limited to the amount, in excess of the threshold amount set forth in Section 12.01(b)(i), proposed to be paid by the indemnifying party in the settlement which is the subject of such requested consent. (d) The party to be indemnified and the indemnifying party will each cooperate with all reasonable requests of the other. SECTION 12.04. WAIVER. No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement, any exhibit or any document, schedule, instrument or certificate contemplated hereby shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies. SECTION 12.05. EXCLUSIVITY OF REMEDIES. The remedies provided in this Article with respect to breaches of this Agreement (including claims which are in the nature of breaches of this Agreement but may be denoted by other descriptive legal terms) are exclusive of any and all other rights or remedies available to one party against the other, either at law or in equity. SECTION 12.06. COSTS, EXPENSES AND LEGAL FEES. Subject to the provisions of Section 14.13, whether or not the transactions contemplated hereby are consummated, each party hereto shall bear its own costs and expenses (including attorneys' fees and expenses), except that each party hereto that is shown to have breached this Agreement or any other agreement contemplated hereby agrees to pay the costs and expenses (including reasonable attorneys' fees and expenses) incurred by any other party in successfully (i) enforcing any of the terms of this Agreement against such breaching party or (ii) proving that another party breached any of the terms of this Agreement; notwithstanding the foregoing, all costs and expenses of the Company and the -39- Shareholder in respect of all actions through the Closing (or related to the Closing, through March 17, 1995) shall be paid by, and be the obligation of, Aaron Brothers; provided, however, that Aaron Brothers shall not be obligated to pay legal fees of Siller, Wilk & Mencher, LLP in excess of $200,000 for services provided after January 31, 1995 (excluding, however, the fees and expenses attributable to general Aaron Brothers operating matters, such as leases, and the arbitration and legal actions concerning the Sacramento D.A. and James Nakamura provided the amounts for all such matters are not material and are consistent with billings in prior periods), such excess being the obligation of Shareholder. This limitation does not apply to reasonable, actual expenses incurred by Siller, Wilk & Mencher, LLP. SECTION 12.07. SPECIFIC PERFORMANCE. The Company and the Shareholder acknowledge that a refusal by the Company or the Shareholder to consummate the transactions contemplated hereby will cause irreparable harm to Michaels, for which there may be no adequate remedy at law and for which the ascertainment of damages would be difficult. Therefore, Michaels shall be entitled, in addition to, and without having to prove the inadequacy of, other remedies at law, to specific performance of this Agreement, as well as injunctive relief (without being required to post bond or other security). SECTION 12.08. TAX EFFECT OF INDEMNIFICATION. Notwithstanding any term or provision of this Agreement to the contrary, any indemnity payments owed by one party to another party to this Agreement shall be reduced by any tax benefits to the party claiming indemnity hereunder and increased by any tax detriments to the party claiming indemnity hereunder. ARTICLE XIII. TERMINATION SECTION 13.01. TERMINATION. This Agreement may be terminated: (a) At any time prior to the Closing Date by mutual agreement of all parties; (b) At any time prior to the Closing Date by Michaels if any representation or warranty of the Company or the Shareholder contained in this Agreement or in any certificate or other document executed and delivered by the Company or the Shareholder pursuant to this Agreement is or becomes untrue or breached in any material respect or if the Company or the Shareholder fails to comply in any material respect with any covenant contained herein, and the cumulative effect of all thereof results in a Material Adverse Effect, and any such misrepresentation, noncompliance or breach is not cured, waived or eliminated within 10 days after receipt by the Company and the Shareholder of written notice thereof; (c) At any time prior to the Closing Date by the Company if any representation or warranty of Michaels contained in this Agreement or in any certificate or other document executed and delivered by Michaels pursuant to this Agreement is or becomes untrue or breached in any material respect or if Michaels fails to comply in any material respect with any covenant -40- contained herein, and the cumulative effect of all thereof results in a material adverse effect on the condition (financial or otherwise), operations, assets or liabilities of Michaels, and any such misrepresentation, noncompliance or breach is not cured, waived or eliminated within 10 days after receipt by Michaels of written notice thereof; (d) On the Closing Date, but prior to the actual Closing, by Michaels if the conditions stated in Article VIII have not been satisfied by the Closing Date; or (e) On or after the Closing Date by the Company if the conditions stated in Article IX have not been satisfied by the Closing Date. In the event this Agreement is terminated pursuant to subparagraph (b), (c), (d) or (e) above, Michaels, the Company and the Shareholder shall each be entitled to pursue, exercise and enforce any and all remedies, rights, powers and privileges available at law or in equity. In the event of a termination of this Agreement under the provisions of this Article, a party not then in material breach of this Agreement shall stand fully released and discharged of any and all obligations under this Agreement. ARTICLE XIV. MISCELLANEOUS SECTION 14.01. AMENDMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all the parties hereto. SECTION 14.02. ASSIGNMENT. Neither this Agreement nor any right created hereby or in any agreement entered into in connection with the transactions contemplated hereby shall be assignable by any party hereto, except by Michaels to a subsidiary of Michaels, provided that (i) in case of any such assignment, the assigning party shall not be released from its obligations hereunder and (ii) Michaels shall not have the right to assign its obligations under Article XI. SECTION 14.03. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. Neither this Agreement nor any other agreement contemplated hereby shall be deemed to confer upon any person not a party hereto or thereto any rights or remedies hereunder or thereunder. SECTION 14.04. ENTIRE AGREEMENT. This Agreement and the agreements contemplated hereby constitute the entire agreement of the parties regarding the subject matter hereof, and supersede all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. -41- SECTION 14.05. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision 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 herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION 14.06. [INTENTIONALLY OMITTED]. SECTION 14.07. 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 DELAWARE. SECTION 14.08. CAPTIONS. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. SECTION 14.09. GENDER AND NUMBER. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. SECTION 14.10. REFERENCE TO AGREEMENT. Use of the words "herein", "hereof", "hereto" and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise noted. SECTION 14.11. CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. Each party shall (and the Company shall direct its directors, officers, employees and representatives to) keep this Agreement, the status of the transactions contemplated by this Agreement, and this Agreement's terms confidential, and shall make no press release (other than an initial press release to be made by Michaels announcing this transaction, the contents of which shall be provided to Shareholder prior to release) or public disclosure, either written or oral, regarding the transactions contemplated by this Agreement without the prior knowledge and written consent of the other parties hereto; provided that the foregoing shall not prohibit any disclosure (i) by press release, filing or otherwise that Michaels has determined in its good faith judgment to be required by federal securities laws or the rules of the National Association of Securities Dealers, (ii) to attorneys, accountants, investment bankers or other agents of the parties assisting the parties in connection with the transactions contemplated by this Agreement, (iii) by Michaels in connection with obtaining financing for the transactions contemplated by this Agreement and conducting an examination of the operations and assets of the Company, (iv) as may be deemed necessary by -42- Michaels in connection with other potential acquisition transactions, or (v) as otherwise required by law. The Shareholder shall have no obligations in respect of any disclosures the Company may make after the Closing. In the event that the transactions contemplated hereby are not consummated for any reason whatsoever, the parties hereto agree not to disclose or use, directly or indirectly, any confidential information they may have concerning the affairs of the other parties, except for information that is required by law to be disclosed. Confidential information includes, but is not limited to, the following: financial records, surveys, reports, plans, store data, proposals, financial information, information relating to personnel, contracts, stock ownership, liabilities and litigation; provided that should the transactions contemplated hereby not be consummated, nothing contained in this Section shall be construed to prohibit the parties hereto from operating businesses in competition with each other. SECTION 14.12. NOTICE. Any notice or communication hereunder or in any agreement entered into in connection with the transactions contemplated hereby must be in writing and addressed to the party to be notified, given by causing the same to be delivered the next day by a nationally recognized overnight courier service, or by depositing the same in the United States mail, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person or by facsimile transmission. Such notice shall be deemed received on the date on which it is hand-delivered or one business day after being sent by facsimile transmission (provided such facsimile transmission is accompanied or immediately followed by delivery by another method permitted hereunder) or on the third business day following the date on which it is so mailed, or on the day actually delivered by any such courier service. For purposes of notice, the addresses of the parties shall be as follows: If to Michaels: Michaels Stores, Inc. 5931 Campus Circle Drive Irving, Texas 75063 Attn: Kristen L. Magnuson with a copy to: Jackson & Walker, L.L.P. 901 Main Street, 60th Floor Dallas, Texas 75202 Attn: Charles D. Maguire, Jr. If to the Company Aaron Brothers Holdings, Inc. or the Shareholder: 1270 S. Goodrich Blvd. City of Commerce, California 90022 Attn: George P. Orban (After the Closing, to the Shareholder c/o Siller, Wilk & Mencher, LLP as noted below) in each case with a Siller, Wilk & Mencher, LLP mandatory copy to: 747 Third Avenue -43- New York, New York 10017 Attn: Stephen I. Siller Any party may change its address for notice by written notice given to the other parties in accordance with this Section. SECTION 14.13. [INTENTIONALLY OMITTED]. SECTION 14.14. SERVICE OF PROCESS. Service of any and all process that may be served on any party hereto in any suit, action or proceeding arising out of this Agreement may be made in the manner and to the address set forth in Section 14.12 and service thus made shall be taken and held to be valid personal service upon such party by any party hereto on whose behalf such service is made. SECTION 14.15. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. -44- EXECUTED as of the date first above written. MICHAELS: --------- MICHAELS STORES, INC. By:___________________________ Its:__________________________ COMPANY: -------- AARON BROTHERS HOLDINGS, INC. By:___________________________ Its:__________________________ SHAREHOLDER: ------------ ABAM INVESTORS LIMITED PARTNERSHIP By: PYRAM, INC. Its: General Partner By:______________________ Stephen I. Siller President -45- By: CHUSA ART CORPORATION Its: General Partner By:_______________________ Thomas C. Dircks Secretary By: RETAIL ENTERPRISES, INC. Its: General Partner By:_________________________ George P. Orban President EX-10.7 3 EXHIBIT 10.7 EXHIBIT 10.7 EMPLOYMENT AGREEMENT by and between MICHAELS STORES, INC. and THIS AGREEMENT is entered into effective as of the 22nd day of March, 1989, by and between MICHAELS STORES, INC., a Delaware corporation, (hereinafter referred to as the "Company") and (hereinafter referred to as the "Executive"). WHEREAS, the Company wishes to attract and retain well-qualified executive and key personnel and to assure both itself and Executive of continuity of management in the event of any actual or threatened change of control of the Company; WHEREAS, Executive has heretofore been employed by the Company and is experienced in the business of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through March 21, 1992; provided, however, that commencing on March 22, 1990 and each March 22 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than the September 22 immediately preceding such March 22, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the term in effect immediately before such Change in Control. 2. EMPLOYMENT. Unless sooner terminated pursuant to the provisions of Section 8 of this Agreement, the Company hereby agrees to employ Executive, and Executive hereby agrees to remain in the employ of the Company, for the period commencing on the Change of Control Date and ending on the 65th birthday of Executive (the "Employment Period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by Executive immediately prior to the Change of Control Date, which services shall be performed at the location where Executive was employed immediately prior to the Change of Control Date. 3. BASE COMPENSATION. The Company agrees to pay Executive during the Employment Period a salary, payable in cash at intervals not less frequently than twice monthly, which is not less than his annual salary immediately prior to the -2- Change of Control Date, with the opportunity for increases, from time to time thereafter, which are in accordance with the Company's regular practices in effect prior to the Change of Control Date. 4. DISCRETIONARY BONUSES. During the Employment Period, Executive shall be entitled to participate in an equitable manner with all other key management personnel of the Company in discretionary bonuses paid to the Company's key management employees. No other compensation provided for in this Agreement shall be deemed a substitute for Executive's right to participate in such discretionary bonuses when and as declared by the Board of Directors or by any committee thereof. 5. OTHER COMPENSATION. (a) PARTICIPATION IN RETIREMENT AND MEDICAL PLANS. During the Employment Period, Executive shall be entitled to receive employee benefits under, and participate in, all employee benefit plans to which Executive was entitled immediately prior to the Change of Control Date, including but not limited to any applicable pension, retirement, deferred compensation, employee stock ownership or Section 401(k) thrift and savings plans (collectively, "Retirement Plans"), and any disability, life insurance or medical and dental plans provided -3- by the Company to executives with comparable duties; provided, however, that this provision shall not be construed to require the Company to establish any new plans. (b) EXECUTIVE BENEFITS; EXPENSES. During the Employment Period, Executive shall be entitled to receive any fringe benefits and perquisites which may be or become applicable to the Company's executive employees, including but not limited to participation in the Company's Key Employee Stock Compensation Program, and any other stock option or incentive plans adopted by the Board of Directors, a reasonable expense account, and any other benefits and perquisites which are commensurate with the responsibilities and functions to be performed by Executive under this Agreement. The Company shall reimburse Executive for all out-of-pocket expenses which Executive shall incur in connection with his services for the Company. During the Employment Period, Executive shall be entitled to the use of a Company automobile in accordance with the Company's practices in effect prior to the Change of Control Date for providing automobiles to its executives. In addition, during the Employment Period, Executive shall be entitled to legal and financial planning benefits consistent with benefits made available by the Company to its executives prior to the Change of Control Date. -4- (c) PARTICIPATION IN OTHER AGREEMENTS. During the Employment Period, Executive shall continue to be treated as an employee under the provisions of all agreements and other documents relating to the Company's Key Employee Stock Compensation Program or any deferred compensation arrangements. 6. VACATION SICK LEAVE AND LEAVES OF ABSENCE. During the Employment Period, Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement for the following purposes: (a) Executive shall be entitled to an annual vacation in accordance with the Company's practices in effect prior to the Change of Control Date for its senior management officials. (b) Upon Executive's request, the Board of Directors shall be entitled to grant to Executive a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as the Board of Directors in its reasonable discretion may determine. (c) In addition, Executive shall be entitled to an annual sick leave in accordance with the Company's practices in effect prior to the Change of Control Date for its senior management officials. -5- 7. CONTROL. (a) CHANGE OF CONTROL. Except as provided in this Section 7(a), for purposes of this Agreement, a Change of Control shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (as such disclosure requirement may in the future be otherwise identified), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, a Change of Control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Mr. Sam Wyly, Mr. Charles J. Wyly, Jr., or any affiliate of either of them, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (B) during any period of three consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, including for this purpose any new director whose election by the Board, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were -6- directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof. (b) CHANGE OF CONTROL DATE. For purposes of this Agreement, the term Change of Control Date shall mean the date upon which a Change of Control as defined in Section 7(a) hereof is deemed to have occurred. 8. TERMINATION OF THE EMPLOYMENT PERIOD. The Employment Period shall terminate upon the occurrence of any of the following events: (a) any termination by the Company of the employment of Executive with the Company for any reason other than death, physical or mental incapacity, or (b) the resignation of Executive upon the occurrence of any of the following: (i) a significant change in the nature or scope of Executive's authorities or duties from those described in Section 2; -7- (ii) a reduction in or delay in payment of total compensation from that provided in Section 3, 4 and 5; (iii) the material breach by the Company of any other provision of this Agreement; or (iv) a determination made by Executive, in his sole discretion, that as a result of a Change in Control of the Company and a change in circumstances thereafter affecting his position, he is unable to fully exercise the authorities, powers, functions or duties attached to his or her position and contemplated by Section 2 of this Agreement. 9. CALCULATION OF TERMINATION PAY. For purposes of this Agreement, Termination Date shall mean the date upon which the Employment Period terminates pursuant to Section 8 hereof. If the Employment Period is terminated pursuant to Section 8 hereof after a Change of Control, but prior to the third anniversary of the Change of Control Date, the Company shall pay to Executive as termination pay the amounts determined as follows: (a) an amount equivalent to three (3) times one hundred percent (100%) of Executive's aggregate monthly salary for the twelve (12) months immediately prior to the Termination Date; and -8- (b) an amount equivalent to three (3) times one hundred percent (100%) of Executive's aggregate bonuses for the twelve (12) months immediately prior to the Termination Date; and (c) an amount equivalent to three (3) times one hundred percent (100%) of the aggregate monthly equivalent cash values of those benefits which Executive shall have received during the twelve (12) months immediately prior to the Termination Date in the form of (i) a car allowance or company car, (ii) those contributions by the Company on behalf of Executive pursuant to a Section 401(k) or other tax-advantaged savings plan established or to be established by the Company; and (iii) those legal and financial planning benefits made available by the Company to Executive; and (d) in addition to the benefits to which Executive is entitled under any pension, deferred compensation or retirement benefit plan or plans maintained by the Company, or any successor plan or plans thereto (hereinafter referred to as the "Pension Plans"), a lump sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age sixty-five (65)) which Executive would have accrued under the terms of the Company's Pension Plans (without regard to any amendment to such Pension -9- Plans made subsequent to the Change in Control Date and on or prior to the Termination Date, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if Executive were fully vested thereunder and had accumulated (after the Termination Date) thirty-six (36) months of service credit thereunder at a level of one hundred percent (100%) of Executive's average rate of compensation during the twelve (12) months immediately prior to the Termination Date and (y) the retirement pension (determined as a straight life annuity commencing at age sixty-five (65)) which Executive had been accrued pursuant to the provisions of the Pension Plans. 10. CONTINUATION OF MEDICAL AND HEALTH BENEFITS. For a period of thirty-six (36) months following the Termination Date, the Company shall arrange to provide Executive with life, medical, dental, health, accident and disability insurance benefits substantially similar to those that Executive is receiving or is entitled to receive immediately prior to the Termination Date, which benefits shall in no event be less than those benefits in effect immediately prior to the Change of Control Date. 11. PAYMENT OF LEGAL EXPENSES. The Company shall also pay Executive all legal fees and expenses incurred by Executive as a result of any termination pursuant to Section 8 hereof, -10- including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. 12. DISBURSEMENT OF TERMINATION PAY. The aggregate amount of all termination payments that are payable to Executive as provided in Section 9 hereof shall be determined in good faith by the Company within 15 days following the Termination Date, and such termination payments shall be distributed by the Company to Executive, at the election of Executive (which election shall be made within thirty (30) days following the Termination Date), either (A) in one lump sum within ninety (90) days following the Termination Date or (B) in thirty-six (36) equal monthly installments beginning thirty (30) days following the Termination Date and continuing every thirty (30) days thereafter. 13. NOTICES. Any notices, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices to the attention of the President, with a copy to the attention of the General Counsel. -11- 14. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Company. (b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while he or she is entitled to receive any amounts payable pursuant to this Agreement, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 15. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. 16. APPLICABLE LAW. This Agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Texas, except to the extent that federal law shall be deemed to apply. -12- 17. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 18. ENTIRE AGREEMENT. This Agreement contains all the terms agreed upon by the parties with respect to the subject matter hereof and supersedes all prior agreements, arrangements and communications. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. EXECUTIVE: -------------------------------- ATTEST: MICHAELS STORES, INC. - --------------------------- By:----------------------------- B. B. Tuley, President -13- EX-10.8 4 EXHIBIT 10.8 EXHIBIT 10.8 AGREEMENT by and between MICHAELS STORES, INC. and THIS AGREEMENT is entered into effective as of the 22nd day of March, 1989, by and between MICHAELS STORES, INC., a Delaware corporation, (hereinafter referred to as the "Company") and hereinafter referred to as the "Consultant"). WHEREAS, the Company wishes to attract and retain certain key consultants and advisors and to assure itself of continuity of strategy and policy in the event of any actual or threatened change of control of the Company; and WHEREAS, Consultant has heretofore been retained by the Company and is experienced in the business of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. TERMS OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through March 21, 1992; provided, however, that commencing on March 22, 1990 and each March 22, thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than the September 22 immediately preceding such March 22, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the term in effect immediately before such Change in Control. 2. CONSULTING PERIOD. Unless sooner terminated pursuant to the provisions of Section 6 of this Agreement, the Company hereby agrees to retain Consultant, and Consultant hereby agrees to offer his services to the Company, for the period commencing on the Change of Control Date and ending on the 65th birthday of Consultant (the "Consulting Period"), to perform such consulting services as are commensurate with the services being performed by Consultant immediately prior to the Change of Control Date, which services shall be performed at the location where Consultant was located immediately prior to the Change of Control Date. 3. BASE COMPENSATION. The Company agrees to pay Consultant during the Consulting Period, in cash at intervals not less frequently than once monthly, consulting fees in an amount not less than Consultant's average monthly consulting fees for the twelve (12) months immediately prior to the Change of Control Date. -2- 4. OTHER COMPENSATION. (a) PARTICIPATION IN RETIREMENT AND MEDICAL PLANS. During the Consulting Period, Consultant shall be entitled to receive benefits under, and participate in, all benefit plans to which Consultant was entitled immediately prior to the Change of Control Date, including but not limited to any applicable pension, retirement, deferred compensation, stock ownership or Section 401(k) thrift and savings plans (collectively, "Retirement Plans"), and any disability, life insurance or medical and dental plans provided by the Company to key advisors with comparable duties; provided, however, that this provision shall not be construed to require the Company to establish any new plans. (b) CONSULTANT BENEFITS; EXPENSES. During the Consulting Period, Consultant shall be entitled to receive any fringe benefits and perquisites which may be or become applicable to the Company's other key advisors, including but not limited to participation in the Company's Key Employee Stock Compensation Program, and any other stock option or incentive plans adopted by the Board of Directors, a reasonable expense account, and any other benefits and perquisites which are commensurate with the responsibilities and functions to be performed by Consultant under this Agreement. The Company shall reimburse Consultant for all out-of-pocket expenses which -3- Consultant shall incur in connection with his services for the Company. During the Consulting Period, Consultant shall be entitled to the use of a Company automobile in accordance with the Company's practices in effect prior to the Change of Control Date for providing automobiles to its key advisors. In addition, during the Consulting Period, Consultant shall be entitled to legal and financial planning benefits consistent with benefits made available by the Company to its key advisors prior to the Change of Control Date. (c) PARTICIPATION IN OTHER AGREEMENTS. During the Consulting Period, Consultant shall continue to be treated as a key advisor and consultant under the provisions of all agreements and other documents relating to the Company's Key Employee Stock Compensation Program or any deferred compensation arrangements. 5. CONTROL. (a) CHANGE OF CONTROL. Except as provided in this Section 5(a), for purposes of this Agreement, a Change of Control shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (as such disclosure statement may in the future be otherwise -4- identified), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, a Change of Control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Mr. Sam Wyly, Mr. Charles J. Wyly, Jr., or any affiliate of either of them, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (B) during any period of three consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, including for this purpose any new director whose election by the Board, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof. (b) CHANGE OF CONTROL DATE. For purposes of this Agreement, the term Change of Control Date shall mean the date upon which a Change of Control as defined in Section 5(a) hereof is deemed to have occurred. -5- 6. TERMINATION OF THE CONSULTING PERIOD. The Consulting Period shall terminate upon the occurrence of any of the following events: (a) any termination by the Company of the consulting agreements or contracts between Consultant and the Company, including but not limited to that certain Consultation Agreement dated January 1, 1986 (as amended June 1, 1986 and March 25, 1988) between the Company and Consultant for any reason other than death, physical or mental incapacity, or (b) the resignation of Consultant upon the occurrence of any of the following: (i) a significant change in the nature of scope of Consultant's duties from those described in Section 2; (ii) a reduction in or delay in payment of total compensation from that provided in Section 3 and 4; (iii) the material breach by the Company of any other provision of this Agreement; or (iv) a determination made by Consultant, in his sole discretion, that as a result of a Change in Control of -6- the Company and a change in circumstance thereafter affecting his position, he is unable to fully exercise his duties as contemplated by Section 2 of this Agreement. 7. CALCULATION OF TERMINATION PAY. For purposes of this Agreement, Termination Date shall mean the date upon which the Consulting Period terminates pursuant to Section 6 hereof. If the Consulting Period is terminated pursuant to Section 6 hereof after a Change of Control, but prior to the third anniversary of the Change of Control Date, the Company shall pay to Consultant as termination pay the amounts determined as follows: (a) an amount equivalent to three (3) times one hundred percent (100%) of the Consultant's aggregate consulting fees for the twelve (12) months immediately prior to the Termination Date; and (b) an amount equivalent to three (3) times one hundred percent (100%) of the aggregate monthly equivalent cash values of those benefits which Consultant shall have received during the twelve (12) months immediately prior to the Termination Date in the form of (i) a car allowance or company car, (ii) those contributions by the Company on behalf of Consultant pursuant to a Section 401(k) or other tax-advantaged savings plan established or to be established by the Company, -7- and (iii) those legal and financial planning benefits made available by the Company to Consultant; and (c) in addition to the benefits to which Consultant is entitled under any pension, deferred compensation or retirement benefit plan or plans maintained by the Company, or any successor plan or plans thereto (hereinafter referred to as the "Pension Plans"), a lump sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age sixty-five (65)) which Consultant would have accrued under the terms of the Company's Pension Plans (without regard to any amendment to such Pension Plans made subsequent to the Change in Control Date and on or prior to the Termination Date, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if Consultant were fully vested thereunder and had accumulated (after the Termination Date) thirty-six (36) months of service credit thereunder at a level of one hundred percent (100%) of Consultant's average rate of compensation during the twelve (12) months immediately prior to the Termination Date and (y) the retirement pension (determined as a straight life annuity commencing at age sixty-five (65)) which Consultant had then accrued pursuant to the provisions of the Pension Plans. -8- 8. CONTINUATION OF MEDICAL AND HEALTH BENEFITS. For a period of thirty-six (36) months following the Termination Date, the Company shall arrange to provide Consultant with life, medical, dental, health, accident and disability insurance benefits substantially similar to those that Consultant is receiving or is entitled to receive immediately prior to the Termination Date, which benefits shall in no event be less than those benefits in effect immediately prior to the Change of Control Date. 9. PAYMENT OF LEGAL EXPENSES. The Company shall also pay Consultant all legal fees and expenses incurred by Consultant as a result of any termination pursuant to Section 6 hereof, including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. 10. DISBURSEMENT OF TERMINATION PAY. The aggregate amount of all termination payments that are payable to Consultant as provided in Section 7 hereof shall be determined in good faith by the Company within 15 days following the Termination Date, and such termination payments shall be distributed by the Company to Consultant, at the election of Consultant (which election shall be made within thirty (30) days following the Termination Date), either (A) in one lump -9- sum within ninety (90) days following the Termination Date or (B) in thirty-six (36) equal monthly installments beginning thirty (30) days following the Termination Date and continuing every thirty (30) days thereafter. 11. NOTICES. Any notices, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to Consultant at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices to the attention of the President, with a copy to the attention of the General Counsel. 12. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Company. (b) This Agreement shall inure to the benefit of and be enforceable by Consultant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Consultant should die while he or she is entitled to receive any amounts payable -10- pursuant to this Agreement, all such amounts shall be paid in accordance with the terms of this Agreement to Consultant's devisee, legatee or other designee or, if there is no such designee, to Consultant's estate. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. 14. APPLICABLE LAW. This Agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Texas, except to the extent that federal law shall be deemed to apply. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. ENTIRE AGREEMENT. This Agreement contains all the terms agreed upon by the parties with respect to the subject matter hereof and supersedes all prior agreements, arrangements and communications. -11- IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. CONSULTANT: ______________________________________ ATTEST: MICHAELS STORES, INC. ________________________________ By:___________________________________ B. B. Tuley, President -12- EX-10.9 5 EXHIBIT 10.9 EXHIBIT 10.9 EMPLOYMENT AGREEMENT by and between MICHAELS STORES, INC. and DOUGLAS B. SULLIVAN THIS AGREEMENT is entered into effective as of the 6th day of April, 1989, by and between MICHAELS STORES, INC., a Delaware corporation, (hereinafter referred to as the ("Company") and DOUGLAS B. SULLIVAN (hereinafter referred to as the "Executive"). WHEREAS, the Company wishes to attract and retain well-qualifed executive and key personnel and to assure both itself and Executive of continuity of management in the event of any actual or threatened change of control of the Company; and WHEREAS, Executive has heretofore been employed by the Company and is experienced in the business of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through April 5, 1992 provided, however, that commencing on April 6, 1990 and each April 6 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than the October 6 immediately preceding such April 6, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twelve (12) months beyond the term in effect immediately before such Change in Control. 2. EMPLOYMENT. Unless sooner terminated pursuant to the provisions of Section 8 of this Agreement, the Company hereby agrees to employ Executive, and Executive hereby agrees to remain in the employ of the Company, for the period commencing on the Change of Control Date and ending on the 65th birthday of Executive (the "Employment Period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by Executive immediately prior to the Change of Control Date, which services shall be performed at the location where Executive was employed immediately prior to the Change of Control Date. 3. BASE COMPENSATION. The Company agrees to pay Executive during the Employment Period a salary, payable in cash at intervals not less frequently than twice monthly, which is not less than his annual salary immediately prior to the -2- Change of Control Date, with the opportunity for increases, from time to time thereafter, which are in accordance with the Company's regular practices in effect prior to the Change of Control Date. 4. DISCRETIONARY BONUSES. During the Employment Period, Executive shall be entitled to participate in an equitable manner with all other key management personnel of the Company in discretionary bonuses paid to the Company's key management employees. No other compensation provided for in this Agreement shall be deemed a substitute for Executive's right to participate in such discretionary bonuses when and as declared by the Board of Directors or by any committee thereof. 5. OTHER COMPENSATION. (a) PARTICIPATION IN RETIREMENT AND MEDICAL PLANS. During the Employment Period, Executive shall be entitled to receive employee benefits under, and participate in, all employee benefit plans to which Executive was entitled immediately prior to the Change of Control Date, including but not limited to any applicable pension, retirement, deferred compensation, employee stock ownership or Section 401(k) thrift and savings plans (collectively, "Retirement Plans"), and any disability, life insurance or medical and dental plans provided -3- by the Company to executives with comparable duties; provided, however, that this provision shall not be construed to require the Company to establish any new plans. (b) EXECUTIVE BENEFITS; EXPENSES. During the Employment Period, Executive shall be entitled to receive any fringe benefits and perquisites which may be or become applicable to the Company's executive employees, including but not limited to participation in the Company's Key Employee Stock Compensation Program, and any other stock option or incentive plans adopted by the Board of Directors, a reasonable expense account, and any other benefits and perquisites which are commensurate with the responsibilities and functions to be performed by Executive under this Agreement. The Comany shall reimburse Executive for all out-of-pocket expenses which Executive shall incur in connection with his services for the Company. During the Employment Period, Executive shall be entitled to the use of a Company automobile in accordance with the Company's practices in effect prior to the Change of Control Date for providing automobiles to its executives. In addition, during the Employment Period, Executive shall be entitled to legal and financial planning benefits consistent with benefits made available by the Company to its executives prior to the Change of Control Date. -4- (c) PARTICIPATION IN OTHER AGREEMENTS. During the Employment Period, Executive shall continue to be treated as an employee under the provisions of all agreements and other documents relating to the Company's Key Employee Stock Compensation Program or any deferred compensation arrangements. 6. VACATION, SICK LEAVE AND LEAVES OF ABSENCE. During the Employment Period, Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement for the following purposes: (a) Executive shall be entitled to an annual vacation in accordance with the Company's practices in effect prior to the Change of Control Date for its senior management officials. (b) Upon Executive's request, the Board of Directors shall be entitled to grant to Executive a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as the Board of Directors in its reasonable discretion may determine. (c) In addition, Executive shall be entitled to an annual sick leave in accordance with the Company's practices in effect prior to the Change of Control Date for its senior management officials. -5- 7. CONTROL. (a) CHANGE OF CONTROL. Except as provided in this Section 7(a), for purposes of this Agreement, a Change of Control shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (as such disclosure requirement may in the future be otherwise identified), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, a Change of Control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Mr. Sam Wyly, Mr. Charles J. Wyly, Jr., or any affiliate of either of them, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (B) during any period of three consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, including for this purpose any new director whose election by the Board, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were -6- directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof. (b) CHANGE OF CONTROL DATE. For purposes of this Agreement, the term Change of Control Date shall mean the date upon which a Change of Control as defined in Section 7(a) hereof is deemed to have occurred. 8. TERMINATION OF THE EMPLOYMENT PERIOD. The Employment Period shall terminate upon the occurrence of any of the following events: (a) any termination by the Company of the employment of Executive with the Company for any reason other than death, physical or mental incapacity, or (b) the resignation of Executive upon the occurrence of any of the following: (i) a significant change in the nature or scope of Executive's authorities or duties from those described in Section 2; -7- (ii) a reduction in or delay in payment of total compensation from that provided in Section 3, 4 and 5; (iii) the material breach by the Company of any other provision of this Agreement; or (iv) a determination made by Executive, in his sole discretion, that as a result of a Change in Control of the Company and a change in circumstances thereafter affecting his position, he is unable to fully exercise the authorities, powers, functions or duties attached to his or her position and contemplated by Section 2 of this Agreement. 9. CALCULATION OF TERMINATION PAY. For purposes of this Agreement, Termination Date shall mean the date upon which the Employment Period terminates pursuant to Section 8 hereof. If the Employment Period is terminated pursuant to Section 8 hereof after a Change in Control, but prior to the first anniversary of the Change in Control Date, the Company shall pay to Executive as termination pay the amounts determined as follows: (a) an amount equivalent to one hundred percent (100%) of Executive's aggregate monthly salary for the twelve (12) months immediately prior to the Termination Date; and -8- (b) an amount equivalent to one hundred percent (100%) of Executive's aggregate bonuses for the twelve (12) months immediately prior to the Termination Date; and (c) an amount equivalent to one hundred percent (100%) of the aggregate monthly equivalent cash values of those benefits which Executive shall have received during the twelve (12) months immediately prior to the Termination Date in the form of (i) a car allowance or company car, (ii) those contributions by the Company on behalf of Executive pursuant to a Section 401(k) or other tax-advantaged savings plan established or to be established by the Company, and (iii) those legal and financial planning benefits made available by the Company to Executive; and (d) in addition to the benefits to which Executive is entitled under any pension, deferred compensation or retirement benefit plan or plans maintained by the Company, or any successor plan or plans thereto (hereinafter referred to as the "Pension Plans"), a lump sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age sixty-five (65)) which Executive would have accrued under the terms of the Company's Pension Plans (without regard to any amendment to such Pension -9- Plans made subsequent to the Change in Control Date and on or prior to the Termination Date, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if Executive were fully vested thereunder and had accumulated (after the Termination Date) twelve (12) months of service credit thereunder at a level of one hundred percent (100%) of Executive's average rate of compensation during the twelve (12) months immediately prior to the Termination Date and (y) the retirement pension (determined as a straight life annuity commencing at age sixty-five (65)) which Executive had then accrued pursuant to the provisions of the Pension Plan. 10. CONTINUATION OF MEDICAL AND HEALTH BENEFITS. For a period of twelve (12) months following the Termination Date, the Company shall arrange to provide Executive with life, medical, dental, health, accident and disability insurance benefits substantially similar to those that Executive is receiving or is entitled to receive immediately prior to the Termination Date, which benefits shall in no event be less than those benefits in effect immediately prior to the Change of Control Date. 11. PAYMENT OF LEGAL EXPENSES. The Company shall also pay Executive all legal fees and expenses incurred by Executive as a result of any termination pursuant to Section 8 hereof, -10- including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. 12. DISBURSEMENT OF TERMINATION PAY. The aggregate amount of all termination payments that are payable to Executive as provided in Section 9 hereof shall be determined in good faith by the Company within 15 days following the Termination Date, and such termination payments shall be distributed by the Company to Executive, at the election of Executive (which election shall be made within thirty (30) days following the Termination Date), either (A) in one lump sum within ninety (90) days following the Termination Date or (B) in twelve (12) equal monthly installments beginning thirty (30) days following the Termination Date and continuing every thirty (30) days thereafter. 13. NOTICES. Any notices, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices to the attention of the President, with a copy to the attention of the General Counsel. -11- 14. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Company. (b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while he or she is entitled to receive any amounts payable pursuant to this Agreement, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 15. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. 16. APPLICABLE LAW. This Agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Texas, except to the extent that federal law shall be deemed to apply. -12- 17. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 18. ENTIRE AGREEMENT. This Agreement contains all the terms agreed upon by the parties with respect to the subject matter hereof and supersedes all prior agreements, arrangements and communications. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. EXECUTIVE: /s/ DOUGLAS B. SULLIVAN -------------------------------------- Douglas B. Sullivan ATTEST: MICHAELS STORES, INC. /s/ MARK V. BUSBY - ------------------------- By: /s/ B. B. TULEY ---------------------------------- B. B. Tuley, President -13- EX-10.18 6 EXHIBIT 10.18 EXHIBIT 10.18 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT is dated as of the 26th day of April, 1995, and entered into among Michaels Stores, Inc. a Delaware corporation ("Company"), the Lenders signatory hereto, and NATIONSBANK OF TEXAS, N.A., a national banking association, individually and as Administrative Lender (in such latter capacity, the "Administrative Lender"). WITNESSETH: WHEREAS, Company, the Lenders and the Administrative Lender entered into a First Amended and Restated Credit Agreement, effective as of June 18, 1994 (as amended, the "Credit Agreement"); WHEREAS, Company, the Administrative Lender and the Lenders have agreed to increase the loan facility and make certain other changes; WHEREAS, the Lenders, Company and the Administrative Lender have agreed to amend the Credit Agreement to make certain changes to the terms therein; WHEREAS, the Lenders, the Administrative Lender and Company have agreed to modify the Credit Agreement upon the terms and conditions set forth below; NOW, THEREFORE, for valuable consideration hereby acknowledged, Company, the Lenders and the Administrative Lender agree as follows: SECTION 1. DEFINITIONS. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. (a) The definition of BORROWING BASE on page 4 of the Credit Agreement shall be deleted in its entirety and the following substituted in its stead: "BORROWING BASE" means, at the time of determination thereof, an amount equal to 50% of Eligible Inventory. (b) The definition of COMMITMENT on page 5 of the Credit Agreement shall be deleted in its entirety and the following substituted in its stead: "COMMITMENT" means $200,000,000 as such amount may be terminated or reduced in accordance with Section 2.09 hereof from time to time, which such amount includes the Letter of Credit Commitment. (c) The definition of LETTER OF CREDIT COMMITMENT on page 11 of the Credit Agreement shall be deleted in its entirety and the following substituted in its stead: "LETTER OF CREDIT COMMITMENT" means an amount equal to the lesser of (a) $25,000,000 or (b) the difference between $200,000,000 minus the aggregate outstanding Advances under the Loan or (c) the difference between the Commitment minus the aggregate outstanding Advances under the Loan. (d) The definition of MATURITY DATE on page 12 of the Credit Agreement shall be deleted in its entirety and the following substituted in its stead: "MATURITY DATE" means June 16, 1998 or such earlier date as the Loan becomes due and payable, regardless of how such maturity is brought about, whether at stated maturity, by acceleration, scheduled reduction or otherwise. SECTION 2. AMENDMENT TO COVER PAGE AND PAGE ONE OF THE CREDIT AGREEMENT. The one place that the number $150,000,000 appears on the cover page of the Credit Agreement, and the two places that the number $150,000,000 appears on page 1 of the Credit Agreement shall, in each case, be deleted and the number $200,000,000 shall be substituted in its stead. SECTION 3. AMENDMENT TO SCHEDULES 5.01 AND 5.05, AND TO EXHIBIT B AND EXHIBIT C TO THE CREDIT AGREEMENT. Schedule 5.01, Schedule 5.05, Exhibit B and Exhibit C to the Credit Agreement shall each be deleted in their entirety and the attached Schedule 5.01, Schedule 5.05, Exhibit B and Exhibit C be substituted in their stead, respectively. SECTION 4. CONDITIONS PRECEDENT. This First Amendment shall not be effective until all proceedings of Company taken in connection with this First Amendment and the transactions contemplated hereby shall be satisfactory in form and substance to the Administrative Lender and Lenders, and the Administrative Lender and Lenders shall have each received the following: (a) a loan certificate of Company certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, the other Loan Papers and in this First Amendment, (ii) that there exists no Default or Event of Default both before and after giving effect to this First Amendment, and the execution, delivery and performance of this First Amendment will not cause a Default of Event of Default, (iii) that is has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this First Amendment by the date hereof, and (iv) that no notice of the execution of this First Amendment is required under the terms of any other agreement of Company and no consent is required under the terms of any agreement of Company in connection with this First Amendment; (b) new Notes evidencing the Loan for each Lender in form and substance acceptable to the Administrative Lender and Lenders; (c) an opinion of counsel of Company acceptable to the Lenders with respect to this First Amendment and all other Loan Papers executed in connection therewith, 2 including, without limitation, an opinion with respect to the validity and enforceability of the Loan Papers before and after giving effect to this First Amendment; and (d) such other documents, instruments, and certificates, in form and substance satisfactory to the Lenders, as the Lenders shall deem necessary or appropriate in connection with this First Amendment and the transactions contemplated hereby. SECTION 5. REPRESENTATIONS AND WARRANTIES. Company represents and warrants to the Lenders and the Administrative Lender that (a) this First Amendment constitutes its legal, valid, and binding obligations, enforceable in accordance with the terms hereof (subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium, or other laws or principles of equity affecting the enforcement of creditors' rights generally), (b) there exists no Event of Default or Default under the Credit Agreement both before and after giving effect to this First Amendment, (c) its representations and warranties set forth in the Credit Agreement and other Loan Papers are true and correct on the date hereof both before and after giving effect to this First Amendment, (d) it has complied with all agreements and conditions to be complied with by it under the Credit Agreement and the other Loan Papers by the date hereof (e) the Credit Agreement, as amended hereby, and the other Loan Papers remain in full force and effect, and (f) no notice to, or consent of, any Person is required under the terms of any agreement of Company in connection with the execution of this First Amendment. SECTION 6. FURTHER ASSURANCES. Company shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to the Administrative Lender, as the Administrative Lender or any Lender may deem necessary or appropriate in connection with this First Amendment. SECTION 7. COUNTERPARTS. This First Amendment and the other Loan Papers may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. In making proof of any such agreement, it shall not be necessary to produce or account for any counterpart other than one signed by the party against which enforcement is sought. SECTION 8. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 9. GOVERNING LAW. (a) THIS AGREEMENT AND ALL LOAN PAPERS SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE EXTENT (A) FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF ALL OR ANY PART OF THIS AGREEMENT AND ALL LOAN 3 PAPERS OR (B) STATE LAW GOVERNS UCC COLLATERAL INTERESTS FOR PROPERTIES OF COMPANY AND THE SUBSIDIARIES OUTSIDE THE STATE OF TEXAS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, COMPANY AND EACH SUBSIDIARY AGREES THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. (b) COMPANY AND EACH SUBSIDIARY HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. IN ADDITION, COMPANY AND EACH SUBSIDIARY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY COMPANY. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 10. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, COMPANY, EACH SUBSIDIARY AND EACH LENDER HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER LOAN PAPERS, OR ANY RELATED MATTERS AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. IN WITNESS WHEREOF, this First Amendment to Credit Agreement is executed as of the date first set forth above. COMPANY: MICHAELS STORES, INC. ____________________________________ By: Its: SPECIFIED PERCENTAGE: 23.33% NATIONSBANK OF TEXAS N.A., as Administrative Lender, and individually as a Lender 901 Main Street 67th Floor Dallas, TX 75202 Attn: Joseph G. Taylor By:_________________________________ Joseph G. Taylor Senior Vice President 4 SPECIFIED PERCENTAGE 23.33% BANK OF AMERICA ILLINOIS, as a Lender Address: 231 S. LaSalle Chicago, IL 60604 By: __________________________________ Attn: Ken Bell Its: __________________________________ Tel: (312) 828-6386 SPECIFIED PERCENTAGE 10.00% BANK ONE, TEXAS, as a Lender Address: 1717 Main Street 3rd Floor By: __________________________________ Dallas, TX 75201 Its: __________________________________ Attn: Alan L. Miller SPECIFIED PERCENTAGE 10.00% CREDIT LYONNAIS NEW YORK BRANCH, as a Lender Address: 500 N. Akard Suite 3210 By: __________________________________ Dallas, TX 75201 Its: __________________________________ Attn: Timothy M. O'Conner SPECIFIED PERCENTAGE 10.00% FIRST INTERSTATE BANK OF TEXAS, N.A., as a Lender Address: 1445 Ross Avenue Third Floor By: __________________________________ Dallas, TX 75202 Its: __________________________________ Attn: Susan Coulter 5 SPECIFIED PERCENTAGE 10.00% MELLON BANK, N.A., as a Lender Address: One Mellon Center Room 4535 By: __________________________________ Pittsburgh, PA 15258-0001 Its: __________________________________ Attn: Marc T. Kennedy SPECIFIED PERCENTAGE 6.67% THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, as a Lender Address: 800 Market Street 14th Floor By: __________________________________ St. Louis, MO 63101 Its: __________________________________ Attn: Dwight Erdbruegger SPECIFIED PERCENTAGE 6.67% UNITED STATES NATIONAL BANK OF OREGON, as a Lender Address: 111 Southwest Fifth Ave. T-29 By: __________________________________ Portland, OR 97204 Its: __________________________________ Attn: Blake Howells 6 AGREED AND ACCEPTED: the following guarantors agree and accept the above increase the Commitment: MICHAELS OF CANADA, INC. By: ___________________________ Its: ___________________________ MICHAELS INTERNATIONAL FINANCE, INC. By: ___________________________ Its: ___________________________ 5931, INC. By: ___________________________ Its: ___________________________ LEEWANDS CREATIVE CRAFTS, INC. By: ___________________________ Its: ___________________________ TREASURE HOUSE STORES, INC. By: ___________________________ Its: ___________________________ 7 OREGON CRAFT & FLORAL SUPPLY CO., INC. OREGON CRAFT & FLORAL SUPPLY CO., II, INC. OREGON CRAFT & FLORAL SUPPLY CO., III, INC. OREGON CRAFT & FLORAL SUPPLY CO., IV, INC. OREGON CRAFT & FLORAL SUPPLY CO., V, INC. OREGON CRAFT & FLORAL SUPPLY CO., VI, INC. OREGON CRAFT & FLORAL SUPPLY CO., VII, INC. OREGON CRAFT & FLORAL SUPPLY CO., VIII, INC. OREGON CRAFT & FLORAL SUPPLY CO., IX, INC. By: ___________________________ Its: ___________________________ HABIF & ROSS ENTERPRISES, INC. By: ___________________________ Its: ___________________________ RIVERSIDE CRAFT & FLORAL SUPPLY CO., INC. By: ___________________________ Its: ___________________________ SAN DIEGO CRAFT & FLORAL SUPPLY CO. INC. By: ___________________________ Its: ___________________________ 8 MISSION VIEJO CRAFT & FLORAL, INC. By: ___________________________ Its: ___________________________ H.F.C.S., INC. By: ___________________________ Its: ___________________________ SAN LEANDRO CRAFT AND FLORAL SUPPLY COMPANY, INC. By: ___________________________ Its: ___________________________ ORANGE CRAFT & FLORAL SUPPLY CO., INC. By: ___________________________ Its: ___________________________ H & H CRAFT & FLORAL SUPPLY CO., #9, INC. By: ___________________________ Its: ___________________________ 9 OC&F NUMBER 18, INC. By: ___________________________ Its: ___________________________ MICHAELS OF PUERTO RICO, INC. By: ___________________________ Its: ___________________________ AARON BROTHERS, INC. **1 By: ___________________________ **2 Its: ___________________________ AARON BROTHERS HOLDINGS, INC. By: ___________________________ Its: ___________________________ ART MARTS, INC. By: ___________________________ Its: ___________________________ 10 EX-10.19 7 EXHIBIT 10.19 EXHIBIT 10.19 MICHAELS STORES, INC. 1994 NON-STATUTORY STOCK OPTION PLAN 1. PURPOSE. The purpose of the 1994 Non-Statutory Stock Option Plan of Michaels Stores, Inc. (the "Plan") is to provide employees and key advisors with a proprietary interest in Michaels Stores, Inc., a Delaware corporation, and its subsidiaries (the "Company") through the granting of options ("Options" or "Options") to purchase shares of the Company's authorized Common Stock, par value $0.10 per share ("Common Stock"), in order to: a. Increase the interest in the Company's welfare of those employees and key advisors who share primary responsibility for the management, growth and protection of the business of the Company; b. Recognize the contributions made by certain employees and key advisors to the Company's growth during its development stage; c. Furnish an incentive to such employees and key advisors to continue their services for the Company; and d. Provide a means through which the Company may attract able persons to engage as employees and key advisors. 2. ADMINISTRATION. The Plan has been established and shall be administered by a committee of two or more members of the Board of Directors of the Company (the "Board of Directors" or "Board") who are not employees of the Company or any of its subsidiaries (the "Committee"). Except as otherwise provided by the terms of this Plan or by the Board, the Committee shall have all the power and authority of the Board hereunder. The Committee shall have full and final authority in its discretion, but subject to the provisions of the PLan, to determine from time to time the individuals to whom Options shall be granted and the number of shares to be covered by each Option; to determined the time or times at which Options shall be granted; to interpret the Plan and the instruments by which Options will be evidenced; to make, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the instruments by which Options shall be evidenced; with the consent of the Participant (as defined in Section 3), to modify or amend any Option agreement or waive any conditions or restrictions applicable to any Option or the exercise thereof and to make all other determinations necessary or advisable for the administration of the Plan. 3. PARTICIPANTS. The Committee may, from time to time, select particular employees and key advisors, including officers and directors, of the Company, or of any subsidiary of the Company, to whom Options are to be granted, and upon the grant of such Options, the selected employees and key advisors shall become Participants in the Plan. As used herein, the term "Participant" means an employee or key advisor who accepts an Option, or the estate, personal representative, beneficiary or transferee thereof having the right to exercise an Option pursuant to its terms. 4. SHARES SUBJECT TO THE PLAN. The shares of Common Stock subject to Options granted pursuant to the Plan shall be either shares of authorized but unissued Common Stock or shares of Common Stock reacquired by the Company. The maximum aggregate number of shares of Common Stock available for issuance from time to time pursuant to the Plan shall be 1,000,000 provided that the Committee may adjust the number of shares available for Options, the number of shares subject to and the exercise price of Options granted hereunder to reflect a change in capitalization of the Company, such as stock dividend, stock split, reverse stock split, share combination, exchange of shares, merger, consolidation, reorganization, liquidation, or the like, of or by the Company. The maximum aggregate number of shares of Common Stock with respect to which Options may be granted to any Participant during the term of the Plan shall not exceed 50% of the total number of shares of Common Stock that may be issued from time to time under the Plan. Shares that by reason of the expiration of an Option, or for any other reason, are no longer subject to purchase pursuant to an Option granted under the Plan, and shares from time to time rendered in payment of the exercise price of Options, may be made subject to additional Options granted pursuant to the Plan. 5. GRANT OF OPTIONS. Options granted hereunder shall be evidenced by written stock option agreements containing such terms and provisions as are recommended and approved from time to time by the Committee, but subject to and not more favorable than the terms of the Plan. The Committee may from time to time require additional terms which the Committee deems necessary or advisable. The Company shall execute stock option agreements upon instruction from the Committee. 6. MAXIMUM AMOUNT OF STOCK SUBJECT TO OPTIONS. Subject to Section 4, the maximum aggregate fair market value (determined as of the time the Option is granted) of the Common Stock for which any Participant may be granted Options in any calendar year shall be determined by the Committee in its discretion. 7. OPTION EXERCISE PRICE. The purchase price of Common Stock subject to an Option granted pursuant to the Plan shall be no less than the fair market value of the Common Stock on the date of grant. 8. RESTRICTIONS. The Committee may, but need not, at the time of granting of an Option or at any subsequent time impose such restrictions, if any, on issuance, voluntary disposition and release from escrow of any Options including, without limitation, permitting exercise of Options only in installments over a period of years. 9. PAYMENT. Full payment for Common Stock purchased upon the exercise of an Option shall be made at the time of exercise. No Common Stock shall be issued until full payment has been made and Participant shall have none of the rights of a shareholder until shares of Common Stock are issued to him. Any federal, state or local taxes required to be paid or withheld at the time of exercise shall also be paid or withheld in full prior to any delivery of shares of Common Stock upon exercise. Payment may be made in cash, in shares of Common Stock then owned by the Participant, or in any form of valid consideration, or a combination of any of the foregoing, as required by the Committee in its discretion. Shares of Common Stock tendered in payment of exercise price of any Options may be reissued to the Participant who tendered the shares of Common Stock as part of the shares of Common Stock issuable upon exercise of other Options granted from time to time pursuant to the Plan. 10. TRANSFERABILITY OF OPTIONS. Options granted under the Plan may be transferred by the holder thereof upon five days prior written notice to the Company. 11. RIGHTS IN EVENT OF DEATH OR DISABILITY OF PARTICIPANT. The Committee shall have discretion to include in each Option agreement such provisions regarding exercisability of the Options following the death or disability of the Participant as it, in its sole discretion, deems to be appropriate. 12. STOCK PURCHASED FOR INVESTMENT. At the discretion of the Committee, any Option agreement may provide that the Option holder shall, by accepting an Option, represent and agree on behalf of himself and his transferees by will or the laws of descent and distribution or otherwise that all shares of Common Stock purchased upon the exercise of the Option will be acquired for investment and not for sale or distribution, and that upon each exercise of any portion of an Option, the person entitled to exercise the same shall furnish evidence satisfactory to the Company (including a written and signed representation) to the effect that the shares of Common Stock are being acquired in good faith and for investment and not for sale or distribution. 13. TERMINATION OF OPTION RIGHTS AND AWARDS. The Committee may provide in each Option agreement for the circumstances under which Options granted hereunder may terminate for any reason that the Committee, in its sole discretion, deems to be appropriate. 14. AMENDMENT OR DISCONTINUATION. The Plan may be amended, altered or discontinued by the Board or, if the Board has delegated this authority to the Committee, by the Committee, without approval of the stockholders. In the event any law, or any rule or regulation issued or promulgated by the Internal Revenue Service, Securities and Exchange Commissions, National Association of Securities Dealers, Inc., any stock exchange or quotation system upon which the Common Stock is listed for trading or other governmental or quasi- -2- governmental agency having jurisdiction over the Company, its Common Stock or the Plan requires the Plan to be amended, the Plan will be amended at that time and all Options then outstanding will be subject to such amendment. 15. EMPLOYMENT. This Plan and any Option granted under this Plan do not confer upon the Participant any right to be employed or to continue employment with the Company. 16. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option pursuant to the Plan shall not impose any obligation upon the Participant to exercise such Option. 17. TERMINATION. Unless sooner terminated by action of the Board or, if the Board has specifically delegated its authority to terminate the Plan to the Committee, by the Committee, the Plan shall terminate on December 31, 2014, and no Options may be granted pursuant to the Plan after such date. 18. USE OF PROCEEDS. The proceeds derived from the sale of stock pursuant to Options granted under the Plan shall constitute general funds of the Company. 19. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective as of the 31st day of March, 1994. MICHAELS STORES, INC. Dated: As of March 31, 1994 By: ----------------------------------- Jack E. Bush, PRESIDENT EX-11 8 COMP. OF EARNINGS EXHIBIT 11 MICHAELS STORES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data)
WEIGHTED WEIGHTED AVERAGE COMMON AVERAGE AND COMMON COMMON SHARES EQUIVALENT SHARES OUTSTANDING OUTSTANDING ------------- ------------------ FULLY PRIMARY DILUTED ------- -------- For the year ended January 29, 1995 Weighted average common shares outstanding 19,405 19,405 19,405 Assumed issuance of shares upon conversion of convertible subordinated debt 638 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 741 764 ------ ------- ------- Total average outstanding shares 19,405 20,146 20,807 ====== ======= ======= Net income $35,647 $35,647 Assumed interest on convertible subordinated debt less tax benefit of $607 969 ------- ------- Net income for per share computation $35,647 $36,616 ======= ======= Earnings per common share $1.77 $1.76 ===== =====
EXHIBIT 11 MICHAELS STORES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data)
WEIGHTED WEIGHTED AVERAGE COMMON AVERAGE AND COMMON COMMON SHARES EQUIVALENT SHARES OUTSTANDING OUTSTANDING ------------- ------------------ FULLY PRIMARY DILUTED ------- ------- For the year ended January 30, 1994 Weighted average common shares outstanding 16,592 16,592 16,592 Assumed issuance of shares upon conversion of convertible subordinated debt at beginning of year 2,572 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 639 645 ------ ------- ------- Total average outstanding shares 16,592 17,231 19,809 ====== ======= ======= Net income $26,287 $26,287 Assumed interest on convertible subordinated debt less tax benefit of $2,427 3,902 ------- ------- Net income for per share computation $26,287 $30,189 ======= ======= Earnings per common share $1.53 $1.52 ===== =====
EXHIBIT 11 MICHAELS STORES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data)
WEIGHTED WEIGHTED AVERAGE COMMON AVERAGE AND COMMON COMMON SHARES EQUIVALENT SHARES OUTSTANDING OUTSTANDING ------------- ----------------- FULLY PRIMARY DILUTED ------- ------- For the year ended January 31, 1993 Weighted average common shares outstanding 15,933 15,933 15,933 Net shares to be issued upon exercise of dilutive stock options and warrants after applying treasury stock method 759 920 ------ ------- ------- Total average outstanding shares 15,933 16,692 16,853 ====== ======= ======= Net income $20,378 $20,378 ======= ======= Earnings per common share $1.22 $1.21 ===== =====
EX-13 9 FINANCIAL STATEMENTS AND MD&A EXHIBIT 13 FINANCIAL HIGHLIGHTS
FISCAL YEAR ---------------------------------------------- 1994 1993 1992 1991 1990(1) ----- ------- ------- ------- -------- (In thousands except per share and store data) RESULTS OF OPERATIONS: Net sales $994,563 $619,688 $493,159 $410,899 $362,028 Operating income 64,036 41,356 34,263 25,643 20,694 Income before extraordinary item 35,647 26,287 20,378 10,739(2) 5,855 Earnings per share 1.76 1.52 1.21 .87(2) .57 STORES OPEN AT END OF PERIOD 380 220 168 140 137 BALANCE SHEET DATA: Current assets $418,532 $291,012 $170,021 $125,873 $ 84,572 Total assets 686,026 397,830 322,099 180,913 144,238 Working capital 232,442 181,816 104,462 74,786 44,080 Long-term debt 138,050 97,750 97,750 -- 52,983 Total liabilities 330,109 212,415 166,822 54,614 97,623 Shareholders' equity 355,917 185,415 155,277 126,299 46,615 (1) Fiscal 1990 was a 53-week fiscal year. (2) Before extraordinary item related to early retirement of debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In fiscal years 1992, 1993 and 1994, Michaels Stores, Inc. (the "Company") added 28, 54 and 184 Michaels stores, respectively, before considering store closures. During these periods, the Company obtained a substantial portion of its sales increases from stores added during, or subsequent to, the prior comparable period and thus not yet included in comparable store sales comparisons. During these periods, sales from these newer stores accounted for approximately 56%, 88% and 93%, respectively, of aggregate sales increases. The Company intends to add approximately 70 to 75 Michaels stores in fiscal 1995, of which 15 stores have been opened as of April 28, 1995. These new stores do not include the 71-store acquisition of Aaron Brothers Holdings, Inc. ("Aaron Brothers") completed in March 1995. In fiscal 1995 and beyond, sales increases from newly opened and acquired stores will depend in part on the availability of suitable store sites, the rate of development of new stores, and the Company's ability to hire and train qualified managers. RESULTS OF OPERATIONS The following table shows the percentage of net sales that each item in the Consolidated Statements of Income represents. This table should be read in conjunction with the following discussion and with the Company's Consolidated Financial Statements, including the related notes.
FISCAL YEAR ----------------------------- 1994 1993 1992 ---- ---- ---- Net sales 100.0% 100.0% 100.0% ----- ----- ----- Cost of sales and occupancy expense 64.9 65.2 65.6 Selling, general and administrative expense 28.0 28.1 27.5 Store closing and conversion costs 0.7 0.0 0.0 ----- ---- ---- Operating income 6.4 6.7 6.9 Interest expense 0.9 1.0 0.0 Other (income) and expense, net (0.2) (1.2) 0.1 ---- ---- ---- Income before income taxes 5.7 6.9 6.8 Provision for income taxes 2.1 2.7 2.7 ---- ---- ---- Net income 3.6% 4.2% 4.1% ==== ==== ====
In the discussion below, all percentages given for expense items are calculated as a percentage of net sales for the applicable year. FOR FISCAL 1994 COMPARED TO FISCAL 1993 Net sales in the fiscal year ended January 29, 1995 ("1994"), increased $374.9 million, or 60%, over the fiscal year ended January 30, 1994 ("1993"). The results for 1994 included sales of 160 stores (net of 24 closures) that were opened or acquired during the year. During 1994, sales of the newer stores accounted for $348.6 million of the increase. Comparable store sales increased seven percent in 1994 compared to the prior year. The Company expects to achieve comparable store sales increases for 1995 although fluctuations in the rate of increase may occur during the year. Cost of sales and occupancy expense for 1994 decreased by 0.3% compared to 1993 due primarily to increases in sales of higher margin custom framing and floral services, an improvement in the gross margin achieved on seasonal merchandise sales and greater margin contributions from new and acquired stores, due principally to new store volume discounts from vendors. This improvement in gross margin was partially offset by an increase in occupancy expenses driven by the Company's shift to new stores with higher average selling square footage than existing stores, coupled with the Company's expansion into states with higher occupancy costs such as New York, Massachusetts and Connecticut. This trend of higher occupancy costs in new stores will continue during 1995, and may offset improvements, if any, in cost of sales as a percentage of sales. Selling, general and administrative expense decreased by 0.1% in 1994 from 1993. The decrease was due primarily to continued leveraging of the Company's general and administrative expenditures over a larger revenue base. Improvements in these expenses as a percentage of sales during 1995 will depend in part on the level of sales increases attained. Interest expense for 1994 was $9.1 million compared to $6.4 million in 1993. The increase was due to higher bank borrowings coupled with higher interest rates than in 1993. The Company expects interest expense during 1995 to increase over 1994 levels. Other income (net of other expense) was $2.2 million in 1994 compared to $7.7 million in 1993. This year's decrease from last year was due to a decline in the Company's average investment portfolio, which was used to fund the store expansion program. The effective tax rate was reduced to 37.6% in 1994 from 38.4% in 1993 primarily due to the Company's participation in tax advantaged programs, partially offset by increases in non-deductible goodwill amortization. The Company expects the effective tax rate to increase slightly during 1995 due to higher non-deductible goodwill amortization over 1994 levels. FOR FISCAL 1993 COMPARED TO FISCAL 1992 Net sales in 1993 increased $126.5 million, or 26%, over the fiscal year ended January 31, 1993 ("1992"). The results for 1993 included sales of 54 stores added during the year. During 1993, sales of the newer stores accounted for $111.3 million of the increase. Comparable store sales increased three percent in 1993 compared to the prior year. Cost of sales and occupancy expense for 1993 decreased by 0.4% compared to 1992 due primarily to increases in sales of higher margin custom framing and floral services, an improvement in the gross margin achieved on seasonal merchandise sales, greater margin contributions from new stores, and an increase in new store volume discounts from vendors. This improvement in gross margin was partially offset by an increase in occupancy expenses driven by the Company's shift to new stores with higher average selling square footage than existing stores, coupled with the Company's expansion into states with higher occupancy costs such as New York, Ohio, Minnesota and Michigan. Selling, general and administrative expense increased by 0.6% in 1993 from 1992. The increase was due to expenses associated with the Company's new store opening program and additional payroll attributed to the increase in custom framing and floral services, offset in part by a decrease in general and administrative expenditures, as a percentage of sales, which were spread over a larger revenue base in 1993. Interest expense for 1993 was $6.4 million compared to $0.3 million in 1992. The increase was due primarily to the issuance of convertible subordinated debt in January 1993. Other income (net of other expense) was $7.7 million in 1993 compared to other expense of $0.5 million in 1992, as the Company earned substantial interest, dividends and capital gains on its investment portfolio during 1993. The effective tax rate was reduced to 38.4% in 1993 from 39.1% in 1992 primarily due to the Company's investments in tax-advantaged securities. LIQUIDITY AND CAPITAL RESOURCES The Company acquired 99 stores, net of closures, and opened 61 stores during fiscal 1994. Capital expenditures for these stores, and, to a lesser extent, the remodeling, expansion and relocation of certain existing stores, the expansion of two distribution facilities, and information system enhancements, amounted to $68.1 million in fiscal 1994. In July 1994, the Company paid $7.9 million in cash as part of the total consideration provided to acquire Leewards Creative Crafts, Inc. ("Leewards"), and repaid $39.6 million of Leewards' outstanding debt. Also in July 1994, the Company completed a public offering of 2,353,432 shares of Michaels common stock. The $72.2 million of net proceeds from the sale were used to reduce outstanding bank debt. In March 1995, the Company acquired the 71-store chain operated by Aaron Brothers. In addition to this acquisition, the Company plans to add approximately 70 to 75 stores, including Craft and Floral Warehouse ("CFW") stores, additional stores in Canada, stores in Puerto Rico, and possibly stores acquired through other minor acquisitions during 1995. The Company anticipates the costs of adding stores (excluding CFW stores) to be approximately $300,000 to $400,000 per store, which includes furniture, fixtures, equipment, and pre-opening expenses. Leasehold improvement costs tend to vary among locations. The inventory investment associated with the typical new store ranges from approximately $450,000 to $600,000 depending on the store size, operating format, and date opened; however, due to the Company's typical payment terms and inventory turnover, the Company's vendors, in effect, finance a significant component of this initial inventory investment. In addition to the new store opening costs and expenses, the Company expects to spend an additional $13.0 to $16.0 million on store renovation, the continued development of new point-of-sale and merchandising systems, and the expansion of the Company's distribution network in fiscal 1995. Inventory per store has increased for several years. While the Company believes that this inventory trend enhances its ability to generate continued increases in comparable store sales, it intends to manage its inventories during the next year such that inventory per store in January 1996 may be lower than it was in January 1995. At January 29, 1995, the Company had working capital of $232.4 million, compared to $181.8 million at January 30, 1994. The Company currently has a bank credit agreement ("Credit Agreement") which includes an unsecured line of credit and provides for the issuance of letters of credit. Borrowings under the Credit Agreement, which expires June 16, 1997, are limited to the lesser of $150 million or the Company's borrowing base (as defined in the Credit Agreement), in either case minus the aggregate amount of letters of credit. As of January 29, 1995, the Company had $93.5 million in available unused credit capacity under the Credit Agreement. In March 1995, the Company paid approximately $5.3 million in cash and retired $19.7 million in outstanding debt of Aaron Brothers. The Credit Agreement has recently been amended to provide a $50 million increase in borrowing capacity, due primarily to the credit capacity used to retire the Aaron Brothers debt and fund its working capital needs of approximately $5.0 million, and to extend its term to June 1998. Management believes that the Company has sufficient working capital, operating cash flows, and available unused credit capacity to sustain current growth plans. OTHER MATTERS The Company's business is seasonal in nature with higher store sales in the third and fourth quarters. Historically, the fourth quarter, which includes the Christmas selling season, has accounted for approximately 37% of the Company's sales and approximately 55% of its operating income. Management considers the effect of inflation on 1994 results and its projected effect on 1995 financial results to be nominal. MICHAELS STORES, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (In thousands except share data)
JANUARY 29, 1995 JANUARY 30, 1994 ---------------- ---------------- ASSETS CURRENT ASSETS: Cash and equivalents $ 1,907 $ 867 Marketable securities 15,002 67,956 Merchandise inventories 375,096 206,185 Deferred income taxes 15,002 2,952 Prepaid expenses and other 11,525 13,052 -------- -------- Total current assets 418,532 291,012 -------- -------- PROPERTY AND EQUIPMENT, AT COST 204,032 119,555 Less accumulated depreciation (62,228) (43,683) -------- -------- 141,804 75,872 -------- -------- COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET 117,377 23,503 OTHER ASSETS 8,313 7,443 -------- -------- 125,690 30,946 -------- -------- $686,026 $397,830 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $103,649 $ 42,309 Short-term bank debt -- 13,000 Income taxes payable -- 7,866 Accrued liabilities and other 82,441 46,021 -------- -------- Total current liabilities 186,090 109,196 -------- -------- BANK DEBT 41,100 -- CONVERTIBLE SUBORDINATED NOTES 96,950 97,750 DEFERRED INCOME TAXES AND OTHER 5,969 5,469 -------- -------- Total long-term liabilities 144,019 103,219 -------- -------- 330,109 212,415 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value, 2,000,000 shares authorized, none issued -- -- Common stock, $.10 par value, 50,000,000 shares authorized, 21,354,167 issued and outstanding (16,697,357 in fiscal 1993) 2,135 1,670 Additional paid-in capital 244,561 107,168 Retained earnings 109,221 76,577 -------- -------- Total shareholders' equity 355,917 185,415 -------- -------- $686,026 $397,830 ======== ========
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data)
FISCAL YEAR ------------------------- 1994 1993 1992 ---- ---- ---- NET SALES $994,563 $619,688 $493,159 -------- -------- -------- Cost of sales and occupancy expense 644,737 403,869 323,577 Selling, general and administrative expense 278,716 174,463 135,319 Store closing and conversion costs 7,074 -- -- -------- ------- -------- OPERATING INCOME 64,036 41,356 34,263 Interest expense 9,103 6,378 263 Other (income) and expense, net (2,226) (7,666) 538 -------- ------- -------- INCOME BEFORE INCOME TAXES 57,159 42,644 33,462 Provision for income taxes 21,512 16,357 13,084 -------- -------- -------- NET INCOME $ 35,647 $ 26,287 $ 20,378 ======== ======== ======== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: Primary $1.77 $1.53 $1.22 Assuming full dilution $1.76 $1.52 $1.21 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 20,146 17,231 16,692 Assuming full dilution 20,807 19,809 16,853
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FISCAL YEAR ----------------------------- 1994 1993 1992 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 35,647 $ 26,287 $ 20,378 Adjustments: Depreciation and amortization 21,512 12,490 10,160 Other (501) (3,537) 466 Change in assets and liabilities excluding the effects of acquisitions: Merchandise inventories (134,671) (87,885) (27,354) Prepaid expenses and other 5,747 (6,358) (451) Deferred income taxes and other 7,276 (611) (190) Accounts payable 37,065 11,545 10,474 Income taxes payable (8,363) 3,304 294 Accrued liabilities and other (1,979) 15,830 3,032 ------- ------- ------- Net change in assets and liabilities (94,925) (64,175) (14,195) -------- -------- -------- Net cash (used in) provided by operating activities (38,267) (28,935) 16,809 -------- -------- -------- INVESTING ACTIVITIES: Additions to property and equipment (68,106) (46,816) (19,796) Net proceeds from sales of marketable securities 44,484 17,807 (81,633) Acquisitions and other (43,685) -- (1,853) -------- -------- -------- Net cash used in investing activities (67,307) (29,009) (103,282) -------- -------- -------- FINANCING ACTIVITIES: Net borrowings under bank credit facilities 28,100 13,000 -- Net proceeds from issuance of long-term debt -- -- 94,636 Payment of other long-term liabilities (89) (115) (216) Proceeds from issuance of common stock 78,603 3,851 6,772 -------- -------- -------- Net cash provided by financing activities 106,614 16,736 101,192 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,040 (41,208) 14,719 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 867 42,075 27,356 -------- -------- -------- CASH AND EQUIVALENTS AT END OF YEAR $ 1,907 $ 867 $ 42,075 ======== ======== ======== Cash payments for: Interest $ 7,166 $ 5,034 $ 222 Income taxes 17,753 11,620 8,087
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Three Years Ended January 29, 1995 (In thousands except share data)
- ------------------------------------------------------------------------------- NUMBER ADDITIONAL OF COMMON PAID-IN RETAINED SHARES STOCK CAPITAL EARNINGS TOTAL - ------------------------------------------------------------------------------- BALANCE AT FEBRUARY 2, 1992 15,058,756 $1,506 $ 94,881 $ 29,912 $126,299 Exercise of stock options and warrants 1,300,191 129 6,643 -- 6,772 Issuance of shares in an acquisition 115,383 12 1,816 -- 1,828 Net income -- -- -- 20,378 20,378 -------- ------ -------- -------- -------- BALANCE AT JANUARY 31, 1993 16,474,330 1,647 103,340 50,290 155,277 Exercise of stock options 223,027 23 3,828 -- 3,851 Net income -- -- -- 26,287 26,287 ---------- ----- -------- -------- -------- BALANCE AT JANUARY 30, 1994 16,697,357 1,670 107,168 76,577 185,415 Adjustment for pooling- of-interests accounting in an acquisition -- -- -- (1,157) (1,157) Issuance of shares in acquisitions 1,992,268 199 58,257 -- 58,456 Proceeds from stock offering 2,353,432 235 71,980 -- 72,215 Adjustment for change in fair value of marketable securities -- -- -- (1,514) (1,514) Exercise of stock options and other 311,110 31 7,156 (332) 6,855 Net income -- -- -- 35,647 35,647 ---------- ------ -------- -------- ------- BALANCE AT JANUARY 29, 1995 21,354,167 $2,135 $244,561 $109,221 $355,917 ========== ====== ======== ======== ========
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Michaels Stores, Inc. (the "Company") owns and operates a chain of specialty retail stores. The Company reports on a 52/53-week fiscal year which ends on the Sunday closest to January 31; thus, fiscal 1994 ("1994"), fiscal 1993 ("1993")and fiscal 1992 ("1992"), ended on January 29, 1995, January 30, 1994 and January 31, 1993, respectively. CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. CASH AND EQUIVALENTS Cash and equivalents are generally comprised of highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost which approximates fair value. MARKETABLE SECURITIES Marketable securities are carried at fair value, based on quoted market prices or dealer quotes as of the last trading day of the fiscal year. MERCHANDISE INVENTORIES Store merchandise inventories are valued at the lower of average cost (determined by a retail method) or market. Distribution center inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. PROPERTY AND EQUIPMENT Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS Costs in excess of net assets of acquired operations are being amortized over 40 years on a straight-line basis. Accumulated amortization was $7,295,000 and $5,182,000 as of the end of 1994 and 1993, respectively. The Company assesses the recoverability of costs in excess of net assets acquired annually based on existing facts and circumstances. The Company measures the recoverability of this asset on an on-going basis based on projected earnings before interest, depreciation and amortization, on an undiscounted basis. Should the Company's assessment indicate an impairment of this asset in the future, an appropriate write-down will be recorded. STORE PRE-OPENING COSTS Store pre-opening costs are expensed in the fiscal year in which the store opens. In 1994, 1993 and 1992, the Company incurred $6,541,000, $4,893,000 and $2,377,000, respectively, of store pre-opening costs. EARNINGS PER SHARE Earnings per share data are based on the weighted average number of shares outstanding, including common stock equivalents and other dilutive securities. The assumed conversion of the convertible subordinated notes was dilutive for the fourth quarter and full year of both 1993 and 1994 and was therefore included in the calculation of fully diluted earnings per share data for those periods. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1994 1993 - ------------------------------------------------------------------- (In thousands) Property and equipment: Land and buildings $ 7,640 $ 7,500 Fixtures and equipment 145,253 87,443 Leasehold improvements 51,139 24,612 -------- -------- $204,032 $119,555 ======== ======== Accrued liabilities and other: Salaries, bonuses and other payroll-related costs $ 21,527 $ 13,498 Rent 16,524 7,138 Taxes, other than income and payroll 13,344 9,337 Other 31,046 16,048 -------- -------- $ 82,441 $ 46,021 ======== ========
DEBT In January 1993, the Company issued $97.75 million of convertible subordinated notes ("Notes") due January 15, 2003. Interest, payable on January 15 and July 15, is computed at the rate of 4 3/4% from the date of issuance to January 15, 1996, and at 6 3/4% thereafter. Interest expense is accrued by the Company based on an effective interest rate of 6.38% (including amortization of deferred issuance costs) over the full term of the Notes. The Notes are redeemable at the option of the Company on or after January 24, 1996 at redemption prices ranging from 104.14% to 100%. The Notes are not entitled to any sinking fund. The Notes are convertible into the Company's common stock at any time, at a conversion price of $38 per share. A total of 2,572,368 shares of common stock were reserved for conversion. During 1994, a total of $800,000 in $1,000 Notes were converted to 21,052 shares of the Company's common stock. The fair value, based on dealer quotes, of the outstanding Notes as of January 29, 1995 and January 30, 1994 was $98.6 million and $105.6 million, respectively. The Company has a bank Credit Agreement ("Credit Agreement") which includes an unsecured line of credit and provides for the issuance of letters of credit. Borrowings under the Credit Agreement, which expires in June 1997, were $41.1 million at January 29, 1995 and borrowings under the Company's prior credit agreement, which expired in April 1994, were $13.0 million at January 30, 1994. The weighted average interest rates for outstanding borrowings were 7.7% and 6.0% as of January 29, 1995 and January 30, 1994, respectively. As of January 29, 1995, the Company had $93.5 million in available unused borrowing capacity under the Credit Agreement. The Credit Agreement requires the Company to maintain various financial ratios and restricts the Company's ability to pay dividends. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax liabilities and assets as of the respective year-end balance sheets are as follows (amounts in thousands):
1994 1993 ------- ------- Deferred tax liabilities: Tax over book depreciation/amortization $ 3,546 $ 3,981 Other - net 2,313 937 ------- ------- Total deferred tax liabilities 5,859 4,918 ------- ------- Deferred tax assets: Tax inventory in excess of book inventory 748 1,121 Accrued expenses not deductible until paid 11,114 2,385 Pre-acquisition net operating loss and alternative minimum tax credit carryforwards 2,687 -- Other - net 1,582 987 ------- ------- Total deferred tax assets 16,131 4,493 ------- ------- Net deferred tax assets (liabilities) $10,272 $ (425) ======= =======
LIABILITY DEFERRED METHOD METHOD --------------- ---------- 1994 1993 1992 ---- ---- ---- (In thousands) Income tax provision: Current $ 7,422 $16,210 $13,219 Deferred 14,090 147 (135) ------- ------- ------- $21,512 $16,357 $13,084 ======= ======= ======= Reconciliation of income tax provision to statutory rate: Income tax expense at statutory rate $20,005 $14,925 $11,377 State income taxes, net of federal income tax benefit 858 1,275 1,347 Amortization of intangibles and other 649 157 360 ------- ------- ------- $21,512 $16,357 $13,084 ======= ======= =======
COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company operates stores and uses distribution and office facilities and equipment leased under noncancellable operating leases, the majority of which provide for renewal options. Future minimum rentals for all noncancellable operating leases as of January 29, 1995 are as follows:
FISCAL YEAR RENT - ----------------------------------------------------------- (In thousands) 1995 $ 70,276 1996 67,131 1997 59,408 1998 51,921 1999 44,210 2000 and thereafter 133,516 -------- $426,462 ========
Rental expense applicable to operating leases was $56,181,000, $33,551,000 and $26,188,000 in 1994, 1993 and 1992, respectively. CONTINGENCIES The Company is a defendant from time to time in routine lawsuits incidental to its business. The Company believes that none of such current proceedings, individually or in the aggregate, will have a materially adverse effect on the Company. STOCK OPTIONS All full-time employees are eligible to participate in the Michaels Stores, Inc. Key Employee Stock Compensation Program (the "Program"), as amended, under which 3,000,000 shares of common stock have been authorized for issuance. Selected employees and key advisors, including directors, of the Company may participate in the 1992 and 1994 Non-Statutory Stock Option Plans of Michaels Stores, Inc. (the "Plans"), with 3,000,000 shares of common stock having been authorized for issuance under each plan. In addition, stock options have been granted to certain directors and key advisors other than pursuant to the Program or the Plans. The exercise price of all options granted was the fair market value on the date of grant.
EXERCISE PRICE SHARES PER SHARE --------- -------------- Exercised during 1992 1,307,838 $3 to $15 1/4 Exercised during 1993 223,027 $3 to $27 Exercised during 1994 308,424 $3 to $27 7/8 Outstanding at January 29, 1995 3,336,313 $3 to $41 7/16 Exercisable at January 29, 1995 1,336,803 $3 to $39 1/4
MARKETABLE SECURITIES The Company invests excess cash in a diversified portfolio consisting of a variety of securities including preferred stocks, mutual funds and government debt instruments, which may include both investment grade and non-investment grade securities. The Company limits its credit exposure to any one entity. Net realized gains, dividend income, and interest income were $0.1 million, $1.0 million, and $0.3 million, respectively, for 1994 and $4.1 million, $4.0 million, and $1.5 million, respectively, for 1993. Marketable securities held by the Company at January 29, 1995 were classified as available-for-sale securities and carried at fair value under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which the Company adopted in the first quarter of 1994. The aggregate fair value of marketable securities as of January 30, 1994 was $72.0 million. During 1993 and 1994, Maverick Capital, Ltd. ("Maverick") provided investment management services for the Company. Maverick is owned and managed by a group of individuals, five of whom are directors of the Company. In May 1994, the Company terminated its investment management services agreement with Maverick. ACQUISITIONS In February 1994, the Company acquired Treasure House Stores, Inc. ("THSI"), a chain of nine arts and crafts stores operating primarily in the Seattle market, for 280,000 shares of Michaels common stock in a transaction accounted for as a pooling-of-interests. The transaction was not considered material to the Company's sales, net income or financial position of any previous year and therefore the Company's financial statements have not been restated. The accumulated deficit of THSI at January 31, 1994 of $1.2 million has been recorded as a decrease in the Company's retained earnings. In April 1994, the Company acquired the affiliated arts and crafts store chains of Oregon Craft & Floral Supply Co. ("OCF"), with eight stores located primarily in the Portland, Oregon area, and H&H Craft & Floral Supply Co. ("H&H"), with eight stores located in southern California, for a total of 455,000 shares of Michaels common stock valued at $18.5 million in a transaction accounted for as a purchase. This transaction resulted in the Company recording an addition to goodwill in the amount of $22.3 million. Effective July 10, 1994, Michaels acquired Leewards, an arts and crafts retailer with 98 stores located primarily in the midwestern and northeastern United States. The acquisition consideration consisted of $7.9 million in cash and 1,257,279 shares of Michaels common stock valued at $39.9 million. Upon consummation of the Leewards acquisition, Michaels also repaid $39.6 million of Leewards' indebtedness. The cost in excess of the estimated fair value of net assets acquired was recorded as goodwill in the amount of $73.7 million. The OCF, H&H and Leewards transactions were accounted for as purchases; accordingly, the purchase prices have been allocated to assets and liabilities based on estimated fair values as of the respective acquisition dates. The results of operations since the acquisition dates are included in the accompanying consolidated financial statements. The following pro forma combined net sales, net income and earnings per share data summarize the results of operations for 1994 and 1993 as if Leewards had been acquired as of the beginning of 1993.
PRO FORMA --------------------------- (In thousands, except per share amounts) 1994 1993 ---------- -------- Net sales $1,050,173 $780,302 ========== ======== Net income (a) $ 36,456 $ 26,157 ========== ======== Earnings per share assuming full dilution (a) $ 1.71 $ 1.41 ========== ======== (a) Excludes a $7.1 million charge ($4.4 million after tax or $.21 per share) for store closing and conversion costs.
The pro forma combined financial results do not purport to represent the results of operations which would have occurred had such transaction been consummated at the beginning of the period indicated or the Company's results of operations for any future period. Anticipated operational efficiencies from the integration of the acquisition are not fully reflected in the above pro forma data. The above pro forma data includes adjustments to: eliminate net sales and related expenses of overlapping Leewards stores that have been closed; eliminate the duplicate occupancy costs of Leewards' distribution center and duplicate purchasing costs; amortize goodwill; expense pre-opening costs in the year incurred; reduce interest expense to Michaels' average borrowing rate; and reflect the tax effects of the above adjustments. The above pro forma data does not include THSI, OCF or H&H prior to their respective acquisition dates in February 1994 and April 1994, since the acquisitions are not considered material, individually or in the aggregate, to the operating results of the Company. SUBSEQUENT EVENT In March 1995, the Company purchased Aaron Brothers Holdings, Inc., which operates a chain of 71 framing and art supplies stores predominantly in California for a purchase price of $25 million in cash, including the assumption of $19.7 million of debt. In 1994, the chain produced sales of approximately $60 million. The transaction will be accounted for as a purchase. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Michaels Stores Inc. We have audited the accompanying consolidated balance sheets of Michaels Stores, Inc. as of January 29, 1995 and January 30, 1994, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended January 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Michaels Stores, Inc. at January 29, 1995 and January 30, 1994, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas March 6, 1995 UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - ----------------------------------------------------------------------------- (In thousands except per share data) 1994: Net sales $159,798 $174,204 $283,069 $377,492 Cost of sales and occupancy expense 103,511 111,237 187,566 242,423 Operating income 9,071 3,076 14,827 37,062 Net income 4,967 713(1) 7,813 22,154 Fully-diluted earnings per common share $ .28 $ .04(1) $ .36 $ .94 Weighted average shares outstanding-assuming full dilution. 17,856 18,845 21,930 24,577 1993: Net sales $112,961 $115,414 $155,750 $235,563 Cost of sales and occupancy expense 73,279 74,150 101,588 154,852 Operating income 5,962 5,756 7,819 21,819 Net income 3,798 3,635 4,852 14,002 Fully-diluted earnings per common share $ .22 $ .21 $ .28 $ .75 Weighted average shares outstanding-assuming full dilution 17,130 17,145 17,287 19,932 (1) Includes a one-time charge of $4.4 million, net of tax, or $.23 per share for store closing and conversion costs.
EX-21.1 10 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF MICHAELS STORES, INC. Michaels of Canada, Inc., a New Brunswick San Diego Craft & Floral Supply Co., Inc., corporation a California corporation Leewards Creative Crafts, Inc., a Delaware Mission Viejo Craft & Floral, Inc., a corporation California corporation Treasure House Stores, Inc., a Delaware H.F.C.S., Inc., a California corporation corporation Oregon Craft & Floral Supply Co., Inc., an San Leandro Craft and Floral Supply Oregon corporation Company, Inc., a California corporation Oregon Craft & Floral Supply Co., II, Inc., Orange Craft & Floral Supply Co., Inc., a an Oregon corporation California corporation Oregon Craft & Floral Supply Co., III, Inc., H & H Craft & Floral Supply Co. #9, Inc., an Oregon corporation a California corporation Oregon Craft & Floral Supply Co., IV, Inc., OC&F Number 18, Inc., an Oregon an Oregon corporation corporation Oregon Craft & Floral Supply Co., V, Inc., Michaels of Puerto Rico, Inc., a Delaware a Washington corporation corporation Oregon Craft & Floral Supply Co., VI, Inc., Aaron Brothers Holdings, Inc., a Delaware an Oregon corporation corporation Oregon Craft & Floral Supply Co., VII, Inc., Aaron Brothers Art Marts, Inc., a Delaware an Oregon corporation corporation (an indirect subsidiary) Oregon Craft & Floral Supply Co., VIII, Aaron Brothers, Inc., a Delaware Inc., an Oregon corporation corporation (an indirect subsidiary) Oregon Craft & Floral Supply Co., IX, Inc., an Oregon corporation Habif & Ross Enterprises, Inc., a California corporation Riverside Craft & Floral Supply Co., Inc., a California corporation
EX-23 11 CONSENT OF ERNST & YOUNG EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Michaels Stores, Inc. of our report dated March 6, 1995, included in the 1994 Annual Report to Shareholders of Michaels Stores, Inc. We also consent to the incorporation by reference in the Registration Statements listed below and in the related Prospectuses of our report dated March 6, 1995, with respect to the consolidated financial statements of Michaels Stores, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended January 29, 1995.
FORM REGISTRATION NO. PERTAINING TO MICHAELS STORES, INC. ---- ---------------- ----------------------------------- S-8 2-92412 Stock Investment Plan S-8 2-97848 Key Employee Stock Compensation Program S-8 33-18476 Key Employee Stock Compensation Program S-8 33-11985 Employees 401(k) Plan S-3 33-21299 Registration of 802,000 shares of Common Stock S-3 33-9456 Post Effective Amendment No. 1 to the Registration Statement on Form S-1 for the registration of 1,000,000 shares of Common Stock S-8 33-26338 Key Employee Stock Compensation Program S-8 33-21573 Moskatel's, Inc. 401(k) Plan S-3 33-22532 Registration of 30,000 shares of Common Stock S-3 33-40673 Registration of 1,240,000 shares of Common Stock S-8 33-43039 Employee Stock Purchase Plan S-8 33-54726 Key Employee Stock Compensation Program S-3 33-52311 Registration of 280,000 shares of Common Stock S-3 33-67804 1992 Non-Statutory Stock Option Plan S-3 33-53883 Registration of 455,000 shares of Common Stock S-3 33-55537 Registration of 901,066 shares of Common Stock
ERNST & YOUNG LLP Dallas, Texas April 28, 1995 EX-27 12 FDS
5 0000740670 MICHAELS STORES, INC. 1,000 12-MOS JAN-29-1995 JAN-31-1994 JAN-29-1995 1,907 15,002 0 0 375,096 418,532 204,032 62,228 686,026 186,090 0 2,135 0 0 353,782 686,026 994,563 994,563 644,737 923,453 7,074 0 6,877 57,159 21,512 35,647 0 0 0 35,647 1.77 1.76
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