-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JhMgDHFy7Cj+XRbFH6th/B8P+NNsbWUIQY5uFcM3wv5jQkaxWITagmphQW0FHRqw bb3WZUbK4RTWJvWJFwM70Q== 0001047469-98-017754.txt : 19980504 0001047469-98-017754.hdr.sgml : 19980504 ACCESSION NUMBER: 0001047469-98-017754 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAELS STORES INC CENTRAL INDEX KEY: 0000740670 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 751943604 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11822 FILM NUMBER: 98608727 BUSINESS ADDRESS: STREET 1: 8000 BENT BRANCH DR STREET 2: PO BOX 619566 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2147147000 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - - ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 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) 8000 BENT BRANCH DRIVE IRVING, TEXAS 75063 P.O. BOX 619566 DFW, TEXAS 75261-9566 (Address of principal executive offices, including zip code) (972) 409-1300 (Registrant's telephone number, including area code) 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 15, 1998, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $983,169,565 BASED ON THE CLOSING PRICE OF THE REGISTRANT'S COMMON STOCK ON SUCH DATE, $35.00, AS REPORTED ON THE NASDAQ STOCK MARKET. AS OF APRIL 15, 1998, 29,550,386 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE None PART I ITEM 1. BUSINESS. GENERAL UNLESS OTHERWISE NOTED, ALL NUMBERS CONTAINED IN THIS DOCUMENT ARE AS OF JANUARY 31, 1998. With approximately $1.5 billion in sales, Michaels Stores, Inc. (the "Company") is the nation's largest and only national retailer dedicated to serving the arts, crafts and decorative items marketplace. The Company's Michaels stores offer a wide selection of competitively priced items, including general crafts, home decor items, picture framing materials and services, art and hobby supplies, party supplies, silk and dried flowers, wearable art, and seasonal and holiday merchandise for the hobbyist and do-it-yourself home decorator. The Company's primary customers are women with above average median household incomes. The average sale in the Company's Michaels stores has increased annually from approximately $12.00 in fiscal 1991 to $16.31 in fiscal 1997. In March 1995, the Company acquired Aaron Brothers, Inc. ("Aaron Brothers"), a chain of specialty framing and art supply stores operating primarily on the West Coast. The Company's Aaron Brothers stores offer professional custom framing services, photo frames, a full line of ready-made frames, and a wide selection of art supplies. During fiscal 1997, Aaron Brothers generated sales of $74.9 million. The average sale in the Company's Aaron Brothers stores has increased annually since the acquisition from approximately $23.94 in fiscal 1995 to approximately $29.50 in fiscal 1997. The Company operates 452 Michaels stores and 74 Aaron Brothers stores in 45 states, Canada and Puerto Rico. The Company's Michaels stores average approximately 16,500 square feet of selling space and offer an assortment of approximately 40,000 stock keeping units ("SKUs") in a typical store during the course of a year (including seasonal product), of which approximately 36,000 SKUs are offered at all times. The Company's Aaron Brothers stores average approximately 6,400 square feet of selling space and offer an assortment of approximately 6,000 SKUs. For fiscal 1997, the average sales of the Company's Michaels and Aaron Brothers stores open for the full fiscal year were $3.1 million and $1.1 million, respectively. The Company believes it is well positioned to continue to solidify its position as the dominant nationwide specialty arts, crafts and decorative items retailer and to increase its return on invested capital through its business strategies of (i) offering a broad selection of products in an appealing store environment that emphasizes superior customer service, (ii) effectively managing its investment in inventory, and (iii) continuing to expand its nationwide presence. MERCHANDISING AND MARKETING The Company's Michaels store merchandising strategy is to provide a broad selection of products in an appealing store environment which emphasizes superior customer service. PRODUCT SELECTION In general, each Michaels store offers products from a number of categories. Most of the categories offer essentially the same type of merchandise throughout the year, although the products may vary from season to season. The merchandise offered by the major categories is as follows: - General craft materials, including those for stenciling, doll making, jewelry making, woodworking, wall decor, tole painting, rubber stamps, memory books and plaster; - Items for personalizing home decor, including vases, containers, baskets, candles, potpourri and gifts; - 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; 2 - Hobby items, including wooden and plastic model kits and related supplies, and paint-by-number kits; - Party needs, including paper party goods, balloons, candy, gift wrap, candy making and cake decorating supplies; - Needle craft 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; - Silk flowers, dried flowers and artificial plants sold separately or in ready-made and custom floral arrangements, all accessories needed for floral arranging and other floral items such as wreaths; - Ribbon and wedding accessories, including satins, laces, florals and other styles sold both in bolts and by the yard; - Wearable art, including adult's and children's garments, fabric paints, embellishments, jewels and sequins, transfers and appliques. In addition to the basic categories described above, the Michaels stores regularly feature seasonal merchandise which complements the Company's core merchandising strategy. Seasonal merchandise is ordered for several holiday periods, including Valentine's Day, Easter, Mother's Day, Halloween and Thanksgiving, in addition to the Christmas season. For example, seasonal merchandise for the Christmas season includes trees, wreaths, candles, lights and ornaments. During the Christmas selling season, a significant portion of floor and shelf space in a typical Michaels store is devoted to Christmas crafts, Christmas decorating and gift making merchandise. Because of the project-oriented nature of these products, the 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 Michaels 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 following table shows Michaels' sales by department as a percent of total sales for fiscal 1997, 1996 and 1995:
PERCENT OF SALES -------------------------------- DEPARTMENT 1997 1996 1995 - ---------- ---------- ---------- ---------- Hobby, party, needlecraft and ribbon . . . . 20% 20% 19% Picture framing . . . . . . . . . . . . . . . 18 17 16 Silk and dried flowers and plants . . . . . . 17 19 22 General craft materials and wearable art . . 16 15 17 Seasonal and home decor . . . . . . . . . . . 15 17 15 Fine art materials . . . . . . . . . . . . . 14 12 11 Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% --- --- --- --- --- ---
The Michaels merchandising 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. Aaron Brothers stores offer professional custom framing services, photo frames, a full line of ready-made frames, and a wide selection of art supplies. The Company's merchandising strategy for its Aaron Brothers stores is to provide competitively priced custom framing services and selection, with a five business day delivery guarantee. In addition, Aaron Brothers strives to provide a fashion forward merchandise selection in an appealing environment with superior customer service. 3 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 with an appropriate amount of guidance and direction. Accordingly, Michaels has 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 Michaels sales associates are craft enthusiasts who are able to help customers with ideas and instructions. The Company periodically offers demonstrations and inexpensive classes in its stores as a means of promoting new craft ideas and expanding its customer base. ADVERTISING The Company focuses on circular and newspaper advertising. The Company has found full-color circular advertising, primarily as an insert to newspapers, 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 throughout the year, in each of its markets, provides the Company with an advantage over its smaller competitors. PURCHASING, DISTRIBUTION AND INVENTORY MANAGEMENT To enhance its competitive positioning the Company is actively pursuing improvements throughout its supply chain. These improvements are intended to minimize the investment in inventory necessary to support the Company's sales growth objectives, maximize its stores' in-stock position, and improve the cost-effectiveness of the delivery of goods from its vendors to its stores. 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. In excess of 95% of the merchandise acquired by the stores is from vendors on the Company's "approved list." Approximately 45% of Michaels store stock is shipped directly from the Michaels distribution centers, with the remaining 55% being shipped directly from vendors. District managers are responsible for monitoring store purchases to further manage the stores' merchandise needs. In 1997, the Company's top ten vendors accounted for approximately 17% of total purchases, with no single vendor accounting for more than 4% of total purchases. The Company believes that its distribution capabilities will allow it to maintain a high in-stock position in its stores while balancing its overall inventory position. The Company believes its distribution network is a competitive advantage and it intends to increase the flow of goods through its distribution centers and thereby reduce its supply chain costs and more effectively manage its investment in inventories. The Company currently operates four distribution centers which supply the Michaels stores with certain merchandise, including substantially all seasonal and promotional items. The Company's distribution centers are located in Texas, California, Kentucky and Florida. The Company's California distribution center will be relocated in 1998. Michaels stores receive deliveries from the distribution centers generally once a week through an internal distribution network using contract carriers. 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). Aaron Brothers purchases all of its merchandise centrally. Aaron Brothers operates a distribution center located in the City of Commerce, California that currently serves all of its stores. Approximately 54% of their store stock is shipped directly from the Aaron Brothers distribution center, with the remaining 46% being shipped directly from vendors. Aaron Brothers systematically replenishes each of its stores automatically on a weekly basis. 4 INVENTORY MANAGEMENT The Company's primary objectives for inventory management are maximizing the efficiency of the flow of product to the stores, improving store in-stock position, improving store labor efficiency, and optimizing overall investment in inventory. The Company manages its inventory in several ways, including: weekly tracking of inventory status; the use of planograms to control the merchandise assortment and to assist in the reorder process for each SKU; and the review of item-level sales information in order to track the sell-through of seasonal and promotional items and to plan its assortments. The data that the Company is obtaining from its point-of-sale ("POS") system is an integral component in the inventory management process. In addition, inventories are verified through physical counts conducted throughout the year and a complete physical count in all stores as close as practicable to year end. STORE OPERATIONS The Company's 452 Michaels stores average approximately 16,500 square feet of selling space. The Company's 74 Aaron Brothers stores average approximately 6,400 square feet of selling space. Net sales for fiscal 1997 averaged approximately $3.1 million per store for Michaels stores open the entire fiscal year and $185 per square foot of selling space, and averaged approximately $1.1 million per store for Aaron Brothers stores open the entire fiscal year and $163 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 and Aaron Brothers 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. Michaels' field organization is headed by an executive vice president and is divided into four geographic zones. Each zone has its own vice president, loss prevention manager, human resources manager, and seven to nine district managers. There are a total of 32 districts. The Company believes this organizational structure enhances the communication among the individual stores and between the stores and corporate headquarters. STORE EXPANSION Having achieved its objective of becoming the largest and only national retailer in arts, crafts and decorative items, the Company recognized that it had the critical mass to achieve improved operating efficiencies that could result in higher returns on capital. On August 23, 1995, the Company announced a shift in focus from sales growth to realizing higher returns on capital. As a result, the Company moderated its internal store growth rate, opening 9 new Michaels stores and 3 new Aaron Brothers stores in fiscal 1997. In fiscal 1998 the Company plans to return to an accelerated new store opening program. The Company intends to open approximately 45 Michaels stores, relocate 12 to 15 stores, and remodel approximately 45 to 50 stores during fiscal 1998. Aaron Brothers plans to open 6 new stores in fiscal 1998. 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, distribution, field supervision, and other regional expenses. Management believes that few of its existing markets are saturated and that there are attractive new markets available to the Company. The anticipated opening of Michaels and Aaron Brothers stores in 1998 and the rate at which stores are opened thereafter will depend upon a number of factors, including the success of existing Michaels and Aaron Brothers stores, the availability and the cost of capital for expansion, the availability of suitable store sites, and the ability to hire and train qualified managers. The Company intends to continue to review acquisition opportunities in existing and new markets. The Company has no arrangements or understandings pending with respect to any acquisitions. Michaels 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. Michaels develops the floor plan and inventory layout, and organizes the advertising and promotions in connection with the opening of each new store. In addition, Michaels maintains a qualified store opening staff to provide new store personnel with in-store training. Accordingly, Michaels 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. Costs for opening stores at particular locations depend upon the type of building and general cost levels in the area. In fiscal 1997, the average net cost to the company of opening a new Michaels store was approximately $536,000 which included leasehold improvements, furniture, fixtures and equipment, and pre-opening expenses. The initial inventory 5 investment associated with each new Michaels store is approximately $750,000 at cost depending on the store size, operating format and the time of year in which the store is opened. The initial inventory investment in new Michaels stores is offset, in part, by extended vendor terms and allowances. INVESTMENT IN INFORMATION TECHNOLOGY The Company is committed to utilizing technology to increase operating efficiencies and to improve its ability to satisfy the needs of its customers. The Company utilizes world-class technology in the form of the latest massively parallel computer systems that communicate to networked computers in its stores over an earth satellite-based communications network. With the installation of the POS system, which includes bar-code scanning, came the ability to better understand the demands of the customer, emerging merchandise trends, and inventory replenishment requirements. New merchandising information systems are being installed to leverage and extend the information provided by the POS system, provide sophisticated inventory management capabilities based on item-level perpetual inventories of the stores, and efficient purchase management capabilities utilizing Electronic Data Interchange with the Company's vendors. Operational efficiencies are being improved through the installation of a new warehouse management system in all distribution centers. The warehouse management system makes extensive use of bar-code scanning and radio-frequency hand-held terminals to communicate directly with employees and the integration of all systems within the distribution centers. The Company believes that information is a competitive tool and intends to be the craft industry leader in the effective, efficient utilization of this resource. COMPETITION Michaels is the largest and only national retailer dedicated to serving the arts and crafts marketplace. Michaels competes primarily with regional and local arts and crafts merchants, 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 Michaels stores compete based on price, quality and variety of merchandise assortment, and customer service. Michaels believes the combination of its broad selection of products, emphasis on customer service, loyal customer base, information received from its POS system, distribution capabilities allowing it to maintain high store in-stock positions, and capacity to advertise frequently in all of its markets provides the Company with a competitive advantage. The U.S. arts, crafts and decorative items retailing industry was estimated by trade publications to be approximately $10 billion in 1997. The industry is highly fragmented and Michaels is the only national arts and crafts retailer. Management believes that there are only a few competitors with arts and crafts sales that exceed $200 million annually, and that the Company's arts and crafts sales are more than twice as large as its largest direct competitor. The Company believes that its significant size relative to its competitors provides it with several advantages including (i) purchasing power, (ii) critical mass to support a cost efficient nationwide distribution network, and (iii) the financial resources to support an annual advertising expenditure of approximately $60 million and significant ongoing capital investments in information technology. Michaels' primary competitors include Hobby Lobby, a chain based in Oklahoma City which operates approximately 163 stores primarily in the midwestern United States; MJDesigns, a chain which operates approximately 57 stores in Dallas/Fort Worth, Baltimore/Washington, D.C. and selected other East Coast markets; and A.C. Moore, a chain which operates approximately 28 stores in the Philadelphia and New York markets. The Company also competes with Frank's Nursery, Jo-Ann etc. (a division of Fabri-Centers of America, Inc.), Old America Stores and Garden Ridge Pottery. Aaron Brothers' competition is composed primarily of local independent custom frame shops and mass merchandisers. Aaron Brothers believes it remains competitive due to its five business day delivery guarantee on custom frame orders, its pricing structure, its fashion forward merchandising assortments and its customer service. 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 both federally registered trademarks. 6 FRANCHISES The Company had previously granted to Dupey Management Corporation ("DMC") the right to open royalty-free, licensed Michaels stores in an eight-county area in north Texas which includes the Dallas/Fort Worth area. As a result of an agreement between the Company and DMC in 1996, DMC relinquished its right to use the Michaels name effective March 31, 1997. EMPLOYEES As of March 21, 1998, approximately 17,900 persons were employed by the Company, approximately 10,600 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 1,900 are engaged in various executive, operating, training and administrative functions in the Company's corporate offices and distribution centers, and the remainder are engaged in store operations. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position - ---- --- -------- Sam Wyly 63 Chairman of the Board of Directors Charles J. Wyly, Jr. 64 Vice Chairman of the Board of Directors R. Michael Rouleau 59 President and Chief Executive Officer Bryan M. DeCordova 41 Executive Vice President--Chief Financial Officer Lawrence H. Fine 44 Executive Vice President--General Merchandise Manager Duane Hiemenz 44 Executive Vice President--Store Operations Douglas B. Sullivan 47 Executive Vice President--Development James F. Tucker 53 Executive Vice President--Chief Information Officer David A. Gary 50 Senior Vice President--Logistics and Distribution H. Kevin Rutherford 39 Senior Vice President--Human Resources Donald R. Miller, Jr. 43 Director and Vice President--Market Development
Mr. Sam Wyly has served as Chairman of the Board of the Company since 1984. Mr. Wyly co-founded Sterling Software, Inc. in 1981 and since that time has served as Chairman of the Board and a director. In 1963, Mr. Wyly founded University Computing Company, a computer software and services company, and served as President or Chairman from 1963 until 1979. University Computing created a computer utility network, one of the earliest and most successful marriages of computing and telecommunications. University Computing was one of the original participants in the software products industry in the late 1960's when the then market-dominant IBM unbundled computer hardware and software. In 1968, Mr. Wyly founded Datran, Inc. which was envisioned as the nation's first all-digital switched "telephone company for computers" and contributed to the break up of AT&T's telephone monopoly and the resulting benefits of increased competition in the telecommunications industry. These Wyly-founded companies are among the forerunners of today's electronic commerce industry. Mr. Wyly co-founded Earth Resources Company, an oil refining and silver 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 Mr. Wyly served as Chairman. Mr. Wyly currently serves as a director of Sterling Commerce, Inc. and as a partner of Maverick Capital, Ltd., an investment fund management company. Sam Wyly is the father of Evan A. Wyly and Kelly Elliott, directors of the Company. Mr. Charles J. Wyly, Jr. became a director of the Company in October 1984 and Vice Chairman in 1985. He co-founded Sterling Software, Inc. in 1981 and since such time has served as a director and (since 1984) as Vice Chairman. Mr. Wyly served as an officer and director of University Computing Company, a computer software and services company, from 1964 to 1975, including President from 1969 to 1973. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources Company, an oil refining and silver mining company, and Charles J. Wyly, Jr. served as Chairman of the Board from 1968 7 to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse chain from 1967 to 1989 and has served as a director of Sterling Commerce, Inc. since December 1995. 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. Rouleau became President of the Company in April 1997 and has been Chief Executive Officer since April 1996. Prior to joining the Company, Mr. Rouleau had served as Executive Vice President of Store Operations for Lowe's since May 1992 and in addition as President of Lowe's Contractor Yard Division since February 1995. Prior to joining Lowe's, Mr. Rouleau was a co-founder and President of Office Warehouse which subsequently merged into Office Max. Mr. DeCordova became Executive Vice President--Chief Financial Officer in March 1997. Since 1990 he was Vice President of Finance, Treasurer and Chief Financial Officer for Duckwall-ALCO Stores, Inc. Mr. Fine became Executive Vice President--General Merchandise Manager in December 1996. Before joining the Company, he was Senior Vice President of Merchandising for Party City. Prior to Party City, he held a variety of merchandising positions with the Jamesway Corporation. Mr. Heimenz became Executive Vice President--Store Operations in August 1996. Prior to joining Michaels, Mr. Hiemenz was a Regional Vice President for Lowe's. Mr. Sullivan became Executive Vice President--Development in April 1997. He joined Michaels in 1988 and has served in a variety of capacities, including overseeing the Company's store operations, distribution, store opening, real estate, legal and personnel functions. 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. Mr. Tucker became Executive Vice President--Chief Information Officer in June 1997. Before joining the Company, Mr. Tucker held the position of Senior Vice President and Chief Information Officer for Shopko Stores, Inc. since 1994. Prior to 1994, Mr. Tucker held the position of Vice President--Management Information Services for Trans World Music Corp. Mr. Gary joined the Company as Senior Vice President--Logistics and Distribution in November 1997. For the previous two years he had served with Kay-Bee Toys, Inc., as Vice President of Distribution and Logistics. Prior to Kay-Bee Toys, Inc., Mr. Gary was Vice President of Distribution and Logistics for Silo, Inc. Mr. Rutherford became Senior Vice President--Human Resources in March 1998. Prior to joining the Company, Mr. Rutherford was Vice President--Corporate Human Resources for Borders Group Inc. since February 1997. From 1994 through February 1997, he served as Vice President--Human Resources for Walden Book Company. From 1992 through 1994, Mr. Rutherford was Vice President--Human Resources for Footaction USA. Mr. Miller is a charter employee of the Company and has served as Vice President--Market Development since November 1990 and as a director since September 1992. From September 1984 to November 1990, he was Director of Real Estate. Prior to joining the Company, Mr. Miller served in various real estate positions with Bonanza and Peoples Restaurants. Mr. Miller has served as a director of Sterling Software, Inc. since September 1993. 8 ITEM 2. PROPERTIES. The Company's Michaels stores generally are situated in high visibility strip shopping centers located near malls and on well-traveled roads. Almost all stores are located in leased premises with lease terms generally ranging from five to ten years. The base rental rates generally range from $85,000 to $250,000 per year. Rental expense for stores open for the full 12-month period of fiscal 1997 averaged $170,000. 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. The Company's Aaron Brothers stores are generally located in high visibility strip shopping centers in trade areas having a high density of population and above average discretionary income. The locations typically contain high profile and/or complementary anchor stores. As of this date, almost all stores are located in leased premises with lease terms generally ranging from five to ten years with options to renew at increased rates. Rental expense for stores open for the full 12-month period of fiscal 1997 averaged $105,000. The following table indicates the number of the Company's stores located in each state or province as of April 15, 1998:
STATE NUMBER OF STORES STATE NUMBER OF STORES - ----- ---------------- ----- ---------------- Alabama 6 Nebraska 1 Alaska 1 Nevada 9* Arizona 19* New Hampshire 2 Arkansas 3 New Jersey 7 British Columbia 1 New Mexico 3 California 144* New York 11 Colorado 10 North Carolina 15 Connecticut 2 North Dakota 1 Florida 24 Ohio 21 Georgia 18 Oklahoma 7 Idaho 2 Ontario 16 Illinois 22 Oregon 11 Indiana 10 Pennsylvania 10 Iowa 6 Puerto Rico 3 Kansas 4 Rhode Island 1 Kentucky 3 South Carolina 4 Louisiana 4 South Dakota 1 Maine 2 Tennessee 11 Maryland 5 Texas 32 Massachusetts 10 Utah 4 Michigan 15 Virginia 9 Minnesota 10 Washington 15 Mississippi 2 West Virginia 1 Missouri 11 Wisconsin 7 --- Total 536
* Of the store counts indicated in Arizona, California and Nevada, Aaron Brothers accounts for 4, 66 and 4 stores, respectively. 9 Michaels leases a 426,000 square foot building at the Alliance Airport in Tarrant County, Texas, a 400,000 square foot building in Buena Park, California, a 350,000 square foot building in Lexington, Kentucky, and a 500,000 square foot building in Jacksonville, Florida for use as distribution centers. The Company's Buena Park, California distribution center will be replaced by a 450,000 square foot building located in Lancaster, California in 1998. Aaron Brothers leases a 126,000 square foot building in City of Commerce, California for use as a distribution center and office facility. The Company also leases a 136,000 square foot building for the corporate headquarters in Irving, Texas. ITEM 3. LEGAL PROCEEDINGS. In August 1995, two lawsuits were filed by certain security holders against the Company and certain present and former officers and directors seeking class action status on behalf of purchasers of the Company's Common Stock between February 1, 1995 and August 23, 1995. Among other things, the plaintiffs alleged that misstatements and omissions by the defendants relating to projected and historical operating results, inventory and other matters involving future plans resulted in an inflation of the price of the Company's Common Stock during the period between February 1, 1995 and August 23, 1995. The plaintiffs sought on behalf of the class an unspecified amount of compensatory damages and reimbursement for the plaintiffs' fees and expenses. The United States District Court for the Northern District of Texas consolidated the two lawsuits on November 16, 1995. On December 22, 1997, the District Court approved a settlement in which the defendants agreed to pay $6.25 million, and the lawsuit was dismissed with prejudice on January 27, 1998. After giving effect to prior expenditures for costs incurred in defending the lawsuit, substantially all of the settlement amount was covered by insurance. A lawsuit was commenced against the Company and several other parties on September 19, 1994 in the Superior Court of Stanislaus County, California, on behalf of a former employee, Naomi Snyder, her child, and her husband. The complaint alleges that the former employee and her then-unborn child were exposed to excessive levels of carbon monoxide in one of the Company's stores caused by a propane gas powered floor buffer which was operated by an outside cleaning service, resulting, among other things, in severe and permanent injuries to the child. Plaintiffs' Statement of Damages, filed on or about January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled the plaintiff's pleadings did not state a cause of action against the Company upon which relief could be granted. However, the ruling by the trial court was overturned by the Court of Appeals of the State of California, Fifth Appellate District, on September 23, 1996. On October 30, 1997, the California Supreme Court sustained the appellate court ruling and remanded the case to the trial court, and discovery is proceeding. The Company believes it has meritorious defenses to this action and will defend itself vigorously. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the litigation described above, is uncertain, and there can be no assurance that future costs related to such litigation would not be material to the Company's financial position or results of operations. 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. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is quoted through The Nasdaq Stock Market under the symbol "MIKE." The following table sets forth the high and low sale prices of the Company's Common Stock for each quarterly period within the two most recent fiscal years.
FISCAL 1997 HIGH LOW ----------- ---- --- First . . . . . . . . $ 20 1/8 $ 11 5/8 Second . . . . . . . 23 3/8 17 3/4 Third . . . . . . . . 34 5/8 20 3/4 Fourth . . . . . . . 37 23 1/8
FISCAL 1996 HIGH LOW ----------- ---- --- First . . . . . . . . $ 19 7/8 $ 11 3/4 Second . . . . . . . 19 1/8 12 3/8 Third . . . . . . . . 14 7/8 10 1/4 Fourth . . . . . . . 14 8 1/16
On April 15, 1998, the last reported sale price of the Common Stock on The Nasdaq Stock Market was $35.00 and as of such date there were approximately 761 holders of record of the Common Stock. Options to purchase 2,000,000 shares of the Company's Common Stock were acquired in December 1996 through private transactions by entities owned by independent trusts of which Wyly family members are beneficiaries. The options had an exercise price equal to the then current market price of $10.50 per share and were exercised on February 28, 1997. 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 1996 and 1997. 11 ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEAR --------------------------------------------------------------------------------------- 1997 1996(1) 1995 1994 1993 ---------- -------------- -------------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE AND STORE DATA) RESULTS OF OPERATIONS: Net sales $1,456,524 $1,378,277 $1,294,886 $ 994,563 $ 619,688 Operating income (loss) 68,942 (20,987)(2) (15,046)(3) 64,036 41,356 Net income (loss) 30,077 (31,233) (20,417) 35,647 26,287 Earnings (loss) per common share (4) 1.05 (1.35) (0.96) 1.67 1.48 BALANCE SHEET DATA: Cash and investments $ 162,283 $ 59,069 $ 2,870 $ 16,909 $ 68,823 Merchandise inventories 385,580 351,208 366,102 375,096 206,185 Total current assets 573,183 437,543 416,292 418,532 291,012 Total assets 908,494 784,435 739,780 686,026 397,830 Working capital 358,691 239,812 228,983 232,442 181,816 Long-term debt 234,889 238,608 187,748 138,082 97,803 Total liabilities 466,583 451,633 403,827 330,109 212,415 Stockholders' equity 441,911 332,802 335,953 355,917 185,415 OTHER FINANCIAL DATA: Cash flow from operating activities $ 77,907 $ 29,749 $ 9,248 $ (38,267) $ (28,935) EBITDA (5) 117,589 21,694 12,930 87,800 61,500 STORES OPEN AT END OF PERIOD: Michaels 452 453 442 380 220 Aaron Brothers 74 72 68 n/a n/a
(1) Fiscal 1996 was a 53-week fiscal year; all other years are 52-week fiscal years. (2) Includes effect of an unusual pre-tax charge of $41.2 million for costs associated with a sale to liquidate merchandise that was eliminated following store resets, markdowns on discontinued furniture and other home decor merchandise, and reserves for the closure of four stores and the write-down of leasehold improvements in three stores. (3) Includes effect of an unusual pre-tax charge of $64.4 million for costs primarily associated with an inventory reduction program. (4) Earnings per common share amounts for years prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. For further discussion of earnings per share and the impact of Statement No. 128, see Note 1 to the consolidated financial statements. (5) EBITDA is calculated as income before income taxes plus interest, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income, as an indicator of the operating performance of the Company, or as an alternative to cash flow as a measure of liquidity. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN STATEMENTS CONTAINED IN THIS DISCUSSION AND ANALYSIS WHICH ARE NOT HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, CUSTOMER DEMAND AND TRENDS IN THE ARTS AND CRAFTS INDUSTRY, RELATED INVENTORY RISKS DUE TO SHIFTS IN CUSTOMER DEMAND, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF COMPETITORS' LOCATIONS OR PRICING, THE AVAILABILITY OF ACCEPTABLE REAL ESTATE LOCATIONS FOR NEW STORES, DIFFICULTIES WITH RESPECT TO NEW INFORMATION SYSTEM TECHNOLOGIES AND THE COMPANY'S ABILITY TO ADDRESS THE YEAR 2000 ISSUE, SUPPLY CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF FINANCING EFFORTS, AND OTHER RISKS DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. GENERAL In fiscal years 1995, 1996 and 1997, we added 64, 17 and 9 Michaels stores, respectively, and closed 2, 2 and 10, respectively. During 1995 and 1996, a substantial portion of our sales increases came from stores added during or after the prior comparable period and therefore not included in same-store sales comparisons. During these periods, sales from these newer stores accounted for approximately 96% and 90%, respectively, of aggregate sales growth increases. Having achieved our objective of becoming the largest and only national retailer of arts, crafts and decorative items, on August 23, 1995, we announced a shift in focus from sales growth to realizing improved operating efficiencies that could result in higher returns on capital. During the second quarter of 1995, we conducted a critical analysis of the composition of our merchandise assortment and the velocity of turnover of individual SKUs and vendor lines included in each category of merchandise. We then implemented a program (the "SKU Reduction Program") designed to reduce the amount of capital invested in inventories. As a result of this program we recorded a $64.4 million charge in the quarter ended July 30, 1995, which primarily represented costs associated with the inventory liquidated during the quarter as well as anticipated costs of liquidations during the remainder of 1995. During 1996 we focused on implementing initiatives to improve our merchandising and store operations, which included completing the installation of the POS system, redefining the merchandise strategy, liquidating merchandise which did not support our new focus toward return on capital, resetting and standardizing the stores, and improving store staffing effectiveness. Based upon information obtained from the newly installed POS system, we made a strategic decision late in the third quarter to discontinue our furniture merchandise line and certain other home decor merchandise resulting in a $41.2 million charge. These changes allowed us to focus on an expanded arts and crafts assortment as our core line of business. In 1997 we moderated our expansion plans and focused on same-store sales growth for the existing base of stores, return on investment, inventory control, productivity enhancements and improved cash flow. We increased the number of basic merchandise SKUs centrally purchased and available for store replenishment from our distribution centers during 1997 by 80% to approximately 8,880 SKUs at year end. We expect this process will continue in 1998 with a goal of having approximately 15,000 SKUs being available for replenishment from our distribution centers by year end. We believe that shifting more inventory replenishment to the distribution centers will result in an increase in inventory turns in future years. However, in the short term, the conversion will cause a temporary increase in our inventory levels until our stores are able to reduce their safety stock. Initiatives for 1998 include a continued focus on growth in same-store sales, implementation of substantial information system enhancements in merchandising and distribution, and a return to an accelerated new store opening program. We intend to open approximately 45 Michaels stores in fiscal 1998, of which 10 have been opened as of April 15, 1998. 13 RESULTS OF OPERATIONS The following table sets forth the percentage relationship to net sales of each line item of the Company's Consolidated Statements of Operations. 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 -------------------------------- 1997 1996 1995 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of sales and occupancy 67.9 72.8 72.3 expense Selling, general and 27.4 28.7 28.9 administrative expense ----- ------ ------ Operating income (loss) 4.7 (1.5) (1.2) Interest expense 1.6 1.5 1.3 Other (income) and expense, net (0.2) 0.0 0.2 ----- ------ ------ Income (loss) before income taxes 3.3 (3.0) (2.7) Provision (benefit) for income taxes 1.2 (0.7) (1.1) ----- ------ ------ Net income (loss) 2.1% (2.3)% (1.6)% ----- ------ ------ ----- ------ ------
In the discussion below, all percentages given for expense items (excluding taxes) are calculated as a percentage of net sales. FISCAL 1997 COMPARED TO FISCAL 1996 Net sales in the fiscal year ended January 31, 1998 ("1997") increased $78.2 million, or 6%, over the fiscal year ended February 1, 1997 ("1996"). The results for 1997 included sales from 9 Michaels and 3 Aaron Brothers stores that were opened during the year, partially offsetting lost sales from 10 Michaels and one Aaron Brothers store closures. Same-store sales for comparable 52-week reporting periods increased 6% in 1997. The improvement in same-store sales performance was due to a strong performance in the Company's core categories of general crafts, framing, art supplies and floral, which management believes was the result of updated planograms and improved information from the new POS item sales history database initiated during the Summer of 1996. By utilizing the information provided by our POS system and a new "correction of errors" process, we have been able to improve our store in-stock position in top-selling items. Going forward we would expect to achieve same-store sales increases for 1998, taken as a whole. Our ability to generate same-store sales increases is dependent, in part, on our ability to continue to improve store in-stock conditions on the top-selling items, to properly allocate seasonal merchandise to the stores based upon anticipated sales trends and the success of our sales promotion efforts. Cost of sales and occupancy expense, as a percentage of net sales, for 1997 was 67.9%, a decrease of 4.9% compared to 1996. Cost of sales and occupancy expense in 1996 included a $47.7 million charge for unusual costs and expenses recorded in the third quarter of 1996 to cover losses on an extended sidewalk sale, markdowns on discontinued furniture and certain other home decor merchandise, and reserves for the closure of four stores and the write-down of leasehold improvements in three stores. Adjusting for the 1996 unusual items, cost of sales and occupancy expense for 1997 decreased by 2.0% compared to the prior year. This decrease was principally due to improved gross margins which management attributes to decreased dependency on promotional advertising and fewer seasonal clearance markdowns in the third and fourth quarters of 1997. Selling, general and administrative expense, as a percentage of net sales, decreased by 1.3% in 1997 compared to 1996. This decrease resulted from a reduction in advertising costs of $8.3 million from 1996 levels and improved expense leverage in store labor and all other categories of store operating expenses with the exception of depreciation, which reflects the impact of increased investment in the POS system. Additionally, in the third quarter of 1996 we recorded a $3.1 million charge associated with unusual costs and expenses relating primarily to an extended sidewalk sale. Interest expense, as a percentage of net sales, was 1.6% for 1997, a slight increase of 0.1% compared to the prior year. This increase was primarily a result of interest expense on the $125 million of Senior Notes issued in June 1996 which was, for the first time, outstanding for the full year in 1997. 14 For 1997 the effective tax rate increased to 38% from 24% in 1996 as we returned to profitability. The 1996 effective tax rate was significantly lower due to the loss in 1996 and our inability to fully carryback the tax losses to prior years. FISCAL 1996 COMPARED TO FISCAL 1995 Net sales in 1996 increased $83.4 million, or 6%, over the fiscal year ended January 28, 1996 ("1995"). The results for 1996 included sales from 13 new Michaels stores (before the impact of 2 store closures) and 4 new Aaron Brothers stores that were opened during the year. Same-store sales declined 1% in 1996. Cost of sales and occupancy expense, as a percentage of net sales, for 1996 was 72.8%, an increase of 0.5% compared to 1995. Cost of sales and occupancy expense in 1996 included $47.7 million of unusual costs recorded in the third quarter to cover losses on an extended sidewalk sale starting on Labor Day, markdowns on discontinued furniture and certain other home decor merchandise, and reserves for the closure of four stores and the write-down of leasehold improvements in three stores. 1995 included a $57.5 million charge taken in the second quarter to cover unusual costs associated with the SKU Reduction Program. Adjusting for both of these unusual items, cost of sales and occupancy expense for 1996 was 69.9%, an increase of 2.0% compared to the prior year, which management believes was due primarily to increases in seasonal and other clearance markdowns and increased distribution and occupancy costs. Distribution costs, as a percentage of net sales, increased primarily due to less efficient utilization of the distribution network and duplicate costs associated with the startup of a new distribution center. The increase in occupancy costs, as a percentage of net sales, resulted from a high proportion of newer stores having a relatively low sales base available to absorb fixed occupancy costs coupled with the same-store sales decline. The $21.0 million operating loss for 1996 reflects $41.2 million of unusual items in the third quarter of 1996 ($50.8 million of unusual costs net of $9.6 million sales) including: a $20 million loss resulting from an extended sidewalk sale starting on Labor Day conducted to sell off merchandise eliminated following store resets; markdown reserves of $15 million primarily related to our strategic decision to exit the furniture merchandise line and certain other discontinued home decor merchandise; and reserves of $4 million for store closures and the write-down of leasehold improvements. Interest expense, as a percentage of net sales, was 1.5% for 1996, an increase of 0.2% compared to the prior year primarily due to the higher interest rate on the $125 million of Senior Notes issued in 1996, compared to the short-term bank borrowings in the prior year as well as the incremental debt associated with an IBM capital lease which financed the POS system. For 1996 the effective tax benefit rate decreased to 24.0% from 41.4% in 1995 due to the size of the loss in 1996 and our inability to fully carryback the tax losses to prior years. LIQUIDITY AND CAPITAL RESOURCES We plan to spend approximately $60 to $65 million on capital expenditures during 1998. We plan to open approximately 45 Michaels and 6 Aaron Brothers stores for approximately $24 million. We expect to spend $15 to $16 million on information systems, approximately $11 million on store relocations and remodeling, and $10 to $14 million on various other projects. We believe that our available cash, funds generated by operating activities, funds available under the bank credit agreement, IBM capital lease financing and proceeds from the sale of stock through the Stock Purchase Plan, should be sufficient to finance continuing operations and sustain current growth plans. We believe that we can finance annual store expansion at a rate of 12% to 15% (on a square footage basis) from internally generated cash flow. Our working capital needs are driven primarily by a seasonal buildup of inventory to support higher sales in the third and fourth quarters, and to a lesser extent funding required for growth in new stores and improvements in our information systems. Net cash provided by operating activities for 1997 was $77.9 million as compared to $29.7 million for 1996. Net cash provided by operating activities during 1997 increased primarily as a result of our return to profitability, partially offset by an increase in merchandise inventories. 15 Capital expenditures during 1997 were $44.0 million, incurred primarily for the opening of 9 new Michaels and 3 new Aaron Brothers stores and the remodeling, relocation or expansion of approximately 42 existing Michaels stores, the pending relocation of a distribution center and various enhancements to our information systems. In February 1997, options to purchase 2,000,000 shares of our Common Stock were exercised through private transactions with entities owned by independent trusts of which family members of Sam Wyly and Charles J. Wyly, Jr., Chairman and Vice Chairman of the Company, respectively, were beneficiaries. The options were purchased by the trusts in December of 1996 with an exercise price equal to the then current market price. The exercise of the options provided us with $20 million of additional capital in 1997. In October 1997, we began issuing Common Stock through our Dividend Reinvestment and Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides owners of shares of Common Stock and other interested investors with a convenient and economical method to purchase Common Stock. The Stock Purchase Plan also provides us with a cost-efficient and flexible mechanism to raise equity capital. During 1997, we issued 241,370 shares through the Stock Purchase Plan, generating $7,872,000 in additional capital. At January 31, 1998, we had working capital of $358.7 million, compared to $239.8 million at February 1, 1997. We currently have a bank credit agreement which provides for an unsecured revolving line of credit of $100 million. There were no borrowings outstanding on the revolving line of credit at any time during 1997. SEASONALITY AND INFLATION Our business is seasonal in nature with higher sales in the third and fourth quarters. Historically, the fourth quarter, which includes the Christmas selling season, has accounted for approximately 37% of our sales and (excluding 1995 and 1996) approximately 57% of our operating income. We believe that the effects of inflation on 1997 results and the projected effect on 1998 financial results will be nominal. IMPACT OF THE YEAR 2000 We have undertaken various initiatives to insure that our computer equipment and software will function properly with respect to dates in the Year 2000 and thereafter. An experienced, nationally-known consulting firm has been contracted to provide objective project management and technical expertise to assist internal resources in completion of the project. The assessment phase of the project is complete. Remediation efforts have been estimated and prioritized according to potential business impact and application sensitivity to dating problems. In the normal course of business, we have had an aggressive systems development strategy for the past two years. New Year 2000-compliant systems being implemented as a result of this development strategy have somewhat mitigated the scope of the effort required to complete the project. Required modification of remaining application systems is currently in process. We currently anticipate that the necessary modifications and conversions will be completed by mid-1999, which is prior to any currently anticipated impact on our systems. We are also in the process of initiating communications with our significant vendors to determine the extent that system interfaces between ourselves and such vendors are vulnerable to the Year 2000 Issue. We will also attempt to ascertain the probability that such vendors will be able to complete their internal Year 2000 remediation efforts and be capable of supplying uninterrupted flow of inventory. We believe that the costs to modify our systems to be Year 2000 compliant, as well as the currently anticipated costs with respect to the Year 2000 Issues of third parties, will not exceed $2 million, which is being expensed as incurred. We presently believe that the Year 2000 Issue will not pose significant operational problems. However, if modifications and conversions are not completed in a timely manner, there can by no assurance that the Year 2000 Issue will not have a material adverse effect on us or adversely affect our relationships with customers, suppliers, or others. Additionally, there can be no assurance that the Year 2000 Issues of such entities will not have a material adverse effect on our systems or business. The anticipated costs of our efforts and the expected date on which we believe we will complete the Year 2000 modifications are based upon our best estimates, which are derived utilizing numerous assumptions of future events. 16 However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those currently anticipated. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information called for by this item is included in "Item 14-Exhibits, Financial Statement Schedules and Reports on Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with accountants on accounting and financial disclosure for the fiscal year ended January 31, 1998. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. BOARD OF DIRECTORS OF THE COMPANY The Board of Directors (the "Board") is presently comprised of eight members. The Board is divided into three classes, with two classes consisting of three directors and one class consisting of two directors. Members of each class of directors generally serve for a term of three years. Each director serves until the Annual Meeting of Stockholders in the year in which his term expires or until his successor is elected and qualified. The following sets forth information as to each of the directors of the Company, including their ages, present principal occupations, other business experiences during the last five years, membership on committees of the Board and directorships in other publicly-held companies.
YEAR TERM NAME AGE POSITION EXPIRES ---- --- -------- ------- Charles J. Wyly, Jr. (1) 64 Vice Chairman of the Board of Directors 1998 Richard E. Hanlon (2) 50 Director 1998 Kelly Elliott 25 Director 1998 F. Jay Taylor (2) 74 Director 1999 Evan A. Wyly 36 Director 1999 Sam Wyly (1) 63 Chairman of the Board of Directors 2000 Michael C. French 55 Director 2000 Donald R. Miller, Jr. 43 Director and Vice President--Market Development 2000
- -------------------- (1) Member of the Executive Committee and the Compensation Committee. (2) Member of the Audit Committee, the Key Employee Stock Compensation Program Committee, the 1992 Non-Statutory Plan Committee, the 1994 Non-Statutory Plan Committee and the 1997 Stock Option Plan Committee. Mr. Charles J. Wyly, Jr. became a director of the Company in October 1984 and Vice Chairman in 1985. He co-founded Sterling Software, Inc. in 1981 and since such time has served as a director and (since 1984) as Vice Chairman. Mr. Wyly served as an officer and director of University Computing Company, a computer software and services company, from 1964 to 1975, including President from 1969 to 1973. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources Company, an oil refining and silver mining 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 and has served as a director of Sterling Commerce, Inc. since December 1995. 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. Hanlon became a director of the Company in April 1990. Since February 1995, Mr. Hanlon has been Vice President--Investor Relations of America Online, Inc., a provider of online computer services. From March 1993 until February 1995, Mr. Hanlon was President of Hanlon & Co., a consulting firm. Since 1995, he has served as a director of Intellicall, Inc., a diversified telecommunications company providing technology and services to private pay telephone networks throughout the United States. Ms. Elliott is an artist and crafter and has served as a director of the Company since December 1997. In 1995, she founded Wyly Works, Inc., a specialty designer and producer of unique paintings, hand-painted ceramics and greeting cards. She has been a professional artist since 1991. Dr. Taylor became a director of the Company in June 1989. Dr. Taylor was President of Louisiana Tech University from 1962 until 1987, and has served as President-Emeritus of Louisiana Tech since 1987. Dr. Taylor also currently serves as a director of Illinois Central Railroad Corporation and Pizza Inn, Inc. and performs mediation and 18 arbitration services as a member of The American Arbitration Association and The Federal Mediation and Conciliation Service. Mr. Evan A. Wyly has served as a director of the Company since September 1992 and as an officer of the Company since December 1991. He has been a Managing Partner of Maverick Capital, Ltd., an investment fund management company, since 1991. In 1988, Mr. Wyly founded Premier Partners Incorporated, a private investment firm, and served as its President prior to joining Maverick Capital, Ltd. Mr. Wyly serves as a director and officer of Sterling Software, Inc. and as a director of Sterling Commerce, Inc. Mr. Sam Wyly has served as Chairman of the Board of the Company since 1984. Mr. Wyly co-founded Sterling Software, Inc. in 1981 and since that time has served as Chairman of the Board and a director. In 1963, Mr. Wyly founded University Computing Company, a computer software and services company, and served as President or Chairman from 1963 until 1979. University Computing created a computer utility network, one of the earliest and most successful marriages of computing and telecommunications. University Computing was one of the original participants in the software products industry in the late 1960's when the then market-dominant IBM unbundled computer hardware and software. In 1968, Mr. Wyly founded Datran, Inc. which was envisioned as the nation's first all-digital switched "telephone company for computers" and contributed to the break up of AT&T's telephone monopoly and the resulting benefits of increased competition in the telecommunications industry. These Wyly-founded companies are among the forerunners of today's electronic commerce industry. Mr. Wyly co-founded Earth Resources Company, an oil refining and silver 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 Mr. Wyly served as Chairman. Mr. Wyly currently serves as a director of Sterling Commerce, Inc. and as a partner of Maverick Capital, Ltd., an investment fund management company. Sam Wyly is the father of Evan A. Wyly and Kelly Elliott, directors of the Company. Mr. French has served as a director of the Company since September 1992. He is Chairman of The Scottish Annuity Company, an annuity and life insurance company, and has been a partner of Maverick Capital Ltd., an investment fund management limited partnership, since 1992 and a director of Sterling Software, Inc. since July 1992. Mr. French is currently a consultant to the international law firm of Jones, Day, Reavis & Pogue. Mr. French was a partner with the law firm of Jackson & Walker, L.L.P. from 1976 through 1995. Mr. Miller is a charter employee of the Company and has served as Vice President--Market Development since November 1990 and as a director since September 1992. From September 1984 to November 1990 he was Director of Real Estate. Prior to joining the Company, Mr. Miller served in various real estate positions with Bonanza and Peoples Restaurants. Mr. Miller has served as a director of Sterling Software, Inc. since September 1993. EXECUTIVE OFFICERS OF THE COMPANY 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 in this Item 10 by reference. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors and persons who own more than 10% of a registered class of the Company's equity securities to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the "SEC"). Such persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it with respect to fiscal 1997, or written representations from certain reporting persons, the Company believes that its officers and directors and persons who own more than 10% of a registered class of the Company's equity securities have complied with all applicable filing requirements. 19 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth certain information regarding compensation paid or accrued by the Company to the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers, employed by the Company at the end of the fiscal year, based on salary and bonus earned during fiscal 1997 and the Vice Chairman of the Board of Directors (the "Named Executives").
LONG-TERM COMPENSATION ------------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS ------------------- ------------------------ --------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL FISCAL COMPENSATION AWARDS OPTIONS/ PAYOUTS COMPENSATION POSITION YEAR SALARY($) BONUS($) ($) ($) SARS(#)(1) ($) ($) ------------------ ------ --------- --------- -------------- ---------- ------------ --------- -------------- R. Michael Rouleau, 1997 500,000 300,000 34,367 (2) -- 400,000 -- 2,154 (3) President and Chief 1996 394,236 -- 27,779 (2) -- 500,000 -- 203,885 (4) Executive Officer Sam Wyly, 1997 450,000 -- -- -- 1,200,000 -- -- Chairman of the 1996 450,000 -- 75,385 (5) -- 633,333 -- -- Board of Directors 1995 450,000 -- 63,690 (5) -- 300,000 (6) -- Charles J. Wyly, Jr., 1997 225,000 -- -- -- 600,000 -- -- Vice Chairman of the 1996 225,000 -- -- -- 367,417 -- -- Board of Directors 1995 225,000 -- -- -- 450,000 (7) -- -- Douglas B. Sullivan 1997 300,000 150,000 47,001 (8) -- -- -- 2,465 (9) Executive Vice 1996 301,809 -- 24,788 (8) -- 253,250(10) -- 6,268 (9) President- 1995 284,686 -- 39,105 (8) -- 245,000(11) -- 5,269 (9) Development Lawrence Fine 1997 221,539 126,563 -- -- 25,000 -- 94,771(12) Executive Vice 1996 34,615 30,000 -- -- 75,000 -- -- President- General Merchandise Manager Duane Hiemenz, 1997 221,154 100,000 6,000 (13) -- 53,333 -- 17,515(14) Executive Vice 1996 119,231 90,000 3,500 (13) -- 80,000 -- 103,561(15) President- Store Operations
- ------------------- (1) Options to acquire shares of Common Stock. (2) Includes life insurance premiums paid by the Company in the amount of $20,181 and $21,605 in fiscal 1997 and 1996, respectively. (3) Annual contribution by the Company for Mr. Rouleau's account pursuant to the Company's 401(k) Plan. (4) Includes $200,000 in relocation expenses paid by the Company and annual contributions by the Company for Mr. Rouleau's account pursuant to the Company's 401(k) Plan in the amount of $3,885. (5) Includes life insurance premiums paid by the Company in the amount of $60,291 and $51,678 in fiscal 1996 and 1995, respectively. (6) 300,000 previously granted stock options which were repriced in fiscal 1995. (7) 450,000 previously granted stock options which were repriced in fiscal 1995. (8) Includes life insurance premiums paid by the Company in the amount of $21,437, $19,430, and $18,798 in fiscal 1997, 1996 and 1995, respectively. (9) Includes the annual contribution by the Company for Mr. Sullivan's account pursuant to the Company's 401(k) Plan in the amount of $2,077, $5,538, and $4,620 in fiscal 1997, 1996 and 1995, respectively, and split-dollar life insurance providing $388, $730, and $649 of current net benefit projected on an actuarial basis in fiscal 1997, 1996 and 1995, respectively. 20 (10) 253,250 previously granted stock options which were repriced in fiscal 1996. (11) Includes 165,000 previously granted stock options which were repriced in fiscal 1995. (12) Includes $91,396 in relocation expense paid by the Company and annual contributions by the Company for Mr. Fine's account pursuant to the Company's 401(k) plan in the amount of $3,375. (13) Annual automobile allowance paid by the Company. (14) Includes $12,246 in relocation expenses paid by the Company and annual contributions by the Company for Mr. Hiemenz's account pursuant to the Company's 401(k) Plan in the amount of $5,269. (15) Relocation expenses paid by the Company. OPTION GRANTS DURING 1997 FISCAL YEAR The following table provides information related to options granted to the Named Executives during fiscal 1997.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED - --------------------------------------------------------------------------------------------------- ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS/SARS APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TEAM (1) OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPLORATION ---------------------- NAME GRANTED (#) (2) FISCAL YEAR ($/SH) (3) DATE 5% ($) 10% ($) - ----------------------------------- --------------- ------------- ------------ ------------ --------- --------- R. Michael Rouleau.. . . . . . . . . 400,000 (4) 9.2 21.375 07/24/00 1,347,694 2,830,050 Sam Wyly . . . . . . . . . . . . . . 1,200,000 27.5 21.375 07/24/00 4,043,081 8,490,150 Charles J. Wyly, Jr. . . . . . . . . 600,000 13.7 21.375 07/24/00 2,021,541 4,245,075 Douglas B. Sullivan . . . . . . . . -- -- -- -- -- -- Lawrence Fine . . . . . . . . . . . 25,000 (4) 0.6 21.375 07/24/00 84,231 176,878 Duane Hiemenz . . . . . . . . . . . 53,333 (4) 1.2 21.375 07/24/00 179,691 377,338
- ------------------- (1) The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the Company's Common Stock over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the options following termination of employment, nontransferability or vesting over periods. The use of the assumed 5% and 10% returns is established by the Securities and Exchange Commission and is not intended by the Company to forecast possible future appreciation of the price of the Common Stock. (2) Options to acquire shares of Common Stock. (3) The option exercise price may be paid in shares of Common Stock owned by the Named Executives, in cash, or in any other form of valid consideration or a combination of any of the foregoing, in some cases as determined by the Board of Directors, the Key Employee Stock Compensation Program Committee, the 1992 Non-Statutory Plan Committee, the 1994 Non-Statutory Plan Committee, and the 1997 Stock Option Plan Committee, as applicable, in its discretion. The exercise price of each option was equal to the fair market value of the Common Stock on the date of grant. (4) Stock options are currently exercisable with respect to 1/3 of the shares covered thereby and become exercisable with respect to 1/3 of the shares covered thereby on each of July 25, 1998 and July 25, 1999. 21 OPTION EXERCISES DURING 1997 FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table provides information related to options exercised by the Named Executives during the 1997 fiscal year and the number and value of options held at fiscal year end. The Company does not have any outstanding stock appreciation rights.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY-END (#) AT FY-END ($) (1) ----------------------------- ----------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE (#) REALIZED ($) (2) EXERCISABLE UNEXERCISABLE EXERCISABLE Unexercisable - -------------------- --------------- ---------------- ----------- ------------- ----------- ------------- R. Michael Rouleau. . . 300,000 2,662,500 133,333 466,667 1,249,997 6,150,003 Sam Wyly. . . . . . . . 633,333 4,433,331 1,200,000 -- 11,250,000 -- Charles J. Wyly, Jr. . 367,417 2,571,919 600,000 -- 5,625,000 -- Douglas B. Sullivan . . 92,750 1,452,797 160,500 -- 2,929,125 -- Lawrence Fine. . . . . 33,333 327,602 25,000 41,667 510,938 667,191 Duane Hiemenz. . . . . 53,333 399,997 17,777 62,223 166,659 783,344
- -------------------- (1) The closing price for the Company's Common stock as reported through The Nasdaq National Market System on January 31, 1998, the last trading day of the 1997 fiscal year, was $30.75. Value is calculated on the basis of the difference between the option exercise price and $30.75 multiplied by the number of shares of Common Stock underlying the option. (2) Value realized is calculated based on the difference between the option exercise price and the closing market price of the Common Stock on the date of exercise multiplied by the number of shares to which the exercise relates. COMPENSATION OF DIRECTORS Directors who are salaried employees of the Company are not compensated for their Board activities. The Company pays Sam Wyly $37,500 per month for serving as Chairman of the Board. On July 25, 1997, the Company granted to Sam Wyly a three-year option to purchase 1,200,000 shares of Common Stock at an exercise price of $21.375, all of which was exercisable immediately. The Company pays Charles J. Wyly, Jr. $18,750 per month for serving as Vice Chairman of the Board. On July 25, 1997, the Company granted to Charles J. Wyly, Jr. a three-year option to purchase 600,000 shares of Common Stock at an exercise price of $21.375, all of which was exercisable immediately. Dr. Taylor and Mr. Hanlon each receive an annual fee of $24,000 as members of the Board, a fee of $1,000 for attendance at each regular or special Board meeting, and a fee of $1,000 for attendance at each meeting of the Audit Committee. On July 25, 1997, the Company granted Dr. Taylor a three-year option to purchase 30,000 shares of Common Stock at an exercise price of $21.375, all of which was exercisable immediately. On July 25, 1997, the Company granted to Mr. Hanlon a three-year option to purchase 30,000 shares of Common Stock at an exercise price of $21.375, all of which was exercisable immediately. Pursuant to a consulting arrangement with the Company, during fiscal 1997, Mr. French received from the Company a non-refundable retainer of $15,000 per month for his advice and assistance. On July 25, 1997, the Company granted to Mr. French a three-year option to purchase 75,000 shares of Common Stock at an exercise price of $21.375, all of which was exercisable immediately. Jones, Day, Reavis & Pogue, a law firm for which Mr. French is a consultant, provides legal services to the Company, but does not charge the Company for any time spent by Mr. French on any Company matters. EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS The Company has entered into agreements with Sam Wyly and Charles J. Wyly, Jr., directors and executive officers of the Company, which agreements provide for the employment of such persons by the Company upon a change of control of the Company (a "Change of Control") for a salary not less than each such individual's respective annual salary immediately preceding the Change of Control and allows each such individual to participate in bonuses with other key management personnel. Each of these agreements (i) is for a term of three years with provisions for annual automatic one- 22 year extensions and, upon a Change of Control, an additional extension of 36 months and (ii) requires the Company to pay to each such individual, if his employment is terminated within three years of a Change of Control, a sum equal to three times such individual's salary and bonus during the twelve-month period immediately preceding termination. The Company has entered into a six-year employment agreement with R. Michael Rouleau, the President and Chief Executive Officer of the Company, effective April 29, 1997, under which Mr. Rouleau is entitled to receive an annual base salary of $500,000 and standard executive officer benefits and to participate in a bonus plan in any year in which a bonus plan is established. During fiscal 1997, Mr. Rouleau received a bonus of $300,000 pursuant to a bonus plan upon the attainment by the Company of certain performance goals. Upon a Change of Control of the Company or if the Company terminates Mr. Rouleau's employment (other than for cause) prior to the expiration of the six-year term, Mr. Rouleau is entitled to continue to receive his base salary and other benefits until April 30, 2003. If Mr. Rouleau's employment is terminated for any reason, at any time, all unvested options then held by him will immediately become fully exercisable and Mr. Rouleau will be entitled to the value of any unvested interest he may have in the Company's 401(k) plan. The Company has entered into an agreement with Douglas B. Sullivan, an executive officer of the Company, which provides for his employment by the Company upon a Change of Control for a salary not less than his annual salary immediately preceding the Change of Control and allows him to participate in bonuses with other key management personnel of the Company. This agreement (i) is for a term of three years with provisions for annual automatic one-year extensions and, upon a Change of Control, an additional extension of twelve months and (ii) requires the Company to pay to Mr. Sullivan, if his employment is terminated within one year of a Change of Control, a sum equal to his salary and bonus during the twelve-month period immediately preceding termination. COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1997, the members of the Compensation Committee were primarily responsible for determining executive compensation. The members of the Option Committees made decisions related to stock option grants to executive officers and directors. The following executive officers, who also are members of the Compensation Committee, participated in deliberations concerning executive officer compensation: Sam Wyly and Charles J. Wyly, Jr. Sam Wyly and Charles J. Wyly, Jr. are members of the Executive Committee and the Compensation Committee of the Company. Sam Wyly and Charles J. Wyly, Jr. are also executive officers and members of the Executive Committees, Stock Option Committees and Boards of Directors of Sterling Software, Inc. and Sterling Commerce, Inc. Accordingly, Sam Wyly and Charles J. Wyly, Jr. have participated in decisions related to compensation of executive officers of each of the Company, Sterling Software, Inc., and Sterling Commerce, Inc. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information as of April 15, 1998 regarding the beneficial ownership of Common Stock by each person known by the Company to own 5% or more of the outstanding shares of Common Stock, each director of the Company, certain Named Executives, and the directors and executive officers of the Company as a group. The persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them, unless otherwise noted. 23
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER OR BENEFICIAL PERCENT NUMBER OF PERSONS IN GROUP OWNERSHIP(1) OF CLASS - --------------------------- ------------ -------- Sam Wyly . . . . . . . . . . . . . . . . . . . . . 2,061,905 (2) 6.8 Charles J. Wyly, Jr. . . . . . . . . . . . . . . . 1,066,444 (3) 3.5 Kelly Elliott. . . . . . . . . . . . . . . . . . . 213,861 (4) * Michael C. French. . . . . . . . . . . . . . . . . 64,534 (5) * Richard E. Hanlon. . . . . . . . . . . . . . . . . 32,600 (6) * Donald R. Miller, Jr.. . . . . . . . . . . . . . . 215,637 (7) * F. Jay Taylor. . . . . . . . . . . . . . . . . . . 51,400 (8) * Evan A. Wyly . . . . . . . . . . . . . . . . . . . 175,875 (9) * R. Michael Rouleau . . . . . . . . . . . . . . . . 201,672(10) * Douglas B. Sullivan. . . . . . . . . . . . . . . . 155,014(11) * Lawrence H. Fine . . . . . . . . . . . . . . . . . 25,040(12) * Duane E. Hiemenz . . . . . . . . . . . . . . . . . 19,310(13) * AMVESCAP PLC . . . . . . . . . . . . . . . . . . . 2,245,000(14) 7.8 11 Devonshire Square London EC2M4YR England First Pacific Advisors, Inc. . . . . . . . . . . . 2,178,216(15) 7.5 11400 West Olympic Boulevard, Suite 1200 Los Angeles, California 90064 FMR Corp.. . . . . . . . . . . . . . . . . . . . . 1,650,045(16) 5.7 82 Devonshire Street Boston, Massachusetts 02109 ICM Asset Management, Inc. . . . . . . . . . . . . 1,607,458(17) 5.6 601 W. Main Avenue, Suite 917 Spokane, Washington 99201 The Wyly Group . . . . . . . . . . . . . . . . . . 3,128,349(18) 10.0 300 Crescent Court, Suite 1000 Dallas, Texas 75201 All current directors and executive officers as a group (16 persons). . . . . . . . . . . . . . 4,363,102(19) 13.5
- -------------------- * Less than 1% (1) The number of shares shown includes outstanding shares of Common Stock owned as of April 15, 1998 by the person indicated and shares underlying options owned by such person on April 15, 1998 that were exercisable within 60 days of such date. Persons holding shares of Common Stock pursuant to the Michaels Stores, Inc. Employees 401(k) Plan (the "401(k) Plan") have sole voting power and investment power with respect to such shares. (2) Includes 1,200,000 shares subject to presently exercisable options; 589,536 shares held of record by Tallulah, Ltd. (a limited partnership of which Mr. Wyly is a general partner); 256,533 shares held of record by family trusts of which Mr. Wyly is trustee (63,861 of which are also beneficially owned by Kelly Elliott); and 15,836 shares held of record by certain of Mr. Wyly's adult children for which he holds power of attorney to vote such shares. (3) Includes 600,000 shares subject to presently exercisable options; 80,000 shares held of record by Brush Creek, Ltd., a limited partnership of which Mr. Wyly is a general partner; and 386,444 shares held of record by family trusts of which Mr. Wyly is Trustee. (4) Includes 150,000 shares subject to presently exercisable options and 63,861 shares held of record by the Kelly W. Elliott Trust of which Mr. Sam Wyly is Trustee (which are also beneficially owned by Sam Wyly). (5) Includes 63,334 shares subject to presently exercisable options and 1,200 shares held by a retirement account directed by Mr. French. 24 (6) Includes 30,000 shares subject to presently exercisable options. (7) Includes 200,000 shares subject to presently exercisable options; 187 shares held by Mr. Miller's spouse; and 11,450 shares owned pursuant to the 401(k) Plan. (8) Includes 30,000 shares subject to presently exercisable options. (9) Includes 150,000 shares subject to presently exercisable options. (10) Includes 183,333 shares subject to presently exercisable options and 2,362 shares owned pursuant to the 401(k) Plan. (11) Includes 110,500 shares subject to presently exercisable options and 7,639 shares owned pursuant to the 401(k) Plan. (12) Includes 25,000 shares subject to presently exercisable options. (13) Includes 17,776 shares subject to presently exercisable options. (14) Based on a Schedule 13G/A filed with the Securities and Exchange Commission dated February 9, 1998, AMVESCAP PLC, a parent holding company, shares the power to dispose or to direct the disposition of, and to vote or direct the vote of, 2,245,000 shares of Common Stock. (15) Based on a Schedule 13G filed with the Securities and Exchange Commission dated January 30, 1998, First Pacific Advisors, Inc., a registered investment advisor, shares the power to dispose or to direct the disposition of 2,178,216 shares of Common Stock and shares the power to vote or to direct the vote of 813,300 shares of Common Stock. (16) Based on a schedule 13G filed with the Securities and Exchange Commission dated February 14, 1998, FMR Corp., a registered investment advisor, has the sole power to dispose or to direct the disposition of 1,650,045 shares of Common Stock and to vote or direct the vote of 474,600 shares of Common Stock. (17) Based on a Schedule 13G/A filed with the Securities and Exchange Commission dated February 10, 1998, ICM Asset Management, Inc., a registered investment adviser, has the sole power to dispose or direct the disposition of 1,607,458 shares of Common Stock and shares the power to vote or direct the vote of 1,126,458 shares of Common Stock. (18) The Wyly Group consists of Sam Wyly and Charles J. Wyly, Jr. Based on a Schedule 13D/A filed with the Securities and Exchange Commission dated January 21, 1998, Sam Wyly shared voting and dispositive power with respect to 15,836 shares of Common Stock, and has sole dispositive power with respect to 2,046,069 shares of Common Stock and sole voting power with respect to 846,069 shares of Common Stock, and Charles J. Wyly, Jr. has sole dispositive power with respect to 1,066,444 shares of Common Stock and sole voting power with respect to 466,444 shares of Common Stock. (19) Includes 93,332 shares subject to presently exercisable options and 200 shares held pursuant to the 401(k) Plan by 5 executive officers not named in the table. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Since the beginning of the Company's last fiscal year, the Company has not entered into any transaction or series of transactions that require disclosure by Regulation S-K Item 404 --Certain Relationships and Related Transactions, nor is any such transaction or series of transactions currently proposed. 25 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE IN REPORT ------- (a) The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Auditors . . . . . . . . . . . . . . . 31 Consolidated Balance Sheets at January 31, 1998 and February 1, 1997 . . . . . . . . . . . . . . . . . . . . . . 32 Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997 and January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 31, 1998, February 1, 1997 and January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 35 Notes to Consolidated Financial Statements for the fiscal years ended January 31, 1998, February 1, 1997 and January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 36 Unaudited Supplemental Quarterly Financial Data for the fiscal years ended January 31, 1998 and February 1, 1997. . . . . . . 44
(2) Financial Statement Schedules: All schedules have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto. (3) Exhibits: The Exhibits listed below and on the accompanying Index to Exhibits immediately following the financial statement schedules are incorporated herein, or incorporated by reference into this report.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1 Bylaws of the Registrant, as amended and restated (previously filed as Exhibit 3.1 to Form 10-K for the year ended January 30, 1994, filed by Registrant on April 28, 1994, SEC File No. 94525504). 3.2 Restated Certificate of Incorporation of the Registrant (previously filed as Exhibit 4.1 to Form S-8 (No. 33-54726), filed by Registrant on November 20, 1992, SEC File No. 92278746). 4.1 Form of Common Stock Certificate (previously filed as Exhibit 4.1 to Form 10-K for the year ended January 30, 1994, filed by Registrant on April 28, 1994, SEC File No. 94525504).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.2 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 (previously filed as Exhibit 19.1 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 4.3 Indenture, dated as of June 21, 1996, between Michaels Stores, Inc. and The Bank of New York (previously filed as Exhibit 19.1 to Form 10-Q for the quarter ended July 28, 1996, filed by Registrant on September 11, 1996, SEC File No. (96628596). 10.1 Michaels Stores, Inc. Employees 401(k) Plan, as amended and restated, effective October 1, 1996 (previously filed as Exhibit 99.2 to Form 8-K, filed by Registrant on September 30, 1996, SEC File No. 96637219). * 10.2 Michaels Stores, Inc. Employees 401(k) Trust, dated July 11, 1996 (previously filed as Exhibit 99.3 to Form 8-K, filed by Registrant on September 30, 1996, SEC File No. 96637219). 10.3 Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and directors of the Registrant (previously filed as Exhibit 10.8 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 10.4 Form of Employment Agreement between Michaels Stores, Inc. and certain directors of the Registrant (Filed herewith). * 10.5 Form of Employment Agreement between Michaels Stores, Inc. and Douglas B. Sullivan (Filed herewith). * 10.6 Michaels Stores, Inc. Amended and Restated Key Employee Stock Compensation Program (previously filed as Exhibit 10.9 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). * 10.7 Michaels Stores, Inc. Amended and Restated 1992 Non-Statutory Stock Option Plan (previously filed as Exhibit 99.1 to Form S-8 (No. 333-21407), filed by Registrant on February 7, 1997, SEC File No. 97521153). * 10.8 Second Amended and Restated Credit Agreement, dated June 20, 1996, between Michaels Stores, Inc. and the lenders named therein (the "Credit Agreement") (previously filed as Exhibit 10 to Form 8-K dated June 20, 1996, filed by Registrant on September 26, 1996, SEC File No. 96635219). 10.9 Waiver Agreement and First Amendment to Credit Agreement, dated January 31, 1997 (previously filed as Exhibit 10.13 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.10 Second Amendment to Credit Agreement, dated as of March 11, 1997 (previously filed as Exhibit 10.14 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.11 Michaels Stores Inc. Amended and Restated 1994 Non-Statutory Stock Option Plan (previously filed as Exhibit 99.1 to Form S-8 (No. 333-21635), filed by Registrant on February 12, 1997, SEC file No. 97527249). * 10.12 Amended, Modified and Restated Master Lease Agreement, dated as of December 18, 1995, between Jacksonville Funding Corporation as Lessor and Michaels Stores, Inc., as Lessee (previously filed as Exhibit 10.17 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.13 Amendment No. 1 to Amended, Modified and Restated Master Lease Agreement, dated as of April 22, 1996, between Jacksonville Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee (Filed herewith). 10.14 Amendment No. 2 to Amended, Modified and Restated Master Lease Agreement, dated as of July 11, 1996, between Jacksonville Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee (Filed herewith). 10.15 Amendment No. 3 to Amended, Modified and Restated Master Lease Agreement, dated as of August 15, 1996, between Jacksonville Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee (Filed herewith). 10.16 Amendment No. 4 to Amended, Modified and Restated Master Lease Agreement and Waiver, dated as of March 11, 1997, between Jacksonville Funding Corporation as Lessor and Michaels Stores, Inc. as Lessee (previously filed as Exhibit 10.17 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.17 Consulting Agreement, dated as of October 1, 1996, between Michaels Stores, Inc. and Michael C. French (Filed herewith). * 10.18 Term Lease Master Agreement between IBM Credit Corporation as Lessor and Michaels Stores, Inc. as Lessee (previously filed as Exhibit 10.18 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.19 Agreement, dated as of January 30, 1996, by and between Michaels Stores, Inc. and Jack E. Bush (previously filed as Exhibit 10.19 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). * 10.20 Agreement, dated as of April 26, 1996, by and between Michaels Stores, Inc. and Jack E. Bush (Filed herewith). * 10.21 Common Stock and Warrant Agreement, dated as of October 16, 1984, between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant (previously filed as Exhibit 4.2 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 10.22 First Amendment to Common Stock and Warrant Agreement, dated October 31, 1984, between the First Dallas Group, Ltd. and Michaels Stores, Inc. (previously filed as Exhibit 4.3 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC file No. 93116847). 10.23 Second Amendment to Common Stock and Warrant Agreement, dated November 28, 1984, between First Dallas Investments-Michaels I, Ltd. and Michaels Stores, Inc. (previously filed as Exhibit 4.4 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 10.24 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. (previously filed as Exhibit 10.23 to Form S-1 (No. 33-09456), filed by Registrant on October 14, 1986, SEC File No 86299802). 10.25 Amendment to Common Stock and Warrant Agreement, dated as of September 1, 1992, between Michaels Stores, Inc. and the other parties named therein (previously filed as Exhibit 4.8 to Form S-8 (No. 33-54726), filed by Registrant on November 20, 1992, SEC File No. 92278746).
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.26 Stock Purchase Agreement, dated as of March 29, 1996, between Michaels Stores, Inc. and Fugue Limited (previously filed as Exhibit 4.9 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.27 Stock Purchase Agreement, dated as of March 29, 1996, between Michaels Stores, Inc. and Locke Limited (previously filed as Exhibit 4.8 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.28 Stock Purchase Agreement, dated as of March 29, 1996, between Michaels Stores, Inc. and Quayle Limited (previously filed as Exhibit 4.7 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.29 Option Agreement, dated as of December 23, 1996, between Michaels Stores, Inc. and Devotion Limited (previously filed as Exhibit 10.28 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.30 Option Agreement, dated as of December 23, 1996, between Michaels Stores, Inc. and Elegance Limited (previously filed as Exhibit 10.29 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.31 Form of 1998 Bonus Plan for R. Michael Rouleau (Filed herewith). * 10.32 Form of 1998 Bonus Plan for Executive Vice Presidents (Filed herewith). * 10.33 Employment Agreement, effective as of April 29, 1997, between Michaels Stores, Inc. and R. Michael Rouleau (previously filed as Exhibit 10.32 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). * 10.34 Michaels Stores, Inc. Stock Option Agreement, dated as of June 6, 1997, between Michaels Stores, Inc. and R. Michael Rouleau (previously filed as Exhibit 99.1 to Form S-8 (No. 333-29417), filed by Registrant on June 17, 1997, SEC File No. 97625464). * 10.35 Agreement, effective January 21, 1997, between Michaels Stores, Inc. and R. Don Morris (previously filed as Exhibit 10.1 to Form 10-Q for the quarter ended May 3, 1997, filed by Registrant on June 17, 1997, SEC File No. 97625145). * 10.36 Michaels Stores, Inc. 1997 Employees Stock Purchase Plan (previously filed as Exhibit 10.33 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). * 10.37 Michaels Stores, Inc. 1997 Stock Option Plan (previously filed as Exhibit 10.2 to Form 10-Q for quarter ended May 3, 1997, filed by Registrant on June 17, 1997, SEC File No. 97625145). *
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 21.1 Subsidiaries of Michaels Stores, Inc. (Filed herewith). 23.1 Consent of Ernst & Young LLP (Filed herewith). 27.1 Financial Data Schedule (Filed herewith).
-------------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c). (b) No reports on Form 8-K were filed during the quarter ended January 31, 1998. 30 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Michaels Stores, Inc. We have audited the accompanying consolidated balance sheets of Michaels Stores, Inc. as of January 31, 1998 and February 1, 1997, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended January 31, 1998. 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 31, 1998 and February 1, 1997, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Dallas, Texas March 10, 1998 31 MICHAELS STORES, INC. - -------------------------------------- - -------------------------------------- CONSOLIDATED BALANCE SHEETS (In thousands except share data)
JANUARY 31, 1998 FEBRUARY 1, 1997 ---------------- ---------------- ASSETS CURRENT ASSETS: Cash and equivalents $ 162,283 $ 59,069 Merchandise inventories 385,580 351,208 Income taxes receivable and deferred income taxes 11,291 15,207 Prepaid expenses and other 14,029 12,059 ---------- ---------- Total current assets 573,183 437,543 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST 331,755 294,022 Less accumulated depreciation (138,719) (104,943) ---------- ---------- 193,036 189,079 ---------- ---------- COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET 136,827 140,697 DEFERRED INCOME TAXES 2,695 10,550 OTHER ASSETS 2,753 6,566 ---------- ---------- 142,275 157,813 ---------- ---------- $ 908,494 $ 784,435 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 109,456 $ 104,966 Accrued liabilities and other 105,036 92,765 ---------- ---------- Total current liabilities 214,492 197,731 ---------- ---------- SENIOR NOTES 125,000 125,000 CONVERTIBLE SUBORDINATED NOTES 96,940 96,940 OTHER LONG-TERM LIABILITIES 30,151 31,962 ---------- ---------- Total long-term liabilities 252,091 253,902 ---------- ---------- 466,583 451,633 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value, 2,000,000 shares authorized, none issued -- -- Common stock, $.10 par value, 50,000,000 shares authorized, 29,033,908 issued and outstanding (23,690,926 in fiscal 1996) 2,903 2,369 Additional paid-in capital 350,977 271,405 Retained earnings 88,031 59,028 ---------- ---------- Total stockholders' equity 441,911 332,802 ---------- ---------- $ 908,494 $ 784,435 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 32 MICHAELS STORES, INC. - -------------------------------------- - -------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data)
FISCAL YEAR ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- NET SALES $1,456,524 $1,378,277 $1,294,886 Cost of sales and occupancy expense 988,990 1,003,815 936,537 Selling, general and administrative expense 398,592 395,449 373,395 ---------- ---------- ---------- OPERATING INCOME (LOSS) 68,942 (20,987) (15,046) Interest expense 23,448 21,038 16,841 Other (income) and expense, net (3,013) (952) 2,952 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 48,507 (41,073) (34,839) Provision (benefit) for income taxes 18,430 (9,840) (14,422) ---------- ---------- ---------- NET INCOME (loss) $ 30,077 $ (31,233) $ (20,417) ---------- ---------- ---------- ---------- ---------- ---------- EARNINGS (LOSS) PER COMMON SHARE: Basic $1.11 $(1.35) $(0.96) Diluted $1.05 $(1.35) $(0.96) COMMON SHARES USED IN PER SHARE CALCULATIONS: Basic 27,215 23,180 21,354 Diluted 28,664 23,180 21,354
See accompanying notes to consolidated financial statements. 33 MICHAELS STORES, INC. - -------------------------------------- - -------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FISCAL YEAR ---------------------------------------- 1997 1996 1995 ---------- ---------- --------- OPERATING ACTIVITIES: Net income (loss) $ 30,077 $ (31,233) $ (20,417) Adjustments: Depreciation 41,387 37,545 26,752 Amortization 4,247 4,184 4,176 Other 2,009 1,052 943 Change in assets and liabilities excluding the effects of acquisitions: Merchandise inventories (34,372) 14,894 13,406 Prepaid expenses and other (1,970) (1,076) (1,534) Deferred income taxes and other 17,604 (1,314) (11,188) Accounts payable 4,490 6,166 (6,585) Accrued liabilities and other 14,435 (469) 3,695 ---------- ---------- --------- Net change in assets and liabilities 187 18,201 (2,206) ---------- ---------- --------- Net cash provided by operating activities 77,907 29,749 9,248 ---------- ---------- --------- INVESTING ACTIVITIES: Additions to property and equipment (43,997) (33,609) (54,906) Net proceeds from sales of property and equipment 1,623 175 3,159 Net proceeds from sales of investments 3,386 1,122 18,860 Acquisitions and other -- -- (24,909) ---------- ---------- --------- Net cash used in investing activities (38,988) (32,312) (57,796) ---------- ---------- --------- FINANCING ACTIVITIES: Net borrowings (payments) under bank credit facilities -- (87,200) 46,100 Payment of other long-term liabilities (4,354) (2,503) (891) Proceeds from issuance of Senior Notes -- 120,542 -- Proceeds from stock options exercised 61,309 3,299 4,443 Proceeds from issuance of common stock and other 7,340 24,624 (141) ---------- ---------- --------- Net cash provided by financing activities 64,295 58,762 49,511 ---------- ---------- --------- NET INCREASE IN CASH AND EQUIVALENTS 103,214 56,199 963 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 59,069 2,870 1,907 ---------- ---------- --------- CASH AND EQUIVALENTS AT END OF YEAR $ 162,283 $ 59,069 $ 2,870 ---------- ---------- --------- ---------- ---------- --------- Supplemental cash flow information: Cash paid for interest $ 22,486 $ 19,291 $ 15,236 ---------- ---------- --------- ---------- ---------- --------- Income tax refunds received $ 4,858 $ 17,366 $ 2,155 ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements. 34 MICHAELS STORES, INC. - -------------------------------------- - -------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Years Ended January 31, 1998 (In thousands except share data)
---------------------------------------------------------------------------- Number Additional of Common paid-in Retained shares stock capital earnings Total ---------------------------------------------------------------------------- BALANCE AT JANUARY 29, 1995 21,354,167 $2,135 $244,561 $109,221 $355,917 Retirement of shares reacquired (170,025) (17) (5,516) -- (5,533) Adjustment for change in market value of marketable securities -- -- -- 1,514 1,514 Exercise of stock options and other 319,968 32 4,280 160 4,472 Net loss -- -- -- (20,417) (20,417) ---------- ------ -------- -------- -------- BALANCE AT JANUARY 28, 1996 21,504,110 2,150 243,325 90,478 335,953 Proceeds from private placement 2,000,000 200 24,800 -- 25,000 Exercise of stock options and other 186,816 19 3,280 (217) 3,082 Net loss -- -- -- (31,233) (31,233) ---------- ------ -------- -------- -------- BALANCE AT FEBRUARY 1, 1997 23,690,926 2,369 271,405 59,028 332,802 Exercise of stock options and other 5,101,612 510 62,046 (1,074) 61,482 Tax benefit from exercise of stock options -- -- 9,678 -- 9,678 Proceeds from Stock Purchase Plan 241,370 24 7,848 -- 7,872 Net income -- -- -- 30,077 30,077 ---------- ------ -------- -------- -------- BALANCE AT JANUARY 31, 1998 29,033,908 $2,903 $350,977 $ 88,031 $441,911 ---------- ------ -------- -------- -------- ---------- ------ -------- -------- --------
See accompanying notes to consolidated financial statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Michaels Stores, Inc. (the "Company") owns and operates a chain of 452 specialty retail stores in 45 states, Canada and Puerto Rico featuring arts, crafts, framing, floral, decorative wall decor and seasonal merchandise for the hobbyist and do-it-yourself home decorator. The Michaels stores typically carry approximately 36,000 items. The Company's wholly-owned subsidiary, Aaron Brothers, Inc., operates a chain of 74 framing and art supply stores. Aaron Brothers stores are located primarily on the West Coast. FISCAL YEAR END The Company reports on the basis of a 52/53-week fiscal year which ends on the Saturday closest to January 31. Thus fiscal 1997 ("1997") and fiscal 1996 ("1996") ended on January 31, 1998 and February 1, 1997, respectively, and 1996 had 53 weeks. Previous fiscal years ended on the Sunday closest to January 31; thus fiscal 1995 ("1995") ended on January 28, 1996. CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentations. MERCHANDISE INVENTORIES Store merchandise inventories are valued as determined by a retail inventory method at the lower of average cost or market. Distribution center inventories are valued at the lower of cost or market determined by the first-in, first-out method. Fiscal 1996 included a $41.2 million charge recorded in the third quarter to cover losses on a sale to liquidate merchandise that was eliminated following store resets, markdowns on discontinued furniture and other home decor merchandise, and reserves for the closure of four stores and the write-down of leasehold improvements in three stores. During 1995 the Company implemented an inventory SKU reduction program which resulted in charges of approximately $64.4 million primarily associated with the retail markdown of inventories. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Useful lives of buildings, fixtures and equipment, leasehold improvements, and capital 36 leases for computer equipment are generally estimated to be 30, 8, 10 and 5 years, respectively. Amortization of assets recorded under capital leases and leasehold improvements is included in depreciation expense. 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 $17,862,000 and $14,061,000 as of the end of 1997 and 1996, respectively. The Company assesses the recoverability of costs in excess of net assets acquired based on existing facts and circumstances. The Company periodically measures the recoverability of this asset based on projected undiscounted cash flows of the acquired operations. Should the Company's assessment indicate an impairment of this asset in the future, an appropriate write-down will be recorded. ADVERTISING COSTS Advertising costs are expensed in the period in which the advertising first occurs. Net advertising expense was $55,143,000, $63,505,000 and $62,696,000 for 1997, 1996 and 1995, respectively. STORE PRE-OPENING COSTS Store pre-opening costs are expensed in the fiscal year in which the store opens. The Company incurred store pre-opening costs of $2,376,000, $3,206,000 and $7,466,000 for 1997, 1996 and 1995, respectively. REVENUE RECOGNITION Revenue from sales of the Company's merchandise and services is recognized at the time of the merchandise sale or when services are performed. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per common share amounts for all periods have been presented, and where appropriate restated, in conformity with Statement 128 requirements. The convertible subordinated notes were not included in the diluted earnings per common share calculation because they were antidilutive for the periods presented. The convertible subordinated notes could potentially affect diluted earnings per common share in the future. 37 The following table sets forth the computation of basic and diluted earnings per common share:
1997 1996 1995 ---------- ---------- ---------- (In thousands except per share amounts) Numerator: Net income $ 30,077 $ (31,233) $ (20,417) ---------- ---------- ---------- ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 27,215 23,180 21,354 Effect of dilutive securities: Employee stock options 1,449 -- -- ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 28,664 23,180 21,354 ---------- ---------- ---------- ---------- ---------- ---------- Basic earnings (loss) per common share $1.11 $(1.35) $(0.96) ----- ------ ------ ----- ------ ------ Diluted earnings (loss) per common share $1.05 $(1.35) $(0.96) ----- ------ ------ ----- ------ ------
NOTE 2 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1997 1996 ---------- ---------- (In thousands) Property and equipment: Land and buildings $ 3,119 $ 3,284 Fixtures and equipment 221,906 193,703 Leasehold improvements 82,832 73,616 Capital leases 23,898 23,419 ---------- ---------- $ 331,755 $ 294,022 ---------- ---------- ---------- ---------- Accrued liabilities and other: Salaries, bonuses and other payroll-related costs $ 39,031 $ 23,946 Taxes, other than income and payroll 16,220 16,097 Rent 7,485 9,019 Current portion of capital lease obligations 4,662 4,215 Other 37,638 39,488 ---------- ---------- $ 105,036 $ 92,765 ---------- ---------- ---------- ----------
NOTE 3 - DEBT In June 1996 the Company completed a public offering of $125 million of Senior Notes (the "Notes"). The Notes bear interest at a rate of 10-7/8% payable June 15 and December 15 of each year and mature on June 15, 2006. Until June 15, 1999, the Company may redeem, at its option, up to an aggregate of $25 million principal amount of the Notes at 110.00%, plus accrued interest to the date of redemption, with the net proceeds of one or more equity offerings if at least $100 million aggregate principal amount of the Notes remains outstanding after each redemption. On or after June 15, 2001, the Notes are redeemable at the option of the Company, in whole or in part, at redemption prices ranging from 105.44% in 2001 to 100.00% in 2004, plus accrued interest to the date of redemption. In addition, the Indenture under which the Notes 38 have been issued contains certain covenants, including but not limited to restrictions on (1) debt; (2) payments such as dividends, repurchases of the Company's Common Stock or repurchases of subordinated obligations; (3) distributions from subsidiaries; (4) sales of assets; (5) transactions with affiliates; (6) liens; and (7) mergers, consolidations and transfers of all or substantially all assets. The Company used the full amount of the net proceeds from the sale of the Notes to reduce indebtedness under the Credit Agreement (as defined below). The fair value, based on dealer quotes, of the outstanding Notes as of January 31, 1998 and February 1, 1997 was $139.5 million and $121.9 million, respectively. In January 1993 the Company issued $97.75 million of convertible subordinated notes ("Subordinated Notes") due January 15, 2003. Interest, payable semi-annually on January 15 and July 15, was 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. The Subordinated Notes are redeemable at the option of the Company at redemption prices ranging from 103.16% currently to 100.00% in 2003, and are not entitled to any sinking fund. They are convertible into the Company's Common Stock at any time, at a conversion price of $38 per share. A total of 2,551,053 shares of Common Stock are reserved for conversion. The fair value, based on dealer quotes, of the outstanding Subordinated Notes as of January 31, 1998 and February 1, 1997 was $100.3 million and $76.7 million, respectively. The Company has a bank credit agreement ("Credit Agreement") which includes an unsecured revolving line of credit and provides for the issuance of commercial letters of credit. There were no borrowings outstanding under the Credit Agreement at January 31, 1998 and February 1, 1997. The weighted average interest rate for outstanding borrowings was 7.2% during 1996. Borrowings under the Credit Agreement are limited to the lesser of $100 million or the Company's borrowing base (as defined in the Credit Agreement, $72.7 million at January 31, 1998), in either case minus the aggregate amount of letters of credit outstanding. The Company is required to pay a commitment fee of .5% on the unused portion of the revolving line of credit. The Credit Agreement requires the Company to maintain various financial ratios and restricts the Company's ability to pay dividends. The Credit Agreement expires in June 1999. NOTE 4 - 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 assets and liabilities as of the respective year end balance sheets are as follows:
1997 1996 ---------- ---------- (In thousands) Deferred tax assets: Net operating loss, general business credit and alternative minimum tax credit carryforwards $ 41,748 $ 41,435 Accrued expenses 15,392 9,533 Other 4,669 3,728 ---------- ---------- Deferred tax assets 61,809 54,696 Valuation allowance (15,258) (15,551) ---------- ---------- Total deferred tax assets 46,551 39,145 ---------- ---------- Deferred tax liabilities: Depreciation and amortization 22,261 19,273 Other 11,974 5,962 ---------- ---------- Total deferred tax liabilities 34,235 25,235 ---------- ---------- Net deferred tax assets $ 12,316 $ 13,910 ---------- ---------- ---------- ----------
39 The federal and state income tax provision (benefit) is as follows:
1997 1996 1995 ---------- ---------- ---------- (In thousands) Federal: Current $ 15,946 $ (9,250) $ (18,202) Deferred 3,581 (590) 9,749 ---------- ---------- ---------- Total federal 19,527 (9,840) (8,453) ---------- ---------- ---------- State: Current 890 -- (5,089) Deferred (1,987) -- (880) ---------- ---------- ---------- Total state (1,097) -- (5,969) ---------- ---------- ---------- Total provision (benefit) $ 18,430 $ (9,840) $ (14,422) ---------- ---------- ---------- ---------- ---------- ----------
Reconciliation between the actual income tax provision (benefit) and the income tax provision (benefit) calculated by applying the federal statutory rate is as follows:
1997 1996 1995 ---------- ---------- ---------- (In thousands) Income tax provision (benefit) at statutory rate $ 16,978 $ (14,376) $ (12,194) Foreign loss not benefited 1,597 2,602 596 Increase in valuation allowance -- 3,271 -- State income taxes, net of federal income tax effect (239) -- (3,879) Amortization of intangibles and other 94 (1,337) 1,055 ---------- ---------- ---------- $ 18,430 $ (9,840) $ (14,422) ---------- ---------- ---------- ---------- ---------- ----------
At January 31, 1998, the Company had federal and state net operating loss carryforwards to reduce future taxable income of approximately $67 million and $146 million, respectively, expiring at various dates between 1998 and 2012. When realized, the federal and state tax benefit associated with approximately $9 million and $13 million, respectively, of such carryforwards will be applied to reduce goodwill. The Company also has tax credit carryforwards of approximately $8 million available to offset future income taxes. NOTE 5 - STOCKHOLDERS' EQUITY In April 1996 the Company completed a private placement of 2,000,000 shares of the Company's Common Stock at a price of $12.50 per share (the "Private Placement"). The Common Stock was sold through three private transactions with separate entities owned by independent trusts of which family members of Sam Wyly and Charles J. Wyly, Jr. (the "Wyly Family") are beneficiaries. Sam Wyly and Charles J. Wyly, Jr. are Chairman and Vice Chairman of the Board of Directors of the Company, respectively. The shares of Common Stock sold in the Private Placement are subject to certain restrictions on future transfer. In addition, the Company will be required to register the shares issued in the Private Placement pursuant to the Securities Act of 1933, as amended, upon demand by the holders of the shares. In February 1997 options to purchase 2,000,000 shares of the Company's Common Stock were exercised through private transactions with entities owned by independent trusts of which Wyly Family members are beneficiaries. The shares are subject to various restrictions on future transfers. The options were purchased in December of 1996 with an exercise price equal to the then current market price. The exercise of the options provided the Company with $20 million of additional capital in 1997. 40 In October 1997 the Company began issuing Common Stock through its Dividend Reinvestment and Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides owners of shares of Common Stock and other interested investors with a convenient and economical method to purchase Common Stock. The Stock Purchase Plan also provides the Company with a cost-efficient and flexible mechanism to raise equity capital. The Company may establish a discount of 0% to 5% in certain transactions to purchase shares under the Stock Purchase Plan. During 1997 the Company issued 241,370 shares through the Stock Purchase Plan generating $7,872,000 in new equity. Select employees and key advisors of the Company, including directors, may participate in the 1997 Stock Option Plan (the "Plan"), with an aggregate of 4,791,214 shares of Common Stock available currently for issuance thereunder. Options issued under the Plan to key employees generally vest over a two year period following the date of grant and those issued to directors generally vest immediately. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. The exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant and, as a result, the Company does not recognize compensation expense for stock option grants in accordance with the provisions of APB 25. Pro forma information regarding net income and earnings per share, as required by the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for the options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.69%, 6.08% and 6.12%; no dividend yield; volatility factors of the expected market price of the Company's Common Stock of 54.7%, 56.6% and 56.6%; and a weighted average expected life of the options of 1.81, 2.95 and 2.95 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate. In addition, options vest over several years and additional option grants are expected. As a result, the Company believes the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and the effects of the following hypothetical calculations are not likely to be representative of similar future calculations. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
1997 1996 1995 ---------- ---------- ---------- (In thousands except per share amounts) Pro forma net income (loss) $15,477 $(50,694) $(28,055) Pro forma earnings (loss) per common share: Basic $0.57 $(2.19) $(1.31) Diluted $0.54 $(2.19) $(1.31)
41 For 1997, 1996 and 1995, the Company's stock option activity is summarized below:
1997 1996 1995 ---------------------- --------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- (In thousands except per share amounts) Outstanding at beginning of year 7,540 $ 12.07 4,067 $ 16.48 3,336 $ 26.28 Granted 4,368 21.60 4,214 11.72 3,031 16.81 Exercised (5,102) 12.32 (187) 12.31 (320) 11.86 Forfeited/Expired (179) 14.26 (554) 14.09 (1,980) 19.87 ------- -------- ------- -------- ------- -------- Outstanding at end of year 6,627 $ 18.10 7,540 $ 12.07 4,067 $ 16.48 ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Exercisable at end of year 4,857 $ 17.72 5,117 $ 11.86 345 $ 15.85 Weighted average fair value of options granted during the year $ 4.67 $ 3.48 $ 7.20
Exercise prices for options outstanding as of January 31, 1998 ranged from $10 to $32-3/8. The weighted average remaining contractual life of the options is 2.5 years. NOTE 6 - RETIREMENT PLAN The Company sponsors a 401(k) savings plan (the "401(k) Plan") for eligible employees of the Company and certain of its subsidiaries. Participation in the 401(k) Plan is voluntary and available to any employee who is 21 years of age and has completed 500 hours of service in a six-month eligibility period. Participants may elect to contribute up to 15% of their compensation on an after-tax basis. In accordance with the provisions of the 401(k) Plan, the Company makes a matching contribution to the account of each participant in an amount equal to 50% of the first 6% of eligible compensation contributed by each participant not to exceed 3% of the participant's total compensation for the year. The Company's matching contribution expense, net of forfeitures, was $1,095,000, $1,338,000 and $945,000 for 1997, 1996 and 1995, respectively. NOTE 7 - COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company operates stores and uses distribution centers, office facilities and equipment generally leased under noncancellable operating leases, the majority of which provide for renewal options. In addition, the Company also leases its POS system under a five year capital lease with IBM at an interest rate of approximately 8% (the "IBM Capital Lease"). Financing activities not affecting cash during 1997, 1996 and 1995 included capital lease obligations incurred in connection with the IBM Capital Lease of $2,515,000, $18,879,000 and $4,496,000, respectively. Future minimum annual rental commitments for all noncancellable leases as of January 31, 1998 are as follows: 42
Operating Capital leases leases --------- -------- (In thousands) For the Fiscal Year: 1998 $ 97,840 $ 5,834 1999 90,344 5,834 2000 81,077 5,744 2001 73,011 2,332 2002 66,067 158 Thereafter 192,239 -- --------- -------- Total minimum rental commitments $ 600,578 19,902 --------- --------- Less: amounts representing interest 2,291 -------- Present value of obligations 17,611 Less: current portion 4,662 -------- Long-term obligations $ 12,949 -------- --------
Rental expense applicable to noncancellable operating leases was $92,659,000, $87,941,000 and $81,036,000 in 1997, 1996 and 1995, respectively. The Company has entered into operating leases for two distribution facilities that require that the Company guarantee payment of the residual value of the property to the lessor at the end of each lease. As of January 31, 1998, the guaranteed residual value of assets subject to these leases was $24,099,000. CONTINGENCIES In August 1995, two lawsuits were filed by certain security holders against the Company and certain present and former officers and directors seeking class action status on behalf of purchasers of the Company's Common Stock between February 1, 1995 and August 23, 1995. Among other things, the plaintiffs alleged that misstatements and omissions by the defendants relating to projected and historical operating results, inventory and other matters involving future plans resulted in an inflation of the price of the Company's Common Stock during the period between February 1, 1995 and August 23, 1995. The plaintiffs sought on behalf of the class an unspecified amount of compensatory damages and reimbursement for the plaintiffs' fees and expenses. The United States District Court for the Northern District of Texas consolidated the two lawsuits on November 16, 1995. On December 22, 1997, the District Court approved a settlement in which the defendants agreed to pay $6.25 million, and the lawsuit was dismissed with prejudice on January 27, 1998. After giving effect to prior expenditures for costs incurred in defending the lawsuit, substantially all of the settlement amount was covered by insurance. A lawsuit was commenced against the Company and several other parties on September 19, 1994 in the Superior Court of Stanislaus County, California, on behalf of a former employee, Naomi Snyder, her child, and her husband. The complaint alleges that the former employee and her then-unborn child were exposed to excessive levels of carbon monoxide in one of the Company's stores caused by a propane gas powered floor buffer which was operated by an outside cleaning service, resulting, among other things, in severe and permanent injuries to the child. Plaintiffs' Statement of Damages, filed on or about January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled the plaintiff's pleadings did not state a cause of action against the Company upon which relief could be granted. However, the ruling by the trial court was overturned by the Court of Appeals of the State of California, Fifth Appellate District, on September 23, 1996. On October 30, 1997, the California Supreme Court sustained the appellate court ruling and remanded the case to the trial court, and discovery is proceeding. The Company believes it has meritorious defenses to this action and will defend itself vigorously. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the litigation described above, is uncertain, and there can be no assurance that future costs related to such litigation would not be material to the Company's financial position or results of operations. 43 UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
First Second Third Fourth Quarter Quarter Quarter Quarter --------------------------------------------------- (In thousands except per share data) 1997: Net sales $ 321,318 $ 278,038 $ 350,070 $ 507,098 Cost of sales and occupancy expense 220,128 190,998 237,528 340,336 Operating income (loss) 9,306 1,493 12,943 45,200 Net income (loss) 3,170 (2,895) 4,422 25,380 Earnings (loss) per common share (2): Basic $0.13 $(0.11) $0.16 $0.88 Diluted $0.12 $(0.11) $0.15 $0.79 Common shares used in per share calculations: Basic 25,229 26,299 28,423 28,908 Diluted (3) 26,186 26,299 30,149 33,292 1996: Net sales $ 301,875 $ 260,476 $ 322,221 $ 493,705 Cost of sales and occupancy expense 205,067 184,574 259,928 354,246 Operating income (loss) 7,838 (8,079) (37,619)(1) 16,873 Net income (loss) 2,725 (7,933) (34,230) 8,205 Earnings (loss) per common share (2): Basic $0.12 $(0.34) $(1.45) $0.35 Diluted $0.12 $(0.34) $(1.45) $0.35 Common shares used in per share calculations: Basic 22,032 23,532 23,553 23,575 Diluted 22,374 23,532 23,553 23,625 (1) Includes effect of an unusual pre-tax charge of $41.2 million for costs associated with a sale to liquidate merchandise that was eliminated following store resets, markdowns on discontinued furniture and other home decor merchandise, and reserves for the closure of four stores and the write-down of leasehold improvements in three stores. (2) The 1996 and first three quarters of 1997 earnings per common share amounts have been restated to comply with Statement 128. (3) The convertible subordinated notes were not included in the diluted earnings per common share calculation for the first, second and third quarter because they were antidilutive. The convertible subordinated notes were included in the diluted earnings per common share in the fourth quarter.
44 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: May 1, 1998 By: /S/ R. MICHAEL ROULEAU ------------------------------------------ R. Michael Rouleau PRESIDENT 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 May 1, 1998 Sam Wyly Board of Directors /S/ CHARLES J. WYLY, JR. Vice Chairman of the May 1, 1998 - -------------------------------------------- Board of Directors Charles J. Wyly, Jr. /S/ R. MICHAEL ROULEAU President and Chief Executive Officer May 1, 1998 - -------------------------------------------- (Principal Executive Officer) R. Michael Rouleau /S/ BRYAN M. DECORDOVA Executive Vice President-- May 1, 1998 - -------------------------------------------- Chief Financial Officer Bryan M. DeCordova (Principal Financial and Accounting Officer) /S/ F. JAY TAYLOR Director May 1, 1998 - -------------------------------------------- F. Jay Taylor /S/ RICHARD E. HANLON Director May 1, 1998 - -------------------------------------------- Richard E. Hanlon /S/ DONALD R. MILLER, JR. Director and May 1, 1998 - -------------------------------------------- Vice President--Market Development Donald R. Miller, Jr. /S/ KELLY ELLIOTT - -------------------------------------------- Director May 1, 1998 Kelly Elliott /S/ MICHAEL C. FRENCH Director May 1, 1998 - -------------------------------------------- Michael C. French /S/ EVAN A. WYLY Director May 1, 1998 - -------------------------------------------- Evan A. Wyly
45 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.1 - Bylaws of the Registrant, as amended and restated (previously filed as Exhibit 3.1 to Form 10-K for the year ended January 30, 1994, filed by Registrant on April 28, 1994, SEC File No. 94525504). 3.2 - Restated Certificate of Incorporation of the Registrant (previously filed as Exhibit 4.1 to Form S-8 (No. 33-54726), filed by Registrant on November 20, 1992, SEC File No. 92278746). 4.1 - Form of Common Stock Certificate (previously filed as Exhibit 4.1 to Form 10-K for the year ended January 30, 1994, filed by Registrant on April 28, 1994, SEC File No. 94525504). 4.2 - 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 (previously filed as Exhibit 19.1 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 4.3 - Indenture, dated as of June 21, 1996, between Michaels Stores, Inc. and The Bank of New York (previously filed as Exhibit 19.1 to Form 10-Q for the quarter ended July 28, 1996, filed by Registrant on September 11, 1996, SEC File No. (96628596). 10.1 - Michaels Stores, Inc. Employees 401(k) Plan, as amended and restated, effective October 1, 1996 (previously filed as Exhibit 99.2 to Form 8-K, filed by Registrant on September 30, 1996, SEC File No. 96637219). * 10.2 - Michaels Stores, Inc. Employees 401(k) Trust, dated July 11, 1996 (previously filed as Exhibit 99.3 to Form 8-K, filed by Registrant on September 30, 1996, SEC File No. 96637219). 10.3 - Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and directors of the Registrant (previously filed as Exhibit 10.8 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 10.4 - Form of Employment Agreement between Michaels Stores, Inc. and certain directors of the Registrant (Filed herewith). * 10.5 - Form of Employment Agreement between Michaels Stores, Inc. and Douglas B. Sullivan (Filed herewith). * 10.6 - Michaels Stores, Inc. Amended and Restated Key Employee Stock Compensation Program (previously filed as Exhibit 10.9 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). * 10.7 - Michaels Stores, Inc. Amended and Restated 1992 Non-Statutory Stock Option Plan (previously filed as Exhibit 99.1 to Form S-8 (No. 333-21407), filed by Registrant on February 7, 1997, SEC File No. 97521153). * 10.8 - Second Amended and Restated Credit Agreement, dated June 20, 1996, between Michaels Stores, Inc. and the lenders named therein (the "Credit Agreement") (previously filed as Exhibit 10 to Form 8-K dated June 20, 1996, filed by Registrant on September 26, 1996, SEC File No. 96635219). 10.9 - Waiver Agreement and First Amendment to Credit Agreement, dated January 31, 1997 (previously filed as Exhibit 10.13 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651).
46
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.10 - Second Amendment to Credit Agreement, dated as of March 11, 1997 (previously filed as Exhibit 10.14 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.11 - Michaels Stores Inc. Amended and Restated 1994 Non-Statutory Stock Option Plan (previously filed as Exhibit 99.1 to Form S-8 (No. 333-21635), filed by Registrant on February 12, 1997, SEC file No. 97527249). * 10.12 - Amended, Modified and Restated Master Lease Agreement, dated as of December 18, 1995, between Jacksonville Funding Corporation as Lessor and Michaels Stores, Inc., as Lessee (previously filed as Exhibit 10.17 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.13 - Amendment No. 1 to Amended, Modified and Restated Master Lease Agreement, dated as of April 22, 1996, between Jacksonville Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee (Filed herewith). 10.14 - Amendment No. 2 to Amended, Modified and Restated Master Lease Agreement, dated as of July 11, 1996, between Jacksonville Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee (Filed herewith). 10.15 - Amendment No. 3 to Amended, Modified and Restated Master Lease Agreement, dated as of August 15, 1996, between Jacksonville Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee (Filed herewith). 10.16 - Amendment No. 4 to Amended, Modified and Restated Master Lease Agreement and Waiver, dated as of March 11, 1997, between Jacksonville Funding Corporation as Lessor and Michaels Stores, Inc. as Lessee (previously filed as Exhibit 10.17 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.17 - Consulting Agreement, dated as of October 1, 1996, between Michaels Stores, Inc. and Michael C. French (Filed herewith). * 10.18 - Term Lease Master Agreement between IBM Credit Corporation as Lessor and Michaels Stores, Inc. as Lessee (previously filed as Exhibit 10.18 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.19 - Agreement, dated as of January 30, 1996, by and between Michaels Stores, Inc. and Jack E. Bush (previously filed as Exhibit 10.19 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). * 10.20 - Agreement, dated as of April 26, 1996, by and between Michaels Stores, Inc. and Jack E. Bush (Filed herewith). * 10.21 - Common Stock and Warrant Agreement, dated as of October 16, 1984, between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant (previously filed as Exhibit 4.2 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847). 10.22 - First Amendment to Common Stock and Warrant Agreement, dated October 31, 1984, between the First Dallas Group, Ltd. and Michaels Stores, Inc. (previously filed as Exhibit 4.3 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC file No. 93116847). 10.23 - Second Amendment to Common Stock and Warrant Agreement, dated November 28, 1984, between First Dallas Investments-Michaels I, Ltd. and Michaels Stores, Inc. (previously filed as Exhibit 4.4 to Form 10-K for the year ended January 31, 1993, filed by Registrant on April 29, 1993, SEC File No. 93116847).
47
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.24 - 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. (previously filed as Exhibit 10.23 to Form S-1 (No. 33-09456), filed by Registrant on October 14, 1986, SEC File No 86299802). 10.25 - Amendment to Common Stock and Warrant Agreement, dated as of September 1, 1992, between Michaels Stores, Inc. and the other parties named therein (previously filed as Exhibit 4.8 to Form S-8 (No. 33-54726), filed by Registrant on November 20, 1992, SEC File No. 92278746). 10.26 - Stock Purchase Agreement, dated as of March 29, 1996, between Michaels Stores, Inc. and Fugue Limited (previously filed as Exhibit 4.9 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.27 - Stock Purchase Agreement, dated as of March 29, 1996, between Michaels Stores, Inc. and Locke Limited (previously filed as Exhibit 4.8 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.28 - Stock Purchase Agreement, dated as of March 29, 1996, between Michaels Stores, Inc. and Quayle Limited (previously filed as Exhibit 4.7 to Form 10-K for the year ended January 28, 1996, filed by Registrant on April 29, 1996, SEC File No. 96552931). 10.29 - Option Agreement, dated as of December 23, 1996, between Michaels Stores, Inc. and Devotion Limited (previously filed as Exhibit 10.28 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.30 - Option Agreement, dated as of December 23, 1996, between Michaels Stores, Inc. and Elegance Limited (previously filed as Exhibit 10.29 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). 10.31 - Form of 1998 Bonus Plan for R. Michael Rouleau (Filed herewith). * 10.32 - Form of 1998 Bonus Plan for Executive Vice Presidents (Filed herewith). * 10.33 - Employment Agreement, effective as of April 29, 1997, between Michaels Stores, Inc. and R. Michael Rouleau (previously filed as Exhibit 10.32 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). * 10.34 - Michaels Stores, Inc. Stock Option Agreement, dated as of June 6, 1997, between Michaels Stores, Inc. and R. Michael Rouleau (previously filed as Exhibit 99.1 to Form S-8 (No. 333-29417), filed by Registrant on June 17, 1997, SEC File No. 97625464). * 10.35 - Agreement, effective January 21, 1997, between Michaels Stores, Inc. and R. Don Morris (previously filed as Exhibit 10.1 to Form 10-Q for the quarter ended May 3, 1997, filed by Registrant on June 17, 1997, SEC File No. 97625145). * 10.36 - Michaels Stores, Inc. 1997 Employees Stock Purchase Plan (previously filed as Exhibit 10.33 to Form 10-K for the year ended February 1, 1997, filed by Registrant on May 2, 1997, SEC File No. 97594651). * 10.37 - Michaels Stores, Inc. 1997 Stock Option Plan (previously filed as Exhibit 10.2 to Form 10-Q for quarter ended May 3, 1997, filed by Registrant on June 17, 1997, SEC File No. 97625145). *
48
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 21.1 - Subsidiaries of Michaels Stores, Inc. (Filed herewith). 23.1 - Consent of Ernst & Young LLP (Filed herewith). 27.1 - Financial Data Schedule (Filed herewith). - ------------------------------------------------------------------------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c).
49 EX-10.4 2 EXHIBIT 10.4 EXHIBIT 10.4 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; 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 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 then 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-10.5 3 EXHIBIT 10.5 EXHIBIT 10.5 EMPLOYMENT AGREEMENT by and between MICHAELS STORES INC. and ____________________ 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 ______________________ (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; 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 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 first 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 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 Plans. 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: --------------------------------------- ATTEST: MICHAELS STORES, INC. Mark V. Beasly By: /s/ B. B. TULEY - --------------------------- ------------------------------------ B. B. Tuley, President -14- EX-10.13 4 EXHIBIT 10.13 AMENDMENT NO. 1 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT THIS AMENDMENT NO. 1 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT is dated as of April 22, 1996 (the "AMENDMENT NO. 1"), is between JACKSONVILLE FUNDING ENTERPRISES, LLC, a Delaware limited liability company and successor in interest to Jacksonville Funding Corporation (the "LESSOR") ; and MICHAELS STORES, INC., a Delaware corporation (the "LESSEE"); and amends that certain Amended, Modified and Restated Master Lease Agreement dated as of December 18, 1995 (the "ORIGINAL LEASE AGREEMENT") between Jacksonville Funding Corporation (a corporation which merged into the Lessor with the Lessor being the surviving entity of such merger) and the Lessee. NOW, THEREFORE, the parties hereto agree as follows: 1. The second line of the first paragraph in the Original Lease Agreement is amended by deleting "December , 1995" therefrom and inserting "December 18, 1995" in place of such deleted reference. 2. Section 11.02(b) in the Original Lease Agreement is deleted in its entirety and replaced by the following: "(b) FIXED CHARGES COVERAGE RATIO. Lessee will not permit the Fixed Charges Coverage Ratio at any time during the first three fiscal quarters in fiscal year 1996 to be less than 1.00 to 1.00, and, in the fourth fiscal quarter in fiscal year 1996 and at all times thereafter, to be less than 1.15 to 1.00. $64,400,000 of the provision established in the fiscal quarter ending July 30, 1995 for inventory markdowns and other charges shall be added to pretax consolidated income of the Lessee for the fiscal quarter ending July 30, 1995 only for purposes of determining compliance with the covenant contained in this Section for the fiscal quarter ending April 28, 1996 only." 3. Section 11.02(d) in the Original Lease Agreement is deleted in its entirety and replaced by the following: "(d) MODIFIED LEVERAGE RATIO. Lessee will not permit the ratio, measured at the end of each quarter, of (i) Adjusted Total Debt to (ii) the sum of (A) consolidated income of Lessee and its Subsidiaries before income taxes for the preceding twelve month period (excluding extraordinary cash gains or losses for the preceding twelve month period), plus (B) interest expense or the preceding twelve month period, plus (C) operating lease expense for the preceding twelve month period, plus (D) depreciation and amortization expense for the preceding twelve month period, at any time to be greater than six (6) to one (l). $64,400,000 of the provision established in the fiscal quarter ending July 30, 1995 for inventory markdowns shall be added to pretax consolidated income of the Lessee for fiscal quarter ending July 30, 1995 only for purposes of determining compliance with the covenant contained in this Section for the fiscal quarter ending April 28, 1996 only." 4. The definition of "Fixed Charges" in APPENDIX A to the Original Lease Agreement is deleted in its entirety and replaced by the following: ""Fixed Charges" shall mean for Lessee and its Subsidiaries as of any determination date for the preceding 12-month period, the sum of (a) interest expense for such period plus (b) operating lease expense for such period all as determined and consolidated in accordance with GAAP, plus (c) capital expenditures (other than capital lease obligations incurred from time to time for point-of-sale equipment and store systems, and services and equipment supporting this equipment and systems not to exceed $32,000,000 in the aggregate throughout the term of this Lease)." 5. The definition of "Fixed Charges Coverage Ratio" in APPENDIX A to the Original Lease Agreement is deleted in its entirety and replaced by the following: ""Fixed Charges Coverage Ratio" shall mean for Lessee and its Subsidiaries as of any determination date for the preceding 12-month period, the ratio of (a) the sum of (i) consolidated income of Lessee and its Subsidiaries before income taxes for such period (excluding extraordinary cash gains or losses for such period), plus (ii) interest expense for such period plus (iii) operating lease expense for such period, plus (iv) depreciation and amortization for such period to (b) Fixed Charges." 6. The definition of "LIBOR Rate" in APPENDIX A to the Original Lease Agreement is deleted in its entirety and replaced by the following: ""LIBOR Rate" shall mean the sum of (a) the applicable percentage referenced in the pricing grid set forth immediately after this paragraph plus (b) the interest rate per annum (rounded upwards, if necessary to the nearest one-sixteenth of one percent) which is the quotient of (A) the rate per annum at which dollar deposits in immediately available funds are offered to NationsBank two Business Days 2 before the first day of such applicable Payment Period by prime banks in the interbank Eurodollar market as at or about 11:00 A.M., Dallas, Texas time, for delivery on the first day of such applicable Rent Payment Period, for the number of days comprised therein and in an amount equal to the aggregate amount bearing such interest rate to be outstanding for such applicable Rent Payment Period, divided by (3) the remainder of 1.00 MINUS the Eurodollar Reserve Percentage applicable to such amounts. PRICING GRID FOR LIBOR RATE
Per Annum Spread for subsection (a) of "LIBOR Rate" Fixed Charges Coverage Ratio definition Less than 1.75 to 1.00 1.40% Greater than or equal to 1.75 to 1.00 0.90%"
7. The definition of "Total Debt" in APPENDIX A to the Original Lease Agreement is deleted in its entirety and replaced by the following: ""Total Debt" shall mean, as of the date of any determination thereof, with respect to Lessee and its Subsidiaries, (i) all indebtedness, direct or indirect, whether or not represented by bonds, debentures, notes or other securities, for the repayment of money borrowed, (ii) all deferred indebtedness for the payment of the purchase price of property or assets purchased, (iii) all indebtedness under any lease which, under GAAP, is required to be capitalized for balance sheet purposes provided that notwithstanding the reporting requirements of GAAP, in no event will any tax retention operating lease which is provided for in the Operative Documents be considered a capital lease for financial or other covenant compliance and provided, further, that this definition of "Total Debt" shall also exclude capital lease obligations incurred from time to time for point-of-sale equipment and store systems, and services and equipment supporting this equipment and systems not to exceed $32,000,000 in the aggregate throughout the term of this Lease, (iv) all guaranties, endorsements, assumptions or other contingent obligations, in respect of, or to purchase or otherwise acquire, indebtedness of others, (v) all contingent obligations (as defined in accordance with GAAP) of any type whatsoever and (vi) all indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned by any of Lessee and its Subsidiaries, whether or not the indebtedness secured thereby shall have been assumed by any of Lessee and its Subsidiaries; provided that under no 3 circumstances shall trade payables of Lessee and its Subsidiaries incurred in the ordinary course of business be included in this definition of "Total Debt"." 8. The definition of "Total Liabilities" in APPENDIX A to the Original Lease Agreement is deleted in its entirety and replaced by the following: ""Total Liabilities" shall mean, as of the date of any determination thereof, the aggregate (after eliminating intercompany items) of all liabilities of Lessee and its Subsidiaries determined in accordance with GAAP (including capitalized leases). Notwithstanding anything contained herein or in the other Operative Documents to the contrary, such term shall include all guaranties and liabilities relating to letters of credit (other than commercial letters of credit) without duplication for liabilities related to workmen's compensation." 9. The Lessee represents and warrants that (a) this Amendment No. 1 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 Lease Event of Default after giving effect to this Amendment No. 1, (c) its representations and warranties set forth in the Original Lease Agreement and the other Operative Documents are true and correct on the date hereof after giving effect to this Amendment No. 1, (d) it has complied with all agreements and conditions to be complied with by it under the Original Lease Agreement and the other Operative Documents by the date hereof, (e) the Original Lease Agreement, as amended hereby-and the other Operative Documents 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 the Lessee in connection with the execution of this Amendment No. 1. 10. The Lessee shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to the Lessor, the Agent to the Lenders and the Co-Agent to the Lenders as any such Person or any Lender may deem reasonably necessary or appropriate in connection with this Amendment No. 1. 11. Except as hereby modified, the terms and conditions of the Original Lease Agreement remain in full force and effect. 12. This Amendment No. 1 has been delivered in, and shall in all respects be governed by, and construed in accordance with, the laws of the State of Texas applicable to agreements made and to be performed entirely within such State, including all matters of 4 construction, validity and performance; PROVIDED, notwithstanding the foregoing, to the extent relating to the creation and perfection of liens on real estate in the State of Florida or any other state, this Amendment No. 1 shall be governed by, and construed in accordance with, the laws of the State of Florida or such other state. 13. This Amendment No. 1 may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute but one and the same instrument. 14. All capitalized terms used but not otherwise defined herein shall have the meanings set forth therefor in the Original Lease Agreement and/or APPENDIX A thereto. (Signature page follows) 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-1 By /s/ Val T. Orton --------------------------------- Title Vice President ------------------------------ By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-2 By /s/ Val T. Orton --------------------------------- Title Vice President ------------------------------ MICHAELS STORES, INC. By --------------------------------- Title ------------------------------ ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ 6 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-1 By --------------------------------- Title ------------------------------ By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-2 By --------------------------------- Title ------------------------------ MICHAELS STORES, INC. By /s/ K.L. Magnuson --------------------------------- Title Vice President ------------------------------ ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ 6 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-1 By --------------------------------- Title ------------------------------ By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-2 By --------------------------------- Title ------------------------------ MICHAELS STORES, INC. By --------------------------------- Title ------------------------------ ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By /s/ Delaney Burgdoerfer --------------------------------- Title VP ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ 6 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-1 By --------------------------------- Title ------------------------------ By First Security Bank of Utah, N.A., as Owner Trustee for Michaels Stores Trust 1995-2 By --------------------------------- Title ------------------------------ MICHAELS STORES, INC. By --------------------------------- Title ------------------------------ ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By Robert Ivosevich --------------------------------- Title ROBERT IVOSEVICH SENIOR VICE PRESIDENT ------------------------------ 6 EX-10.14 5 EXHIBIT 10.14 AMENDMENT NO. 2 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT THIS AMENDMENT NO. 2 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT is dated as of July 11, 1996 (the "AMENDMENT NO. 2"), is between JACKSONVILLE FUNDING ENTERPRISES, LLC, a Delaware limited liability company and successor in interest to Jacksonville Funding Corporation (the "LESSOR"); and MICHAELS STORES, INC., a Delaware corporatIon (the "LESSEE"); and amends that certain Amended, Modified and Restated Master Lease Agreement dated as of December 18, 1995 (as amended by Amendment No. 1 to Amended, Modified and Restated Master Lease Agreement dated as of April 22, 1996, the "ORIGINAL LEASE AGREEMENT") between Jacksonville Funding Corporation (a corporation which merged into the Lessor with the Lessor being the surviving entity of such merger) and the Lessee. NOW, THEREFORE, the parties hereto agree as follows: 1. Section 11.02 in the Original Lease Agreement is deleted in its entirety and replaced with the following: "SECTION 11.02. FINANCIAL COVENANTS. Lessee will comply with the following financial covenants and demonstrate such compliance as of the end of each fiscal quarter of Lessee pursuant to a Lessee Compliance Certificate delivered to Lessor in accordance with the terms of Section 11.01 hereof: (a) RATIO OF FUNDED DEBT TO TOTAL CAPITALIZATION. Lessee will not permit the ratio of Funded Debt to Total Capitalization at any time during Lessee's (i) second and third fiscal quarters each year during the Term to be greater than 55%, and (ii) first and fourth fiscal quarters each year during the Term to be greater than 45%. (b) FIXED CHARGES COVERAGE RATIO. Lessee will not permit the Fixed Charges Coverage Ratio at any time during the Lessee's fiscal quarters ending (i) October 27, 1996, February 2, 1997, May 4, 1997 and August 3, 1997, to be less than 1.35 to 1.00, and (ii) thereafter during the Term to be less than 1.50 to 1.00. (c) CURRENT RATIO. Lessee will not permit the ratio of (i) Current Assets to (ii) the sum of (A) Current Liabilities plus (B) amounts outstanding under the Revolving Credit Agreement as Advances, at any time after July 28, 1996 to be less than 1.75 to 1.00. (d) MODIFIED LEVERAGE RATIO. Lessee will not permit the ratio, measured at the end of each quarter (beginning with the fourth quarter of fiscal year 1996), of (i) Adjusted Total Debt to (ii) the sum of (A) consolidated income of Lessee and its Subsidiaries before income taxes for the preceding twelve month period (excluding extraordinary cash gains or losses for the preceding twelve month period), plus (B) interest expense for the preceding twelve month period, plus (C) operating lease expense for the preceding twelve month period plus (D) depreciation and amortization expense for the preceding twelve month period, at any time to be greater than six (6) to one (1). (e) LIMITATION ON CAPITAL EXPENDITURES. Lessee shall not permit aggregate consolidated Capital Expenditures (including the cash portion of each acquisition) of the Lessee and its Subsidiaries, to exceed $70,000,000 during any fiscal year during the Term, provided that, capital lease obligations of Lessee in connection with the point-of-sale equipment and store systems and services and equipment supporting such equipment and systems, commencing fiscal year 1996 and thereafter, up to a maximum aggregate amount of $32,000,000 throughout the Term, shall be excluded from Capital Expenditures for the purposes of determining compliance with this Section 11.02(e). The financial covenants specified above in this Section 11.02 shall automatically be deemed to be amended and modified at such times as (and in the same manner and to the same extent as) the corresponding financial covenants under the Revolving Credit Agreement are amended and modified; PROVIDED, HOWEVER, notwithstanding the foregoing, to the extent (i) the Revolving Credit Agreement is terminated or expires prior to the termination or expiration of the Term or (ii) NationsBank or Credit Lyonnais, for whatever reason, ceases to be a lender under the Revolving Credit Agreement prior to the termination or expiration of the Term, then in each such case, the financial covenants under this Lease thereafter shall be identical to those in existence (A) as of the date the Revolving Credit Agreement terminates or expires (in the case of subsection (i) of this proviso) or (B) as of the date such Lender ceases to be a lender under the Revolving Credit Agreement (in the case of subsection (ii) of this proviso)." 2. DEFINED TERMS. The following definitions shall be added to or amended in APPENDIX A of the Original Lease Agreement, as appropriate, to read as follows: "Capital Expenditures" means capital expenditures, as defined in accordance with GAAP. 2 "Fixed Charges" means for the Lessee and its Subsidiaries as of any determination date for the preceding 12-month period, the sum of (a) interest expense for such period, plus (b) scheduled principal payments on Funded Debt permitted to be incurred under Section 7.02(iv) of the Revolving Credit Agreement or such period, plus (c) operating lease expense for such period, all as determined and consolidated in accordance with GAAP. "Fixed Charges Coverage Ratio" means for the Lessee and its SubsidiarIes as of any determination date for the preceding 12-month period, the ratio of (a) the sum of (i) consolidated income of the Lessee and its Subsidiaries before income taxes for such period (excluding extraordinary cash gains or losses for such period), plus (ii) interest expense for such period plus (iii) operating lease expense for such period plus (iv) depreciation and amortization for such period to (b) Fixed Charges, all as determined and consolidated in accordance with GAAP. "Funded Debt" means money borrowed and Total Debt represented by notes payable and drafts accepted representing extensions of credit, all obligations evidenced by bonds, debentures, notes or other similar instruments (including all obligations secured by any Lien to which any property or asset owned by a Person is subject, whether or not the obligation secured thereby shall have been assumed), all Total Debt upon which interest charges are customarily paid by a Person (excluding trade payables), all Total Debt evidenced in writing (including capitalized lease obligations) issued or assumed by such Person as full or partial payment for property or services, whether or not any such notes, drafts, obligations or Total Debt represent Total Debt for money borrowed, provided that, Funded Debt shall not include any Total Debt among (a) the Lessee and (b) the Lessee's Subsidiaries. "LIBOR Rate" shall mean the sum of (a) 1.40% plus (b) the interest rate per annum (rounded upwards, if necessary to the nearest one-sixteenth of one percent) which is the quotient of (A) the rate per annum at which dollar deposits in immediately available funds are offered to NationsBank two Business Days before the first day of such applicable Payment Period by prime banks in the interbank Eurodollar market as at or about 11:00 A.M., Dallas, Texas time, for delivery on the first day of such applicable Rent Payment Period, for the number of days comprised therein and in an amount equal to the aggregate amount bearing such interest rate to be outstanding for such applicable Rent Payment Period, divided by (B) the remainder of 1.00 MINUS the Eurodollar Reserve Percentage applicable to such amounts. 3 "Total Capitalization" means, on any date of determination for the Lessee and its Subsidiaries, on a consolidated basis, the sum of (a) Net Worth on such date of determination plus (b) the aggregate outstanding amount of Funded Debt for the Lessee and its Subsidiaries on such date of determination. 3. The Lessee represents and warrants that (a) this Amendment No. 2 constitutes its legal, valid, and binding obligation, 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 Lease Event of Default after giving effect to this Amendment No. 2, (c) its representations and warranties set forth in the Original Lease Agreement and the other Operative Documents are true and correct on the date hereof after giving effect to this Amendment No. 2, (d) it has complied with all agreements and conditions to be complied with by it under the Original Lease Agreement and the other Operative Documents by the date hereof after giving effect to this Amendment No. 2, (e) the Original Lease Agreement, as amended hereby, and the other Operative Documents 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 the Lessee in connection with the execution of this Amendment No. 2. 4. The Lessee shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to the Lessor, the Agent to the Lenders and the Co-Agent to the Lenders as any such Person or any Lender may deem reasonably necessary or appropriate in connection with this Amendment No. 2. 5. Except as hereby modified, the terms and conditions of the Original Lease Agreement remain in full force and effect. 6. This Amendment No. 2 has been delivered in, and shall in all respects be governed by, and construed in accordance with, the laws of the State of Texas applicable to agreements made and to be performed entirely within such State, including all matters of construction, validity and performance; PROVIDED, notwithstanding the foregoing, to the extent relating to the creation and perfection of liens on real estate in the State of Florida or any other state, this Amendment No. 2 shall be governed by, and construed in accordance with, the laws of the State of Florida or such other state. 7. This Amendment No. 2 may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute but one and the same instrument. 4 8. All capitalized terms used but not otherwise defined herein shall have the meanings set forth therefor in the Original Lease Agreement and/or APPENDIX A thereto. (Signature page follows) 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By /s/ Nancy M. Doll ------------------------------------------- Title Vice President ---------------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By /s/ Nancy M. Doll ------------------------------------------- Title Vice President ---------------------------------------- MICHAELS STORES, INC. By ------------------------------------------- Title ---------------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By ------------------------------------------- Title ---------------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By ------------------------------------------- Title ---------------------------------------- MICHAELS STORES, INC. By /s/ K.L. Magnuson ------------------------------------------- Title Vice President ---------------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By ------------------------------------------- Title ---------------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By ------------------------------------------- Title ---------------------------------------- MICHAELS STORES, INC. By ------------------------------------------- Title ---------------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By /s/ Delaney Burgdoerfer --------------------------------- Title Vice President ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By ------------------------------------------- Title ---------------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By ------------------------------------------- Title ---------------------------------------- MICHAELS STORES, INC. By ------------------------------------------- Title ---------------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and as a Lender By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and as a Lender By /s/ Robert Ivosevich --------------------------------- Title ROBERT IVOSEVICH ------------------------------ SENIOR VICE PRESIDENT EX-10.15 6 EXHIBIT 10.15 AMENDMENT NO. 3 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT THIS AMENDMENT NO. 3 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT is dated as of August 15, 1996 (the "AMENDMENT NO. 3"), is between JACKSONVILLE FUNDING ENTERPRISES, LLC, a Delaware limited liability company and successor in interest to Jacksonville Funding Corporation (the "Lessor"); and MICHAELS STORES, INC., a Delaware corporation (the "Lessee"); and amends that certain Amended, Modified and Restated Master Lease Agreement dated as of December 18, 1995 (as amended by Amendment No. 1 to Amended, Modified and Restated Master Lease Agreement dated as of April 22, 1996 and Amendment No. 2 to Amended, Modified and Restated Master Lease Agreement dated as of July 11, 1996, the "ORIGINAL LEASE AGREEMENT") between Jacksonville Funding Corporation (a corporation which merged into the Lessor with the Lessor being the surviving entity of such merger) and the Lessee. NOW, THEREFORE, the parties hereto agree as follows: 1. The following definition set forth in APPENDIX A to the Original Lease Agreement is hereby amended and modified to read as follows: "Base Rate" means a fluctuating rate per annum as shall be in effect from time to time equal to the lesser of (a) the Highest Lawful Rate and (b) the sum of (A) the Federal Funds Rate, plus (B) 1.74%. The Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Highest Lawful Rate or Federal Funds Rate, as applicable, to account for such change. 2. The Lessee represents and warrants that (a) this Amendment No. 3 constitutes its legal, valid, and binding obligation, 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 Lease Event of Default after giving effect to this Amendment No. 3, (c) the Lessee's representations and warranties set forth in the Original Lease Agreement and the other Operative Documents are true and correct on the date hereof after giving effect to this Amendment No. 3, (d) Lessee has complied with all agreements and conditions to be complied with by it under the Original Lease Agreement and the other Operative Documents by the date hereof after giving effect to this Amendment No. 3, (e) the Original Lease Agreement, as amended hereby, and the other Operative Documents 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 the Lessee in connection with the execution of this Amendment No. 3. 3. The Lessee shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to the Lessor, the Agent to the Lenders and the Co-Agent to the Lenders as any such Person or any Lender may deem reasonably necessary or appropriate in connection with this Amendment No. 3. 4. Except as hereby modified, the terms and conditions of the Original Lease Agreement remain in full force and effect. 5. This Amendment No. 3 has been delivered in, and shall in all respects be governed by, and construed in accordance with, the laws of the State of Texas applicable to agreements made and to be performed entirely within such State, including all matters of construction, validity and performance; PROVIDED, notwithstanding the foregoing, to the extent relating to the creation and perfection of liens on real estate in the State of Florida or any other state, this Amendment No. 3 shall be governed by, and construed in accordance with, the laws of the State of Florida or such other state. 6. This Amendment No. 3 may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute but one and the same instrument. 7. All capitalized terms used but not otherwise defined herein shall have the meanings set forth therefor in the Original Lease Agreement and/or APPENDIX A thereto. (Signature page follows) 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By /s/ Val T. Orton -------------------------------------- Title VICE PRESIDENT ----------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By /s/ Val T. Orton -------------------------------------- Title VICE PRESIDENT ----------------------------------- MICHAELS STORES, INC. By -------------------------------------- Title ----------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ GUARANTY FEDERAL BANK, F.S.B., as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By -------------------------------------- Title ----------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By -------------------------------------- Title ----------------------------------- MICHAELS STORES, INC. By /s/ K.L. Magnuson -------------------------------------- Title VICE PRESIDENT ----------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ GUARANTY FEDERAL BANK, F.S.B., as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By -------------------------------------- Title ----------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By -------------------------------------- Title ----------------------------------- MICHAELS STORES, INC. By -------------------------------------- Title ----------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and the Holders, as a Lender and as a Holder By /s/ Delaney Burgdoerfer --------------------------------- Title Vice President ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ GUARANTY FEDERAL BANK, F.S.B., as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By -------------------------------------- Title ----------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By -------------------------------------- Title ----------------------------------- MICHAELS STORES, INC. By -------------------------------------- Title ----------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and the Holders, as a Lender and as a Holder By /s/ Jacques-Yves Mulliez --------------------------------- Title Jacques-Yves Mulliez Senior Vice President ------------------------------ GUARANTY FEDERAL BANK, F.S.B., as a Lender By --------------------------------- Title ------------------------------ IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 as of the above-written date. JACKSONVILLE FUNDING ENTERPRISES, LLC, as a successor in interest to Jacksonville Funding Corporation, by its members By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-1 By -------------------------------------- Title ----------------------------------- By First Security Bank, National Association, as Owner Trustee for Michaels Stores Trust 1995-2 By -------------------------------------- Title ----------------------------------- MICHAELS STORES, INC. By -------------------------------------- Title ----------------------------------- ACKNOWLEDGED AND AGREED: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent to the Lenders and the Holders, as a Lender and as a Holder By --------------------------------- Title ------------------------------ GUARANTY FEDERAL BANK, F.S.B., as a Lender By /s/ Robert S. Hays --------------------------------- Title Vice President ------------------------------ EX-10.17 7 EXHIBIT 10.17 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is made and entered into as of the 1st day of October, 1996, by and between Michaels Stores, Inc., a Delaware corporation (the "Company"), and Michael C. French, an individual (the "Consultant"). RECITALS: A. The company has obtained and is desirous of continuing to obtain certain legal, financial and other strategic consulting services from the Consultant, and the Consultant has provided and wishes to provide such services to the Company, all upon the terms and conditions set forth in this Agreement. B. Therefore, in consideration of the mutual covenants and agreements herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Consultant hereby agree as follows: AGREEMENT: Section 1. CONSULTING SERVICES. The Consultant shall provide such legal, financial and other strategic consulting services for the Company as the Chairman of the Board of Directors or the Chief Executive Officer of the Company may from time to time reasonably request. The Consultant acknowledges and agrees that he also may be asked to provide such services to certain subsidiaries and affiliates of the Company and that he shall do so on the same basis as he is to provide services to the Company. All references to the Company in this Agreement shall also include any such subsidiary or affiliate, unless otherwise clearly required by the context. In providing services to the Company under this Agreement, the Consultant shall be at all times under and subject to the direction and supervision of the Chairman of the Board of Directors and the Chief Executive Officer of the Company. Section 2. CONSULTING FEES: EXPENSES. As consideration for providing services to the Company under this Agreement, the Consultant shall be entitled to a fee, payable by the Company on a monthly basis (or on any other periodic basis hereafter agreed to by the Company and the Consultant), of $15,000 per month. In addition to the fees provided for above, the Consultant shall be entitled to reimbursement from the Company of any direct, out-of-packet expenses incurred by the Consultant during the course of providing services to the Company under this Agreement. Section 3. TERMINATION. This agreement shall continue from and after the date hereof until terminated in accordance with the following subsections: (a) Either party may terminate this Agreement for any reason by giving the other party 30 days prior written notice of such termination. If the Consultant terminates this Agreement pursuant to this Section 3(a) or if the Company terminates this Agreement because of gross misconduct on the part of the Consultant (which finding of gross misconduct must be made by a majority of the Company's directors and memorialized in a resolution duly adopted thereby), the Company shall be obligated to pay the Consultant the monthly consulting fee specified above for the month in which such termination occurs, but thereafter shall have no obligation to pay any consulting fees hereunder. If the Company terminates this Agreement for any other reason (other than the death or Total Disability (as defined below) of the Consultant, which circumstances are governed by subsections (b) and (c) below), the Consultant shall be entitled to receive from the Company the monthly consulting fee specified above for a period of 36 months from and after the month in which such termination occurs, provided that the Consultant executes and delivers to the Company a release and confidentiality agreement reasonably satisfactory to the Company. (b) This Agreement shall terminate automatically upon the death of the Consultant. In such event, the Company shall be obligated to pay the estate of the Consultant the monthly consulting fee specified above for a period of 36 months from and after the month in which such death occurs. (c) This Agreement may be terminated by the Company upon the Total Disability of the Executive. As used herein, the term 'Total Disability" shall mean the Executive's inability to render any services under this Agreement for a period of six consecutive calendar months. In order to terminate this Agreement as a result of the Consultant's Total Disability, the Company shall notify the Executive (or an appropriate representative thereof) of such termination in writing. If the Company terminates this Agreement pursuant to this Section 3(c), the Consultant shall be entitled to receive from the Company the monthly consulting fee specified above for a period of 36 months from and after the month in which such termination occurs, provided that the Consultant (or an appropriate representative thereof) executes and delivers to the Company a release and confidentiality agreement reasonably satisfactory to the Company. Section 4. CONFIDENTIALITY: RELATED MATTERS. The Consultant shall not use, for his personal gain or benefit or the personal gain or benefit of any member of his family, any confidential or proprietary information of the Company which is obtained by or provided to the Consultant consistent with the purposes and intent of this Agreement. During the term of this Agreement and for so long as he receives consulting fees hereunder, the Consultant shall not act as a legal or financial consultant or advisor to any other person or entity in the arts and crafts industry without the prior written consent of the Company's Chief Executive Officer or the Chairman of its Board of Directors. During the term of this Agreement and for so long as he receives consulting fees hereunder, the Consultant shall not, on his own behalf or on behalf of others, solicit, divert or hire away, or attempt to solicit, divert or hire away, any person employed by the Company. Section 5. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Company (and its subsidiaries) and the Consultant with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the Company (and its subsidiaries) and the Consultant with respect to such subject matter. Section 6. BINDING EFFECT: ASSIGNMENT. This Agreement shall be binding upon the inure to the benefit of only the Company (and its subsidiaries) and the Consultant and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interest or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any person other than the Company (and its subsidiaries) and the Consultant, and their respective successors and permitted assigns, any rights, benefits or remedies of any nature whatsoever. Section 7. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. Section 8. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only, do not constitute a part of this Agreement and shall not affect in any manner the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the Company and the Consultant have executed and delivered this Agreement as of the date first above written. MICHAELS STORES, INC. By: /s/ R. Don Morris --------------------------------------------- R. Don Morris, Executive Vice President and Chief Financial Officer /s/ Michael C. French --------------------------------------------- Michael C. French EX-10.20 8 EXHIBIT 10.20 AGREEMENT THIS AGREEMENT is made as of the 26th day of April, 1996, by and between Michaels Stores, Inc., a Delaware corporation (the "Company"), and Jack E. Bush ("Bush"). RECITALS A. Bush and the Company previously entered into an Agreement dated as of January 30, 1996 (the "Prior Agreement"), which, among other things, provided for certain payments to Bush. B. Bush and the Company wish to amend the Prior Agreement as set forth below. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: 1. Paragraph 2(c) of the Prior Agreement is amended in its entirety to read as follows: (c) SUPPLEMENTAL RETIREMENT BENEFIT. The Company will pay to Bush as a supplemental retirement benefit the sum of $661,350 on the earlier of (i) February 1, 1999, or (ii) ten days after the occurrence of a Change in Control as defined in paragraph 2(b) above. Notwithstanding the foregoing, prior to February 1, 1999, and prior to a Change in Control, Bush may, upon ten days prior written notice to the Company, withdraw all or any portion of such supplemental retirement benefit at any time, and the Company will deduct from the supplemental retirement benefit an amount for such early withdrawal. The amount of the deduction will be a percentage of the amount withdrawn, which will be the same percentage, and will be determined in the same manner, as the percentage deduction described in paragraph 2(b) above for early withdrawals from Bush's deferred compensation account. Bush acknowledges and agrees that the Company's agreement to pay Bush the foregoing supplemental retirement benefit is in full satisfaction and release of the Company's obligation to provide Bush with an annuity, as set forth in the letter dated June 25, 1991, from the Chairman of the Company to Bush. 2. In all other respects, the terms and conditions of the Prior Agreement remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. MICHAELS STORES, INC. By: /s/ R. Don Morris ------------------------------------- Title: Executive Vice-President and ---------------------------------- Chief Financial Officer /s/ Jack E. Bush ---------------------------------------- Jack E. Bush 2 EX-10.31 9 EXHIBIT 10.31 MICHAELS-Registered Service Mark- THE ARTS AND CRAFTS STORE -SM- 1998 R. MICHAEL ROULEAU CHIEF EXECUTIVE OFFICER BONUS PLAN CONFIDENTIAL 1 1998 CHIEF EXECUTIVE OFFICER BONUS PLAN OVERVIEW A. PURPOSE The 1998 Corporate Management Bonus Plan has been developed to provide financial incentives to those members of management that can make an important contribution to Michaels success. 1. BONUS PAYOUT Bonus payout for the Chief Executive Officer can be up to 60% of your base salary as of February 1, 1998. B. BONUS PLAN ELIGIBILITY 1. The performance period parallels Fiscal Year 1998. It begins on February 1, 1998 and concludes on January 30, 1999. 2. If the Chief Executive Officer was not employed in a bonus eligible position during the entire fiscal year, he/she will be eligible to receive a prorated bonus based upon the number of full months that he/she was in position. Individuals who assume the position on or before the 15th of the month, will receive credit for the entire month. Individuals who assume the position after the 15th will not receive credit for that month. 3. Your target bonus payout will be a percentage of your actual base salary as of February 1, 1998. 4. In order to receive any payout, you must be employed by the Company, in a bonus eligible position, on January 30, 1999. 5. If an associate is promoted or changes jobs during the bonus period, bonus earnings will be calculated based upon the number of full months (see #2, above) in each position, the respective base salaries and the applicable target bonus amount(s). 6. Bonus payments are typically made in April of the following fiscal year. 7. The Company anticipates that this bonus plan will be part of an ongoing bonus program, but the Company does not guarantee that the program will in fact continue for future periods or that the terms of the program will not change. 2 MICHAELS STORES INC. 1998 CORPORATE BONUS PLAN CHIEF EXECUTIVE OFFICER BONUS TARGET = 50% OF BASE SALARY AS OF 2/1/98 BONUS POTENTIAL = 60% OF BASE SALARY AS OF 2/1/98 E.P.S. Company Profit 32,212,000 Shares Before Taxes % of Base Salary ($ millions) Earned $1.49 at $79.9 Above $79.9 60% (110+) $1.35 at $72.6 PLAN $72.6 -- 79.8 50% (100 to 110.0%) $1.28 at $69.0 $69.0 -- 72.5 40% (95 to 99.9%) $1.23 at $66.1 $66.1 -- 68.9 20% (91 to 94.9%) $1.18 at $63.1 $63.1 -- 66.0 10% (87 to 90.9%) Less than $63.1 0% (below 87%)
3 EX-10.32 10 EXHIBIT 10.32 MICHAELS-Registered Service Mark- THE ARTS AND CRAFTS STORE-SM- 1998 EXECUTIVE VICE PRESIDENT, BONUS PLAN CONFIDENTIAL 1 1998 EXECUTIVE VICE PRESIDENT BONUS PLAN OVERVIEW A. PURPOSE The 1998 Corporate Management Bonus Plan has been developed to provide financial incentives to those members of management that can make an important contribution to Michaels success. 1. BONUS PAYOUT Bonus payout for the Executive Vice President can be up to 50% of your base salary as of February 1, 1998. B. BONUS PLAN ELIGIBILITY 1. The performance period parallels Fiscal Year 1998. It begins on February 1, 1998 and concludes on January 30, 1999. 2. If the Executive Vice President was not employed in a bonus eligible position during the entire fiscal year, he/she will be eligible to receive a prorated bonus based upon the number of full months that he/she was in position. Individuals who assume the position on or before the 15th of the month, will receive credit for the entire month. Individuals who assume the position after the 15th will not receive credit for that month. 3. Your target bonus payout will be a percentage of your actual base salary as of February 1, 1998. 4. In order to receive any payout, you must be employed by the Company, in a bonus eligible position, on January 30, 1999. 5. If an associate is promoted or changes jobs during the bonus period, bonus earnings will be calculated based upon the number of full months (see #2, above) in each position, the respective base salaries and the applicable target bonus amount(s). 6. Bonus payments are typically made in April of the following fiscal year. 7. The Company anticipates that this bonus plan will be part of an ongoing bonus program, but the Company does not guarantee that the program will in fact continue for future periods or that the terms of the program will not change. 2 MICHAELS STORES INC. 1998 CORPORATE BONUS PLAN EXECUTIVE VICE PRESIDENT BONUS TARGET = 40% OF BASE SALARY AS OF 2/1/98 BONUS POTENTIAL = 50% OF BASE SALARY AS OF 2/1/98 E.P.S. COMPANY PROFIT 32,212,000 SHARES BEFORE TAXES % OF BASE SALARY ($ MILLIONS) EARNED $1.49 AT $79.9 ABOVE $79.9 50% (110+) $1.35 AT $72.6 PLAN $72.6 -- 79.8 40% (100 TO 110.0%) $1.28 AT $69.0 $69.0 -- 72.5 30% (95 TO 99.9%) $1.23 AT $66.1 $66.1 -- 68.9 15% (91 TO 94.9%) $1.18 AT $63.1 $63.1 -- 66.0 5% (87 TO 90.9%) LESS THAN $63.1 0% (BELOW 87%)
3 EX-21.1 11 EXHIBIT 21.1 Exhibit 21.1 MICHAELS STORES, INC. SUBSIDIARIES OF MICHAELS STORES, INC. Michaels of Canada, ULC, a Nova Scotia unlimited liability company. Michaels Stores of Puerto Rico, Inc., a Delaware corporation. Aaron Brothers, Inc., a Delaware corporation. 5931, Inc., a Delaware corporation. 5931 Business Trust, a Delaware business trust. EX-23.1 12 EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements listed below and in the related Prospectuses of our report dated March 10, 1998, with respect to the consolidated financial statements of Michaels Stores, Inc. included in the Annual Report (Form 10-K) for the year ended January 31, 1998. Form Registration No. Pertaining to Michaels Stores, Inc. - ---- ---------------- ----------------------------------- S-3 333-29419 1997 Stock Option Plan S-3 333-29421 Amended and Restated 1994 Non-Statutory Stock Option Plan and Stock Option Agreement dated June 6, 1997, between Michaels Stores, Inc. and R. Michael Rouleau S-3 333-29423 Amended and Restated 1992 Non-Statutory Stock Option Plan S-3 333-34459 Dividend Reinvestment and Stock Purchase Plan S-8 33-61055 Employees 401(K) Plan S-8 333-21407 Amended and Restated 1992 Non-Statutory Stock Option Plan S-8 333-21635 Amended and Restated 1994 Non Statutory Stock Option Plan S-8 333-29417 Stock Option Agreement dated June 6, 1997, between Michaels Stores, Inc. and R. Michael Rouleau S-8 333-29429 1997 Employee Stock Purchase Plan
/s/ Ernst & Young LLP Dallas, Texas May 1, 1998 EX-27.1 13 EXHIBIT 27.1
5 1,000 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 162,283 0 0 0 385,580 573,183 331,755 138,719 908,494 214,492 221,940 0 0 2,903 439,008 908,494 1,456,524 1,456,524 988,990 1,387,582 (3,013) 0 23,448 48,507 18,430 30,077 0 0 0 30,077 1.11 1.05
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