<PAGE>
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 FEBRUARY 1, 1997
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. [ ]
AS OF APRIL 15, 1997, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT WAS $411,643,907 BASED ON THE CLOSING PRICE
OF THE REGISTRANT'S COMMON STOCK ON SUCH DATE, $18-1/2, AS REPORTED ON THE
NASDAQ NATIONAL MARKET SYSTEM.
AS OF APRIL 15, 1997, 25,946,023 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED FEBRUARY 1, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS
REPORT, AND PORTIONS OF THE PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS OF THE REGISTRANT TO BE HELD DURING 1997 ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS REPORT.
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PART I
Item 1. BUSINESS.
GENERAL
UNLESS OTHERWISE NOTED, ALL NUMBERS CONTAINED IN THIS DOCUMENT ARE AS OF
FEBRUARY 1, 1997.
With approximately $1.4 billion in sales, Michaels Stores, Inc. (the
"Company") is the nation's largest 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. 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 $14.85 in fiscal 1996, due in part to increased sales of custom
framing, custom floral arrangements and home decor items.
In March 1995, the Company acquired Aaron Brothers, Inc. ("Aaron
Brothers"), a chain of specialty framing and art supply stores operating
primarily in California. The Company's Aaron Brothers stores offer professional
custom framing services, photo frames, and a full line of ready made frames as
well as a wide selection of art supplies. During fiscal 1996, Aaron Brothers
generated sales of $69.0 million. The average sale in the Company's Aaron
Brothers stores is approximately $26.92.
The Company operates 453 Michaels stores and 72 Aaron Brothers stores in 45
states, Puerto Rico and Canada. The Company's Michaels stores average
approximately 16,200 square feet of selling space and offer an assortment of
approximately 40,000 stock keeping units ("SKU") in a typical store during the
course of a year (including seasonal product), of which approximately 35,000
SKUs are "planogrammed" SKUs offered at all times. The Company's Aaron Brothers
stores average approximately 6,500 square feet of selling space and offer an
assortment of approximately 6,500 SKUs. For fiscal 1996, the average sales of
the Company's Michaels and Aaron Brothers stores open for the full fiscal year
were $2.9 million and $1.0 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.
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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;
- Hobby items, including wooden and plastic model kits and related
supplies, and paint-by-number kits;
- Party needs, including paper party goods, gift wrap, candy making and
cake decorating supplies, balloons and candy;
- 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, including satins, laces, florals and other styles sold both in
bolts and by the yard.
In addition to the basic categories described above, the Company operates a
home decor do-it-yourself fabric program in 36 Michaels stores which complements
the Company's core strategy and regularly features seasonal merchandise.
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.
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The following table shows Michaels' sales by department as a percent of total
sales for fiscal 1996, 1995,and 1994:
Department Percent of Sales
---------- ------------------------
1996 1995 1994
---- ---- ----
Silk and dried flowers and plants............... 19% 22% 22%
General craft materials and wearable art........ 15 17 20
Picture framing................................. 17 16 15
Home decor, seasonal and promotional items...... 17 15 14
Fine art materials.............................. 12 11 10
Hobby, party, needlecraft, ribbon and all other. 20 19 19
---- ---- ----
Total...................................... 100% 100% 100%
==== ==== ====
During the Christmas selling season, a significant portion of floor and
shelf space in a typical store is devoted to Christmas crafts, Christmas
decorating and gift making merchandise. Because of the project-oriented
nature of these products, the Company's peak Christmas selling season extends
from October through December. Accordingly, a fully developed seasonal
merchandising program, including inventory, merchandise layout and
instructional ideas, is implemented in each store beginning in July of each
year. This program requires additional inventory accumulation so that each
store is fully stocked during the peak season. Sales of all merchandise
typically increase during the Christmas selling season because of increased
customer traffic. The Company believes that merchandise centered around
other traditional holidays, such as Valentine's Day, Easter and Halloween, is
becoming more popular and is a growing contributor to sales.
The Michaels selling floor strategy is developed centrally and implemented
at the store level through the use of "planograms" which provide store managers
with detailed descriptions and illustrations with respect to store layout and
merchandise presentation. Planograms are also used to cluster various products
which can be combined to create individual projects.
Aaron Brothers stores offer a wide selection of art supplies,
professional custom framing services, photo frames, and what the Company
believes to be America's largest selection of ready made frames. The
Company's merchandising strategy for its Aaron Brothers stores is to provide
competitively priced exceptional custom framing services and selection, with
a five day delivery guarantee or the frame is free. In addition, Aaron
Brothers strives to provide a fashion forward merchandise selection in an
appealing environment with superior customer service.
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 stores as a means of promoting new craft ideas.
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Advertising
The Company believes that its advertising promotes art, craft, floral,
framing and home decor ideas among its customers. 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." Of this
merchandise, approximately 46% is received from the Company's distribution
centers and 54% is received directly from vendors. District managers are
responsible for monitoring store purchases to insure compliance with Company
programs.
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 anticipates that its California distribution center will
be relocated in 1998. Michaels stores receive deliveries from the distribution
centers generally once a week (twice a week during the Christmas selling season)
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 126,000 square foot distribution center located in City of Commerce,
California that currently serves all of its stores. Approximately 60% of their
store stock is shipped directly from the Aaron
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Brothers distribution center, with the remaining 40% being shipped directly from
the vendors. Aaron Brothers systematically replenishes each of its stores
automatically on a weekly basis.
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 with "order
point/order quantity" information to control the reorder for each SKU; 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 now 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 453 Michaels stores average approximately 16,200 square feet
of selling space. The Company's 72 Aaron Brothers stores average approximately
6,500 square feet of selling space. Net sales for fiscal 1996 averaged
approximately $2.9 million per store for Michaels stores open the entire fiscal
year and $179 per square foot of selling space, and averaged approximately $1.0
million per store for Aaron Brothers stores open the entire fiscal year and $153
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, operations
manager, loss prevention manager, human resources manager, and eight or nine
district managers. There are a total of 35 districts. The Company believes
this organizational structure enhances the communication among the individual
stores and between the stores and corporate headquarters. The Company
actively communicates with its regional team through regularly scheduled
management meetings and conference calls.
STORE EXPANSION
Having achieved its objective of becoming the largest 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 and currently anticipates
opening 9 to 12 new Michaels stores in fiscal 1997 and approximately 35 to 50
during 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
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anticipated development of Michaels and Aaron Brothers stores in 1997 and the
rate at which stores are developed 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. The Company
anticipates developing a similar process for opening new Aaron Brothers stores.
Costs for opening stores at particular locations depend upon the type of
building and general cost levels in the area. In fiscal 1996, the average net
cost to the company of opening a new Michaels store was approximately $388,000
which included leasehold improvements, furniture, fixtures and equipment, and
pre-opening expenses. The initial inventory investment associated with each new
Michaels store is approximately $450,000 to $650,000 depending on the store
size, operating format and the time of year in which the store was opened. The
initial inventory investment in new Michaels stores is offset, in part, by
extended vendor terms and allowances.
NEW STORE PROTOTYPES
In October 1996, the Company relocated a store in San Antonio, Texas, to a
new store prototype featuring a racetrack format that routes customers around
the store with new signage to identify each merchandise department. In-store
galleries highlight the custom floral, seasonal premade fashion floral, and
framing departments. The store manager's office was moved to the front of the
store to enhance customer service. The prototype model will continue to be
refined in future stores based upon on-going evaluation of sales performance.
The Company anticipates rolling out the new Michaels prototype to 9-12 new
stores, 10-12 relocations, and 15-20 conversions of existing stores in 1997.
In November 1996, Aaron Brothers opened two new prototype stores in
Las Vegas, Nevada. These stores are approximately 6,400 square feet, feature
updated colors, and a new lighting package. Space has been allocated for
customers to design their own framing using an expanded selection of prints,
mats, and frames giving the store an interactive flavor.
INVESTMENT IN INFORMATION TECHNOLOGY
The installation of POS systems in all the Company's stores was completed
in July 1996. The Company believes the information obtained from item level
scanning through the new POS system has enabled it to identify important trends
to assist it in managing its inventory by facilitating the elimination of less
profitable SKUs, increasing the in-stock level of more popular SKUs, assisting
in the analysis of product margins, and generating data for advertising
cost/benefit evaluations. The Company believes that the POS system will also
allow Michaels to provide better customer service by increasing the speed and
accuracy of register check out and enabling the more rapid restocking of items.
<PAGE>
COMPETITION
Michaels is the largest nationwide retailer dedicated to serving the arts
and crafts marketplace. Michaels competes primarily with regional and local
merchants that tend to specialize in particular aspects of arts and crafts,
and mass merchandisers that typically dedicate a portion of their selling
space to a limited selection of arts, crafts, picture framing and seasonal
products. The Company believes that its Michaels stores compete based on
price, quality and variety of merchandise assortment, and customer service.
The Company believes the combination of its broad selection of products,
emphasis on customer service, loyal customer base, information received from
its point-of-sale system, distribution capabilities allowing it to maintain
high 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, which was
estimated by trade publications to be approximately $11.0 billion in sales in
fiscal 1995, has increased in size each year since 1990 when industry sales
totaled $6.0 billion. The industry is highly fragmented and Michaels is the
only nationwide independent 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) superior purchasing power, (ii) critical
mass to support a cost efficient nationwide distribution network, and (iii)
the financial resources to support an annual advertising budget of
approximately 5% of sales ($64 million in fiscal 1996), and significant
ongoing capital investments in information technology.
Michaels' primary competitors include Hobby Lobby, a chain based in
Oklahoma City which operates approximately 138 stores primarily in the
midwestern United States; MJ Designs, 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 19
stores in the Philadelphia and New York markets. The Company also competes,
to a lesser degree, with Frank's Nursery (owned by General Host), 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 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 federally registered trademarks.
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 has relinquished its right to
use the Michaels name effective March 31, 1997.
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EMPLOYEES
As of March 22, 1997, approximately 16,500 persons were employed by the
Company, approximately 9,500 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 1,500 are
engaged in various executive, operating, training and administrative functions
in the Company's corporate office and distribution centers, and the remainder
are engaged in store operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ---- --- --------
Sam Wyly 62 Chairman of the Board of Directors
Charles J. Wyly, Jr. 63 Vice Chairman of the Board of Directors
R. Michael Rouleau 58 President and Chief Executive Officer
Bryan M. DeCordova 40 Executive Vice President-Chief
Financial Officer
Lawrence H. Fine 43 Executive Vice President-General
Merchandise Manager
Duane Hiemenz 43 Executive Vice President-Store Operations
Douglas B. Sullivan 46 Executive Vice President-Development
Kristen L. Magnuson 41 Vice President-Finance and Planning
Donald R. Miller, Jr. 42 Managing Director and
Vice President-Market Development
John H. Rittenhouse 40 Vice President-Distribution
Michael C. French 54 Managing Director
Evan A. Wyly 35 Managing Director
Mr. Sam Wyly has served as Chairman of the Board of the Company since 1984.
In 1963, Mr. Wyly founded University Computing Company, a computer software and
services company, and served as President or Chairman from 1963 until February
1979. Mr. Wyly co-founded Earth Resources Company, an oil refining and silver
and gold mining company, and served as its Executive Committee Chairman from
1968 to 1980. 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 breakup of AT&T's telephone monopoly and the resulting
benefits of increased competition in the telecommunications industry. Mr. Wyly
and his brother, Charles J. Wyly, Jr., bought the 20-restaurant Bonanza
Steakhouse chain in 1967. While he served as Chairman, the restaurant chain
grew to approximately 600 restaurants by 1989. Mr. Wyly co-founded Sterling
Software, Inc. in 1981 and since that time has served as Chairman of the Board
and as a director. Mr Wyly is a partner of Maverick Capital Ltd., an investment
fund management limited partnership. He has served as a director of Sterling
Commerce, Inc., since December 1995.
Mr. Charles J. Wyly, Jr. became a director of the Company in October 1984
and Vice Chairman in February 1985. He co-founded Sterling
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Software, Inc. in 1981 and since such time has served as a director and
(since November 1984) as Vice Chairman of Sterling Software, Inc. He has
served as a director of Sterling Commerce, Inc. since December 1995. Mr.
Wyly served as an officer and director of University Computing Company from
1964 to 1975, including President from 1969 to 1973. From 1968 to 1980, Mr.
Wyly served as Chairman of the Board of Earth Resources Company, an oil
refining and silver and gold mining company which he co-founded with his
brother, Sam Wyly. Mr. Wyly served as Vice Chairman of the Bonanza
Steakhouse chain from 1967 to 1989.
Mr. Rouleau became President and Chief Executive Office in April 1997 and
has been Chief Executive Officer of the Company 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 on April 1, 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.
Ms. Magnuson became Vice President-Finance and Planning for the Company in
August 1990. Prior to joining the Company, Ms. Magnuson had served with
MeraBank, a Federal Savings Bank, from March 1987 to August 1990, most recently
as Senior Vice President and Controller. Prior to March 1987 Ms. Magnuson was a
Senior Manager/Principal at Arthur Young & Company.
Mr. Miller, a Managing Director, is a charter employee of the Company and
has served as Vice President-Market Development of the Company since November
1990 and as a director of the Company 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. Mr. Miller is the son-in-law of Charles J. Wyly, Jr.,
Vice Chairman of the Company.
Mr. Rittenhouse joined the Company as Vice President-Distribution in
January 1995. For the previous eight years he had served with Target Stores, a
division of Dayton Hudson Corporation, as Director of Distribution. Prior to
that he held various positions with Southland Corporation.
Mr. French, a Managing Director, has served as a director of the Company
since September 1992. He has been a partner of Maverick Capital
<PAGE>
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. Evan A. Wyly, a Managing Director, has served as a director of the
Company since September 1992 and as an officer of the Company since December
1991. In June 1988, Mr. Wyly founded Premier Partners Incorporated, a private
investment firm, and served as President prior to joining the Company. Mr. Wyly
is a managing partner of Maverick Capital Ltd., an investment fund management
limited partnership. He serves as a director and officer of Sterling Software,
Inc., and as a director of Sterling Commerce, Inc. Evan Wyly is the son of Sam
Wyly, a director and officer of the Company.
Item 2. PROPERTIES.
The Company's Michaels stores generally are situated in strip shopping
centers located near malls and on well-traveled roads. Almost all stores are in
leased premises with lease terms generally ranging from five to ten years. The
base rental rates generally range from $85,000 to $235,000 per year. Rental
expense for stores open during the full 12-month period of fiscal 1996 averaged
$160,000. 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, all
current stores are located in leased properties with lease terms generally
ranging from five to ten years with options to renew. Rental expense for stores
opened the full 12-month period of fiscal 1996 averaged $102,000.
<PAGE>
The following table indicates the number of the Company's stores located in
each state or province as of April 28, 1997:
Number of
State Stores
----- ------
Alabama 5
Alaska 1
Arizona 17*
Arkansas 3
British Columbia 1
California 144*
Colorado 9
Connecticut 2
Florida 23
Georgia 18
Idaho 2
Illinois 23
Indiana 10
Iowa 6
Kansas 4
Kentucky 3
Louisiana 4
Maine 2
Maryland 1
Massachusetts 10
Michigan 16
Minnesota 9
Mississippi 1
Missouri 11
Nebraska 1
Nevada 9*
New Hampshire 2
New Jersey 7
New Mexico 3
New York 11
North Carolina 15
North Dakota 1
Ohio 21
Oklahoma 7
Ontario 16
Oregon 10
Pennsylvania 9
Puerto Rico. 3
Rhode Island 1
South Carolina 4
South Dakota 1
Tennessee 10
Texas 32
Utah 4
Virginia 7
Washington 14
West Virginia 1
Wisconsin 7
---
Total 521
- --------------------
*Of the store counts indicated in Arizona, California and Nevada, Aaron
Brothers accounts for 3, 65 and 4 stores, respectively.
<PAGE>
The Company leases a 426,000 square foot building at the Alliance Airport
in Tarrant County, Texas for use as a distribution center. The Company also
leases a 136,000 square foot building for the corporate headquarters in Irving,
Texas. Michaels also leases 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 facility in Jacksonville, Florida. Aaron Brothers leases a 126,000
square foot building in City of Commerce, California, for use as a distribution
center and office facility.
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 allege
that misstatements and omissions by defendants relating to projected and
historical operating results, inventory and other matters involving future plans
resulted in an inflation of the price of the Company's Common Stock during the
period between February 1, 1995 and August 23, 1995. The plaintiffs seek on
behalf of the class an unspecified amount of compensatory damages and
reimbursement for the plaintiffs' fees and expenses. The United States District
Court for the Northern District of Texas consolidated the two lawsuits on
November 16, 1995. The Court certified a class on March 24, 1997 and discovery
is proceeding. The Company believes that it has meritorious defenses to this
action and intends to defend itself vigorously.
A lawsuit was commenced against the Company and several other parties on
September 19, 1994 in the Superior Court of Stanislaus County, California, on
behalf of a former employee, Naomi Snyder, her child, and her husband. The
complaint alleges that the former employee and her then-unborn child were
exposed to excessive levels of carbon monoxide in one of the Company's stores
caused by a propane gas powered floor buffer which was operated by an outside
cleaning service, resulting, among other things, in severe and permanent
injuries to the child. Plaintiffs' Statement of Damages, filed on or about
January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled
the plaintiffs' pleadings did not state a cause of action against the Company
upon which relief could be granted. However, the ruling by the trial court was
overturned by the Court of Appeals of the State of California, Fifth Appellate
District, on September 23, 1996. On or about November 1, 1996 the Company filed
its petition for review with the California Supreme Court requesting a review of
the appellate decision. Review was granted on December 23, 1996. Should the
California Supreme Court sustain the appellate court ruling and remand the case
to the trial court, the Company believes it has meritorious defenses to this
action and will defend itself vigorously.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the litigation described above,
is uncertain, and there can be no assurance that future costs related to such
litigation would not be material to the Company's financial position or results
of operations.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Since September 3, 1991, the Common Stock has been quoted through the
Nasdaq National Market System under the symbol "Mike". From December 10, 1986
until September 3, 1991, the Common Stock was traded on the American Stock
Exchange. The Company's Common Stock began trading in the over-the-counter
market in May 1984 and was quoted through the Nasdaq National Market System from
May 21, 1985 until December 10, 1986.
The following table sets forth the high and low bid prices of the Company's
Common Stock for each quarterly period within the two most recent fiscal years.
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
Fiscal 1995 High Low
----------- ---- ---
First $37 1/2 $27 3/4
Second 32 3/4 20 3/4
Third 25 3/4 11
Fourth 18 11 3/8
On April 15, 1997, the last reported bid price of the Common Stock on the
Nasdaq National Market System was $18-1/2 and as of such date there were
approximately 1,031 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 1995 and 1996.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information required by this item is included in the
Company's 1996 Annual Report to Shareholders (the "1996 Annual Report") under
the heading "Financial Highlights." Such information is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included in the 1996 Annual Report
on pages 9 and 10 under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Such information is incorporated
herein by reference.
<PAGE>
CERTAIN STATEMENTS CONTAINED IN THE 1996 ANNUAL REPORT AND INCORPORATED HEREIN
BY REFERENCE WHICH ARE NOT HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, CUSTOMER DEMAND
AND TRENDS IN THE ARTS AND CRAFTS INDUSTRY, RELATED INVENTORY RISKS DUE TO
SHIFTS IN CUSTOMER DEMAND, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF
COMPETITORS' LOCATIONS OR PRICING, THE AVAILABILITY OF ACCEPTABLE REAL ESTATE
LOCATIONS FOR NEW STORES, DIFFICULTIES WITH RESPECT TO NEW INFORMATION SYSTEM
TECHNOLOGIES, SUPPLY CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF FINANCING
EFFECTS, THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES AND OTHER RISKS
DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item are
included in this Annual Report on Form 10-K, or are included in the Company's
1996 Annual Report and are incorporated herein by reference, as indicated in the
following Index to Financial Statements.
Index to Financial Statements and 1996 Annual
- --------------------------------- -----------
Financial Statement Schedules Report Page
- ----------------------------- -----------
Report of Independent Auditors 19
Consolidated Balance Sheets at
February 1, 1997 and January 28, 1996 11
Consolidated Statements of Operations for
the fiscal years ended February 1, 1997,
January 28, 1996 and January 29, 1995 12
Consolidated Statements of Cash Flows for
the fiscal years ended February 1, 1997,
January 28, 1996 and January 29, 1995 13
Consolidated Statements of Shareholders'
Equity for the fiscal years ended
February 1, 1997, January 28, 1996
and January 29, 1995 14
Notes to Consolidated Financial Statements 15-18
All schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the consolidated financial
statements and notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors of the company is set forth in the
Proxy Statement to be delivered to shareholders in connection with the Company's
Annual Meeting of Shareholders to be held on June 6, 1997 (the "Proxy
Statement") under the heading "Election of Directors," which information is
incorporated herein by reference. The name, age and position of each executive
officer of the Company is set forth under the heading "Executive Officers of the
Registrant" in Item 1 of this report, which information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Management Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Stockholders and Management Ownership," which information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) The following documents are filed as a part
of this Annual Report on Form 10-K:
(1) Financial Statements:
The financial statements filed as a part of this report are
listed in the "Index to Financial Statements and Financial
Statement Schedules" at Item 8.
(2) Financial Statement Schedules:
The financial statement schedules filed as a part of this
report are listed in the "Index to Financial Statements and
Financial Statement Schedules" at Item 8.
<PAGE>
(3) Exhibits:
The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item 14.
(b) Reports on Form 8-K:
No report on Form 8-K was filed on behalf of the Registrant
during the last quarter of the period covered by this report.
(c) Exhibits:
2.1 - Agreement and Plan of Merger, dated as of May 10, 1994,
among Michaels Stores, Inc., LWA Acquisition Corporation and
Leewards Creative Crafts, Inc.(2)
2.2 - First Amendment to Agreement and Plan of Merger dated as of
June 2, 1994 among Michaels Stores, Inc., LWA Acquisition
Corporation and Leewards Creative Crafts, Inc.(3)
2.3 - Stock Purchase Agreement, dated as of February 16, 1994,
among Michaels Stores, Inc., Treasure House Stores, Inc. and
the stockholders of Treasure House Stores, Inc.(4)
2.4 - Amendment No. 1 to Stock Purchase Agreement, dated as of
February 22, 1994, among Michaels Stores, Inc., Treasure
House Stores, Inc., THSI Acquisition Corporation and the
stockholders of Treasure House Stores, Inc.(4)
2.5 - Agreement and Plan of Merger, dated as of March 3, 1994,
among Michaels Stores, Inc. and the other parties listed
therein.(2)
2.6 - Amendment No. 1 to Agreement and Plan of Merger, dated as of
March 3, 1994, among Michaels Stores, Inc. and the other
parties listed therein.(2)
2.7 - Stock Purchase Agreement, dated as of March 8, 1995, among
Aaron Brothers Holdings, Inc., ABAM Investors Limited
Partnership, and Michaels Stores, Inc.(5)
3.1 - Bylaws of the Registrant, as amended and restated.(6)
3.2 - Restated Certificate of Incorporation of the Registrant.(7)
4.1 - Form of Common Stock Certificate.(8)
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.(9)
<PAGE>
4.3 - Indenture, dated as of June 21, 1996 between Michaels
Stores, Inc. and The Bank of New York.(10)
10.1 - Michaels Stores, Inc. Employees 401(k) Plan, as amended and
restated effective October 1, 1996.(11)
10.2 - Michaels Stores, Inc. Employees 401(k) Trust, dated July 11,
1996.(11)
10.3 - Form of Indemnity Agreement between Michaels Stores, Inc.
and certain officers and directors of the Registrant (9)
10.4 - Form of Employment Agreement between Michaels Stores, Inc.
and certain directors of the Registrant.(1)(19)
10.5 - Form of Consulting Agreement between Michaels Stores, Inc.
and certain directors of the Registrant.(1)(19)
10.6 - Form of Employment Agreement between Michaels Stores, Inc.
and certain key executives of the Registrant.(1)(19)
10.7 - Michaels Stores, Inc. Employees Stock Purchase Plan.(13)
10.8 - Amendment No. 1 to Michaels Stores, Inc. Employees Stock
Purchase Plan.(1)
10.9 - Michaels Stores, Inc. Amended and Restated Key Employee
Stock Compensation Program.(1)(19)
10.10 - Michaels Stores, Inc. Amended and Restated 1992 Non-Statutory
Stock Option Plan.(14)(19)
10.11 - Form of Non-Statutory Stock Option Agreement covering
options granted to certain directors and consultants of the
Company other than pursuant to the Michaels Stores, Inc. Key
Employee Stock Compensation Program and the Michaels Stores,
Inc. 1992 Non-Statutory Stock Option Plan.(9)(19)
10.12 - Second Amended and Restated Credit Agreement dated June 20,
1996, between Michaels Stores, Inc. and NationsBank of
Texas, N.A. (the "Credit Agreement").(15)
10.13 - Waiver Agreement and First Amendment to Credit Agreement
dated January 31, 1997.(1)
10.14 - Second Amendment to Credit Agreement dated as of March 11,
1997.(1)
10.15 - Michaels Stores, Inc. Amended and Restated 1994 Non-Statutory
Stock Option Plan.(16)
10.16 - 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.(17)
<PAGE>
10.17 - 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.(1)
10.18 - Term Lease Master Agreement between IBM Credit Corporation
as Lessor and Michaels Stores, Inc. as Lessee.(1)
10.19 - Agreement dated as of January 30, 1996 by and between
Michaels Stores, Inc. and Jack E. Bush.(17)
10.20 - Common Stock and Warrant Agreement dated as of October 16,
1984 between Michaels Stores, Inc. and Peoples Restaurants,
Inc., including form of Warrant.(9)
10.21 - First Amendment to Common Stock and Warrant Agreement dated
October 31, 1984 between the First Dallas Group, Ltd. and
Michaels Stores, Inc.(9)
10.22 - Second Amendment to Common Stock and Warrant Agreement dated
November 28, 1984 between First Dallas Investments-Michaels
I, Ltd. and Michaels Stores, Inc.(9)
10.23 - 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.(18)
10.24 - Amendment to Common Stock and Warrant Agreement, dated as of
September 1, 1992 between Michaels Stores, Inc. and the
other parties named therein.(7)
10.25 - Stock Purchase Agreement, dated as of March 29, 1996 between
Michaels Stores, Inc. and Fugue Limited.(17)
10.26 - Stock Purchase Agreement, dated as of March 29, 1996 between
Michaels Stores, Inc. and Locke Limited.(17)
10.27 - Stock Purchase Agreement, dated as of March 29, 1996 between
Michaels Stores, Inc. and Quayle Limited.(17)
10.28 - Option Agreement, dated as of December 23, 1996 between
Michaels Stores, Inc. and Devotion Limited.(1)
10.29 - Option Agreement, dated as of December 23, 1996 between
Michaels Stores, Inc. and Elegance Limited.(1)
10.30 - 1997 Bonus Plan for R. Michael Rouleau.(1)(19)
10.31 - 1997 Bonus Plan for Douglas B. Sullivan.(1)(19)
10.32 - Employment Agreement effective as of April 29, 1997 between
Michaels Stores, Inc. and R. Michael Rouleau.(1)(19)
10.33 - Michaels Stores, Inc. 1997 Employees Stock Purchase Plan.(1)
<PAGE>
11.1 - Computation of Earnings Per Common Share.(1)
13.1 - Portions of 1996 Annual Report to Shareholders that are
incorporated by reference into Items 6, 7 and 8 of this
Annual Report on Form 10-K.(1)
21.1 - Subsidiaries of Michaels Stores, Inc.(1)
23.1 - Consent of Ernst & Young.(1)
27.1 - Financial Data Schedule.(1)
- ---------------------
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-53639) and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended May 1, 1994 and incorporated herein by
reference.
(4) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-52311) and incorporated herein by reference.
(5) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 19, 1995 and incorporated herein by
reference.
(6) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 30, 1994 and incorporated herein by
reference.
(7) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-54726) and incorporated herein by reference.
(8) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 2-89370) and incorporated herein by reference.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 31, 1993 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended July 28, 1996 and incorporated herein by
reference.
(11) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K, dated September 30, 1996 and incorporated herein by reference.
(12) Previously filed as an Exhibit to the Registrant's Annual Report on
form 10-K for the year ended January 29, 1989 and incorporated herein by
reference.
(13) Previously filed as an Exhibit to the Registrant's Annual report on
Form 10-K for the year ended February 2, 1992 and incorporated herein by
reference.
(14) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (333-21407) and incorporated herein by reference.
(15) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K, dated June 20, 1996 and incorporated herein by reference.
(16) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (333-21635) and incorporated herein by reference.
(17) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 28, 1996 filed on April 29, 1996 and
incorporated herein by reference.
(18) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-9456) and incorporated herein by reference.
(19) Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form pursuant to Item 14 (c).
<PAGE>
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 2, 1997 By: /s/ Sam Wyly
-----------------------------
Sam Wyly
Chairman of the Board of Directors
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.
/s/ Sam Wyly Chairman of the Board of May 2, 1997
- ------------------------ Directors
Sam Wyly
/s/ Charles J. Wyly, Jr. Vice Chairman of the May 2, 1997
- ------------------------- Board of Directors
Charles J. Wyly, Jr.
/s/ R. Michael Rouleau President and May 2, 1997
- ------------------------- Chief Executive Officer
R. Michael Rouleau (Principal Executive Officer)
/s/ Bryan M. DeCordova Executive Vice President- May 2, 1997
- ------------------------- Chief Financial Officer
Bryan M. DeCordova (Principal Financial and
Accounting Officer)
/s/ F. Jay Taylor Director May 2, 1997
- -------------------------
F. Jay Taylor
/s/ Richard E. Hanlon Director May 2, 1997
- -------------------------
Richard E. Hanlon
/s/ Donald R. Miller, Jr Managing Director and May 2, 1997
- -------------------------- Vice President-
Donald R. Miller, Jr. Market Development
/s/ Michael C. French Managing Director May 2, 1997
- --------------------------
Michael C. French
/s/ Evan A. Wyly Managing Director May 2, 1997
- --------------------------
Evan A. Wyly
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Merger, dated as of May 10, 1994,
among Michaels Stores, Inc., LWA Acquisition Corporation and
Leewards Creative Crafts, Inc.(2)
2.2 First Amendment to Agreement and Plan of Merger dated as of
June 2, 1994 among Michaels Stores, Inc., LWA Acquisition
Corporation and Leewards Creative Crafts, Inc.(3)
2.3 Stock Purchase Agreement, dated as of February 16, 1994,
among Michaels Stores, Inc., Treasure House Stores, Inc. and
the stockholders of Treasure House Stores, Inc.(4)
2.4 Amendment No. 1 to Stock Purchase Agreement, dated as of
February 22, 1994, among Michaels Stores, Inc., Treasure
House Stores, Inc., THSI Acquisition Corporation and the
stockholders of Treasure House Stores, Inc.(4)
2.5 Agreement and Plan of Merger, dated as of March 3, 1994,
among Michaels Stores, Inc. and the other parties listed
therein.(2)
2.6 Amendment No. 1 to Agreement and Plan of Merger, dated as of
March 3, 1994, among Michaels Stores, Inc. and the other
parties listed therein.(2)
2.7 Stock Purchase Agreement, dated as of March 8, 1995, among
Aaron Brothers Holdings, Inc., ABAM Investors Limited
Partnership, and Michaels Stores, Inc.(5)
3.1 Bylaws of the Registrant, as amended and restated.(6)
3.2 Restated Certificate of Incorporation of the Registrant.(7)
4.1 Form of Common Stock Certificate.(8)
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.(9)
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
4.3 Indenture, dated as of June 21, 1996 between Michaels
Stores, Inc. and The Bank of New York.(10)
10.1 Michaels Stores, Inc. Employees 401(k) Plan, as amended and
restated effective October 1, 1996.(11)
10.2 Michaels Stores, Inc. Employees 401(k) Trust, dated July 11,
1996.(11)
10.3 Form of Indemnity Agreement between Michaels Stores, Inc.
and certain officers and directors of the Registrant (9)
10.4 Form of Employment Agreement between Michaels Stores, Inc.
and certain directors of the Registrant.(1)(19)
10.5 Form of Consulting Agreement between Michaels Stores, Inc.
and certain directors of the Registrant.(1)(19)
10.6 Form of Employment Agreement between Michaels Stores, Inc.
and certain key executives of the Registrant.(1)(19)
10.7 Michaels Stores, Inc. Employees Stock Purchase Plan.(13)
10.8 Amendment No. 1 to Michaels Stores, Inc. Employees Stock
Purchase Plan.(1)
10.9 Michaels Stores, Inc. Amended and Restated Key Employee
Stock Compensation Program.(1)(19)
10.10 Michaels Stores, Inc. Amended and Restated 1992 Non-Statutory
Stock Option Plan.(14)(19)
10.11 Form of Non-Statutory Stock Option Agreement covering
options granted to certain directors and consultants of the
Company other than pursuant to the Michaels Stores, Inc. Key
Employee Stock Compensation Program and the Michaels Stores,
Inc. 1992 Non-Statutory Stock Option Plan.(9)(19)
10.12 Second Amended and Restated Credit Agreement dated June 20,
1996, between Michaels Stores, Inc. and NationsBank of
Texas, N.A. (the "Credit Agreement").(15)
10.13 Waiver Agreement and First Amendment to Credit Agreement
dated January 31, 1997.(1)
10.14 Second Amendment to Credit Agreement dated as of March 11,
1997.(1)
10.15 Michaels Stores, Inc. Amended and Restated 1994 Non-Statutory
Stock Option Plan.(16)
10.16 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.(17)
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
10.17 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.(1)
10.18 Term Lease Master Agreement between IBM Credit Corporation
as Lessor and Michaels Stores, Inc. as Lessee.(1)
10.19 Agreement dated as of January 30, 1996 by and between
Michaels Stores, Inc. and Jack E. Bush.(17)
10.20 Common Stock and Warrant Agreement dated as of October 16,
1984 between Michaels Stores, Inc. and Peoples Restaurants,
Inc., including form of Warrant.(9)
10.21 First Amendment to Common Stock and Warrant Agreement dated
October 31, 1984 between the First Dallas Group, Ltd. and
Michaels Stores, Inc.(9)
10.22 Second Amendment to Common Stock and Warrant Agreement dated
November 28, 1984 between First Dallas Investments-Michaels
I, Ltd. and Michaels Stores, Inc.(9)
10.23 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.(18)
10.24 Amendment to Common Stock and Warrant Agreement, dated as of
September 1, 1992 between Michaels Stores, Inc. and the
other parties named therein.(7)
10.25 Stock Purchase Agreement, dated as of March 29, 1996 between
Michaels Stores, Inc. and Fugue Limited.(17)
10.26 Stock Purchase Agreement, dated as of March 29, 1996 between
Michaels Stores, Inc. and Locke Limited.(17)
10.27 Stock Purchase Agreement, dated as of March 29, 1996 between
Michaels Stores, Inc. and Quayle Limited.(17)
10.28 Option Agreement, dated as of December 23, 1996 between
Michaels Stores, Inc. and Devotion Limited.(1)
10.29 Option Agreement, dated as of December 23, 1996 between
Michaels Stores, Inc. and Elegance Limited.(1)
10.30 1997 Bonus Plan for R. Michael Rouleau.(1)(19)
10.31 1997 Bonus Plan for Douglas B. Sullivan.(1)(19)
10.32 Employment Agreement effective as of April 29, 1997 between
Michaels Stores, Inc. and R. Michael Rouleau.(1)(19)
10.33 Michaels Stores, Inc. 1997 Employees Stock Purchase Plan.(1)
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
11.1 Computation of Earnings Per Common Share.(1)
13.1 Portions of 1996 Annual Report to Shareholders that are
incorporated by reference into Items 6, 7 and 8 of this
Annual Report on Form 10-K.(1)
21.1 Subsidiaries of Michaels Stores, Inc.(1)
23.1 Consent of Ernst & Young.(1)
27.1 Financial Data Schedule.(1)
- ---------------------
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-53639) and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended May 1, 1994 and incorporated herein by
reference.
(4) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-52311) and incorporated herein by reference.
(5) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 19, 1995 and incorporated herein by
reference.
(6) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 30, 1994 and incorporated herein by
reference.
(7) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-54726) and incorporated herein by reference.
(8) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 2-89370) and incorporated herein by reference.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 31, 1993 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended July 28, 1996 and incorporated herein by
reference.
(11) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K, dated September 30, 1996 and incorporated herein by reference.
(12) Previously filed as an Exhibit to the Registrant's Annual Report on
form 10-K for the year ended January 29, 1989 and incorporated herein by
reference.
(13) Previously filed as an Exhibit to the Registrant's Annual report on
Form 10-K for the year ended February 2, 1992 and incorporated herein by
reference.
(14) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (333-21407) and incorporated herein by reference.
(15) Previously filed as an Exhibit to the Registrant's Current Report on
Form 8-K, dated June 20, 1996 and incorporated herein by reference.
(16) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (333-21635) and incorporated herein by reference.
(17) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended January 28, 1996 filed on April 29, 1996 and
incorporated herein by reference.
(18) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-9456) and incorporated herein by reference.
(19) Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form pursuant to Item 14 (c).
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
by and between
MICHAELS STORES INC.
and
____________________
<PAGE>
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
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<PAGE>
EXHIBIT 10.5
AGREEMENT
by and between
MICHAELS STORES, INC.
and
_____________________
<PAGE>
THIS AGREEMENT is entered into effective as of the 22nd day of March,
1989, by and between MICHAELS STORES, INC., a Delaware corporation, (hereinafter
referred to as the "Company") and ________________________ (hereinafter referred
to as the "Consultant").
WHEREAS, the Company wishes to attract and retain certain key
consultants and advisors and to assure itself of continuity of strategy and
policy in the event of any actual or threatened change of control of the
Company; and
WHEREAS, Consultant has heretofore been retained by the Company and is
experienced in the business of the Company;
NOW, THEREFORE, it is hereby agreed by and between the parties as follows:
1. 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,
<PAGE>
if a Change in Control shall have occurred during the original or extended
term of this Agreement, this Agreement shall continue in effect for a period
of thirty-six (36) months beyond the term in effect immediately before such
Change in Control.
2. CONSULTING PERIOD. Unless sooner terminated pursuant to the
provisions of Section 6 of this Agreement, the Company hereby agrees to
retain Consultant, and Consultant hereby agrees to offer his services to the
Company, for the period commencing on the Change of Control Date and ending
on the 65th birthday of Consultant (the "Consulting Period"), to perform such
consulting services as are commensurate with the services being performed by
Consultant immediately prior to the Change of Control Date, which services
shall be performed at the location where Consultant was located immediately
prior to the Change of Control Date.
3. BASE COMPENSATION. The Company agrees to pay Consultant during the
Consulting Period, in cash at intervals not less frequently than once
monthly, consulting fees in an amount not less than Consultant's average
monthly consulting fees for the twelve (12) months immediately prior to the
Change of Control Date.
-2-
<PAGE>
4. OTHER COMPENSATION.
(a) PARTICIPATION IN RETIREMENT AND MEDICAL PLANS. During the
Consulting Period, Consultant shall be entitled to receive benefits under,
and participate in, all benefit plans to which Consultant was entitled
immediately prior to the Change of Control Date, including but not limited to
any applicable pension, retirement, deferred compensation, stock ownership or
Section 401(k) thrift and savings plans (collectively, "Retirement Plans"),
and any disability, life insurance or medical and dental plans provided by
the Company to key advisors with comparable duties; provided, however, that
this provision shall not be construed to require the Company to establish any
new plans.
(b) CONSULTANT BENEFITS; EXPENSES. During the Consulting Period,
Consultant shall be entitled to receive any fringe benefits and perquisites
which may be or become applicable to the Company's other key advisors,
including but not limited to participation in the Company's Key Employee
Stock Compensation Program, and any other stock option or incentive plans
adopted by the Board of Directors, a reasonable expense account, and any
other benefits and perquisites which are commensurate with the
responsibilities and functions to be performed by Consultant under this
Agreement. The Company shall reimburse Consultant for all out-of-pocket
expenses which
-3-
<PAGE>
Consultant shall incur in connection with his services for the Company.
During the Consulting Period, Consultant shall be entitled to the use of a
Company automobile in accordance with the Company's practices in effect prior
to the Change of Control Date for providing automobiles to its key advisors.
In addition, during the Consulting Period, Consultant shall be entitled to
legal and financial planning benefits consistent with benefits made available
by the Company to its key advisors prior to the Change of Control Date.
(c) PARTICIPATION IN OTHER AGREEMENTS. During the Consulting
Period, Consultant shall continue to be treated as a key advisor and
consultant under the provisions of all agreements and other documents
relating to the Company's Key Employee Stock Compensation Program or any
deferred compensation arrangements.
5. CONTROL.
(a) CHANGE OF CONTROL. Except as provided in this Section 5(a),
for purposes of this Agreement, a Change of Control shall mean a change in
control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (as such disclosure
requirement may in the future be otherwise
-4-
<PAGE>
identified), whether or not the Company is then subject to such reporting
requirement; provided that, without limitation, a Change of Control shall be
deemed to have occurred if (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than Mr. Sam Wyly, Mr. Charles J.
Wyly, Jr., or any affiliate of either of them, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities; or (B)
during any period of three consecutive years (not including any period prior
to the execution of this Agreement), individuals who at the beginning of such
period constitute the Board of Directors, including for this purpose any new
director whose election by the Board, or nomination for election by the
Company's stockholders, was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof.
(b) CHANGE OF CONTROL DATE. For purposes of this Agreement, the
term Change of Control Date shall mean the date upon which a Change of
Control as defined in Section 5(a) hereof is deemed to have occurred.
-5-
<PAGE>
6. TERMINATION OF THE CONSULTING PERIOD.
The Consulting Period shall terminate upon the occurrence of any of
the following events:
(a) any termination by the Company of the consulting agreements or
contracts between Consultant and the Company, including but not limited to
that certain Consultation Agreement dated January 1, 1986 (as amended June 1,
1986 and March 25, 1988) between the Company and Consultant for any reason
other than death, physical or mental incapacity, or
(b) the resignation of Consultant upon the occurrence of any of
the following:
(i) a significant change in the nature or scope of
Consultant's duties from those described in Section 2;
(ii) a reduction in or delay in payment of total compensation
from that provided in Section 3 and 4;
(iii) the material breach by the Company of any other provision
of this Agreement; or
(iv) a determination made by Consultant, in his sole
discretion, that as a result of a Change in Control of
-6-
<PAGE>
the Company and a change in circumstances thereafter affecting his position,
he is unable to fully exercise his duties as contemplated by Section 2 of
this Agreement.
7. CALCULATION OF TERMINATION PAY. For purposes of this Agreement,
Termination Date shall mean the date upon which the Consulting Period
terminates pursuant to Section 6 hereof. If the Consulting Period is
terminated pursuant to Section 6 hereof after a Change of Control, but prior
to the third anniversary of the Change of Control Date, the Company shall pay
to Consultant as termination pay the amounts determined as follows:
(a) an amount equivalent to three (3) times one hundred percent
(100%) of Consultant's aggregate consulting fees for the twelve (12) months
immediately prior to the Termination Date; and
(b) an amount equivalent to three (3) times one hundred percent
(100%) of the aggregate monthly equivalent cash values of those benefits
which Consultant shall have received during the twelve (12) months
immediately prior to the Termination Date in the form of (i) a car allowance
or company car, (ii) those contributions by the Company on behalf of
Consultant pursuant to a Section 401(k) or other tax-advantaged savings plan
established or to be established by the Company,
-7-
<PAGE>
and (iii) those legal and financial planning benefits made available by the
Company to Consultant; and
(c) in addition to the benefits to which Consultant is entitled
under any pension, deferred compensation or retirement benefit plan or plans
maintained by the Company, or any successor plan or plans thereto
(hereinafter referred to as the "Pension Plans"), a lump sum equal to the
actuarial equivalent of the excess of (x) the retirement pension (determined
as a straight life annuity commencing at age sixty-five (65)) which
Consultant would have accrued under the terms of the Company's Pension Plans
(without regard to any amendment to such Pension Plans made subsequent to the
Change in Control Date and on or prior to the Termination Date, which
amendment adversely affects in any manner the computation of retirement
benefits thereunder), determined as if Consultant were fully vested
thereunder and had accumulated (after the Termination Date) thirty-six (36)
months of service credit thereunder at a level of one hundred percent (100%)
of Consultant's average rate of compensation during the twelve (12) months
immediately prior to the Termination Date and (y) the retirement pension
(determined as a straight life annuity commencing at age sixty-five (65))
which Consultant had then accrued pursuant to the provisions of the Pension
Plans.
-8-
<PAGE>
8. CONTINUATION OF MEDICAL AND HEALTH BENEFITS. For a period of
thirty-six (36) months following the Termination Date, the Company shall
arrange to provide Consultant with life, medical, dental, health, accident
and disability insurance benefits substantially similar to those that
Consultant is receiving or is entitled to receive immediately prior to the
Termination Date, which benefits shall in no event be less than those
benefits in effect immediately prior to the Change of Control Date.
9. PAYMENT OF LEGAL EXPENSES. The Company shall also pay Consultant
all legal fees and expenses incurred by Consultant as a result of any
termination pursuant to Section 6 hereof, including, but not limited to, all
such fees and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit provided
by this Agreement.
10. DISBURSEMENT OF TERMINATION PAY. The aggregate amount of all
termination payments that are payable to Consultant as provided in Section 7
hereof shall be determined in good faith by the Company within 15 days
following the Termination Date, and such termination payments shall be
distributed by the Company to Consultant, at the election of Consultant
(which election shall be made within thirty (30) days following the
Termination Date), either (A) in one lump
-9-
<PAGE>
sum within ninety (90) days following the Termination Date or (B) in
thirty-six (36) equal monthly installments beginning thirty (30) days
following the Termination Date and continuing every thirty (30) days
thereafter.
11. NOTICES. Any notices, demands and other communications provided
for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to Consultant at the last address he has filed
in writing with the Company or, in the case of the Company, at its principal
executive offices to the attention of the President, with a copy to the
attention of the General Counsel.
12. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Company which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all
or substantially all of the assets of the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by Consultant's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Consultant should die while he or she is entitled to receive any amounts
payable
-10-
<PAGE>
pursuant to this Agreement, all such amounts shall be paid in accordance with
the terms of this Agreement to Consultant's devisee, legatee or other
designee or, if there is no such designee, to Consultant's estate.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties.
14. APPLICABLE LAW. This Agreement shall be governed in all respects,
whether as to validity, construction, capacity, performance or otherwise, by
the laws of the State of Texas, except to the extent that federal law shall
be deemed to apply.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. ENTIRE AGREEMENT. This Agreement contains all the terms agreed
upon by the parties with respect to the subject matter hereof and supersedes
all prior agreements, arrangements and communications.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
CONSULTANT:
---------------------------------------
ATTEST: MICHAELS STORES, INC.
- ------------------- By:
------------------------------------
B. B. Tuley, President
-12-
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
by and between
MICHAELS STORES, INC.
and
______________________
<PAGE>
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
<PAGE>
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-
<PAGE>
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
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<PAGE>
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.
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<PAGE>
(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.
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<PAGE>
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
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<PAGE>
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;
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<PAGE>
(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
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<PAGE>
(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
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<PAGE>
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,
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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.
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<PAGE>
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.
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<PAGE>
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:
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ATTEST: MICHAELS STORES, INC.
By:
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B. B. Tuley, President
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<PAGE>
AMENDMENT NO. 1
TO THE
MICHAELS STORES, INC.
EMPLOYEES STOCK PURCHASE PLAN
This Amendment to the Michaels Stores, Inc. Employees Stock Purchase
Plan (the "Plan") is made and entered into as of February 25, 1997. All
capitalized terms used herein that are not otherwise defined shall have the
meaning set forth in the Plan.
WITNESSETH:
WHEREAS, the Plan was made and adopted effective as of May 1, 1992; and
WHEREAS, the Board of Directors of Michaels Stores, Inc. (the
"Company") has deemed it to be in the best interest of the Company and its
stockholders to amend the Plan in the manner set forth below; and
WHEREAS, pursuant to Section 18 of the Plan the Plan may be amended
with respect to the amendment set forth below by the Board of Directors of the
Company;
NOW, THEREFORE, in accordance with the terms of the Plan, the Plan is
hereby amended as follows:
1. Section 19 of the Plan is hereby amended in its entirety to read
as follows:
19. TERMINATION OF THE PLAN. The Plan and all rights of
employees under any offering hereunder shall terminate:
(a) On the day that participating employees become entitled
to purchase a number of shares equal to or greater than the
number of shares remaining available for purchase under the Plan;
or
(b) at any time, at the discretion of the Board of
Directors.
If on the day the Plan terminates participating employees are
entitled to purchase a number of shares greater than the number of
shares remaining available for purchase under the Plan, the available
shares shall be allocated by the Committee among such participating
employees in such manner as it deems fair. Upon termination of the
Plan, all amounts in the accounts of participating employees shall be
carried forward into the employee's payroll deduction account under a
successor plan, if any, or promptly refunded.
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Amendment No. 1 to
the Michaels Stores, Inc. Employee Stock Purchase Plan as of the day and year
first set forth above.
MICHAELS STORES, INC.
By:
--------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
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<PAGE>
MICHAELS STORES, INC.
AMENDED AND RESTATED
KEY EMPLOYEE STOCK COMPENSATION PROGRAM
1. PURPOSE. The Michaels Stores, Inc. Key Employee Stock Compensation
Program, as amended and restated (the "Program"), is intended to secure for
Michaels Stores, Inc. (the "Company") and its shareholders the benefits
arising from ownership of the Company's common stock ("Common Stock") by
those selected executive and other key employees of the Company who will be
responsible for its future growth. The Program is designed to help attract
and retain superior personnel for positions of substantial responsibility
with the Company and to provide key employees with an additional incentive to
contribute to the success of the Company.
2. PROGRAM PARTS. In order to maintain flexibility in the award of
stock benefits, the Program is comprised of four parts: the Incentive Stock
Option Plan, as amended and restated (the "Incentive Plan"), the
Non-Statutory Stock Option Plan, as amended and restated (the "Non-Statutory
Plan"), the Stock Appreciation Rights Plan, as amended and restated (the "SAR
Plan"), and the Restricted Stock Plan, as amended and restated (the
"Restricted Stock Plan"). Copies of the Incentive Plan, Non-Statutory Plan,
SAR Plan and Restricted Stock Plan are attached hereto and are collectively
referred to herein as the "Plans". The grant of an option, appreciation right
or restricted stock award under one of the Plans ("Rights") shall not be
construed to prohibit the grant of Rights under any other Plan.
3. APPLICABILITY OF GENERAL PROVISIONS. Unless any Plan specifically
indicates to the contrary, all Plans shall be subject to the General
Provisions of the Program set forth below.
4. ADMINISTRATION OF THE PLANS. The Plans shall be administered,
construed, governed and amended in accordance with the General Provisions and
their respective terms.
GENERAL PROVISIONS OF PROGRAM
ARTICLE 1. ADMINISTRATION. The program shall be administered by the
Board of Directors of the Company (the "Board of Directors" or "Board") or by
a Stock Option Committee (the "Committee") of not less than two directors of
the Company appointed by the Board of Directors. All of the members of the
Committee are intended at all times to qualify as "outside directors" within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as in
effect from time to time (the "Code") and as "Non-Employee Directors" within
the meaning of Rule 16b-3 ("Rule 16b-3") under Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); provided, however,
that the failure of a member of the Committee to so qualify shall not be
deemed to invalidate any Right granted under any of the Plans.
<PAGE>
ARTICLE 2. AUTHORITY. Subject to the other provisions of the Program,
and with a view to effecting its purpose, the Board and the Committee shall
have full and final authority and discretion:
(a) to constitute and interpret the Program;
(b) to define and interpret the terms used herein;
(c) to prescribe, amend and rescind rules and regulations relating
to the Program;
(d) to determine the employees to whom Rights shall be granted
under the Program;
(e) to determine the time or times at which Rights shall be granted
under the Program;
(f) to determine the number of shares subject to each Right, the
price and the duration of each Right;
(g) to determine and interpret all of the other terms and
conditions of Rights;
(h) to remove or relax restrictions on the terms and conditions of
the Rights, including, without limitation, the power to accelerate vesting
schedules of the Rights; and
(i) to make all other determinations necessary or advisable for the
administration of the Program and to do everything necessary or appropriate
to administer the Program.
Any determination or interpretation by the Board or the Committee, as
applicable, under the Program, any Plan or any Right or any instrument
evidencing a Right will be final and conclusive; provided, that in the event
the Board and the Committee shall disagree with respect to such determination
or interpretation, the Board's determination or interpretation will be final.
Notwithstanding any provision of the Program or the Plans to the contrary,
the Committee will have exclusive authority and discretion to take any action
required as permitted to be taken under the provisions of Articles 2, 4, 6
and 7 hereunder and Sections 3, 4 and 7 of the Incentive Plan, 3, 4 and 5 of
the Non-Statutory Plan, 2, 3 and 5 of the SAR Plan, and 2(a), 2(b) and 2(d)
of the Restricted Stock Plan that are intended to comply with the
requirements of Section 162(m) of the Code.
ARTICLE 3. MAXIMUM NUMBER OF SHARES SUBJECT TO THE PROGRAM. Subject to
Article 7, the maximum aggregate number of shares of Common Stock subject to
the Program shall
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<PAGE>
be 3,000,000. If any Rights granted under the Program expire or terminate
for any reason before they have been exercised in full, the unpurchased
shares subject to expiration or termination shall again be available for the
purposes of the Program.
ARTICLE 4. ELIGIBILITY AND PARTICIPATION. Only regular full-time
employees of the Company or of any parent or subsidiary of the Company shall
be eligible for selection by the Board or the Committee, as applicable, to
participate in the Program. No director of the Company will be eligible to
receive any Rights under the Program. Although Directors are not eligible to
participate in the Program, they are not necessarily prohibited from
participation in, or from receiving Rights under, any other Company plan.
ARTICLE 5. EFFECTIVE DATE OF PROGRAM. This amendment and restatement
of the Program shall become effective upon its adoption by the Board of
Directors of the Company.
ARTICLE 6. TERMINATION AND AMENDMENT OF PROGRAM. The Program shall
terminate on February 24, 2002. No Rights shall be granted under the Program
after that date. Subject to the limitation contained in Article 8 of the
General Provisions, the Board or the Committee, as applicable, may at any
time amend or revise the terms of the Program, including the form and
substance of the option, appreciation right and restricted stock agreements
to be used hereunder.
ARTICLE 7. ADJUSTMENTS. If the outstanding shares of Common Stock are
increased, decreased, changed into or exchanged for a different number or
kind of shares or securities through merger, consolidation, combination,
exchange of shares, other reorganization, recapitalization, reclassification,
stock dividend, stock split or reverse stock split, an appropriate and
proportionate adjustment shall be made in the maximum number and kind of
shares as to which Rights may be granted under the Program. A corresponding
adjustment changing the number or kind of shares allocated to unexercised
Rights or portions thereof, which shall have been granted prior to any such
change, shall likewise be made. Any such adjustment in outstanding options
and appreciation rights shall be made without change in the aggregate
purchase price applicable to the unexercised portion of the Right, but with a
corresponding adjustment in the price for each share covered by the Right.
ARTICLE 8. PRIOR RIGHTS AND OBLIGATIONS. No amendment, suspension or
termination of the Program shall, without the consent of the employee who
has received a Right, alter or impair any of that employee's rights or
obligations under any Right granted under the Program prior to that
amendment, suspension or termination.
ARTICLE 9. PRIVILEGES OF STOCK OWNERSHIP. Notwithstanding the exercise
of any option granted pursuant to the terms of the Program, no employee shall
have any of the rights or privileges of a shareholder of the Company in
respect of any shares of stock issuable upon the exercise of his or her Right
until certificates representing the shares have been issued and delivered.
No shares shall be required to be issued and delivered upon exercise of any
Right until all of the requirements of law and of all regulatory agencies
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<PAGE>
having jurisdiction over the issuance and delivery of the securities shall
have been fully complied with.
ARTICLE 10. RESERVATION OF SHARES OF COMMON STOCK. During the term of
the Program, the Company will at all times reserve and keep available such
number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of the Program. In addition, the Company will from time to
time, as is necessary to accomplish the purposes of the Program, seek or
obtain from any regulatory agency having jurisdiction any requisite authority
in order to issue shares of Common Stock hereunder. The inability of the
Company to obtain from any regulatory agency having jurisdiction the
authority deemed by the Company's counsel to be necessary to the lawful
issuance of any shares of its stock hereunder shall relieve the Company of
any liability in respect of the non-issuance of the stock as to which the
requisite authority shall not have been obtained.
ARTICLE 11. TAX WITHHOLDING. To the extent that the Company is
required to withhold federal, state, local or foreign taxes in connection
with any benefit realized by a participant under the Plans, or is requested
by a participant to withhold additional amounts with respect to such taxes,
and the amounts available to the Company for such withholding are
insufficient, it will be a condition to the realization of such benefit that
the participant make arrangements satisfactory to the Company for payment of
the balance of such taxes required or requested to be withheld. In addition,
if permitted by the Committee or the Board, a participant may elect to have
any withholding obligation of the Company satisfied with shares of Common
Stock that would otherwise be transferred to the participant on exercise of
the Rights.
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<PAGE>
AMENDED AND RESTATED
INCENTIVE STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of this Michaels Stores, Inc. (the
"Company") Incentive Stock Option Plan, as amended and restated (the "Plan"),
is to promote the growth and general prosperity of the Company by permitting
the Company to grant options to purchase shares of its Common Stock to its
full-time, key employees. This Plan is designed to help attract and retain
superior personnel for positions of substantial responsibility with the
Company and its subsidiaries and to provide key employees with an additional
incentive to contribute to the success of the Company. The Company intends
that options granted pursuant to this Plan will qualify as "incentive stock
options" within the meaning of Section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"). This Plan is a part of the Company's Key
Employee Stock Compensation Program (the "Program"). Unless any provision
herein indicates to the contrary, this Plan shall be subject to the General
Provisions of the Program.
SECTION 2. OPTION TERMS AND CONDITIONS. The Terms and conditions of
options granted under this Plan may differ from one another as the Board or
the Committee, as applicable, shall, in its discretion, determine so long as
all options granted under this Plan satisfy the requirements of this Plan.
SECTION 3. DURATION OF OPTIONS. Each option granted pursuant to this
Plan and all rights thereunder shall expire on the date determined by the
Board or the Committee, as applicable, but in no event shall any option
granted under this Plan expire earlier than one year or later than ten years
from the date on which the option is granted. In addition, each option shall
be subject to early termination as provided in this Plan.
SECTION 4. PURCHASE PRICE. The purchase price for shares acquired
pursuant to the exercise in whole or in part, of any option shall not be less
than the fair market value of the shares at the time of the grant of the
option. Fair market value shall be determined by the Committee on the basis
of such factors as it deems appropriate; provided that if at the time the
determination of fair market value is made, those shares are admitted to
trading on a national securities exchange for which sale prices are regularly
reported, the fair market value of those shares shall not be less than the
lower of (i) the mean between the closing bid and asked prices reported for,
or (ii) the last trade price of a 100 share lot of, the Common Stock on that
exchange on the date or most recent trading day preceding the date on which
the option is granted. For purposes of the preceding sentence, the term
"national securities exchange" shall include the National Association of
Securities Dealers Automated Quotation System and the over-the-counter market.
SECTION 5. LIMITATIONS ON CERTAIN OWNERS OF COMMON STOCK.
Notwithstanding anything herein to the contrary, if an employee owns directly
or indirectly Common Stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company and its subsidiaries on
the date of grant of an option, the option exercise price shall not be less
than 110% of the fair market value of the Common Stock subject to the
<PAGE>
option on the date of grant and such option shall not be exercisable for more
than five years from the date of grant.
SECTION 6. MAXIMUM AMOUNT OF OPTIONS IN ANY CALENDAR YEAR. The maximum
aggregate fair market value of Common Stock, determined at the time the
option is granted, with respect to which incentive stock options, as defined
in Section 422(b) of the Code, are exercisable for the first time by any
employee during any calendar year under all incentive stock option plans of
the Company and its subsidiaries shall not exceed $100,000. This limitation
shall apply to options granted under this Plan after December 31, 1986. Any
option granted under the Program and first exercisable in excess of the
foregoing limitations shall be considered granted pursuant to the Company's
Non-Statutory Stock Option Plan, and shall be clearly and specifically
designated as not being an incentive stock option.
SECTION 7. EXERCISE OF OPTIONS. Each option shall be exercisable in
one or more installments during its term, and the right to exercise may be
cumulative as determined by the Board or the Committee, as applicable. No
option may be exercised for a fraction of a share of Common Stock. The
purchase price of any shares purchased shall be paid at the time of exercise
of the option either (i) in cash, (ii) by certified or cashier's check, (iii)
by delivery of shares of Common Stock, if permitted by the Board or the
Committee, as applicable, (iv) by delivery of a copy of irrevocable
instructions from the option holder to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the shares purchased upon
exercise of the option or pledge them as collateral for a loan and promptly
deliver to the Company the amount of sale or loan proceeds necessary to pay
such purchase price or (v) by cash or certified or cashier's check for the
par value of the stock plus a promissory note for the balance of the exercise
price, which note shall provide for full personal liability of the maker and
shall contain such other terms and provisions as the Board or the Committee,
as applicable, may determine, including without limitation the right to repay
the note partially or wholly with Common Stock. If any portion of the
purchase price or a note given at the time of exercise is paid in shares of
Common Stock, those shares shall be tendered at their then fair market value
as determined by the Board or the Committee, as applicable, in accordance
with Section 4 of this Plan.
SECTION 8. ACCELERATION OF RIGHT OF EXERCISE OF INSTALLMENTS.
Notwithstanding the first sentence of Section 7 of this Plan, in the event
the Company or its shareholders enter into an agreement to dispose of all or
substantially all of the assets or stock of the Company by means of a sale,
merger or other reorganization, liquidation, or otherwise, any option granted
pursuant to this Plan shall become immediately exercisable with respect to
the full number of shares subject to that option during the period commencing
as of the date of the agreement to dispose of all or substantially all of the
assets or stock of the Company and ending when the disposition of assets or
stock contemplated by that agreement is consummated or the option is
otherwise terminated in accordance with its provisions or the provisions of
this Plan, whichever occurs first; provided that no option shall be
immediately exercisable under this Section 8 on account of any agreement of
merger or other reorganization where the shareholders of the Company
immediately before the consummation of the transaction will own at least 50%
of the total combined voting power of all classes of stock entitled to vote
of the surviving entity (whether the Company or some
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<PAGE>
other entity) immediately after the consummation of the transaction. In the
event the transaction contemplated by the agreement referred to in this
Section 8 is not consummated, but rather is terminated, canceled or expires,
the options granted pursuant to this Plan shall thereafter be treated as if
that agreement had never been entered into.
Notwithstanding the first sentence of Section 7 of this Plan, in the
event of a change in control or threatened change in control of the Company,
all options granted prior to such change in control or threatened change in
control shall become immediately exercisable. The term "control" for
purposes of this Section 8 shall refer to the acquisition of 10% or more of
the voting securities of the Company by any person or by persons acting as a
group within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended; provided that for purposes of this Plan, no change in
control or threatened change in control shall be deemed to have occurred if
prior to the acquisition of, or offer to acquire, 10% or more of the voting
securities of the Company, the full Board of Directors shall have adopted by
not less than two thirds vote a resolution specifically approving such
acquisition or offer. The term "person" for purposes of this Section 8
refers to an individual or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
SECTION 9. WRITTEN NOTICE REQUIRED. Any option granted pursuant to
this Plan shall be exercised when written notice of that exercise has been
given to the Company at its principal office by the person entitled to
exercise the option and full payment for the shares with respect to which the
option is exercised has been received by the Company.
SECTION 10. LIMITATION ON EXERCISE. Notwithstanding Sections 7 and 8 of
this Plan, no option granted to an employee pursuant to this Plan shall be
exercisable while there is outstanding any other incentive stock option
previously granted to such employee to purchase Common Stock of the Company
or shares in a corporation which, at the time of the granting of such option,
is a subsidiary of the Company, or is a predecessor corporation, as referred
to in Section 422(b)(7) of the Code, of any such corporation. For this
purpose, an incentive stock option shall be treated as outstanding until that
option is exercised in full or expires solely by reason of the passage of
time. This Section 10 shall not apply to any option granted to an employee
pursuant to this Plan after December 31, 1986.
SECTION 11. COMPLIANCE WITH SECURITIES LAWS. Shares of Common Stock
shall not be issued with respect to any option granted under this Plan unless
the exercise of that option and the issuance and delivery of those shares
pursuant thereto shall comply with all relevant provisions of state and
federal law, including without limitation the Securities Act of 1933, as
amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or market upon which the shares may then
be listed or traded and shall be further subject to the approval of counsel
for the Company with respect to such compliance. The Committee may also
require an employee to whom an option has been granted ("Optionee") to
furnish evidence satisfactory to the Company, including a written and signed
representation letter and consent to be bound by any transfer restriction
imposed by law, legend, condition or otherwise, that the shares are being
purchased only for investment and without any present intention to sell or
distribute the shares in violation of
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<PAGE>
any state or federal law, rule or regulation. Further, each Optionee shall
consent to the imposition of a legend on the certificate representing the
shares of Common Stock issued upon the exercise of the option restricting
their transferability as required by law or by this Section.
SECTION 12. EMPLOYMENT OF OPTIONEE. Each Optionee, if requested by the
Board or the Committee, as applicable, must agree in writing as a condition
of receiving his or her option, to remain in the employ of the Company, or
any of its subsidiaries, following the date of the granting of that option
for a period specified by the Board or the Committee, as applicable, which
period shall in no event exceed three years. Nothing in this Plan or in any
option granted hereunder shall confer upon any Optionee any right to
continued employment by the Company or any of its subsidiaries, or limit in
any way the right of the Company or any subsidiary at any time to terminate
or alter the terms of that employment.
SECTION 13. OPTION RIGHTS UPON TERMINATION OF EMPLOYMENT. If an
Optionee ceases to be employed by the Company or any subsidiary for any
reason other than retirement, death or disability, his or her option shall
immediately terminate; provided that the Committee may, in its sole
discretion, allow the option to be exercised (either to the extent
exercisable by its terms on the date of termination of employment or as
otherwise specified by the Board or the Committee, as applicable) at any time
after the date of termination of employment, until either the option or this
Plan otherwise provides for termination. An employee retiring under a
qualified retirement plan of the Company shall automatically be allowed a
three month period following termination due to retirement in which to
exercise his or her option.
SECTION 14. OPTION RIGHTS UPON DISABILITY. If an Optionee becomes
disabled within the meaning of Section 105(d)(4) of the Code while employed
by the Company or any subsidiary, the Board or the Committee, as applicable,
in its discretion, may allow the option to be fully exercised, at any time
within one year after the date of such termination, unless either the option
or this Plan otherwise provides for earlier termination.
SECTION 15. OPTION RIGHTS UPON DEATH OF OPTIONEE. Except as otherwise
limited by the Board or the Committee, as applicable, at the time of the
grant of an option, if an Optionee dies while employed by the Company or any
subsidiary, or within three months after ceasing to be an employee thereof,
his or her option shall expire one year after the date of death unless by its
terms it expires sooner. During this one year or shorter period, the option
may be fully exercised to the extent that it remains unexercised on the date
of death, by the person or persons to whom the Optionee's rights under the
option shall pass by will or by the laws of descent and distribution.
SECTION 16. OPTIONS NOT TRANSFERABLE. Options granted pursuant to this
Plan may not be sold, pledged, assigned or transferred in any manner
otherwise than by will or the laws of descent and distribution and may be
exercised during the lifetime of an Optionee only by that Optionee or by his
or her guardian or legal representative.
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<PAGE>
SECTION 17. ADJUSTMENTS TO NUMBER AND PURCHASE PRICE OF OPTIONED SHARES.
All options granted pursuant to this Plan shall be adjusted in the manner
prescribed by Article 7 of the General Provisions of the Program.
SECTION 18. REPORTS TO SHAREHOLDERS. The Company shall furnish to each
Optionee a copy of the annual report sent to the Company's shareholders, and
to those Optionees who do not otherwise receive such material, copies of all
other reports, proxy statements and other communications distributed to its
shareholders generally. Upon written request, the Company shall furnish to
each Optionee a copy of its most recent Form 10-K Annual Report.
SECTION 19. MAXIMUM NUMBER OF SHARES SUBJECT TO THE PLAN. The maximum
aggregate number of shares of Common Stock which may be issued pursuant to
options granted pursuant to this Plan shall be 3,000,000 subject to
adjustment as provided in Article 7 of the General Provisions of the Program.
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<PAGE>
MICHAELS STORES, INC.
AMENDED AND RESTATED
NON-STATUTORY STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of this Michaels Stores, Inc. (the
"Company") Non-Statutory Stock Option Plan, as amended and restated (the
"Plan"), is to promote the growth and general prosperity of the Company by
permitting the Company to grant options to purchase shares of its Common
Stock to its full-time, key employees. This Plan is designed to help attract
and retain superior personnel for positions of substantial responsibility
with the Company and its subsidiaries and to provide key employees with an
additional incentive to contribute to the success of the Company. Any option
granted pursuant to this Plan shall be clearly and specifically designated as
not being an incentive stock option, as defined in Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code"). This Plan is part of
the Company's Key Employee Stock Compensation Program (the "Program").
Unless any provision herein indicates to the contrary, this Plan shall be
subject to the General Provisions of the Program.
SECTION 2. OPTION TERMS AND CONDITIONS. The terms and conditions of
options granted under this Plan may differ from one another as the Board or
the Committee, as applicable, shall in its discretion determine so long as
all options granted under this Plan satisfy the requirements of this Plan.
SECTION 3. DURATION OF OPTIONS. Each option granted pursuant to this
Plan and all rights thereunder shall expire on the date determined by the
Board or the Committee, as applicable, but in no event shall any option
granted under this Plan expire later than ten years from the date on which
the option is granted. In addition, each option shall be subject to early
termination as provided in this Plan.
SECTION 4. PURCHASE PRICE. The purchase price for shares acquired
pursuant to the exercise, in whole or in part, of any option shall be
determined by the Board or the Committee, as applicable, and shall be any
lawful consideration.
SECTION 5. EXERCISE OF OPTIONS. Each option shall be exercisable in
one or more installments during its term, and the right to exercise may be
cumulative as determined by the Committee. No option may be exercised for a
fraction of a share of Common Stock. The purchase price of any shares
purchased shall be paid at the time of exercise of the option either (i) in
cash, (ii) by certified or cashier's check, (iii) by delivery of shares of
Common Stock, if permitted by the Committee, (iv) by delivery of a copy of
irrevocable instructions from the option holder to a broker or dealer,
reasonably acceptable to the Company, to sell certain of the shares purchased
upon exercise of the option or pledge them as collateral for a loan and
promptly deliver to the Company the amount of sale or loan proceeds necessary
to pay such purchase price or (v) by cash or certified or cashier's check for
the par value of the stock plus a promissory note for the balance of the
exercise price, which note shall provide for full personal liability of the
maker and shall contain such other
<PAGE>
terms and provisions as the Board or the Committee, as applicable, may
determine, including without limitation the right to repay the note partially
or wholly with Common Stock. If any portion of the purchase price or a note
given at the time of exercise is paid in shares of Common Stock, those shares
shall be tendered at their then fair market value. Fair market value shall
be determined by the Board or the Committee, as applicable, on the basis of
such factors as it deems appropriate; provided that if at the time the
determination of fair market value is made, those shares are admitted to
trading on a national securities exchange for which sale prices are regularly
reported, the fair market value of those shares shall not be less than the
lower of (i) the mean between the closing bid and asked prices reported for
or (ii) the last trade price of a 100-share lot of the Common Stock on that
exchange on the date or most recent trading day preceding the date on which
the determination is made. For purposes of the preceding sentence, the term
"national securities exchange" shall include the National Association of
Securities Dealers Automated Quotation System and the over-the-counter market.
SECTION 6. ACCELERATION OF RIGHT OF EXERCISE OF INSTALLMENTS.
Notwithstanding the first sentence of Section 5 of this Plan, if the Company
or its shareholders enter into an agreement to dispose of all or
substantially all of the assets or stock of the Company by means of a sale,
merger or other reorganization, liquidation, or otherwise, any option granted
pursuant to this Plan shall become immediately exercisable with respect to
the full number of shares subject to that option during the period commencing
as of the date of the agreement to dispose of all or substantially all of the
assets or stock of the Company and ending when the disposition of assets or
stock contemplated by that agreement is consummated or the option is
otherwise terminated in accordance with its provisions or the provisions of
this Plan, whichever occurs first; provided that no option shall be
immediately exercisable under this Section 6 on account of any agreement of
merger or other reorganization where the shareholders of the Company
immediately before the consummation of the transaction will own at least 50%
of the total combined voting power of all classes of stock entitled to vote
of the surviving entity (whether the Company or some other entity)
immediately after the consummation of the transaction. In the event the
transaction contemplated by the agreement referred to in this Section 6 is
not consummated, but rather is terminated, canceled or expires, the options
granted pursuant to this Plan shall thereafter be treated as if that
agreement had never been entered into.
Notwithstanding the first sentence of Section 5 of this Plan, in the
event of a change in control or threatened change in control of the Company,
all options granted prior to such change in control or threatened change in
control shall become immediately exercisable. The term "control" for
purposes of this Section 6 shall refer to the acquisition of 10% or more of
the voting securities of the Company by any person or by persons acting as a
group within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended; provided that for purpose of this Plan, no change in
control or threatened change in control shall be deemed to have occurred if
prior to the acquisition of, or offer to acquire, 10% or more of the voting
securities of the Company, the full Board of Directors shall have adopted by
not less than two-thirds vote a resolution specifically approving such
acquisition or offer. The term "person" for purposes of this Section 6
refers to an individual or a corporation,
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<PAGE>
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
SECTION 7. WRITTEN NOTICE REQUIRED. Any option granted pursuant to
this Plan shall be exercised when written notice of that exercise has been
given to the Company at its principal office by the person entitled to
exercise the option and full payment for the shares with respect to which the
option is exercised has been received by the Company.
SECTION 8. COMPLIANCE WITH SECURITIES LAWS. Shares of Common Stock
shall not be issued with respect to any option granted under this Plan unless
the exercise of that option and the issuance and delivery of those shares
pursuant thereto shall comply with all relevant provisions of state and
federal law, including without limitation the Securities Act of 1933, as
amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or market upon which the shares may then
be listed or traded, and shall be further subject to the approval of counsel
for the Company with respect to such compliance. The Board or the Committee,
as applicable, may also require an employee to whom an option has been
granted ("Optionee") to furnish evidence satisfactory to the Company,
including a written and signed representation letter and consent to be bound
by any transfer restriction imposed by law, legend, condition or otherwise,
that the shares are being purchased only for investment and without any
present intention to sell or distribute the shares in violation of any state
of federal law, rule or regulation. Further, each Optionee shall consent to
the imposition of a legend on the certificate representing the shares of
Common Stock issued upon the exercise of the option restricting their
transferability as required by law or by this Section.
SECTION 9. EMPLOYMENT OF OPTIONEE. Each Optionee, if requested by the
Board or the Committee, as applicable, must agree in writing as a condition
of the granting of his or her option, to remain in the employ of the Company,
or any of its subsidiaries, following the date of the granting of that option
for a period specified by the Board or the Committee, as applicable, which
period shall in no event exceed three years. Nothing in this Plan or in any
option granted hereunder shall confer upon any Optionee any right to
continued employment by the Company or any of its subsidiaries, or limit in
any way the right of the Company or any subsidiary at any time to terminate
or alter the terms of that employment.
SECTION 10. OPTION RIGHTS UPON TERMINATION OF EMPLOYMENT. If an
Optionee ceases to be employed by the Company or any subsidiary for any
reason other than retirement, death or disability, his or her option shall
immediately terminate; provided that the Board or the Committee, as
applicable, may, in its sole discretion, allow the option to be exercised
(either to the extent exercisable on the date of termination of employment or
as otherwise specified by the Board or the Committee, as applicable) at any
time after the date of termination of employment, until either the option or
this Plan otherwise provides for termination. An employee retiring under a
qualified retirement plan of the Company shall automatically be allowed a
three month period following termination due to retirement in which to
exercise his or her option.
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<PAGE>
SECTION 11. OPTION RIGHTS UPON DISABILITY. If an Optionee becomes
disabled within the meaning of Section 105(d)(4) of the Code while employed
by the Company or any subsidiary, the Board or the Committee, in its
respective discretion, may allow the option to be fully exercised, at any
time within one year after the date of such termination, unless either the
option or this Plan otherwise provides for earlier termination.
SECTION 12. OPTION RIGHTS UPON DEATH OF OPTIONEE. Except as otherwise
limited by the Board or the Committee, as applicable, at the time of the
grant of an option, if an Optionee dies while employed by the Company or any
subsidiary, or within three months after ceasing to be an employee thereof,
his or her option shall expire one year after the date of death unless by its
terms it expires sooner. During this one year or shorter period, the option
may be fully exercised to the extent that it remains unexercised on the date
of death, by the person or persons to whom the Optionee's rights under the
option shall pass by will or by the laws of descent and distribution.
SECTION 13. OPTIONS NOT TRANSFERABLE. Options granted pursuant to this
Plan may not be sold, pledged, assigned or transferred in any manner other
than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order, and may be exercised during the lifetime
of an Optionee or a permitted transferee only by that Optionee or transferee,
or by his or her guardian or legal representative.
SECTION 14. ADJUSTMENTS TO NUMBER AND PURCHASE PRICE OF OPTIONED
SHARES. All options granted pursuant to this Plan shall be adjusted in the
manner prescribed by Article 7 of the General Provisions of the Program.
SECTION 15. REPORTS TO SHAREHOLDERS. The Company shall furnish to each
Optionee a copy of the annual report sent to the Company's shareholders and
to those Optionees who do not otherwise receive such material, copies of all
other reports, proxy statements and other communications distributed to its
shareholders generally. Upon written request, the Company shall furnish to
each Optionee a copy of its most recent Form 10-K Annual Report.
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<PAGE>
MICHAELS STORES, INC.
AMENDED AND RESTATED
STOCK APPRECIATION RIGHTS PLAN
SECTION 1. PURPOSE. The purpose of this Michaels Stores, Inc. (the
"Company") Stock Appreciation Rights Plan, as amended and restated (the
"Plan"), is to promote the growth and general prosperity of the Company by
permitting the Company to grant stock appreciation rights for its Common
Stock to its full-time, key employees. This Plan is designed to help attract
and retain superior personnel for positions of substantial responsibility
with the Company and its subsidiaries and to provide key employees with an
additional incentive to contribute to the success of the Company. This Plan
is part of the Company's Key Employee Stock Compensation Program (the
"Program"). Unless any provision herein indicates to the contrary, this Plan
shall be subject to the General Provisions of the Program.
SECTION 2. TERMS AND CONDITIONS. The Board or the Committee may, but
shall not be obligated to, authorize, on such terms and conditions as it
deems appropriate in each case, the Company to accept the surrender by the
recipient ("Optionee") of a stock option granted under the Incentive Stock
Option Plan or the Non-Statutory Stock Option Plan ("Stock Option Plans") of
the right to exercise that option, or a portion thereof, in consideration for
the payment by the Company of an amount equal to the excess of the fair
market value of the shares of Common Stock subject to such option, or portion
thereof, surrendered over the option price of such shares ("stock
appreciation right"). Such payment, at the discretion of the Board or the
Committee, as applicable, may be made in shares of Common Stock valued at the
then fair market value thereof, determined as provided in Section 4 of the
Stock Option Plan under which the option was granted, or in cash or partly in
cash and partly in shares of Common Stock. The Board or the Committee, as
applicable, shall not be authorized to make payment to any Optionee in shares
of Common Stock unless Section 83 of the Internal Revenue Code of 1986, as
amended, would apply to the Common Stock transferred to the Optionee.
SECTION 3. TIME LIMITATIONS. No stock appreciation right granted
pursuant to this Plan may be exercised until the Company has been subject to
and complied with the reporting requirements of Section 13 of the Securities
Exchange Act of 1934, as amended, for a period of at least one year prior to
such exercise. In addition, no stock appreciation right granted pursuant to
this Plan may be exercised until six months from the date of grant of such
right. Any election by an Optionee to exercise a stock appreciation right
shall be subject to approval by the Board or the Committee, as applicable,
and shall be made during the period beginning on the third business day
following the release for publication of quarterly or annual financial
information regarding the Company and ending on the twelfth business day
following such date. This condition shall be deemed to be satisfied when the
specified financial data appears on or in a wire service, financial news
service or newspaper of general circulation or is otherwise first made
publicly available. In the case of any particular exercise of a stock
appreciation right, the Board or the Committee, as applicable,
<PAGE>
may waive any limitation contained in this Section which is not required for
compliance with Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended.
SECTION 4. EXERCISE OF STOCK APPRECIATION RIGHTS; EFFECTS ON STOCK
OPTIONS AND VICE-VERSA. Upon the exercise of a stock appreciation right, the
number of shares available under the stock option to which it relates shall
decrease by a number equal to the number of shares for which the right was
exercised. Upon the exercise of a stock option, any related stock
appreciation right shall terminate as to any number of shares subject to such
right that exceeds the total number of shares for which the stock option
remains unexercised.
SECTION 5. TIME OF GRANT. Stock appreciation rights may be granted
concurrently with the stock options to which they relate or at any time
thereafter prior to the exercise or expiration of such options.
SECTION 6. NON-TRANSFERABLE. The holder of a stock appreciation right
may not transfer or assign the right otherwise than by will or in accordance
with the laws of descent and distribution or pursuant to a qualified domestic
relations order. Furthermore, in the event of the termination of his or her
service with the Company, the right may be exercised only during the period,
if any, within which the option to which it relates may be exercised.
SECTION 7. TANDEM INCENTIVE STOCK OPTION - STOCK APPRECIATION RIGHT.
Whenever an incentive stock option and a stock appreciation right are granted
together and the exercise of one affects the right to exercise the other, the
following requirements shall apply:
(a) the stock appreciation right will expire no later than the
expiration of the underlying incentive stock option;
(b) the stock appreciation right may be for no more than the
difference between the exercise price of the underlying option and the market
price of the stock subject to the underlying option at the time the stock
appreciation right is exercised;
(c) the stock appreciation right is transferable only when the
underlying incentive stock option is transferable, and under the same
conditions;
(d) the stock appreciation right may be exercised only when the
underlying incentive stock option is eligible to be exercised; and
(e) the stock appreciation right may be exercised only when the
market price of the stock subject to the option exceeds the exercise price of
the stock subject to the option.
For the purposes of Section 10 of the Incentive Stock Option Plan, a tandem
incentive stock option-stock appreciation right will be considered exercised
in full when either the underlying incentive stock option or the stock
appreciation right is fully exercised.
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<PAGE>
MICHAELS STORES, INC.
AMENDED AND RESTATED
RESTRICTED STOCK PLAN
SECTION 1. PURPOSE. The purpose of this Michaels Stores, Inc. (the
"Company") Restricted Stock Plan, as amended and restated (the "Plan"), is to
promote the growth and general prosperity of the Company by permitting the
Company to grant shares of restricted Common Stock ("restricted stock") to
its full-time, key employees. This Plan is designed to help attract and
retain superior personnel for positions of substantial responsibility with
the Company and its subsidiaries and to provide key employees with an
additional incentive to contribute to the success of the Company. This Plan
is part of the Company's Key Employee Stock Compensation Program (the
"Program"). Unless any provision herein indicates to the contrary, this Plan
shall be subject to the General Provisions of the Program.
SECTION 2. TERMS AND CONDITIONS. Each restricted stock grant confers
upon the recipient thereof the right to receive a specified number of shares
of Common Stock of the Company in accordance with the terms and conditions of
each participant's individual written agreement as set forth in Section 3.
The general terms and conditions of the restricted stock awards shall be as
follows:
a. Any shares awarded hereunder to a participant shall be
restricted for a period of time to be determined by the Board or the
Committee, as applicable, for each participant at the time of the award,
which period shall be not less than two years or more than five years. The
restrictions shall prohibit the sale, assignment, transfer, pledge or other
encumbrance of such shares, and will provide for possible reversion thereof
to the Company in accordance with subparagraph (b) during the period of
restriction.
b. All restricted stock awarded under this Plan to a
participant shall be forfeited and returned to the Company in the event the
participant ceases to be employed by the Company or one of its subsidiaries
prior to the expiration of the period of restriction, unless the
participant's termination of employment is due to his or her death, total
disability or retirement. Whether or not a participant has retired or is
disabled will be subject to the sole discretion of the Board or the
Committee, as applicable.
c. In the event of a participant's death or total disability,
the restrictions under subparagraph (a) will lapse with respect to all
restricted stock awarded to the participant under this Plan prior to any such
event, and the shares of Common Stock involved shall cease to be restricted
stock within the meaning of this Plan and shall no longer be subject to
forfeiture to the Company pursuant to subparagraph (b).
d. In the event of a participant's retirement, the restrictions
under subparagraph (a) shall continue to apply unless the Board or the
Committee, as applicable, in its discretion shall shorten the restriction
period.
<PAGE>
e. Stock certificates issued with respect to awards of
restricted stock made under this Plan shall be registered in the name of the
participant, but shall be delivered by him or her to the Company together
with a stock power endorsed in blank. Each such certificate shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO FORFEITURE, RESTRICTIONS ON TRANSFER
AND CERTAIN OTHER TERMS AND CONDITIONS SET FORTH
IN THE MICHAELS STORES, INC. RESTRICTED STOCK PLAN
AND THE AGREEMENT BETWEEN THE REGISTERED OWNER OF
THE SHARES REPRESENTED BY THIS CERTIFICATE AND
MICHAELS STORES, INC. ENTERED INTO PURSUANT TO
SUCH PLAN."
f. Upon the lapse of a restriction period as determined
pursuant to subparagraph (a), the Company will return the stock certificates
representing the shares with respect to which the restriction has lapsed to
the participant or his or her legal representative, and pursuant to the
instruction of the participant or his or her legal representative will issue
a certificate for such shares which does not bear the legend set forth in
subparagraph (e).
g. If a participant receives any other securities or assets
(other than ordinary cash dividends) with respect to restricted stock that is
still subject to restrictions provided for in subparagraph (a), those
securities or assets will be subject to the same restrictions provided for in
subparagraph (a), will be subject to the same restrictions that may otherwise
be applicable to the restricted stock under this Section 2 and shall be
delivered by the participant to the Company as provided in subparagraph (e).
h. From the time of grant of the restricted stock award, the
participant shall be entitled to exercise all voting rights attributable to
the restricted stock, subject to forfeiture of such voting rights and the
stock as provided in subparagraph (b).
SECTION 3. INDIVIDUAL AGREEMENTS. Each participant shall be required
to enter into a written agreement with the Company as a pre-condition to
receiving an award under this Plan. Pursuant to such agreement, the
participant shall agree to be bound by the terms and conditions of this Plan,
the awards made pursuant thereto, and such other matters, including without
limitation compliance with withholding tax statutes and federal and state
securities laws, rules and regulations, as the Board or the Committee, as
applicable, determines appropriate.
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<PAGE>
EXHIBIT 10.13
WAIVER AGREEMENT AND
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AGREEMENT AND FIRST AMENDMENT TO CREDIT AGREEMENT (this "First
Amendment") is dated as of the 31st day of January 1997, and entered into among
MICHAELS STORES, INC., a Delaware corporation ("Company"), the Lenders signatory
hereto, NATIONSBANK OF TEXAS, N.A., a national banking association, individually
and as Administrative Lender (in such latter capacity, the "Administrative
Lender"), and BANK OF AMERICA ILLINOIS, a national banking association,
individually and as Co-Agent.
WITNESSETH:
WHEREAS, Company, the Lenders, and the Administrative Lender entered into a
Second Amended and Restated Credit Agreement, effective as of June 20, 1996 (as
amended, restated, waived or otherwise modified from time to time, the "Credit
Agreement");
WHEREAS, Company, the Lenders, and the Administrative Lender entered into a
Limited and Conditional Waiver Letter to certain terms of the Credit Agreement
dated November 14, 1996 (the "Waiver Agreement");
WHEREAS, Company has requested a waiver of compliance with certain
provisions of the Credit Agreement and an amendment to certain provisions of the
Credit Agreement, and the Lenders and the Administrative Lender have agreed to
such a waiver and amendment upon the terms and conditions set forth below; and
WHEREAS, the Lenders, the Administrative Lender, and Company have agreed to
amend the Credit Agreement to make certain changes to the terms therein upon the
terms and conditions set forth below;
NOW, THEREFORE, for valuable consideration hereby acknowledged, Company,
the Lenders and the Administrative Lender agree as follows:
SECTION 1. DEFINITIONS. Unless specifically defined or redefined below,
capitalized terms used herein shall have the meanings ascribed thereto in the
Credit Agreement.
<PAGE>
SECTION 2. AMENDMENTS TO SECTION 1.01, CERTAIN DEFINITIONS.
(a) The definition of "ELIGIBLE INVENTORY" on page 8 of the Credit
Agreement is hereby deleted and the following definition of "ELIGIBLE
INVENTORY" is hereby substituted in its stead:
"ELIGIBLE INVENTORY" means at any date the lesser of
the actual cost or the current fair market value of
inventory of Company and its Guarantors on such date
determined in accordance with GAAP, provided that such
inventory shall constitute Eligible Inventory only if on the
date as of which the determination is being made it (i)
shall not be damaged or obsolete, (ii) shall not have
exceeded its normal shelf life, and (iii) shall not be
subject to any Lien, except Permitted Liens. Eligible
Inventory will include the face amount of Commercial Letters
of Credit outstanding in support of the purchase of Eligible
Inventory, but shall not include any inventory of Company or
any Guarantors which is subject to a security interest
securing any indebtedness of Company or such Guarantor.
(b) The definition of "GUARANTORS" on page 11 of the Credit Agreement
is hereby deleted and the following definition of "GUARANTORS" is hereby
substituted in its stead:
"GUARANTORS" means at any date, each Subsidiary that
executes a Guaranty of the Obligations which such Guaranty
is effective and enforceable against such Subsidiary, and
"GUARANTOR" means any one of the Guarantors.
SECTION 3. AMENDMENT TO SECTION 6.15, GUARANTIES OF THE SUBSIDIARIES.
Section 6.15 on page 46 of the Credit Agreement is hereby deleted in its
entirety and the following Section 6.15 is hereby substituted in its stead:
Section 6.15 GUARANTIES OF THE SUBSIDIARIES. Each
existing and future Subsidiary except Aaron Brothers, Inc.
and its subsidiaries and successors, Michaels of Canada,
Inc., Michaels of Puerto Rico, Inc., 5931, Inc., 5931
Business Trust, Michaels International Finance, Inc. and
Riverside Craft & Floral Supply Co., Inc. shall have
executed and delivered to Administrative Lender a duly
completed Guaranty in the form of EXHIBIT D attached hereto.
On the date that any such Subsidiary delivers any such
Guaranty, such Subsidiary shall deliver to the
Administrative Lender together therewith:
2
<PAGE>
(i) certificate or articles of incorporation of such
Subsidiary certified as of a recent date by the Secretary of
State of the state of such Subsidiary's incorporation;
(ii) bylaws of such Subsidiary certified by the secretary or
assistant secretary of such Subsidiary;
(iii) recent certificates of the appropriate government
officials of the state of incorporation of such Subsidiary and
any other state in which such Subsidiary conducts business as to
the existence and good standing of such Subsidiary in such state;
(iv) resolutions of the Board of Directors of such
Subsidiary certified by its secretary or assistant secretary,
which resolutions shall authorize the execution, delivery and
performance by such Subsidiary of the Guaranty; and
(v) a certificate of incumbency certified by the
secretary or assistant secretary of such Subsidiary with
specimen signatures of the president or vice president and
secretary or other officers of such Subsidiary who will sign
the Guaranty and any other Loan Papers to which such
Subsidiary is a party.
SECTION 4. AMENDMENT TO SUBSECTION 7.01(d), TANGIBLE ASSETS OF
SUBSIDIARIES THAT ARE NOT GUARANTORS. Subsection 7.01(d) on page 48 of the
Credit Agreement is hereby deleted in its entirety and the following
subsection 7.01(d) is hereby substituted in its stead:
(d) INTENTIONALLY DELETED.
SECTION 5. AMENDMENT TO SUBSECTION 7.02(b). Subsection 7.02(b) on page 48
of the Credit Agreement is hereby deleted in its entirety and the following
subsection 7.02(b) is hereby substituted in its stead:
(b) Company, Aaron Brothers, Inc. (and its
subsidiaries and successors), Michaels of Canada, Inc. and
Michaels of Puerto Rico, Inc. may incur or permit to exist
accounts payable and accrued liabilities incurred in the
ordinary course of business, and each of the Subsidiaries
except 5931, Inc. and 5931 Business Trust may incur or
permit to exist accounts payable to the Company related to
the Company's transfer of inventory to each Subsidiary in
the ordinary course of business, and
3
<PAGE>
SECTION 6. AMENDMENT TO SECTION 7.07, SUBSIDIARIES. Section 7.07 on page
53 of the Credit Agreement is hereby deleted in its entirety and the following
Section 7.07 is hereby substituted in its stead:
Section 7.07 SUBSIDIARIES. Company will not (a)
(directly or indirectly) create or acquire, in any manner
whatsoever, any new Subsidiaries; provided, however, that
Company or any Subsidiary may create or acquire
Subsidiaries, so long as (i) there exists no Default or
Event of Default at the time of each creation or after
giving effect thereto; (ii) each new United States
Subsidiary shall execute a Guaranty of the Obligations
hereunder, other than any new Subsidiaries of Aaron
Brothers, Inc.; (iii) Company and each new United States
Subsidiary shall execute and deliver such other
certificates, agreements and documents as Administrative
Lender or any Lender may reasonably require, other than any
new Subsidiaries of Aaron Brothers, Inc.; and (iv) no United
States Subsidiary shall issue any new stock, of any
classification, without Lenders' prior written consent,
except issuance to Company or any Subsidiary, and (b) permit
intercompany transactions among the Company and the
Guarantors with Subsidiaries that are not Guarantors, other
than (i) as specifically permitted in Section 7.09 hereof
and (ii) as disclosed on SCHEDULE 7.07 hereto. 5931, Inc.
and 5931 Business Trust shall enter into a full
subordination agreement for the benefit of the
Administrative Lender and the Lenders subordinating all
amounts owed by the Company or any Guarantor to 5931, Inc.
and/or 5931 Business Trust, to the Obligations hereunder and
the Guaranties, on terms and conditions, and subject to
documentation acceptable to the Majority Lenders.
SECTION 7. AMENDMENT TO SUBSECTION 7.09(a)(vi). Subsection 7.09(a)(vi) on
page 54 of the Credit Agreement is hereby deleted in its entirety and the
following Subsection 7.09(a)(vi) is hereby substituted in its stead:
(vi) invest in Subsidiaries that are not Guarantors (A) in connection
with the transfer of inventory to such Subsidiary (except 5931, Inc.
and 5931 Business Trust) in the ordinary course of business and (B) in
connection with (I) invoices representing obligations incurred and
(II) payments required under operating leases, each in the ordinary
course of business and paid by Company to Persons on behalf of such
Subsidiaries; or
4
<PAGE>
SECTION 8. AMENDMENT TO SUBSECTION 8.01(m), TANGIBLE ASSETS OF
SUBSIDIARIES THAT ARE NOT GUARANTORS. Subsection 8.01(m) on page 59 of the
Credit Agreement is hereby deleted in its entirety and the following
Subsection 8.01(m) is hereby substituted in its stead:
(m) INTENTIONALLY DELETED.
SECTION 9. LIMITED AND CONDITIONAL WAIVER.
(a) The Company has informed the Lenders that the Company is in breach of
Section 5.03, due to financial covenant defaults under the Tax Retention Leases,
and Section 7.01(b) of the Credit Agreement (the "Subject Non-Compliance"). The
Company has requested from the Lenders a limited waiver of (a) any Default or
Event of Default caused by the Subject Non-Compliance, for the period from
October 27, 1996 through and including March 15, 1997, (b) any breach of
Sections 4.02(a), (b) and (c) of the Credit Agreement due to the Subject
Non-Compliance, but only to permit $10,000,000 in the aggregate to be advanced
by the Lenders to the Company during the period from November 5, 1996 through
and including November 30, 1996, in accordance with the terms of each other
provision of the Credit Agreement and (c) any breach of Sections 4.03(a), (b)
and (c) of the Credit Agreement due to the Subject Non-Compliance, but only to
permit the issuance of Letters of Credit in accordance with the terms of the
Credit Agreement from the date hereof through and including March 15, 1997;
provided that the aggregate of all borrowings advanced by the Lenders and
Letters of Credit issued during the period from November 5, 1996 through and
including March 15, 1997 shall not exceed $10,000,000 (collectively, the
"Limited Conditional Waiver").
(b) Subject to the terms and conditions of this First Amendment, the
Lenders agree to waive (a) any Default or Event of Default caused by the Subject
Non-Compliance only during the period from October 27, 1996 through and
including March 15, 1997, and (b) compliance with Sections 4.02(a), (b) and (c)
and Sections 4.03(a), (b) and (c) with respect to the Subject Non-Compliance
only, but, with respect to this subsection (b) only, for the sole purpose of
allowing the Company to (i) borrow in accordance with all other terms of the
Credit Agreement a maximum of $10,000,000 from the period from November 5, 1996
through and including November 30, 1996, and (ii) obtain Letters of Credit in
accordance with the terms of the Credit Agreement from the date hereof through
and including March 15, 1997; provided that, in each case set forth above, the
aggregate of all borrowings advanced by the Lenders and Letters of Credit issued
during the period from November 5, 1996 through and including March 15, 1997
shall not exceed $10,000,000 (the "Permitted Borrowings") and provided further
that, only documentary Letters of Credit may be obtained and only if the Company
certifies to the Administrative Lender along with each application for such
Letter of Credit as to the amount of cash the Company has on hand in its deposit
accounts as of the date of such application. This Limited Conditional Waiver is
NOT a waiver of any other breach of any other term or provision of the Credit
Agreement or any other Loan Paper. This Limited Conditional Waiver is solely
for the time periods stated above, and shall not be extended or used for any
other purpose.
5
<PAGE>
(c) Notwithstanding anything herein to the contrary, if there exists a
Default or Event of Default (that is not a result of the Subject Non-Compliance)
or any other event or circumstance which would not permit the Company to borrow
under the Credit Agreement under the terms of Section 4.02 of the Credit
Agreement or otherwise (other than any caused by the Subject Non-Compliance),
the Permitted Borrowings may not, and no other borrowings may, be made under the
Credit Agreement.
(d) In connection with the limited waiver set forth above, and
notwithstanding anything in the Credit Agreement or in any Loan Paper to the
contrary:
(i) effective on the date hereof, for every determination and
calculation under the Credit Agreement and the Loan Papers, the Applicable
Margin means with respect to (i) Eurodollar Rate Borrowings and Stand-By
Letters of Credit, 1.50% per annum, (ii) Commercial Letters of Credit,
0.38% per annum, and (iii) the Commitment Fee, 0.35% per annum. This
provision shall supersede the definition of "Applicable Margin" on page 2
of the Credit Agreement in its entirety; and
(ii) any voluntary or mandatory repayment or prepayment of all or any
portion of the Obligations may not be reborrowed by the Company. No
continuation or conversion under Section 2.22 of the Credit Agreement shall
constitute a repayment or prepayment for purposes of this provision. Under
no circumstances shall the Company be entitled to borrow additional
Advances under the Credit Agreement during the period from November 5, 1996
through and including November 30, 1996 aggregating in excess of an amount
equal to (i) $10,000,000 minus (ii) the sum of the face amount of all
Letters of Credit issued during such period. In no event shall the Company
be entitled to any borrowing in the form of Advances of any type under the
Credit Agreement and the Loan Papers after November 30, 1996 (except
documentary Letters of Credit in accordance with the terms hereof until
March 15, 1997).
(e) The effectiveness of this Limited Conditional Waiver is conditioned
upon the receipt by the Company of a comparable waiver under each Tax Retention
Lease by January 31, 1997.
(f) This Limited Conditional Waiver is intended by the parties to be
narrowly construed. This Limited Conditional Waiver expires in accordance with
its terms on March 15, 1997.
SECTION 10. AFFIRMATION. Company hereby acknowledges and agrees that
nothing in this First Amendment shall affect Company's obligations under the
Credit Agreement or the other Loan Papers executed in connection therewith
(except as specifically provided in this First Amendment), which remain valid,
binding and enforceable, and except as amended hereby, unamended, or shall
constitute a waiver by the Lenders of any of their rights or remedies (except as
specifically provided in this First Amendment), now or at any time in the
future, with respect
6
<PAGE>
to any requirement under the Credit Agreement or the other Loan Papers or
with respect to an Event of Default or Default, occurring now or at any time
in the future.
SECTION 11. CONDITIONS PRECEDENT. This First Amendment shall not be
effective until (a) all proceedings of Company taken in connection with this
First Amendment and the transactions contemplated hereby shall be satisfactory
in form and substance to the Administrative Lender and Lenders signatory hereto,
(b) the Company has delivered the waivers required by Section 9(e) hereof, and
(c) the Administrative Lender and Lenders shall have each received such
documents, instruments, and certificates, in form and substance satisfactory to
the Lenders, as the Lenders shall deem necessary or appropriate in connection
with this First Amendment and the transactions contemplated hereby.
SECTION 12. REPRESENTATIONS AND WARRANTIES. Company represents and
warrants to the Lenders and the Administrative Lender that (a) this First
Amendment constitutes its legal, valid, and binding obligations, enforceable in
accordance with the terms hereof (subject as to enforcement of remedies to any
applicable bankruptcy, reorganization, moratorium, or other laws or principles
of equity affecting the enforcement of creditors' rights generally), (b) there
exists no Event of Default or Default under the Credit Agreement after giving
effect to this First Amendment, except as described in Section 9 hereof, (c) its
representations and warranties set forth in the Credit Agreement and other Loan
Papers are true and correct on the date hereof after giving effect to this First
Amendment, (d) it has complied with all agreements and conditions to be complied
with by it under the Credit Agreement as amended hereby and the other Loan
Papers by the date hereof, except as indicated in Section 9 hereof, (e) the
Credit Agreement, as amended hereby, and the other Loan Papers remain in full
force and effect, and (f) no notice to, or consent of, any Person is required
under the terms of any agreement of Company in connection with the execution of
this First Amendment, except as required by Section 9(e) hereof.
SECTION 13. FURTHER ASSURANCES. Within 15 days after the date hereof, the
Company shall have delivered a subordination agreement in form and substance
acceptable to the Administrative Lender and Majority Lenders fully subordinating
all receivables owed by the Company and the Guarantors to 5931, Inc. and/or 5931
Business Trust to the Obligations and the Guaranties, in form and substance, and
subject to documentation, acceptable to the Majority Lenders. Company shall
execute and deliver such further agreements, documents, instruments, and
certificates in form and substance satisfactory to the Administrative Lender, as
the Administrative Lender or any Lender may deem reasonably necessary or
appropriate in connection with this First Amendment.
SECTION 14. COUNTERPARTS. This First Amendment and the other Loan Papers
may be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought.
7
<PAGE>
SECTION 15. PRIOR WAIVER; ENTIRE AGREEMENT. THIS FIRST AMENDMENT
SUPERSEDES IN ITS ENTIRETY THAT CERTAIN LIMITED AND CONDITIONAL WAIVER LETTER
DATED NOVEMBER 14, 1996, FROM THE LENDERS TO COMPANY. THIS FIRST AMENDMENT AND
THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
SECTION 16. GOVERNING LAW. (a) THIS FIRST AMENDMENT AND ALL LOAN PAPERS
SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE
EXTENT FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF ALL OR ANY PART OF THIS FIRST AMENDMENT AND ALL LOAN PAPERS.
WITHOUT EXCLUDING ANY OTHER JURISDICTION, COMPANY AND EACH SUBSIDIARY AGREES
THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION
HEREWITH.
(b) COMPANY AND EACH SUBSIDIARY HEREBY WAIVES PERSONAL SERVICE OF ANY
LEGAL PROCESS UPON IT. IN ADDITION, COMPANY AND EACH SUBSIDIARY AGREES THAT
SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT
REQUESTED) DIRECTED TO COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THE
CREDIT AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON
RECEIPT BY COMPANY. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE
ADMINISTRATIVE LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW.
SECTION 17. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
COMPANY, EACH SUBSIDIARY AND EACH LENDER HEREBY WAIVES ANY RIGHT THAT IT MAY
HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT,
EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS FIRST AMENDMENT, THE
OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
8
<PAGE>
IN WITNESS WHEREOF, this First Amendment to Credit Agreement is executed as
of the date first set forth above.
COMPANY: MICHAELS STORES, INC.
/s/ KRISTEN L. MAGNUSON
-------------------------------------------
By: Kristen L. Magnuson
Its: Vice President of Finance
LENDERS: NATIONSBANK OF TEXAS N.A., as Administrative
Lender, and individually as a Lender
/s/ SHARON M. ELLIS
-------------------------------------------
By: Sharon M. Ellis
Its: Vice President
BANK OF AMERICA ILLINOIS, as Co-Agent,
and individually as a Lender
/s/ J. STEPHEN MERNICK
-------------------------------------------
By: J. Stephen Mernick
Its: Senior Vice President
CREDIT LYONNAIS NEW YORK BRANCH, as
a Lender
/s/ ROBERT IVOSEVICH
-------------------------------------------
By: Robert Ivosevich
Its: Senior Vice President
9
<PAGE>
WELLS FARGO BANK (TEXAS), N.A., as
a Lender
/s/ JACK W. HAYE
-------------------------------------------
By: Jack W. Haye
Its: Vice President
MELLON BANK, N.A., as a Lender
-------------------------------------------
By:
----------------------------------------
Its:
----------------------------------------
UNITED STATES NATIONAL BANK OF
OREGON, as a Lender
/s/ THOMAS MARKS
-------------------------------------------
By: Thomas Marks
Its: Assistant Vice President
THE FIRST NATIONAL BANK OF BOSTON, as
a Lender
/s/ JUDITH C.E. KELLY
-------------------------------------------
By: Judith C.E. Kelly
Its: Vice President
10
<PAGE>
EXHIBIT 10.14
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment") is
dated as of the 11th day of March, 1997, and entered into among MICHAELS STORES,
INC., a Delaware corporation ("Company"), the Lenders signatory hereto,
NATIONSBANK OF TEXAS, N.A., a national banking association, individually and as
Administrative Lender (in such latter capacity, the "Administrative Lender"),
and BANK OF AMERICA ILLINOIS, a national banking association, individually and
as Co-Agent (in such latter capacity, the "Co-Agent").
WITNESSETH:
WHEREAS, Company, the Lenders, the Co-Agent, and the Administrative Lender
entered into a Second Amended and Restated Credit Agreement, effective as of
June 20, 1996 (as amended, restated, waived or otherwise modified from time to
time, the "Credit Agreement");
WHEREAS, Company, the Lenders, the Co-Agent, and the Administrative Lender
entered into a Limited and Conditional Waiver Letter to certain terms of the
Credit Agreement dated November 14, 1996 ("Waiver");
WHEREAS, Company, the Lenders, the Co-Agent, and the Administrative Lender
entered into Waiver Agreement and First Amendment to Credit Agreement dated as
of the 31st day of January 1997 ("First Amendment");
WHEREAS, Company has requested a further amendment to certain provisions of
the Credit Agreement, and the Lenders, the Co-Agent, and the Administrative
Lender have agreed to such an amendment upon the terms and conditions set forth
below; and
WHEREAS, the Lenders, the Co-Agent, the Administrative Lender, and Company
have agreed to amend the Credit Agreement to make certain changes to the terms
therein upon the terms and conditions set forth below;
NOW, THEREFORE, for valuable consideration hereby acknowledged, Company,
the Lenders, the Co-Agent, and the Administrative Lender agree as follows:
SECTION 1. DEFINITIONS. Unless specifically defined or redefined below,
capitalized terms used herein shall have the meanings ascribed thereto in the
Credit Agreement.
SECTION 2. AMENDMENT TO ARTICLE I. The definition of "Applicable Margin"
in Article I shall be amended and restated in its entirety as follows:
"APPLICABLE MARGIN" means with respect to (a) Eurodollar Rate Borrowings
and Stand-By Letters of Credit, 2.00% per annum, (b) Commercial Letters of
Credit, 0.50% per annum, and (c) the Commitment Fee, 0.50% per annum.
Notwithstanding the foregoing, commencing on the first day of the calendar month
following the month in which the Administrative Lender
<PAGE>
receives the Company's Compliance Certificate required by Section 6.01(a)
hereof, effective on such date, the Applicable Margin shall be adjusted to
reflect the Applicable Margin prescribed by the chart below for the Fixed
Charges Coverage Ratio as demonstrated by the most recently delivered Loan
Compliance Certificate. The Applicable Margin for each type of Advance, each
Letter of Credit and the Commitment Fee shall mean the respective amount set
forth below opposite such relevant Fixed Charges Coverage Ratio in Columns A,
B and C below, until the first succeeding quarterly date for which the most
recently delivered Loan Compliance Certificate demonstrates a change in the
Fixed Charges Coverage Ratio to an amount so that another Applicable Margin
shall be applied. In order to obtain an adjustment to a lower Applicable
Margin, Company must demonstrate to the reasonable satisfaction of
Administrative Lender the required applicable Fixed Charges Coverage Ratio.
COLUMN A COLUMN B COLUMN C
Per Annum Rate Per Annum Rate Per Annum Rate
Eurodollar Rate
Borrowings and
Fixed Charges Stand-By Letters Commercial Letters
Coverage Ratio of Credit of Credit Commitment Fee
- -------------- --------- --------- --------------
less than
1.15 to 1.00 2.00% 0.50% 0.50%
Greater than or equal
to 1.15 to 1.00 but
less than
1.35 to 1.00 1.75% 0.50% 0.425%
Greater than or equal
to 1.35 to 1.00 but
less than
1.55 to 1.00 1.50% 0.38% 0.35%
Greater than or equal
to 1.55 to 1.00 but
less than
1.70 to 1.00 1.25% 0.25% 0.30%
Greater than or equal
to 1.70 to 1.00 but
less than
1.85 to 1.00 1.00% 0.25% 0.25%
2
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Greater than or equal to
1.85 to 1.00 0.75% 0.20% 0.20%
SECTION 3. AMENDMENT TO SECTION 7.01(b). Section 7.01(b) of the Credit
Agreement shall be amended and restated in its entirety as follows:
(b) FIXED CHARGES COVERAGE RATIO. Company will not permit the Fixed
Charges Coverage Ratio at any time during Company's fiscal quarters ending
(i) February 1, 1997, and May 3, 1997, to be less than 0.95 to 1.00, (ii)
August 2, 1997, to be less than 1.00 to 1.00, (iii) November 1, 1997, to be
less than 1.40 to 1.00, and (iv) thereafter during the term of this
Agreement, to be less than 1.50 to 1.00.
SECTION 4. AMENDMENT TO SECTION 7.01(e). Section 7.01(e) of the Credit
Agreement shall be amended and restated in its entirety as follows:
(e) LIMITATION ON CAPITAL EXPENDITURES. Company shall not permit
aggregate consolidated Capital Expenditures (including the cash portion of
each acquisition) of the Company and its Subsidiaries, to exceed
$40,000,000 in fiscal year 1997 (not including $21,000,000 used to
construct or purchase a distribution facility and related equipment to be
financed with the proceeds of a private sale of common stock in the
Company), and $70,000,000 during any fiscal year thereafter during the term
of this Agreement, provided that, capital lease obligations of Company 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 of this Agreement, shall be excluded from Capital
Expenditures for the purposes of determining compliance with this Section
7.01(e).
SECTION 5. AMENDMENT TO SECTION 7.02(c)(i). Section 7.02(c)(i) of the
Credit Agreement shall be amended and restated in its entirety as follows:
(c)(i) the Company may incur Debt owed (x) to or held by a Subsidiary that
is a Guarantor, or (y) to 5931, Inc. or 5931 Business Trust in the
aggregate principal amount not in excess of the lesser of $300,000,000 or
3-1\2% of total revenues of the Company and its Subsidiaries on an
aggregate, cumulative, consolidated basis, as defined by GAAP, for the
period from May 3, 1993 to July 31, 1999, on subordination terms
satisfactory to the Administrative Lender, or
SECTION 6. AMENDMENT TO SECTION 7.05(ii). Section 7.05(ii) of the Credit
Agreement shall be amended and restated in its entirety as follows:
(ii) any Subsidiary may merge or consolidate with or into another
Person, or become a party to any merger or consolidation, provided that
such merger or
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<PAGE>
consolidation is part of an Acquisition by Company permitted by
Section 7.09 hereof or part of a disposition by Company permitted by
Section 7.05(v) below, or
SECTION 7. AMENDMENT TO SECTION 7.07. Section 7.07 of the Credit
Agreement shall be amended and restated in its entirety as follows:
Section 7.07 SUBSIDIARIES. Company and its Subsidiaries will
not (a) (directly or indirectly) create or acquire, in any manner
whatsoever, any new Subsidiaries; provided, however, that Company or
any Subsidiary may create or acquire Subsidiaries, so long as
(i) there exists no Default or Event of Default at the time of each
creation or after giving effect thereto; (ii) each new United States
Subsidiary shall execute a Guaranty of the Obligations hereunder,
other than any new Subsidiaries of Aaron Brothers, Inc. or of the
Company formed solely in connection with the reorganization,
recapitalization or disposition of Aaron Brothers, Inc. and for no
other purpose; (iii) Company and each new United States Subsidiary
shall execute and deliver such other certificates, agreements and
documents as Administrative Lender or any Lender may reasonably
require, other than any new Subsidiaries of Aaron Brothers, Inc.; and
(iv) no United States Subsidiary shall issue any new stock except as
expressly permitted in SECTION 7.05 hereof, of any classification,
without Lenders' prior written consent, except issuance to Company or
any Subsidiary, and (b) permit intercompany transactions (including
loans, distributions, advances, or other Investments of any kind or
character) among the Company and the Guarantors with Subsidiaries that
are not Guarantors, other than (i) as specifically permitted in
Section 7.09 hereof, (ii) as disclosed on SCHEDULE 7.07 hereto, or
(iii) as specifically permitted in Section 7.02.
SECTION 8. AMENDMENT TO SECTION 7.09(a) Section 7.09(a) of the Credit
Agreement shall be amended and restated in its entirety as follows:
(a) make any Investment except investments in trade receivables
incurred by Company in the ordinary course of business, endorsements of
negotiable instruments for collection in the ordinary course of Company's
business; provided that, so long as there exists no Default or Event of
Default at the time of such Investment and none is caused thereby, Company
and its Subsidiaries may (i) invest in Cash Equivalents, (ii) invest in
publicly traded debt and equity securities listed on national exchanges,
provided that (A) any such Investment shall not cause any representation or
warranty under Section 5.07 hereof to be untrue, (B) neither the Company
nor its Subsidiaries shall violate any Applicable Law, and (C) Company and
its Subsidiaries shall remain within the limits of individual issuer
concentration set forth on SCHEDULE 7.09(a) hereto, (iii) invest up to
$25,000,000 in Investments at any one time outstanding, subject to Section
7.07 hereof (iv) invest in any Canadian or United States Subsidiary that
has executed a Guaranty in the form of EXHIBIT D hereto, (v) invest in any
foreign organized Subsidiary that has executed a Guaranty in the form of
EXHIBIT D hereto in an amount not to exceed in the
4
<PAGE>
aggregate at any time $15,000,000, provided, however, such limitation
shall not apply to (I) Investments in Canadian Subsidiaries that are
Guarantors or (II) Investments in foreign organized Subsidiaries that are
Guarantors and otherwise approved by the prior written consent of Majority
Lenders, and (vi) invest in Subsidiaries that are not Guarantors (A) in
connection with the transfer of inventory to such Subsidiary (except 5931,
Inc. and 5931 Business Trust) in the ordinary course of business and (B) in
connection with (I) invoices representing obligations incurred and (II)
payments required under operating leases, each in the ordinary course of
business and paid by Company to Persons on behalf of such Subsidiaries; or
SECTION 9. AMENDMENT TO SUBSECTION 8.01(g). Section 8.01(g) shall be
amended and restated in its entirety as follows:
(i) Company or Subsidiary shall fail to make any payment in excess of
$5,000,000 in respect of any obligation when due (whether by scheduled
maturity, mandatory prepayment, acceleration, demand or otherwise), and
such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such obligation; or
Company or Subsidiary shall fail to make any payment in respect of any Debt
or Tax Retention Leases in excess of $5,000,000 when due (whether by
scheduled maturity, mandatory prepayment, acceleration, demand or
otherwise), which failure has caused or could cause an acceleration of said
Debt or Tax Retention Leases, and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such Debt or Tax Retention Leases; or any other default shall
occur under any agreement or instrument relating to any Debt or Tax
Retention Leases in excess of $5,000,000, which default has caused or could
cause or permit an acceleration of such Debt or Tax Retention Leases and
which default shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Debt or Tax
Retention Leases; provided, however, that any failure to make a payment on
or any other breach of or default under an obligation other than for
borrowed money by Company or Subsidiary or Tax Retention Leases described
in the foregoing portion of this subsection (g) shall not be an Event of
Default if and so long as (a) Company's or Subsidiary's failure to make
such payment, or its action or inaction giving rise to such breach or other
default, is based upon Company's or Subsidiary's good faith, reasonable
opinion that the creditor has failed to perform its obligations pursuant to
the contract or arrangement with Company or Subsidiary and such payment is
not justly due, (b) Company or Subsidiary has provided adequate reserves
therefore in accordance with GAAP and (c) Company or Subsidiary is
diligently contesting its obligation to make such payment, or if, in lieu
of (b) and (c), Company or Subsidiary has adequately bonded such
obligation; or
(ii) Company shall breach any covenant or condition under any instrument
or agreement governing Debt or Tax Retention Leases, and such breach shall
cause Debt or Tax Retention Leases in excess of $5,000,000 to be required
to be prepaid;
5
<PAGE>
SECTION 10. AFFIRMATION. Company hereby acknowledges and agrees that
nothing in this Second Amendment shall affect Company's obligations under the
Credit Agreement or the other Loan Papers executed in connection therewith
(except as specifically provided in this Second Amendment), which remain valid,
binding and enforceable, and except as amended hereby, unamended, or shall
constitute a waiver by the Lenders of any of their rights or remedies (except as
specifically provided in this Second Amendment), now or at any time in the
future, with respect to any requirement under the Credit Agreement or the other
Loan Papers or with respect to an Event of Default or Default, occurring now or
at any time in the future.
SECTION 11. CONDITIONS PRECEDENT. This Second Amendment shall not be
effective until (a) all proceedings of Company taken in connection with this
Second Amendment and the transactions contemplated hereby shall be satisfactory
in form and substance to the Administrative Lender and Lenders signatory hereto,
(b) the effectiveness of the Second Amendment is conditional upon the receipt by
the Company of a comparable amendment under each Tax Retention Lease, (c) 5931
Business Trust shall enter into a full subordination agreement for the benefit
of the Administrative Lender and the Lenders subordinating all amounts owed by
the Company or any Guarantor to 5931 Business Trust, to the Obligations
hereunder and the Guaranties, on terms and conditions, and subject to
documentation acceptable to the Majority Lenders, and (d) all fees, costs and
expenses shall be paid, including attorneys' fees, and the payment of
$100,000.00 amendment fee shall be made in full.
SECTION 12. WAIVER; CONFIRMATION OF COMMITMENT. As of the effective date
of this Second Amendment (unless otherwise specifically herein provided), the
Lenders hereby (a) agree the Limited Conditional Waiver (as defined in both the
Waiver and the First Amendment) granted by the Lenders pursuant to the Waiver
and the First Amendment shall be permanent (and shall be effective as of
October 27, 1996) and any Default or Event of Default caused by the Subject
Non-Compliance (as defined in both the Waiver and the First Amendment) shall
be waived on a one-time basis only effective October 27, 1996, and (b) confirm
that their respective Commitments are fully reinstated and that the Company
is permitted to borrow and arrange for the issuance of Letters of Credit as
provided for under the Credit Agreement, as amended hereby, subject at all
times to the Company being in compliance with the Credit Agreement, as
amended hereby, and no Default or Event of Default having occurred thereunder.
SECTION 13. REPRESENTATIONS AND WARRANTIES. Company represents and
warrants to the Lenders and the Administrative Lender that (a) this Second
Amendment constitutes its legal, valid, and binding obligations, enforceable in
accordance with the terms hereof (subject as to enforcement of remedies to any
applicable bankruptcy, reorganization, moratorium, or other laws or principles
of equity affecting the enforcement of creditors' rights generally), (b) there
exists no Event of Default or Default under the Credit Agreement after giving
effect to this Second Amendment, (c) its representations and warranties set
forth in the Credit Agreement and other Loan Papers are true and correct on the
date hereof after giving effect to this Second Amendment, (d) it has complied
with all agreements and conditions to be complied with by it under the Credit
Agreement as amended hereby and the other Loan Papers by the date hereof, (e)
the Credit Agreement, as amended hereby, and the other Loan Papers remain in
full force
6
<PAGE>
and effect, and (f) no notice to, or consent of, any Person is required under
the terms of any agreement of Company in connection with the execution of
this Second Amendment.
SECTION 14. COUNTERPARTS. This Second Amendment and the other Loan Papers
may be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought.
SECTION 15. PRIOR WAIVER; ENTIRE AGREEMENT. THIS SECOND AMENDMENT AND
THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
SECTION 16. GOVERNING LAW. (a) THIS SECOND AMENDMENT AND ALL LOAN PAPERS
SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE
EXTENT FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION OF ALL OR ANY PART OF THIS SECOND AMENDMENT AND ALL LOAN PAPERS.
WITHOUT EXCLUDING ANY OTHER JURISDICTION, COMPANY AND EACH SUBSIDIARY AGREES
THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION
HEREWITH.
(b) COMPANY AND EACH SUBSIDIARY HEREBY WAIVES PERSONAL SERVICE OF ANY
LEGAL PROCESS UPON IT. IN ADDITION, COMPANY AND EACH SUBSIDIARY AGREES THAT
SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT
REQUESTED) DIRECTED TO COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THE
CREDIT AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON
RECEIPT BY COMPANY. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE
ADMINISTRATIVE LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW.
SECTION 17. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
COMPANY, EACH SUBSIDIARY AND EACH LENDER HEREBY WAIVES ANY RIGHT THAT IT MAY
HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT,
EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS SECOND AMENDMENT, THE
OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
7
<PAGE>
IN WITNESS WHEREOF, this Second Amendment to Credit Agreement is executed
as of the date first set forth above.
COMPANY: MICHAELS STORES, INC.
/s/ KRISTEN L. MAGNUSON
-------------------------------------------
By: Kristen L. Magnuson
Its: Vice President of Finance
LENDERS: NATIONSBANK OF TEXAS N.A., as Administrative
Lender, and individually as a Lender
/s/ SHARON M. ELLIS
-------------------------------------------
By: Sharon M. Ellis
Its: Vice President
BANK OF AMERICA ILLINOIS, as Co-Agent,
and individually as a Lender
/s/ W. THOMAS BARNETT
-------------------------------------------
By: W. Thomas Barnett
Its: Vice President
CREDIT LYONNAIS NEW YORK BRANCH, as
a Lender
/s/ ROBERT IVOSEVICH
-------------------------------------------
By: Robert Ivosevich
Its: Senior Vice President
8
<PAGE>
WELLS FARGO BANK (TEXAS), N.A., as a Lender
/s/ KRISTI TROUT
-------------------------------------------
By: Kristi Trout
Its: Banking Officer
MELLON BANK, N.A., as a Lender
/s/ MARC T. KENNEDY
-------------------------------------------
By: Marc T. Kennedy
Its: Vice President
UNITED STATES NATIONAL BANK OF OREGON,
as a Lender
-------------------------------------------
By:
----------------------------------------
Its:
----------------------------------------
THE FIRST NATIONAL BANK OF BOSTON, as
a Lender
/s/ JUDITH C.E. KELLY
-------------------------------------------
By: Judith C.E. Kelly
----------------------------------------
Its: Vice President
----------------------------------------
9
<PAGE>
EXHIBIT 10.17
AMENDMENT NO. 4 TO AMENDED, MODIFIED AND RESTATED
MASTER LEASE AGREEMENT
AND WAIVER
THIS AMENDMENT NO. 4 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE
AGREEMENT AND WAIVER is dated as of March 11, 1997 (the "AMENDMENT NO. 4"), 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 and is given with respect to 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, Amendment No. 2 to Amended, Modified and Restated Master
Lease Agreement dated as of July 11, 1996 and Amendment No. 3 to Amended,
Modified and Restated Master Lease Agreement dated as of August 15, 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(b) (Fixed Charges Coverage Ratio) of the Original Lease
Agreement is hereby amended in its entirety to read as follows:
"(b) FIXED CHARGES COVERAGE RATIO. Lessee will not permit the Fixed
Charges Coverage Ratio at any time during Lessee's fiscal quarters ending
(i) February 1, 1997 and May 3, 1997, to be less than .95 to 1.00; (ii)
August 2, 1997 to be less than 1.00 to 1.00, (iii) November 1, 1997 to be
less than 1.40 to 1.00 and (iv) thereafter during the Term to be less than
1.50 to 1.00."
2. The provisions of Section 11.02(d) (MODIFIED LEVERAGE RATIO) of the
Original Lease Agreement are hereby waived for each of the fiscal quarters
ending on, respectively, February 1, 1997, May 3, 1997 and August 2, 1997. This
waiver is a one time accommodation with respect to such Section and shall not be
construed or interpreted to (a) permanently amend, modify or otherwise
supplement the terms of the Original Lease Agreement, as amended by this
Amendment No. 4, or (b) constitute a waiver of any other Lease Default or Lease
Event of Default occurring prior to or after the date of this Amendment No. 4.
From and after August 2, 1997, and for the calculation for the fiscal quarter
ending November 1, 1997 and thereafter, Section 11.02(d) shall be amended in its
entirety to read as follows:
"(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
<PAGE>
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 6.00 to 1.00;
PROVIDED, HOWEVER, for the calculation measured as of November 1, 1997 for
the preceding twelve month period, such ratio shall not be greater than
6.25 to 1.00."
3. Section 11.02(e) (LIMITATION ON CAPITAL EXPENDITURES) shall be amended
in its entirety to read as follows:
"(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 $40,000,000
during fiscal year 1997 (such limit not to include $21,000,000 used to
construct or purchase a distribution facility and related equipment to be
financed with the proceeds of a private sale of Lessee's common stock) and
$70,000,000 during any fiscal year thereafter 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)."
4. REPRESENTATIONS OF LESSEE. The Lessee represents and warrants that
(a) this Amendment No. 4 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. 4, (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. 4, (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. 4, (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. 4.
5. ACKNOWLEDGMENT OF WAIVER PROVISIONS. The parties hereto acknowledge
and agree that the terms and provisions of (a) that certain Waiver and
Acknowledgment dated as of November 19, 1996 and (b) that certain Waiver and
Acknowledgment dated as of January 31, 1997 shall be and remain effective as of
and from October 27, 1996 to and including the date of this Amendment No. 4 with
respect to the provisions of Section 11.02(b) of the Original Lease Agreement.
It is the intention of the parties hereto that the amendment to Section 11.02(b)
set forth in this Amendment No. 4 shall
2
<PAGE>
permanently modify such section, and that any Default or Event of Default
attributable to Lessee's failure to comply with the provisions of Section
11.02(b) prior to the date of this Amendment No. 4 shall be waived.
6. FURTHER AGREEMENTS. The Lessee shall execute and deliver such further
agreements, documents, instruments, and certificates in form and substance
satisfactory to (a) the Lessor, (b) the Agent to the Lenders and the Holders,
and (c) the Co-Agent to the Lenders and the Holders as any such Person or any
Lender may deem reasonably necessary or appropriate in connection with this
Amendment No. 4.
7. NO OTHER MODIFICATIONS. Except as hereby modified, the terms and
conditions of the Original Lease Agreement remain in full force and effect.
8. GOVERNING LAW. This Amendment No. 4 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. 4 shall be governed by, and construed in
accordance with, the laws of the State of Florida or such other state.
9. AMENDMENT FEE. As a condition to the effectiveness of this Amendment
No. 4, the Lessee shall pay to the Lessor (or to Lessor's designee) an amount
equal to .10% multiplied by Lessor's Cost ($26,702.80, herein referred to as the
"AMENDMENT FEE"). Such Amendment Fee shall be due and payable by Lessee in
immediately available funds on the date of the execution and delivery of this
Amendment No. 4.
10. COUNTERPARTS. This Amendment No. 4 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.
11. DEFINED TERMS. 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 pages follow)
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 4
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
-----------------------------
<PAGE>
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
-----------------------------
<PAGE>
EXHIBIT 10.18
IBM Credit Corporation STAMFORD, CT 06904
Term Lease Master Agreement
Name and Address of Lessee: Agreement No.: CM30101
MICHAEL'S STORES, INC.
5931 CAMPUS CIRCLE IBM Branch Office No.: CMP
IRVING, TX 75063
IBM Branch Office Address: IBM Customer No.: 5803327
1603 LBJ FRWY.
DALLAS, TX 75234
The Lessor pursuant to this Term Lease Master Agreement (Agreement) will
be (a) IBM Credit Corporation, or a subsidiary or affiliate thereof, (b)
a partnership in which IBM Credit Corporation is a partner, or (c) a
related business enterprise for whom IBM Credit Corporation is the agent
(Lessor). The subject matter of the lease shall be machines, field
installable upgrades, feature additions or accessories marketed by
International Business Machines Corporation (IBM) and shall be referred
to as Equipment. Any lease transaction requested by Lessee and accepted
by Lessor shall be specified in a Term Lease Supplement (Supplement). A
Supplement shall refer to and incorporate by reference this Agreement
and, when signed by the parties, shall constitute the lease (Lease) for
the Equipment specified therein. Additional details pertaining to a Lease
shall be specified in a Supplement. A Supplement may also specify
additional terms and conditions as well as other amounts to be financed
(Financing). Financing may include licensed program material charges (LPM
Charges) for licensed programs marketed by IBM under the referenced IBM
license agreement (License Agreement).
1. OPTIONS. The Supplement shall designate various lease and
financing options. Option A is a Lease available only for Modifications
(Paragraph 23) to Equipment under Option A prior to enactment of the Tax
Reform Act of 1986. Option B is a Lease with an option to purchase during
the Lease. For Equipment under Option B Prime (B'). Lessor assumes
for tax purposes that Lessee is the owner. For financing LPM Charges,
Option S will apply.
2. CREDIT REVIEW. For each Lease, Lessee consents to any
reasonable credit investigation and review by Lessor.
3. AGREEMENT TERM. This Agreement shall be effective when signed
by both parties and may be terminated by either party upon one month's
written notice. However, each Lease then in effect shall survive any
termination of this Agreement.
4. CHANGES. Lessor may, upon prior written notice, change the terms and
conditions of this Agreement. Any change will apply on the effective date
specified in the notice to Leases which have an Estimated Shipment Date, or
Effective Date for Additional License, one month or more after the date of
notice. By notice to Lessor in writing prior to delivery, or Effective Date
for Additional License, and within 15 days after receipt of such notice,
Lessee may terminate the Lease for an affected item. Otherwise, the change
shall apply.
5. ADVANCE RENT. Lessee shall pay to Lessor, prior to Lessor's
acceptance of a Lease, Advance Rent, if specified. Advance Rent shall be
refunded if Lessor for any reason does not accept the Lease or Lessee
terminates the Lease in accordance with Paragraph 4, 12 or 15.
6. SELECTION AND USE OF EQUIPMENT, PROGRAMMING AND LICENSED PROGRAM
MATERIALS. Lessee agrees that is shall be responsible for the selection, use
of, and results obtained from, the Equipment, any programming supplied by IBM
without additional charge for use on the Equipment (Programming), licensed
program materials, and any other associated equipment, programs or services.
7. ASSIGNMENT TO LESSOR. Lessee hereby assigns, exclusively to Lessor,
Lessee's right to purchase the Equipment from IBM. This assignment is
effective when Lessor accepts the applicable Supplement and Lessor shall then
be obligated to purchase and pay for the Equipment. Other than the
obligation to pay the purchase price, all responsibilities and limitations
applicable to Customer as defined in the referenced IBM purchase agreement in
effect at the time the Lease is accepted by Lessor (Purchase Agreement) shall
apply to Lessee.
If the Equipment is subject to a volume procurement amendment to the
Purchase Agreement or to another discount offering, (a) Lessor will pay the
same amount for the Equipment that would have been payable by Lessee, and (b)
Lessee will remain responsible to IBM for any late order change charges,
settlement charges, adjustment charges or any other charges incurred under
the volume procurement amendment or other discount offering.
8. LEASE NOT CANCELLABLE; LESSEE'S OBLIGATIONS ABSOLUTE. Lessee's
obligations to pay shall be absolute and unconditional and shall not be
subject to any delay, reduction, set-off, defense, counterclaim or recoupment
for any reason whatsoever, including any failure of the Equipment,
Programming or licensed program materials or any representations by IBM.
If the Equipment, Programming or licensed program materials are unsatisfactory
for any reason, Lessee shall make any claim solely against IBM and shall,
nevertheless, pay Lessor all amounts payable under the Lease.
9. WARRANTIES. Lessor grants to Lessee the benefit of any and all
warranties made available by IBM in the Purchase Agreement. Lessor warrants
that neither Lessor nor anyone acting or claiming through Lessor, by
assignment or otherwise, will interfere with Lessee's quiet enjoyment of the
use of the Equipment so long as no event of default shall have occurred and
be continuing. EXCEPT FOR LESSOR'S WARRANTY OF QUIET ENJOYMENT, LESSOR MAKES
NO WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, BUT
NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. AS TO LESSOR, LESSEE LEASES THE EQUIPMENT AND TAKES
THE ADDITIONAL TERMS AND CONDITIONS ON PAGES 2 THROUGH 4 ARE PART OF THIS
AGREEMENT.
LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND ITS SUPPLEMENT,
UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS.
FURTHER, LESSEE AGREES THAT THIS AGREEMENT AND ITS SUPPLEMENT ARE THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES,
SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL
OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF.
ACCEPTED BY:
IBM CREDIT CORPORATION MICHAEL'S STORES, INC.
---------------------------------------
By: /s/ R.E. Chuhth By: /s/ J. Eugene Stubbs
--------------------------------- -----------------------------------
Authorized Signature Authorized Signature
R.E. Chuhth 3/16/88 By: J. Eugene Stubbs 12/29/87
- ------------------------------------ ---------------------------------------
Name (Type or Print) (Date) Name (Type or Print)
Page 1 of 4
BRANCH OFFICE CENTRAL AGREEMENTS/CONTRACTS FILE
<PAGE>
ANY PROGRAMMING "AS IS." IN NO EVENT SHALL LESSOR HAVE ANY LIABILITY FOR, NOR
SHALL LESSEE HAVE ANY REMEDY AGAINST LESSOR FOR, CONSEQUENTIAL DAMAGES, ANY
LOSS OF PROFITS OR SAVINGS, LOSS OF USE, OR ANY OTHER COMMERCIAL LOSS.
10. LESSEE AUTHORIZATION. So long as Lessee is not in default under
the Lease (a) Lessee is authorized to act on Lessor's behalf concerning
delivery and installation of the Equipment, any IBM warranty service for the
Equipment, and any programming services for the Programming, and (b) Lessee
shall have, solely for these purposes, all rights Lessor may have against IBM
under the Purchase Agreement. The foregoing authorization shall not
constitute any surrender of Lessor's interest in the Equipment.
11. DELIVERY AND INSTALLATION. Lessee shall arrange with IBM for the
delivery of the Equipment and Programming and for installation of the Equipment
at the Equipment Location. Lessee shall pay any delivery and installation
charges. Lessor shall not be liable to Lessee for any delay in, or failure
of, delivery of the Equipment and Programming. Lessee shall examine the
Equipment and Programming immediately upon delivery. If the Equipment is not
in good condition or the Equipment or Programming does not correspond to
IBM's specifications, Lessee shall promptly give IBM written notice and shall
provide IBM reasonable assistance to cure the defect or discrepancy.
12. LATE DELIVERY. If the Equipment or licensed program materials are
not delivered to the Equipment Location on or before the 15th day after the
Estimated Shipment Date, Lessor may, upon written notice to Lessee, increase
the Lease Rate. Lessee may terminate the Lease for the affected item by
giving Lessor written notice prior to delivery. Otherwise, the Rent shall be
adjusted to reflect such increase.
13. RENT COMMENCEMENT DATE. The Rent Commencement Date, unless
otherwise specified in the Supplement, shall be the date payment is due IBM
under the applicable referenced Agreement. Lessee shall be notified of the
Rent Commencement Date and the serial numbers of the Equipment.
14. LEASE TERM. The Lease shall be effective when signed by both
parties. The initial Term of the Lease shall expire at the end of the number
of Payment Periods, specified as "Term" in the Supplement, after the Rent
Commencement Date. However, obligations under the Lease shall continue until
they have been performed in full.
15. RATE PROTECTION. Unless modified pursuant to Paragraph 12, the
Rent shall be based on the Lease Rate specified in the Supplement or such
greater Lease Rate as may be specified by written notice to Lessee more than
one month before the Estimated Shipment Date or Effective Date for Additional
License. By notice to Lessor in writing prior to delivery, or Effective Date
for Additional License, and within 15 days after receipt of such notice,
Lessee may terminate the Lease for the affected item. Otherwise, the Rent
shall be adjusted to reflect the increase. The Unit Purchase Price and LPM
Charges are subject to change in accordance with the referenced Agreements.
16. RENT. During the initial Term, Lessee shall pay Lessor, for each
Payment Period, Rent as determined in Paragraph 15. Lessee's obligation to
pay shall begin on the Rent Commencement Date. Rent will be invoiced in
advance as of the first day of each Payment Period and will be due on the day
following the last day of the Payment Period. When the Rent Commencement
Date is not on the first day of a calendar month and/or when the initial Term
does not expire on the last day of a calendar month, the applicable Rent will
be prorated on the basis of 30-day months. Advance Rent, if any, will be
applied to the initial invoice(s).
17. RENEWAL. If Lessee is not then in default under the Lease, Lessee
may renew the Lease one or more times but not beyond six years from the
expiration of the initial Term. Lessor shall offer renewal Terms of one year
and may offer longer Terms if then generally available. For a renewal Term,
upon request by Lessee, at least five months prior to Lease expiration,
Lessor shall notify Lessee, at least four months prior to expiration, of the
Rent, any changes to the Payment Period and due dates, and of any required
Purchase Option or Renewal Option Percents not specified in the Supplement.
The Rent shall be objectively determined by Lessor by using the projected
fair market rental value of the Equipment as of the commencement of such
renewal Term. However, for Option B', the Rent shall be as specified in the
Supplement. Lessee may renew for any renewal Term only by so notifying
Lessor in writing at least three months before expiration.
18. PURCHASE OF EQUIPMENT. Under Option A, if Lessee is not then in
default under the Lease, Lessee may purchase Equipment only upon expiration
of the Lease. Upon request by Lessee, at least five months prior to Lease
expiration, Lessor shall notify Lessee, at least four months prior to
expiration, of the purchase price. The purchase price shall be objectively
determined by Lessor by using the projected fair market sales value of the
Equipment as of such expiration date, plus the total of (a) any recapture of
investment tax credit and (b) any tax due thereon. Lessee may purchase such
Equipment by notifying Lessor in writing at least three months before such
expiration.
Under Option B or B', if Lessee is not then in default under the Lease,
Lessee may, upon notice to Lessor, purchase Equipment at any time on or after
the second anniversary of the Rent Commencement Date. Such notice shall be
given not later than three months prior to Lease expiration and shall specify
the desired date of purchase which shall be one month or more after the date
of notice. If the date of purchase is an anniversary of the Rent
Commencement Date, the purchase price shall be an amount determined by
multiplying the Unit Purchase Price by the Purchase Option Percent for such
Equipment for such anniversary. If the date of purchase is between two
anniversaries, the purchase price shall be the prorated price (in 12 monthly
steps) between the purchase prices described above for such anniversaries.
If the date of purchase is the expiration of the Lease, Lessor shall
objectively determine the projected fair market sales value and Lessee shall
have the benefit of that value, if lower.
If Lessee purchases any Equipment, Lessee shall, on or before the date
of purchase, pay to Lessor the purchase price, any applicable taxes, all Rent
due through the day preceding the date of purchase, any other amounts due,
and the prepayment of Financing (Paragraph 35). Lessor shall, on the date of
purchase, transfer to Lessee by bill of sale, without recourse or warranty of
any kind, express or implied, all of Lessor's right, title and interest in
and to such Equipment on an "As Is, Where Is" basis except that Lessor shall
warrant title free and clear of all encumbrances.
19. OPTIONAL EXTENSION. If Lessee has not elected to renew or
purchase, and as long as Lessee is not in default under the Lease, the Lease
will be extended unless Lessee notifies Lessor in writing, not less than
three months prior to Lease expiration, that Lessee does not want the
extension. The extension will be under the same terms and conditions then in
effect, including Rent (but, for Options A or B, not less than fair market
rental value) and will continue until the earlier of termination by either
party upon three months' prior written notice or six years after expiration
of the initial Term.
20. INSPECTION; MARKING; FINANCIAL STATEMENT. Upon request, Lessee
shall make the Equipment and its maintenance records available for inspection
by Lessor during Lessee's normal business hours. Lessee shall affix to the
Equipment any labels indicating ownership supplied by Lessor. Lessee shall
execute and deliver to Lessor for filing any Uniform Commercial Code
financing statements or similar documents Lessor may reasonably request.
21. EQUIPMENT USE. Lessee agrees that Equipment will be operated by
competent, qualified personnel, in accordance with applicable operating
instructions, laws and government regulations and that Equipment under Option
A will be used only for business purposes.
22. MAINTENANCE. Lessee, at its expense, shall keep the Equipment in a
suitable environment as specified by IBM and in good condition and working
order, ordinary wear and tear excepted.
23. ALTERATIONS; MODIFICATIONS; PARTS. Lessee may alter or modify the
Equipment only upon written notice to Lessor. Any non-IBM alteration is to
be removed and the Equipment restored to its normal, unaltered condition at
Lessee's expense prior to its return to Lessor. At Lessee's option, any IBM
field installable upgrade, feature addition or accessory added to any item of
Equipment (Modification) may be removed. If removed, the Equipment is to be
restored at Lessee's expense to its normal, unmodified condition. If not
removed, such Modification shall, upon return of the Equipment, become,
without charge, the property of Lessor free of all encumbrances. Restoration
will include replacement of any parts removed in connection with the
installation of an alteration or Modification. Any part installed in
connection with warranty or maintenance service shall be the property of
Lessor.
Page 2 of 4
<PAGE>
24. LEASES FOR MODIFICATIONS AND ADDITIONS. Lessor will arrange for
leasing of Modifications and Additions under the terms and conditions then
generally in effect, subject to satisfactory credit review. Additions shall be
machines, or LPM Charges for licensed program materials, which are associated
with the Equipment. These Modifications and Additions must be ordered by
Lessee from IBM. Any lease for Modifications shall, and any lease for
Additions may, expire at the same time as the Lease for the Equipment. The
rent shall be determined by Lessor and specified in a Supplement. If Lessee
purchases Equipment prior to Lease expiration, Lessee shall simultaneously
purchase any Modifications under the Lease.
25. RETURN OF EQUIPMENT. Upon expiration or termination of the Lease
for any item of Equipment, or upon demand by Lessor pursuant to Paragraph 38,
Lessee shall promptly return the Equipment, freight prepaid, to a location in
the continental United States specified by Lessor. Except for Casualty Loss,
Lessee shall pay any costs and expenses incurred by Lessor to inspect and
qualify the Equipment for IBM's maintenance agreement service. Any parts
removed in connection therewith shall become Lessor's property.
26. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessor will maintain, at its
own expense, insurance covering loss of or damage to the Equipment (but
excluding any Modifications not subject to a Lease and any non-IBM
alterations) with a $5,000 deductible per incident. If any item of Equipment
shall be lost, stolen, destroyed or irreparably damaged for any cause
whatsoever (Casualty Loss) before the Date of Installation as defined in the
Purchase Agreement, the Lease for that item shall terminate. If any item of
Equipment suffers Casualty Loss, or shall be otherwise damaged, on or after
the Date of Installation, Lessee shall promptly inform Lessor. If Lessor
determines that the item can be economically repaired, Lessee shall place the
item in good condition and working order and Lessor will reimburse Lessee the
reasonable cost of such repair, less the deductible. If not so repairable,
Lessee shall pay Lessor the lesser of $5,000 or the fair market value of the
Equipment immediately prior to the Casualty Loss. Upon Lessor's receipt of
payment the Lease for that item shall terminate.
27. TAXES. Lessee shall promptly reimburse Lessor for, or shall pay
directly if so requested by Lessor, as additional Rent, all taxes, charges,
and fees imposed or levied by any governmental body or agency upon or in
connection with the purchase, ownership, leasing, possession, use or relocation
of the Equipment or Programming or in connection with the financing of LPM
Charges or otherwise in connection with the transactions contemplated by the
Lease, excluding, however, all taxes on or measured by the net income of
Lessor. Upon request, Lessee will provide proof of payment. Any other taxes,
charges and fees relating to the licensing, possession or use of licensed
program materials will be governed by the License Agreement.
28. LESSOR'S PAYMENT. If Lessee fails to perform its obligations under
Paragraph 27 or 31 or to discharge any encumbrances created by Lessee, Lessor
shall have the right to substitute performance, in which case, Lessee shall
pay Lessor the cost thereof.
29. TAX INDEMNIFICATION (APPLIES ONLY FOR EQUIPMENT UNDER OPTIONS A OR
B). The Lease is entered into on the basis that under the Internal Revenue
Code of 1986, as amended (Code), Lessor shall be entitled to (1) Maximum
Accelerated Cost Recovery System (ACRS) deductions for 5-year property, and
(2) deductions for interest expense incurred to finance purchase of the
Equipment. The Bulletin "Lessor's Tax Assumptions" will be given to Lessee on
request.
Lessee represents, warrants and covenants that at all times during the
Lease:
(a) no item of Equipment will constitute "public utility property" as
defined in the Code;
(b) Lessee will not make any election under the Code or take any
action, or fail to take any action, if such election, action or failure to
act would cause any item of Equipment to cease to be eligible for any ACRS
deductions or interest deductions;
(c) Lessee will keep and make available to Lessor the records required to
establish the matters referred to in this Paragraph 29; and
(d) for Equipment located in a United States possession, Lessee
represents that Lessee is a tax exempt entity as defined in the Code.
Furthermore, if Lessee is a tax exempt entity, Lessee covenants that it
will not renew or extend the Lease if such action shall cause Lessor a Tax
Loss as described below.
If, as a result of any act, failure to act, misrepresentation,
inaccuracy, or breach of any warranty or covenant, or default under the
Lease, by Lessee, an affiliate of Lessee, or any person who shall obtain the
use or possession of any item of Equipment through Lessee. Lessor shall lose
the right to claim or shall suffer any disallowance or recapture of all or
any portion of any ACRS deductions or interest deductions (Tax Loss) with
respect to any item of Equipment, then, promptly upon written notice to
Lessee that a Tax Loss has occurred, Lessee shall reimburse Lessor the amount
determined below.
The reimbursement shall be an amount that, in the reasonable opinion of
Lessor, shall make Lessor's after-tax rate of return and cash flows
(Financial Returns), over the term of the Lease for such item of Equipment,
equal to the expected Financial Returns that would have been otherwise
available. The reimbursement shall take into account the effects of any
interest, penalties and additions to tax required to be paid by Lessor as a
result of such Tax Loss and all taxes required to be paid by Lessor as a
result of any payments pursuant to this paragraph. Financial Returns shall be
based on economic and tax assumptions used by Lessor in entering into the
Lease.
All the rights and privileges of Lessor arising from this Paragraph 29
shall survive the expiration or termination of the Lease.
For purposes of determining tax effects under Paragraphs 18, 27, 29 and
30, the term "Lessor" shall include, to the extent of interests, any partner
in Lessor and any affiliated group of corporations, and each member thereof,
of which Lessor or any such partner is or shall become a member and with
which Lessor or any such partner joins in the filing of consolidated or
combined returns.
30. GENERAL INDEMNITY. This Lease is a net lease. Therefore, Lessee
shall indemnify Lessor against, and hold Lessor harmless from, any and all
claims, actions, damages, obligations, liabilities and liens; and all costs
and expenses, including legal fees, incurred by Lessor in connection
therewith; arising out of the Lease including, without limitation, the
purchase, ownership, lease, licensing, possession, maintenance, condition,
use or return of the Equipment, programming or licensed program materials; or
arising by operation of law; excluding, however, any of the foregoing which
result from the sole negligence or willful misconduct of Lessor. Lessee
agrees that upon written notice by Lessor of the assertion of any claim,
action, damage, obligation, liability or lien, Lessee shall assume full
responsibility for the defense thereof. Any payment pursuant to this paragraph
shall be of such amount as shall be necessary so that, after payment of any
taxes required to be paid thereon by Lessor, including taxes on or measured
by the net income of Lessor, the balance will equal the amount due hereunder.
Lessee's obligations under this paragraph shall not constitute a guarantee of
the residual value or useful life of any item of Equipment or a guarantee of
any debt of Lessor. The provisions of this paragraph with regard to matters
arising during the Lease shall survive the expiration or termination of the
Lease.
31. LIABILITY INSURANCE. Lessee shall obtain and maintain
comprehensive general liability insurance, in an amount of $1,000,000 or more
for each occurrence, with an insurer having a "Best's Policyholders" rating
of B- or better. The policy shall name Lessor as an additional insured as
Lessor's interests may appear and shall contain a clause requiring the insurer
to give Lessor at least one month's prior written notice of the cancellation,
or any alteration in the terms, of the policy. Lessee shall furnish to
Lessor, upon request, evidence that such insurance coverage is in effect.
32. SUBLEASE AND RELOCATION OF EQUIPMENT; ASSIGNMENT BY LESSEE. Upon
Lessor's prior written consent, which will not be unreasonably withheld,
Lessee may sublet the Equipment or relocate it from the Equipment Location.
No sublease or relocation shall relieve Lessee of its obligations under the
Lease. In no event shall Lessee remove the Equipment from the United States.
Lessee shall not assign, transfer or otherwise dispose of the Lease or
Equipment, or any interest therein, or create or suffer any levy, lien or
encumbrance thereof except those created by Lessor.
33. ASSIGNMENT BY LESSOR. Lessee acknowledges and understands that the
terms and conditions of the Lease have been fixed to enable Lessor to sell
and assign its interest or grant a security interest or interests in the
Lease and Equipment individually
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BRANCH OFFICE CENTRAL AGREEMENTS/CONTRACTS FILE
<PAGE>
or together, in whole or in part, for the purpose of securing loans to Lessor
or otherwise. If Lessee is given written notice of any assignment, it shall
promptly acknowledge receipt thereof in writing. Each loan assignee shall
have all of the rights of Lessor under the Lease. Lessee shall not assert
against any such assignee any setoff, defense or counterclaim that Lessee may
have against Lessor or any other person. Lessor shall not be relieved of its
obligations hereunder as a result of any such assignment unless Lessee
expressly consents thereto.
34. FINANCING. If the Lease provides for financing of LPM Charges, Lessor
will pay such Charges directly to IBM. Any other charges due IBM under the
License Agreement shall be paid directly to IBM by Lessee. Lessee's obligation
to pay Rent shall not be affected by any discontinuance, return or destruction
of any license or licensed program materials under the License Agreement on or
after the date LPM Charges are due. If Lessee discontinues any of the licensed
program materials in accordance with the terms of the License Agreement prior
to the date LPM Charges are due, the financing of affected LPM Charges shall
be cancelled.
35. FINANCING PREPAYMENT (DOES NOT APPLY FOR ITEMS OF EQUIPMENT). Lessee
may terminate an item of Financing (but not an item of Equipment) by prepaying
its remaining Rent. Lessee shall provide Lessor with notice of the intended
prepayment date which shall be at least one month after the date of the
notice. Lessor may, depending on market conditions at the time, make an
adjustment in the remaining Rent to reflect such prepayment and shall advise
Lessee of the balance to be paid. If, prior to Lease expiration, Lessee
purchases the Equipment or if the Lease is terminated, Lessee shall at the
same time prepay any related Financing including that for programs licensed to
the Equipment.
36. DELINQUENT PAYMENTS. If any amount to be paid to Lessor is not paid on
or before its due date, Lessee shall pay Lessor on demand 2% of such late
payment for each month or part thereof from the due date until the date paid
or, if less, the maximum allowed by law.
37. DEFAULT; NO WAIVER. Lessee shall be in default under the Lease upon
the occurrence of any of the following events: (a) Lessee fails to pay when
due any amount required to be paid by Lessee under the Lease and such failure
shall continue for a period of seven days after the due date; (b) Lessee fails
to perform any other provisions under the Lease or violates any of the
covenants or representations made by Lessee in the Lease, or Lessee fails to
perform any of its obligations under any other Lease entered into pursuant to
this Agreement, and such failure or breach shall continue unremedied for a
period of 15 days after written notice is received by Lessee from Lessor; (c)
Lessee violates any of the covenants or representations made by Lessee in any
application for credit or in any agreement with IBM with respect to the
Equipment or licensed program materials or fails to perform any provision in
any such agreement (except the obligation to pay the purchase price or LPM
Charges); (d) Lessee makes an assignment for the benefit of creditors, whether
voluntary or involuntary, or consents to the appointment of a trustee or
receiver, or if either shall be appointed for Lessee or for a substantial part
of its property without its consent; (e) any petition or proceeding is filed
by or against Lessee under any Federal or State bankruptcy or insolvency code
or similar law; or (f) if applicable, Lessee makes a bulk transfer subject to
the provisions of the Uniform Commercial Code.
Any failure of Lessor to require strict performance by Lessee or any waiver
by Lessor of any provision in the Lease shall not be construed as a consent or
waiver of any other breach of the same or of any other provision.
38. REMEDIES. If Lessee is in default under the Lease, Lessor shall have
the right, in its sole discretion, to exercise any one or more of the
following remedies in order to protect its interests, reasonably expected
profits and economic benefits. Lessor may (a) declare any Lease entered into
pursuant to this Agreement to be in default; (b) terminate in whole or in part
any Lease; (c) recover from Lessee any and all amounts then due and to become
due; (d) take possession of any or all items of Equipment, wherever located,
without demand or notice, without any court order or other process of law; and
(e) demand that Lessee return any or all such items of Equipment to Lessor in
accordance with Paragraph 25 and, for each day that Lessee shall fail to
return any item of Equipment, Lessor may demand an amount equal to the Rent,
prorated on the basis of a 30-day month, in effect immediately prior to such
default. Upon repossession or return of such item or items of Equipment,
Lessor shall sell, lease or otherwise dispose of such item or items in a
commercially reasonable manner, with or without notice and on public or
private bid, and apply the net proceeds thereof towards the amounts due under
the Lease but only after deducting (i) in the case of sale, the estimated fair
market value of such item or items as of the scheduled expiration of the
Lease; or (ii) in the case of any replacement lease, the rent due for any
period beyond the scheduled expiration of the Lease for such item or items
(iii) in either case, all expenses, including legal fees, incurred in
connection therewith; and (iv) where appropriate, any amount in accordance
with Paragraph 29. Any excess net proceeds are to be retained by Lessor.
Lessor may pursue any other remedy available at law or in equity, including,
but not limited to, seeking damages, specific performance and an injunction.
No right or remedy is exclusive of any other provided herein or permitted
by law or equity. All such rights and remedies shall be cumulative and may be
enforced concurrently or individually from time to time.
39. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs and
expenses, including legal and collection fees, incurred by Lessor enforcing
the terms, conditions or provisions of the Lease or in protecting Lessor's
rights and interests in the Lease and the Equipment.
40. OWNERSHIP; PERSONAL PROPERTY; LICENSED PROGRAM MATERIALS. The
Equipment under Lease is and shall be the property of Lessor. Lessee shall
have no right, title or interest therein except as set forth in the Lease.
The Equipment is, and shall at all times be and remain, personal property and
shall not become a fixture or realty. Licensed program materials are licensed
and provided by IBM directly to Lessee under the terms and conditions of the
License Agreement.
41. NOTICES; ADMINISTRATION. Service of all notices under the Lease shall
be sufficient if delivered personally or mailed to Lessee at its address
specified in the Supplement or to IBM Credit Corporation or Lessor in care of
the IBM Branch Office specified in the Supplement. Notice by mail shall be
effective when deposited in the United States mail, duly addressed and with
postage prepaid. Notices, consents and approvals from or by Lessor shall be
given by Lessor or on its behalf by IBM and all payments shall be made to IBM
until Lessor shall notify Lessee otherwise.
42. LESSEE REPRESENTATION. If the Lease includes Financing, Lessee
represents that it is (a) a corporation if any item of Equipment is located
in Ohio, Mississippi, Virginia or West Virginia, and/or (b) a business
corporation if any item of Equipment is located in Pennsylvania.
43. REVISIONS FOR PREVIOUSLY INSTALLED EQUIPMENT. Equipment installed
with Lessee under an IBM lease or rental agreement may be purchased by Lessor,
on the Effective Date of Purchase (as defined in the Purchase Agreement), for
lease to Lessee under Option B or B'. For such Equipment, the Lease shall be
revised as follows:
Paragraphs 4 and 26 - replace "Estimated Shipment Date" by "Intended
Effective Date of Purchase"; replace "delivery" and "Date of Installation" by
"Effective Date of Purchase";
Paragraph 7 - add at the end of the first paragraph, "Assignment of the
option to purchase installed Equipment at the net purchase option price under
an IBM lease or rental agreement will be permitted only when Lessee submits
the Supplement in sufficient time to achieve the Intended Effective Date of
Purchase. The Effective Date of Purchase under this assignment shall be the
later of the first day of the Quotation Month or the day on which the
applicable Supplement is accepted by Lessor. If the Quotation Month expires
and the purchase of Equipment is not concluded, this assignment and Lease will
be null and void regarding any such Equipment and all rights, duties and
obligations of Lessee and IBM will remain in accordance with the provisions of
the IBM agreement under which the Equipment is currently installed.";
Paragraphs 11 and 12 - delete both paragraphs; and
Paragraph 15 - replace the entire paragraph with the following: "The Rent
shall be based on the Lease Rate specified in the Supplement or such greater
Lease Rate as may be specified by written notice to Lessee more than one month
before the Effective Date of Purchase. The Unit Purchase Price is subject to
change in accordance with the referenced Purchase Agreement. Lessee may
terminate the Lease for any item subject to an increase by giving Lessor
written notice on or before the Effective Date of Purchase."
44. APPLICABLE LAW; SEVERABILITY. The Lease shall be governed by the
laws of the State of Connecticut. If any provision shall be held to be invalid
or unenforceable, the validity and enforceability of the remaining provisions
shall not in any way be affected or impaired.
Page 4 of 4
<PAGE>
290 Harbor Drive
IBM Credit Corporation Stamford, CT 06904
(203) 973-5100
- --------------------------------------------------------------------------------
ADDENDUM TO TERM LEASE SUPPLEMENT
Enterprise No. 5798022 Term Lease Master Agreement No. CMJ0101
Customer No. 5803327 Supplement No. C00244329
Lessor and MICHAELS STORES INC (Lessee) agree that for the purposes of the
referenced Supplement only, the Term Lease Master Agreement between the
parties is hereby modified as follows:
For the following Modification(s) listed on the Supplement, the Term Lease
Master Agreement is hereby modified:
From Equipment To Equipment
Type Model Serial Term Type Model
---- ----- ------ ---- ---- -----
9406 F70 18013 48 9406 320
Paragraph entitled - Modification to a Machine Not Owned by Lessor - is a new
paragraph which reads as follows:
"The Equipment which is the subject to this Lease is an IBM supplied
Modification to a machine or machines which are owned by Lessee (Base
Machines). Lessee agrees that the Base Machine will be altered by the
installation of the Modification. The Base Machine and the Modification taken
together shall be referred to as the 'New Machine'. Lessee represents and
warrants that there are and will be no liens or other security or ownership
interest in the Base Machine and that entering into and performing under this
Agreement does not constitute a breach of, or is inconsistent with the terms
of, any other agreement concerning the Base Machine to which Lessee is a
party or by which the Lessee is bound."
Paragraph 19 - Optional Extension - in line 8 replace "either party" with
"Lessor or purchase by Lessee".
Paragraph 24 - Leases for Modifications and Additions - in line 4 after
"review." insert "However, the fact that the Base Machine is not owned by
Lessor may be deemed by Lessor, in Lessor's sole discretion, to limit or
preclude Lessor from arranging for leasing of subsequent Modifications to the
New Machine."
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
December 21, 1995 Addendum No. Q01239490-04
1
<PAGE>
290 Harbor Drive
IBM Credit Corporation Stamford, CT 06904
(203) 973-5100
- --------------------------------------------------------------------------------
Paragraph 25 - Return of Equipment - replace the first sentence with the
following:
"Lessee acknowledges that inasmuch as the Modification modifies a Base
Machine and the Modification cannot be separated from the Base Machine,
accordingly, the Modification cannot be returned to the Lessor; provided,
however, upon demand by Lessor pursuant to Paragraph 38, Lessee shall promptly
return the Equipment, including the Base Machine, freight prepaid, to a
location in the continental United States specified by Lessor."
Paragraph 37 - Default, No Waiver - in line 23 after "Commercial Code" add
the following:
"; or (g) any interference with or disturbance to Lessor's rights to,
interests in, or benefits from the Modification to the Base Machine (Loss).
Such Losses shall include, without limitation, conversion of the
Modification, ownership disputes with respect to the New Machine or
Modification, removal or seizure of the Modification or New Machine, breach
of any representation or covenant by Lessee as to the absence of liens or any
other interest of third parties with respect to the Modification, bankruptcy
or insolvency of any third party lessor who has upgraded machines subject to
this Lease or of any owner of the Base Machine or any upgrade or other
modification thereof, or other judicial process or any other interference or
disturbance of Lessor's right, title or interest in the Modification."
Paragraph 38 - Remedies - in line 15 after "default.", insert "Inasmuch as
the Modification modifies the Base Machine and cannot be removed, it is
agreed by Lessee that any repossession occurring under (d) above will include
the Base Machine and Lessee shall indemnify Lessor and hold Lessor harmless
for its actions pursuant to Paragraph 38."
- - in line 15, delete the sentence beginning with "Upon repossession" through
the remainder of the paragraph and replace with the following:
"Upon repossession, Lessor shall determine the fair market value of the New
Machine and shall deduct such value from all amounts due Lessor under the
Lease, including without limitations all expenses, legal fees, and other
amounts incurred in connection therewith and, where appropriate, any amounts
due Lessor in accordance with Paragraphs 27, 29 and 30. Upon demand Lessee
shall pay to Lessor the deficiency, if any, between the fair market value and
the amounts
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
December 21, 1995 Addendum No. Q01239490-04
2
<PAGE>
290 Harbor Drive
IBM Credit Corporation Stamford, CT 06904
(203) 973-5100
- --------------------------------------------------------------------------------
due Lessor. Lessor shall pay Lessee any excess, if any, between the fair
market value and amounts due Lessor.
Lessor may pursue any other remedy available at law or in equity, including,
but not limited to, seeking damages, specific performance and an injunction."
Accepted by:
IBM Credit Corporation MICHAELS STORES INC
For or as Lessor:
by /s/ LENA E. FAJNOR by /s/ COLBY H. SPRINGER
--------------------------------- --------------------------------
Authorized Signature Authorized Signature
L. E. Fajnor 1/13/96 Colby H. Springer 12/22/95
--------------------------------- --------------------------------
Print Name Date Print Name Date
Customer Supp. Ops. Mgr.
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
December 21, 1995 Addendum No. Q01239490-04
3
<PAGE>
290 Harbor Drive
IBM CREDIT CORPORATION Stamford, CT 06904
203/973-5100
- ------------------------------------------------------------------------------
ADDENDUM TO TERM LEASE SUPPLEMENT
SALE/LEASEBACK
Enterprise No. 5798022 Term Lease Master Agreement No. CMJ0101
Customer No. 6272046 Supplement No. C00247986
Lessor and MICHAELS STORES INC. (Lessee) agree that for the purpose of the
referenced Supplement only, the Term Lease Master Agreement between the parties
is hereby modified as follows:
In the preamble in line 3 replace from "marketed" through line 5
"(Supplement)" with "referred to as Equipment and specified in a
Term Lease Supplement (Supplement)".
Paragraph -- Revisions for Lease Financing of Assets from Lessee --
is a new paragraph and reads as follows:
"The Equipment, which is the subject of this Lease, consists of
IBM equipment listed on the attached Schedule A and non-IBM equipment
listed on the attached Schedule B (Lessee Components) to be sold by
Lessee to Lessor.
If for any reason the Lessee Components have not been sold to Lessor
this Lease will be null and void. All rights, duties and obligations
of Lessee and IBM with regard to the Lessee Components will remain in
accordance with the provisions of the IBM agreement under which they
were originally installed.
Lessor and Lessee further agree as follows: The Lessee agrees to sell,
and the Lessor agrees to purchase Lessee Components listed in the
attached Schedules.
PURCHASE PRICE: The purchase price of the Lessee Components listed on
Schedule A is $1,823,451.23 with payment to be made in the form of a
credit to be placed on Lessee's account.
The purchase price of the Lessee Component listed on Schedule B is
$2,682,252.00.
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
Jan. 26, 1996 Addendum No. Q01231559-06
1
<PAGE>
IBM Credit Corporation
- -------------------------------------------------------------------------------
WARRANTY: Lessee represents and warrants that on the Effective Date of
Purchase 1) the Lessee Components are in good operating condition and
qualify for maintenance by the manufacturer without additional expense 2)
the Lessee Components including all features, subassemblies and parts
therein are genuine as manufactured and assembled, and 3) the Lessee
Components will be owned by Lessee free and clear of all liens,
encumbrances, security interests or charges of any kind. Lessee hereby
assigns to Lessor any and all remaining rights with respect to the
Lessee's Components under the "Warranties" and "Patents and Copyrights"
provisions of the agreement under which they were installed.
TITLE: On the Effective Date of Purchase Lessee shall pass title to
Lessor free and clear of any liens, encumbrances, security interests or
charges of any kind and Lessee shall give to the Lessor a Bill of Sale in
the form attached hereto conveying such title."
Paragraph 4 -- Changes -- after "Estimated Shipment Date" insert "or
Effective Date of Purchase".
Paragraph 13 -- Rent Commencement Date -- replace the paragraph with the
following:
"The Rent Commencement Date for the Lessee Components shall be the date
following the date Lessee executes the Bill of Sale for the Lessee
Components (Effective Date of Purchase)."
Paragraph 18 -- Purchase of Equipment -- in line 6 after "Equipment"
insert the following:
"which shall not exceed an amount calculated by multiplying the "Not to
Exceed Percent" in the table below by the purchase price stated on the
supplement:
Type/Model Option/Term Not to Exceed Percent
---------- ----------- ---------------------
4693/202 B+/60 6.5%
4693/321 B+/60 6.5%
4693/541 B+/60 6.5%
HU01/001 B+/60 4.5%
TL06/960 B+/60 4.5%
TL21/001 B+/60 4.5%
EL01/001 B+/60 4.5%
MON4/001 B+/60 4.5%
TL22/001 B+/60 4.5%
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
Jan. 26, 1996 Addendum No. Q01231559-06
2
<PAGE>
IBM Credit Corporation
- -------------------------------------------------------------------------------
- in line 8, after "thereon." insert the following:
"The Lessee must provide written notice 90 days prior to lease expiration
to coordinate this unique end of lease purchase option."
Paragraph 23 - Alterations; Modifications; Parts - replace the entire
paragraph with the following:
"Lessee may alter or modify the Equipment only with prior written notice
to Lessor. Any Lessor-owned Parts that Lessee removes shall remain
Lessor's property and Lessee is not permitted to make such Parts
available for sale, transfer, exchange or other disposition without
Lessor's prior written consent. Before Lessee returns the Equipment to
Lessor, Lessee must restore the Equipment to its original, unaltered or
unmodified condition. At Lessee's expense, Lessee must remove any
Alteration or Modification that Lessor does not own, and restore any
original Parts that Lessee has removed. If Lessor consents to a
disposition of the removed Parts, the restoration must be with parts
Lessor owns or supplies, or those supplied by a source approved by
Lessor. All Alterations and Modifications not removed when the Equipment
is returned to Lessor shall become Lessor's property, without charge,
free of encumbrances. Lessee shall have no further interest in such
Alteration or Modification or its proceeds. Any part installed in
connection with warranty or maintenance service shall become the property
of Lessor. Under the terms of this Agreement an Alteration is any change
made to the Equipment that deviates from the manufacturer's design. A
Modification is any manufacturer's field installable upgrade, feature, or
accessory added to the manufacturer's Equipment. A Part is any portion or
integral element of the Equipment."
Paragraph 24 - Leases for Modifications and Additions - for non-IBM
Equipment listed on the attached Schedule B only, in line 7 replace "from
IBM" with "from Lessee's Supplier".
Paragraph 25 - Return of Equipment - in line 7 replace "IBM's maintenance
agreement service" with "the manufacturer's service agreement or if not
offered by the manufacturer, to return the Equipment to good repair and
operating condition".
Paragraph 26 - Casualty Insurance - in line 8, after "Agreement" insert
"or before the Effective Date of Purchase".
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
Jan 26, 1996 Addendum No. Q01231559-06
3
<PAGE>
IBM Credit Corporation
- -------------------------------------------------------------------------------
Paragraph 29 - Tax Indemnification (Applies Only to Equipment paragraph:
"Pursuant to Lessor's obligations under Section 168(f)(5) of the Code,
assumptions have been made regarding Lessee Components based on the
Lessee's warrant that Lessee Components were placed in service after
December 31, 1986. Lessee represents, warrants and covenants that Lessee,
as owner of the Equipment prior to this sale-leaseback, was entitled to
and claimed the maximum Accelerated Cost Recovery System (ACRS)
deductions, under the code, for 5 year property."
Lessee represents that the person executing this Addendum on behalf of Lessee
is a duly authorized representative of Lessee, has the authority to execute
such Addendum and will provide evidence of such authority if requested to do
so.
This Addendum is being entered into for the purposes of Lessor purchasing the
Lessee Components and then leasing such Lessee Components to Lessee under the
Term Lease Master Agreement between Lessor and the Lessee.
This purchase shall be governed by and construed in accordance with the laws
of the State of Connecticut.
Prepared by: T DEMOPOULOS
Accepted by:
IBM Credit Corporation MICHAELS STORES INC.
For or as Lessor:
by by /s/ COLBY SPRINGER
------------------------------- -------------------------------
Colby Springer 1/26/96
------------------------------- -------------------------------
Print Name Date Print Name Date
A231559F/BP4
- ------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
Jan 26, 1996 Addendum No. Q01231559-06
4
<PAGE>
IBM Credit Corporation
- -------------------------------------------------------------------------------
IBM CREDIT CORPORATION
BILL OF SALE
FROM SELLER: MICHAELS STORES INC.
TO: BUYER: IBM Credit Corporation
290 Harbor Drive
Stamford CT 06904
The Seller named above, for valuable consideration, the receipt of which is
acknowledged, hereby sells and transfers to the Buyer above to have and to
hold forever the following equipment (Equipment):
Machine Serial
Type Model Number Features
---------------------------------------------------------
SEE SCHEDULE A1 & B1
Seller represents and warrants that 1) the Equipment is in good operating
condition and qualifies for Maintenance by the manufacturer without
additional expense, 2) the Equipment including all features, subassemblies
and parts therein is genuine as manufactured and assembled, and 3) the
Equipment is owned by Seller free and clear of all liens, encumbrances,
security interests or charges of any kind.
IN WITNESS WHEREOF, Seller has caused this instrument to be executed in its
name by a duly authorized representative on the ________________, ________.
SELLER: MICHAELS STORES, INC.
SIGNATURE: /s/ COLBY SPRINGER
------------------------
NAME:
-----------------------------
TITLE:
-----------------------------
DATE:
-----------------------------
- -------------------------------------------------------------------------------
NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
Jan. 26, 1996 Addendum No. Q01231559-06
6
<PAGE>
290 Harbor Drive
IBM CREDIT CORPORATION Stamford, CT 06904
203-973-5100
- -------------------------------------------------------------------------------
AMENDMENT TO TERM LEASE MASTER AGREEMENT
Enterprise No. 5798022 Term Lease Master Agreement No. CMJ0101
-----------
Customer No. 6272046 Amendment No. AMEND146
Lessor and MICHAELS STORES INC. (Lessee) agree that the Term Lease Master
Agreement between the parties is hereby modified as follows for Leases which
specify this Amendment as the applicable TLMA Amendment No. in the Term Lease
Supplement and whose Rent Commencement Date is no later than 09/01/96:
In the preamble in line 3 replace from "marketed" through line 5
"(Supplement)" with "referred to as Equipment and specified in a
Term Lease Supplement (Supplement)".
Paragraph 18 - Purchase of Equipment - in line 6 after "Equipment"
insert the following:
"which shall not exceed an amount calculated by multiplying the "Not
to Exceed Percent" in the table below by the purchase price stated
on the supplement:
Type/Model Option/Term Not to Exceed
Percent
------------------------------- ----------- -------------
4693/ALL B+/60 6.5%
6581/ALL,6571/ALL,2248/R01 B+/60 6.5%
LS07/001 B+/60 4.5%
HU01/001,TL06/960,TL21/001 B+/60 4.5%
TL22/001,MON4/001,EL01,EP/001 B+/60 4.5%
- in line 8, after "thereon." insert the following:
"The Lessee must provide written notice 90 days prior to lease
expiration to coordinate this unique end of lease purchase option."
Paragraph 23 - Alterations; Modifications; Parts - replace the
entire paragraph with the following:
- -------------------------------------------------------------------------------
NO CHANGES TO THIS AMENDMENT ARE AUTHORIZED
Amendment No. AMEND146
<PAGE>
IBM Credit Corporation
- -------------------------------------------------------------------------------
"Lessee may alter or modify the Equipment only with prior written
notice to Lessor. Any Lessor-owned Parts that Lessee removes shall
remain Lessor's property and Lessee is not permitted to make such
Parts available for sale, transfer, exchange or other disposition
without Lessor's prior written consent. Before Lessee returns the
Equipment to Lessor, Lessee must restore the Equipment to its
original, unaltered or unmodified condition. At Lessee's expense,
Lessee must remove any Alteration or Modification that Lessor does
not own, and restore any original Parts that Lessee has removed. If
Lessor consents to a disposition of the removed Parts, the
restoration must be with parts Lessor owns or supplies, or those
supplied by a source approved by Lessor. All Alterations and
Modifications not removed when the Equipment is returned to Lessor
shall become Lessor's property, without charge, free of encumbrances.
Lessee shall have no further interest in such Alteration or
Modification or its proceeds. Any part installed in connection with
warranty or maintenance service shall become the property of Lessor.
Under the terms of this Agreement an Alteration is any change made to
the Equipment that deviates from the manufacturer's design. A
Modification is any manufacturer's field installable upgrade, feature,
or accessory added to the manufacturer's Equipment. A Part is any
portion or integral element of the Equipment."
Paragraph 24 - Leases for Modifications and Additions - in line 7
replace "from IBM" with "from Lessee's Supplier".
Paragraph 25 - Return of Equipment - in line 7 replace "IBM's
maintenance agreement service" with "the manufacturer's service
agreement or if not offered by the manufacturer, to return the
Equipment to good repair and operating condition".
Prepared by: T. DEMOPOULOS
February 27, 1996
Accepted by:
IBM Credit Corporation MICHAEL STORES INC.
For or as Lessor:
by /s/ ANDREA SINNOTT by /s/ COLBY SPRINGER
--------------------------------- --------------------------------
Authorized Signature Authorized Signature
A.M. Sinnott 5/15/96 Colby Springer 3-8-96
OSO Manager
--------------------------------- --------------------------------
Name (Type or Print) Date Name (Type or Print) Date
AMEND146/BP4
This Amendment is valid if accepted by MICHAELS STORES INC. and IBM Credit
Corporation no later than April 9, 1996.
- -------------------------------------------------------------------------------
NO CHANGES TO THIS AMENDMENT ARE AUTHORIZED
Amendment No. AMEND146
<PAGE>
EXHIBIT 10.28
THE SECURITIES REPRESENTED BY THIS OPTION HAVE NOT BEEN REGISTERED PURSUANT TO
THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY
NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER THAT ACT
AND ANY APPLICABLE STATE SECURITIES LAWS, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND SELLER SHALL HAVE RECEIVED, AT THE EXPENSES OF THE
HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO SELLER
(WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO
SELLER).
OPTION AGREEMENT
This OPTION AGREEMENT (this "Agreement") is made and entered as of December
23, 1996 between Michaels Stores, Inc., a Delaware corporation ("Seller") and
Devotion Limited, an Isle of Man corporation ("Purchaser").
RECITAL
Seller desires to grant and sell to Purchaser, and Purchaser desires to
purchase from Seller, the option to acquire 1,333,333 newly issued and
outstanding shares (the "Option Shares") of Common Stock, par value $.10 per
share, of Seller (the "Common Stock") on the terms and subject to the conditions
set forth in this Agreement.
Seller and Purchaser hereby agree as follows:
I. OPTION GRANT
1.1 OPTION. In exchange for $0.50 per Option Share (the "Option Grant
Price"), Seller hereby irrevocably grants to Purchaser an option (the
"Option") to purchase the Option Shares at $10.50 per Option Share (the
"Option Price"). The Option will terminate and will no longer be in effect
after 5:00 p.m. Central Time on February 28, 1997 (the "Option Expiration
Time").
1.2 EXERCISE OF OPTION. The Option may be exercised, in whole or in part,
at any time, or from time to time, from this date to the Option Expiration Time
(the "Option Period"). If at any time, or from time to time, Purchaser wishes
to exercise the Option, in whole or in part, Purchaser will notify Seller in
writing (each an "Option Notice") of the number of Option Shares for which the
Option is being exercised.
1.3 OPTION PRICE. If Purchaser exercises the Option pursuant to Section
1.2, Purchaser will pay to Seller at the Closing (as defined below) the
aggregate amount equal to the product of (a) the number of Option Shares that
are the subject of the
<PAGE>
related Option Notice multiplied by (b) the Option Price less the Option Grant
Price (the "Purchase Price").
1.4 THE CLOSING.
(a) Subject to Section 1.5, the closing of the purchase and sale of
the Option Shares under this Agreement (the "Closing") will take place on the
date five business days after the Seller has delivered an Option Notice or such
other date as Seller and Purchaser may agree (the "Closing Date").
(b) At the Closing, (i) Purchaser will pay to Seller the Purchase
Price by wire transfer of immediately available funds to an account or accounts
designated by Seller and (ii) Seller will deliver to Purchaser a single
certificate representing the Option Shares registered in the name of "Devotion
Limited".
(c) At the Closing Seller will deliver to Purchaser, and Purchaser
will deliver to Seller, a certificate confirming that their respective
representations and warranties set forth in this Agreement are true and complete
in all material respects on the Closing Date as if made on that date.
1.5 CONDITION TO CLOSING.
(a) Notwithstanding anything to the contrary in this Agreement, the
obligation of Seller to consummate the sale and purchase of the Option Shares
contemplated hereby is subject to satisfaction of each of the following
conditions:
(i) The Board of Directors of Seller shall have approved the
sale of the Option Shares on or before the Closing Date.
(ii) The representations and warranties of Purchaser in this
Agreement shall be true and complete in all material respects on and as of
the Closing Date.
(b) Notwithstanding anything to the contrary in this Agreement, the
obligations of Purchaser to consummate the sale and purchase of the Option
Shares contemplated hereby are subject to the condition that the representations
and warranties made by Seller in this Agreement shall be true and complete in
all material respects on and as of the Closing Date.
II. REPRESENTATIONS AND WARRANTIES OF SELLER
2.1 ORGANIZATION; POWER AND AUTHORITY. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller has requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery by Seller
-2-
<PAGE>
of this Agreement and the performance by it of the transactions contemplated
hereby to be performed by it have been duly authorized by all necessary
corporate action on the part of Seller. This Agreement has been duly executed
and delivered by Seller and constitutes a valid and binding obligation of
Seller.
2.2 CAPITALIZATION. The authorized capital stock of Seller consists of
(i) 50,000,000 shares of Common Stock, of which as of December 10, 1996,
23,560,592 shares were issued and outstanding, fully paid and nonassessable and
no shares were held in the treasury, and (ii) 2,000,000 shares of preferred
stock, $.10 par value per share, of which as of December 10, 1996, no shares
were outstanding. Upon the issuance of the Option Shares to Purchaser and the
payment to Seller of the Purchase Price, the Option Shares will be validly
issued and outstanding, fully paid and nonassessable, and Purchaser will acquire
good and valid title to the Option Shares, free and clear of any charges, liens
or other encumbrances ("Encumbrances") of any kind. Neither the granting of the
Option or issuing any of the Option Shares will violate any preemptive rights,
rights of first refusal or other acquisition rights.
2.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement by Seller nor the consummation by Seller of the
transactions contemplated hereby will (a) conflict with or result in any breach
or violation of, or constitute a default under, any note, pledge, trust,
commitment, agreement or other instrument or obligation to which Seller is a
party or by which Seller or any of its properties may be bound, (b) require any
consent, approval, authorization or permit of, or filing with or notification
to, any court, governmental authority or other regulatory or administrative
agency or commission, domestic or foreign ("Governmental Entity"), or (c)
violate any statute or any order, decree, injunction, rule or regulation of any
Governmental Entity applicable to Seller.
2.4 SEC REPORTS; FINANCIAL STATEMENTS.
(a) Seller has delivered to Purchaser (i) its Annual Report on Form
10-K for the fiscal year ended January 28, 1996 and (ii) its Quarterly Reports
on Form 10-Q for each of the fiscal quarters ended April 28, 1996, July 28, 1996
and October 27, 1996, respectively, each in the form (including exhibits) filed
with the Securities and Exchange Commission ("SEC") (collectively, the "SEC
Reports"). Each SEC Report has been prepared and filed in accordance with all
applicable rules and regulations of the SEC and at the time of its filing was in
compliance with such rules and regulations in all material respects. As of
their respective dates, the SEC Reports did not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) Each of the audited consolidated financial statements and
unaudited consolidated interim financial statements of Seller (and the related
notes and schedules) included in the SEC Reports present fairly, in all material
respects, the consolidated financial position of Seller and its consolidated
subsidiaries as of the respective dates
-3-
<PAGE>
thereof and the results of operations and cash flows for the respective
periods set forth therein, in accordance with generally accepted accounting
principles consistently applied during the period involved, except as
otherwise noted therein and subject, in the case of the unaudited interim
consolidated financial statements, to the omission of certain notes not
ordinarily accompanying such unaudited interim consolidated financial
statements and to normal year-end adjustments and any other adjustments
described therein.
(c) Except as set forth in the SEC Reports, any other reports filed
with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that relate to Seller, and any public announcements made by
Seller, since October 27, 1996 there has been no material adverse change in the
assets, earnings, financial position, business or prospects of Seller and its
subsidiaries, considered as a whole.
2.5 NO BROKER; FINDER; ETC. None of Seller or its directors, officers or
employees has employed any investment banker, consultant, broker or finder or
incurred any liability for any brokerage fees, commissions or finders fees in
connection with the transactions contemplated under this Agreement.
III. REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.1 PURCHASE FOR INVESTMENT. Purchaser acknowledges that the Option and
the Option Shares have not been registered under the Securities Act of 1933, as
amended ("Securities Act"), or under any state or foreign securities laws.
Purchaser is not an underwriter as such term is defined under the Securities
Act, and is purchasing the Option Shares solely for investment with no present
intention to distribute any of the Option Shares to any person or entity
("Person"). Purchaser will not sell or otherwise dispose of any of the Option
Shares, except in accordance with the registration requirements or exemption
provisions under the Securities Act and the rules and regulations promulgated
thereunder, and any other applicable securities laws. Purchaser further
understands that the certificate representing the Option Shares will bear the
following legend and agrees that it will hold the Option Shares subject thereto:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY
STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION
HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE
SAME IS REGISTERED UNDER THAT ACT AND ANY APPLICABLE STATE
SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND MICHAELS STORES, INC. SHALL
HAVE RECEIVED,
-4-
<PAGE>
AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION
REASONABLY SATISFACTORY TO MICHAELS STORES, INC. (WHICH MAY
INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO
MICHAELS STORES, INC.).
3.2 SUITABILITY AND SOPHISTICATION. Purchaser represents and warrants
that it (a) is an "accredited investor" as defined in Rule 501(a) promulgated
under the Securities Act, (b) has such knowledge and experience in financial and
business matters that it is capable of independently evaluating the risks and
merits of purchasing the Option and the Option Shares, (c) has been provided
with the opportunity to make a reasonable investigation of Seller, including the
opportunity to make any inquiries and to request additional information
necessary to its investment decision, and Seller has satisfactorily responded to
any inquiries and furnished to Purchaser all requested information, (d) has
independently evaluated the risks and merits of purchasing the Option and the
Option Shares and has independently determined that the Option Shares are a
suitable investment for it, and (e) has sufficient financial resources to bear
the loss of its entire investment in the Option and the Option Shares.
3.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement by Purchaser nor the consummation by Purchaser of the
transactions contemplated hereby will (a) conflict with or result in any breach
or violation of, or constitute a default under, any note, pledge, trust,
commitment, agreement or other instrument or obligation to which Purchaser is a
party or by which Purchaser or any of its properties may be bound, (b) require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, or (c) violate any statute or any
order, decree, injunction, rule or regulation of any Governmental Entity
applicable to Purchaser.
3.4 NO AGREEMENTS. Purchaser acknowledges that there are no agreements,
arrangements, commitments or understandings relating to any of the Option Shares
except pursuant to this Agreement.
3.5 NO BROKER; FINDER; ETC. None of Purchaser or its directors, officers,
agents or employees has employed any investment banker, consultant, broker or
finder or incurred any liability for any brokerage fees, commissions or finders
fees in connection with the transactions contemplated under this Agreement.
IV. REGISTRATION RIGHTS
4.1 REGISTRATION. Upon receipt of a written request (the "Registration
Notice") by Purchaser at any time after one year from the date of the initial
Closing, Seller shall cause to be filed as soon as practicable a registration
statement (a "Shelf Registration Statement") under the Securities Act on Form
S-3 or any other appropriate form under
-5-
<PAGE>
the Securities Act for an offering to be made on a delayed or continuous basis
pursuant to Rule 415 thereunder or any similar rule that may be adopted by the
SEC and permitting sales in ordinary course brokerage or dealer transactions
not involving an underwritten public offering (and shall register or qualify
the shares to be sold in such offering under such other securities or "blue
sky" laws as required pursuant to this Section 4.1) covering no less than the
aggregate number of Option Shares then held by Purchaser (those Option Shares
together with any shares of Common Stock or other securities that may
subsequently be issued with respect to the Option Shares as result of a stock
split or dividend, reclassification, or combination of shares or any sale,
transfer, assignment or other transaction by Seller or Purchaser involving the
Option Shares and any securities into which the Option Shares may thereafter
be changed as a result of merger, consolidation, or recapitalization or
otherwise are referred to as the "Registrable Shares") so that the Registrable
Shares will be included in an effective registration statement under the
Securities Act. Seller shall use its reasonable efforts to cause the Shelf
Registration Statement to be declared effective by the SEC on or before 90
days following Seller's receipt of the Registration Notice. Seller shall use
its reasonable efforts to keep the Shelf Registration Statement continuously
effective (and to register or qualify the shares to be sold in such offering
under such other securities or "blue sky" laws as required pursuant to this
Section 4.1) for so long as Purchaser holds any Registrable Shares or until
Seller has caused to be delivered to Purchaser an opinion of counsel, which
counsel shall be reasonably acceptable to Purchaser, stating that the
Registrable Shares may be sold by Purchaser pursuant to Rule 144 without
regard to any volume limitations and that Seller has satisfied the
informational requirements of Rule 144. Seller shall file any necessary
listing applications or amendments to existing applications to cause the
Registrable Shares to be listed on the primary exchange or quotation system on
which its shares of Common Stock are then listed, if any. Seller will use
reasonable efforts to register or qualify the Registrable Shares under such
other securities or "blue sky" laws of such jurisdictions as Purchaser may
reasonably request and do any and all other acts and things that may be
reasonably necessary or advisable to register or qualify for sale in such
jurisdictions the Registrable Shares owned by Purchaser; PROVIDED THAT Seller
shall not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified, (ii) subject itself to
taxation in any such jurisdiction, (iii) consent to general service of process
in any such jurisdiction, or (iv) provide any undertaking required by such
other securities or "blue sky" laws or make any change in its charter or
bylaws that the Board of Directors of Seller determines in good faith to be
contrary to the best interest of Seller and its stockholders. Notwithstanding
the foregoing, if Seller shall furnish to Purchaser a certificate signed by
the chief executive officer of Seller stating that in the good faith judgment
of the Board of Directors of Seller it would be significantly disadvantageous
to Seller and its stockholders for the Shelf Registration Statement to be
amended or supplemented, Seller may defer such amending or supplementing of
such Shelf Registration Statement for not more than 45 days and in such event
Purchaser shall be required to discontinue disposition of any Registrable
Shares covered by such Shelf Registration Statement during such period.
-6-
<PAGE>
4.2 DISTRIBUTION OF REGISTRABLE SHARES. If Purchaser intends to
distribute the Registrable Shares covered by the Shelf Registration Statement by
means of an underwriting, Purchaser shall so advise Seller. In that event, the
underwriting shall be managed by an underwriter or underwriters selected by
Purchaser that are reasonably acceptable to Seller (which approval shall not
unreasonably be withheld). Purchaser shall have the right to negotiate with the
underwriters and to determine all terms of the underwriting, including the gross
price and net price at which the Registrable Shares are to be sold. Seller
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected as above provided and any representations
and warranties of Seller thereunder to and for the benefit of the underwriters
shall also be made to and for the benefit of Purchaser. Seller will furnish to
Purchaser and the underwriters (i) an opinion of counsel for Seller, addressed
to Purchaser and the underwriters, dated the date of the closing under the
underwriting agreement, and (ii) a "comfort letter" signed by the independent
public accountants who have certified Seller's financial statements included in
the Shelf Registration Statement, addressed to Purchaser and the underwriters;
PROVIDED HOWEVER, that (i) the opinion and "comfort letter" shall cover
substantially the same matters with respect to the Shelf Registration Statement
(and the prospectus included therein) as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to underwriters in
underwritten public secondary offerings and such other matters as Purchaser may
reasonably request, and (ii) the "comfort letter" shall also cover events
subsequent to the date of such financial statements.
4.3 FURNISH INFORMATION. In connection with the Shelf Registration
Statement, Purchaser will (a) cooperate with Seller to effect such registration
and to maintain the effectiveness thereof, (b) promptly and accurately furnish
any information reasonably requested by Seller concerning Purchaser and the
proposed distribution by Purchaser, and (c) promptly comply with all applicable
requirements of the Securities Act, the Exchange Act and any other applicable
federal or state laws, including, but not limited to, furnishing Seller such
information regarding Purchaser, the Registrable Shares held by it and the
intended method of disposition of such securities as reasonably required in
connection with the action to be taken by Seller pursuant to this Agreement.
4.4 EXPENSES OF REGISTRATION. Seller will bear all expenses incurred in
effecting any registration pursuant to this Agreement, including without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for Seller, blue sky fees and
expenses, expenses of any regular or special audit incident to or required by
any such registration, but will not include any expenses payable by Purchaser
under this Section 4.4. Purchaser will pay in connection with any registration
of its Registrable Shares any underwriting discounts, selling commissions, fees
or disbursements of Purchaser's counsel or of any advisor to Purchaser not
retained by Seller, or fees and expenses incident to preparation of information
by Purchaser, and expenses incurred in connection with the qualification of the
Registrable Shares in a jurisdiction that requires those expenses to be paid by
a selling shareholder.
4.5 REGISTRATION PROCEDURE.
-7-
<PAGE>
(a) Seller will keep Purchaser advised in writing of the initiation
and the completion of each registration, qualification and compliance effected
by Seller under this Agreement.
(b) At its expense, Seller will:
(i) prepare and file with the SEC such amendments and supplements
to the Shelf Registration Statement and the prospectus used in connection
therewith as may be necessary to keep the Shelf Registration Statement
effective for the period described in Section 4.1(a) and to comply with the
provisions of the Securities Act with respect to the sale or other
disposition of the Registrable Shares whenever the Purchaser shall desire
to sell or otherwise dispose of the Registrable Shares within that period;
(ii) furnish to Purchaser and any underwriters such numbers of
copies of the Shelf Registration Statement, amendments and supplements
thereto, the prospectus included in the Shelf Registration Statement
including any preliminary prospectus, and any amendments or supplements
thereto, and such other documents, as Purchaser and any underwriters may
reasonably request in order to facilitate the sale or other disposition of
the Registrable Shares;
(iii) use its reasonable efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, beginning with the first fiscal
quarter beginning after the effective date of the registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of
the Securities Act; and
(iv) notify Purchaser at any time when a prospectus relating to
the Registrable Shares is required to be delivered under the Securities
Act, of the happening of any event of which Seller has knowledge as a
result of which the prospectus included in the Shelf Registration
Statement, as then in effect, contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
4.6 POSTPONEMENT OF REGISTRATION. If after any registration statement
including Registrable Shares has become effective there exists in the opinion of
Seller's management material non-public information about Seller which has not
been released and which, in the reasonable opinion of Seller's management, would
not be advisable to release, then upon receipt of notice from Seller, Purchaser
will not offer or sell or permit to be offered or sold any of the Registrable
Shares for such time as Seller believes such condition is continuing. If the
offering is not completed because of Seller's exercise of its rights hereunder,
Seller will reimburse Purchaser for all of its expenses incurred in connection
with the terminated offering.
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<PAGE>
4.7 INDEMNIFICATION BY SELLER.
(a) Seller will indemnify Purchaser, its directors, officers,
employees, and agents, and any person controlling the Purchaser (within the
meaning of the Securities Act) and each underwriter, if any, of the Registrable
Shares and each person controlling that underwriter (within the meaning of the
Securities Act), against all claims, losses, expenses, damages, liabilities and
actions ("Claims") in respect of Claims (including any Claim incurred in
settlement of any litigation, commenced or threatened) arising out of or based
on (i) any untrue statement or alleged untrue statement of a material fact in
any prospectus or any related registration statement, or any amendment or
supplement thereto, or any notification or the like incident to any such
registration, or any amendment or supplement thereto, or any qualification or
compliance, or (ii) any omission or alleged omission to state in any such
prospectus or related registration statement incident to such registration,
qualification or compliance, a material fact required to be stated in it or
necessary to make that statement in it not misleading in light of the
circumstance in which the statement was made, or (iii) any violation by Seller
of any rule or regulation promulgated under the Securities Act applicable to
Seller and relating to action or inaction required of Seller in connection with
any such registration, qualification or compliance; provided, however, that the
indemnity agreement contained in this Section 4.7(a) will not apply (A) to
amounts paid in settlement of any Claim if such settlement is effected without
the consent of Seller (which consent will not be unreasonably withheld) and (B)
with respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus or the prospectus or the prospectus
as amended or supplemented, but eliminated or remedied in the prospectus or the
prospectus as amended or supplemented, and will not inure to the benefit of
Purchaser, its directors, officers, employees, agents, or any underwriter (or to
the benefit of any person who controls Purchaser or such underwriter within the
meaning of the Securities Act) from whom the person asserting the Claim
purchased any of the Registrable Shares, if a copy of the prospectus (as then
amended or supplemented and provided to Purchaser) was not sent or given to such
person through no fault of Seller at or prior to the time such action is
required by the Securities Act, nor will Seller be liable in any such case for
any Claim to the extent that it arises out of or is based upon (1) any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (2) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (3) any violation
or alleged violation by Seller of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law (collectively a "Violation")
which occurs in reliance upon and in conformity with written information
furnished for use in connection with such registration by or on behalf of
Purchaser (with respect to a Claim by Purchaser under this Section 4.7(a)) or
such underwriter or controlling person (with respect to a Claim by such
underwriter or controlling person under this Section 4.7(a)).
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<PAGE>
(b) Seller will reimburse Purchaser, its directors, officers,
employees, agents, and controlling person and each such underwriter or
controlling person for any legal or any other expenses reasonably incurred in
connection with investigating or defending any Claim; provided, however, that
the reimbursement provisions contained in this Section 4.7(b) will not apply (i)
to amounts paid in settlement of any Claim if such settlement is effected
without the consent of Seller (which consent will not be unreasonably withheld)
and (ii) with respect to any untrue statement or omission or alleged untrue
statement or omission made in any preliminary prospectus or the prospectus or
the prospectus as amended or supplemented, but eliminated or remedied in the
prospectus or the prospectus as amended or supplemented, and will not inure to
the benefit of Purchaser, its directors, officers, employees, agents, and
controlling person or any underwriter (or to the benefit of any person who
controls such underwriter within the meaning of the Securities Act) from whom
the person asserting any Claim purchased any of the Registrable Shares, if a
copy of the prospectus (as then amended or supplemented and provided to
Purchaser) was not sent or given to such person through no fault of Seller at or
prior to the time such action is required by the Securities Act, nor will Seller
be liable in any such case for any Claim to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and in conformity with
written information furnished for use in connection with such registration by or
on behalf of Purchaser (with respect to a claim for reimbursement by Purchaser,
its directors, officers, employees, agents, and controlling person under this
Section 4.7(b)) or such underwriter or controlling person (with respect to a
claim for reimbursement by such underwriter or controlling person under this
Section 4.7(b)).
4.8 INDEMNIFICATION BY PURCHASER.
(a) Purchaser hereby indemnifies Seller, its directors, officers,
employees, agents, and any person controlling Seller (within the meaning of the
Securities Act) each underwriter, if any, of Seller's securities covered by such
registration statement, each person who controls that underwriter (within the
meaning of the Securities Act) against all Claims (including any Claim incurred
in settlement of any litigation commenced or settled) arising out of or based on
(i) any untrue statement or alleged untrue statement of a material fact in any
prospectus or any related registration statement, notification or the like,
incident to such registration, qualification or compliance, or (ii) any omission
or alleged omission to state in any such prospectus or any related registration
statement, qualification or compliance, a material fact required to be stated in
it or necessary to make the statement(s) in it not misleading in light of the
circumstance in which the statement was made, or (iii) any violation by
Purchaser of any rule or regulation promulgated under the Securities Act
applicable to Purchaser and relating to action or inaction required of Purchaser
in connection with any such registration, qualification or compliance; provided,
however, that the indemnity agreement contained in this Section 4.8(a) will
apply to any Claim only to the extent that it arises out of or is based upon a
Violation which occurs solely in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
or on behalf of Purchaser, and provided further that Purchaser will have no
liability hereunder if (A) any such written information contained an untrue
statement
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<PAGE>
or omission or alleged untrue statement or omission that was subsequently
corrected in writing by Purchaser and furnished to Seller or the underwriter
in sufficient time for incorporation into the final prospectus, or (B) Seller
pays any amounts in settlement of any such Claim if such settlement is
effected without the consent of Purchaser (which consent will not be
unreasonably withheld).
(b) Purchaser will reimburse Seller and its directors, officers,
employees, agents and controlling person (within the meaning of the Securities
Act) each underwriter, and each person controlling that underwriter (within the
meaning of the Securities Act) for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such Claim; provided,
however, that the reimbursement provisions contained in this Section 4.8(b) will
apply to any such Claim only to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
or on behalf of Purchaser.
4.9 NOTICE. Promptly after receipt by an indemnified party under Section
4.7 or 4.8 of notice of the commencement of any action (including, but not
limited to, any action by a Governmental Entity), such indemnified party will,
if a Claim in respect thereof is to be made against any indemnifying party under
Sections 4.7 or 4.8, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party will have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties and the indemnified
party will bear the fees and expenses of any additional counsel thereafter
retained by it; provided, however, that indemnified parties will have the right
to retain counsel to represent all indemnified parties, with the fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified parties by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential material differing interests between
such indemnified parties and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, will relieve such indemnifying party of
any liability to the indemnified party under Section 4.7 or 4.8, but the
omission so to deliver written notice to the indemnifying party will not relieve
it of any liability that it may have to any indemnified party otherwise than
under Section 4.7 or 4.8.
4.10 CONTRIBUTION.
(a) If for any reason the indemnification provided for in Section 4.7
or 4.8 is unavailable to an indemnified party or insufficient to hold it
harmless as contemplated by such sections, then the indemnifying party will
contribute to the amount paid or payable by the indemnified party as a result of
any Claim in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying party, as well
as any other relevant equitable considerations; provided,
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however, that, in any such case, (i) Purchaser will not be required to
contribute any amount in excess of the sales price of all Registrable Shares
sold by Purchaser pursuant to such registration statement, and (ii) no party
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) will be entitled to contribution from any other party
who was not guilty of such fraudulent misrepresentation.
(b) Promptly after receipt by a party of notice of the commencement
of any action, suit or proceeding in connection with a public offering of Common
Stock, such party will, if a claim for contribution in respect thereof is able
to be made against another party, notify the contributing party of the
commencement thereof. The omission to notify the contributing party will not
relieve it from any liability which it may have to any other party other than
for contribution under the Securities Act. In case any such action, suit or
proceeding is brought against any party, and such party notifies a contributing
party of the commencement thereof, the contributing party will be entitled to
participate therein with the notifying party and any other contributing party
similarly notified.
4.11 "MARKET STAND-OFF" AGREEMENT. Purchaser will not, to the extent
requested by Seller or the underwriter(s) managing any underwritten offering of
Seller's securities, sell, make any short sale of, loan, grant any option for
the purchase of or otherwise transfer or dispose of any Option Shares (other
than those included in the underwritten offering) without the prior written
consent of Seller or such underwriters for such period of time as Seller or the
underwriters may specify commencing up to 7 days before the anticipated
effective date of an underwritten registration of Seller's securities and
extending up to 120 days after that effective date. In order to enforce the
foregoing, Seller may impose stop-transfer instructions with respect to the
Option Shares.
V. ADDITIONAL COVENANTS
5.1 RESTRICTIONS ON TRANSFER.
(a) RESTRICTION. For a period of 3 years from the date of the
initial Closing, Purchaser covenants and agrees that it will not and it will
cause each of its "Affiliates" (as hereinafter defined) to not directly or
indirectly sell, tender, transfer, pledge, hypothecate or otherwise dispose of,
or offer or agree to do any of the foregoing ("Transfer"), any interest in the
Option Shares which may be owned "beneficially" (as that term is defined in Rule
13d-3 under the Exchange Act) or of record by it and such Affiliates, except:
(i) a Transfer to any person or entity who or which agrees to be
bound by all the provisions of this Article V;
(ii) a Transfer to any person or entity who or which has made a
tender offer for Seller's Common Stock, but only if the Board of Directors
of
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<PAGE>
Seller has recommended acceptance of such tender offer to the stockholders
of Seller;
(iii) a Transfer to Seller or any of its Subsidiaries;
(iv) a Transfer to an Affiliate of Purchaser which is (or agrees
to become) a party hereto;
(v) a Transfer which is a bona fide pledge of, or grant of a
security interest in, the Option Shares to an institutional, commercial, or
other bona fide lender (including without limitation any securities
brokerage) for money borrowed;
(vi) a Transfer in connection with any registration statement of
Seller that is declared effective during the term of this Article V and
includes the Option Shares as a result of exercise of the registration
rights granted pursuant to this Agreement; provided, however, that any such
disposition by Purchaser or an underwriter pursuant to this Section 5.1(vi)
will be made in a manner which (if pursuant to an underwritten offering, in
the written opinion of the underwriter) is intended to effect a broad
distribution with no Transfers of the Option Shares to any one "person" or
"group" (as such terms are defined in and under Section 13(d) of the
Exchange Act) if after such Transfers such person or group would
beneficially hold in excess of 5 percent of Seller's Common Stock; or
(vii) a Transfer permitted pursuant to Rule 144 under the
Securities Act; provided, that Purchaser will use its best efforts to
effect as wide a distribution of the Option Shares as is reasonably
practicable.
(b) DEFINITION OF AFFILIATE. For all purposes of this Agreement, when
used with reference to Purchaser, the word "Affiliate" means any person directly
or indirectly controlling, controlled by, or under direct or indirect control
with, Purchaser or such other person, as the case may be. For the purposes of
this definition, "control" when used with respect to any specified person means
the power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlling" and "controlled" have meanings
correlative of the foregoing. For the purposes of this definition, "person"
includes, without limitation, any individual, corporation, partnership, joint
venture, trust, and any employee pension, profit sharing and other benefit plan
and trust. As to any individual person, the term "person" means such
individual's spouse, children, brothers and sisters.
5.2 NO TRANSFER. Purchaser covenants and agrees that for a period of 3
years from the date of the initial Closing, without Seller's prior written
consent, it will not and it will cause each of its Affiliates to not Transfer or
otherwise dispose of or encumber any of the Option Shares or any beneficial
interest therein except as permitted pursuant to this Article V.
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<PAGE>
5.3 LEGENDS AND STOP TRANSFER ORDERS.
(a) LEGEND. During the term of the restrictions and covenants of
this Article V each of the certificates representing the Option Shares will be
registered in the name of Purchaser (except as hereinafter permitted), will be
subject to stop transfer instructions, and will include substantially the
following legend in addition to any other legends required by the terms of this
Agreement:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN LIMITATIONS ON TRANSFER SET FORTH IN A STOCK OPTION
AGREEMENT, DATED DECEMBER 23, 1996, BETWEEN MICHAELS STORES,
INC. AND DEVOTION LIMITED, WHICH MAY BE APPLICABLE TO
CERTAIN TRANSFEREES. A COPY OF SUCH AGREEMENT IS ON FILE
WITH THE SECRETARY OF MICHAELS STORES, INC.
(b) REMOVAL OF LEGEND. Such stop transfer instructions and legend
will be applicable to any disposition of the Option Shares other than pursuant
to a public offering of the Option Shares permitted pursuant to Section 5.1(vi).
5.4 TERM AND TERMINATION.
(a) TERM. The term of these restrictions and covenants in this
Article V will commence on the date hereof and will continue for a period of 3
years after the initial Closing.
(b) TERMINATION. Notwithstanding the foregoing, the restrictions and
covenants in this Article V will terminate immediately if individuals who at the
date hereof constituted the Board of Directors of Seller and any new director
whose election by the Board or nomination for election by Seller's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office, who either were directors at such date or whose election or nomination
for election was previously so approved, have ceased for any reason to
constitute a majority thereof.
5.5 CERTAIN ACTIONS. Purchaser agrees that for a period of 3 years after
the initial Closing, except within the terms of a specific request from Seller,
it will not propose or publicly announce or otherwise disclose an intent to
propose, or enter into or agree to enter into, singly or with any other person
or directly or indirectly, (a) any form of business combination, acquisition, or
other transaction relating to Seller or any majority-owned affiliate thereof,
(b) any form of restructuring, recapitalization or similar transaction with
respect to Seller or any such affiliate, or (c) any demand, request or proposal
to amend, waiver or terminate any provision of this Agreement, and except as
aforesaid during such period, Purchaser will not (i) acquire, or offer, propose
or agree to acquire by purchase or otherwise, any securities of Seller entitled
to be voted generally
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<PAGE>
in the election of directors of Seller or any direct or indirect options or
other rights to acquire any such securities ("Voting Securities"), (ii) make,
or in any way participate in, any solicitation of proxies with respect to any
Voting Securities (including by the execution of action by written consent),
become a participant in any election contest with respect to Seller, seek to
influence any Person with respect to any Voting Securities or demand a copy of
Seller's list of its stockholders or other books and records, (iii)
participate in or encourage the formation of any partnership, syndicate or
other group which owns or seeks or offers to acquire beneficial ownership of
any Voting Securities or which seeks to affect control of Seller or for the
purpose of circumventing any provision of this Agreement, or (iv) otherwise
act, alone or in concert with others (including by providing financing for
another Person), to seek or to offer to control of influence, in any manner,
the management, Board of Directors or policies of Seller.
5.6 SPECIFIC PERFORMANCE. Purchaser acknowledges that Seller would be
irreparably damaged and would not have an adequate remedy at law for money
damages in the event that any of the covenants of Seller in this Article V were
not performed in accordance with its terms or otherwise were materially
breached. Purchaser therefore agrees that Seller will be entitled to an
injunction or injunctions to prevent breaches of such performance and to
specific enforcement of such covenants in addition to any other remedy to which
it may be entitled, at law or in equity.
VI. MISCELLANEOUS
6.1 CONFIDENTIALITY. The terms of this Agreement will remain confidential;
provided, however, Seller may make such disclosure in any public filing or
announcement as may be necessary to comply with applicable law.
6.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Except as
provided in this Agreement, each of the representations, warranties and
covenants in this Agreement will survive the consummation of the transactions
contemplated in this Agreement. Article IV and V will have no force or effect
until Purchaser has delivered an Option Exercise Note to Seller under Section
1.2 and acquired any or all of the Option Shares.
6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between Purchaser and Seller with respect to the transactions contemplated
hereby and supersedes all prior agreements among the parties with respect to
such matters.
6.4 RIGHTS OF THE PARTIES. Nothing expressed or implied in this Agreement
is intended or will be construed to confer upon or give any person or entity
other than the parties hereto and their permitted assigns any rights or remedies
under or by reason of this Agreement or any transaction contemplated hereby.
6.5 FURTHER ASSURANCES. From time to time, as and when requested by
either party hereto, the other party will execute and deliver, or cause to
be executed and
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delivered, all such documents and instruments as may be reasonably necessary
to consummate the transactions contemplated hereby.
6.6 APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed in that State, without giving effect to the principles of
conflicts of law thereof.
6.7 INTERPRETATION. For purposes of this Agreement, a "subsidiary" of a
corporation means any corporation more than 50% of the outstanding voting
securities of which are directly or indirectly owned by such other corporation.
The descriptive headings contained herein are for convenience and reference only
and will not effect in any way the meaning or interpretation of this Agreement.
6.8 NOTICES. All notices and other communications hereunder must be in
writing and must be given (and will be deemed to have been duly given upon
receipt) by delivery in person, by cable, telegram, telex, facsimile
transmission or other standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
If to Seller:
Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063
Attn: General Counsel
Fax No.: 214-409-1965
If to Purchaser:
Devotion Limited
c/o Trident Trust Company (IOM) Limited
100 Market Street
P. O. Box 175
Douglas, Isle of Man
British Isles IM99ITT
Attention: David Bester
Fax No.: 011-44-1624-620-588
or to such other address as any party may have furnished to the other parties in
writing in accordance herewith.
6.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one agreement.
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6.10 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns, but will not be assignable by any party without the prior
written consent of the other party; provided that any such assignment will not
relieve the assigning party from any of its obligations hereunder.
6.11 EXPENSES. Subject to Section 4.7 and 4.8 hereof, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by the party incurring such expense.
6.12 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party hereto. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement.
SELLER:
MICHAELS STORES, INC.
By: /s/ Kristen L. Magnuson
-------------------------------
Name: Kristen L. Magnuson
-----------------------------
Title: VP - Finance & Planning
----------------------------
PURCHASER:
DEVOTION LIMITED
By: /s/ Richard Scott
-------------------------------
Name: Richard Scott
-----------------------------
Title: Director
----------------------------
David Hermanus Bester
Company Secretary
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EXHIBIT 10.29
THE SECURITIES REPRESENTED BY THIS OPTION HAVE NOT BEEN REGISTERED PURSUANT TO
THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY
NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER THAT ACT
AND ANY APPLICABLE STATE SECURITIES LAWS, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND SELLER SHALL HAVE RECEIVED, AT THE EXPENSES OF THE
HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO SELLER
(WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO
SELLER).
OPTION AGREEMENT
This OPTION AGREEMENT (this "Agreement") is made and entered as of December
23, 1996 between Michaels Stores, Inc., a Delaware corporation ("Seller") and
Elegance Limited, an Isle of Man corporation ("Purchaser").
RECITAL
Seller desires to grant and sell to Purchaser, and Purchaser desires to
purchase from Seller, the option to acquire 666,667 newly issued and outstanding
shares (the "Option Shares") of Common Stock, par value $.10 per share, of
Seller (the "Common Stock") on the terms and subject to the conditions set forth
in this Agreement.
Seller and Purchaser hereby agree as follows:
I. OPTION GRANT
1.1 OPTION. In exchange for $0.50 per Option Share (the "Option Grant
Price"), Seller hereby irrevocably grants to Purchaser an option (the "Option")
to purchase the Option Shares at $10.50 per Option Share (the "Option
Price"). The Option will terminate and will no longer be in effect after
5:00 p.m. Central Time on February 28, 1997 (the "Option Expiration Time").
1.2 EXERCISE OF OPTION. The Option may be exercised, in whole or in part,
at any time, or from time to time, from this date to the Option Expiration Time
(the "Option Period"). If at any time, or from time to time, Purchaser wishes
to exercise the Option, in whole or in part, Purchaser will notify Seller in
writing (each an "Option Notice") of the number of Option Shares for which the
Option is being exercised.
1.3 OPTION PRICE. If Purchaser exercises the Option pursuant to Section
1.2, Purchaser will pay to Seller at the Closing (as defined below) the
aggregate amount equal to the product of (a) the number of Option Shares that
are the subject of the
<PAGE>
related Option Notice multiplied by (b) the Option Price less the Option
Grant Price (the "Purchase Price").
1.4 THE CLOSING.
(a) Subject to Section 1.5, the closing of the purchase and sale of
the Option Shares under this Agreement (the "Closing") will take place on the
date five business days after the Seller has delivered an Option Notice or such
other date as Seller and Purchaser may agree (the "Closing Date").
(b) At the Closing, (i) Purchaser will pay to Seller the Purchase
Price by wire transfer of immediately available funds to an account or accounts
designated by Seller and (ii) Seller will deliver to Purchaser a single
certificate representing the Option Shares registered in the name of "Elegance
Limited".
(c) At the Closing Seller will deliver to Purchaser, and Purchaser
will deliver to Seller, a certificate confirming that their respective
representations and warranties set forth in this Agreement are true and complete
in all material respects on the Closing Date as if made on that date.
1.5 CONDITION TO CLOSING.
(a) Notwithstanding anything to the contrary in this Agreement, the
obligation of Seller to consummate the sale and purchase of the Option Shares
contemplated hereby is subject to satisfaction of each of the following
conditions:
(i) The Board of Directors of Seller shall have approved the
sale of the Option Shares on or before the Closing Date.
(ii) The representations and warranties of Purchaser in this
Agreement shall be true and complete in all material respects on and as of
the Closing Date.
(b) Notwithstanding anything to the contrary in this Agreement, the
obligations of Purchaser to consummate the sale and purchase of the Option
Shares contemplated hereby are subject to the condition that the representations
and warranties made by Seller in this Agreement shall be true and complete in
all material respects on and as of the Closing Date.
II. REPRESENTATIONS AND WARRANTIES OF SELLER
2.1 ORGANIZATION; POWER AND AUTHORITY. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller has requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery by Seller
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of this Agreement and the performance by it of the transactions contemplated
hereby to be performed by it have been duly authorized by all necessary
corporate action on the part of Seller. This Agreement has been duly
executed and delivered by Seller and constitutes a valid and binding
obligation of Seller.
2.2 CAPITALIZATION. The authorized capital stock of Seller consists of
(i) 50,000,000 shares of Common Stock, of which as of December 10, 1996,
23,560,592 shares were issued and outstanding, fully paid and nonassessable and
no shares were held in the treasury, and (ii) 2,000,000 shares of preferred
stock, $.10 par value per share, of which as of December 10, 1996, no shares
were outstanding. Upon the issuance of the Option Shares to Purchaser and the
payment to Seller of the Purchase Price, the Option Shares will be validly
issued and outstanding, fully paid and nonassessable, and Purchaser will acquire
good and valid title to the Option Shares, free and clear of any charges, liens
or other encumbrances ("Encumbrances") of any kind. Neither the granting of the
Option or issuing any of the Option Shares will violate any preemptive rights,
rights of first refusal or other acquisition rights.
2.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement by Seller nor the consummation by Seller of the
transactions contemplated hereby will (a) conflict with or result in any breach
or violation of, or constitute a default under, any note, pledge, trust,
commitment, agreement or other instrument or obligation to which Seller is a
party or by which Seller or any of its properties may be bound, (b) require any
consent, approval, authorization or permit of, or filing with or notification
to, any court, governmental authority or other regulatory or administrative
agency or commission, domestic or foreign ("Governmental Entity"), or (c)
violate any statute or any order, decree, injunction, rule or regulation of any
Governmental Entity applicable to Seller.
2.4 SEC REPORTS; FINANCIAL STATEMENTS.
(a) Seller has delivered to Purchaser (i) its Annual Report on Form
10-K for the fiscal year ended January 28, 1996 and (ii) its Quarterly Reports
on Form 10-Q for each of the fiscal quarters ended April 28, 1996, July 28, 1996
and October 27, 1996, respectively, each in the form (including exhibits) filed
with the Securities and Exchange Commission ("SEC") (collectively, the "SEC
Reports"). Each SEC Report has been prepared and filed in accordance with all
applicable rules and regulations of the SEC and at the time of its filing was in
compliance with such rules and regulations in all material respects. As of
their respective dates, the SEC Reports did not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) Each of the audited consolidated financial statements and
unaudited consolidated interim financial statements of Seller (and the related
notes and schedules) included in the SEC Reports present fairly, in all material
respects, the consolidated financial position of Seller and its consolidated
subsidiaries as of the respective dates
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thereof and the results of operations and cash flows for the respective
periods set forth therein, in accordance with generally accepted accounting
principles consistently applied during the period involved, except as
otherwise noted therein and subject, in the case of the unaudited interim
consolidated financial statements, to the omission of certain notes not
ordinarily accompanying such unaudited interim consolidated financial
statements and to normal year-end adjustments and any other adjustments
described therein.
(c) Except as set forth in the SEC Reports, any other reports filed
with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that relate to Seller, and any public announcements made by
Seller, since October 27, 1996 there has been no material adverse change in the
assets, earnings, financial position, business or prospects of Seller and its
subsidiaries, considered as a whole.
2.5 NO BROKER; FINDER; ETC. None of Seller or its directors, officers or
employees has employed any investment banker, consultant, broker or finder or
incurred any liability for any brokerage fees, commissions or finders fees in
connection with the transactions contemplated under this Agreement.
III. REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.1 PURCHASE FOR INVESTMENT. Purchaser acknowledges that the Option and
the Option Shares have not been registered under the Securities Act of 1933, as
amended ("Securities Act"), or under any state or foreign securities laws.
Purchaser is not an underwriter as such term is defined under the Securities
Act, and is purchasing the Option Shares solely for investment with no present
intention to distribute any of the Option Shares to any person or entity
("Person"). Purchaser will not sell or otherwise dispose of any of the Option
Shares, except in accordance with the registration requirements or exemption
provisions under the Securities Act and the rules and regulations promulgated
thereunder, and any other applicable securities laws. Purchaser further
understands that the certificate representing the Option Shares will bear the
following legend and agrees that it will hold the Option Shares subject thereto:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY
STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION
HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE
SAME IS REGISTERED UNDER THAT ACT AND ANY APPLICABLE STATE
SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND MICHAELS STORES, INC. SHALL
HAVE RECEIVED,
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AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION
REASONABLY SATISFACTORY TO MICHAELS STORES, INC. (WHICH MAY
INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY
TO MICHAELS STORES, INC.).
3.2 SUITABILITY AND SOPHISTICATION. Purchaser represents and warrants
that it (a) is an "accredited investor" as defined in Rule 501(a) promulgated
under the Securities Act, (b) has such knowledge and experience in financial and
business matters that it is capable of independently evaluating the risks and
merits of purchasing the Option and the Option Shares, (c) has been provided
with the opportunity to make a reasonable investigation of Seller, including the
opportunity to make any inquiries and to request additional information
necessary to its investment decision, and Seller has satisfactorily responded to
any inquiries and furnished to Purchaser all requested information, (d) has
independently evaluated the risks and merits of purchasing the Option and the
Option Shares and has independently determined that the Option Shares are a
suitable investment for it, and (e) has sufficient financial resources to bear
the loss of its entire investment in the Option and the Option Shares.
3.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and
delivery of this Agreement by Purchaser nor the consummation by Purchaser of the
transactions contemplated hereby will (a) conflict with or result in any breach
or violation of, or constitute a default under, any note, pledge, trust,
commitment, agreement or other instrument or obligation to which Purchaser is a
party or by which Purchaser or any of its properties may be bound, (b) require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, or (c) violate any statute or any
order, decree, injunction, rule or regulation of any Governmental Entity
applicable to Purchaser.
3.4 NO AGREEMENTS. Purchaser acknowledges that there are no agreements,
arrangements, commitments or understandings relating to any of the Option Shares
except pursuant to this Agreement.
3.5 NO BROKER; FINDER; ETC. None of Purchaser or its directors, officers,
agents or employees has employed any investment banker, consultant, broker or
finder or incurred any liability for any brokerage fees, commissions or finders
fees in connection with the transactions contemplated under this Agreement.
IV. REGISTRATION RIGHTS
4.1 REGISTRATION. Upon receipt of a written request (the "Registration
Notice") by Purchaser at any time after one year from the date of the initial
Closing, Seller shall cause to be filed as soon as practicable a registration
statement (a "Shelf Registration Statement") under the Securities Act on
Form S-3 or any other appropriate form under
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<PAGE>
the Securities Act for an offering to be made on a delayed or continuous
basis pursuant to Rule 415 thereunder or any similar rule that may be adopted
by the SEC and permitting sales in ordinary course brokerage or dealer
transactions not involving an underwritten public offering (and shall
register or qualify the shares to be sold in such offering under such other
securities or "blue sky" laws as required pursuant to this Section 4.1)
covering no less than the aggregate number of Option Shares then held by
Purchaser (those Option Shares together with any shares of Common Stock or
other securities that may subsequently be issued with respect to the Option
Shares as result of a stock split or dividend, reclassification, or
combination of shares or any sale, transfer, assignment or other transaction
by Seller or Purchaser involving the Option Shares and any securities into
which the Option Shares may thereafter be changed as a result of merger,
consolidation, or recapitalization or otherwise are referred to as the
"Registrable Shares") so that the Registrable Shares will be included in an
effective registration statement under the Securities Act. Seller shall use
its reasonable efforts to cause the Shelf Registration Statement to be
declared effective by the SEC on or before 90 days following Seller's receipt
of the Registration Notice. Seller shall use its reasonable efforts to keep
the Shelf Registration Statement continuously effective (and to register or
qualify the shares to be sold in such offering under such other securities or
"blue sky" laws as required pursuant to this Section 4.1) for so long as
Purchaser holds any Registrable Shares or until Seller has caused to be
delivered to Purchaser an opinion of counsel, which counsel shall be
reasonably acceptable to Purchaser, stating that the Registrable Shares may
be sold by Purchaser pursuant to Rule 144 without regard to any volume
limitations and that Seller has satisfied the informational requirements of
Rule 144. Seller shall file any necessary listing applications or amendments
to existing applications to cause the Registrable Shares to be listed on the
primary exchange or quotation system on which its shares of Common Stock are
then listed, if any. Seller will use reasonable efforts to register or
qualify the Registrable Shares under such other securities or "blue sky" laws
of such jurisdictions as Purchaser may reasonably request and do any and all
other acts and things that may be reasonably necessary or advisable to
register or qualify for sale in such jurisdictions the Registrable Shares
owned by Purchaser; PROVIDED THAT Seller shall not be required to (i) qualify
generally to do business in any jurisdiction where it is not then so
qualified, (ii) subject itself to taxation in any such jurisdiction, (iii)
consent to general service of process in any such jurisdiction, or (iv)
provide any undertaking required by such other securities or "blue sky" laws
or make any change in its charter or bylaws that the Board of Directors of
Seller determines in good faith to be contrary to the best interest of Seller
and its stockholders. Notwithstanding the foregoing, if Seller shall furnish
to Purchaser a certificate signed by the chief executive officer of Seller
stating that in the good faith judgment of the Board of Directors of Seller
it would be significantly disadvantageous to Seller and its stockholders for
the Shelf Registration Statement to be amended or supplemented, Seller may
defer such amending or supplementing of such Shelf Registration Statement for
not more than 45 days and in such event Purchaser shall be required to
discontinue disposition of any Registrable Shares covered by such Shelf
Registration Statement during such period.
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<PAGE>
4.2 DISTRIBUTION OF REGISTRABLE SHARES. If Purchaser intends to
distribute the Registrable Shares covered by the Shelf Registration Statement by
means of an underwriting, Purchaser shall so advise Seller. In that event, the
underwriting shall be managed by an underwriter or underwriters selected by
Purchaser that are reasonably acceptable to Seller (which approval shall not
unreasonably be withheld). Purchaser shall have the right to negotiate with the
underwriters and to determine all terms of the underwriting, including the gross
price and net price at which the Registrable Shares are to be sold. Seller
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected as above provided and any representations
and warranties of Seller thereunder to and for the benefit of the underwriters
shall also be made to and for the benefit of Purchaser. Seller will furnish to
Purchaser and the underwriters (i) an opinion of counsel for Seller, addressed
to Purchaser and the underwriters, dated the date of the closing under the
underwriting agreement, and (ii) a "comfort letter" signed by the independent
public accountants who have certified Seller's financial statements included in
the Shelf Registration Statement, addressed to Purchaser and the underwriters;
PROVIDED HOWEVER, that (i) the opinion and "comfort letter" shall cover
substantially the same matters with respect to the Shelf Registration Statement
(and the prospectus included therein) as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to underwriters in
underwritten public secondary offerings and such other matters as Purchaser may
reasonably request, and (ii) the "comfort letter" shall also cover events
subsequent to the date of such financial statements.
4.3 FURNISH INFORMATION. In connection with the Shelf Registration
Statement, Purchaser will (a) cooperate with Seller to effect such registration
and to maintain the effectiveness thereof, (b) promptly and accurately furnish
any information reasonably requested by Seller concerning Purchaser and the
proposed distribution by Purchaser, and (c) promptly comply with all applicable
requirements of the Securities Act, the Exchange Act and any other applicable
federal or state laws, including, but not limited to, furnishing Seller such
information regarding Purchaser, the Registrable Shares held by it and the
intended method of disposition of such securities as reasonably required in
connection with the action to be taken by Seller pursuant to this Agreement.
4.4 EXPENSES OF REGISTRATION. Seller will bear all expenses incurred in
effecting any registration pursuant to this Agreement, including without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for Seller, blue sky fees and
expenses, expenses of any regular or special audit incident to or required by
any such registration, but will not include any expenses payable by Purchaser
under this Section 4.4. Purchaser will pay in connection with any registration
of its Registrable Shares any underwriting discounts, selling commissions, fees
or disbursements of Purchaser's counsel or of any advisor to Purchaser not
retained by Seller, or fees and expenses incident to preparation of information
by Purchaser, and expenses incurred in connection with the qualification of the
Registrable Shares in a jurisdiction that requires those expenses to be paid by
a selling shareholder.
4.5 REGISTRATION PROCEDURE.
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<PAGE>
(a) Seller will keep Purchaser advised in writing of the initiation
and the completion of each registration, qualification and compliance effected
by Seller under this Agreement.
(b) At its expense, Seller will:
(i) prepare and file with the SEC such amendments and supplements
to the Shelf Registration Statement and the prospectus used in connection
therewith as may be necessary to keep the Shelf Registration Statement
effective for the period described in Section 4.1(a) and to comply with the
provisions of the Securities Act with respect to the sale or other
disposition of the Registrable Shares whenever the Purchaser shall desire
to sell or otherwise dispose of the Registrable Shares within that period;
(ii) furnish to Purchaser and any underwriters such numbers of
copies of the Shelf Registration Statement, amendments and supplements
thereto, the prospectus included in the Shelf Registration Statement
including any preliminary prospectus, and any amendments or supplements
thereto, and such other documents, as Purchaser and any underwriters may
reasonably request in order to facilitate the sale or other disposition of
the Registrable Shares;
(iii) use its reasonable efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, beginning with the first fiscal
quarter beginning after the effective date of the registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of
the Securities Act; and
(iv) notify Purchaser at any time when a prospectus relating to
the Registrable Shares is required to be delivered under the Securities
Act, of the happening of any event of which Seller has knowledge as a
result of which the prospectus included in the Shelf Registration
Statement, as then in effect, contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
4.6 POSTPONEMENT OF REGISTRATION. If after any registration statement
including Registrable Shares has become effective there exists in the opinion of
Seller's management material non-public information about Seller which has not
been released and which, in the reasonable opinion of Seller's management, would
not be advisable to release, then upon receipt of notice from Seller, Purchaser
will not offer or sell or permit to be offered or sold any of the Registrable
Shares for such time as Seller believes such condition is continuing. If the
offering is not completed because of Seller's exercise of its rights hereunder,
Seller will reimburse Purchaser for all of its expenses incurred in connection
with the terminated offering.
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<PAGE>
4.7 INDEMNIFICATION BY SELLER.
(a) Seller will indemnify Purchaser, its directors, officers,
employees, and agents, and any person controlling the Purchaser (within the
meaning of the Securities Act) and each underwriter, if any, of the Registrable
Shares and each person controlling that underwriter (within the meaning of the
Securities Act), against all claims, losses, expenses, damages, liabilities and
actions ("Claims") in respect of Claims (including any Claim incurred in
settlement of any litigation, commenced or threatened) arising out of or based
on (i) any untrue statement or alleged untrue statement of a material fact in
any prospectus or any related registration statement, or any amendment or
supplement thereto, or any notification or the like incident to any such
registration, or any amendment or supplement thereto, or any qualification or
compliance, or (ii) any omission or alleged omission to state in any such
prospectus or related registration statement incident to such registration,
qualification or compliance, a material fact required to be stated in it or
necessary to make that statement in it not misleading in light of the
circumstance in which the statement was made, or (iii) any violation by Seller
of any rule or regulation promulgated under the Securities Act applicable to
Seller and relating to action or inaction required of Seller in connection with
any such registration, qualification or compliance; provided, however, that the
indemnity agreement contained in this Section 4.7(a) will not apply (A) to
amounts paid in settlement of any Claim if such settlement is effected without
the consent of Seller (which consent will not be unreasonably withheld) and (B)
with respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus or the prospectus or the prospectus
as amended or supplemented, but eliminated or remedied in the prospectus or the
prospectus as amended or supplemented, and will not inure to the benefit of
Purchaser, its directors, officers, employees, agents, or any underwriter (or to
the benefit of any person who controls Purchaser or such underwriter within the
meaning of the Securities Act) from whom the person asserting the Claim
purchased any of the Registrable Shares, if a copy of the prospectus (as then
amended or supplemented and provided to Purchaser) was not sent or given to such
person through no fault of Seller at or prior to the time such action is
required by the Securities Act, nor will Seller be liable in any such case for
any Claim to the extent that it arises out of or is based upon (1) any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (2) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (3) any violation
or alleged violation by Seller of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law (collectively a "Violation")
which occurs in reliance upon and in conformity with written information
furnished for use in connection with such registration by or on behalf of
Purchaser (with respect to a Claim by Purchaser under this Section 4.7(a)) or
such underwriter or controlling person (with respect to a Claim by such
underwriter or controlling person under this Section 4.7(a)).
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<PAGE>
(b) Seller will reimburse Purchaser, its directors, officers,
employees, agents, and controlling person and each such underwriter or
controlling person for any legal or any other expenses reasonably incurred in
connection with investigating or defending any Claim; provided, however, that
the reimbursement provisions contained in this Section 4.7(b) will not apply (i)
to amounts paid in settlement of any Claim if such settlement is effected
without the consent of Seller (which consent will not be unreasonably withheld)
and (ii) with respect to any untrue statement or omission or alleged untrue
statement or omission made in any preliminary prospectus or the prospectus or
the prospectus as amended or supplemented, but eliminated or remedied in the
prospectus or the prospectus as amended or supplemented, and will not inure to
the benefit of Purchaser, its directors, officers, employees, agents, and
controlling person or any underwriter (or to the benefit of any person who
controls such underwriter within the meaning of the Securities Act) from whom
the person asserting any Claim purchased any of the Registrable Shares, if a
copy of the prospectus (as then amended or supplemented and provided to
Purchaser) was not sent or given to such person through no fault of Seller at or
prior to the time such action is required by the Securities Act, nor will Seller
be liable in any such case for any Claim to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and in conformity with
written information furnished for use in connection with such registration by or
on behalf of Purchaser (with respect to a claim for reimbursement by Purchaser,
its directors, officers, employees, agents, and controlling person under this
Section 4.7(b)) or such underwriter or controlling person (with respect to a
claim for reimbursement by such underwriter or controlling person under this
Section 4.7(b)).
4.8 INDEMNIFICATION BY PURCHASER.
(a) Purchaser hereby indemnifies Seller, its directors, officers,
employees, agents, and any person controlling Seller (within the meaning of the
Securities Act) each underwriter, if any, of Seller's securities covered by such
registration statement, each person who controls that underwriter (within the
meaning of the Securities Act) against all Claims (including any Claim incurred
in settlement of any litigation commenced or settled) arising out of or based on
(i) any untrue statement or alleged untrue statement of a material fact in any
prospectus or any related registration statement, notification or the like,
incident to such registration, qualification or compliance, or (ii) any omission
or alleged omission to state in any such prospectus or any related registration
statement, qualification or compliance, a material fact required to be stated in
it or necessary to make the statement(s) in it not misleading in light of the
circumstance in which the statement was made, or (iii) any violation by
Purchaser of any rule or regulation promulgated under the Securities Act
applicable to Purchaser and relating to action or inaction required of Purchaser
in connection with any such registration, qualification or compliance; provided,
however, that the indemnity agreement contained in this Section 4.8(a) will
apply to any Claim only to the extent that it arises out of or is based upon a
Violation which occurs solely in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
or on behalf of Purchaser, and provided further that Purchaser will have no
liability hereunder if (A) any such written information contained an untrue
statement
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or omission or alleged untrue statement or omission that was subsequently
corrected in writing by Purchaser and furnished to Seller or the underwriter
in sufficient time for incorporation into the final prospectus, or (B) Seller
pays any amounts in settlement of any such Claim if such settlement is
effected without the consent of Purchaser (which consent will not be
unreasonably withheld).
(b) Purchaser will reimburse Seller and its directors, officers,
employees, agents and controlling person (within the meaning of the Securities
Act) each underwriter, and each person controlling that underwriter (within the
meaning of the Securities Act) for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such Claim; provided,
however, that the reimbursement provisions contained in this Section 4.8(b) will
apply to any such Claim only to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
or on behalf of Purchaser.
4.9 NOTICE. Promptly after receipt by an indemnified party under Section
4.7 or 4.8 of notice of the commencement of any action (including, but not
limited to, any action by a Governmental Entity), such indemnified party will,
if a Claim in respect thereof is to be made against any indemnifying party under
Sections 4.7 or 4.8, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party will have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties and the indemnified
party will bear the fees and expenses of any additional counsel thereafter
retained by it; provided, however, that indemnified parties will have the right
to retain counsel to represent all indemnified parties, with the fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified parties by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential material differing interests between
such indemnified parties and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, will relieve such indemnifying party of
any liability to the indemnified party under Section 4.7 or 4.8, but the
omission so to deliver written notice to the indemnifying party will not relieve
it of any liability that it may have to any indemnified party otherwise than
under Section 4.7 or 4.8.
4.10 CONTRIBUTION.
(a) If for any reason the indemnification provided for in Section 4.7
or 4.8 is unavailable to an indemnified party or insufficient to hold it
harmless as contemplated by such sections, then the indemnifying party will
contribute to the amount paid or payable by the indemnified party as a result of
any Claim in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying party, as well
as any other relevant equitable considerations; provided,
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however, that, in any such case, (i) Purchaser will not be required to
contribute any amount in excess of the sales price of all Registrable Shares
sold by Purchaser pursuant to such registration statement, and (ii) no party
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) will be entitled to contribution from any other party
who was not guilty of such fraudulent misrepresentation.
(b) Promptly after receipt by a party of notice of the commencement
of any action, suit or proceeding in connection with a public offering of Common
Stock, such party will, if a claim for contribution in respect thereof is able
to be made against another party, notify the contributing party of the
commencement thereof. The omission to notify the contributing party will not
relieve it from any liability which it may have to any other party other than
for contribution under the Securities Act. In case any such action, suit or
proceeding is brought against any party, and such party notifies a contributing
party of the commencement thereof, the contributing party will be entitled to
participate therein with the notifying party and any other contributing party
similarly notified.
4.11 "MARKET STAND-OFF" AGREEMENT. Purchaser will not, to the extent
requested by Seller or the underwriter(s) managing any underwritten offering of
Seller's securities, sell, make any short sale of, loan, grant any option for
the purchase of or otherwise transfer or dispose of any Option Shares (other
than those included in the underwritten offering) without the prior written
consent of Seller or such underwriters for such period of time as Seller or the
underwriters may specify commencing up to 7 days before the anticipated
effective date of an underwritten registration of Seller's securities and
extending up to 120 days after that effective date. In order to enforce the
foregoing, Seller may impose stop-transfer instructions with respect to the
Option Shares.
V. ADDITIONAL COVENANTS
5.1 RESTRICTIONS ON TRANSFER.
(a) RESTRICTION. For a period of 3 years from the date of the
initial Closing, Purchaser covenants and agrees that it will not and it will
cause each of its "Affiliates" (as hereinafter defined) to not directly or
indirectly sell, tender, transfer, pledge, hypothecate or otherwise dispose of,
or offer or agree to do any of the foregoing ("Transfer"), any interest in the
Option Shares which may be owned "beneficially" (as that term is defined in Rule
13d-3 under the Exchange Act) or of record by it and such Affiliates, except:
(i) a Transfer to any person or entity who or which agrees to be
bound by all the provisions of this Article V;
(ii) a Transfer to any person or entity who or which has made a
tender offer for Seller's Common Stock, but only if the Board of Directors
of
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Seller has recommended acceptance of such tender offer to the stockholders
of Seller;
(iii) a Transfer to Seller or any of its Subsidiaries;
(iv) a Transfer to an Affiliate of Purchaser which is (or agrees
to become) a party hereto;
(v) a Transfer which is a bona fide pledge of, or grant of a
security interest in, the Option Shares to an institutional, commercial, or
other bona fide lender (including without limitation any securities
brokerage) for money borrowed;
(vi) a Transfer in connection with any registration statement of
Seller that is declared effective during the term of this Article V and
includes the Option Shares as a result of exercise of the registration
rights granted pursuant to this Agreement; provided, however, that any such
disposition by Purchaser or an underwriter pursuant to this Section 5.1(vi)
will be made in a manner which (if pursuant to an underwritten offering, in
the written opinion of the underwriter) is intended to effect a broad
distribution with no Transfers of the Option Shares to any one "person" or
"group" (as such terms are defined in and under Section 13(d) of the
Exchange Act) if after such Transfers such person or group would
beneficially hold in excess of 5 percent of Seller's Common Stock; or
(vii) a Transfer permitted pursuant to Rule 144 under the
Securities Act; provided, that Purchaser will use its best efforts to
effect as wide a distribution of the Option Shares as is reasonably
practicable.
(b) DEFINITION OF AFFILIATE. For all purposes of this Agreement, when
used with reference to Purchaser, the word "Affiliate" means any person directly
or indirectly controlling, controlled by, or under direct or indirect control
with, Purchaser or such other person, as the case may be. For the purposes of
this definition, "control" when used with respect to any specified person means
the power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlling" and "controlled" have meanings
correlative of the foregoing. For the purposes of this definition, "person"
includes, without limitation, any individual, corporation, partnership, joint
venture, trust, and any employee pension, profit sharing and other benefit plan
and trust. As to any individual person, the term "person" means such
individual's spouse, children, brothers and sisters.
5.2 NO TRANSFER. Purchaser covenants and agrees that for a period of 3
years from the date of the initial Closing, without Seller's prior written
consent, it will not and it will cause each of its Affiliates to not Transfer or
otherwise dispose of or encumber any of the Option Shares or any beneficial
interest therein except as permitted pursuant to this Article V.
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5.3 LEGENDS AND STOP TRANSFER ORDERS.
(a) LEGEND. During the term of the restrictions and covenants of
this Article V each of the certificates representing the Option Shares will be
registered in the name of Purchaser (except as hereinafter permitted), will be
subject to stop transfer instructions, and will include substantially the
following legend in addition to any other legends required by the terms of this
Agreement:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN LIMITATIONS ON TRANSFER SET FORTH IN A STOCK OPTION
AGREEMENT, DATED DECEMBER 23, 1996, BETWEEN MICHAELS STORES,
INC. AND ELEGANCE LIMITED, WHICH MAY BE APPLICABLE TO
CERTAIN TRANSFEREES. A COPY OF SUCH AGREEMENT IS ON FILE
WITH THE SECRETARY OF MICHAELS STORES, INC.
(b) REMOVAL OF LEGEND. Such stop transfer instructions and legend
will be applicable to any disposition of the Option Shares other than pursuant
to a public offering of the Option Shares permitted pursuant to Section 5.1(vi).
5.4 TERM AND TERMINATION.
(a) TERM. The term of these restrictions and covenants in this
Article V will commence on the date hereof and will continue for a period of 3
years after the initial Closing.
(b) TERMINATION. Notwithstanding the foregoing, the restrictions and
covenants in this Article V will terminate immediately if individuals who at the
date hereof constituted the Board of Directors of Seller and any new director
whose election by the Board or nomination for election by Seller's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office, who either were directors at such date or whose election or nomination
for election was previously so approved, have ceased for any reason to
constitute a majority thereof.
5.5 CERTAIN ACTIONS. Purchaser agrees that for a period of 3 years after
the initial Closing, except within the terms of a specific request from Seller,
it will not propose or publicly announce or otherwise disclose an intent to
propose, or enter into or agree to enter into, singly or with any other person
or directly or indirectly, (a) any form of business combination, acquisition, or
other transaction relating to Seller or any majority-owned affiliate thereof,
(b) any form of restructuring, recapitalization or similar transaction with
respect to Seller or any such affiliate, or (c) any demand, request or proposal
to amend, waiver or terminate any provision of this Agreement, and except as
aforesaid during such period, Purchaser will not (i) acquire, or offer, propose
or agree to acquire by purchase or otherwise, any securities of Seller entitled
to be voted generally
-14-
<PAGE>
in the election of directors of Seller or any direct or indirect options or
other rights to acquire any such securities ("Voting Securities"), (ii) make,
or in any way participate in, any solicitation of proxies with respect to any
Voting Securities (including by the execution of action by written consent),
become a participant in any election contest with respect to Seller, seek to
influence any Person with respect to any Voting Securities or demand a copy of
Seller's list of its stockholders or other books and records, (iii)
participate in or encourage the formation of any partnership, syndicate or
other group which owns or seeks or offers to acquire beneficial ownership of
any Voting Securities or which seeks to affect control of Seller or for the
purpose of circumventing any provision of this Agreement, or (iv) otherwise
act, alone or in concert with others (including by providing financing for
another Person), to seek or to offer to control of influence, in any manner,
the management, Board of Directors or policies of Seller.
5.6 SPECIFIC PERFORMANCE. Purchaser acknowledges that Seller would be
irreparably damaged and would not have an adequate remedy at law for money
damages in the event that any of the covenants of Seller in this Article V were
not performed in accordance with its terms or otherwise were materially
breached. Purchaser therefore agrees that Seller will be entitled to an
injunction or injunctions to prevent breaches of such performance and to
specific enforcement of such covenants in addition to any other remedy to which
it may be entitled, at law or in equity.
VI. MISCELLANEOUS
6.1 CONFIDENTIALITY. The terms of this Agreement will remain confidential;
provided, however, Seller may make such disclosure in any public filing or
announcement as may be necessary to comply with applicable law.
6.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Except as
provided in this Agreement, each of the representations, warranties and
covenants in this Agreement will survive the consummation of the transactions
contemplated in this Agreement. Article IV and V will have no force or effect
until Purchaser has delivered an Option Exercise Note to Seller under Section
1.2 and acquired any or all of the Option Shares.
6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between Purchaser and Seller with respect to the transactions contemplated
hereby and supersedes all prior agreements among the parties with respect to
such matters.
6.4 RIGHTS OF THE PARTIES. Nothing expressed or implied in this Agreement
is intended or will be construed to confer upon or give any person or entity
other than the parties hereto and their permitted assigns any rights or remedies
under or by reason of this Agreement or any transaction contemplated hereby.
6.5 FURTHER ASSURANCES. From time to time, as and when requested by
either party hereto, the other party will execute and deliver, or cause to be
executed and
-15-
<PAGE>
delivered, all such documents and instruments as may be reasonably necessary
to consummate the transactions contemplated hereby.
6.6 APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed in that State, without giving effect to the principles of
conflicts of law thereof.
6.7 INTERPRETATION. For purposes of this Agreement, a "subsidiary" of a
corporation means any corporation more than 50% of the outstanding voting
securities of which are directly or indirectly owned by such other corporation.
The descriptive headings contained herein are for convenience and reference only
and will not effect in any way the meaning or interpretation of this Agreement.
6.8 NOTICES. All notices and other communications hereunder must be in
writing and must be given (and will be deemed to have been duly given upon
receipt) by delivery in person, by cable, telegram, telex, facsimile
transmission or other standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
If to Seller:
Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063
Attn: General Counsel
Fax No.: 214-409-1965
If to Purchaser:
Elegance Limited
c/o Trident Trust Company (IOM) Limited
100 Market Street
P.O. Box 175
Douglas, Isle of Man
British Isles IM99ITT
Attention: David Bester
Fax No.: 011-44-1624-620-588
or to such other address as any party may have furnished to the other parties in
writing in accordance herewith.
6.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed to be an original but all of which
together will constitute but one agreement.
-16-
<PAGE>
6.10 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns, but will not be assignable by any party without the prior
written consent of the other party; provided that any such assignment will not
relieve the assigning party from any of its obligations hereunder.
6.11 EXPENSES. Subject to Section 4.7 and 4.8 hereof, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by the party incurring such expense.
6.12 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party hereto. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement.
SELLER:
MICHAELS STORES, INC.
By: /s/ Kristen L. Magnuson
-------------------------------
Name: Kristen L. Magnuson
-----------------------------
Title: VP - Finance & Planning
----------------------------
PURCHASER:
ELEGANCE LIMITED
By: /s/ Richard Scott
-------------------------------
Name: Richard Scott
-----------------------------
Title: Director
----------------------------
David Hermanus Bester
Company Secretary
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<PAGE>
EXHIBIT 10.30
[LOGO]
1997
R. MICHAEL ROULEAU
CHIEF EXECUTIVE OFFICER
BONUS PLAN
CONFIDENTIAL
<PAGE>
1997 CHIEF EXECUTIVE OFFICER
BONUS PLAN OVERVIEW
A. PURPOSE
The 1997 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 50% of your
base salary as of February 2, 1997. FOR 1997 ONLY, we are adding an
additional bonus incentive to the target payout percentage. If the
Company exceeds its Profit Before Taxes goal by 10%, you are eligible
to earn up to 60% of your base salary. This additional incentive is
being offered because of the pivotal role that 1997 will play in
Michaels future and your importance to that contribution.
B. BONUS PLAN ELIGIBILITY
1. The performance period parallels Fiscal Year 1997. It begins on
February 2, 1997 and concludes on January 31, 1998.
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 that entire
month. Individuals who do not assume the position until 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 2, 1997.
4. In order to receive any payout, you must be employed by the Company,
in a bonus eligible position, on January 31, 1998.
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).
2
<PAGE>
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.
3
<PAGE>
MICHAELS STORES INC.
1997 CORPORATE BONUS PLAN
CHIEF EXECUTIVE OFFICER
BONUS TARGET = 50% OF BASE SALARY AS OF 2/2/97
BONUS POTENTIAL = 60% OF BASE SALARY AS OF 2/2/97
- -----------------------------------------------------------------------------
COMPANY PROFIT
BEFORE TAXES % OF BASE SALARY
($ MILLIONS) EARNED
- -----------------------------------------------------------------------------
ABOVE $47.08 60%
(110%+)
- -----------------------------------------------------------------------------
PLAN $42.8 -- 47.08 50%
(100 to 109.9%)
- -----------------------------------------------------------------------------
$40.7 -- 42.79 40%
(95 to 99.9%)
- -----------------------------------------------------------------------------
$39.0 -- 40.69 20%
(91 to 94.9%)
- -----------------------------------------------------------------------------
$37.2 -- 38.99 10%
(87 to 90.9%)
- -----------------------------------------------------------------------------
LESS THAN $37.2 0%
(below 87%)
- -----------------------------------------------------------------------------
4
<PAGE>
EXHIBIT 10.31
[LOGO]
1997
DOUG SULLIVAN
PRESIDENT
BONUS PLAN
CONFIDENTIAL
<PAGE>
1997 PRESIDENT
BONUS PLAN OVERVIEW
A. PURPOSE
The 1997 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 President can be up to 40% of your base salary as
of February 2, 1997. FOR 1997 ONLY, we are adding an additional bonus
incentive to the target payout percentage. If the Company exceeds its
Profit Before Taxes goal by 10%, you are eligible to earn up to 50% of
your base salary. This additional incentive is being offered because
of the pivotal role that 1997 will play in Michaels future and your
importance to that contribution.
B. BONUS PLAN ELIGIBILITY
1. The performance period parallels Fiscal Year 1997. It begins on
February 2, 1997 and concludes on January 31, 1998.
2. If the 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 that entire month. Individuals who do not
assume the position until 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 2, 1997.
4. In order to receive any payout, you must be employed by the Company,
in a bonus eligible position, on January 31, 1998.
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).
2
<PAGE>
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.
3
<PAGE>
MICHAELS STORES INC.
1997 CORPORATE BONUS PLAN
PRESIDENT
BONUS TARGET = 40% OF BASE SALARY AS OF 2/2/97
BONUS POTENTIAL = 50% OF BASE SALARY AS OF 2/2/97
- ----------------------------------------------------------------------------
COMPANY PROFIT
BEFORE TAXES % OF BASE SALARY
($ MILLIONS) EARNED
- ----------------------------------------------------------------------------
ABOVE $47.08 50%
(110%+)
- ----------------------------------------------------------------------------
PLAN $42.8 -- 47.08 40%
(100 to 109.9%)
- ----------------------------------------------------------------------------
$40.7 -- 42.79 30%
(95 to 99.9%)
- ----------------------------------------------------------------------------
$39.0 -- 40.69 15%
(91 to 94.9%)
- ----------------------------------------------------------------------------
$37.2 -- 38.99 5%
(87 to 90.9%)
- ----------------------------------------------------------------------------
LESS THAN $37.2 0%
(below 87%)
- ----------------------------------------------------------------------------
4
<PAGE>
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of April 29, 1997
by and between Michaels Stores, Inc., a Delaware corporation (the "Company"),
and R. Michael Rouleau ("Executive").
The parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Executive and Executive
accepts such employment for the period beginning as of the date hereof and
ending on April 30, 2003, subject to earlier termination pursuant to
Paragraph 1(d). After April 30, 2003, this Agreement will continue for
successive one-year terms unless the Company gives written notice to
Executive pursuant to Paragraph 4 of this Agreement at least 120 days prior
to the expiration of any term of this Agreement that the Agreement will not
be renewed. If a Change in Control of the Company (as hereinafter defined)
shall have occurred during any term of this Agreement, this Agreement shall
continue in effect until the term of the Agreement expires.
(a) SALARY, BONUS AND BENEFITS. During the term of this
Agreement, the Company will pay Executive a base salary ("Base Salary") of
$500,000 per annum, or such higher amount as the Company's Board of Directors
or an appropriate committee thereof shall determine in its sole discretion.
Base Salary will be paid in equal bi-weekly installments. On or about April
1 of each year during the term of this Agreement, Executive shall be eligible
to receive a bonus based on the Company's applicable bonus plan. If a Change
in Control of the Company shall have occurred during any term of this
Agreement, Executive shall be entitled to receive employee benefits under,
and participate in for the remaining term of the Agreement, all employee
benefit plans to which Executive was entitled immediately prior to the date
of the Change in Control, including but not limited to any applicable pension
plan, retirement plan, stock option plan, employee stock ownership, 401(k)
savings plan, disability insurance plan, life insurance plan, medical and
dental insurance plans.
(b) ADDITIONAL BENEFITS. In addition to the salary and any bonus
payable to Executive pursuant to Paragraph 1(a), Executive will be entitled
during the term of this Agreement to health insurance, life insurance,
disability insurance, four weeks of vacation annually, a Company-paid
automobile, and such other employment-related benefits that the Company
provides to its executive employees, as well as any perquisites the Board of
Directors or an appropriate committee thereof may establish. The Company
shall reimburse Executive, in accordance with its
<PAGE>
standard expense reporting and reimbursement policies in effect from time to
time, for all out-of-pocket expenses which Executive shall incur in
connection with his services for the Company.
(c) SERVICES. During the term of this Agreement, Executive will
serve as President and Chief Executive Officer of the Company and will
perform such services of an executive and administrative nature for the
Company and its subsidiaries as the Company's Board of Directors and/or the
Company's Chairman of the Board of Directors may from time to time direct.
It is the intention of the parties that, subject to the directives of the
Company's Board of Directors and its Chairman, Executive's principal
responsibilities shall be to direct the day to day management of the Company.
Executive will devote all of his business time and attention (except for
vacation periods and reasonable periods of illness or other incapacity) to
the business of the Company and its subsidiaries.
(d) TERMINATION; SEVERANCE PAY. The term of this Agreement will
terminate upon the first to occur of (i) the expiration of the term of the
Agreement, (ii) Executive's death or permanent disability (as determined by
the Board of Directors in its good faith judgment) or (iii) the date on which
the Company's Board of Directors terminates Executive's employment for
"Cause." In the event that the Company shall terminate Executive's
employment prior to April 30, 2003 otherwise than pursuant to clause (ii) or
(iii) above, the Company shall pay severance pay to Executive by continuing
the Base Salary, as well as all additional benefits described in Paragraph
1(a) and in effect at the time of such termination, until April 30, 2003.
Such payments shall be made in bi-weekly installments. For purposes of this
Agreement, "Cause" shall mean by determination of the Company's Board of
Directors in its good faith judgment that Executive has: (1) knowingly
committed gross misconduct in the performance of his duties, (2) knowingly
committed gross negligence or gross nonfeasance in the performance of his
duties, (3) committed an act of financial dishonesty against the Company or
any of its subsidiaries, or (4) committed any felony involving moral
turpitude.
In the event this Agreement terminates because of the
expiration of the term of the Agreement or because of Executive's death or
disability, or in the event of the termination of Executive's employment by
the Company for any reason other than Cause, the Company will allow
Executive's spouse to continue to participate in Company's medical plan on
the same basis as such continued participation is provided to spouses of
other executive employees until her 65th birthday. If such continued
participation is not possible for any reason, the Company will purchase
health insurance coverage for Executive's spouse that provides, to the extent
practicable, reasonably
-2-
<PAGE>
comparable benefits until her 65th birthday. In no event will the Company be
obligated to provide any medical plan or other health insurance coverage if
Executive's spouse becomes eligible for medical benefits offered by another
employer. In addition, in the event this Agreement is terminated at any time
and for any reason (i) any unvested portion of Executive's 401(k) savings
plan interest will automatically accelerate and become immediately 100%
vested on the date of such termination or, if such accelerated vesting is not
permitted by any law, regulation or governmental ruling applicable to the
401(k) savings plan, the Company will pay to Executive the value of his
unvested interest in the 401(k) savings plan; (ii) any and all unvested stock
options to purchase common stock of the Company granted to Executive at any
time during his employment with Company will automatically accelerate and
become immediately 100% vested and exercisable on the date of said
termination; (iii) Executive will have the option to purchase the
Company-paid automobile in his possession at the depreciated book value of
said automobile; and (iv) Executive will automatically become the owner of
his Company-paid whole life insurance policy.
2. CONFIDENTIAL INFORMATION. Executive acknowledges that the trade
secrets and similar proprietary information obtained by him during the course
of his employment with the Company (including his employment prior to the
date of this Agreement), concerning the business or affairs of the Company
and its subsidiaries are the property of the Company. Therefore, Executive
agrees that, at no time during or after the term of this Agreement, will he
disclose to any unauthorized person or use for his own account any of such
information or data without the written consent of the Chairman of the Board
of Directors, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result
of Executive's acts or omissions to act. Executive agrees to deliver to the
Company at the termination of his employment, or at any other time the
Company may request, all memoranda, notes, plans, records, reports and other
documents (and copies thereof) relating to the business of the Company and
its subsidiaries which he may then possess or have under his control.
3. CHANGE IN CONTROL. For purposes of this Agreement, the term
"Change in Control" means the occurrence of any of the following events:
(a) the Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than two-thirds of the combined voting
power of the then-outstanding securities entitled to vote generally in the
election of directors ("Voting Stock") of such
-3-
<PAGE>
corporation or person immediately after such transaction are held in the
aggregate by the holders of Voting Stock of the Company immediately prior
to such transaction;
(b) the Company sells or otherwise transfers all or substantially all
of its assets to another corporation or other legal person, and as a result
of such sale or transfer less than two-thirds of the combined voting power
of the then-outstanding Voting Stock of such corporation or person
immediately after such sale or transfer is held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such sale or
transfer;
(c) there is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated pursuant to the
Act, disclosing that any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Act) has become the beneficial owner
(as the term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Act) of securities
representing 20% or more of the combined voting power of the
then-outstanding Voting Stock of the Company;
(d) the Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Act disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report or item
therein) that a change in control of the Company has occurred or will occur
in the future pursuant to any then-existing contract or transaction; or
(e) if, during any period of two consecutive years, individuals who
at the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority thereof; provided,
however, that for purposes of this Paragraph 3(e) each director who is
first elected, or first nominated for election by the Company's
stockholders, by a vote of at least two-thirds of the directors of the
Company (or a committee thereof) then still in office who were directors of
the Company at the beginning of any such period will be deemed to have been
a director of the Company at the beginning of such period.
Notwithstanding the foregoing provisions of Paragraph 3(c) or (d) above,
unless otherwise determined in a specific case by majority vote of the Board,
a "Change in Control" will not be deemed to have occurred for purposes of
Paragraph 3(c) or (d) above solely because (A) the Company, (B) a Subsidiary
or (C) any Company-sponsored employee benefit plan of the Company or any
Subsidiary
-4-
<PAGE>
either files or becomes obligated to file a report or a proxy statement under
or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or
any successor schedule, form or report or item therein) under the Act
disclosing beneficial ownership by it of shares of Voting Stock of the
Company, whether in excess of 20% or otherwise, or because the Company
reports that a change in control of the Company has occurred or will occur in
the future by reason of such beneficial ownership or any decrease thereof.
4. NOTICES. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, or mailed by first class
mail, to the recipient at the address below indicated:
To the Company:
Michaels Stores, Inc.
c/o Sam Wyly, Chairman
300 Crescent Court
Suite 1000
Dallas, Texas 75201
To Executive:
R. Michael Rouleau
6622 Waggoner Dr.
Dallas, Texas 75230
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or mailed.
5. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in
any jurisdiction, such invalidity, illegality or unenforceability will not
affect any other provision or any other jurisdiction, but this Agreement will
be reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
6. COMPLETE AGREEMENT. This Agreement constitutes the complete
agreement and understanding between the parties hereto and supersedes and
preempts any prior understandings, agreements or representations by or
between the parties hereto, written or oral, which may have related to the
subject matter hereof in any way.
-5-
<PAGE>
7. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which
taken together constitute one and the same agreement.
8. SUCCESSORS AND ASSIGNABILITY. This Agreement is intended to bind
and inure to the benefit of and be enforceable by Executive and his heirs,
executors or administrators, and to bind and inure to the benefit of and be
enforceable by the Company and its successors and assigns. This Agreement
shall not be assignable by Executive, except by will or pursuant to the laws
of descent and distribution.
9. CHOICE OF LAW. All questions concerning the construction,
validity, and interpretation of this Agreement will be governed by the
internal law, and not the law of conflicts, of the State of Texas, including
without limitation the Texas statute of limitations.
10. REMEDIES. Each of the parties to this Agreement will be entitled
to enforce its rights under this Agreement specifically, to recover damages
by reason of any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that any party may in its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief in order to enforce or prevent
any violations of the provisions of this Agreement.
11. AMENDMENTS AND WAIVERS. Any provision of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive.
12. LEGAL FEES. In the event of any litigation between the parties
hereto relating to this Agreement, the prevailing party will be entitled to
recover from the losing party reimbursement for the prevailing party's
reasonable attorneys' fees and expenses.
-6-
<PAGE>
IN WITNESS HEREOF, the parties have executed this Agreement on the 29th
day of April, 1997.
MICHAELS STORES, INC.
By:
--------------------------
Sam Wyly, Chairman of
the Board of Directors
--------------------------
R. Michael Rouleau
-7-
<PAGE>
EXHIBIT 10.33
MICHAELS STORES, INC.
1997 EMPLOYEES STOCK PURCHASE PLAN
The purpose of this 1997 Employees Stock Purchase Plan (the "Plan") is to
provide employees of Michaels Stores, Inc. (the "Company") a continued
opportunity to purchase shares of the Company's common stock, par value $0.10
per share (the "Common Stock"), through quarterly offerings to be made on each
consecutive February 1, May 1, August 1, and November 1. This Plan will become
effective on the date the Company's current Employees Stock Purchase Plan
terminates (the "Effective Date"). One million (1,000,000) shares of Common
Stock in the aggregate have been approved for this purpose.
1. ADMINISTRATION. The Plan will be administered by a Committee
appointed by the Board of Directors of the Company, consisting of at least two
of its members. The Committee will have authority to make rules and regulations
for the administration of the Plan. The Committee's interpretations and
decisions with regard to the Plan shall be final and conclusive.
2. ELIGIBILITY. Employees of the Company and, at the discretion of the
Committee, employees of one or more subsidiaries of the Company, will be
eligible to participate in the Plan, in accordance with such rules as may be
prescribed from time to time, which rules, however, shall neither permit nor
deny participation in the Plan contrary to the requirements of Section 423(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and regulations
promulgated thereunder. No employee may be granted an option if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of an employee, and stock which
the employee may purchase under outstanding options shall be treated as stock
owned by the employee.
3. OFFERINGS. The Company will make one or more quarterly offerings to
employees to purchase stock under the Plan. The effective date of each offering
shall be the first day of each quarter beginning each February 1, May 1,
August 1, and November 1 during the term of the Plan. Each offering period
shall last three months. The measure of an employee's participation in an
offering will be based on (i) a percentage of the amounts received as
compensation by the participating employee during the offering period (or during
such portion thereof as an employee may elect to participate), plus (ii) an
elective amount of up to $1,000.00.
4. PARTICIPATION. An employee eligible on the effective date of any
offering may participate in such offering at any time by completing and
forwarding a payroll deduction authorization form to the appropriate payroll
location. The form will authorize a regular
<PAGE>
payroll deduction from the employee's compensation, and must specify the date
on which such deduction is to commence, which may not be retroactive.
In addition, an eligible employee on the effective date of any offering may
elect to participate in the offering by contributing to his or her account (as
defined in Section 5) all or a portion of the elective amount (which shall not
exceed $1,000.00 during any offering period). Such eligible employee shall
notify the Company of such election in writing prior to the beginning of the
last day of the offering period. Such election to contribute all or a portion
of the elective amount shall be effective as of the later of the receipt of
notice by the Company or the receipt of the contribution.
5. MAINTENANCE OF ACCOUNTS; PAYROLL DEDUCTIONS. The Company will
maintain accounts for all participating employees. With respect to any offering
made under the Plan, an employee may authorize a payroll deduction in terms of
whole number percentages up to a maximum of 10% of the basic or regular rate of
compensation an employee receives during the offering period (or during such
portion thereof as an employee may elect to participate). Payroll deductions
will be credited to an employee's account as of the last day of such payroll
period.
An employee may at any time increase or decrease the employee's payroll
deduction by filing a new payroll deduction authorization form. The change may
not become effective sooner than the next pay period after receipt of the form.
A payroll deduction may be increased only once and reduced only once during any
offering period.
In the event an employee elects to participate in an offering by
contributing to his or her account, such contribution must be received by the
Company from the participating employee during the offering period prior to the
beginning of the last day of the offering period (at which time the amount
received will be credited to the employee's account).
6. LIMIT ON SIZE OF OPTION. No employee may be granted an option which
permits his or her rights to purchase stock under the Plan, and any other stock
purchase plan of the Company and its subsidiaries, to accrue at a rate which
exceeds $25,000 of the fair market value of such stock (determined at the
effective date of the offering) for each calendar year in which the option is
outstanding at any time.
7. PURCHASE OF SHARES. Each employee participating in any offering under
the Plan will be granted an option, upon the effective date of such offering,
for as many shares of Common Stock as the participating employee may elect to
purchase with the following amounts:
(a) up to 10% of the basic or regular rate of compensation received
during the specified offering period (or during such portion thereof as an
employee may elect to participate), to be paid by payroll deductions during
such period;
(b) an elective amount paid by the participating employee into his or
her account of up to $1,000.00; and
-2-
<PAGE>
(c) the balance, if any, carried forward from the employee's account
for the preceding offering period pursuant to the final paragraph of this
Section 7.
The purchase price for each share purchased will be 85% of the average
market price on the last day of a month when there are sufficient funds in the
employee's account to purchase one or more full shares. As of the last day of a
month during any offering, the account of each participant employee shall be
totaled. If such account contains sufficient funds to purchase one or more full
shares as of that date, the employee shall be deemed to have exercised an option
to purchase such share or shares at such price; the employee's account shall be
charged for the amount of purchase; and the ownership of such share or shares
shall be appropriately evidenced on the books of the Company. Subsequent shares
covered by the employee's option will be purchased in the same manner, whenever
sufficient funds have again accrued in the employee's account.
A participating employee may not purchase a share under any offering beyond
the end of the offering period with respect thereto. Any balance remaining in
an employee's account at the end of an offering period will be carried forward
into the employee's account for the following offering period. In no event will
the balance carried forward be equal to or greater than the purchase price of
one share on the last day of the offering period.
8. WITHDRAWAL FROM OFFERING. An employee may at any time and for any
reason withdraw from participation in an offering, and thereby draw out the
balance accumulated in the employee's account. The employee may thereafter
begin participation again only once during the remainder of the offering period.
Withdrawals from an employee's account are not permitted unless the employee
withdraws from an offering. Partial withdrawals from the employee's account
will not be permitted.
9. ISSUANCE OF CERTIFICATES. The Company will issue or cause its
transfer agent to issue to Plan participants certificates representing shares of
Common Stock purchased by such Plan participant upon written request.
10. REGISTRATION OF CERTIFICATES. Certificates may be registered only in
the name of the employee, or, if the employee so indicates on the employee's
payroll deduction authorization form, in the employee's name jointly with a
member of the employee's family, with right of survivorship. An employee who is
a resident of a jurisdiction which does not recognize such a joint tenancy may
have certificates registered in the employee's name as tenant in common or as
community property with a member of the employee's family, without right of
survivorship.
11. DEFINITIONS. The phrase "average market price" means the average of
the high and low sale prices of Common Stock on a given day, or if no sales of
Common Stock were made on that day, the average of the high and low sale prices
of Common Stock on the next preceding day on which sales were made, as reported
by NASDAQ/NMS or, if the Common Stock is no longer listed for trading in
NASDAQ/NMS, the principal domestic securities exchange on which the Common Stock
is then listed for trading. The term "subsidiary"
-3-
<PAGE>
means a subsidiary of the Company within the meaning of Section 424(f) of the
Code and the regulations promulgated thereunder.
12. RIGHTS AS A STOCKHOLDER. None of the rights or privileges of a
stockholder of the Company shall exist with respect to shares purchased under
the Plan unless and until such full shares shall have been appropriately
evidenced on the books of the Company.
13. RIGHTS ON RETIREMENT, DEATH, OR TERMINATION OF EMPLOYMENT. In the
event of a participating employee's retirement, death, or termination of
employment ("ineligibility"), no payroll deduction shall be taken from any pay
due and owing to the employee once ineligible, and the employee's account shall
be paid to the employee or, in the event of the employee's death, to the
employee's estate.
14. RIGHTS NOT TRANSFERABLE. Rights under the Plan or under an offering
are not transferable by a participant employee other than by will or the laws of
descent and distribution, and are exercisable during the employee's lifetime
only by the employee.
15. APPLICATION OF FUNDS. All funds received or held by the Company under
the Plan may be used for any corporate purpose.
16. ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK. In the event of
a subdivision of outstanding shares, or the payment of a stock dividend, the
number of shares approved for the Plan shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board of
Directors. In the event of any other change affecting Common Stock, such
adjustment shall be made as may be deemed equitable by the Board of Directors to
give proper effect to such event.
17. AMENDMENT OF THE PLAN. The Board of Directors may at any time, or
from time to time, amend the Plan in any respect, except that, without the
approval of the stockholders of the Company not later than 12 months after the
date of approval of such amendment by the Board of Directors, no amendment shall
be effective if it would (a) increase or decrease the number of shares approved
for the Plan (other than as provided in Section 16) or (b) change the
designation of subsidiaries eligible to participate in the Plan.
18. TERMINATION OF THE PLAN. The Plan and all rights of employees under
any offering hereunder shall terminate:
(a) On the day that participating employees become entitled to
purchase a number of shares equal to or greater than the number of shares
remaining available for purchase under the Plan, unless extended by the
Board; or
(b) at any time, at the discretion of the Board of Directors.
If on the day the Plan terminates participating employees are entitled to
purchase a number of shares greater than the number of shares remaining
available for purchase
-4-
<PAGE>
under the Plan, the available shares shall be allocated by the Committee among
such participating employees in such manner as it deems fair. Upon termination
of the Plan, all amounts in the accounts of participating employees shall be
carried forward into the employee's payroll deduction account under a successor
plan, if any, or promptly refunded.
19. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver
Common Stock under the Plan is subject to the approval of any governmental
authority required in connection with the authorization, issuance, or sale of
such stock.
-5-
<PAGE>
EXHIBIT 11.1
MICHAELS STORES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share data)
Weighted
Weighted Average Common
Average and Common
Common Shares Equivalent Shares
Outstanding Outstanding
------------- -----------------
Fully
Primary Diluted
-------- --------
For the year ended February 1, 1997
Weighted average common shares
outstanding 23,180 23,180 23,180
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method - 113 113
-------- -------- --------
Total average outstanding shares 23,180 23,293 23,293
======== ======== ========
Net loss $(31,233) $(31,233)
======== ========
Loss per common share $(1.34) $(1.34)
======== ========
<PAGE>
MICHAELS STORES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share data)
Weighted
Weighted Average Common
Average and Common
Common Shares Equivalent Shares
Outstanding Outstanding
------------- -----------------
Fully
Primary Diluted
--------- ---------
For the year ended January 28, 1996
Weighted average common shares
outstanding 21,451 21,451 21,451
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method - 66 66
--------- --------- ---------
Total average outstanding shares 21,451 21,517 21,517
======== ======== ========
Net loss $(20,417) $(20,417)
======== ========
Loss per common share $(0.95) $(0.95)
======== ========
<PAGE>
MICHAELS STORES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share data)
Weighted
Weighted Average Common
Average and Common
Common Shares Equivalent Shares
Outstanding Outstanding
------------- -----------------
Fully
Primary Diluted
-------- --------
For the year ended January 29, 1995
Weighted average common shares
outstanding 19,405 19,405 19,405
Assumed issuance of shares upon
conversion of convertible
subordinated debt 638
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method 741 764
-------- -------- --------
Total average outstanding shares 19,405 20,146 20,807
======== ======== ========
Net income $35,647 $35,647
Assumed interest on convertible
subordinated debt less tax
benefit of $607 969
-------- --------
Net income for per share computation $35,647 $36,616
======== ========
Earnings per common share $ 1.77 $ 1.76
======== ========
<PAGE>
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AND STORE DATA)
<TABLE>
FISCAL YEAR
--------------------------------------------------------------
1996(1) 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales $1,378,277 $1,294,886 $ 994,563 $619,688 $493,159
Operating (loss) income (20,987)(2) (15,046)(3) 64,036 41,356 34,263
Net (loss) income (31,233) (20,417) 35,647 26,287 20,378
Net (loss) earnings per share (1.34) (0.95) 1.76 1.52 1.21
STORES OPEN AT END OF PERIOD:
Michaels 453 442 380 220 168
Aaron Brothers 72 68 n/a n/a n/a
BALANCE SHEET DATA:
Cash and investments $ 59,069 $ 2,870 $ 16,909 $ 68,823 $ 42,075
Merchandise inventories 351,208 366,102 375,096 206,185 118,300
Current assets 437,543 416,292 418,532 291,012 170,021
Total assets 784,435 739,780 686,026 397,830 322,099
Working capital 239,812 228,983 232,442 181,816 104,462
Long-term debt 238,608 187,748 138,082 97,803 97,843
Total liabilities 451,633 403,827 330,109 212,415 166,822
Shareholders' equity 332,802 335,953 355,917 185,415 155,277
OTHER FINANCIAL DATA:
EBITDA 21,694 12,930 87,800 61,500 43,885
Cash flow from operations 29,749 9,248 (38,267) (28,935) 16,809
</TABLE>
(1) Fiscal 1996 was a 53-week fiscal year.
(2) Includes effect of an unusual pre-tax charge of $41.2 million for costs
associated with an extended sidewalk sale to sell off 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
others.
(3) Includes effect of an unusual pre-tax charge of $64.4 million for costs
primarily associated with an inventory reduction program.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The comparability of our financial results in recent years has been
significantly affected by the rapid expansion of the Company through both new
store openings and acquisitions. In fiscal years 1994, 1995 and 1996, we
added 184, 64 and 17 stores, respectively, and closed 24, 2 and 2,
respectively. During these periods, a substantial portion of our sales
increases came from stores added during or after the prior comparable period
and thus not yet included in same-store sales comparisons. During these
periods, sales from these newer stores accounted for approximately 93%, 96%
and 90%, respectively, of aggregate sales increases. We anticipate that
future expansion will be more moderate as we focus on same-store sales
improvements, return on investment, inventory control, productivity
enhancements and improved cash flow. We intend to add approximately 9 to 12
Michaels stores in fiscal 1997, of which 3 have been opened as of April 15,
1997.
In 1994 we opened 184 stores, of which 25 were acquired in three separate
transactions for 735,000 shares of the Company's Common Stock. We also
acquired Leewards, which operated 98 stores, for total cash and assumed debt
of $47.5 million and 1,195,140 shares of Common Stock. Nineteen of the
acquired stores were closed and the rest were converted to the Michaels
format.
In 1995 we acquired Aaron Brothers, currently a chain of 72 framing and art
supply stores located primarily in California, for a total of $25 million in
cash and assumed debt.
Having achieved our objective of becoming the largest retailer in arts,
crafts and decorative items, we recognized that we had the critical mass to
achieve improved operating efficiencies that could result in higher returns
on capital. On August 23, 1995, we announced a shift in focus from sales
growth to realizing 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.
The SKU Reduction Program resulted in the Company's incurring $64.4 million
of unusual costs for the quarter ended July 30, 1995, which primarily were
costs for inventory liquidated during the quarter as well as anticipated
costs of liquidations during the balance of 1995.
During 1996 we focused on implementing initiatives geared toward improving
our merchandising and store operations, including completing the
point-of-sale scanning system, redefining the merchandise strategy, selling
off merchandise which did not support the new focus, resetting the stores,
and improving store staffing effectiveness. Based upon information obtained
from the newly installed point-of-sale 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 in
the third quarter. These changes will allow us to focus on an expanded arts
and crafts assortment as our core line of business.
We believe that operating at lower inventory levels combined with the
improvements in merchandise mix will continue to result in an increase in
inventory turns, providing improved cash flow and higher returns on capital.
We believe that this improved cash flow, combined with lower inventory
financing requirements, slower growth in square footage, and the recent
additions to our equity will continue to strengthen our balance sheet.
RESULTS OF OPERATIONS
The following table shows certain percentages of net sales. This table should
be read in conjunction with the following discussion and with our
Consolidated Financial Statements, including the related notes.
FISCAL YEAR
--------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy expense 72.8 72.3 64.9
Selling, general and administrative expense 28.7 28.9 28.0
Store closing and conversion costs 0.0 0.0 0.7
----- ----- -----
Operating (loss) income (1.5) (1.2) 6.4
Interest expense 1.5 1.3 0.9
Other expense and (income), net 0.0 0.2 (0.2)
----- ----- -----
(Loss) income before income taxes (3.0) (2.7) 5.7
(Benefit) provision for income taxes (0.7) (1.1) 2.1
----- ----- -----
Net (loss) income (2.3)% (1.6)% 3.6%
===== ===== =====
In the discussion below, all percentages given for expense items (excluding
taxes) are calculated as a percentage of net sales.
FOR FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in the fiscal year ended February 1, 1997 ("1996") increased $83.4
million, or 6%, over the fiscal year ended January 28, 1996 ("1995"). The
results for 1996 included sales from 13 Michaels stores (before the impact of
two closures) and 4 Aaron Brothers stores that were opened during the year.
Same-store sales declined one percent in 1996. We expect to achieve
same-store sales increases for fiscal 1997 taken as a whole, although there
may be same-store sales decreases in some individual months during the year
based, for example, upon holiday date changes (Easter) and changes in
advertising promotions. Our ability to generate same-store sales increases is
dependent, in part, on our ability to improve in-stock conditions on the top
selling items, to properly allocate seasonal merchandise to the stores, and
the success of sales promotion efforts.
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,
reserves for the closure of four stores and the write-down of leasehold
improvements in three others. 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. We
believe that distribution costs will be more effectively leveraged in the
future by moving a greater percentage of our merchandise through regional
distribution centers in order to reduce more expensive direct-to-store
shipments. 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. We believe that as same-store sales increase in the future,
occupancy costs as a percent of sales will improve.
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
9
<PAGE>
sidewalk sale starting on Labor Day conducted to sell off merchandise
eliminated following the 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 point-of-sale
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.
FOR FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in 1995 increased $300.3 million, or 30%, over the fiscal year
ended January 29, 1995 ("1994"). The results for 1995 included sales from 62
Michaels stores (net of 2 closures) that were opened during the year. During
1995 sales of the newer stores accounted for $287.3 million of the increase.
Same-store sales increased 3% in 1995 compared to the prior year.
Cost of sales and occupancy expense as a percentage of net sales for 1995
increased by 7.4% compared to 1994 due primarily to reduced margin on
merchandise associated with the SKU Reduction Program plus an aggressive
holiday promotional strategy and an increase in occupancy expense.
Selling, general and administrative expense increased by 0.9% in 1995 from
1994. A significant portion of the increase was attributable to the costs
associated with the retirement of the Company's former President, costs
related to the SKU Reduction Program, and increased depreciation due to
continued investment in the new point-of-sale system.
Interest expense for 1995 was $16.8 million compared to $9.1 million in 1994.
The increase was due to higher bank borrowings to acquire Aaron Brothers and
to finance new stores, investment in point-of-sale equipment, and seasonal
inventory growth.
The effective tax rate changed to a 41.4% benefit rate in 1995 from a 37.6%
provision rate in 1994 due primarily to the interrelated effects in 1995 of
increased goodwill amortization and the pre-tax loss.
LIQUIDITY AND CAPITAL RESOURCES
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 to fund growth in new stores and systems improvements. Net cash
provided by operating activities for 1996 was $29.7 million as compared to
$9.2 million for 1995. Net cash provided by operating activities during 1996
increased primarily as a result of a decrease in inventory per store and
improved payables leveraging due to improved turns and better utilization of
vendor terms along with the centralization of payables.
Capital expenditures during 1996 were $33.6 million, incurred primarily for
the opening of 13 new Michaels and 4 new Aaron Brothers stores and the
remodeling, relocation or expansion of approximately 34 existing Michaels
stores, the relocation of a distribution center and the corporate office, and
various systems enhancements.
In April 1996 we completed a private placement of 2,000,000 shares of the
Company's Common Stock at a price of $12.50 per share. The Common Stock was
sold in private transactions with separate 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, are beneficiaries.
In June 1996 we completed a public offering of $125 million of Senior Notes.
We used the full amount of the net proceeds from the sale to reduce
indebtedness under our revolving credit facility.
At February 1, 1997, we had working capital of $239.8 million, compared to
$229.0 million at January 28, 1996. We currently have a bank credit agreement
which provides for an unsecured line of credit of $100 million.
Subsequent to year-end, options to purchase 2,000,000 shares of the Company's
Common Stock were exercised on February 28, 1997 in private transactions with
entities owned by independent trusts of which Wyly family members are
beneficiaries. The options were purchased by the trusts in December of 1996
with an exercise price equal to the then current market price of $10.50 per
share. The proceeds will be used to reduce 1997 seasonal borrowing
requirements.
We plan to spend approximately $31 to $37 million on capital expenditures
during fiscal 1997. We plan to add 9 to 12 Michaels stores for approximately
$5 million. We expect to spend $6 to $8 million on merchandising and other
information systems, approximately $12 to $14 million on store relocations
and remodeling, and $8 to $10 million on various other projects. In addition,
we may incur interim construction costs of up to $20 million for the
relocation in early 1998 of one of the distribution centers.
We believe that our available cash, funds generated by operations, an IBM
capital lease financing and funds available under the bank credit agreement
and the Senior Notes should be sufficient to finance continuing operations
and sustain current growth plans. We believe that we can finance an annual
store expansion of 12% to 15% (on a square footage basis) from internally
generated cash flow.
SEASONALITY AND INFLATION
The Company's 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 the
Company's sales and (excluding 1995 and 1996) approximately 55% of its
operating income.
We believe that the effect of inflation on 1996 results and the projected
effect on 1997 financial results to be nominal.
10
<PAGE>
CONSOLIDATED BALANCE SHEETS MICHAELS STORES, INC.
(IN THOUSANDS EXCEPT SHARE DATA)
FEBRUARY 1, 1997 JANUARY 28, 1996
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 59,069 $ 2,870
Merchandise inventories 351,208 366,102
Income taxes receivable and deferred
income taxes 15,207 35,177
Prepaid expenses and other 12,059 12,143
--------- --------
Total current assets 437,543 416,292
--------- --------
PROPERTY AND EQUIPMENT, AT COST 294,022 255,386
Less accumulated depreciation (104,943) (82,157)
--------- --------
189,079 173,229
--------- --------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED
OPERATIONS, NET 140,697 143,721
DEFERRED INCOME TAXES 10,550 -
OTHER ASSETS 6,566 6,538
--------- --------
157,813 150,259
--------- --------
$ 784,435 $739,780
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 104,966 $ 98,799
Accrued liabilities and other 92,765 88,510
--------- --------
Total current liabilities 197,731 187,309
--------- --------
BANK DEBT - 87,200
SENIOR NOTES 125,000 -
CONVERTIBLE SUBORDINATED NOTES 96,940 96,940
OTHER LONG-TERM LIABILITIES 31,962 32,378
--------- --------
Total long-term liabilities 253,902 216,518
--------- --------
451,633 403,827
--------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000
shares authorized, none issued - -
Common stock, $.10 par value, 50,000,000
shares authorized, 23,690,926 issued and
outstanding (21,504,110 in fiscal 1995) 2,369 2,150
Additional paid-in capital 271,405 243,325
Retained earnings 59,028 90,478
--------- --------
Total shareholders' equity 332,802 335,953
--------- --------
$ 784,435 $739,780
========= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS MICHAELS STORES, INC.
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL YEAR
----------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
NET SALES $1,378,277 $1,294,886 $994,563
---------- ---------- --------
Cost of sales and occupancy expense 1,003,815 936,537 644,737
Selling, general and administrative expense 395,449 373,395 278,716
Store closing and conversion costs - - 7,074
---------- ---------- --------
OPERATING (LOSS) INCOME (20,987) (15,046) 64,036
Interest expense 21,038 16,841 9,103
Other (income) and expense, net (952) 2,952 (2,226)
---------- ---------- --------
(LOSS) INCOME BEFORE INCOME TAXES (41,073) (34,839) 57,159
(Benefit) provision for income taxes (9,840) (14,422) 21,512
---------- ---------- --------
NET (LOSS) INCOME $ (31,233) $ (20,417) $ 35,647
========== ========== =======
(LOSS) EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ (1.34) $ (0.95) $ 1.77
Assuming full dilution $ (1.34) $ (0.95) $ 1.76
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 23,293 21,517 20,146
Assuming full dilution 23,293 21,517 20,807
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS MICHAELS STORES, INC.
(IN THOUSANDS)
<TABLE>
FISCAL YEAR
--------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(31,233) $(20,417) $ 35,647
Adjustments:
Depreciation 37,545 26,752 18,341
Amortization 4,184 4,176 2,735
Other 1,052 943 (65)
Change in assets and liabilities excluding the effects of acquisitions:
Merchandise inventories 14,894 13,406 (134,671)
Prepaid expenses and other (1,076) (1,534) 5,747
Deferred income taxes and other (1,314) (11,188) 7,276
Accounts payable 6,166 (6,585) 37,065
Income taxes payable - - (8,363)
Accrued liabilities and other (469) 3,695 (1,979)
-------- -------- ---------
Net change in assets and liabilities 18,201 (2,206) (94,925)
-------- -------- ---------
Net cash provided by (used in) operating activities 29,749 9,248 (38,267)
-------- -------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (33,609) (54,906) (68,106)
Net proceeds from sales of property and equipment 175 3,159 -
Net proceeds from sales of marketable securities 1,122 18,860 44,484
Acquisitions and other - (24,909) (43,685)
-------- -------- ---------
Net cash used in investing activities (32,312) (57,796) (67,307)
-------- -------- ---------
FINANCING ACTIVITIES:
Net borrowings under bank credit facilities (87,200) 46,100 28,100
Payment of other long-term liabilities (2,503) (891) (89)
Proceeds from issuance of Senior Notes 120,542 - -
Proceeds from issuance of common stock and other 27,923 4,302 78,603
-------- -------- ---------
Net cash provided by financing activities 58,762 49,511 106,614
-------- -------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 56,199 963 1,040
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 2,870 1,907 867
-------- -------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 59,069 $ 2,870 $ 1,907
======== ======== =========
Cash payments (receipts) for:
Interest $ 19,291 $ 15,236 $ 7,166
Income taxes (17,366) (2,155) 17,753
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY MICHAELS STORES, INC.
FOR THE THREE YEARS ENDED FEBRUARY 1, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
NUMBER ADDITIONAL
OF COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
---------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 30, 1994 16,697,357 $1,670 $107,168 $ 76,577 $185,415
Adjustments for pooling-of-interests accounting in an acquisition - - - (1,157) (1,157)
Issuance of shares in acquisitions 1,992,268 199 58,257 - 58,456
Proceeds from stock offering 2,353,432 235 71,980 - 72,215
Adjustments for change in market value of marketable securities - - - (1,514) (1,514)
Exercise of stock options and other 311,110 31 7,156 (332) 6,855
Net income - - - 35,647 35,647
---------- ------ -------- -------- --------
BALANCE AT JANUARY 29, 1995 21,354,167 2,135 244,561 109,221 355,917
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
========== ====== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Michaels Stores, Inc. (the "Company") owns and operates a chain of specialty
retail stores featuring a wide selection of picture framing materials and
services, silk and dried flowers, hobby and art supplies, creative crafts,
and party, seasonal and holiday merchandise. The Company operates in 45
states, Canada and Puerto Rico.
FISCAL YEAR END
The Company reports on a 52/53-week fiscal year which ends on the Saturday
closest to January 31. Thus fiscal 1996 ("1996") ended on February 1, 1997
and had 53 weeks. Previous fiscal years ended on the Sunday closest to
January 31; thus fiscal 1995 ("1995") and fiscal 1994 ("1994") ended on
January 28, 1996 and January 29, 1995, respectively.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. Certain fiscal 1995 and 1994 amounts have been
reclassified to conform to the fiscal 1996 presentation.
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 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.
MERCHANDISE INVENTORIES
Store merchandise inventories are valued at the lower of average cost
(determined by a retail method) or market. Distribution center inventories
are valued at the lower of cost (determined by the first-in, first-out
method) or market.
Fiscal 1996 included $41.2 million of unusual costs recorded in the third
quarter to cover losses on an extended sidewalk sale to sell off 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 others.
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
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 leases are generally estimated to be 30,
8, 10, and 5 years, respectively. Amortization of assets recorded under
capital leases is included in depreciation expense.
Statement of Financial Accounting Standards No. 121 "Accounting For the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of"
was implemented in January 1996. This statement had no material impact on the
Company's 1996 results of operations or financial position.
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 $14,061,000
and $10,532,000 as of the end of 1996 and 1995, respectively. The Company
assesses the recoverability of costs in excess of net assets acquired
annually based on existing facts and circumstances. The Company measures the
recoverability of this asset on an ongoing basis based on projected earnings
before interest, depreciation and amortization, on an undiscounted basis.
Should the Company's assessment indicate an impairment of this asset in the
future, an appropriate write-down will be recorded.
INTEREST-RATE SWAP AGREEMENT
The Company enters into interest-rate swap agreements from time to time to
modify the interest characteristics of its outstanding debt from a floating
rate to a fixed basis. These agreements involve the receipt of fixed rate
amounts in exchange for floating rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt.
ADVERTISING COSTS
Advertising costs are expensed in the period in which the advertising first
occurs. In 1996, 1995 and 1994, the Company incurred $63,505,000, $62,696,000
and $47,089,000, respectively, of advertising expense.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed in the fiscal year in which the store
opens. In 1996, 1995 and 1994, the Company incurred $3,206,000, $7,466,000
and $6,541,000, respectively, of store pre-opening costs.
EARNINGS PER SHARE
Earnings per share data are based on the weighted average number of shares
outstanding, including common stock equivalents and other dilutive
securities. The assumed conversion of the convertible subordinated notes was
dilutive for the fourth quarter and full year of 1994 and was therefore
included in the calculation of fully diluted earnings per share data for
those periods.
DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1996 1995
- --------------------------------------------------------------------------
(IN THOUSANDS)
Property and equipment:
Land and buildings $ 3,284 $ 3,284
Fixtures and equipment 193,703 178,069
Leasehold improvements 73,616 68,557
Capital leases 23,419 5,476
-------- --------
$294,022 $255,386
======== ========
Accrued liabilities and other:
Salaries, bonuses and other payroll-related costs $ 23,946 $ 29,467
Rent 9,019 8,237
Taxes, other than income and payroll 16,097 15,439
Current portion of capital lease obligations 4,215 981
Other 39,488 34,386
-------- --------
$ 92,765 $ 88,510
======== ========
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. are beneficiaries. 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 after one year
from the date of purchase.
15
<PAGE>
Subsequent to year end, options to purchase 2,000,000 shares of the Company's
Common Stock were exercised on February 28, 1997 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 by the trusts in December of 1996 with
an exercise price equal to the then current market price of $10.50 per share.
The proceeds will be used to reduce 1997 seasonal borrowing requirements.
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 commencing December 15, 1996,
and mature on June 15, 2006. The Notes are not redeemable prior to June 15,
2001, except that 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 such 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 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, 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. The fair value, based on dealer
quotes, of the outstanding Notes as of February 1, 1997 was $121.9 million.
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 104.14% to 100%, 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. During 1995 and
1994, a total of $10,000 and $800,000, respectively, in Subordinated Notes
were converted to 21,315 shares of the Company's Common Stock. The fair
value, based on dealer quotes, of the outstanding Subordinated Notes as of
February 1, 1997 and January 28, 1996 was $76.7 million and $76.0 million,
respectively.
The Company has a bank credit agreement which is unsecured and provides for
the issuance of commercial letters of credit. Borrowings under the credit
agreement, which expires in June 1999, were $87.2 million at January 28,
1996. There were no borrowings outstanding at February 1, 1997. The weighted
average interest rates for borrowings were 7.2% and 7.3% during 1996 and
1995, respectively. Borrowings are limited to the lesser of $100 million or
the Company's borrowing base (as defined in the credit agreement, $51.9
million at February 1, 1997) in either case minus the aggregate amount of
letters of credit outstanding. The credit agreement requires the Company to
maintain various financial ratios and restricts the Company's ability to pay
dividends.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of deferred tax liabilities and assets as of the respective
year-end balance sheets are as follows:
1996 1995
- --------------------------------------------------------------------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss, general business credit and
alternative minimum tax credit carryforwards $ 37,397 $ 10,390
Tax inventory in excess of book inventory - 3,100
Accrued expenses not deductible until paid 9,533 13,529
Other - net 3,728 2,295
-------- -------
Total deferred tax assets 50,658 29,314
Valuation allowance (11,513) (5,077)
-------- -------
Net deferred tax assets 39,145 24,237
-------- -------
Deferred tax liabilities:
Tax over book depreciation/amortization 19,273 12,885
Other - net 5,252 4,608
Book inventory in excess of tax inventory 710 -
-------- -------
Total deferred tax liabilities 25,235 17,493
-------- -------
Net deferred tax assets $ 13,910 $ 6,744
======== =======
1996 1995 1994
- -----------------------------------------------------------------------------
(IN THOUSANDS)
Income tax (benefit) provision:
Federal:
Current $ (9,250) $ (18,202) $ 6,103
Deferred (590) 9,749 14,090
-------- -------- -------
Total federal (9,840) (8,453) 20,193
-------- -------- -------
State:
Current - (5,089) 1,319
Deferred - (880) -
-------- -------- -------
Total state - (5,969) 1,319
-------- -------- -------
$ (9,840) $(14,422) $21,512
======== ======== =======
Reconciliation of income tax provision to statutory rate:
Income tax (benefit) expense
at statutory rate $(14,376) $(12,194) $20,005
Foreign loss not benefited 2,602 596 16
Increase in valuation allowance 3,271 - -
State income taxes, net of
federal income tax effect - (3,879) 858
Amortization of intangibles
and other (1,337) 1,055 633
-------- -------- -------
$ (9,840) $(14,422) $21,512
======== ======== =======
At February 1, 1997, the Company had federal and state net operating loss and
tax credit carryforwards of $37,397,000 of which $34,486,000 expire at
various dates between 1998 and 2012. When realized, the tax benefit
associated with $4,690,000 of such carryforwards will be applied to reduce
goodwill.
16
<PAGE>
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 the IBM Capital Lease which is a five-year lease
at an interest rate of approximately 8%. Future minimum annual rental
commitments for all noncancellable leases as of February 1, 1997 are as
follows:
OPERATING CAPITAL
LEASES LEASES
- ---------------------------------------------------------------------------
(IN THOUSANDS)
1997 $ 91,710 $ 5,645
1998 85,796 5,645
1999 76,300 5,645
2000 66,811 5,556
2001 58,326 2,089
Thereafter 185,914 -
-------- -------
Total minimum rental commitments $564,857 24,580
Less: amounts representing interest ======== 3,697
-------
Present value of obligations 20,883
Less: current portion 4,215
-------
Long-term obligations $16,668
=======
Rental expense applicable to noncancellable operating leases was $87,941,000,
$81,036,000 and $56,181,000 in 1996, 1995 and 1994, respectively.
The Company has entered into operating leases on 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 February 1, 1997, 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 allege that misstatements and omissions by defendants relating to
projected and historical operating results, inventory and other matters
involving future plans resulted in an inflation of the price of the Company's
Common Stock during the period between February 1, 1995 and August 23, 1995.
The plaintiffs seek on behalf of the class an unspecified amount of
compensatory damages and reimbursement for the plaintiffs' fees and expenses.
The United States District Court for the Northern District of Texas
consolidated the two lawsuits on November 16, 1995. The Court certified a
class on March 24, 1997 and discovery is proceeding. The Company believes
that it has meritorious defenses to this action and intends to defend itself
vigorously.
A lawsuit was commenced against the Company and several other parties on
September 19, 1994 in the Superior Court of Stanislaus County, California, on
behalf of a former employee, Naomi Snyder, her child, and her husband. The
complaint alleges that the former employee and her then-unborn child were
exposed to excessive levels of carbon monoxide in one of the Company's stores
caused by a propane gas powered floor buffer which was operated by an outside
cleaning service, resulting, among other things, in severe and permanent
injuries to the child. Plaintiffs' Statement of Damages, filed on or about
January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled
that the plaintiffs' pleadings did not state a cause of action against the
Company upon which relief could be granted. However, the ruling by the trial
court was overturned by the Court of Appeals of the State of California,
Fifth Appellate District, on September 23, 1996. On or about November 1, 1996
the Company filed its petition for review with the California Supreme Court
requesting a review of the appellate decision. Review was granted on December
23, 1996. Should the California Supreme Court sustain the appellate court
ruling and remand the case to the trial court, the Company believes it has
meritorious defenses to this action and will defend itself vigorously.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the litigation described
above, is uncertain, and there can be no assurance that future costs related
to such litigation would not be material to the Company's financial position
or results of operations.
STOCK OPTIONS
All full-time employees are eligible to participate in the Michaels Stores,
Inc. Key Employee Stock Compensation Program (the "Program"), as amended,
under which 3,000,000 shares of Common Stock have been authorized for
issuance. Select employees and key advisors, including directors, of the
Company may participate in the 1992 and 1994 Non-Statutory Stock Option Plans
of Michaels Stores, Inc. (the "Plans"), with an aggregate of 5,500,000 shares
of Common Stock having been authorized for issuance under the Plans. Shares
issued prior to 1996 generally vest over and are fully vested four years from
grant date while those issued in 1996 generally vest over and are fully
vested two years from grant date.
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 because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123 ("Statement 123"), "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized
according to the provisions of APB 25.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and 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 a Black-Scholes options
pricing model with the following weighted-average assumptions for 1996 and
1995, respectively; risk-free interest rates of 6.08% and 6.12%; no dividend
yield; volatility factors of the expected market price of the Company's
Common Stock of 56.6%; and a weighted average expected life of the options of
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.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. Because options vest over several years and additional option grants
are expected, the effects of the following hypothetical calculations are not
likely to be representative of similar future calculations.
17
<PAGE>
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:
1996 1995
- ------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro forma net loss $(50,694) $(28,055)
Pro forma loss per share:
Primary $ (2.18) $ (1.30)
Assuming full dilution $ (2.18) $ (1.30)
For 1996 and 1995, the Company's stock option activity is summarized below:
<TABLE>
1996 1995
------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 4,067 $16.48 3,336 $26.28
Granted 4,214 11.72 3,031 16.81
Exercised (187) 12.31 (320) 11.86
Forfeited/Expired (554) 14.09 (1,980) 19.87
----- ------ ------ ------
Outstanding at end of year 7,540 $12.07 4,067 $16.48
===== ====== ====== ======
Exercisable at end of year 5,117 $11.86 345 $15.85
Weighted average fair value of
options granted during the year $ 3.48 $ 7.20
</TABLE>
In fiscal 1994, options to purchase 308,424 shares of Common Stock were
exercised at prices ranging from $3 to $27 7/8. Exercise prices for options
outstanding as of February 1, 1997 ranged from $10 to $18 3/8. The weighted
average remaining contractual life of the options is 2 years.
ACQUISITIONS
In February 1994, the Company acquired Treasure House Stores, Inc. ("THSI"),
for 280,000 shares of the Company's Common Stock in a transaction accounted
for as a pooling-of-interests. The transaction was not considered material to
the Company's sales, net income or financial position of any previous year
and therefore the Company's financial statements were not restated.
In April 1994, the Company acquired the affiliated companies that operated
the arts and crafts store chains of Oregon Craft & Floral Supply Co. ("OCF")
and H&H Craft & Floral Supply Co. ("H&H") for a total of 455,000 shares of
the Company's Common Stock valued at $18.5 million. This transaction resulted
in the Company recording an addition to goodwill in the amount of $22.3
million.
In July 1994, the Company acquired Leewards Creative Crafts, Inc.
("Leewards"), an arts and crafts retailer with 98 stores located primarily in
the midwestern and northeastern United States. The acquisition consideration
consisted of $7.9 million in cash and 1,257,279 shares of the Company's
Common Stock valued at $39.9 million. Upon consummation of the Leewards
acquisition, the Company also repaid $39.6 million of Leewards' indebtedness.
The cost in excess of the estimated fair value of net assets acquired was
recorded as goodwill in the amount of $77.9 million.
In March 1995, the Company purchased Aaron Brothers, Inc. ("Aaron Brothers"),
which operated a chain of 71 framing and art supplies stores predominantly in
California, for a purchase price of $25 million consisting of approximately
$5.3 million in cash and the assumption of $19.7 million of debt. This
transaction resulted in the Company recording an addition to goodwill in the
amount of $26.7 million.
The OCF, H&H, Leewards and Aaron Brothers transactions were accounted for as
purchases; accordingly, the purchase prices have been allocated to assets and
liabilities based on estimated fair values as of the respective acquisition
dates. The results of operations since the acquisition dates are included in
the accompanying consolidated financial statements.
The following pro forma combined net sales, net income and earnings per share
data summarize the results of operations for 1994 as if Leewards had been
acquired as of the beginning of 1994.
PRO FORMA
----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1994
----------
Net sales $1,050,173
==========
Net income(1) $ 36,456
==========
Earnings per share assuming full dilution(1) $ 1.71
==========
(1) Excludes a $7.1 million charge ($4.4 million after tax or $.21 per share)
for store closing and conversion costs.
The above pro forma data does not include THSI, OCF, H&H or Aaron Brothers
prior to their respective acquisition dates since the acquisitions were not
considered material, individually or in the aggregate, to the operating
results of the Company.
18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Michaels Stores, Inc.
We have audited the accompanying consolidated balance sheets of Michaels
Stores, Inc. as of February 1, 1997 and January 28, 1996, and the related
consolidated statements of operations, cash flows, and shareholders' equity
for each of the three years in the period ended February 1, 1997. 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 February 1, 1997 and January 28, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
February 1, 1997, in conformity with generally accepted accounting principles.
Dallas, Texas
March 12, 1997
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
<TABLE>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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
Primary earnings (loss) per common share $ .12 $ (.34) $ (1.45) $ .35
Weighted average shares outstanding 22,459 23,532 23,553 23,629
1995:
Net sales $265,547 $259,910 $312,696 $456,733
Cost of sales and occupancy expense 172,043 230,133 208,736 325,625
Operating income (loss) 15,420 (54,973)(2) 12,921 11,586
Net income (loss) 7,557 (33,124) 3,006 2,144
Primary earnings (loss) per common share $ .35 $ (1.55) $ .14 $ .10
Weighted average shares outstanding 21,845 21,413 21,337 21,475
</TABLE>
(1) Includes effect of an unusual pre-tax charge of $41.2 million for costs
associated with an extended sidewalk sale to sell off 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 others.
(2) Includes effect of an unusual pre-tax charge of $64.4 million for costs
primarily associated with an inventory reduction program.
19
<PAGE>
Exhibit 21.1
MICHAELS STORES, INC.
SUBSIDIARIES OF MICHAELS STORES, INC.
Michaels of Canada, Inc., a New Brunswick corporation.
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.
Carolina Art & Frame, Inc., a North Carolina corporation.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Michaels Stores, Inc. of our report dated March 12, 1997, included
in the 1996 Annual Report to Shareholders of Michaels Stores, Inc.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-21635) pertaining to the Michaels Stores, Inc.
Amended and Restated 1994 Non-Statutory Stock Option Plan, and the
Registration Statement (Form S-8 No. 333-21407) pertaining to the Michaels
Stores, Inc. Amended and Restated 1992 Non-Statutory Stock Option Plan, of
our report dated March 12, 1997 with respect to the consolidated financial
statements of Michaels Stores, Inc. incorporated by reference in this Annual
Report (Form 10-K) for the year ended February 1, 1997.
Dallas, Texas
April 30, 1997
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 59,069
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 351,208
<CURRENT-ASSETS> 437,543
<PP&E> 294,022
<DEPRECIATION> 104,943
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<BONDS> 221,940
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 784,435
<SALES> 1,378,277
<TOTAL-REVENUES> 1,378,277
<CGS> 1,003,815
<TOTAL-COSTS> 1,399,264
<OTHER-EXPENSES> (952)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,038
<INCOME-PRETAX> (41,073)
<INCOME-TAX> (9,840)
<INCOME-CONTINUING> (31,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,233)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
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