SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OR THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-11822
__________________________
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1943604
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8000 Bent Branch Drive, Irving, Texas 75063
P.O. Box 619566, DFW, Texas 75261-9566
(Address of principal executive offices including zip code)
(972) 409-1300
(Registrant's telephone number, including area code)
_______________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
____ ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding as of
Title June 9, 1997
Common stock, par value $.10 per share 26,152,399
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
MICHAELS STORES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
May 3, February 1,
1997 1997
________ ________
<S> <C> <C>
Current assets:
Cash and equivalents $ 77,309 $ 59,069
Merchandise inventories 370,681 351,208
Income taxes receivable
and deferred income taxes 13,774 15,207
Prepaid expenses and other 13,305 12,059
________ ________
Total current assets 475,069 437,543
________ ________
Property and equipment, at cost 298,038 294,022
Less accumulated depreciation (113,673) (104,943)
________ ________
184,365 189,079
________ ________
Costs in excess of net assets of
acquired operations, net 139,729 140,697
Deferred income taxes 11,758 10,550
Other assets 3,383 6,566
________ ________
154,870 157,813
________ ________
$814,304 $784,435
________ ________
________ ________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $115,117 $104,966
Accrued liabilities and other 85,502 92,765
________ ________
Total current liabilities 200,619 197,731
________ ________
Senior notes 125,000 125,000
Convertible subordinated notes 96,940 96,940
Other long-term liabilities 31,107 31,962
________ ________
Total long-term liabilities 253,047 253,902
________ ________
453,666 451,633
________ ________
Commitments and contingencies
Shareholders' equity:
Common stock, 26,032,984 shares
outstanding 2,603 2,369
Additional paid-in capital 296,122 271,405
Retained earnings 61,913 59,028
________ ________
Total shareholders' equity 360,638 332,802
________ ________
$814,304 $784,435
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
_______________________
May 3, April 28,
1997 1996
________ _________
<S> <C> <C>
Net sales $321,318 $301,875
Cost of sales and occupancy expense 220,128 205,067
Selling, general and administrative
expense 91,884 88,970
________ ________
Operating income 9,306 7,838
Interest expense 5,742 3,710
Other income, net (1,549) (267)
________ ________
Income before income taxes 5,113 4,395
Provision for income taxes 1,943 1,670
________ ________
Net income $ 3,170 $ 2,725
________ ________
________ ________
Earnings per common and common
equivalent share $.12 $.12
____ ____
____ ____
Weighted average common and common
equivalent shares outstanding 26,303 22,459
______ ______
______ ______
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
_______________________
May 3, April 28,
1997 1996
________ _________
<S> <C> <C>
Operating activities:
Net income $ 3,170 $ 2,725
Adjustments:
Depreciation 9,945 7,763
Amortization 1,056 1,046
Other (60) 149
Change in assets and liabilities:
Merchandise inventories (19,473) (11,035)
Prepaid expenses and other (1,245) 727
Deferred income taxes and other 285 3,628
Accounts payable 10,151 5,895
Accrued liabilities and other (6,546) (9,304)
________ ________
Net change in assets and liabilities (16,828) (10,089)
________ ________
Net cash provided by (used in)
operating activities (2,717) 1,594
________ _________
Investing activities:
Additions to property and equipment (5,427) (7,779)
Net proceeds from sales of investments 3,386 -
________ ________
Net cash used in investing activities (2,041) (7,779)
________ ________
Financing activities:
Net borrowings under bank credit facilities - (13,700)
Payment of other long-term liabilities (996) -
Proceeds from issuance of common stock
and other 23,994 24,925
________ ________
Net cash provided by financing
activities 22,998 11,225
________ ________
Net increase in cash and equivalents 18,240 5,040
Cash and equivalents at beginning of year 59,069 2,870
________ ________
Cash and equivalents at end of period $ 77,309 $ 7,910
________ ________
________ ________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended May 3, 1997
(Unaudited)
Note A
______
The accompanying consolidated financial statements are unaudited (except for
the Consolidated Balance Sheet as of February 1, 1997) and, in the opinion of
management, reflect all adjustments that are necessary for a fair
presentation of financial position and results of operations for the three
months ended May 3, 1997. All of such adjustments are of a normal and
recurring nature. Because of the seasonal nature of the Company's business,
the results of operations for the three months ended May 3, 1997 are not
indicative of the results to be expected for the entire year.
Note B
______
Earnings per share data are based on the weighted average number of shares
outstanding, including common stock equivalents and other dilutive securities
when applicable. The assumed conversion of the convertible subordinated
notes was anti-dilutive for each period presented and was therefore not
included in the calculation of fully diluted earnings per share data.
Note C
______
In August 1995, two lawsuits were filed by certain security holders against
the Company and certain present and former officers and directors seeking
class action status on behalf of purchasers of the Company's Common Stock
between February 1, 1995 and August 23, 1995. Among other things, the
plaintiffs allege that misstatements and omissions by defendants relating to
projected and historical operating results, inventory and other matters
involving future plans resulted in an inflation of the price of the Company's
Common Stock during the period between February 1, 1995 and August 23, 1995.
The plaintiffs seek on behalf of the class an unspecified amount of
compensatory damages and reimbursement for the plaintiffs' fees and expenses.
The United States District Court for the Northern District of Texas
consolidated the two lawsuits on November 16, 1995. The Court certified a
class on March 24, 1997 and discovery is proceeding. The Company believes
that it has meritorious defenses to this action and intends to defend itself
vigorously.
A lawsuit was commenced against the Company and several other parties on
September 19, 1994 in the Superior Court of Stanislaus County, California, on
behalf of a former employee, Naomi Snyder, her child, and her husband. The
complaint alleges that the former employee and her then-unborn child were
exposed to excessive levels of carbon monoxide in one of the Company's stores
caused by a propane gas powered floor buffer which was operated by an outside
cleaning service, resulting, among other things, in severe and permanent
injuries to the child. Plaintiffs' Statement of Damages, filed on or about
January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled
the plaintiff's pleadings did not state a cause of action against the Company
upon which relief could be granted. However, the ruling by the trial court
was overturned by the Court of Appeals of the State of California, Fifth
Appellate District, on September 23, 1996. On or about November 1, 1996 the
Company filed its petition for review with the California Supreme Court
requesting a review of the appellate decision. Review was granted on
December 23, 1996. Should the California Supreme Court sustain the appellate
court ruling and remand the case to the trial court, the Company believes it
has meritorious defenses to this action and will defend itself vigorously.
<PAGE>
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes
that resolution of all known contingencies, including the litigation
described above, is uncertain, and there can be no assurance that future
costs related to such litigation would not be material to the Company's
financial position or results of operations.
Note D
______
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share together with disclosure of how the per share amounts were
computed. The adoption of this new standard is not expected to have a
material impact on the disclosure of earnings per share in the financial
statements.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
_______
Certain statements contained in this section which are not historical facts
are forward-looking statements that involve risks and uncertainties,
including, but not limited to, customer demand and trends in the arts and
crafts industry, related inventory risks due to shifts in customer demand,
the effect of economic conditions, the impact of competitors' locations or
pricing, the availability of acceptable real estate locations for new stores,
difficulties with respect to new information system technologies, supply
constraints or difficulties, and the results of financing efforts.
Results of Operations
_____________________
The following table shows the percentage of net sales that each item in the
Consolidated Statements of Operations represents. This table should be read
in conjunction with the following discussion and with the Company's financial
statements, including the notes:
<TABLE>
<CAPTION>
For the
Quarter Ended
___________________
May 3, April 28,
1997 1996
______ _________
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales and occupancy
expense 68.5 67.9
Selling, general and
administrative expense 28.6 29.5
_____ _____
Operating income 2.9 2.6
Interest expense 1.8 1.2
Other income, net (0.5) (0.1)
_____ _____
Income before income taxes 1.6 1.5
Provision for income taxes 0.6 0.6
_____ _____
Net income 1.0% 0.9%
_____ _____
_____ _____
</TABLE>
<PAGE>
Three months ended May 3, 1997 compared to the
______________________________________________
three months ended April 28, 1996
_________________________________
Net sales in the first quarter of fiscal 1997 increased $19.4 million, or 6%,
over the first quarter of fiscal 1996. The results for the first quarter of
fiscal 1997 included sales from 7 new Michaels stores (net of 8 closures)
that were opened during the twelve month period ended May 3, 1997. During
the first quarter, sales of the new stores accounted for an increase of $4.7
million. Same store sales increased 4% in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996 which contributed $14.7 million
to the net sales increase. The improvement in same store sales performance
is due to strong performance in the Company's core categories as a result of
updated planograms put into place last summer and improved in-stock positions
in top selling and hot items.
Cost of sales and occupancy expense, as a percentage of net sales, for the
first quarter of fiscal 1997 increased by 0.6% compared to the first quarter
of fiscal 1996. This increase was due to higher occupancy costs and higher
distribution costs. The increase in occupancy costs is primarily
attributable to rent reserves established for the Company's 1997 store
relocation program and rent increases from the 1996 relocation and expansion
program. Distribution costs increased due to the Company's investment last
year in an upgraded warehouse network and the related systems. As the
Company improves its utilization of this increased capacity, return on the
investment will yield improved gross margins.
Selling, general and administrative expense, as a percentage of net sales,
decreased by 0.9% in the first quarter of fiscal 1997 compared to the first
quarter of 1996. The Company saved $4 million in advertising costs versus
last year, as well as showed improved expense leverage in nearly all
categories of store operating expenses with the exception of depreciation
which reflects the impact of its increased investment in the POS system.
<PAGE>
Liquidity and Capital Resources
_______________________________
Cash flow from operations of negative $2.7 million was used during the first
quarter of fiscal 1997 compared to positive $1.6 million of cash flow from
operations generated during the first quarter of fiscal 1996. These results
are consistent with the Company's pattern of building inventory and opening
and relocating stores early in the fiscal year. Inventories per Michaels
store decreased 3% to $793,000 at May 3, 1997 compared to $816,000 last year.
The Company's trade payable leverage improved to 31% from 28% last year
reflecting the fresher nature of the Company's inventory and the improved
utilization of terms through the centralization of payables. Borrowings
outstanding under the Company's bank credit agreement ("Credit Agreement"),
which expires in June 1999, were $73.5 million at the end of the first
quarter of fiscal 1996. There were no borrowings outstanding at May 3, 1997,
reflecting net proceeds of $120.9 million received during June 1996 from the
issuance of Senior Notes used to reduce the amount of borrowings under the
credit facility. The Company is in compliance with all covenants in the
Credit Agreement as of May 3, 1997.
The Company opened three Michaels stores and closed seven during the first
three months of fiscal 1997. Capital expenditures for the newly opened
stores amounted to approximately $400,000. Additional capital expenditures
of approximately $5.0 million during the quarter related primarily to the
relocation or remodelling of approximately 12 existing stores, and for
various systems enhancements. The Company expects capital expenditures
during the remainder of fiscal 1997 to total approximately $26 to $32
million, relating primarily to costs for new stores, store relocations and
remodeling, merchandising and other information systems and various other
projects. In addition, the Company may incur interim construction costs
during the remainder of fiscal 1997 of up to $12 million for the relocation
in 1998 of one of its distribution centers.
At May 3, 1997, the Company had working capital of $274.5 million compared to
$239.8 million at February 1, 1997. The Credit Agreement provides for an
unsecured line of credit of up to $100 million. Management believes that the
Company's available cash, funds generated by operations and funds available
under the Credit Agreement should be sufficient to finance continuing
operations and sustain current growth plans. Management believes that the
Company can finance an annual store expansion of 12% to 15% (on a square
footage basis) from internally generated cash flow.
<PAGE>
MICHAELS STORES, INC.
FORM 10-Q
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Separation Agreement effective January 21, 1997 between
Michaels Stores, Inc. and R. Don Morris.
Exhibit 10.2 - Michaels Stores, Inc. 1997 Stock Option Plan.
Exhibit 11 - Computation of Earnings Per Common Share for the Three
Months Ended May 3, 1997.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period covered by
this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAELS STORES, INC.
By: /s/ Bryan M. DeCordova
_______________________
Bryan M. DeCordova
Executive Vice President-
Chief Financial Officer
(Principal Financial Officer)
Dated: June 17, 1997
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
10.1 Separation Agreement effective
January 21, 1997 between Michaels
Stores, Inc. and R. Don Morris.
10.2 Michaels Stores, Inc. 1997 Stock
Option Plan.
11 Computation of Earnings Per Common
Share for the Three Months Ended
May 3, 1997.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
MICHAELS STORES, INC.
Computation of Earnings Per Common Share
Three Months Ended May 3, 1997
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average
Outstanding
Equivalent Shares
_______________________________________
Total Fully
Outstanding Primary Diluted
___________ __________ __________
<S> <C> <C> <C>
Outstanding at beginning
of year 23,690,926 23,690,926 23,690,926
Shares issued during
quarter 2,342,058 1,538,208 1,538,208
__________ __________
Weighted average common
shares outstanding 25,229,134 25,229,134
Net shares to be issued upon
exercise of dilutive stock
options after applying treasury
stock method 842,269 1,074,347
__________ __________ __________
Total outstanding common shares 26,032,984 26,071,403 26,303,481
__________ __________ __________
__________ __________ __________
Earnings per common and
common equivalent share $.12 $.12
____ ____
____ ____
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000740670
<NAME> MICHAELS STORES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-03-1997
<CASH> 77,309
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 370,681
<CURRENT-ASSETS> 475,069
<PP&E> 298,038
<DEPRECIATION> 113,673
<TOTAL-ASSETS> 814,304
<CURRENT-LIABILITIES> 200,619
<BONDS> 221,940
0
0
<COMMON> 2,603
<OTHER-SE> 358,035
<TOTAL-LIABILITY-AND-EQUITY> 814,304
<SALES> 321,318
<TOTAL-REVENUES> 321,318
<CGS> 220,128
<TOTAL-COSTS> 312,012
<OTHER-EXPENSES> (1,549)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,742
<INCOME-PRETAX> 5,113
<INCOME-TAX> 1,943
<INCOME-CONTINUING> 3,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,170
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
<PAGE>
EXHIBIT 10.1
AGREEMENT
THIS AGREEMENT ("Agreement") is entered into effective
as of January 21, 1997, between MICHAELS STORES, INC.
("Michaels") and R. DON MORRIS ("Morris").
WHEREAS, Morris has been an employee and officer of
Michaels and in such capacities has performed services for Michaels;
and
WHEREAS, Morris wishes to retire from the positions he
holds with Michaels; and
WHEREAS, the parties wish to set forth in full their
agreement regarding certain matters;
NOW, THEREFORE, in consideration of the covenants
contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
parties do hereby agree as follows:
Section 1. Resignation as Officer; Continued
Employment. Morris hereby resigns as an officer of Michaels and
from any position he holds with Michaels and any subsidiary of
Michaels (including without limitation fiduciary appointments),
effective as of March 24, 1997. Morris shall remain a non-officer
employee of Michaels from March 25, 1997 through September 30,
1997, and for his services as such shall be compensated at a rate
equal to his current base salary, subject to all applicable or
customary tax, benefits and insurance premium withholding
requirements, and in accordance with Michaels' customary payroll
practices, for such period. During the period of such continued
employment, Michaels will provide Morris with office space,
furniture and equipment reasonably adequate to facilitate his
performance of the duties of such employment, and will provide
standard utilities and local telephone service at the location of such
office space. Morris will promptly reimburse Michaels for any out
of pocket expenses (excluding the allocated costs of rent, utilities
and local telephone service) incurred in connection with such office
space, furniture and equipment (including without limitation the
costs of supplies and long distance telephone charges) which exceed
$500 in any month during such period. Any charges incurred by
Morris in connection with any cellular or car telephone shall be at his
sole expense.
Section 2. Effectiveness. Upon the expiration of the 7-day
revocation period described in Section 25 below, this Agreement
will become effective as of the date first set forth above, unless
Morris revokes the Agreement during such revocation period. If the
Agreement becomes effective, it may not thereafter be revoked by
either party.
Section 3. Benefits.
(a) Retirement/Death Benefits. Subject to the
terms of Section 13 below, Michaels agrees to pay Morris monthly
retirement and/or death benefits of $15,000, subject to all applicable
or customary tax, benefits and insurance premium withholding
requirements (including without limitation Morris' (or his current
eligible dependents') share of the cost of health care benefits as
provided in Section 3(b) below), beginning on October 1, 1997 and
continuing on the first day of each month thereafter until the later to
occur of (i) Morris' death or (ii) September 1, 2012. If Morris dies
before September 1, 2012, the payments under this Section shall be
to such beneficiary as designated in writing to Michaels by Morris,
or, if no beneficiary has been so designated, such payments shall be
paid to Morris' estate. The retirement/death benefits provided for in
this Section are agreed to with the expectation that Michaels will
obtain a benefit from the agreements contained in Section 13 below.
<PAGE>
(b) Health Care Benefits. Michaels will permit
Morris and his current eligible dependents to participate in Michaels'
medical plan on substantially the same basis as senior executive
employees and their eligible dependents participate in such medical
plan from time to time. If such continued participation is not
possible for any reason, Michaels will purchase health insurance
coverage for Morris and his current eligible dependents that
provides, to the extent practicable, reasonably comparable benefits.
Such medical plan participation or insurance coverage will terminate
with respect to Morris upon the earliest to occur of (i) August 6,
2004, (ii) the date of Morris' death or (iii) the date on which Morris
becomes eligible to receive similar benefits from another person or
entity; and will terminate with respect to any current eligible
dependent on the earliest to occur of (A) the date on which the
dependent ceases to be an eligible dependent (as determined under
the terms of the Michaels medical plan in effect from time to time),
(B) the date on which the dependent becomes eligible to receive
Medicare or similar benefits from another person or entity or (C)
September 30, 2012. Notwithstanding anything to the contrary
contained herein, beginning on October 1, 1997 the cost of such
benefits, whether provided under the Michaels medical plan or other
insurance coverage, based on COBRA rates applicable to senior
executive employees from time to time, shall be shared equally by
Michaels and Morris (or his current eligible dependents, as the case
may be). In the event that any monthly retirement/death benefit
provided for in Section 3(a) above is reduced pursuant to the terms
of Section 13 below to an amount less than Morris' (or his current
eligible dependents') share of the cost of the health care benefits
provided hereunder for such month, then such shortfall will be paid
by Michaels on Morris' (or his current eligible dependents') behalf,
and the Reduction Amount (as defined in Section 13), and the
$1,570,000 maximum total reduction specified in Section 13, shall
both be increased by an amount equal to the amount of such shortfall
so paid by Michaels.
(c) Whole Life Insurance Policy Premiums.
Michaels will pay to Morris the current monthly premium for 55
months with respect to that certain Whole Life - Adjustable
Insurance Policy issued by Northwestern Mutual Life Insurance
Company ("Northwestern"), dated October 2, 1991, Policy Number
11 917 570, beginning with the premium due in June 1997, subject
to all applicable withholding requirements.
(d) Split-Dollar Insurance. Michaels and Morris
are parties to that certain Contributory Split-Dollar Insurance
Agreement dated February 28, 1990 (the "Split-Dollar Agreement").
Michaels hereby forgives and discharges the loan to Morris
described in Article Three of the Split-Dollar Agreement, and will
execute and deliver to Morris a reassignment of the Insurance
Contract (as defined in Article One of the Split-Dollar Agreement)
or a release of the original collateral assignment of the Insurance
Contract. It is acknowledged and agreed that Michaels will make no
further payments under or with respect to the Split-Dollar Agreement
or the Insurance Contract.
<PAGE>
(e) Liability Insurance. Michaels will cause
Morris to continue to be covered under a policy of officers' and
directors' liability insurance with respect to Morris' prior services as
an executive officer of Michaels which will provide coverage that is
comparable to that provided to other individuals serving as executive
officers of Michaels during the period of such prior service by
Morris.
(f) Automobile. Morris may continue to use the
automobile leased for his use by Michaels and currently in his
possession until the expiration of the applicable lease in December
1997, whereupon Michaels will enable Morris to purchase such
automobile at the purchase price stated in such lease. During the
term of such lease, Michaels shall continue to make all rent
payments required thereunder. Morris will be solely liable for all
operating costs associated with such automobile, including without
limitation fuel, oil, parts (other than parts required in connection
with any routine maintenance in accordance with the manufacturer's
recommended maintenance schedule), tires and paint, but excluding
insurance premiums and the costs of routine maintenance in
accordance with the manufacturer's recommended maintenance
schedule, which will continue to be paid by Michaels.
(g) AAirpass. Michaels hereby transfers and
assigns to Morris its interest in and to the American Airlines
AAirpass (the "AAirpass") purchased for his use by Michaels and
currently in his possession. Morris hereby assumes full
responsibility for all current and future charges, fees and assessments
incurred under or with respect to the AAirpass, agrees to indemnify
Michaels and hold it harmless from and against any and all such
charges, fees and assessments and agrees promptly to execute and
deliver a standard American Airlines form of Assumption
Agreement relating to the AAirpass.
(h) Tax Information. Michaels will use
reasonable efforts to provide to Morris information which is in
Michaels' possession or subject to its control and which is requested
by Morris in connection with the preparation of his personal tax
returns.
Section 4. Assistance with Litigation. Morris will make
himself available and will assist Michaels and its affiliates in
connection with any litigation in which Michaels or any of its
affiliates is now or may become involved, including without
limitation that certain action styled Steven Kalodner, et al. v.
Michaels Stores, Inc., et al. pending in the United States District
Court for the Northern District of Texas, Dallas Division. Any
reasonable costs and expenses incurred by Morris in providing such
assistance will be promptly reimbursed, or paid in advance, by
Michaels.
Section 5. Taxes. Morris shall promptly pay and be
solely liable for all income and other taxes and charges imposed on
Morris as a result of payments made or other benefits provided to
him pursuant to this Agreement.
Section 6. Return of Property. Morris shall promptly
return to Michaels all property of Michaels in Morris' possession or
subject to his control, except that Morris shall be entitled to keep as
his personal property (a) the personal computer and related
equipment and software currently located in his office at Michaels
and (b) two fax machines currently located at his residences. As
between Morris and Michaels, Morris will be solely liable for all
charges incurred for periods after March 24, 1997 in connection with
any property, services or benefits whatsoever, including without
limitation charges incurred in connection with any cellular or car
telephone, except as otherwise specifically provided in this
Agreement.
Section 7. Advice in Writing. Michaels hereby advises
Morris to consult with an attorney of his choice prior to signing this
Agreement.
Section 8. Period of Consideration. It is acknowledged
and agreed that Morris has at least twenty-one (21) days to consider
whether to execute this Agreement.
<PAGE>
Section 9. Voluntary Act. Morris represents and agrees
that he has thoroughly discussed all aspects of this Agreement with
his attorney, that Morris is fully aware of his right to discuss any and
all aspects of this matter with an attorney of his choice, that he has
carefully read and fully understands all of the provisions of this
Agreement, and that he is voluntarily entering into this Agreement.
Section 10. Release. Except for Michaels' continuing
obligations under this Agreement, Morris, his representatives, heirs,
successors and assigns do hereby completely release and forever
discharge Michaels, its parent, affiliated and subsidiary corporations
and entities, and its current and former officers, directors,
shareholders, agents, employees, attorneys, successors and assigns
from all claims, rights, demands, actions, liabilities, causes of action
and obligations of any kind whatsoever, whether known or unknown,
suspected or unsuspected, which Morris may now have or has ever
had against them (collectively, "Claims") including, but not limited
to, Claims of age discrimination under the Age Discrimination in
Employment Act of 1967, as amended.
Section 11. Confidential Information. Morris agrees to
hold confidential, and not to disclose to any person, firm, corporation
or agency, any trade secret information gained in the course of his
employment with, or engagement as a consultant by, Michaels
concerning Michaels and/or any of its affiliates, subsidiaries, parents,
predecessors or related entities and any confidential information
concerning Michaels or any of its affiliates, subsidiaries, parents,
predecessors or related entities, except if such disclosure is required
by law or legal process. Confidential information shall include,
without limitation, information concerning financial affairs, business
plans, proprietary statistics, reports, pricing information, customer
or supplier data or contracts, but shall not include information that
is or becomes publicly available other than as a result of Morris'
violation of his obligations hereunder or information that is or
becomes available to Morris on a non-confidential basis from
another source not bound, to Morris' knowledge, by any contractual,
fiduciary or other obligation of confidentiality owed to Michaels or
any of its affiliates, subsidiaries, parents, predecessors or related
entities.
Section 12. Non-Interference with Business Relationships.
Morris agrees that, for a period of 18 months from the effective date
of this Agreement, Morris will not solicit, entice or otherwise induce
any employee of Michaels (or of any franchisee, subsidiary or
affiliate of Michaels) to leave the employ of Michaels (or of any
such franchisee, subsidiary or affiliate) for any reason whatsoever;
nor will Morris directly or indirectly hire or aid, assist or abet any
other person or entity in soliciting or hiring any employee of
Michaels (or of any such franchisee, subsidiary or affiliate); nor will
Morris otherwise intentionally interfere with any contractual or other
business relationship between Michaels (or any such franchisee,
subsidiary or affiliate) and any other person or entity.
Section 13. Stock Options. Morris and Michaels
acknowledge and agree that the options held by Morris as of the date
hereof (the "Options") to purchase a total of 283,250 shares of
Michaels' Common Stock (the "Common Stock"), granted to him
pursuant to the terms of Michaels' Key Employee Stock
Compensation Program, shall survive Morris' retirement and the
termination of Morris' employment and may be exercised in whole
or in part by Morris, subject to all of the other terms and conditions
of the Options, including without limitation the vesting and
termination provisions thereof. The retirement/death benefits
provided for in Section 3(a) hereof will be reduced (up to a
maximum total reduction of $1,570,000) by an amount (the
"Reduction Amount") equal to 33 percent of the difference between
(a) the aggregate fair market value of the shares of Common Stock
received by Morris upon exercise of the Options, measured at the
date(s) of exercise ("Fair Market Value"), and (b) the aggregate price
paid by Morris to Michaels to exercise the Options (the "Exercise
Price"), but only to the extent such difference exceeds $1,000,000.
The Reduction Amount will be applied to reduce the next monthly
retirement/death benefit to be paid after the exercise of any of the
Options results in the cumulative Fair Market Value exceeding the
cumulative Exercise Price by at least $1,000,000, then to each
succeeding monthly payment obligation until the total Reduction
Amount has been exhausted or the $1,570,000 maximum total
reduction has been reached.
<PAGE>
For example:
If the Fair Market Value of 200,000 shares of
Common Stock received by Morris upon his first
exercise of Options is $4,500,000 ($22.50 per share)
and the Exercise Price of such Options is $2,500,000
($12.50 per share), then the Reduction Amount is
calculated as follows:
$4,500,000
(2,500,000)
2,000,000
(1,000,000)
1,000,000
x 33%
Reduction Amount: $ 330,000
In this example, the next following 22 monthly
payments provided for in Section 3(a) above will be
reduced to zero. Furthermore, additional monthly
payments will be reduced upon Morris' subsequent
exercise of additional Options by amounts equal to
the difference between the Fair Market Value of the
additional shares so acquired and the Exercise Price
of such additional Options.
If, at the time an Option is exercised, the shares of Common Stock
are admitted to trading on a national securities exchange for which
sale prices are regularly reported, the Fair Market Value of the shares
covered by such Option shall be the last reported trade price of the
Common Stock on that exchange on the date of exercise. For
purposes of the preceding sentence, the term "national securities
exchange" shall include without limitation the National Association
of Securities Dealers Automated Quotation System and the over-the-counter
market. In the event that Morris assigns or transfers any of
the Options or any interest therein, Morris will be deemed for
purposes of this Section to have exercised such Options on the date
of such assignment or transfer, to have received the shares of
Common Stock covered thereby and to have paid the Exercise Price
of such Options. Notwithstanding anything to the contrary contained
herein, the Reduction Amount, and the $1,570,000 maximum total
reduction specified above, shall both be subject to increase as
provided in Section 3(b) above.
Section 14. Equitable Remedies. Morris expressly affirms
and recognizes that this Agreement contains obligations which, in
the event of his breach thereof, afford Michaels no adequate remedy
at law. As a result thereof, in the event of Morris' breach, or
threatened breach, of any term or provision contained in this
Agreement, Morris agrees that Michaels shall be entitled to both
temporary and permanent injunctive relief. The right of Michaels to
such relief shall not be construed to prevent Michaels from pursuing,
either consecutively or concurrently, any and all other legal or
equitable remedies available to it for such breach or threatened
breach, specifically including without limitation the recovery of
monetary damages.
<PAGE>
Section 15. Expenses of Counsel. Each party agrees that
he or it, respectively, will pay and be solely responsible for all legal
and other fees and expenses incurred by him or it in connection with
the negotiation, preparation and execution of this Agreement. In the
event either party in any respect breaches the terms and conditions
of this Agreement, or threatens to do the same, and in the event that
it becomes necessary for the other party to employ legal counsel to
enforce any provision of this Agreement or to seek or obtain relief
through legal proceedings on account of such breach or threatened
breach of this Agreement, the breaching party (or the party
threatening to breach this Agreement) shall pay to the other party
reasonable attorneys' fees, as well as all court costs, disbursements
and other expenses of any nature whatsoever, which such other party
may expend or incur in connection with the enforcement of this
Agreement or of any rights and remedies provided by this
Agreement.
Section 16. Non-Denigration. Michaels and Morris agree
that it or he will not criticize, denigrate or otherwise speak adversely
against the other in regard to past or present activities.
Section 17. Amendment. This Agreement may be
amended, modified or supplemented only by an instrument in
writing executed by both of the parties hereto.
Section 18. Assignment. Neither this Agreement nor any
right or obligation created hereby shall be assignable by either party
hereto, without the express written permission of the other party,
except by operation of law, including, but not limited to, the
applicable laws of descent and distribution.
Section 19. Entire Agreement. This Agreement contains
the entire agreement of the parties and supersedes any and all other
agreements between the parties hereto with respect to the subject
matter hereof.
Section 20. Governing Law. THIS AGREEMENT
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HERETO SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS (BUT NOT THE RULES
GOVERNING CONFLICTS OF LAWS) OF THE STATE OF
TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT
SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS.
Section 21. Invalid Provisions. If any provision hereof is
held to be illegal, invalid or unenforceable under present or future
laws effective during the term hereof, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a
part hereof; and the remaining provisions hereof shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance therefrom. Furthermore,
in lieu of such illegal, invalid or unenforceable provision there shall
be added automatically as a part of this Agreement a provision as
similar in terms to such illegal, invalid or unenforceable provision as
may be possible and yet be legal, valid and enforceable.
<PAGE>
Section 22. Headings. The headings, captions and
arrangements used herein are for convenience only and shall not be
deemed to limit, amplify or modify the terms hereof, nor affect the
meaning thereof.
Section 23. Multiple Counterparts. This Agreement has
been executed in a number of identical counterparts, all of which
constitute, collectively, one agreement; but in making proof of this
Agreement, it shall not be necessary to produce or account for more
than one such counterpart.
Section 24. Parties Bound. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective representatives, heirs, successors and permitted assigns.
Section 25. Revocation Period. It is expressly agreed that
for seven (7) days following execution of this Agreement by Morris,
Morris may revoke this Agreement; it is further expressly agreed by
the parties that this Agreement shall not become effective or
enforceable until the seven (7) day revocation period described
above has expired without Morris' having exercised his right to
revoke this Agreement.
EXECUTED effective as of the date first set forth above.
MICHAELS STORES, INC.
By: ____________________________________
Sam Wyly
Chairman of the Board of Directors
____________________________________
R. Don Morris
<PAGE>
EXHIBIT 10.2
MICHAELS STORES, INC.
1997 STOCK OPTION PLAN
Michaels Stores, Inc., a Delaware corporation (the
"Company"), hereby establishes the Michaels Stores, Inc. 1997
Stock Option Plan (the "Plan"), effective as of June 6, 1997.
1. Purpose. The purpose of the Plan is to attract and
retain the best available talent and encourage the highest level of
performance by executive officers, key employees, directors,
advisors and consultants, and to provide them with incentives to
put forth maximum efforts for the success of the Company's
business, in order to serve the best interests of the Company and
its stockholders. All options granted under the Plan are intended
to be nonstatutory stock options.
2. Definitions. The following terms, when used in the
Plan with initial capital letters, will have the following meanings:
(a) "Act" means the Securities Exchange Act of
1934 as in effect from time to time.
(b) "Board" means the Board of Directors of the
Company.
(c) "Code" means the Internal Revenue Code of
1986, as in effect from time to time.
(d) "Common Stock" means the common stock,
par value $.10 per share, of the Company or any security
into which such common stock may be changed by reason
of any transaction or event of the type described in
Paragraph 7.
(e) "Date of Grant" means the date specified by
the Stock Option Committee or the Board, as applicable, on
which a grant of Stock Options will become effective
(which date will not be earlier than the date on which such
committee or the Board takes action with respect thereto).
(f) "Market Value per Share" means the fair
market value per share of the Common Stock on the Date
of Grant as determined by the Stock Option Committee or
the Board, as applicable.
(g) "Option Price" means the purchase price per
share payable on exercise of a Stock Option.
<PAGE>
(h) "Participant" means a person who is selected
by the Stock Option Committee or the Board, as applicable,
to receive Stock Options under Paragraph 5 of the Plan and
who is at that time (i) an executive officer or other key
employee of the Company or any Subsidiary, (ii) an advisor
or consultant to the Company or any Subsidiary, or (iii) a
member of the Board.
(i) "Rule 16b-3" means Rule 16b-3 under
Section 16 of the Act as such Rule is in effect from time to
time.
(j) "Stock Option Committee" means the 1997
Stock Option Plan Committee, which is a committee of the
Board whose members are appointed by the Board from
time to time. All of the members of the Special Stock
Option Committee, which may not be less than two, are
intended at all times to qualify as "outside directors" within
the meaning of Section 162(m) of the Code, and as "Non-Employee
Directors" within the meaning of Rule 16b-3;
provided, however, that the failure of a member of such
committee to so qualify shall not be deemed to invalidate
any Stock Option granted by such committee.
(k) "Stock Option" means the right to purchase
one or more shares of Common Stock upon exercise of an
option granted pursuant to Paragraph 5.
(l) "Subsidiary" means any corporation,
partnership, joint venture or other entity in which the
Company owns or controls, directly or indirectly, not less
than 50% of the total combined voting power or equity
interests represented by all classes of stock issued by such
corporation, partnership, joint venture or other entity.
3. Shares Available Under Plan. The shares of
Common Stock which may be issued under the Plan will not
exceed in the aggregate 6,800,000 shares, subject to adjustment as
provided in this Paragraph 3. Such shares may be shares of
original issuance or treasury shares or a combination of the
foregoing.
(a) Any shares of Common Stock which are
subject to Stock Options that are terminated unexercised,
forfeited or surrendered or that expire for any reason will
again be available for issuance under the Plan.
(b) If, as of the close of business on the last day
of each fiscal quarter of the Company following the
effective date of the Plan, the sum of (i) the total number of
shares of Common Stock previously issued upon the
exercise of Stock Options, (ii) the total number of shares of
Common Stock then subject to outstanding Stock Options,
and (iii) the total number of shares of Common Stock then
remaining available for future Stock Option grants under
the Plan (such sum being the "Plan Shares") is less than
20% of the total number of shares of Common Stock then
outstanding computed on a fully diluted basis (such total
number being the "Outstanding Shares"), the number of
shares of Common Stock available for issuance under the
Plan will be increased (but not decreased) so that the
number of Plan Shares will be equal to 20% of the number
of Outstanding Shares. For purposes of the foregoing
adjustment, all outstanding Stock Options and stock options
granted under other Company plans will be treated as fully
exercised in computing the number of outstanding shares of
Common Stock on a fully diluted basis, without regard to
whether such stock options are then fully exercisable.
<PAGE>
(c) The shares available for issuance under the
Plan also will be subject to adjustment as provided in
Paragraph 7.
4. Individual Limitation on Stock Options. The
maximum aggregate number of shares of Common Stock with
respect to which Stock Options may be granted to any Participant
during any single calendar year will not exceed 1,500,000 shares.
5. Grants of Stock Options. The Stock Option
Committee or the Board may from time to time authorize grants to
any Participant of Stock Options upon such terms and conditions
as such committee or the Board, as applicable, may determine in
accordance with the provisions set forth below.
(a) Each grant will specify the number of shares
of Common Stock to which it pertains.
(b) Each grant will specify the Option Price,
which will not be less than 100% of the Market Value per
Share on the Date of Grant.
(c) Successive grants may be made to the same
Participant whether or not any Stock Options previously
granted to such Participant remain unexercised.
(d) Each grant will specify the required period
or periods (if any) of continuous service by the Participant
with the Company or any Subsidiary and/or any other
conditions to be satisfied before the Stock Options or
installments thereof will become exercisable, and any grant
may provide, or may be amended to provide, for the earlier
exercise of the Stock Options in the event of a change in
control of the Company (as defined in the stock option
agreement evidencing such grant or in any agreement
referred to in such stock option agreement) or in the event
of any other similar transaction or event.
(e) Each Stock Option granted pursuant to this
Paragraph 5 may be made subject to such transfer
restrictions as the Stock Option Committee or the Board, as
applicable, may determine.
(f) Each grant will be evidenced by a stock
option agreement executed on behalf of the Company by
the Chief Executive Officer (or another officer designated
by the Stock Option Committee or the Board, as applicable)
and delivered to the Participant and containing such further
terms and provisions, consistent with the Plan, as such
committee or the Board, as applicable, may approve.
<PAGE>
6. Payment. The Option Price will be payable, as
required by the Stock Option Committee or the Board in such
Committee's or the Board's sole discretion, as applicable, (i) in
cash or by check acceptable to the Company, (ii) by the transfer to
the Company of shares of Common Stock owned by the Participant
for at least six months (or, with the consent of the Stock Option
Committee or the Board, as applicable, for less than six months)
having an aggregate fair market value per share at the date of
exercise equal to the aggregate Option Price, (iii) by authorizing
the Company to withhold a number of shares of Common Stock
otherwise issuable to the Participant having an aggregate fair
market value per share on the date of exercise equal to the
aggregate Option Price, (iv) in any other form of valid
consideration or (v) by a combination of such methods of payment;
provided, however, that the payment methods described in
clauses (ii) and (iii) will not be available at any time that the
Company is prohibited from purchasing or acquiring such shares
of Common Stock. The Stock Option Committee or the Board, as
applicable, may permit deferred payment of the Option Price from
the proceeds of sale through a bank or broker of some or all of the
shares to which such exercise relates.
7. Adjustments. The Stock Option Committee or the
Board may make or provide for such adjustments in the maximum
number of shares specified in Paragraph 3, in the number of shares
of Common Stock covered by outstanding Stock Options granted
hereunder, in the Option Price applicable to any such Stock
Options, and/or in the kind of shares covered thereby (including
shares of another issuer), as such committee or the Board, as
applicable, in its sole discretion, exercised in good faith, may
determine is equitably required to prevent dilution or enlargement
of the rights of Participants that otherwise would result from any
stock dividend, stock split, combination of shares, recapitalization
or other change in the capital structure of the Company, merger,
consolidation, spin-off, reorganization, partial or complete
liquidation, issuance of rights or warrants to purchase securities or
any other corporate transaction or event having an effect similar to
any of the foregoing. In the event the Stock Option Committee
shall disagree with the Board with respect to the foregoing
adjustments, the Board's determination will be final and
conclusive. Any fractional shares resulting from the foregoing
adjustments will be eliminated.
8. Withholding of Taxes. To the extent that the
Company is required to withhold federal, state, local or foreign
taxes in connection with any benefit realized by an optionee under
the Plan, or is requested by an optionee to withhold additional
amounts with respect to such taxes, and the amounts available to
the Company for such withholding are insufficient, it will be a
condition to the realization of such benefit that the optionee make
arrangements satisfactory to the Company for payment of the
balance of such taxes required or requested to be withheld. In
addition, if permitted by the Stock Option Committee or the Board,
an optionee may elect to have any withholding obligation of the
Company satisfied with shares of Common Stock that would
otherwise be transferred to the optionee on exercise of the Stock
Option.
9. Administration of the Plan. (a) The Plan will be administered by
the Stock Option Committee and the Board. For purposes of any action taken
by the Stock Option Committee or the Board, whichever is applicable, a
majority of the members will constitute a quorum, and the action
of the members present at any meeting at which a quorum is
present, or acts unanimously approved in writing, will be the acts
of the Stock Option Committee or the Board.
<PAGE>
(b) The Stock Option Committee and the Board
have the full authority and discretion to administer the Plan and to
take any action that is necessary or advisable in connection with the
administration of the Plan, including without limitation the
authority and discretion to interpret and construe any provision of
the Plan or of any agreement, notification or document evidencing
the grant of a Stock Option. The interpretation and construction by
the Stock Option Committee or the Board, as applicable, of any
such provision and any determination by the Stock Option
Committee or the Board pursuant to any provision of the Plan or
of any such agreement, notification or document will be final and
conclusive; provided, that in the event the Stock Option Committee
shall disagree with the Board with respect to such interpretation,
construction or determination, the Board's determination will be
final and conclusive. No member of the Stock Option Committee
or the Board will be liable for any such action or determination
made in good faith.
(c) Notwithstanding any provision of the Plan to
the contrary, the Stock Option Committee will have the exclusive
authority and discretion to take any action required or permitted to
be taken under the provisions of Paragraph 7, Paragraph 9(a),
Paragraph 9(b), Paragraph 10(a) and Paragraph 10(b) with respect
to Stock Options granted under the Plan that are intended to
comply with the requirements of Section 162(m) of the Code.
10. Amendments, Etc. (a) The Stock Option Committee or the Board, as
applicable, may, without the consent of the optionee, amend any agreement
evidencing a Stock Option granted under the Plan, or otherwise
take action, to accelerate the time or times at which the Stock
Option may be exercised, to extend the expiration date of the Stock
Option, to waive any other condition or restriction applicable to
such Stock Option or to the exercise of such Stock Option, to
reduce the exercise price of such Stock Option, to amend the
definition of a change in control of the Company (if such a
definition is contained in such agreement) to expand the events that
would result in a change in control of the Company and to add a
change in control provision to such agreement (if such provision is
not contained in such agreement) and may amend any such
agreement in any other respect with the consent of the optionee.
(b) The Plan may be amended from time to time
by the Board or any duly authorized committee thereof. In the
event any law, or any rule or regulation issued or promulgated by
the Internal Revenue Service, the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc.,
any stock exchange upon which the Common Stock is listed for
trading, or any other governmental or quasi-governmental agency
having jurisdiction over the Company, the Common Stock or the
Plan, requires the Plan to be amended, or in the event Rule 16b-3
is amended or supplemented (e.g., by addition of alternative rules)
or any of the rules under Section 16 of the Act are amended or
supplemented, in either event to permit the Company to remove or
lessen any restrictions on or with respect to Stock Options, the
Stock Option Committee and the Board each reserves the right to
amend the Plan to the extent of any such requirement, amendment
or supplement, and all Stock Options then outstanding will be
subject to such amendment.
<PAGE>
(c) The Plan may be terminated at any time by
action of the Board. The termination of the Plan will not adversely
affect the terms of any outstanding Stock Option.
(d) The Plan will not confer upon any Participant
any right with respect to continuance of employment or other
service with the Company or any Subsidiary, nor will it interfere
in any way with any right the Company or any Subsidiary would
otherwise have to terminate a Participant's employment or other
service at any time.
MICHAELS STORES, INC.
By ___________________________
Name: R. Michael Rouleau
Title: President and Chief
Executive Officer
