<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 JANUARY 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-11822
-------------------------
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1943604
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8000 BENT BRANCH DRIVE
IRVING, TEXAS 75063
P.O. BOX 619566
DFW, TEXAS 75261-9566
(Address of principal executive offices, including zip code)
(972) 409-1300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
Common Stock, Par Value $.10 Per Share
-------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K (229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN,
AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
AS OF APRIL 15, 1998, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $983,169,565 BASED ON THE
CLOSING PRICE OF THE REGISTRANT'S COMMON STOCK ON SUCH DATE, $35.00, AS
REPORTED ON THE NASDAQ STOCK MARKET.
AS OF APRIL 15, 1998, 29,550,386 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
UNLESS OTHERWISE NOTED, ALL NUMBERS CONTAINED IN THIS DOCUMENT ARE
AS OF JANUARY 31, 1998.
With approximately $1.5 billion in sales, Michaels Stores, Inc.
(the "Company") is the nation's largest and only national retailer dedicated
to serving the arts, crafts and decorative items marketplace. The Company's
Michaels stores offer a wide selection of competitively priced items,
including general crafts, home decor items, picture framing materials and
services, art and hobby supplies, party supplies, silk and dried flowers,
wearable art, and seasonal and holiday merchandise for the hobbyist and
do-it-yourself home decorator. The Company's primary customers are women
with above average median household incomes. The average sale in the
Company's Michaels stores has increased annually from approximately $12.00 in
fiscal 1991 to $16.31 in fiscal 1997.
In March 1995, the Company acquired Aaron Brothers, Inc. ("Aaron
Brothers"), a chain of specialty framing and art supply stores operating
primarily on the West Coast. The Company's Aaron Brothers stores offer
professional custom framing services, photo frames, a full line of ready-made
frames, and a wide selection of art supplies. During fiscal 1997, Aaron
Brothers generated sales of $74.9 million. The average sale in the Company's
Aaron Brothers stores has increased annually since the acquisition from
approximately $23.94 in fiscal 1995 to approximately $29.50 in fiscal 1997.
The Company operates 452 Michaels stores and 74 Aaron Brothers
stores in 45 states, Canada and Puerto Rico. The Company's Michaels stores
average approximately 16,500 square feet of selling space and offer an
assortment of approximately 40,000 stock keeping units ("SKUs") in a typical
store during the course of a year (including seasonal product), of which
approximately 36,000 SKUs are offered at all times. The Company's Aaron
Brothers stores average approximately 6,400 square feet of selling space and
offer an assortment of approximately 6,000 SKUs. For fiscal 1997, the
average sales of the Company's Michaels and Aaron Brothers stores open for
the full fiscal year were $3.1 million and $1.1 million, respectively.
The Company believes it is well positioned to continue to solidify
its position as the dominant nationwide specialty arts, crafts and decorative
items retailer and to increase its return on invested capital through its
business strategies of (i) offering a broad selection of products in an
appealing store environment that emphasizes superior customer service, (ii)
effectively managing its investment in inventory, and (iii) continuing to
expand its nationwide presence.
MERCHANDISING AND MARKETING
The Company's Michaels store merchandising strategy is to provide a
broad selection of products in an appealing store environment which
emphasizes superior customer service.
PRODUCT SELECTION
In general, each Michaels store offers products from a number of
categories. Most of the categories offer essentially the same type of
merchandise throughout the year, although the products may vary from season
to season. The merchandise offered by the major categories is as follows:
- General craft materials, including those for stenciling, doll
making, jewelry making, woodworking, wall decor, tole
painting, rubber stamps, memory books and plaster;
- Items for personalizing home decor, including vases,
containers, baskets, candles, potpourri and gifts;
- Picture framing materials and services, including ready-made
frames and custom framing, mat boards, glass, backing
materials and related supplies, framed art and photo albums;
- Fine art materials, representing a number of major brand lines
and including items such as pastels, water colors, oil paints,
acrylics, easels, brushes, paper and canvas;
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- Hobby items, including wooden and plastic model kits and
related supplies, and paint-by-number kits;
- Party needs, including paper party goods, balloons, candy,
gift wrap, candy making and cake decorating supplies;
- Needle craft items, including stitchery supplies,
hand-knitting yarns, needles, canvas and related supplies for
needlepoint, embroidery and cross stitching, knitting,
crochet, rug making kits, and quilts and afghans, which are
sold separately or in kits;
- Silk flowers, dried flowers and artificial plants sold
separately or in ready-made and custom floral arrangements,
all accessories needed for floral arranging and other floral
items such as wreaths;
- Ribbon and wedding accessories, including satins, laces,
florals and other styles sold both in bolts and by the yard;
- Wearable art, including adult's and children's garments,
fabric paints, embellishments, jewels and sequins, transfers
and appliques.
In addition to the basic categories described above, the Michaels
stores regularly feature seasonal merchandise which complements the Company's
core merchandising strategy. Seasonal merchandise is ordered for several
holiday periods, including Valentine's Day, Easter, Mother's Day, Halloween
and Thanksgiving, in addition to the Christmas season. For example, seasonal
merchandise for the Christmas season includes trees, wreaths, candles, lights
and ornaments.
During the Christmas selling season, a significant portion of floor
and shelf space in a typical Michaels store is devoted to Christmas crafts,
Christmas decorating and gift making merchandise. Because of the
project-oriented nature of these products, the peak Christmas selling season
extends from October through December. Accordingly, a fully developed
seasonal merchandising program, including inventory, merchandise layout and
instructional ideas, is implemented in each Michaels store beginning in July
of each year. This program requires additional inventory accumulation so that
each store is fully stocked during the peak season. Sales of all merchandise
typically increase during the Christmas selling season because of increased
customer traffic.
The following table shows Michaels' sales by department as a
percent of total sales for fiscal 1997, 1996 and 1995:
<TABLE>
<CAPTION>
PERCENT OF SALES
--------------------------------
DEPARTMENT 1997 1996 1995
- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
Hobby, party, needlecraft and ribbon . . . . 20% 20% 19%
Picture framing . . . . . . . . . . . . . . . 18 17 16
Silk and dried flowers and plants . . . . . . 17 19 22
General craft materials and wearable art . . 16 15 17
Seasonal and home decor . . . . . . . . . . . 15 17 15
Fine art materials . . . . . . . . . . . . . 14 12 11
Total . . . . . . . . . . . . . . . . . . . 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
The Michaels merchandising strategy is developed centrally and
implemented at the store level through the use of "planograms" which provide
store managers with detailed descriptions and illustrations with respect to
store layout and merchandise presentation. Planograms are also used to
cluster various products which can be combined to create individual projects.
Aaron Brothers stores offer professional custom framing services,
photo frames, a full line of ready-made frames, and a wide selection of art
supplies. The Company's merchandising strategy for its Aaron Brothers stores
is to provide competitively priced custom framing services and selection,
with a five business day delivery guarantee. In addition, Aaron Brothers
strives to provide a fashion forward merchandise selection in an appealing
environment with superior customer service.
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CUSTOMER SERVICE
The Company believes that customer service is critically important
to its merchandising strategy. Many of the craft supplies sold in Michaels
stores can be assembled into unique end-products with an appropriate amount
of guidance and direction. Accordingly, Michaels has displays in every store
in an effort to stimulate new project ideas, and supplies project sheets with
detailed instructions on how to assemble the product. In addition, many
Michaels sales associates are craft enthusiasts who are able to help
customers with ideas and instructions. The Company periodically offers
demonstrations and inexpensive classes in its stores as a means of promoting
new craft ideas and expanding its customer base.
ADVERTISING
The Company focuses on circular and newspaper advertising. The
Company has found full-color circular advertising, primarily as an insert to
newspapers, to be the most effective medium of advertising. Such circulars
advertise numerous products in order to emphasize the wide selection of
products available at Michaels stores. The Company believes that its ability
to advertise through circulars and newspapers throughout the year, in each of
its markets, provides the Company with an advantage over its smaller
competitors.
PURCHASING, DISTRIBUTION AND INVENTORY MANAGEMENT
To enhance its competitive positioning the Company is actively
pursuing improvements throughout its supply chain. These improvements are
intended to minimize the investment in inventory necessary to support the
Company's sales growth objectives, maximize its stores' in-stock position,
and improve the cost-effectiveness of the delivery of goods from its vendors
to its stores.
PURCHASING AND DISTRIBUTION
The Company's purchasing strategy is to negotiate centrally with
its vendors in order to take advantage of volume purchasing discounts and
improve control over product mix and inventory. In excess of 95% of the
merchandise acquired by the stores is from vendors on the Company's "approved
list." Approximately 45% of Michaels store stock is shipped directly from the
Michaels distribution centers, with the remaining 55% being shipped directly
from vendors. District managers are responsible for monitoring store
purchases to further manage the stores' merchandise needs. In 1997, the
Company's top ten vendors accounted for approximately 17% of total purchases,
with no single vendor accounting for more than 4% of total purchases.
The Company believes that its distribution capabilities will allow
it to maintain a high in-stock position in its stores while balancing its
overall inventory position. The Company believes its distribution network is
a competitive advantage and it intends to increase the flow of goods through
its distribution centers and thereby reduce its supply chain costs and more
effectively manage its investment in inventories. The Company currently
operates four distribution centers which supply the Michaels stores with
certain merchandise, including substantially all seasonal and promotional
items. The Company's distribution centers are located in Texas, California,
Kentucky and Florida. The Company's California distribution center will be
relocated in 1998. Michaels stores receive deliveries from the distribution
centers generally once a week through an internal distribution network using
contract carriers.
Substantially all of the products sold in Michaels stores are
manufactured in the United States, the Far East and Mexico. Goods
manufactured in the Far East generally require long lead times and are
ordered four to six months in advance of delivery. Such products are either
imported directly by the Company or acquired from distributors based in the
United States. In all cases, purchases are denominated in U.S. dollars (or
Canadian dollars for purchases of certain items delivered directly to stores
in Canada).
Aaron Brothers purchases all of its merchandise centrally. Aaron
Brothers operates a distribution center located in the City of Commerce,
California that currently serves all of its stores. Approximately 54% of
their store stock is shipped directly from the Aaron Brothers distribution
center, with the remaining 46% being shipped directly from vendors. Aaron
Brothers systematically replenishes each of its stores automatically on a
weekly basis.
4
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INVENTORY MANAGEMENT
The Company's primary objectives for inventory management are
maximizing the efficiency of the flow of product to the stores, improving
store in-stock position, improving store labor efficiency, and optimizing
overall investment in inventory. The Company manages its inventory in
several ways, including: weekly tracking of inventory status; the use of
planograms to control the merchandise assortment and to assist in the reorder
process for each SKU; and the review of item-level sales information in order
to track the sell-through of seasonal and promotional items and to plan its
assortments. The data that the Company is obtaining from its point-of-sale
("POS") system is an integral component in the inventory management process.
In addition, inventories are verified through physical counts conducted
throughout the year and a complete physical count in all stores as close as
practicable to year end.
STORE OPERATIONS
The Company's 452 Michaels stores average approximately 16,500
square feet of selling space. The Company's 74 Aaron Brothers stores average
approximately 6,400 square feet of selling space. Net sales for fiscal 1997
averaged approximately $3.1 million per store for Michaels stores open the
entire fiscal year and $185 per square foot of selling space, and averaged
approximately $1.1 million per store for Aaron Brothers stores open the
entire fiscal year and $163 per square foot of selling space. Store sites
are selected based upon meeting certain economic, demographic and traffic
criteria or for clustering stores in markets where certain operating
efficiencies can be achieved. The Michaels and Aaron Brothers stores
currently in operation are located primarily in strip shopping centers in
areas with easy access and ample parking.
Typically, a Michaels store is managed by a store manager and one
to three assistant store managers, depending on the sales volume of the
store. Michaels' field organization is headed by an executive vice president
and is divided into four geographic zones. Each zone has its own vice
president, loss prevention manager, human resources manager, and seven to
nine district managers. There are a total of 32 districts. The Company
believes this organizational structure enhances the communication among the
individual stores and between the stores and corporate headquarters.
STORE EXPANSION
Having achieved its objective of becoming the largest and only
national retailer in arts, crafts and decorative items, the Company
recognized that it had the critical mass to achieve improved operating
efficiencies that could result in higher returns on capital. On August 23,
1995, the Company announced a shift in focus from sales growth to realizing
higher returns on capital. As a result, the Company moderated its internal
store growth rate, opening 9 new Michaels stores and 3 new Aaron Brothers
stores in fiscal 1997. In fiscal 1998 the Company plans to return to an
accelerated new store opening program. The Company intends to open
approximately 45 Michaels stores, relocate 12 to 15 stores, and remodel
approximately 45 to 50 stores during fiscal 1998. Aaron Brothers plans to
open 6 new stores in fiscal 1998.
The Company's expansion strategy is to give priority to adding
stores in existing markets in order to enhance economies of scale associated
with advertising, distribution, field supervision, and other regional
expenses. Management believes that few of its existing markets are saturated
and that there are attractive new markets available to the Company. The
anticipated opening of Michaels and Aaron Brothers stores in 1998 and the
rate at which stores are opened thereafter will depend upon a number of
factors, including the success of existing Michaels and Aaron Brothers
stores, the availability and the cost of capital for expansion, the
availability of suitable store sites, and the ability to hire and train
qualified managers. The Company intends to continue to review acquisition
opportunities in existing and new markets. The Company has no arrangements
or understandings pending with respect to any acquisitions.
Michaels has developed a standardized procedure which allows for
the efficient opening of new stores and their integration into the Company's
information and distribution systems. Michaels develops the floor plan and
inventory layout, and organizes the advertising and promotions in connection
with the opening of each new store. In addition, Michaels maintains a
qualified store opening staff to provide new store personnel with in-store
training. Accordingly, Michaels generally opens new stores during the period
from February through October because new store personnel require significant
in-store training prior to entering the Christmas selling season.
Costs for opening stores at particular locations depend upon the
type of building and general cost levels in the area. In fiscal 1997, the
average net cost to the company of opening a new Michaels store was
approximately $536,000 which included leasehold improvements, furniture,
fixtures and equipment, and pre-opening expenses. The initial inventory
5
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investment associated with each new Michaels store is approximately $750,000
at cost depending on the store size, operating format and the time of year in
which the store is opened. The initial inventory investment in new Michaels
stores is offset, in part, by extended vendor terms and allowances.
INVESTMENT IN INFORMATION TECHNOLOGY
The Company is committed to utilizing technology to increase
operating efficiencies and to improve its ability to satisfy the needs of its
customers. The Company utilizes world-class technology in the form of the
latest massively parallel computer systems that communicate to networked
computers in its stores over an earth satellite-based communications network.
With the installation of the POS system, which includes bar-code scanning,
came the ability to better understand the demands of the customer, emerging
merchandise trends, and inventory replenishment requirements. New
merchandising information systems are being installed to leverage and extend
the information provided by the POS system, provide sophisticated inventory
management capabilities based on item-level perpetual inventories of the
stores, and efficient purchase management capabilities utilizing Electronic
Data Interchange with the Company's vendors. Operational efficiencies are
being improved through the installation of a new warehouse management system
in all distribution centers. The warehouse management system makes extensive
use of bar-code scanning and radio-frequency hand-held terminals to
communicate directly with employees and the integration of all systems within
the distribution centers. The Company believes that information is a
competitive tool and intends to be the craft industry leader in the
effective, efficient utilization of this resource.
COMPETITION
Michaels is the largest and only national retailer dedicated to
serving the arts and crafts marketplace. Michaels competes primarily with
regional and local arts and crafts merchants, and mass merchandisers that
typically dedicate a portion of their selling space to a limited selection of
arts, crafts, picture framing and seasonal products. The Company believes
that its Michaels stores compete based on price, quality and variety of
merchandise assortment, and customer service. Michaels believes the
combination of its broad selection of products, emphasis on customer service,
loyal customer base, information received from its POS system, distribution
capabilities allowing it to maintain high store in-stock positions, and
capacity to advertise frequently in all of its markets provides the Company
with a competitive advantage.
The U.S. arts, crafts and decorative items retailing industry was
estimated by trade publications to be approximately $10 billion in 1997. The
industry is highly fragmented and Michaels is the only national arts and
crafts retailer. Management believes that there are only a few competitors
with arts and crafts sales that exceed $200 million annually, and that the
Company's arts and crafts sales are more than twice as large as its largest
direct competitor. The Company believes that its significant size relative to
its competitors provides it with several advantages including (i) purchasing
power, (ii) critical mass to support a cost efficient nationwide distribution
network, and (iii) the financial resources to support an annual advertising
expenditure of approximately $60 million and significant ongoing capital
investments in information technology.
Michaels' primary competitors include Hobby Lobby, a chain based in
Oklahoma City which operates approximately 163 stores primarily in the
midwestern United States; MJDesigns, a chain which operates approximately 57
stores in Dallas/Fort Worth, Baltimore/Washington, D.C. and selected other
East Coast markets; and A.C. Moore, a chain which operates approximately 28
stores in the Philadelphia and New York markets. The Company also competes
with Frank's Nursery, Jo-Ann etc. (a division of Fabri-Centers of America,
Inc.), Old America Stores and Garden Ridge Pottery.
Aaron Brothers' competition is composed primarily of local
independent custom frame shops and mass merchandisers. Aaron Brothers
believes it remains competitive due to its five business day delivery
guarantee on custom frame orders, its pricing structure, its fashion forward
merchandising assortments and its customer service.
SERVICE AND TRADE MARKS
The name "Michaels" and the Michaels logo are both federally
registered service marks held by an affiliate of the Company. The name
"Aaron Brothers" and the Aaron Brothers logo are both federally registered
trademarks.
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FRANCHISES
The Company had previously granted to Dupey Management Corporation
("DMC") the right to open royalty-free, licensed Michaels stores in an
eight-county area in north Texas which includes the Dallas/Fort Worth area.
As a result of an agreement between the Company and DMC in 1996, DMC
relinquished its right to use the Michaels name effective March 31, 1997.
EMPLOYEES
As of March 21, 1998, approximately 17,900 persons were employed by
the Company, approximately 10,600 of whom were employed on a part-time basis.
The number of part-time employees is substantially increased during the
Christmas selling season. Of the Company's full-time employees,
approximately 1,900 are engaged in various executive, operating, training and
administrative functions in the Company's corporate offices and distribution
centers, and the remainder are engaged in store operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Sam Wyly 63 Chairman of the Board of Directors
Charles J. Wyly, Jr. 64 Vice Chairman of the Board of Directors
R. Michael Rouleau 59 President and Chief Executive Officer
Bryan M. DeCordova 41 Executive Vice President--Chief Financial
Officer
Lawrence H. Fine 44 Executive Vice President--General Merchandise
Manager
Duane Hiemenz 44 Executive Vice President--Store Operations
Douglas B. Sullivan 47 Executive Vice President--Development
James F. Tucker 53 Executive Vice President--Chief Information
Officer
David A. Gary 50 Senior Vice President--Logistics and
Distribution
H. Kevin Rutherford 39 Senior Vice President--Human Resources
Donald R. Miller, Jr. 43 Director and Vice President--Market
Development
</TABLE>
Mr. Sam Wyly has served as Chairman of the Board of the Company
since 1984. Mr. Wyly co-founded Sterling Software, Inc. in 1981 and since
that time has served as Chairman of the Board and a director. In 1963, Mr.
Wyly founded University Computing Company, a computer software and services
company, and served as President or Chairman from 1963 until 1979.
University Computing created a computer utility network, one of the earliest
and most successful marriages of computing and telecommunications.
University Computing was one of the original participants in the software
products industry in the late 1960's when the then market-dominant IBM
unbundled computer hardware and software. In 1968, Mr. Wyly founded Datran,
Inc. which was envisioned as the nation's first all-digital switched
"telephone company for computers" and contributed to the break up of AT&T's
telephone monopoly and the resulting benefits of increased competition in the
telecommunications industry. These Wyly-founded companies are among the
forerunners of today's electronic commerce industry. Mr. Wyly co-founded
Earth Resources Company, an oil refining and silver mining company, and
served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and
his brother, Charles J. Wyly, Jr., bought the 20-restaurant Bonanza
Steakhouse chain in 1967. It grew to approximately 600 restaurants by 1989,
during which time Mr. Wyly served as Chairman. Mr. Wyly currently serves as a
director of Sterling Commerce, Inc. and as a partner of Maverick Capital,
Ltd., an investment fund management company. Sam Wyly is the father of Evan
A. Wyly and Kelly Elliott, directors of the Company.
Mr. Charles J. Wyly, Jr. became a director of the Company in
October 1984 and Vice Chairman in 1985. He co-founded Sterling Software,
Inc. in 1981 and since such time has served as a director and (since 1984) as
Vice Chairman. Mr. Wyly served as an officer and director of University
Computing Company, a computer software and services company, from 1964 to
1975, including President from 1969 to 1973. Mr. Wyly and his brother, Sam
Wyly, founded Earth Resources Company, an oil refining and silver mining
company, and Charles J. Wyly, Jr. served as Chairman of the Board from 1968
7
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to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse chain
from 1967 to 1989 and has served as a director of Sterling Commerce, Inc.
since December 1995. Charles J. Wyly, Jr. is the father-in-law of Donald R.
Miller, Jr., a director and Vice President--Market Development of
the Company.
Mr. Rouleau became President of the Company in April 1997 and has
been Chief Executive Officer since April 1996. Prior to joining the Company,
Mr. Rouleau had served as Executive Vice President of Store Operations for
Lowe's since May 1992 and in addition as President of Lowe's Contractor Yard
Division since February 1995. Prior to joining Lowe's, Mr. Rouleau was a
co-founder and President of Office Warehouse which subsequently merged into
Office Max.
Mr. DeCordova became Executive Vice President--Chief Financial
Officer in March 1997. Since 1990 he was Vice President of Finance,
Treasurer and Chief Financial Officer for Duckwall-ALCO Stores, Inc.
Mr. Fine became Executive Vice President--General Merchandise
Manager in December 1996. Before joining the Company, he was Senior Vice
President of Merchandising for Party City. Prior to Party City, he held a
variety of merchandising positions with the Jamesway Corporation.
Mr. Heimenz became Executive Vice President--Store Operations in
August 1996. Prior to joining Michaels, Mr. Hiemenz was a Regional Vice
President for Lowe's.
Mr. Sullivan became Executive Vice President--Development in April
1997. He joined Michaels in 1988 and has served in a variety of capacities,
including overseeing the Company's store operations, distribution, store
opening, real estate, legal and personnel functions. Prior to his joining
the Company, Mr. Sullivan had served with Family Dollar Stores, Inc. for 11
years, most recently as Vice President--Real Estate.
Mr. Tucker became Executive Vice President--Chief Information
Officer in June 1997. Before joining the Company, Mr. Tucker held the
position of Senior Vice President and Chief Information Officer for Shopko
Stores, Inc. since 1994. Prior to 1994, Mr. Tucker held the position of Vice
President--Management Information Services for Trans World Music Corp.
Mr. Gary joined the Company as Senior Vice President--Logistics and
Distribution in November 1997. For the previous two years he had served with
Kay-Bee Toys, Inc., as Vice President of Distribution and Logistics. Prior
to Kay-Bee Toys, Inc., Mr. Gary was Vice President of Distribution and
Logistics for Silo, Inc.
Mr. Rutherford became Senior Vice President--Human Resources in
March 1998. Prior to joining the Company, Mr. Rutherford was Vice
President--Corporate Human Resources for Borders Group Inc. since February
1997. From 1994 through February 1997, he served as Vice President--Human
Resources for Walden Book Company. From 1992 through 1994, Mr. Rutherford
was Vice President--Human Resources for Footaction USA.
Mr. Miller is a charter employee of the Company and has served as
Vice President--Market Development since November 1990 and as a director
since September 1992. From September 1984 to November 1990, he was Director
of Real Estate. Prior to joining the Company, Mr. Miller served in various
real estate positions with Bonanza and Peoples Restaurants. Mr. Miller has
served as a director of Sterling Software, Inc. since September 1993.
8
<PAGE>
ITEM 2. PROPERTIES.
The Company's Michaels stores generally are situated in high
visibility strip shopping centers located near malls and on well-traveled
roads. Almost all stores are located in leased premises with lease terms
generally ranging from five to ten years. The base rental rates generally
range from $85,000 to $250,000 per year. Rental expense for stores open for
the full 12-month period of fiscal 1997 averaged $170,000. The leases are
generally renewable, with increases in lease rental rates. A majority of the
existing leases contain provisions pursuant to which the lessor has provided
leasehold improvements to prepare for opening. However, the Company has been
paying and anticipates continuing to pay for a larger portion of future
improvements directly as opposed to financing them through the lessor.
The Company's Aaron Brothers stores are generally located in high
visibility strip shopping centers in trade areas having a high density of
population and above average discretionary income. The locations typically
contain high profile and/or complementary anchor stores. As of this date,
almost all stores are located in leased premises with lease terms generally
ranging from five to ten years with options to renew at increased rates.
Rental expense for stores open for the full 12-month period of fiscal 1997
averaged $105,000.
The following table indicates the number of the Company's stores
located in each state or province as of April 15, 1998:
<TABLE>
<CAPTION>
STATE NUMBER OF STORES STATE NUMBER OF STORES
- ----- ---------------- ----- ----------------
<S> <C> <C> <C>
Alabama 6 Nebraska 1
Alaska 1 Nevada 9*
Arizona 19* New Hampshire 2
Arkansas 3 New Jersey 7
British Columbia 1 New Mexico 3
California 144* New York 11
Colorado 10 North Carolina 15
Connecticut 2 North Dakota 1
Florida 24 Ohio 21
Georgia 18 Oklahoma 7
Idaho 2 Ontario 16
Illinois 22 Oregon 11
Indiana 10 Pennsylvania 10
Iowa 6 Puerto Rico 3
Kansas 4 Rhode Island 1
Kentucky 3 South Carolina 4
Louisiana 4 South Dakota 1
Maine 2 Tennessee 11
Maryland 5 Texas 32
Massachusetts 10 Utah 4
Michigan 15 Virginia 9
Minnesota 10 Washington 15
Mississippi 2 West Virginia 1
Missouri 11 Wisconsin 7
---
Total 536
</TABLE>
* Of the store counts indicated in Arizona, California and Nevada, Aaron
Brothers accounts for 4, 66 and 4 stores, respectively.
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<PAGE>
Michaels leases a 426,000 square foot building at the Alliance
Airport in Tarrant County, Texas, a 400,000 square foot building in Buena
Park, California, a 350,000 square foot building in Lexington, Kentucky, and
a 500,000 square foot building in Jacksonville, Florida for use as
distribution centers. The Company's Buena Park, California distribution
center will be replaced by a 450,000 square foot building located in
Lancaster, California in 1998. Aaron Brothers leases a 126,000 square foot
building in City of Commerce, California for use as a distribution center and
office facility. The Company also leases a 136,000 square foot building for
the corporate headquarters in Irving, Texas.
ITEM 3. LEGAL PROCEEDINGS.
In August 1995, two lawsuits were filed by certain security holders
against the Company and certain present and former officers and directors
seeking class action status on behalf of purchasers of the Company's Common
Stock between February 1, 1995 and August 23, 1995. Among other things, the
plaintiffs alleged that misstatements and omissions by the defendants
relating to projected and historical operating results, inventory and other
matters involving future plans resulted in an inflation of the price of the
Company's Common Stock during the period between February 1, 1995 and August
23, 1995. The plaintiffs sought on behalf of the class an unspecified amount
of compensatory damages and reimbursement for the plaintiffs' fees and
expenses. The United States District Court for the Northern District of Texas
consolidated the two lawsuits on November 16, 1995. On December 22, 1997,
the District Court approved a settlement in which the defendants agreed to
pay $6.25 million, and the lawsuit was dismissed with prejudice on January
27, 1998. After giving effect to prior expenditures for costs incurred in
defending the lawsuit, substantially all of the settlement amount was covered
by insurance.
A lawsuit was commenced against the Company and several other
parties on September 19, 1994 in the Superior Court of Stanislaus County,
California, on behalf of a former employee, Naomi Snyder, her child, and her
husband. The complaint alleges that the former employee and her then-unborn
child were exposed to excessive levels of carbon monoxide in one of the
Company's stores caused by a propane gas powered floor buffer which was
operated by an outside cleaning service, resulting, among other things, in
severe and permanent injuries to the child. Plaintiffs' Statement of
Damages, filed on or about January 26, 1995, seeks $11 million. On April 10,
1995 the trial court ruled the plaintiff's pleadings did not state a cause of
action against the Company upon which relief could be granted. However, the
ruling by the trial court was overturned by the Court of Appeals of the State
of California, Fifth Appellate District, on September 23, 1996. On October
30, 1997, the California Supreme Court sustained the appellate court ruling
and remanded the case to the trial court, and discovery is proceeding. The
Company believes it has meritorious defenses to this action and will defend
itself vigorously.
The Company is a defendant from time to time in lawsuits incidental
to its business. Based on currently available information, the Company
believes that resolution of all known contingencies, including the litigation
described above, is uncertain, and there can be no assurance that future
costs related to such litigation would not be material to the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of security holders
during the fourth quarter of the fiscal year covered by this report.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Stock is quoted through The Nasdaq Stock
Market under the symbol "MIKE."
The following table sets forth the high and low sale prices of the
Company's Common Stock for each quarterly period within the two most recent
fiscal years.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ---- ---
<S> <C> <C>
First . . . . . . . . $ 20 1/8 $ 11 5/8
Second . . . . . . . 23 3/8 17 3/4
Third . . . . . . . . 34 5/8 20 3/4
Fourth . . . . . . . 37 23 1/8
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ---- ---
<S> <C> <C>
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
</TABLE>
On April 15, 1998, the last reported sale price of the Common Stock
on The Nasdaq Stock Market was $35.00 and as of such date there were
approximately 761 holders of record of the Common Stock.
Options to purchase 2,000,000 shares of the Company's Common Stock
were acquired in December 1996 through private transactions by entities owned
by independent trusts of which Wyly family members are beneficiaries. The
options had an exercise price equal to the then current market price of
$10.50 per share and were exercised on February 28, 1997.
The Company's present plan is to retain earnings for the
foreseeable future for use in the Company's business and the financing of its
growth. The Company did not pay any dividends on its Common Stock during
fiscal 1996 and 1997.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------------------------------
1997 1996(1) 1995 1994 1993
---------- -------------- -------------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales $1,456,524 $1,378,277 $1,294,886 $ 994,563 $ 619,688
Operating income (loss) 68,942 (20,987)(2) (15,046)(3) 64,036 41,356
Net income (loss) 30,077 (31,233) (20,417) 35,647 26,287
Earnings (loss) per
common share (4) 1.05 (1.35) (0.96) 1.67 1.48
BALANCE SHEET DATA:
Cash and investments $ 162,283 $ 59,069 $ 2,870 $ 16,909 $ 68,823
Merchandise inventories 385,580 351,208 366,102 375,096 206,185
Total current assets 573,183 437,543 416,292 418,532 291,012
Total assets 908,494 784,435 739,780 686,026 397,830
Working capital 358,691 239,812 228,983 232,442 181,816
Long-term debt 234,889 238,608 187,748 138,082 97,803
Total liabilities 466,583 451,633 403,827 330,109 212,415
Stockholders' equity 441,911 332,802 335,953 355,917 185,415
OTHER FINANCIAL DATA:
Cash flow from operating
activities $ 77,907 $ 29,749 $ 9,248 $ (38,267) $ (28,935)
EBITDA (5) 117,589 21,694 12,930 87,800 61,500
STORES OPEN AT END OF PERIOD:
Michaels 452 453 442 380 220
Aaron Brothers 74 72 68 n/a n/a
</TABLE>
(1) Fiscal 1996 was a 53-week fiscal year; all other years are 52-week fiscal
years.
(2) Includes effect of an unusual pre-tax charge of $41.2 million for costs
associated with a sale to liquidate merchandise that was eliminated
following store resets, markdowns on discontinued furniture and other home
decor merchandise, and reserves for the closure of four stores and the
write-down of leasehold improvements in three stores.
(3) Includes effect of an unusual pre-tax charge of $64.4 million for costs
primarily associated with an inventory reduction program.
(4) Earnings per common share amounts for years prior to 1997 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE. For further discussion of earnings
per share and the impact of Statement No. 128, see Note 1 to the
consolidated financial statements.
(5) EBITDA is calculated as income before income taxes plus interest,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. EBITDA should not be considered by an investor as an alternative to
net income, as an indicator of the operating performance of the Company, or
as an alternative to cash flow as a measure of liquidity.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CERTAIN STATEMENTS CONTAINED IN THIS DISCUSSION AND ANALYSIS WHICH
ARE NOT HISTORICAL FACTS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, CUSTOMER DEMAND AND TRENDS
IN THE ARTS AND CRAFTS INDUSTRY, RELATED INVENTORY RISKS DUE TO SHIFTS IN
CUSTOMER DEMAND, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF
COMPETITORS' LOCATIONS OR PRICING, THE AVAILABILITY OF ACCEPTABLE REAL ESTATE
LOCATIONS FOR NEW STORES, DIFFICULTIES WITH RESPECT TO NEW INFORMATION SYSTEM
TECHNOLOGIES AND THE COMPANY'S ABILITY TO ADDRESS THE YEAR 2000 ISSUE, SUPPLY
CONSTRAINTS OR DIFFICULTIES, THE RESULTS OF FINANCING EFFORTS, AND OTHER
RISKS DETAILED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
GENERAL
In fiscal years 1995, 1996 and 1997, we added 64, 17 and 9 Michaels
stores, respectively, and closed 2, 2 and 10, respectively. During 1995 and
1996, a substantial portion of our sales increases came from stores added
during or after the prior comparable period and therefore not included in
same-store sales comparisons. During these periods, sales from these newer
stores accounted for approximately 96% and 90%, respectively, of aggregate
sales growth increases.
Having achieved our objective of becoming the largest and only
national retailer of arts, crafts and decorative items, on August 23, 1995,
we announced a shift in focus from sales growth to realizing improved
operating efficiencies that could result in higher returns on capital.
During the second quarter of 1995, we conducted a critical analysis of the
composition of our merchandise assortment and the velocity of turnover of
individual SKUs and vendor lines included in each category of merchandise. We
then implemented a program (the "SKU Reduction Program") designed to reduce
the amount of capital invested in inventories. As a result of this program
we recorded a $64.4 million charge in the quarter ended July 30, 1995, which
primarily represented costs associated with the inventory liquidated during
the quarter as well as anticipated costs of liquidations during the remainder
of 1995.
During 1996 we focused on implementing initiatives to improve our
merchandising and store operations, which included completing the
installation of the POS system, redefining the merchandise strategy,
liquidating merchandise which did not support our new focus toward return on
capital, resetting and standardizing the stores, and improving store staffing
effectiveness. Based upon information obtained from the newly installed POS
system, we made a strategic decision late in the third quarter to discontinue
our furniture merchandise line and certain other home decor merchandise
resulting in a $41.2 million charge. These changes allowed us to focus on an
expanded arts and crafts assortment as our core line of business.
In 1997 we moderated our expansion plans and focused on same-store
sales growth for the existing base of stores, return on investment, inventory
control, productivity enhancements and improved cash flow. We increased the
number of basic merchandise SKUs centrally purchased and available for store
replenishment from our distribution centers during 1997 by 80% to
approximately 8,880 SKUs at year end. We expect this process will continue
in 1998 with a goal of having approximately 15,000 SKUs being available for
replenishment from our distribution centers by year end. We believe that
shifting more inventory replenishment to the distribution centers will result
in an increase in inventory turns in future years. However, in the short
term, the conversion will cause a temporary increase in our inventory levels
until our stores are able to reduce their safety stock.
Initiatives for 1998 include a continued focus on growth in
same-store sales, implementation of substantial information system
enhancements in merchandising and distribution, and a return to an
accelerated new store opening program. We intend to open approximately 45
Michaels stores in fiscal 1998, of which 10 have been opened as of April 15,
1998.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net
sales of each line item of the Company's Consolidated Statements of
Operations. This table should be read in conjunction with the following
discussion and with the Company's Consolidated Financial Statements,
including the related notes.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales and occupancy 67.9 72.8 72.3
expense
Selling, general and 27.4 28.7 28.9
administrative expense
----- ------ ------
Operating income (loss) 4.7 (1.5) (1.2)
Interest expense 1.6 1.5 1.3
Other (income) and expense, net (0.2) 0.0 0.2
----- ------ ------
Income (loss) before income taxes 3.3 (3.0) (2.7)
Provision (benefit) for income taxes 1.2 (0.7) (1.1)
----- ------ ------
Net income (loss) 2.1% (2.3)% (1.6)%
----- ------ ------
----- ------ ------
</TABLE>
In the discussion below, all percentages given for expense items
(excluding taxes) are calculated as a percentage of net sales.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales in the fiscal year ended January 31, 1998 ("1997")
increased $78.2 million, or 6%, over the fiscal year ended February 1, 1997
("1996"). The results for 1997 included sales from 9 Michaels and 3 Aaron
Brothers stores that were opened during the year, partially offsetting lost
sales from 10 Michaels and one Aaron Brothers store closures. Same-store
sales for comparable 52-week reporting periods increased 6% in 1997. The
improvement in same-store sales performance was due to a strong performance
in the Company's core categories of general crafts, framing, art supplies and
floral, which management believes was the result of updated planograms and
improved information from the new POS item sales history database initiated
during the Summer of 1996. By utilizing the information provided by our POS
system and a new "correction of errors" process, we have been able to
improve our store in-stock position in top-selling items. Going forward we
would expect to achieve same-store sales increases for 1998, taken as a
whole. Our ability to generate same-store sales increases is dependent, in
part, on our ability to continue to improve store in-stock conditions on the
top-selling items, to properly allocate seasonal merchandise to the stores
based upon anticipated sales trends and the success of our sales promotion
efforts.
Cost of sales and occupancy expense, as a percentage of net sales,
for 1997 was 67.9%, a decrease of 4.9% compared to 1996. Cost of sales and
occupancy expense in 1996 included a $47.7 million charge for unusual costs
and expenses recorded in the third quarter of 1996 to cover losses on an
extended sidewalk sale, markdowns on discontinued furniture and certain other
home decor merchandise, and reserves for the closure of four stores and the
write-down of leasehold improvements in three stores. Adjusting for the 1996
unusual items, cost of sales and occupancy expense for 1997 decreased by 2.0%
compared to the prior year. This decrease was principally due to improved
gross margins which management attributes to decreased dependency on
promotional advertising and fewer seasonal clearance markdowns in the third
and fourth quarters of 1997.
Selling, general and administrative expense, as a percentage of net
sales, decreased by 1.3% in 1997 compared to 1996. This decrease resulted
from a reduction in advertising costs of $8.3 million from 1996 levels and
improved expense leverage in store labor and all other categories of store
operating expenses with the exception of depreciation, which reflects the
impact of increased investment in the POS system. Additionally, in the third
quarter of 1996 we recorded a $3.1 million charge associated with unusual
costs and expenses relating primarily to an extended sidewalk sale.
Interest expense, as a percentage of net sales, was 1.6% for 1997,
a slight increase of 0.1% compared to the prior year. This increase was
primarily a result of interest expense on the $125 million of Senior Notes
issued in June 1996 which was, for the first time, outstanding for the full
year in 1997.
14
<PAGE>
For 1997 the effective tax rate increased to 38% from 24% in 1996 as
we returned to profitability. The 1996 effective tax rate was significantly
lower due to the loss in 1996 and our inability to fully carryback the tax
losses to prior years.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in 1996 increased $83.4 million, or 6%, over the fiscal year
ended January 28, 1996 ("1995"). The results for 1996 included sales from 13
new Michaels stores (before the impact of 2 store closures) and 4 new Aaron
Brothers stores that were opened during the year. Same-store sales declined 1%
in 1996.
Cost of sales and occupancy expense, as a percentage of net sales, for
1996 was 72.8%, an increase of 0.5% compared to 1995. Cost of sales and
occupancy expense in 1996 included $47.7 million of unusual costs recorded in
the third quarter to cover losses on an extended sidewalk sale starting on Labor
Day, markdowns on discontinued furniture and certain other home decor
merchandise, and reserves for the closure of four stores and the write-down of
leasehold improvements in three stores. 1995 included a $57.5 million charge
taken in the second quarter to cover unusual costs associated with the SKU
Reduction Program. Adjusting for both of these unusual items, cost of sales and
occupancy expense for 1996 was 69.9%, an increase of 2.0% compared to the prior
year, which management believes was due primarily to increases in seasonal and
other clearance markdowns and increased distribution and occupancy costs.
Distribution costs, as a percentage of net sales, increased primarily due to
less efficient utilization of the distribution network and duplicate costs
associated with the startup of a new distribution center. The increase in
occupancy costs, as a percentage of net sales, resulted from a high proportion
of newer stores having a relatively low sales base available to absorb fixed
occupancy costs coupled with the same-store sales decline.
The $21.0 million operating loss for 1996 reflects $41.2 million of
unusual items in the third quarter of 1996 ($50.8 million of unusual costs net
of $9.6 million sales) including: a $20 million loss resulting from an extended
sidewalk sale starting on Labor Day conducted to sell off merchandise eliminated
following store resets; markdown reserves of $15 million primarily related to
our strategic decision to exit the furniture merchandise line and certain other
discontinued home decor merchandise; and reserves of $4 million for store
closures and the write-down of leasehold improvements.
Interest expense, as a percentage of net sales, was 1.5% for 1996, an
increase of 0.2% compared to the prior year primarily due to the higher interest
rate on the $125 million of Senior Notes issued in 1996, compared to the
short-term bank borrowings in the prior year as well as the incremental debt
associated with an IBM capital lease which financed the POS system.
For 1996 the effective tax benefit rate decreased to 24.0% from 41.4%
in 1995 due to the size of the loss in 1996 and our inability to fully carryback
the tax losses to prior years.
LIQUIDITY AND CAPITAL RESOURCES
We plan to spend approximately $60 to $65 million on capital
expenditures during 1998. We plan to open approximately 45 Michaels and 6 Aaron
Brothers stores for approximately $24 million. We expect to spend $15 to $16
million on information systems, approximately $11 million on store relocations
and remodeling, and $10 to $14 million on various other projects.
We believe that our available cash, funds generated by operating
activities, funds available under the bank credit agreement, IBM capital lease
financing and proceeds from the sale of stock through the Stock Purchase Plan,
should be sufficient to finance continuing operations and sustain current growth
plans. We believe that we can finance annual store expansion at a rate of 12% to
15% (on a square footage basis) from internally generated cash flow.
Our working capital needs are driven primarily by a seasonal buildup
of inventory to support higher sales in the third and fourth quarters, and to a
lesser extent funding required for growth in new stores and improvements in our
information systems. Net cash provided by operating activities for 1997 was
$77.9 million as compared to $29.7 million for 1996. Net cash provided by
operating activities during 1997 increased primarily as a result of our return
to profitability, partially offset by an increase in merchandise inventories.
15
<PAGE>
Capital expenditures during 1997 were $44.0 million, incurred
primarily for the opening of 9 new Michaels and 3 new Aaron Brothers stores and
the remodeling, relocation or expansion of approximately 42 existing Michaels
stores, the pending relocation of a distribution center and various enhancements
to our information systems.
In February 1997, options to purchase 2,000,000 shares of our Common
Stock were exercised through private transactions with entities owned by
independent trusts of which family members of Sam Wyly and Charles J. Wyly, Jr.,
Chairman and Vice Chairman of the Company, respectively, were beneficiaries.
The options were purchased by the trusts in December of 1996 with an exercise
price equal to the then current market price. The exercise of the options
provided us with $20 million of additional capital in 1997.
In October 1997, we began issuing Common Stock through our Dividend
Reinvestment and Stock Purchase Plan (the "Stock Purchase Plan"). The Stock
Purchase Plan provides owners of shares of Common Stock and other interested
investors with a convenient and economical method to purchase Common Stock. The
Stock Purchase Plan also provides us with a cost-efficient and flexible
mechanism to raise equity capital. During 1997, we issued 241,370 shares
through the Stock Purchase Plan, generating $7,872,000 in additional capital.
At January 31, 1998, we had working capital of $358.7 million,
compared to $239.8 million at February 1, 1997. We currently have a bank credit
agreement which provides for an unsecured revolving line of credit of $100
million. There were no borrowings outstanding on the revolving line of credit
at any time during 1997.
SEASONALITY AND INFLATION
Our business is seasonal in nature with higher sales in the third and
fourth quarters. Historically, the fourth quarter, which includes the Christmas
selling season, has accounted for approximately 37% of our sales and (excluding
1995 and 1996) approximately 57% of our operating income.
We believe that the effects of inflation on 1997 results and the
projected effect on 1998 financial results will be nominal.
IMPACT OF THE YEAR 2000
We have undertaken various initiatives to insure that our computer
equipment and software will function properly with respect to dates in the Year
2000 and thereafter. An experienced, nationally-known consulting firm has been
contracted to provide objective project management and technical expertise to
assist internal resources in completion of the project. The assessment phase of
the project is complete. Remediation efforts have been estimated and
prioritized according to potential business impact and application sensitivity
to dating problems. In the normal course of business, we have had an aggressive
systems development strategy for the past two years. New Year 2000-compliant
systems being implemented as a result of this development strategy have somewhat
mitigated the scope of the effort required to complete the project. Required
modification of remaining application systems is currently in process. We
currently anticipate that the necessary modifications and conversions will be
completed by mid-1999, which is prior to any currently anticipated impact on our
systems.
We are also in the process of initiating communications with our
significant vendors to determine the extent that system interfaces between
ourselves and such vendors are vulnerable to the Year 2000 Issue. We will also
attempt to ascertain the probability that such vendors will be able to complete
their internal Year 2000 remediation efforts and be capable of supplying
uninterrupted flow of inventory.
We believe that the costs to modify our systems to be Year 2000
compliant, as well as the currently anticipated costs with respect to the Year
2000 Issues of third parties, will not exceed $2 million, which is being
expensed as incurred. We presently believe that the Year 2000 Issue will not
pose significant operational problems. However, if modifications and
conversions are not completed in a timely manner, there can by no assurance that
the Year 2000 Issue will not have a material adverse effect on us or adversely
affect our relationships with customers, suppliers, or others. Additionally,
there can be no assurance that the Year 2000 Issues of such entities will not
have a material adverse effect on our systems or business.
The anticipated costs of our efforts and the expected date on which we
believe we will complete the Year 2000 modifications are based upon our best
estimates, which are derived utilizing numerous assumptions of future events.
16
<PAGE>
However, there can be no assurance that these estimates will be achieved and
actual results could differ materially from those currently anticipated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item is included in
"Item 14-Exhibits, Financial Statement Schedules and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on
accounting and financial disclosure for the fiscal year ended January 31, 1998.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
BOARD OF DIRECTORS OF THE COMPANY
The Board of Directors (the "Board") is presently comprised of eight
members. The Board is divided into three classes, with two classes consisting of
three directors and one class consisting of two directors. Members of each
class of directors generally serve for a term of three years. Each director
serves until the Annual Meeting of Stockholders in the year in which his term
expires or until his successor is elected and qualified. The following
sets forth information as to each of the directors of the Company, including
their ages, present principal occupations, other business experiences during the
last five years, membership on committees of the Board and directorships in
other publicly-held companies.
<TABLE>
<CAPTION>
YEAR
TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------
<S> <C> <C> <C>
Charles J. Wyly, Jr. (1) 64 Vice Chairman of the Board of Directors 1998
Richard E. Hanlon (2) 50 Director 1998
Kelly Elliott 25 Director 1998
F. Jay Taylor (2) 74 Director 1999
Evan A. Wyly 36 Director 1999
Sam Wyly (1) 63 Chairman of the Board of Directors 2000
Michael C. French 55 Director 2000
Donald R. Miller, Jr. 43 Director and Vice President--Market Development 2000
</TABLE>
- --------------------
(1) Member of the Executive Committee and the Compensation Committee.
(2) Member of the Audit Committee, the Key Employee Stock Compensation Program
Committee, the 1992 Non-Statutory Plan Committee, the 1994 Non-Statutory
Plan Committee and the 1997 Stock Option Plan Committee.
Mr. Charles J. Wyly, Jr. became a director of the Company in October
1984 and Vice Chairman in 1985. He co-founded Sterling Software, Inc. in 1981
and since such time has served as a director and (since 1984) as Vice Chairman.
Mr. Wyly served as an officer and director of University Computing Company, a
computer software and services company, from 1964 to 1975, including President
from 1969 to 1973. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources
Company, an oil refining and silver mining company, and Charles J. Wyly, Jr.
served as Chairman of the Board from 1968 to 1980. Mr. Wyly served as Vice
Chairman of the Bonanza Steakhouse chain from 1967 to 1989 and has served as a
director of Sterling Commerce, Inc. since December 1995. Charles J. Wyly, Jr.
is the father-in-law of Donald R. Miller, Jr., a director and Vice
President--Market Development of the Company.
Mr. Hanlon became a director of the Company in April 1990. Since
February 1995, Mr. Hanlon has been Vice President--Investor Relations of America
Online, Inc., a provider of online computer services. From March 1993 until
February 1995, Mr. Hanlon was President of Hanlon & Co., a consulting firm.
Since 1995, he has served as a director of Intellicall, Inc., a diversified
telecommunications company providing technology and services to private pay
telephone networks throughout the United States.
Ms. Elliott is an artist and crafter and has served as a director of the
Company since December 1997. In 1995, she founded Wyly Works, Inc., a
specialty designer and producer of unique paintings, hand-painted ceramics
and greeting cards. She has been a professional artist since 1991.
Dr. Taylor became a director of the Company in June 1989. Dr. Taylor
was President of Louisiana Tech University from 1962 until 1987, and has served
as President-Emeritus of Louisiana Tech since 1987. Dr. Taylor also currently
serves as a director of Illinois Central Railroad Corporation and Pizza Inn,
Inc. and performs mediation and
18
<PAGE>
arbitration services as a member of The American Arbitration Association and The
Federal Mediation and Conciliation Service.
Mr. Evan A. Wyly has served as a director of the Company since September
1992 and as an officer of the Company since December 1991. He has been a
Managing Partner of Maverick Capital, Ltd., an investment fund management
company, since 1991. In 1988, Mr. Wyly founded Premier Partners
Incorporated, a private investment firm, and served as its President prior to
joining Maverick Capital, Ltd. Mr. Wyly serves as a director and officer of
Sterling Software, Inc. and as a director of Sterling Commerce, Inc.
Mr. Sam Wyly has served as Chairman of the Board of the Company since
1984. Mr. Wyly co-founded Sterling Software, Inc. in 1981 and since that
time has served as Chairman of the Board and a director. In 1963, Mr. Wyly
founded University Computing Company, a computer software and services
company, and served as President or Chairman from 1963 until 1979.
University Computing created a computer utility network, one of the earliest
and most successful marriages of computing and telecommunications.
University Computing was one of the original participants in the software
products industry in the late 1960's when the then market-dominant IBM
unbundled computer hardware and software. In 1968, Mr. Wyly founded Datran,
Inc. which was envisioned as the nation's first all-digital switched
"telephone company for computers" and contributed to the break up of AT&T's
telephone monopoly and the resulting benefits of increased competition in the
telecommunications industry. These Wyly-founded companies are among the
forerunners of today's electronic commerce industry. Mr. Wyly co-founded
Earth Resources Company, an oil refining and silver mining company, and
served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and
his brother, Charles J. Wyly, Jr., bought the 20-restaurant Bonanza
Steakhouse chain in 1967. It grew to approximately 600 restaurants by 1989,
during which time Mr. Wyly served as Chairman. Mr. Wyly currently serves as a
director of Sterling Commerce, Inc. and as a partner of Maverick Capital,
Ltd., an investment fund management company. Sam Wyly is the father of Evan
A. Wyly and Kelly Elliott, directors of the Company.
Mr. French has served as a director of the Company since September 1992.
He is Chairman of The Scottish Annuity Company, an annuity and life
insurance company, and has been a partner of Maverick Capital Ltd., an
investment fund management limited partnership, since 1992 and a director of
Sterling Software, Inc. since July 1992. Mr. French is currently a
consultant to the international law firm of Jones, Day, Reavis & Pogue. Mr.
French was a partner with the law firm of Jackson & Walker, L.L.P. from 1976
through 1995.
Mr. Miller is a charter employee of the Company and has served as Vice
President--Market Development since November 1990 and as a director since
September 1992. From September 1984 to November 1990 he was Director of Real
Estate. Prior to joining the Company, Mr. Miller served in various real
estate positions with Bonanza and Peoples Restaurants. Mr. Miller has served
as a director of Sterling Software, Inc. since September 1993.
EXECUTIVE OFFICERS OF THE COMPANY
The name, age and position of each executive officer of the Company is
set forth under the heading "Executive Officers of the Registrant" in Item 1 of
this report, which information is incorporated in this Item 10 by reference.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors and persons who own more than 10%
of a registered class of the Company's equity securities to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission (the "SEC"). Such persons are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it with respect to
fiscal 1997, or written representations from certain reporting persons, the
Company believes that its officers and directors and persons who own more than
10% of a registered class of the Company's equity securities have complied with
all applicable filing requirements.
19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding
compensation paid or accrued by the Company to the Company's Chief Executive
Officer and each of the Company's four other most highly compensated executive
officers, employed by the Company at the end of the fiscal year, based on salary
and bonus earned during fiscal 1997 and the Vice Chairman of the Board of
Directors (the "Named Executives").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------------------------ ---------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION AWARDS OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($) ($) SARS(#)(1) ($) ($)
------------------ ------ --------- --------- -------------- ---------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Michael Rouleau, 1997 500,000 300,000 34,367 (2) -- 400,000 -- 2,154 (3)
President and Chief 1996 394,236 -- 27,779 (2) -- 500,000 -- 203,885 (4)
Executive Officer
Sam Wyly, 1997 450,000 -- -- -- 1,200,000 -- --
Chairman of the 1996 450,000 -- 75,385 (5) -- 633,333 -- --
Board of Directors 1995 450,000 -- 63,690 (5) -- 300,000 (6) --
Charles J. Wyly, Jr., 1997 225,000 -- -- -- 600,000 -- --
Vice Chairman of the 1996 225,000 -- -- -- 367,417 -- --
Board of Directors 1995 225,000 -- -- -- 450,000 (7) -- --
Douglas B. Sullivan 1997 300,000 150,000 47,001 (8) -- -- -- 2,465 (9)
Executive Vice 1996 301,809 -- 24,788 (8) -- 253,250(10) -- 6,268 (9)
President- 1995 284,686 -- 39,105 (8) -- 245,000(11) -- 5,269 (9)
Development
Lawrence Fine 1997 221,539 126,563 -- -- 25,000 -- 94,771(12)
Executive Vice 1996 34,615 30,000 -- -- 75,000 -- --
President-
General Merchandise
Manager
Duane Hiemenz, 1997 221,154 100,000 6,000 (13) -- 53,333 -- 17,515(14)
Executive Vice 1996 119,231 90,000 3,500 (13) -- 80,000 -- 103,561(15)
President-
Store Operations
</TABLE>
- -------------------
(1) Options to acquire shares of Common Stock.
(2) Includes life insurance premiums paid by the Company in the amount of
$20,181 and $21,605 in fiscal 1997 and 1996, respectively.
(3) Annual contribution by the Company for Mr. Rouleau's account pursuant
to the Company's 401(k) Plan.
(4) Includes $200,000 in relocation expenses paid by the Company and annual
contributions by the Company for Mr. Rouleau's account
pursuant to the Company's 401(k) Plan in the amount of $3,885.
(5) Includes life insurance premiums paid by the Company in the amount of
$60,291 and $51,678 in fiscal 1996 and 1995, respectively.
(6) 300,000 previously granted stock options which were repriced in
fiscal 1995.
(7) 450,000 previously granted stock options which were repriced in
fiscal 1995.
(8) Includes life insurance premiums paid by the Company in the amount of
$21,437, $19,430, and $18,798 in fiscal 1997, 1996 and
1995, respectively.
(9) Includes the annual contribution by the Company for Mr. Sullivan's
account pursuant to the Company's 401(k) Plan in the amount of $2,077,
$5,538, and $4,620 in fiscal 1997, 1996 and 1995, respectively, and
split-dollar life insurance providing $388, $730, and $649 of current
net benefit projected on an actuarial basis in fiscal 1997, 1996 and
1995, respectively.
20
<PAGE>
(10) 253,250 previously granted stock options which were repriced in
fiscal 1996.
(11) Includes 165,000 previously granted stock options which were repriced in
fiscal 1995.
(12) Includes $91,396 in relocation expense paid by the Company and annual
contributions by the Company for Mr. Fine's account
pursuant to the Company's 401(k) plan in the amount of $3,375.
(13) Annual automobile allowance paid by the Company.
(14) Includes $12,246 in relocation expenses paid by the Company and annual
contributions by the Company for Mr. Hiemenz's account
pursuant to the Company's 401(k) Plan in the amount of $5,269.
(15) Relocation expenses paid by the Company.
OPTION GRANTS DURING 1997 FISCAL YEAR
The following table provides information related to options granted to
the Named Executives during fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- --------------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TEAM (1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPLORATION ----------------------
NAME GRANTED (#) (2) FISCAL YEAR ($/SH) (3) DATE 5% ($) 10% ($)
- ----------------------------------- --------------- ------------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
R. Michael Rouleau.. . . . . . . . . 400,000 (4) 9.2 21.375 07/24/00 1,347,694 2,830,050
Sam Wyly . . . . . . . . . . . . . . 1,200,000 27.5 21.375 07/24/00 4,043,081 8,490,150
Charles J. Wyly, Jr. . . . . . . . . 600,000 13.7 21.375 07/24/00 2,021,541 4,245,075
Douglas B. Sullivan . . . . . . . . -- -- -- -- -- --
Lawrence Fine . . . . . . . . . . . 25,000 (4) 0.6 21.375 07/24/00 84,231 176,878
Duane Hiemenz . . . . . . . . . . . 53,333 (4) 1.2 21.375 07/24/00 179,691 377,338
</TABLE>
- -------------------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation on the Company's Common Stock over the term of the
options. These numbers do not take into account provisions of certain
options providing for termination of the options following termination of
employment, nontransferability or vesting over periods. The
use of the assumed 5% and 10% returns is established by the Securities and
Exchange Commission and is not intended by the Company to forecast
possible future appreciation of the price of the Common Stock.
(2) Options to acquire shares of Common Stock.
(3) The option exercise price may be paid in shares of Common Stock owned by
the Named Executives, in cash, or in any other form of valid
consideration or a combination of any of the foregoing, in some cases
as determined by the Board of Directors, the Key Employee Stock
Compensation Program Committee, the 1992 Non-Statutory Plan Committee,
the 1994 Non-Statutory Plan Committee, and the 1997 Stock Option Plan
Committee, as applicable, in its discretion. The exercise price of
each option was equal to the fair market value of the Common Stock
on the date of grant.
(4) Stock options are currently exercisable with respect to 1/3 of the shares
covered thereby and become exercisable with respect to 1/3 of the shares
covered thereby on each of July 25, 1998 and July 25, 1999.
21
<PAGE>
OPTION EXERCISES DURING 1997 FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table provides information related to options exercised by
the Named Executives during the 1997 fiscal year and the number and value of
options held at fiscal year end. The Company does not have any outstanding
stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END (#) AT FY-END ($) (1)
----------------------------- -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) (2) EXERCISABLE UNEXERCISABLE EXERCISABLE Unexercisable
- -------------------- --------------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Michael Rouleau. . . 300,000 2,662,500 133,333 466,667 1,249,997 6,150,003
Sam Wyly. . . . . . . . 633,333 4,433,331 1,200,000 -- 11,250,000 --
Charles J. Wyly, Jr. . 367,417 2,571,919 600,000 -- 5,625,000 --
Douglas B. Sullivan . . 92,750 1,452,797 160,500 -- 2,929,125 --
Lawrence Fine. . . . . 33,333 327,602 25,000 41,667 510,938 667,191
Duane Hiemenz. . . . . 53,333 399,997 17,777 62,223 166,659 783,344
</TABLE>
- --------------------
(1) The closing price for the Company's Common stock as reported through The
Nasdaq National Market System on January 31, 1998, the last trading day
of the 1997 fiscal year, was $30.75. Value is calculated on the basis
of the difference between the option exercise price and $30.75
multiplied by the number of shares of Common Stock underlying the option.
(2) Value realized is calculated based on the difference between the option
exercise price and the closing market price of the Common Stock on the
date of exercise multiplied by the number of shares to which the
exercise relates.
COMPENSATION OF DIRECTORS
Directors who are salaried employees of the Company are not compensated
for their Board activities. The Company pays Sam Wyly $37,500 per month for
serving as Chairman of the Board. On July 25, 1997, the Company granted to
Sam Wyly a three-year option to purchase 1,200,000 shares of Common Stock at
an exercise price of $21.375, all of which was exercisable immediately. The
Company pays Charles J. Wyly, Jr. $18,750 per month for serving as Vice
Chairman of the Board. On July 25, 1997, the Company granted to Charles J.
Wyly, Jr. a three-year option to purchase 600,000 shares of Common Stock at
an exercise price of $21.375, all of which was exercisable immediately.
Dr. Taylor and Mr. Hanlon each receive an annual fee of $24,000 as
members of the Board, a fee of $1,000 for attendance at each regular or
special Board meeting, and a fee of $1,000 for attendance at each meeting of
the Audit Committee. On July 25, 1997, the Company granted Dr. Taylor a
three-year option to purchase 30,000 shares of Common Stock at an exercise
price of $21.375, all of which was exercisable immediately. On July 25,
1997, the Company granted to Mr. Hanlon a three-year option to purchase
30,000 shares of Common Stock at an exercise price of $21.375, all of which
was exercisable immediately.
Pursuant to a consulting arrangement with the Company, during fiscal
1997, Mr. French received from the Company a non-refundable retainer of
$15,000 per month for his advice and assistance. On July 25, 1997, the
Company granted to Mr. French a three-year option to purchase 75,000 shares
of Common Stock at an exercise price of $21.375, all of which was exercisable
immediately. Jones, Day, Reavis & Pogue, a law firm for which Mr. French is
a consultant, provides legal services to the Company, but does not charge the
Company for any time spent by Mr. French on any Company matters.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company has entered into agreements with Sam Wyly and Charles J.
Wyly, Jr., directors and executive officers of the Company, which agreements
provide for the employment of such persons by the Company upon a change of
control of the Company (a "Change of Control") for a salary not less than
each such individual's respective annual salary immediately preceding the
Change of Control and allows each such individual to participate in bonuses
with other key management personnel. Each of these agreements (i) is for a
term of three years with provisions for annual automatic one-
22
<PAGE>
year extensions and, upon a Change of Control, an additional extension of 36
months and (ii) requires the Company to pay to each such individual, if his
employment is terminated within three years of a Change of Control, a sum
equal to three times such individual's salary and bonus during the
twelve-month period immediately preceding termination.
The Company has entered into a six-year employment agreement with R.
Michael Rouleau, the President and Chief Executive Officer of the Company,
effective April 29, 1997, under which Mr. Rouleau is entitled to receive an
annual base salary of $500,000 and standard executive officer benefits and to
participate in a bonus plan in any year in which a bonus plan is established.
During fiscal 1997, Mr. Rouleau received a bonus of $300,000 pursuant to a
bonus plan upon the attainment by the Company of certain performance goals.
Upon a Change of Control of the Company or if the Company terminates Mr.
Rouleau's employment (other than for cause) prior to the expiration of the
six-year term, Mr. Rouleau is entitled to continue to receive his base salary
and other benefits until April 30, 2003. If Mr. Rouleau's employment is
terminated for any reason, at any time, all unvested options then held by him
will immediately become fully exercisable and Mr. Rouleau will be entitled to
the value of any unvested interest he may have in the Company's 401(k) plan.
The Company has entered into an agreement with Douglas B. Sullivan, an
executive officer of the Company, which provides for his employment by the
Company upon a Change of Control for a salary not less than his annual salary
immediately preceding the Change of Control and allows him to participate in
bonuses with other key management personnel of the Company. This agreement
(i) is for a term of three years with provisions for annual automatic
one-year extensions and, upon a Change of Control, an additional extension of
twelve months and (ii) requires the Company to pay to Mr. Sullivan, if his
employment is terminated within one year of a Change of Control, a sum equal
to his salary and bonus during the twelve-month period immediately preceding
termination.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
During fiscal 1997, the members of the Compensation Committee were
primarily responsible for determining executive compensation. The members of
the Option Committees made decisions related to stock option grants to
executive officers and directors. The following executive officers, who also
are members of the Compensation Committee, participated in deliberations
concerning executive officer compensation: Sam Wyly and Charles J. Wyly, Jr.
Sam Wyly and Charles J. Wyly, Jr. are members of the Executive Committee
and the Compensation Committee of the Company. Sam Wyly and Charles J. Wyly,
Jr. are also executive officers and members of the Executive Committees,
Stock Option Committees and Boards of Directors of Sterling Software, Inc.
and Sterling Commerce, Inc. Accordingly, Sam Wyly and Charles J. Wyly, Jr.
have participated in decisions related to compensation of executive officers
of each of the Company, Sterling Software, Inc., and Sterling Commerce, Inc.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of April 15, 1998
regarding the beneficial ownership of Common Stock by each person known by
the Company to own 5% or more of the outstanding shares of Common Stock, each
director of the Company, certain Named Executives, and the directors and
executive officers of the Company as a group. The persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock owned by them, unless otherwise noted.
23
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL OWNER OR BENEFICIAL PERCENT
NUMBER OF PERSONS IN GROUP OWNERSHIP(1) OF CLASS
- --------------------------- ------------ --------
<S> <C> <C>
Sam Wyly . . . . . . . . . . . . . . . . . . . . . 2,061,905 (2) 6.8
Charles J. Wyly, Jr. . . . . . . . . . . . . . . . 1,066,444 (3) 3.5
Kelly Elliott. . . . . . . . . . . . . . . . . . . 213,861 (4) *
Michael C. French. . . . . . . . . . . . . . . . . 64,534 (5) *
Richard E. Hanlon. . . . . . . . . . . . . . . . . 32,600 (6) *
Donald R. Miller, Jr.. . . . . . . . . . . . . . . 215,637 (7) *
F. Jay Taylor. . . . . . . . . . . . . . . . . . . 51,400 (8) *
Evan A. Wyly . . . . . . . . . . . . . . . . . . . 175,875 (9) *
R. Michael Rouleau . . . . . . . . . . . . . . . . 201,672(10) *
Douglas B. Sullivan. . . . . . . . . . . . . . . . 155,014(11) *
Lawrence H. Fine . . . . . . . . . . . . . . . . . 25,040(12) *
Duane E. Hiemenz . . . . . . . . . . . . . . . . . 19,310(13) *
AMVESCAP PLC . . . . . . . . . . . . . . . . . . . 2,245,000(14) 7.8
11 Devonshire Square
London EC2M4YR
England
First Pacific Advisors, Inc. . . . . . . . . . . . 2,178,216(15) 7.5
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
FMR Corp.. . . . . . . . . . . . . . . . . . . . . 1,650,045(16) 5.7
82 Devonshire Street
Boston, Massachusetts 02109
ICM Asset Management, Inc. . . . . . . . . . . . . 1,607,458(17) 5.6
601 W. Main Avenue, Suite 917
Spokane, Washington 99201
The Wyly Group . . . . . . . . . . . . . . . . . . 3,128,349(18) 10.0
300 Crescent Court, Suite 1000
Dallas, Texas 75201
All current directors and executive officers
as a group (16 persons). . . . . . . . . . . . . . 4,363,102(19) 13.5
</TABLE>
- --------------------
* Less than 1%
(1) The number of shares shown includes outstanding shares of Common Stock
owned as of April 15, 1998 by the person indicated and shares underlying
options owned by such person on April 15, 1998 that were exercisable
within 60 days of such date. Persons holding shares of Common Stock
pursuant to the Michaels Stores, Inc. Employees 401(k) Plan (the "401(k)
Plan") have sole voting power and investment power with respect to such
shares.
(2) Includes 1,200,000 shares subject to presently exercisable options;
589,536 shares held of record by Tallulah, Ltd. (a limited partnership
of which Mr. Wyly is a general partner); 256,533 shares held of record
by family trusts of which Mr. Wyly is trustee (63,861 of which are also
beneficially owned by Kelly Elliott); and 15,836 shares held of record
by certain of Mr. Wyly's adult children for which he holds power of
attorney to vote such shares.
(3) Includes 600,000 shares subject to presently exercisable options; 80,000
shares held of record by Brush Creek, Ltd., a limited partnership of
which Mr. Wyly is a general partner; and 386,444 shares held of record
by family trusts of which Mr. Wyly is Trustee.
(4) Includes 150,000 shares subject to presently exercisable options and
63,861 shares held of record by the Kelly W. Elliott Trust of which Mr.
Sam Wyly is Trustee (which are also beneficially owned by Sam Wyly).
(5) Includes 63,334 shares subject to presently exercisable options and
1,200 shares held by a retirement account directed by Mr. French.
24
<PAGE>
(6) Includes 30,000 shares subject to presently exercisable options.
(7) Includes 200,000 shares subject to presently exercisable options; 187
shares held by Mr. Miller's spouse; and 11,450 shares owned pursuant to
the 401(k) Plan.
(8) Includes 30,000 shares subject to presently exercisable options.
(9) Includes 150,000 shares subject to presently exercisable options.
(10) Includes 183,333 shares subject to presently exercisable options and
2,362 shares owned pursuant to the 401(k) Plan.
(11) Includes 110,500 shares subject to presently exercisable options and
7,639 shares owned pursuant to the 401(k) Plan.
(12) Includes 25,000 shares subject to presently exercisable options.
(13) Includes 17,776 shares subject to presently exercisable options.
(14) Based on a Schedule 13G/A filed with the Securities and Exchange
Commission dated February 9, 1998, AMVESCAP PLC, a parent holding
company, shares the power to dispose or to direct the disposition of,
and to vote or direct the vote of, 2,245,000 shares of Common Stock.
(15) Based on a Schedule 13G filed with the Securities and Exchange
Commission dated January 30, 1998, First Pacific Advisors, Inc., a
registered investment advisor, shares the power to dispose or to direct
the disposition of 2,178,216 shares of Common Stock and shares the power
to vote or to direct the vote of 813,300 shares of Common Stock.
(16) Based on a schedule 13G filed with the Securities and Exchange
Commission dated February 14, 1998, FMR Corp., a registered investment
advisor, has the sole power to dispose or to direct the disposition of
1,650,045 shares of Common Stock and to vote or direct the vote of
474,600 shares of Common Stock.
(17) Based on a Schedule 13G/A filed with the Securities and Exchange
Commission dated February 10, 1998, ICM Asset Management, Inc., a
registered investment adviser, has the sole power to dispose or direct
the disposition of 1,607,458 shares of Common Stock and shares the power
to vote or direct the vote of 1,126,458 shares of Common Stock.
(18) The Wyly Group consists of Sam Wyly and Charles J. Wyly, Jr. Based on a
Schedule 13D/A filed with the Securities and Exchange Commission dated
January 21, 1998, Sam Wyly shared voting and dispositive power with
respect to 15,836 shares of Common Stock, and has sole dispositive power
with respect to 2,046,069 shares of Common Stock and sole voting power
with respect to 846,069 shares of Common Stock, and Charles J. Wyly,
Jr. has sole dispositive power with respect to 1,066,444 shares of
Common Stock and sole voting power with respect to 466,444 shares of
Common Stock.
(19) Includes 93,332 shares subject to presently exercisable options and 200
shares held pursuant to the 401(k) Plan by 5 executive officers not
named in the table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since the beginning of the Company's last fiscal year, the Company
has not entered into any transaction or series of transactions that require
disclosure by Regulation S-K Item 404 --Certain Relationships and Related
Transactions, nor is any such transaction or series of transactions currently
proposed.
25
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE IN
REPORT
-------
<C> <C> <S>
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors . . . . . . . . . . . . . . . 31
Consolidated Balance Sheets at January 31, 1998 and
February 1, 1997 . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and
January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1998, February 1, 1997 and
January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Stockholders' Equity for the fiscal
years ended January 31, 1998, February 1, 1997 and
January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements for the fiscal
years ended January 31, 1998, February 1, 1997 and
January 28, 1996. . . . . . . . . . . . . . . . . . . . . . . 36
Unaudited Supplemental Quarterly Financial Data for the fiscal
years ended January 31, 1998 and February 1, 1997. . . . . . . 44
</TABLE>
(2) Financial Statement Schedules:
All schedules have been omitted because they are not applicable or
the required information is included in the financial statements or
notes thereto.
(3) Exhibits:
The Exhibits listed below and on the accompanying Index to Exhibits
immediately following the financial statement schedules are
incorporated herein, or incorporated by reference into this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 Bylaws of the Registrant, as amended and restated
(previously filed as Exhibit 3.1 to Form 10-K for
the year ended January 30, 1994, filed by
Registrant on April 28, 1994, SEC File No. 94525504).
3.2 Restated Certificate of Incorporation of the
Registrant (previously filed as Exhibit 4.1 to Form
S-8 (No. 33-54726), filed by Registrant on November
20, 1992, SEC File No. 92278746).
4.1 Form of Common Stock Certificate (previously filed
as Exhibit 4.1 to Form 10-K for the year ended
January 30, 1994, filed by Registrant on April 28,
1994, SEC File No. 94525504).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.2 Indenture, dated as of January 22, 1993, between
Michaels Stores, Inc. and NationsBank of Texas,
N.A., as Trustee, including the form of 4 3/4% /
6 3/4% Step-up Convertible Subordinated Note included
therein (previously filed as Exhibit 19.1 to Form
10-K for the year ended January 31, 1993, filed by
Registrant on April 29, 1993, SEC File No. 93116847).
4.3 Indenture, dated as of June 21, 1996, between
Michaels Stores, Inc. and The Bank of New York
(previously filed as Exhibit 19.1 to Form 10-Q for
the quarter ended July 28, 1996, filed by
Registrant on September 11, 1996, SEC File No.
(96628596).
10.1 Michaels Stores, Inc. Employees 401(k) Plan, as
amended and restated, effective October 1, 1996
(previously filed as Exhibit 99.2 to Form 8-K, filed
by Registrant on September 30, 1996, SEC File No.
96637219). *
10.2 Michaels Stores, Inc. Employees 401(k) Trust, dated
July 11, 1996 (previously filed as Exhibit 99.3 to
Form 8-K, filed by Registrant on September 30, 1996,
SEC File No. 96637219).
10.3 Form of Indemnity Agreement between Michaels Stores,
Inc. and certain officers and directors of the
Registrant (previously filed as Exhibit 10.8 to Form
10-K for the year ended January 31, 1993, filed by
Registrant on April 29, 1993, SEC File No. 93116847).
10.4 Form of Employment Agreement between Michaels
Stores, Inc. and certain directors of the Registrant
(Filed herewith). *
10.5 Form of Employment Agreement between Michaels
Stores, Inc. and Douglas B. Sullivan (Filed
herewith). *
10.6 Michaels Stores, Inc. Amended and Restated Key
Employee Stock Compensation Program (previously
filed as Exhibit 10.9 to Form 10-K for the year
ended February 1, 1997, filed by Registrant on May
2, 1997, SEC File No. 97594651). *
10.7 Michaels Stores, Inc. Amended and Restated 1992
Non-Statutory Stock Option Plan (previously filed as
Exhibit 99.1 to Form S-8 (No. 333-21407), filed by
Registrant on February 7, 1997, SEC File No.
97521153). *
10.8 Second Amended and Restated Credit Agreement, dated
June 20, 1996, between Michaels Stores, Inc. and the
lenders named therein (the "Credit Agreement")
(previously filed as Exhibit 10 to Form 8-K dated
June 20, 1996, filed by Registrant on September 26,
1996, SEC File No. 96635219).
10.9 Waiver Agreement and First Amendment to Credit
Agreement, dated January 31, 1997 (previously filed
as Exhibit 10.13 to Form 10-K for the year ended
February 1, 1997, filed by Registrant on May 2,
1997, SEC File No. 97594651).
10.10 Second Amendment to Credit Agreement, dated as of
March 11, 1997 (previously filed as Exhibit 10.14 to
Form 10-K for the year ended February 1, 1997, filed
by Registrant on May 2, 1997, SEC File No. 97594651).
10.11 Michaels Stores Inc. Amended and Restated 1994
Non-Statutory Stock Option Plan (previously filed as
Exhibit 99.1 to Form S-8 (No. 333-21635), filed by
Registrant on February 12, 1997, SEC file No.
97527249). *
10.12 Amended, Modified and Restated Master Lease
Agreement, dated as of December 18, 1995, between
Jacksonville Funding Corporation as Lessor and
Michaels Stores, Inc., as Lessee (previously filed
as Exhibit 10.17 to Form 10-K for the year ended
January 28, 1996, filed by Registrant on April 29,
1996, SEC File No. 96552931).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.13 Amendment No. 1 to Amended, Modified and Restated
Master Lease Agreement, dated as of April 22, 1996,
between Jacksonville Funding Enterprises, LLC as
Lessor and Michaels Stores, Inc. as Lessee (Filed
herewith).
10.14 Amendment No. 2 to Amended, Modified and Restated
Master Lease Agreement, dated as of July 11, 1996,
between Jacksonville Funding Enterprises, LLC as
Lessor and Michaels Stores, Inc. as Lessee (Filed
herewith).
10.15 Amendment No. 3 to Amended, Modified and Restated
Master Lease Agreement, dated as of August 15, 1996,
between Jacksonville Funding Enterprises, LLC as
Lessor and Michaels Stores, Inc. as Lessee (Filed
herewith).
10.16 Amendment No. 4 to Amended, Modified and Restated
Master Lease Agreement and Waiver, dated as of March
11, 1997, between Jacksonville Funding Corporation
as Lessor and Michaels Stores, Inc. as Lessee
(previously filed as Exhibit 10.17 to Form 10-K for
the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651).
10.17 Consulting Agreement, dated as of October 1, 1996,
between Michaels Stores, Inc. and Michael C. French
(Filed herewith). *
10.18 Term Lease Master Agreement between IBM Credit
Corporation as Lessor and Michaels Stores, Inc. as
Lessee (previously filed as Exhibit 10.18 to Form
10-K for the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651).
10.19 Agreement, dated as of January 30, 1996, by and
between Michaels Stores, Inc. and Jack E. Bush
(previously filed as Exhibit 10.19 to Form 10-K for
the year ended January 28, 1996, filed by
Registrant on April 29, 1996, SEC File No.
96552931). *
10.20 Agreement, dated as of April 26, 1996, by and
between Michaels Stores, Inc. and Jack E. Bush
(Filed herewith). *
10.21 Common Stock and Warrant Agreement, dated as of
October 16, 1984, between Michaels Stores, Inc. and
Peoples Restaurants, Inc., including form of Warrant
(previously filed as Exhibit 4.2 to Form 10-K for
the year ended January 31, 1993, filed by
Registrant on April 29, 1993, SEC File No. 93116847).
10.22 First Amendment to Common Stock and Warrant
Agreement, dated October 31, 1984, between the First
Dallas Group, Ltd. and Michaels Stores, Inc.
(previously filed as Exhibit 4.3 to Form 10-K for
the year ended January 31, 1993, filed by Registrant
on April 29, 1993, SEC file No. 93116847).
10.23 Second Amendment to Common Stock and Warrant
Agreement, dated November 28, 1984, between First
Dallas Investments-Michaels I, Ltd. and Michaels
Stores, Inc. (previously filed as Exhibit 4.4 to
Form 10-K for the year ended January 31, 1993, filed
by Registrant on April 29, 1993, SEC File No.
93116847).
10.24 Third Amendment to Common Stock and Warrant
Agreement, dated February 27, 1985, between First
Dallas Investments-Michaels I, Ltd., The First
Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr.
and Michaels Stores, Inc. (previously filed as
Exhibit 10.23 to Form S-1 (No. 33-09456), filed by
Registrant on October 14, 1986, SEC File No
86299802).
10.25 Amendment to Common Stock and Warrant Agreement,
dated as of September 1, 1992, between Michaels
Stores, Inc. and the other parties named therein
(previously filed as Exhibit 4.8 to Form S-8 (No.
33-54726), filed by Registrant on November 20, 1992,
SEC File No. 92278746).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.26 Stock Purchase Agreement, dated as of March 29,
1996, between Michaels Stores, Inc. and Fugue
Limited (previously filed as Exhibit 4.9 to Form
10-K for the year ended January 28, 1996, filed by
Registrant on April 29, 1996, SEC File No. 96552931).
10.27 Stock Purchase Agreement, dated as of March 29,
1996, between Michaels Stores, Inc. and Locke
Limited (previously filed as Exhibit 4.8 to Form
10-K for the year ended January 28, 1996, filed by
Registrant on April 29, 1996, SEC File No. 96552931).
10.28 Stock Purchase Agreement, dated as of March 29,
1996, between Michaels Stores, Inc. and Quayle
Limited (previously filed as Exhibit 4.7 to Form
10-K for the year ended January 28, 1996, filed by
Registrant on April 29, 1996, SEC File No. 96552931).
10.29 Option Agreement, dated as of December 23, 1996,
between Michaels Stores, Inc. and Devotion Limited
(previously filed as Exhibit 10.28 to Form 10-K for
the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651).
10.30 Option Agreement, dated as of December 23, 1996,
between Michaels Stores, Inc. and Elegance Limited
(previously filed as Exhibit 10.29 to Form 10-K for
the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651).
10.31 Form of 1998 Bonus Plan for R. Michael Rouleau
(Filed herewith). *
10.32 Form of 1998 Bonus Plan for Executive Vice
Presidents (Filed herewith). *
10.33 Employment Agreement, effective as of April 29,
1997, between Michaels Stores, Inc. and R. Michael
Rouleau (previously filed as Exhibit 10.32 to Form
10-K for the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651). *
10.34 Michaels Stores, Inc. Stock Option Agreement, dated
as of June 6, 1997, between Michaels Stores, Inc.
and R. Michael Rouleau (previously filed as Exhibit
99.1 to Form S-8 (No. 333-29417), filed by
Registrant on June 17, 1997, SEC File No.
97625464). *
10.35 Agreement, effective January 21, 1997, between
Michaels Stores, Inc. and R. Don Morris (previously
filed as Exhibit 10.1 to Form 10-Q for the quarter
ended May 3, 1997, filed by Registrant on June 17,
1997, SEC File No. 97625145). *
10.36 Michaels Stores, Inc. 1997 Employees Stock Purchase
Plan (previously filed as Exhibit 10.33 to Form 10-K
for the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651). *
10.37 Michaels Stores, Inc. 1997 Stock Option Plan
(previously filed as Exhibit 10.2 to Form 10-Q for
quarter ended May 3, 1997, filed by Registrant on
June 17, 1997, SEC File No. 97625145). *
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
21.1 Subsidiaries of Michaels Stores, Inc. (Filed herewith).
23.1 Consent of Ernst & Young LLP (Filed herewith).
27.1 Financial Data Schedule (Filed herewith).
</TABLE>
--------------------
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to
Item 14(c).
(b) No reports on Form 8-K were filed during the quarter ended January 31,
1998.
30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Michaels Stores, Inc.
We have audited the accompanying consolidated balance sheets of Michaels
Stores, Inc. as of January 31, 1998 and February 1, 1997, and the related
consolidated statements of operations, cash flows, and stockholders' equity
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michaels
Stores, Inc. at January 31, 1998 and February 1, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
March 10, 1998
31
<PAGE>
MICHAELS STORES, INC.
- --------------------------------------
- --------------------------------------
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
JANUARY 31, 1998 FEBRUARY 1, 1997
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 162,283 $ 59,069
Merchandise inventories 385,580 351,208
Income taxes receivable and deferred income taxes 11,291 15,207
Prepaid expenses and other 14,029 12,059
---------- ----------
Total current assets 573,183 437,543
---------- ----------
PROPERTY AND EQUIPMENT, AT COST 331,755 294,022
Less accumulated depreciation (138,719) (104,943)
---------- ----------
193,036 189,079
---------- ----------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET 136,827 140,697
DEFERRED INCOME TAXES 2,695 10,550
OTHER ASSETS 2,753 6,566
---------- ----------
142,275 157,813
---------- ----------
$ 908,494 $ 784,435
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 109,456 $ 104,966
Accrued liabilities and other 105,036 92,765
---------- ----------
Total current liabilities 214,492 197,731
---------- ----------
SENIOR NOTES 125,000 125,000
CONVERTIBLE SUBORDINATED NOTES 96,940 96,940
OTHER LONG-TERM LIABILITIES 30,151 31,962
---------- ----------
Total long-term liabilities 252,091 253,902
---------- ----------
466,583 451,633
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000 shares authorized,
none issued -- --
Common stock, $.10 par value, 50,000,000 shares authorized,
29,033,908 issued and outstanding (23,690,926 in fiscal 1996) 2,903 2,369
Additional paid-in capital 350,977 271,405
Retained earnings 88,031 59,028
---------- ----------
Total stockholders' equity 441,911 332,802
---------- ----------
$ 908,494 $ 784,435
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
MICHAELS STORES, INC.
- --------------------------------------
- --------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES $1,456,524 $1,378,277 $1,294,886
Cost of sales and occupancy expense 988,990 1,003,815 936,537
Selling, general and administrative expense 398,592 395,449 373,395
---------- ---------- ----------
OPERATING INCOME (LOSS) 68,942 (20,987) (15,046)
Interest expense 23,448 21,038 16,841
Other (income) and expense, net (3,013) (952) 2,952
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 48,507 (41,073) (34,839)
Provision (benefit) for income taxes 18,430 (9,840) (14,422)
---------- ---------- ----------
NET INCOME (loss) $ 30,077 $ (31,233) $ (20,417)
---------- ---------- ----------
---------- ---------- ----------
EARNINGS (LOSS) PER COMMON SHARE:
Basic $1.11 $(1.35) $(0.96)
Diluted $1.05 $(1.35) $(0.96)
COMMON SHARES USED IN PER SHARE CALCULATIONS:
Basic 27,215 23,180 21,354
Diluted 28,664 23,180 21,354
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
MICHAELS STORES, INC.
- --------------------------------------
- --------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 30,077 $ (31,233) $ (20,417)
Adjustments:
Depreciation 41,387 37,545 26,752
Amortization 4,247 4,184 4,176
Other 2,009 1,052 943
Change in assets and liabilities excluding
the effects of acquisitions:
Merchandise inventories (34,372) 14,894 13,406
Prepaid expenses and other (1,970) (1,076) (1,534)
Deferred income taxes and other 17,604 (1,314) (11,188)
Accounts payable 4,490 6,166 (6,585)
Accrued liabilities and other 14,435 (469) 3,695
---------- ---------- ---------
Net change in assets and liabilities 187 18,201 (2,206)
---------- ---------- ---------
Net cash provided by operating
activities 77,907 29,749 9,248
---------- ---------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (43,997) (33,609) (54,906)
Net proceeds from sales of property
and equipment 1,623 175 3,159
Net proceeds from sales of investments 3,386 1,122 18,860
Acquisitions and other -- -- (24,909)
---------- ---------- ---------
Net cash used in investing activities (38,988) (32,312) (57,796)
---------- ---------- ---------
FINANCING ACTIVITIES:
Net borrowings (payments) under bank
credit facilities -- (87,200) 46,100
Payment of other long-term liabilities (4,354) (2,503) (891)
Proceeds from issuance of Senior Notes -- 120,542 --
Proceeds from stock options exercised 61,309 3,299 4,443
Proceeds from issuance of common stock
and other 7,340 24,624 (141)
---------- ---------- ---------
Net cash provided by financing
activities 64,295 58,762 49,511
---------- ---------- ---------
NET INCREASE IN CASH AND EQUIVALENTS 103,214 56,199 963
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 59,069 2,870 1,907
---------- ---------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 162,283 $ 59,069 $ 2,870
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information:
Cash paid for interest $ 22,486 $ 19,291 $ 15,236
---------- ---------- ---------
---------- ---------- ---------
Income tax refunds received $ 4,858 $ 17,366 $ 2,155
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
MICHAELS STORES, INC.
- --------------------------------------
- --------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended January 31, 1998
(In thousands except share data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Number Additional
of Common paid-in Retained
shares stock capital earnings Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 29, 1995 21,354,167 $2,135 $244,561 $109,221 $355,917
Retirement of shares reacquired (170,025) (17) (5,516) -- (5,533)
Adjustment for change in market
value of marketable securities -- -- -- 1,514 1,514
Exercise of stock options and other 319,968 32 4,280 160 4,472
Net loss -- -- -- (20,417) (20,417)
---------- ------ -------- -------- --------
BALANCE AT JANUARY 28, 1996 21,504,110 2,150 243,325 90,478 335,953
Proceeds from private placement 2,000,000 200 24,800 -- 25,000
Exercise of stock options and other 186,816 19 3,280 (217) 3,082
Net loss -- -- -- (31,233) (31,233)
---------- ------ -------- -------- --------
BALANCE AT FEBRUARY 1, 1997 23,690,926 2,369 271,405 59,028 332,802
Exercise of stock options and other 5,101,612 510 62,046 (1,074) 61,482
Tax benefit from exercise of stock
options -- -- 9,678 -- 9,678
Proceeds from Stock Purchase Plan 241,370 24 7,848 -- 7,872
Net income -- -- -- 30,077 30,077
---------- ------ -------- -------- --------
BALANCE AT JANUARY 31, 1998 29,033,908 $2,903 $350,977 $ 88,031 $441,911
---------- ------ -------- -------- --------
---------- ------ -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Michaels Stores, Inc. (the "Company") owns and operates a chain of 452
specialty retail stores in 45 states, Canada and Puerto Rico featuring arts,
crafts, framing, floral, decorative wall decor and seasonal merchandise for
the hobbyist and do-it-yourself home decorator. The Michaels stores
typically carry approximately 36,000 items. The Company's wholly-owned
subsidiary, Aaron Brothers, Inc., operates a chain of 74 framing and art
supply stores. Aaron Brothers stores are located primarily on the West Coast.
FISCAL YEAR END
The Company reports on the basis of a 52/53-week fiscal year which ends
on the Saturday closest to January 31. Thus fiscal 1997 ("1997") and fiscal
1996 ("1996") ended on January 31, 1998 and February 1, 1997, respectively,
and 1996 had 53 weeks. Previous fiscal years ended on the Sunday closest to
January 31; thus fiscal 1995 ("1995") ended on January 28, 1996.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND EQUIVALENTS
Cash and equivalents are generally comprised of highly liquid
instruments with original maturities of three months or less. Cash
equivalents are carried at cost which approximates fair value.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentations.
MERCHANDISE INVENTORIES
Store merchandise inventories are valued as determined by a retail
inventory method at the lower of average cost or market. Distribution center
inventories are valued at the lower of cost or market determined by the
first-in, first-out method.
Fiscal 1996 included a $41.2 million charge recorded in the third
quarter to cover losses on a sale to liquidate merchandise that was
eliminated following store resets, markdowns on discontinued furniture and
other home decor merchandise, and reserves for the closure of four stores and
the write-down of leasehold improvements in three stores.
During 1995 the Company implemented an inventory SKU reduction program
which resulted in charges of approximately $64.4 million primarily associated
with the retail markdown of inventories.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on
a straight-line basis over the estimated useful lives of the assets. Useful
lives of buildings, fixtures and equipment, leasehold improvements, and
capital
36
<PAGE>
leases for computer equipment are generally estimated to be 30, 8, 10 and 5
years, respectively. Amortization of assets recorded under capital leases
and leasehold improvements is included in depreciation expense.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS
Costs in excess of net assets of acquired operations are being amortized
over 40 years on a straight-line basis. Accumulated amortization was
$17,862,000 and $14,061,000 as of the end of 1997 and 1996, respectively.
The Company assesses the recoverability of costs in excess of net assets
acquired based on existing facts and circumstances. The Company periodically
measures the recoverability of this asset based on projected undiscounted
cash flows of the acquired operations. Should the Company's assessment
indicate an impairment of this asset in the future, an appropriate write-down
will be recorded.
ADVERTISING COSTS
Advertising costs are expensed in the period in which the advertising
first occurs. Net advertising expense was $55,143,000, $63,505,000 and
$62,696,000 for 1997, 1996 and 1995, respectively.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed in the fiscal year in which the
store opens. The Company incurred store pre-opening costs of $2,376,000,
$3,206,000 and $7,466,000 for 1997, 1996 and 1995, respectively.
REVENUE RECOGNITION
Revenue from sales of the Company's merchandise and services is
recognized at the time of the merchandise sale or when services are performed.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per common
share amounts for all periods have been presented, and where appropriate
restated, in conformity with Statement 128 requirements. The convertible
subordinated notes were not included in the diluted earnings per common share
calculation because they were antidilutive for the periods presented. The
convertible subordinated notes could potentially affect diluted earnings per
common share in the future.
37
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C>
Numerator:
Net income $ 30,077 $ (31,233) $ (20,417)
---------- ---------- ----------
---------- ---------- ----------
Denominator:
Denominator for basic earnings per share -
weighted average shares 27,215 23,180 21,354
Effect of dilutive securities:
Employee stock options 1,449 -- --
---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 28,664 23,180 21,354
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per common share $1.11 $(1.35) $(0.96)
----- ------ ------
----- ------ ------
Diluted earnings (loss) per common share $1.05 $(1.35) $(0.96)
----- ------ ------
----- ------ ------
</TABLE>
NOTE 2 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Property and equipment:
Land and buildings $ 3,119 $ 3,284
Fixtures and equipment 221,906 193,703
Leasehold improvements 82,832 73,616
Capital leases 23,898 23,419
---------- ----------
$ 331,755 $ 294,022
---------- ----------
---------- ----------
Accrued liabilities and other:
Salaries, bonuses and other payroll-related costs $ 39,031 $ 23,946
Taxes, other than income and payroll 16,220 16,097
Rent 7,485 9,019
Current portion of capital lease obligations 4,662 4,215
Other 37,638 39,488
---------- ----------
$ 105,036 $ 92,765
---------- ----------
---------- ----------
</TABLE>
NOTE 3 - DEBT
In June 1996 the Company completed a public offering of $125
million of Senior Notes (the "Notes"). The Notes bear interest at a rate of
10-7/8% payable June 15 and December 15 of each year and mature on June 15,
2006. Until June 15, 1999, the Company may redeem, at its option, up to an
aggregate of $25 million principal amount of the Notes at 110.00%, plus
accrued interest to the date of redemption, with the net proceeds of one or
more equity offerings if at least $100 million aggregate principal amount of
the Notes remains outstanding after each redemption. On or after June 15,
2001, the Notes are redeemable at the option of the Company, in whole or in
part, at redemption prices ranging from 105.44% in 2001 to 100.00% in 2004,
plus accrued interest to the date of redemption. In addition, the Indenture
under which the Notes
38
<PAGE>
have been issued contains certain covenants, including but not limited to
restrictions on (1) debt; (2) payments such as dividends, repurchases of the
Company's Common Stock or repurchases of subordinated obligations; (3)
distributions from subsidiaries; (4) sales of assets; (5) transactions with
affiliates; (6) liens; and (7) mergers, consolidations and transfers of all
or substantially all assets. The Company used the full amount of the net
proceeds from the sale of the Notes to reduce indebtedness under the Credit
Agreement (as defined below). The fair value, based on dealer quotes, of the
outstanding Notes as of January 31, 1998 and February 1, 1997 was $139.5
million and $121.9 million, respectively.
In January 1993 the Company issued $97.75 million of convertible
subordinated notes ("Subordinated Notes") due January 15, 2003. Interest,
payable semi-annually on January 15 and July 15, was computed at the rate of
4-3/4% from the date of issuance to January 15, 1996, and at 6-3/4%
thereafter. Interest expense is accrued by the Company based on an effective
interest rate of 6.38% (including amortization of deferred issuance costs)
over the full term. The Subordinated Notes are redeemable at the option of
the Company at redemption prices ranging from 103.16% currently to 100.00% in
2003, and are not entitled to any sinking fund. They are convertible into
the Company's Common Stock at any time, at a conversion price of $38 per
share. A total of 2,551,053 shares of Common Stock are reserved for
conversion. The fair value, based on dealer quotes, of the outstanding
Subordinated Notes as of January 31, 1998 and February 1, 1997 was $100.3
million and $76.7 million, respectively.
The Company has a bank credit agreement ("Credit Agreement") which
includes an unsecured revolving line of credit and provides for the issuance
of commercial letters of credit. There were no borrowings outstanding under
the Credit Agreement at January 31, 1998 and February 1, 1997. The weighted
average interest rate for outstanding borrowings was 7.2% during 1996.
Borrowings under the Credit Agreement are limited to the lesser of $100
million or the Company's borrowing base (as defined in the Credit Agreement,
$72.7 million at January 31, 1998), in either case minus the aggregate amount
of letters of credit outstanding. The Company is required to pay a
commitment fee of .5% on the unused portion of the revolving line of credit.
The Credit Agreement requires the Company to maintain various financial
ratios and restricts the Company's ability to pay dividends. The Credit
Agreement expires in June 1999.
NOTE 4 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of deferred tax assets and liabilities as of the
respective year end balance sheets are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss, general business credit and alternative minimum
tax credit carryforwards $ 41,748 $ 41,435
Accrued expenses 15,392 9,533
Other 4,669 3,728
---------- ----------
Deferred tax assets 61,809 54,696
Valuation allowance (15,258) (15,551)
---------- ----------
Total deferred tax assets 46,551 39,145
---------- ----------
Deferred tax liabilities:
Depreciation and amortization 22,261 19,273
Other 11,974 5,962
---------- ----------
Total deferred tax liabilities 34,235 25,235
---------- ----------
Net deferred tax assets $ 12,316 $ 13,910
---------- ----------
---------- ----------
</TABLE>
39
<PAGE>
The federal and state income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Federal:
Current $ 15,946 $ (9,250) $ (18,202)
Deferred 3,581 (590) 9,749
---------- ---------- ----------
Total federal 19,527 (9,840) (8,453)
---------- ---------- ----------
State:
Current 890 -- (5,089)
Deferred (1,987) -- (880)
---------- ---------- ----------
Total state (1,097) -- (5,969)
---------- ---------- ----------
Total provision (benefit) $ 18,430 $ (9,840) $ (14,422)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Reconciliation between the actual income tax provision (benefit)
and the income tax provision (benefit) calculated by applying the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate $ 16,978 $ (14,376) $ (12,194)
Foreign loss not benefited 1,597 2,602 596
Increase in valuation allowance -- 3,271 --
State income taxes, net of federal income tax effect (239) -- (3,879)
Amortization of intangibles and other 94 (1,337) 1,055
---------- ---------- ----------
$ 18,430 $ (9,840) $ (14,422)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At January 31, 1998, the Company had federal and state net operating
loss carryforwards to reduce future taxable income of approximately $67
million and $146 million, respectively, expiring at various dates between
1998 and 2012. When realized, the federal and state tax benefit associated
with approximately $9 million and $13 million, respectively, of such
carryforwards will be applied to reduce goodwill. The Company also has tax
credit carryforwards of approximately $8 million available to offset future
income taxes.
NOTE 5 - STOCKHOLDERS' EQUITY
In April 1996 the Company completed a private placement of
2,000,000 shares of the Company's Common Stock at a price of $12.50 per share
(the "Private Placement"). The Common Stock was sold through three private
transactions with separate entities owned by independent trusts of which
family members of Sam Wyly and Charles J. Wyly, Jr. (the "Wyly Family") are
beneficiaries. Sam Wyly and Charles J. Wyly, Jr. are Chairman and Vice
Chairman of the Board of Directors of the Company, respectively. The shares
of Common Stock sold in the Private Placement are subject to certain
restrictions on future transfer. In addition, the Company will be required
to register the shares issued in the Private Placement pursuant to the
Securities Act of 1933, as amended, upon demand by the holders of the shares.
In February 1997 options to purchase 2,000,000 shares of the Company's
Common Stock were exercised through private transactions with entities owned
by independent trusts of which Wyly Family members are beneficiaries. The
shares are subject to various restrictions on future transfers. The options
were purchased in December of 1996 with an exercise price equal to the then
current market price. The exercise of the options provided the Company with
$20 million of additional capital in 1997.
40
<PAGE>
In October 1997 the Company began issuing Common Stock through its
Dividend Reinvestment and Stock Purchase Plan (the "Stock Purchase Plan").
The Stock Purchase Plan provides owners of shares of Common Stock and other
interested investors with a convenient and economical method to purchase
Common Stock. The Stock Purchase Plan also provides the Company with a
cost-efficient and flexible mechanism to raise equity capital. The Company
may establish a discount of 0% to 5% in certain transactions to purchase
shares under the Stock Purchase Plan. During 1997 the Company issued 241,370
shares through the Stock Purchase Plan generating $7,872,000 in new equity.
Select employees and key advisors of the Company, including directors,
may participate in the 1997 Stock Option Plan (the "Plan"), with an aggregate
of 4,791,214 shares of Common Stock available currently for issuance
thereunder. Options issued under the Plan to key employees generally vest
over a two year period following the date of grant and those issued to
directors generally vest immediately.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. The exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant and, as a result, the Company does not
recognize compensation expense for stock option grants in accordance with the
provisions of APB 25.
Pro forma information regarding net income and earnings per share, as
required by the provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," has been determined as if
the Company had accounted for its employee stock options under the fair value
method. The fair value for the options was estimated at the date of grant
using the Black-Scholes option valuation model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 5.69%, 6.08% and 6.12%; no dividend yield; volatility
factors of the expected market price of the Company's Common Stock of 54.7%,
56.6% and 56.6%; and a weighted average expected life of the options of 1.81,
2.95 and 2.95 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. The Company's employee stock options have
characteristics significantly different from those of traded options and
changes in the subjective input assumptions can materially affect the fair
value estimate. In addition, options vest over several years and additional
option grants are expected. As a result, the Company believes the existing
models do not necessarily provide a reliable single measure of the fair value
of its employee stock options and the effects of the following hypothetical
calculations are not likely to be representative of similar future
calculations.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C>
Pro forma net income (loss) $15,477 $(50,694) $(28,055)
Pro forma earnings (loss) per common share:
Basic $0.57 $(2.19) $(1.31)
Diluted $0.54 $(2.19) $(1.31)
</TABLE>
41
<PAGE>
For 1997, 1996 and 1995, the Company's stock option activity is
summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,540 $ 12.07 4,067 $ 16.48 3,336 $ 26.28
Granted 4,368 21.60 4,214 11.72 3,031 16.81
Exercised (5,102) 12.32 (187) 12.31 (320) 11.86
Forfeited/Expired (179) 14.26 (554) 14.09 (1,980) 19.87
------- -------- ------- -------- ------- --------
Outstanding at end of year 6,627 $ 18.10 7,540 $ 12.07 4,067 $ 16.48
------- -------- ------- -------- ------- --------
------- -------- ------- -------- ------- --------
Exercisable at end of year 4,857 $ 17.72 5,117 $ 11.86 345 $ 15.85
Weighted average fair value of options
granted during the year $ 4.67 $ 3.48 $ 7.20
</TABLE>
Exercise prices for options outstanding as of January 31, 1998 ranged
from $10 to $32-3/8. The weighted average remaining contractual life of the
options is 2.5 years.
NOTE 6 - RETIREMENT PLAN
The Company sponsors a 401(k) savings plan (the "401(k) Plan") for
eligible employees of the Company and certain of its subsidiaries.
Participation in the 401(k) Plan is voluntary and available to any employee
who is 21 years of age and has completed 500 hours of service in a six-month
eligibility period. Participants may elect to contribute up to 15% of their
compensation on an after-tax basis. In accordance with the provisions of the
401(k) Plan, the Company makes a matching contribution to the account of each
participant in an amount equal to 50% of the first 6% of eligible
compensation contributed by each participant not to exceed 3% of the
participant's total compensation for the year. The Company's matching
contribution expense, net of forfeitures, was $1,095,000, $1,338,000 and
$945,000 for 1997, 1996 and 1995, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company operates stores and uses distribution centers, office
facilities and equipment generally leased under noncancellable operating
leases, the majority of which provide for renewal options. In addition, the
Company also leases its POS system under a five year capital lease with IBM
at an interest rate of approximately 8% (the "IBM Capital Lease"). Financing
activities not affecting cash during 1997, 1996 and 1995 included capital
lease obligations incurred in connection with the IBM Capital Lease of
$2,515,000, $18,879,000 and $4,496,000, respectively. Future minimum annual
rental commitments for all noncancellable leases as of January 31, 1998 are
as follows:
42
<PAGE>
<TABLE>
<CAPTION>
Operating Capital
leases leases
--------- --------
(In thousands)
<S> <C> <C>
For the Fiscal Year:
1998 $ 97,840 $ 5,834
1999 90,344 5,834
2000 81,077 5,744
2001 73,011 2,332
2002 66,067 158
Thereafter 192,239 --
--------- --------
Total minimum rental commitments $ 600,578 19,902
---------
---------
Less: amounts representing interest 2,291
--------
Present value of obligations 17,611
Less: current portion 4,662
--------
Long-term obligations $ 12,949
--------
--------
</TABLE>
Rental expense applicable to noncancellable operating leases was
$92,659,000, $87,941,000 and $81,036,000 in 1997, 1996 and 1995, respectively.
The Company has entered into operating leases for two distribution
facilities that require that the Company guarantee payment of the residual
value of the property to the lessor at the end of each lease. As of January
31, 1998, the guaranteed residual value of assets subject to these leases was
$24,099,000.
CONTINGENCIES
In August 1995, two lawsuits were filed by certain security holders
against the Company and certain present and former officers and directors
seeking class action status on behalf of purchasers of the Company's Common
Stock between February 1, 1995 and August 23, 1995. Among other things, the
plaintiffs alleged that misstatements and omissions by the defendants
relating to projected and historical operating results, inventory and other
matters involving future plans resulted in an inflation of the price of the
Company's Common Stock during the period between February 1, 1995 and August
23, 1995. The plaintiffs sought on behalf of the class an unspecified amount
of compensatory damages and reimbursement for the plaintiffs' fees and
expenses. The United States District Court for the Northern District of Texas
consolidated the two lawsuits on November 16, 1995. On December 22, 1997,
the District Court approved a settlement in which the defendants agreed to
pay $6.25 million, and the lawsuit was dismissed with prejudice on January
27, 1998. After giving effect to prior expenditures for costs incurred in
defending the lawsuit, substantially all of the settlement amount was covered
by insurance.
A lawsuit was commenced against the Company and several other parties on
September 19, 1994 in the Superior Court of Stanislaus County, California, on
behalf of a former employee, Naomi Snyder, her child, and her husband. The
complaint alleges that the former employee and her then-unborn child were
exposed to excessive levels of carbon monoxide in one of the Company's stores
caused by a propane gas powered floor buffer which was operated by an outside
cleaning service, resulting, among other things, in severe and permanent
injuries to the child. Plaintiffs' Statement of Damages, filed on or about
January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled
the plaintiff's pleadings did not state a cause of action against the Company
upon which relief could be granted. However, the ruling by the trial court
was overturned by the Court of Appeals of the State of California, Fifth
Appellate District, on September 23, 1996. On October 30, 1997, the
California Supreme Court sustained the appellate court ruling and remanded
the case to the trial court, and discovery is proceeding. The Company
believes it has meritorious defenses to this action and will defend itself
vigorously.
The Company is a defendant from time to time in lawsuits incidental to
its business. Based on currently available information, the Company believes
that resolution of all known contingencies, including the litigation
described above, is uncertain, and there can be no assurance that future
costs related to such litigation would not be material to the Company's
financial position or results of operations.
43
<PAGE>
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
1997:
Net sales $ 321,318 $ 278,038 $ 350,070 $ 507,098
Cost of sales and occupancy expense 220,128 190,998 237,528 340,336
Operating income (loss) 9,306 1,493 12,943 45,200
Net income (loss) 3,170 (2,895) 4,422 25,380
Earnings (loss) per common share (2):
Basic $0.13 $(0.11) $0.16 $0.88
Diluted $0.12 $(0.11) $0.15 $0.79
Common shares used in per share calculations:
Basic 25,229 26,299 28,423 28,908
Diluted (3) 26,186 26,299 30,149 33,292
1996:
Net sales $ 301,875 $ 260,476 $ 322,221 $ 493,705
Cost of sales and occupancy expense 205,067 184,574 259,928 354,246
Operating income (loss) 7,838 (8,079) (37,619)(1) 16,873
Net income (loss) 2,725 (7,933) (34,230) 8,205
Earnings (loss) per common share (2):
Basic $0.12 $(0.34) $(1.45) $0.35
Diluted $0.12 $(0.34) $(1.45) $0.35
Common shares used in per
share calculations:
Basic 22,032 23,532 23,553 23,575
Diluted 22,374 23,532 23,553 23,625
(1) Includes effect of an unusual pre-tax charge of $41.2 million for costs
associated with a sale to liquidate merchandise that was eliminated
following store resets, markdowns on discontinued furniture and other
home decor merchandise, and reserves for the closure of four stores and
the write-down of leasehold improvements in three stores.
(2) The 1996 and first three quarters of 1997 earnings per common share
amounts have been restated to comply with Statement 128.
(3) The convertible subordinated notes were not included in the diluted
earnings per common share calculation for the first, second and third
quarter because they were antidilutive. The convertible subordinated
notes were included in the diluted earnings per common share in the
fourth quarter.
</TABLE>
44
<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 1, 1998 By: /S/ R. MICHAEL ROULEAU
------------------------------------------
R. Michael Rouleau
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
- -------------------------------------------- Chairman of the May 1, 1998
Sam Wyly Board of Directors
/S/ CHARLES J. WYLY, JR. Vice Chairman of the May 1, 1998
- -------------------------------------------- Board of Directors
Charles J. Wyly, Jr.
/S/ R. MICHAEL ROULEAU President and Chief Executive Officer May 1, 1998
- -------------------------------------------- (Principal Executive Officer)
R. Michael Rouleau
/S/ BRYAN M. DECORDOVA Executive Vice President-- May 1, 1998
- -------------------------------------------- Chief Financial Officer
Bryan M. DeCordova (Principal Financial and
Accounting Officer)
/S/ F. JAY TAYLOR Director May 1, 1998
- --------------------------------------------
F. Jay Taylor
/S/ RICHARD E. HANLON Director May 1, 1998
- --------------------------------------------
Richard E. Hanlon
/S/ DONALD R. MILLER, JR. Director and May 1, 1998
- -------------------------------------------- Vice President--Market Development
Donald R. Miller, Jr.
/S/ KELLY ELLIOTT
- -------------------------------------------- Director May 1, 1998
Kelly Elliott
/S/ MICHAEL C. FRENCH Director May 1, 1998
- --------------------------------------------
Michael C. French
/S/ EVAN A. WYLY Director May 1, 1998
- --------------------------------------------
Evan A. Wyly
</TABLE>
45
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
3.1 - Bylaws of the Registrant, as amended and restated (previously filed
as Exhibit 3.1 to Form 10-K for the year ended January 30, 1994,
filed by Registrant on April 28, 1994, SEC File No. 94525504).
3.2 - Restated Certificate of Incorporation of the Registrant (previously
filed as Exhibit 4.1 to Form S-8 (No. 33-54726), filed by
Registrant on November 20, 1992, SEC File No. 92278746).
4.1 - Form of Common Stock Certificate (previously filed as Exhibit 4.1
to Form 10-K for the year ended January 30, 1994, filed by
Registrant on April 28, 1994, SEC File No. 94525504).
4.2 - Indenture, dated as of January 22, 1993, between Michaels Stores,
Inc. and NationsBank of Texas, N.A., as Trustee, including the form
of 4 3/4% / 6 3/4% Step-up Convertible Subordinated Note included
therein (previously filed as Exhibit 19.1 to Form 10-K for the year
ended January 31, 1993, filed by Registrant on April 29, 1993, SEC
File No. 93116847).
4.3 - Indenture, dated as of June 21, 1996, between Michaels Stores, Inc.
and The Bank of New York (previously filed as Exhibit 19.1 to Form
10-Q for the quarter ended July 28, 1996, filed by Registrant on
September 11, 1996, SEC File No. (96628596).
10.1 - Michaels Stores, Inc. Employees 401(k) Plan, as amended and
restated, effective October 1, 1996 (previously filed as Exhibit
99.2 to Form 8-K, filed by Registrant on September 30, 1996, SEC
File No. 96637219). *
10.2 - Michaels Stores, Inc. Employees 401(k) Trust, dated July 11, 1996
(previously filed as Exhibit 99.3 to Form 8-K, filed by Registrant
on September 30, 1996, SEC File No. 96637219).
10.3 - Form of Indemnity Agreement between Michaels Stores, Inc. and
certain officers and directors of the Registrant (previously filed
as Exhibit 10.8 to Form 10-K for the year ended January 31, 1993,
filed by Registrant on April 29, 1993, SEC File No. 93116847).
10.4 - Form of Employment Agreement between Michaels Stores, Inc. and
certain directors of the Registrant (Filed herewith). *
10.5 - Form of Employment Agreement between Michaels Stores, Inc. and
Douglas B. Sullivan (Filed herewith). *
10.6 - Michaels Stores, Inc. Amended and Restated Key Employee Stock
Compensation Program (previously filed as Exhibit 10.9 to Form 10-K
for the year ended February 1, 1997, filed by Registrant on May 2,
1997, SEC File No. 97594651). *
10.7 - Michaels Stores, Inc. Amended and Restated 1992 Non-Statutory Stock
Option Plan (previously filed as Exhibit 99.1 to Form S-8 (No.
333-21407), filed by Registrant on February 7, 1997, SEC File No.
97521153). *
10.8 - Second Amended and Restated Credit Agreement, dated June 20, 1996,
between Michaels Stores, Inc. and the lenders named therein (the
"Credit Agreement") (previously filed as Exhibit 10 to Form 8-K
dated June 20, 1996, filed by Registrant on September 26, 1996, SEC
File No. 96635219).
10.9 - Waiver Agreement and First Amendment to Credit Agreement, dated
January 31, 1997 (previously filed as Exhibit 10.13 to Form 10-K
for the year ended February 1, 1997, filed by Registrant on May 2,
1997, SEC File No. 97594651).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.10 - Second Amendment to Credit Agreement, dated as of March 11, 1997
(previously filed as Exhibit 10.14 to Form 10-K for the year ended
February 1, 1997, filed by Registrant on May 2, 1997, SEC File No.
97594651).
10.11 - Michaels Stores Inc. Amended and Restated 1994 Non-Statutory Stock
Option Plan (previously filed as Exhibit 99.1 to Form S-8 (No.
333-21635), filed by Registrant on February 12, 1997, SEC file No.
97527249). *
10.12 - Amended, Modified and Restated Master Lease Agreement, dated as of
December 18, 1995, between Jacksonville Funding Corporation as
Lessor and Michaels Stores, Inc., as Lessee (previously filed as
Exhibit 10.17 to Form 10-K for the year ended January 28, 1996,
filed by Registrant on April 29, 1996, SEC File No. 96552931).
10.13 - Amendment No. 1 to Amended, Modified and Restated Master Lease
Agreement, dated as of April 22, 1996, between Jacksonville Funding
Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee
(Filed herewith).
10.14 - Amendment No. 2 to Amended, Modified and Restated Master Lease
Agreement, dated as of July 11, 1996, between Jacksonville Funding
Enterprises, LLC as Lessor and Michaels Stores, Inc. as Lessee
(Filed herewith).
10.15 - Amendment No. 3 to Amended, Modified and Restated Master Lease
Agreement, dated as of August 15, 1996, between Jacksonville
Funding Enterprises, LLC as Lessor and Michaels Stores, Inc. as
Lessee (Filed herewith).
10.16 - Amendment No. 4 to Amended, Modified and Restated Master Lease
Agreement and Waiver, dated as of March 11, 1997, between
Jacksonville Funding Corporation as Lessor and Michaels Stores,
Inc. as Lessee (previously filed as Exhibit 10.17 to Form 10-K for
the year ended February 1, 1997, filed by Registrant on May 2,
1997, SEC File No. 97594651).
10.17 - Consulting Agreement, dated as of October 1, 1996, between Michaels
Stores, Inc. and Michael C. French (Filed herewith). *
10.18 - Term Lease Master Agreement between IBM Credit Corporation as
Lessor and Michaels Stores, Inc. as Lessee (previously filed as
Exhibit 10.18 to Form 10-K for the year ended February 1, 1997,
filed by Registrant on May 2, 1997, SEC File No. 97594651).
10.19 - Agreement, dated as of January 30, 1996, by and between Michaels
Stores, Inc. and Jack E. Bush (previously filed as Exhibit 10.19 to
Form 10-K for the year ended January 28, 1996, filed by Registrant
on April 29, 1996, SEC File No. 96552931). *
10.20 - Agreement, dated as of April 26, 1996, by and between Michaels
Stores, Inc. and Jack E. Bush (Filed herewith). *
10.21 - Common Stock and Warrant Agreement, dated as of October 16, 1984,
between Michaels Stores, Inc. and Peoples Restaurants, Inc.,
including form of Warrant (previously filed as Exhibit 4.2 to Form
10-K for the year ended January 31, 1993, filed by Registrant on
April 29, 1993, SEC File No. 93116847).
10.22 - First Amendment to Common Stock and Warrant Agreement, dated
October 31, 1984, between the First Dallas Group, Ltd. and Michaels
Stores, Inc. (previously filed as Exhibit 4.3 to Form 10-K for the
year ended January 31, 1993, filed by Registrant on April 29, 1993,
SEC file No. 93116847).
10.23 - Second Amendment to Common Stock and Warrant Agreement, dated
November 28, 1984, between First Dallas Investments-Michaels I,
Ltd. and Michaels Stores, Inc. (previously filed as Exhibit 4.4 to
Form 10-K for the year ended January 31, 1993, filed by Registrant
on April 29, 1993, SEC File No. 93116847).
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.24 - Third Amendment to Common Stock and Warrant Agreement, dated
February 27, 1985, between First Dallas Investments-Michaels I,
Ltd., The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr.
and Michaels Stores, Inc. (previously filed as Exhibit 10.23 to
Form S-1 (No. 33-09456), filed by Registrant on October 14, 1986,
SEC File No 86299802).
10.25 - Amendment to Common Stock and Warrant Agreement, dated as of
September 1, 1992, between Michaels Stores, Inc. and the other
parties named therein (previously filed as Exhibit 4.8 to Form S-8
(No. 33-54726), filed by Registrant on November 20, 1992, SEC File
No. 92278746).
10.26 - Stock Purchase Agreement, dated as of March 29, 1996, between
Michaels Stores, Inc. and Fugue Limited (previously filed as
Exhibit 4.9 to Form 10-K for the year ended January 28, 1996,
filed by Registrant on April 29, 1996, SEC File No. 96552931).
10.27 - Stock Purchase Agreement, dated as of March 29, 1996, between
Michaels Stores, Inc. and Locke Limited (previously filed as
Exhibit 4.8 to Form 10-K for the year ended January 28, 1996,
filed by Registrant on April 29, 1996, SEC File No. 96552931).
10.28 - Stock Purchase Agreement, dated as of March 29, 1996, between
Michaels Stores, Inc. and Quayle Limited (previously filed as
Exhibit 4.7 to Form 10-K for the year ended January 28, 1996,
filed by Registrant on April 29, 1996, SEC File No. 96552931).
10.29 - Option Agreement, dated as of December 23, 1996, between Michaels
Stores, Inc. and Devotion Limited (previously filed as Exhibit
10.28 to Form 10-K for the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651).
10.30 - Option Agreement, dated as of December 23, 1996, between Michaels
Stores, Inc. and Elegance Limited (previously filed as Exhibit
10.29 to Form 10-K for the year ended February 1, 1997, filed by
Registrant on May 2, 1997, SEC File No. 97594651).
10.31 - Form of 1998 Bonus Plan for R. Michael Rouleau (Filed herewith). *
10.32 - Form of 1998 Bonus Plan for Executive Vice Presidents (Filed
herewith). *
10.33 - Employment Agreement, effective as of April 29, 1997, between
Michaels Stores, Inc. and R. Michael Rouleau (previously filed as
Exhibit 10.32 to Form 10-K for the year ended February 1, 1997,
filed by Registrant on May 2, 1997, SEC File No. 97594651). *
10.34 - Michaels Stores, Inc. Stock Option Agreement, dated as of June 6,
1997, between Michaels Stores, Inc. and R. Michael Rouleau
(previously filed as Exhibit 99.1 to Form S-8 (No. 333-29417),
filed by Registrant on June 17, 1997, SEC File No. 97625464). *
10.35 - Agreement, effective January 21, 1997, between Michaels Stores,
Inc. and R. Don Morris (previously filed as Exhibit 10.1 to Form
10-Q for the quarter ended May 3, 1997, filed by Registrant on June
17, 1997, SEC File No. 97625145). *
10.36 - Michaels Stores, Inc. 1997 Employees Stock Purchase Plan
(previously filed as Exhibit 10.33 to Form 10-K for the year ended
February 1, 1997, filed by Registrant on May 2, 1997, SEC File No.
97594651). *
10.37 - Michaels Stores, Inc. 1997 Stock Option Plan (previously filed as
Exhibit 10.2 to Form 10-Q for quarter ended May 3, 1997, filed by
Registrant on June 17, 1997, SEC File No. 97625145). *
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
21.1 - Subsidiaries of Michaels Stores, Inc. (Filed herewith).
23.1 - Consent of Ernst & Young LLP (Filed herewith).
27.1 - Financial Data Schedule (Filed herewith).
- -------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c).
</TABLE>
49
<PAGE>
EXHIBIT 10.4
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
-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 third anniversary of the Change of Control Date, the Company shall pay
to Executive as termination pay the amounts determined as follows:
(a) an amount equivalent to three (3) times one hundred percent
(100%) of Executive's aggregate monthly salary for the twelve (12) months
immediately prior to the Termination Date; and
-8-
<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
-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)
thirty-six (36) months of service credit thereunder at a level of one hundred
percent (100%) of Executive's average rate of compensation during the twelve
(12) months immediately prior to the Termination Date and (y) the retirement
pension (determined as a straight life annuity commencing at age sixty-five
(65)) which Executive had then accrued pursuant to the provisions of the
Pension Plans.
10. CONTINUATION OF MEDICAL AND HEALTH BENEFITS. For a period of
thirty-six (36) months following the Termination Date, the Company shall
arrange to provide Executive with life, medical, dental, health, accident and
disability insurance benefits substantially similar to those that Executive
is receiving or is entitled to receive immediately prior to the Termination
Date, which benefits shall in no event be less than those benefits in effect
immediately prior to the Change of Control Date.
11. PAYMENT OF LEGAL EXPENSES. The Company shall also pay Executive
all legal fees and expenses incurred by Executive as a result of any
termination pursuant to Section 8 hereof,
-10-
<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 thirty-six (36) equal monthly installments
beginning thirty (30) days following the Termination Date and continuing
every thirty (30) days thereafter.
13. NOTICES. Any notices, demands and other communications provided
for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to Executive at the last address he has filed in
writing with the Company or, in the case of the Company, at its principal
executive offices to the attention of the President, with a copy to the
attention of the General Counsel.
-11-
<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.
By:
- --------------------------- ----------------------------------
B. B. Tuley, President
-13-
<PAGE>
EXHIBIT 10.5
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
-14-
<PAGE>
AMENDMENT NO. 1 TO AMENDED, MODIFIED AND RESTATED
MASTER LEASE AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE
AGREEMENT is dated as of April 22, 1996 (the "AMENDMENT NO. 1"), is between
JACKSONVILLE FUNDING ENTERPRISES, LLC, a Delaware limited liability company
and successor in interest to Jacksonville Funding Corporation (the "LESSOR") ;
and
MICHAELS STORES, INC., a Delaware corporation (the "LESSEE"); and
amends that certain Amended, Modified and Restated Master Lease Agreement
dated as of December 18, 1995 (the "ORIGINAL LEASE AGREEMENT") between
Jacksonville Funding Corporation (a corporation which merged into the Lessor
with the Lessor being the surviving entity of such merger) and the Lessee.
NOW, THEREFORE, the parties hereto agree as follows:
1. The second line of the first paragraph in the Original Lease Agreement
is amended by deleting "December , 1995" therefrom and inserting "December 18,
1995" in place of such deleted reference.
2. Section 11.02(b) in the Original Lease Agreement is deleted in its
entirety and replaced by the following:
"(b) FIXED CHARGES COVERAGE RATIO. Lessee will not permit the Fixed
Charges Coverage Ratio at any time during the first three fiscal quarters
in fiscal year 1996 to be less than 1.00 to 1.00, and, in the fourth fiscal
quarter in fiscal year 1996 and at all times thereafter, to be less than
1.15 to 1.00. $64,400,000 of the provision established in the fiscal
quarter ending July 30, 1995 for inventory markdowns and other charges
shall be added to pretax consolidated income of the Lessee for the fiscal
quarter ending July 30, 1995 only for purposes of determining compliance
with the covenant contained in this Section for the fiscal quarter ending
April 28, 1996 only."
3. Section 11.02(d) in the Original Lease Agreement is deleted in its
entirety and replaced by the following:
"(d) MODIFIED LEVERAGE RATIO. Lessee will not permit the ratio,
measured at the end of each quarter, of (i) Adjusted Total Debt to (ii) the
sum of (A) consolidated income of Lessee and its Subsidiaries before income
taxes for the preceding twelve month period (excluding extraordinary cash
gains or losses for the preceding twelve month period), plus
<PAGE>
(B) interest expense or the preceding twelve month period, plus (C)
operating lease expense for the preceding twelve month period, plus (D)
depreciation and amortization expense for the preceding twelve month
period, at any time to be greater than six (6) to one (l). $64,400,000 of
the provision established in the fiscal quarter ending July 30, 1995 for
inventory markdowns shall be added to pretax consolidated income of the
Lessee for fiscal quarter ending July 30, 1995 only for purposes of
determining compliance with the covenant contained in this Section for the
fiscal quarter ending April 28, 1996 only."
4. The definition of "Fixed Charges" in APPENDIX A to the Original Lease
Agreement is deleted in its entirety and replaced by the following:
""Fixed Charges" shall mean for Lessee and its Subsidiaries as of any
determination date for the preceding 12-month period, the sum of (a)
interest expense for such period plus (b) operating lease expense for such
period all as determined and consolidated in accordance with GAAP, plus (c)
capital expenditures (other than capital lease obligations incurred from
time to time for point-of-sale equipment and store systems, and services
and equipment supporting this equipment and systems not to exceed
$32,000,000 in the aggregate throughout the term of this Lease)."
5. The definition of "Fixed Charges Coverage Ratio" in APPENDIX A to the
Original Lease Agreement is deleted in its entirety and replaced by the
following:
""Fixed Charges Coverage Ratio" shall mean for Lessee and its
Subsidiaries as of any determination date for the preceding 12-month
period, the ratio of (a) the sum of (i) consolidated income of Lessee and
its Subsidiaries before income taxes for such period (excluding
extraordinary cash gains or losses for such period), plus (ii) interest
expense for such period plus (iii) operating lease expense for such period,
plus (iv) depreciation and amortization for such period to (b) Fixed
Charges."
6. The definition of "LIBOR Rate" in APPENDIX A to the Original Lease
Agreement is deleted in its entirety and replaced by the following:
""LIBOR Rate" shall mean the sum of (a) the applicable percentage
referenced in the pricing grid set forth immediately after this paragraph
plus (b) the interest rate per annum (rounded upwards, if necessary to the
nearest one-sixteenth of one percent) which is the quotient of (A) the rate
per annum at which dollar deposits in immediately available funds are
offered to NationsBank two Business Days
2
<PAGE>
before the first day of such applicable Payment Period by prime banks in
the interbank Eurodollar market as at or about 11:00 A.M., Dallas, Texas
time, for delivery on the first day of such applicable Rent Payment Period,
for the number of days comprised therein and in an amount equal to the
aggregate amount bearing such interest rate to be outstanding for such
applicable Rent Payment Period, divided by (3) the remainder of 1.00 MINUS
the Eurodollar Reserve Percentage applicable to such amounts.
PRICING GRID FOR LIBOR RATE
<TABLE>
<CAPTION>
Per Annum Spread for
subsection (a) of "LIBOR Rate"
Fixed Charges Coverage Ratio definition
<S> <C>
Less than 1.75 to 1.00 1.40%
Greater than or equal to 1.75
to 1.00 0.90%"
</TABLE>
7. The definition of "Total Debt" in APPENDIX A to the Original Lease
Agreement is deleted in its entirety and replaced by the following:
""Total Debt" shall mean, as of the date of any determination thereof,
with respect to Lessee and its Subsidiaries, (i) all indebtedness, direct
or indirect, whether or not represented by bonds, debentures, notes or
other securities, for the repayment of money borrowed, (ii) all deferred
indebtedness for the payment of the purchase price of property or assets
purchased, (iii) all indebtedness under any lease which, under GAAP, is
required to be capitalized for balance sheet purposes provided that
notwithstanding the reporting requirements of GAAP, in no event will any
tax retention operating lease which is provided for in the Operative
Documents be considered a capital lease for financial or other covenant
compliance and provided, further, that this definition of "Total Debt"
shall also exclude capital lease obligations incurred from time to time for
point-of-sale equipment and store systems, and services and equipment
supporting this equipment and systems not to exceed $32,000,000 in the
aggregate throughout the term of this Lease, (iv) all guaranties,
endorsements, assumptions or other contingent obligations, in respect of,
or to purchase or otherwise acquire, indebtedness of others, (v) all
contingent obligations (as defined in accordance with GAAP) of any type
whatsoever and (vi) all indebtedness secured by any mortgage, pledge,
security interest or lien existing on property owned by any of Lessee and
its Subsidiaries, whether or not the indebtedness secured thereby shall
have been assumed by any of Lessee and its Subsidiaries; provided that
under no
3
<PAGE>
circumstances shall trade payables of Lessee and its Subsidiaries incurred
in the ordinary course of business be included in this definition of "Total
Debt"."
8. The definition of "Total Liabilities" in APPENDIX A to the Original
Lease Agreement is deleted in its entirety and replaced by the following:
""Total Liabilities" shall mean, as of the date of any determination
thereof, the aggregate (after eliminating intercompany items) of all
liabilities of Lessee and its Subsidiaries determined in accordance with
GAAP (including capitalized leases). Notwithstanding anything contained
herein or in the other Operative Documents to the contrary, such term shall
include all guaranties and liabilities relating to letters of credit (other
than commercial letters of credit) without duplication for liabilities
related to workmen's compensation."
9. The Lessee represents and warrants that (a) this Amendment No. 1
constitutes its legal, valid, and binding obligations, enforceable in accordance
with the terms hereof (subject as to enforcement of remedies to any applicable
bankruptcy, reorganization, moratorium, or other laws or principles of equity
affecting the enforcement of creditors' rights generally), (b) there exists no
Lease Event of Default after giving effect to this Amendment No. 1, (c) its
representations and warranties set forth in the Original Lease Agreement and the
other Operative Documents are true and correct on the date hereof after giving
effect to this Amendment No. 1, (d) it has complied with all agreements and
conditions to be complied with by it under the Original Lease Agreement and the
other Operative Documents by the date hereof, (e) the Original Lease Agreement,
as amended hereby-and the other Operative Documents remain in full force and
effect, and (f) no notice to, or consent of, any Person is required under the
terms of any agreement of the Lessee in connection with the execution of this
Amendment No. 1.
10. The Lessee shall execute and deliver such further agreements,
documents, instruments, and certificates in form and substance satisfactory to
the Lessor, the Agent to the Lenders and the Co-Agent to the Lenders as any such
Person or any Lender may deem reasonably necessary or appropriate in connection
with this Amendment No. 1.
11. Except as hereby modified, the terms and conditions of the Original
Lease Agreement remain in full force and effect.
12. This Amendment No. 1 has been delivered in, and shall in all respects
be governed by, and construed in accordance with, the laws of the State of Texas
applicable to agreements made and to be performed entirely within such State,
including all matters of
4
<PAGE>
construction, validity and performance; PROVIDED, notwithstanding the foregoing,
to the extent relating to the creation and perfection of liens on real estate in
the State of Florida or any other state, this Amendment No. 1 shall be governed
by, and construed in accordance with, the laws of the State of Florida or such
other state.
13. This Amendment No. 1 may be executed in any number of counterparts,
each of which shall be deemed an original and all of which taken together shall
constitute but one and the same instrument.
14. All capitalized terms used but not otherwise defined herein shall have
the meanings set forth therefor in the Original Lease Agreement and/or APPENDIX
A thereto.
(Signature page follows)
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES,
LLC, as a successor in interest to
Jacksonville Funding Corporation,
by its members
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-1
By /s/ Val T. Orton
---------------------------------
Title Vice President
------------------------------
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-2
By /s/ Val T. Orton
---------------------------------
Title Vice President
------------------------------
MICHAELS STORES, INC.
By
---------------------------------
Title
------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES,
LLC, as a successor in interest to
Jacksonville Funding Corporation,
by its members
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-1
By
---------------------------------
Title
------------------------------
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-2
By
---------------------------------
Title
------------------------------
MICHAELS STORES, INC.
By /s/ K.L. Magnuson
---------------------------------
Title Vice President
------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES,
LLC, as a successor in interest to
Jacksonville Funding Corporation,
by its members
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-1
By
---------------------------------
Title
------------------------------
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-2
By
---------------------------------
Title
------------------------------
MICHAELS STORES, INC.
By
---------------------------------
Title
------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By /s/ Delaney Burgdoerfer
---------------------------------
Title VP
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES,
LLC, as a successor in interest to
Jacksonville Funding Corporation,
by its members
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-1
By
---------------------------------
Title
------------------------------
By First Security Bank of Utah,
N.A., as Owner Trustee for Michaels
Stores Trust 1995-2
By
---------------------------------
Title
------------------------------
MICHAELS STORES, INC.
By
---------------------------------
Title
------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By Robert Ivosevich
---------------------------------
Title ROBERT IVOSEVICH
SENIOR VICE PRESIDENT
------------------------------
6
<PAGE>
AMENDMENT NO. 2 TO AMENDED, MODIFIED AND RESTATED
MASTER LEASE AGREEMENT
THIS AMENDMENT NO. 2 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE
AGREEMENT is dated as of July 11, 1996 (the "AMENDMENT NO. 2"), is between
JACKSONVILLE FUNDING ENTERPRISES, LLC, a Delaware limited liability company
and successor in interest to Jacksonville Funding Corporation (the "LESSOR");
and
MICHAELS STORES, INC., a Delaware corporatIon (the "LESSEE"); and
amends that certain Amended, Modified and Restated Master Lease Agreement
dated as of December 18, 1995 (as amended by Amendment No. 1 to Amended,
Modified and Restated Master Lease Agreement dated as of April 22, 1996, the
"ORIGINAL LEASE AGREEMENT") between Jacksonville Funding Corporation (a
corporation which merged into the Lessor with the Lessor being the surviving
entity of such merger) and the Lessee.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 11.02 in the Original Lease Agreement is deleted in its
entirety and replaced with the following:
"SECTION 11.02. FINANCIAL COVENANTS. Lessee will comply with the
following financial covenants and demonstrate such compliance as of the end
of each fiscal quarter of Lessee pursuant to a Lessee Compliance
Certificate delivered to Lessor in accordance with the terms of Section
11.01 hereof:
(a) RATIO OF FUNDED DEBT TO TOTAL CAPITALIZATION. Lessee will not
permit the ratio of Funded Debt to Total Capitalization at any time during
Lessee's (i) second and third fiscal quarters each year during the Term to
be greater than 55%, and (ii) first and fourth fiscal quarters each year
during the Term to be greater than 45%.
(b) FIXED CHARGES COVERAGE RATIO. Lessee will not permit the Fixed
Charges Coverage Ratio at any time during the Lessee's fiscal quarters
ending (i) October 27, 1996, February 2, 1997, May 4, 1997 and August 3,
1997, to be less than 1.35 to 1.00, and (ii) thereafter during the Term to
be less than 1.50 to 1.00.
(c) CURRENT RATIO. Lessee will not permit the ratio of (i) Current
Assets to (ii) the sum of (A) Current Liabilities plus (B) amounts
outstanding under the Revolving Credit
<PAGE>
Agreement as Advances, at any time after July 28, 1996 to be less than 1.75
to 1.00.
(d) MODIFIED LEVERAGE RATIO. Lessee will not permit the ratio,
measured at the end of each quarter (beginning with the fourth quarter of
fiscal year 1996), of (i) Adjusted Total Debt to (ii) the sum of (A)
consolidated income of Lessee and its Subsidiaries before income taxes for
the preceding twelve month period (excluding extraordinary cash gains or
losses for the preceding twelve month period), plus (B) interest expense
for the preceding twelve month period, plus (C) operating lease expense for
the preceding twelve month period plus (D) depreciation and amortization
expense for the preceding twelve month period, at any time to be greater
than six (6) to one (1).
(e) LIMITATION ON CAPITAL EXPENDITURES. Lessee shall not permit
aggregate consolidated Capital Expenditures (including the cash portion of
each acquisition) of the Lessee and its Subsidiaries, to exceed $70,000,000
during any fiscal year during the Term, provided that, capital lease
obligations of Lessee in connection with the point-of-sale equipment and
store systems and services and equipment supporting such equipment and
systems, commencing fiscal year 1996 and thereafter, up to a maximum
aggregate amount of $32,000,000 throughout the Term, shall be excluded from
Capital Expenditures for the purposes of determining compliance with this
Section 11.02(e).
The financial covenants specified above in this Section 11.02 shall
automatically be deemed to be amended and modified at such times as (and in the
same manner and to the same extent as) the corresponding financial covenants
under the Revolving Credit Agreement are amended and modified; PROVIDED,
HOWEVER, notwithstanding the foregoing, to the extent (i) the Revolving Credit
Agreement is terminated or expires prior to the termination or expiration of the
Term or (ii) NationsBank or Credit Lyonnais, for whatever reason, ceases to be a
lender under the Revolving Credit Agreement prior to the termination or
expiration of the Term, then in each such case, the financial covenants under
this Lease thereafter shall be identical to those in existence (A) as of the
date the Revolving Credit Agreement terminates or expires (in the case of
subsection (i) of this proviso) or (B) as of the date such Lender ceases to be a
lender under the Revolving Credit Agreement (in the case of subsection (ii) of
this proviso)."
2. DEFINED TERMS. The following definitions shall be added to or amended
in APPENDIX A of the Original Lease Agreement, as appropriate, to read as
follows:
"Capital Expenditures" means capital expenditures, as defined in
accordance with GAAP.
2
<PAGE>
"Fixed Charges" means for the Lessee and its Subsidiaries as of any
determination date for the preceding 12-month period, the sum of (a)
interest expense for such period, plus (b) scheduled principal payments on
Funded Debt permitted to be incurred under Section 7.02(iv) of the
Revolving Credit Agreement or such period, plus (c) operating lease expense
for such period, all as determined and consolidated in accordance with
GAAP.
"Fixed Charges Coverage Ratio" means for the Lessee and its
SubsidiarIes as of any determination date for the preceding 12-month
period, the ratio of (a) the sum of (i) consolidated income of the Lessee
and its Subsidiaries before income taxes for such period (excluding
extraordinary cash gains or losses for such period), plus (ii) interest
expense for such period plus (iii) operating lease expense for such period
plus (iv) depreciation and amortization for such period to (b) Fixed
Charges, all as determined and consolidated in accordance with GAAP.
"Funded Debt" means money borrowed and Total Debt represented by notes
payable and drafts accepted representing extensions of credit, all
obligations evidenced by bonds, debentures, notes or other similar
instruments (including all obligations secured by any Lien to which any
property or asset owned by a Person is subject, whether or not the
obligation secured thereby shall have been assumed), all Total Debt upon
which interest charges are customarily paid by a Person (excluding trade
payables), all Total Debt evidenced in writing (including capitalized lease
obligations) issued or assumed by such Person as full or partial payment
for property or services, whether or not any such notes, drafts,
obligations or Total Debt represent Total Debt for money borrowed, provided
that, Funded Debt shall not include any Total Debt among (a) the Lessee and
(b) the Lessee's Subsidiaries.
"LIBOR Rate" shall mean the sum of (a) 1.40% plus (b) the interest
rate per annum (rounded upwards, if necessary to the nearest one-sixteenth
of one percent) which is the quotient of (A) the rate per annum at which
dollar deposits in immediately available funds are offered to NationsBank
two Business Days before the first day of such applicable Payment Period by
prime banks in the interbank Eurodollar market as at or about 11:00 A.M.,
Dallas, Texas time, for delivery on the first day of such applicable Rent
Payment Period, for the number of days comprised therein and in an amount
equal to the aggregate amount bearing such interest rate to be outstanding
for such applicable Rent Payment Period, divided by (B) the remainder of
1.00 MINUS the Eurodollar Reserve Percentage applicable to such amounts.
3
<PAGE>
"Total Capitalization" means, on any date of determination for the
Lessee and its Subsidiaries, on a consolidated basis, the sum of (a) Net
Worth on such date of determination plus (b) the aggregate outstanding
amount of Funded Debt for the Lessee and its Subsidiaries on such date of
determination.
3. The Lessee represents and warrants that (a) this Amendment No. 2
constitutes its legal, valid, and binding obligation, enforceable in accordance
with the terms hereof (subject as to enforcement of remedies to any applicable
bankruptcy, reorganization, moratorium, or other laws or principles of equity
affecting the enforcement of creditors' rights generally), (b) there exists no
Lease Event of Default after giving effect to this Amendment No. 2, (c) its
representations and warranties set forth in the Original Lease Agreement and the
other Operative Documents are true and correct on the date hereof after giving
effect to this Amendment No. 2, (d) it has complied with all agreements and
conditions to be complied with by it under the Original Lease Agreement and the
other Operative Documents by the date hereof after giving effect to this
Amendment No. 2, (e) the Original Lease Agreement, as amended hereby, and the
other Operative Documents remain in full force and effect, and (f) no notice to,
or consent of, any Person is required under the terms of any agreement of the
Lessee in connection with the execution of this Amendment No. 2.
4. The Lessee shall execute and deliver such further agreements,
documents, instruments, and certificates in form and substance satisfactory to
the Lessor, the Agent to the Lenders and the Co-Agent to the Lenders as any such
Person or any Lender may deem reasonably necessary or appropriate in connection
with this Amendment No. 2.
5. Except as hereby modified, the terms and conditions of the Original
Lease Agreement remain in full force and effect.
6. This Amendment No. 2 has been delivered in, and shall in all respects
be governed by, and construed in accordance with, the laws of the State of
Texas applicable to agreements made and to be performed entirely within such
State, including all matters of construction, validity and performance;
PROVIDED, notwithstanding the foregoing, to the extent relating to the creation
and perfection of liens on real estate in the State of Florida or any other
state, this Amendment No. 2 shall be governed by, and construed in accordance
with, the laws of the State of Florida or such other state.
7. This Amendment No. 2 may be executed in any number of counterparts,
each of which shall be deemed an original and all of which taken together shall
constitute but one and the same instrument.
4
<PAGE>
8. All capitalized terms used but not otherwise defined herein shall have
the meanings set forth therefor in the Original Lease Agreement and/or APPENDIX
A thereto.
(Signature page follows)
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-1
By /s/ Nancy M. Doll
-------------------------------------------
Title Vice President
----------------------------------------
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-2
By /s/ Nancy M. Doll
-------------------------------------------
Title Vice President
----------------------------------------
MICHAELS STORES, INC.
By
-------------------------------------------
Title
----------------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-1
By
-------------------------------------------
Title
----------------------------------------
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-2
By
-------------------------------------------
Title
----------------------------------------
MICHAELS STORES, INC.
By /s/ K.L. Magnuson
-------------------------------------------
Title Vice President
----------------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-1
By
-------------------------------------------
Title
----------------------------------------
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-2
By
-------------------------------------------
Title
----------------------------------------
MICHAELS STORES, INC.
By
-------------------------------------------
Title
----------------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By /s/ Delaney Burgdoerfer
---------------------------------
Title Vice President
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-1
By
-------------------------------------------
Title
----------------------------------------
By First Security Bank, National Association,
as Owner Trustee for Michaels Stores Trust
1995-2
By
-------------------------------------------
Title
----------------------------------------
MICHAELS STORES, INC.
By
-------------------------------------------
Title
----------------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and as a Lender
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and as a Lender
By /s/ Robert Ivosevich
---------------------------------
Title ROBERT IVOSEVICH
------------------------------
SENIOR VICE PRESIDENT
<PAGE>
AMENDMENT NO. 3 TO AMENDED, MODIFIED AND RESTATED
MASTER LEASE AGREEMENT
THIS AMENDMENT NO. 3 TO AMENDED, MODIFIED AND RESTATED MASTER LEASE
AGREEMENT is dated as of August 15, 1996 (the "AMENDMENT NO. 3"), is between
JACKSONVILLE FUNDING ENTERPRISES, LLC, a Delaware limited liability company
and successor in interest to Jacksonville Funding Corporation (the "Lessor");
and
MICHAELS STORES, INC., a Delaware corporation (the "Lessee"); and
amends that certain Amended, Modified and Restated Master Lease Agreement
dated as of December 18, 1995 (as amended by Amendment No. 1 to Amended,
Modified and Restated Master Lease Agreement dated as of April 22, 1996 and
Amendment No. 2 to Amended, Modified and Restated Master Lease Agreement dated
as of July 11, 1996, the "ORIGINAL LEASE AGREEMENT") between Jacksonville
Funding Corporation (a corporation which merged into the Lessor with the Lessor
being the surviving entity of such merger) and the Lessee.
NOW, THEREFORE, the parties hereto agree as follows:
1. The following definition set forth in APPENDIX A to the Original Lease
Agreement is hereby amended and modified to read as follows:
"Base Rate" means a fluctuating rate per annum as shall be in effect
from time to time equal to the lesser of (a) the Highest Lawful Rate and
(b) the sum of (A) the Federal Funds Rate, plus (B) 1.74%. The Base Rate
shall be adjusted automatically as of the opening of business on the
effective date of each change in the Highest Lawful Rate or Federal Funds
Rate, as applicable, to account for such change.
2. The Lessee represents and warrants that (a) this Amendment No. 3
constitutes its legal, valid, and binding obligation, enforceable in accordance
with the terms hereof (subject as to enforcement of remedies to any applicable
bankruptcy, reorganization, moratorium, or other laws or principles of equity
affecting the enforcement of creditors' rights generally), (b) there exists no
Lease Event of Default after giving effect to this Amendment No. 3, (c) the
Lessee's representations and warranties set forth in the Original Lease
Agreement and the other Operative Documents are true and correct on the date
hereof after giving effect to this Amendment No. 3, (d) Lessee has complied
with all agreements and conditions to be complied with by it under the Original
Lease Agreement and the other Operative
<PAGE>
Documents by the date hereof after giving effect to this Amendment No. 3, (e)
the Original Lease Agreement, as amended hereby, and the other Operative
Documents remain in full force and effect, and (f) no notice to, or consent of,
any Person is required under the terms of any agreement of the Lessee in
connection with the execution of this Amendment No. 3.
3. The Lessee shall execute and deliver such further agreements,
documents, instruments, and certificates in form and substance satisfactory to
the Lessor, the Agent to the Lenders and the Co-Agent to the Lenders as any such
Person or any Lender may deem reasonably necessary or appropriate in connection
with this Amendment No. 3.
4. Except as hereby modified, the terms and conditions of the Original
Lease Agreement remain in full force and effect.
5. This Amendment No. 3 has been delivered in, and shall in all respects
be governed by, and construed in accordance with, the laws of the State of Texas
applicable to agreements made and to be performed entirely within such State,
including all matters of construction, validity and performance; PROVIDED,
notwithstanding the foregoing, to the extent relating to the creation and
perfection of liens on real estate in the State of Florida or any other state,
this Amendment No. 3 shall be governed by, and construed in accordance with,
the laws of the State of Florida or such other state.
6. This Amendment No. 3 may be executed in any number of counterparts,
each of which shall be deemed an original and all of which taken together shall
constitute but one and the same instrument.
7. All capitalized terms used but not otherwise defined herein shall have
the meanings set forth therefor in the Original Lease Agreement and/or APPENDIX
A thereto.
(Signature page follows)
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-1
By /s/ Val T. Orton
--------------------------------------
Title VICE PRESIDENT
-----------------------------------
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-2
By /s/ Val T. Orton
--------------------------------------
Title VICE PRESIDENT
-----------------------------------
MICHAELS STORES, INC.
By
--------------------------------------
Title
-----------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
GUARANTY FEDERAL BANK, F.S.B., as
a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-1
By
--------------------------------------
Title
-----------------------------------
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-2
By
--------------------------------------
Title
-----------------------------------
MICHAELS STORES, INC.
By /s/ K.L. Magnuson
--------------------------------------
Title VICE PRESIDENT
-----------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
GUARANTY FEDERAL BANK, F.S.B., as
a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-1
By
--------------------------------------
Title
-----------------------------------
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-2
By
--------------------------------------
Title
-----------------------------------
MICHAELS STORES, INC.
By
--------------------------------------
Title
-----------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By /s/ Delaney Burgdoerfer
---------------------------------
Title Vice President
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
GUARANTY FEDERAL BANK, F.S.B., as
a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-1
By
--------------------------------------
Title
-----------------------------------
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-2
By
--------------------------------------
Title
-----------------------------------
MICHAELS STORES, INC.
By
--------------------------------------
Title
-----------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By /s/ Jacques-Yves Mulliez
---------------------------------
Title Jacques-Yves Mulliez
Senior Vice President
------------------------------
GUARANTY FEDERAL BANK, F.S.B., as
a Lender
By
---------------------------------
Title
------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3
as of the above-written date.
JACKSONVILLE FUNDING ENTERPRISES, LLC, as a
successor in interest to Jacksonville Funding
Corporation, by its members
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-1
By
--------------------------------------
Title
-----------------------------------
By First Security Bank, National
Association, as Owner Trustee for
Michaels Stores Trust 1995-2
By
--------------------------------------
Title
-----------------------------------
MICHAELS STORES, INC.
By
--------------------------------------
Title
-----------------------------------
ACKNOWLEDGED AND AGREED:
NATIONSBANK OF TEXAS, N.A., as Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
CREDIT LYONNAIS NEW YORK BRANCH, as Co-Agent
to the Lenders and the Holders, as a Lender
and as a Holder
By
---------------------------------
Title
------------------------------
GUARANTY FEDERAL BANK, F.S.B., as
a Lender
By /s/ Robert S. Hays
---------------------------------
Title Vice President
------------------------------
<PAGE>
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement") is made and entered into as of
the 1st day of October, 1996, by and between Michaels Stores, Inc., a Delaware
corporation (the "Company"), and Michael C. French, an individual (the
"Consultant").
RECITALS:
A. The company has obtained and is desirous of continuing to obtain
certain legal, financial and other strategic consulting services from the
Consultant, and the Consultant has provided and wishes to provide such services
to the Company, all upon the terms and conditions set forth in this Agreement.
B. Therefore, in consideration of the mutual covenants and agreements
herein set forth, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Consultant
hereby agree as follows:
AGREEMENT:
Section 1. CONSULTING SERVICES. The Consultant shall provide such
legal, financial and other strategic consulting services for the Company as the
Chairman of the Board of Directors or the Chief Executive Officer of the Company
may from time to time reasonably request. The Consultant acknowledges and agrees
that he also may be asked to provide such services to certain subsidiaries and
affiliates of the Company and that he shall do so on the same basis as he is to
provide services to the Company. All references to the Company in this
Agreement shall also include any such subsidiary or affiliate, unless otherwise
clearly required by the context. In providing services to the Company under this
Agreement, the Consultant shall be at all times under and subject to the
direction and supervision of the Chairman of the Board of Directors and the
Chief Executive Officer of the Company.
Section 2. CONSULTING FEES: EXPENSES. As consideration for providing
services to the Company under this Agreement, the Consultant shall be entitled
to a fee, payable by the Company on a monthly basis (or on any other periodic
basis hereafter agreed to by the Company and the Consultant), of $15,000 per
month. In addition to the fees provided for above, the Consultant shall be
entitled to reimbursement from the Company of any direct, out-of-packet expenses
incurred by the Consultant during the course of providing services to the
Company under this Agreement.
Section 3. TERMINATION. This agreement shall continue from and after
the date hereof until terminated in accordance with the following subsections:
(a) Either party may terminate this Agreement for any reason by giving the
other party 30 days prior written notice of such termination. If the Consultant
terminates this Agreement pursuant to this Section 3(a) or if the Company
terminates this Agreement because of gross
<PAGE>
misconduct on the part of the Consultant (which finding of gross misconduct must
be made by a majority of the Company's directors and memorialized in a
resolution duly adopted thereby), the Company shall be obligated to pay the
Consultant the monthly consulting fee specified above for the month in which
such termination occurs, but thereafter shall have no obligation to pay any
consulting fees hereunder. If the Company terminates this Agreement for any
other reason (other than the death or Total Disability (as defined below) of the
Consultant, which circumstances are governed by subsections (b) and (c) below),
the Consultant shall be entitled to receive from the Company the monthly
consulting fee specified above for a period of 36 months from and after the
month in which such termination occurs, provided that the Consultant executes
and delivers to the Company a release and confidentiality agreement reasonably
satisfactory to the Company.
(b) This Agreement shall terminate automatically upon the death of the
Consultant. In such event, the Company shall be obligated to pay the estate of
the Consultant the monthly consulting fee specified above for a period of 36
months from and after the month in which such death occurs.
(c) This Agreement may be terminated by the Company upon the Total
Disability of the Executive. As used herein, the term 'Total Disability" shall
mean the Executive's inability to render any services under this Agreement for a
period of six consecutive calendar months. In order to terminate this Agreement
as a result of the Consultant's Total Disability, the Company shall notify the
Executive (or an appropriate representative thereof) of such termination in
writing. If the Company terminates this Agreement pursuant to this Section 3(c),
the Consultant shall be entitled to receive from the Company the monthly
consulting fee specified above for a period of 36 months from and after the
month in which such termination occurs, provided that the Consultant (or an
appropriate representative thereof) executes and delivers to the Company a
release and confidentiality agreement reasonably satisfactory to the Company.
Section 4. CONFIDENTIALITY: RELATED MATTERS. The Consultant shall not
use, for his personal gain or benefit or the personal gain or benefit of any
member of his family, any confidential or proprietary information of the Company
which is obtained by or provided to the Consultant consistent with the purposes
and intent of this Agreement. During the term of this Agreement and for so long
as he receives consulting fees hereunder, the Consultant shall not act as a
legal or financial consultant or advisor to any other person or entity in the
arts and crafts industry without the prior written consent of the Company's
Chief Executive Officer or the Chairman of its Board of Directors. During the
term of this Agreement and for so long as he receives consulting fees hereunder,
the Consultant shall not, on his own behalf or on behalf of others, solicit,
divert or hire away, or attempt to solicit, divert or hire away, any person
employed by the Company.
Section 5. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the Company (and its subsidiaries) and the Consultant with
respect to the subject matter hereof and supersedes all prior agreements and
understandings, both written and oral, between the Company (and its
subsidiaries) and the Consultant with respect to such subject matter.
<PAGE>
Section 6. BINDING EFFECT: ASSIGNMENT. This Agreement shall be binding
upon the inure to the benefit of only the Company (and its subsidiaries) and the
Consultant and their respective successors and permitted assigns. Neither this
Agreement nor any of the rights, interest or obligations hereunder shall be
assigned by either of the parties hereto without the prior written consent of
the other party. Nothing in this Agreement, express or implied, is intended to
or shall confer upon any person other than the Company (and its subsidiaries)
and the Consultant, and their respective successors and permitted assigns, any
rights, benefits or remedies of any nature whatsoever.
Section 7. GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas.
Section 8. DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience of reference only, do not constitute a part of this
Agreement and shall not affect in any manner the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the Company and the Consultant have executed and
delivered this Agreement as of the date first above written.
MICHAELS STORES, INC.
By: /s/ R. Don Morris
---------------------------------------------
R. Don Morris, Executive Vice President and
Chief Financial Officer
/s/ Michael C. French
---------------------------------------------
Michael C. French
<PAGE>
AGREEMENT
THIS AGREEMENT is made as of the 26th day of April, 1996, by and between
Michaels Stores, Inc., a Delaware corporation (the "Company"), and Jack E. Bush
("Bush").
RECITALS
A. Bush and the Company previously entered into an Agreement dated as of
January 30, 1996 (the "Prior Agreement"), which, among other things, provided
for certain payments to Bush.
B. Bush and the Company wish to amend the Prior Agreement as set forth
below.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement, the parties agree as follows:
1. Paragraph 2(c) of the Prior Agreement is amended in its entirety to
read as follows:
(c) SUPPLEMENTAL RETIREMENT BENEFIT. The Company will pay to Bush as
a supplemental retirement benefit the sum of $661,350 on the earlier of (i)
February 1, 1999, or (ii) ten days after the occurrence of a Change in
Control as defined in paragraph 2(b) above. Notwithstanding the foregoing,
prior to February 1, 1999, and prior to a Change in Control, Bush may, upon
ten days prior written notice to the Company, withdraw all or any portion
of such supplemental retirement benefit at any time, and the Company will
deduct from the supplemental retirement benefit an amount for such early
withdrawal. The amount of the deduction will be a percentage of the amount
withdrawn, which will be the same percentage, and will be determined in the
same manner, as the percentage deduction described in paragraph 2(b) above
for early withdrawals from Bush's deferred compensation account. Bush
acknowledges and agrees that the Company's agreement to pay Bush the
foregoing supplemental retirement benefit is in full satisfaction and
release of the Company's obligation to provide Bush with an annuity, as set
forth in the letter dated June 25, 1991, from the Chairman of the Company
to Bush.
2. In all other respects, the terms and conditions of the Prior Agreement
remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
MICHAELS STORES, INC.
By: /s/ R. Don Morris
-------------------------------------
Title: Executive Vice-President and
----------------------------------
Chief Financial Officer
/s/ Jack E. Bush
----------------------------------------
Jack E. Bush
2
<PAGE>
MICHAELS-Registered Service Mark-
THE ARTS AND CRAFTS STORE -SM-
1998
R. MICHAEL ROULEAU
CHIEF EXECUTIVE OFFICER
BONUS PLAN
CONFIDENTIAL
1
<PAGE>
1998 CHIEF EXECUTIVE OFFICER
BONUS PLAN OVERVIEW
A. PURPOSE
The 1998 Corporate Management Bonus Plan has been developed to provide
financial incentives to those members of management that can make an
important contribution to Michaels success.
1. BONUS PAYOUT
Bonus payout for the Chief Executive Officer can be up to 60% of your
base salary as of February 1, 1998.
B. BONUS PLAN ELIGIBILITY
1. The performance period parallels Fiscal Year 1998. It begins on
February 1, 1998 and concludes on January 30, 1999.
2. If the Chief Executive Officer was not employed in a bonus eligible
position during the entire fiscal year, he/she will be eligible to
receive a prorated bonus based upon the number of full months that
he/she was in position. Individuals who assume the position on or
before the 15th of the month, will receive credit for the entire
month. Individuals who assume the position after the 15th will not
receive credit for that month.
3. Your target bonus payout will be a percentage of your actual base
salary as of February 1, 1998.
4. In order to receive any payout, you must be employed by the Company,
in a bonus eligible position, on January 30, 1999.
5. If an associate is promoted or changes jobs during the bonus period,
bonus earnings will be calculated based upon the number of full months
(see #2, above) in each position, the respective base salaries and the
applicable target bonus amount(s).
6. Bonus payments are typically made in April of the following fiscal
year.
7. The Company anticipates that this bonus plan will be part of an
ongoing bonus program, but the Company does not guarantee that the
program will in fact continue for future periods or that the terms of
the program will not change.
2
<PAGE>
MICHAELS STORES INC.
1998 CORPORATE BONUS PLAN
CHIEF EXECUTIVE OFFICER
BONUS TARGET = 50% OF BASE SALARY AS OF 2/1/98
BONUS POTENTIAL = 60% OF BASE SALARY AS OF 2/1/98
<TABLE>
<S> <C> <C>
E.P.S. Company Profit
32,212,000 Shares Before Taxes % of Base Salary
($ millions) Earned
$1.49 at $79.9 Above $79.9 60%
(110+)
$1.35 at $72.6 PLAN $72.6 -- 79.8 50%
(100 to 110.0%)
$1.28 at $69.0 $69.0 -- 72.5 40%
(95 to 99.9%)
$1.23 at $66.1 $66.1 -- 68.9 20%
(91 to 94.9%)
$1.18 at $63.1 $63.1 -- 66.0 10%
(87 to 90.9%)
Less than $63.1 0%
(below 87%)
</TABLE>
3
<PAGE>
MICHAELS-Registered Service Mark-
THE ARTS AND CRAFTS STORE-SM-
1998
EXECUTIVE VICE PRESIDENT,
BONUS PLAN
CONFIDENTIAL
1
<PAGE>
1998 EXECUTIVE VICE PRESIDENT
BONUS PLAN OVERVIEW
A. PURPOSE
The 1998 Corporate Management Bonus Plan has been developed to provide
financial incentives to those members of management that can make an
important contribution to Michaels success.
1. BONUS PAYOUT
Bonus payout for the Executive Vice President can be up to 50% of your
base salary as of February 1, 1998.
B. BONUS PLAN ELIGIBILITY
1. The performance period parallels Fiscal Year 1998. It begins on
February 1, 1998 and concludes on January 30, 1999.
2. If the Executive Vice President was not employed in a bonus eligible
position during the entire fiscal year, he/she will be eligible to
receive a prorated bonus based upon the number of full months that
he/she was in position. Individuals who assume the position on or
before the 15th of the month, will receive credit for the entire
month. Individuals who assume the position after the 15th will not
receive credit for that month.
3. Your target bonus payout will be a percentage of your actual base
salary as of February 1, 1998.
4. In order to receive any payout, you must be employed by the Company,
in a bonus eligible position, on January 30, 1999.
5. If an associate is promoted or changes jobs during the bonus period,
bonus earnings will be calculated based upon the number of full months
(see #2, above) in each position, the respective base salaries and the
applicable target bonus amount(s).
6. Bonus payments are typically made in April of the following fiscal
year.
7. The Company anticipates that this bonus plan will be part of an
ongoing bonus program, but the Company does not guarantee that the
program will in fact continue for future periods or that the terms of
the program will not change.
2
<PAGE>
MICHAELS STORES INC.
1998 CORPORATE BONUS PLAN
EXECUTIVE VICE PRESIDENT
BONUS TARGET = 40% OF BASE SALARY AS OF 2/1/98
BONUS POTENTIAL = 50% OF BASE SALARY AS OF 2/1/98
<TABLE>
<S> <C> <C>
E.P.S. COMPANY PROFIT
32,212,000 SHARES BEFORE TAXES % OF BASE SALARY
($ MILLIONS) EARNED
$1.49 AT $79.9 ABOVE $79.9 50%
(110+)
$1.35 AT $72.6 PLAN $72.6 -- 79.8 40%
(100 TO 110.0%)
$1.28 AT $69.0 $69.0 -- 72.5 30%
(95 TO 99.9%)
$1.23 AT $66.1 $66.1 -- 68.9 15%
(91 TO 94.9%)
$1.18 AT $63.1 $63.1 -- 66.0 5%
(87 TO 90.9%)
LESS THAN $63.1 0%
(BELOW 87%)
</TABLE>
3
<PAGE>
Exhibit 21.1
MICHAELS STORES, INC.
SUBSIDIARIES OF MICHAELS STORES, INC.
Michaels of Canada, ULC, a Nova Scotia unlimited liability company.
Michaels Stores of Puerto Rico, Inc., a Delaware corporation.
Aaron Brothers, Inc., a Delaware corporation.
5931, Inc., a Delaware corporation.
5931 Business Trust, a Delaware business trust.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
listed below and in the related Prospectuses of our report dated March 10,
1998, with respect to the consolidated financial statements of Michaels
Stores, Inc. included in the Annual Report (Form 10-K) for the year ended
January 31, 1998.
<TABLE>
Form Registration No. Pertaining to Michaels Stores, Inc.
- ---- ---------------- -----------------------------------
<S> <C> <C>
S-3 333-29419 1997 Stock Option Plan
S-3 333-29421 Amended and Restated 1994 Non-Statutory Stock
Option Plan and Stock Option Agreement dated June 6,
1997, between Michaels Stores, Inc. and R. Michael
Rouleau
S-3 333-29423 Amended and Restated 1992 Non-Statutory Stock Option Plan
S-3 333-34459 Dividend Reinvestment and Stock Purchase Plan
S-8 33-61055 Employees 401(K) Plan
S-8 333-21407 Amended and Restated 1992 Non-Statutory Stock Option Plan
S-8 333-21635 Amended and Restated 1994 Non Statutory Stock Option Plan
S-8 333-29417 Stock Option Agreement dated June 6, 1997, between
Michaels Stores, Inc. and R. Michael Rouleau
S-8 333-29429 1997 Employee Stock Purchase Plan
</TABLE>
/s/ Ernst & Young LLP
Dallas, Texas
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 162,283
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 385,580
<CURRENT-ASSETS> 573,183
<PP&E> 331,755
<DEPRECIATION> 138,719
<TOTAL-ASSETS> 908,494
<CURRENT-LIABILITIES> 214,492
<BONDS> 221,940
0
0
<COMMON> 2,903
<OTHER-SE> 439,008
<TOTAL-LIABILITY-AND-EQUITY> 908,494
<SALES> 1,456,524
<TOTAL-REVENUES> 1,456,524
<CGS> 988,990
<TOTAL-COSTS> 1,387,582
<OTHER-EXPENSES> (3,013)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,448
<INCOME-PRETAX> 48,507
<INCOME-TAX> 18,430
<INCOME-CONTINUING> 30,077
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,077
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.05
</TABLE>
