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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2015
Commission file number 001-36501
THE MICHAELS COMPANIES, INC.
A Delaware Corporation
IRS Employer Identification No. 37-1737959
8000 Bent Branch Drive
Irving, Texas 75063
(972) 409-1300
The Michaels Companies, Inc.’s common stock, par value $0.06775 per share, is registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934 (the “Act) and is listed on the NASDAQ Global Select Market. The Michaels Companies, Inc.
does not have any securities registered under Section 12(g) of the Act.
The Michaels Companies, Inc. is a not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
The Michaels Companies, Inc. (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.
The Michaels Companies, Inc. has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will be contained, to the
best of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The Michaels Companies, Inc. is a non-accelerated filer.
The Michaels Companies, Inc. is not a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of The Michaels Companies, Inc.’s common stock held by non-affiliates as of August 2, 2014
was approximately $451,255,000 based upon the closing sales price of $15.34 quoted on The NASDAQ Global Select Market as
of August 1, 2014. For this purpose, directors and officers have been assumed to be affiliates.
As of March 11, 2015, 205,944,893 shares of The Michaels Companies, Inc.’s common stock were outstanding.
The registrant will incorporate by reference information required in response to Part III, items 10-14, from its definitive
proxy statement for its annual meeting of shareholders, to be held on June 3, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
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THE MICHAELS COMPANIES, INC.
TABLE OF CONTENTS
Part I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV.
Item 15. Exhibits and Financial Statement Schedules
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ITEM 1. BUSINESS.
PART I
The following discussion, as well as other portions of this Annual Report on Form 10-K, contains
forward-looking statements that reflect our plans, estimates and beliefs. Any statements contained herein
(including, but not limited to, statements to the effect that Michaels or its management “anticipates”,
“plans”, “estimates”, “expects”, “believes”, “intends”, and other similar expressions) that are not
statements of historical fact should be considered forward-looking statements and should be read in
conjunction with our consolidated financial statements and related notes contained elsewhere in this report.
Specific examples of forward-looking statements include, but are not limited to, statements regarding our
forecasts of financial performance, store openings, capital expenditures, and working capital requirements.
Our actual results could materially differ from those discussed in these forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited to, those discussed below and
elsewhere in this Annual Report on Form 10-K and particularly in “Item 1A. Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Unless the
context otherwise indicates, references in this Annual Report on Form 10-K to “we”, “our”, “us”, “our
Company”, “the Company”, “Michaels”, mean The Michaels Companies, Inc., together with its
subsidiaries.
General
With $4.7 billion in sales in fiscal 2014, the Company, together with its subsidiaries, is the largest
arts and crafts specialty retailer in North America (based on store count) providing materials, project ideas
and education for creative activities. Our mission is to inspire and enable customer creativity, create a fun
and rewarding place to work, foster meaningful connections with our communities and lead the industry in
growth and innovation. With crafting classes, store events, project sheets, store displays, mobile applications
and online videos, we offer a shopping experience that can inspire creativity and confidence in our
customers’ artistic abilities.
As of January 31, 2015, we operate 1,168 Michaels retail stores in 49 states, as well as in Canada,
with approximately 18,000 average square feet of selling space per store. We also operate 120 Aaron
Brothers stores in nine states, with approximately 5,400 average square feet of selling space per store,
offering photo frames, a full line of ready-made frames, custom framing services and a wide selection of art
supplies.
In July 2013, we were incorporated in Delaware in connection with Michaels Stores, Inc.’s (“MSI”)
reorganization into a holding company structure (the “Reorganization”). The Company, Michaels FinCo
Holdings, LLC (“FinCo Holdings”), Michaels FinCo, Inc. (“FinCo Inc.”), Michaels Funding, Inc.
(“Holdings”) and Michaels Stores MergerCo, Inc. (“MergerCo”) were formed in connection with the
Reorganization and MergerCo was merged with and into MSI with MSI being the surviving corporation. As
a result of the Reorganization, FinCo Holdings is wholly owned by the Company, FinCo, Inc. and Holdings
are wholly owned by FinCo Holdings, and MSI is wholly owned by Holdings. MSI was incorporated in
Delaware in 1983 and is headquartered in Irving, Texas.
On July 2, 2014, we completed an initial public offering (“IPO”) in which we issued and sold 27.8
million shares of common stock at a public offering price of $17.00 per share. After deducting for
underwriting fees, the net proceeds of $446 million were used to redeem $439 million of our then
outstanding 7.50%/8.25% PIK Toggle Notes which were due in 2018 (‘‘PIK Notes’’) and to pay other
offering related expenses. Upon completion of the IPO, our common stock became listed on The NASDAQ
Global Select Market under the symbol “MIK”.
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Merchandising
Michaels. Each Michaels store offers approximately 35,000 basic stock-keeping units (“SKUs”) in
a number of product categories. The following table shows a breakdown of sales for Michaels stores by
department as a percentage of total net sales:
General crafts
Home décor and seasonal
Framing
Scrapbooking
2014
Fiscal Year
2013
2012
52 %
21
17
10
100 %
53 %
20
17
10
100 %
51 %
21
17
11
100 %
We have a product development and sourcing design team focused on quality, innovation and cost
mitigation. Our infrastructure and internal product development and global sourcing teams position us to
continue delivering a differentiated level of innovation, quality and value to our customers. Our global
sourcing network allows us to control new product introductions, maintain quality standards, monitor
delivery times, and manage product costs and inventory levels in order to enhance profitability.
We continue to search for ways to leverage our position as a market leader by establishing strategic
partnerships and exclusive product relationships to provide our customers with exciting merchandise. We
have partnerships with popular celebrities and brands such as Wilton, Cake Boss, Crayola, Martha Stewart
Crafts, Isaac Mizrahi and Rainbow Loom. We will continue to explore opportunities to form future
partnerships and exclusive product associations. In fiscal 2014, we launched our e-commerce platform to
complement our existing web and mobile platforms.
Aaron Brothers. Each Aaron Brothers store offers approximately 7,000 SKUs, including photo
frames, a full line of ready-made frames, art prints, framed art, art supplies and custom framing services.
The merchandising strategy for our Aaron Brothers stores is to provide a unique, upscale framing assortment
in an appealing environment with attentive customer service.
Seasonality
Our business is highly seasonal, with higher sales in the third and fourth fiscal quarters. Our fourth
quarter, which includes the Christmas selling season, has on average accounted for approximately 34% of
our net sales and approximately 46% of our operating income.
Purchasing and Inventory Management
We purchase merchandise from approximately 630 vendors through our wholly-owned subsidiary,
Michaels Stores Procurement Company. We believe our buying power and ability to make centralized
purchases enable us to acquire products on favorable terms. Centralized merchandising management teams
negotiate with vendors in an attempt to obtain the lowest net merchandise costs and to improve product mix
and inventory levels. In fiscal 2014, one sourcing agent supplied approximately 14% of our
purchases. There were no other vendors or sourcing agents accounting for more than 10% of total
purchases.
In addition to purchasing from outside vendors, our Michaels and Aaron Brothers stores purchase
custom frames, framing supplies and mats from our framing operation, Artistree, which consists of a
manufacturing facility and four regional processing centers to support our retail stores.
Substantially all of the products sold in Michaels stores are manufactured in Asia and North
America. Goods manufactured in Asia generally require long lead times and are ordered four to six months
in advance of delivery. Those products are either imported directly by us or acquired from distributors based
in the U.S.
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Our automated replenishment system uses perpetual inventory records to analyze on-hand SKU
quantities by store, as well as other pertinent information such as sales forecasts, seasonal selling patterns,
promotional events and vendor lead times, to generate recommended merchandise reorder information.
These recommended orders are reviewed daily and purchase orders are delivered electronically to our
vendors and our distribution centers. In addition to improving our store in-stock position, these systems
enable us to better forecast merchandise ordering quantities for our vendors and give us the ability to
identify, order and replenish the stores’ merchandise using less store associate labor. These systems also
allow us to react more quickly to selling trends and allow our store associates to devote more time to
customer service, thereby improving inventory productivity and sales opportunities.
Artistree
We currently own and operate a vertically integrated framing operation, leveraging Artistree, our
wholly-owned manufacturing subsidiary, across our Michaels and Aaron Brothers store networks. Artistree
supplies precut mats and high quality custom framing merchandise. We believe Artistree provides a
competitive advantage to our Michaels and Aaron Brothers stores and gives us quality control over the entire
process.
Our moulding manufacturing plant, located in Kernersville, North Carolina, converts lumber into
finished frame moulding and supplies the finished frame moulding to our regional processing centers for
custom framing orders for our stores. We manufacture approximately 35% of the moulding we process,
import approximately 40% from quality manufacturers in Indonesia, Malaysia, China and Italy, and
purchase the balance from distributors. We directly source metal moulding for processing in our regional
centers. The custom framing orders are processed (frames cut and joined, along with cutting mats and
foamboard backing) and shipped to our stores where the custom frame order is completed for customer pick-
up.
During fiscal 2014, we operated four regional processing centers in City of Industry, California;
Coppell, Texas; Kernersville, North Carolina; and Mississauga, Ontario. Our precut mats and custom frame
supplies are packaged and distributed out of our Coppell regional processing center. Combined, these
facilities occupy approximately 538,000 square feet and, in fiscal 2014, processed approximately 32 million
linear feet of frame moulding and approximately 5 million individually custom cut mats for our Michaels
and Aaron Brothers stores.
Distribution
We currently operate a distribution network through our wholly-owned subsidiary, Michaels Stores
Procurement Company, to supply our stores with merchandise. Approximately 90% of Michaels stores’
merchandise receipts are shipped through the distribution network with the remainder shipped directly from
vendors to stores. Approximately 55% of Aaron Brothers stores’ merchandise is shipped through the
distribution network with the remainder shipped directly from vendors. Our seven distribution centers are
located in California, Florida, Illinois, Pennsylvania, Texas and Washington. We utilize a third-party
warehouse to support the distribution of our seasonal merchandise, as well as a third-party fulfillment center
for our e-commerce merchandise.
Michaels stores generally receive deliveries from the distribution centers weekly through a
transportation network using a dedicated fleet of trucks and contract carriers. Aaron Brothers stores
generally receive merchandise on a biweekly basis from a dedicated distribution center located in the Los
Angeles, California area.
Our Industry
According to the Craft & Hobby Association (“CHA”), approximately 55% of U.S. households
participated in at least one crafting project during 2012, which represented over 62 million households.
Additionally, these households purchased crafting supplies, on average, 1.9 times per month and reported
participating in approximately three crafting categories during the year. We believe the broad, multi-
generational appeal, high personal attachment and the low-cost, project-based nature of crafting creates a
loyal, resilient following. This is supported by CHA findings that nearly half of crafters report being a
crafter for 10 or more years.
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Store Expansion and Relocation
The following table shows our total store growth for the last five years:
Michaels stores:
Open at beginning of year
New stores
Relocated stores opened
Closed stores
Relocated stores closed
Open at end of year
Aaron Brothers stores:
Open at beginning of year
New stores
Relocated stores opened
Closed stores
Relocated stores closed
Open at end of year
Total store count at end of year
2014
2013
Fiscal Year
2012
2011
2010
1,136
32
13
—
(13)
1,168
121
5
—
(6)
—
120
1,288
1,099
40
14
(3)
(14)
1,136
125
—
2
(5)
(1)
121
1,257
1,064
38
13
(3)
(13)
1,099
134
—
—
(8)
(1)
125
1,224
1,045
25
15
(6)
(15)
1,064
137
—
—
(3)
—
134
1,198
1,023
23
10
(1)
(10)
1,045
152
—
—
(15)
—
137
1,182
We believe, based on an internal real estate and market penetration study of Michaels stores, that
the combined U.S. and Canadian markets can support approximately 1,500 Michaels stores. We plan to open
approximately 47 Michaels stores in fiscal 2015, including 17 relocations. We continue to pursue a store
relocation program to improve the real estate location quality and performance of our store base. During
fiscal 2015, we plan to close up to 5 Michaels stores and up to 5 Aaron Brothers stores. Many of our store
closings are stores that have reached the end of their lease term. We believe our ongoing store evaluation
process results in strong performance across our store base.
We have developed a standardized procedure to allow for the efficient opening of new stores and
their integration into our information and distribution systems. We develop the floor plan, merchandise
layout and organize the advertising and promotions in connection with the opening of each new store. In
addition, we maintain qualified store opening teams to provide new store associates with store training.
Our store operating model, which is based on historical store performance, assumes an average
store size of approximately 18,000 selling square feet. Our fiscal 2014 average initial net investment, which
varies by site and specific store characteristics, is approximately $1.2 million per store and consists of store
build-out costs, pre-opening expenses and average first year inventory.
Employees
As of January 31, 2015, we employed approximately 51,000 associates, approximately 39,000 of
whom were employed on a part-time basis. The number of part-time associates substantially increases
during the Christmas selling season. Of our full-time associates, approximately 3,300 are engaged in various
executive, operating, training, distribution and administrative functions in our support center, division
offices and distribution centers and the remainder are engaged in store operations. None of our associates are
subject to a collective bargaining agreement.
Competition
We are the largest arts and crafts specialty retailer in North America based on store count. The
market we compete in is highly fragmented, including stores across the nation operated primarily by small,
independent retailers along with a few regional and national chains. We believe customers choose where to
shop based upon store location, breadth of
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selection, price, quality of merchandise, availability of product and customer service. We compete with
many different types of retailers and classify our competition within the following categories:
·
·
·
·
Mass merchandisers. This category includes companies such as Wal-Mart Stores, Inc., Target
Corporation and other mass merchandisers. These retailers typically dedicate only a small portion
of their selling space to a limited selection of home décor, arts and crafts supplies and seasonal
merchandise, but they do seek to capitalize on the latest trends by stocking products that are
complementary
their current merchandise offerings. These mass
merchandisers generally have limited customer service staffs with minimal experience in crafting
projects.
trends and
those
to
Multi-store chains. This category consists of several multi-store chains, each operating more than
100 stores, including: Hobby Lobby Stores, Inc., which operates approximately 640 stores in 47
states; Jo-Ann Stores, Inc., which operates approximately 850 stores in 49 states; and A.C. Moore
Arts & Crafts, Inc., which operates approximately 140 stores primarily in the Eastern United
States. We believe all of these chains are significantly smaller than Michaels with respect to net
sales.
Small, local specialty retailers. This category includes local independent arts and crafts retailers
and custom framing shops. Typically, these are single-store operations managed by the owner.
These stores generally have limited resources for advertising, purchasing and distribution. Many
of these stores have established a loyal customer base within a given community and compete
based on relationships and customer service.
Internet. This category includes all internet-based retailers that sell arts and crafts merchandise,
completed projects and online custom framing. Our internet competition is inclusive of those
companies discussed in the categories above, as well as others that may only sell products online.
These retailers provide consumers with the ability to search and compare products and prices
without having to visit a physical store. These sellers generally offer a wide variety of products
but do not offer product expertise or project advice.
Foreign Sales
All of our international business is in Canada, which accounted for approximately 10% of total
sales in fiscal 2014, fiscal 2013 and fiscal 2012. During the last three years, less than 8% of our assets have
been located outside of the U.S. See Note 10 to the consolidated financial statements for net sales and total
assets by country.
Trademarks and Service Marks
We own or have rights to trademarks, service marks or trade names we use in connection with the
operation of our business, including “Aaron Brothers”, “Artistree”, “Michaels”, “Michaels the Arts and
Crafts Store”, “Recollections”, “Where Creativity Happens”, and the stylized Michaels logo. We have
registered our primary private brands including Artist’s Loft, ArtMinds, Celebrate It, Creatology, Craft
Smart, imagin8, Recollections, Loops & Threads, Studio Décor, Bead Landing, Make Market and Ashland
and various sub-brands associated with these primary marks. Solely for convenience, some of the
trademarks, service marks and trade names referred to in this Annual Report on Form 10-K are listed
without the copyright, trademark, and registered trademark symbols, but we will assert, to the fullest extent
under applicable law, our rights to our copyrights, trademarks, service marks, trade names and domain
names.
Available Information
We provide links to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, and other documents filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on our
Internet website, free of charge, at www.michaels.com under the heading “Investor Relations”. These reports
are available as soon as reasonably practicable after we electronically file them with the Securities and
Exchange Commission (“SEC”). The reports may also be accessed at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. These filings are also available through the
SEC’s EDGAR system at www.sec.gov.
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We use our website ( www.michaels.com) as a means of disclosing material non-public information
and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the
SEC. These disclosures are included on our website (www.michaels.com) in the “Investor Relations”
section. Accordingly, investors should monitor this portion of our website ( www.michaels.com), in addition
to following our press releases, SEC filings and public conference calls and webcasts.
We webcast our earnings calls and certain events we participate in or host with members of the
investment community on the investor relations section of our website. Additionally, we provide
notifications of news or announcements regarding press and earnings releases as part of the investor
relations section of our website. The contents of our website are not part of this Annual Report on Form 10-
K, or any other report we file with, or furnish to, the SEC.
ITEM 1A. RISK FACTORS.
Our financial performance is subject to various risks and uncertainties. The risks described below
are those we believe are the material risks we face. Any of the risk factors described below could
significantly and adversely affect our business, prospects, sales, revenues, gross profit, cash flows, financial
condition and results of operations.
We face risks related to the effect of economic uncertainty.
In the event of a prolonged economic downturn or slow recovery, our growth, prospects, results of
operations, cash flows and financial condition could be adversely impacted. Our stores offer arts and crafts
supplies and products for the crafter, and custom framing for the do-it-yourself home decorator, which some
customers may perceive as discretionary. Pressure on discretionary income brought on by economic
downturns and slow recoveries, including housing market declines, rising energy prices and weak labor
markets, may cause consumers to reduce the amount they spend on discretionary items. For example, as a
result of the recession during fiscal 2007 and fiscal 2008, despite adding a number of new stores, our total
net sales decreased from $3,862 million to $3,817 million. The inherent uncertainty related to predicting
economic conditions make it difficult for us to accurately forecast future demand trends, which could cause
us to purchase excess inventories, resulting in increases in our inventory carrying cost, or limit our ability to
satisfy customer demand and potentially lose market share.
We face risks related to our substantial indebtedness.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our
operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk
associated with our variable rate debt and prevent us from meeting our obligations under our notes and credit
facilities. As of January 31, 2015, we had total outstanding debt of $3,149 million, of which approximately
$2,453 million was subject to variable interest rates and $696 million was subject to fixed interest rates. As
of January 31, 2015, we had approximately $588 million of additional borrowing capacity (after giving
effect to $62 million of letters of credit then outstanding) under our Restated Revolving Credit Facility. Our
substantial indebtedness could have important consequences to us, including:
· making it more difficult for us to satisfy our obligations with respect to our debt, and any
failure to comply with the obligations under our debt instruments, including restrictive
covenants, could result in an event of default under the agreements governing our
indebtedness;
·
·
·
increasing our vulnerability to general economic and industry conditions;
requiring a substantial portion of our cash flow from operations to be dedicated to the payment
of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund
our operations, capital expenditures, selling and marketing efforts, product development,
future business opportunities and other purposes;
exposing us to the risk of increased interest rates as certain of our borrowings, including under
our Senior Secured Credit Facilities, which consist of the Restated Revolving Credit Facility
and the Restated Term Loan Credit Facility (each, as defined below), are at variable rates;
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·
·
·
restricting us from making strategic acquisitions or causing us to make non ‑strategic
divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures,
product development, debt service requirements, acquisitions, and general corporate or other
purposes; and
limiting our ability to plan for, or adjust to, changing market conditions and placing us at a
competitive disadvantage compared to our competitors who may be less highly leveraged.
The occurrence of any one of these events could have an adverse effect on our business, financial
condition, results of operations, and ability to satisfy our obligations under our indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future,
subject, in the case of MSI, Holdings, and FinCo Holdings and their subsidiaries, to the restrictions
contained in our Senior Secured Credit Facilities and the indentures governing our notes. In addition, our
Senior Secured Credit Facilities and indentures governing our notes do not restrict our owners from creating
new holding companies that may be able to incur indebtedness without regard to the restrictions set forth in
our Senior Secured Credit Facilities and indentures governing our notes. If new indebtedness is added to our
current debt levels, the related risks that we now face could intensify.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our Senior Secured Credit Facilities and the indentures governing our notes contain various
covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability
of the relevant borrowers, issuers, guarantors and their restricted subsidiaries to, among other things:
·
·
·
incur or guarantee additional debt;
pay dividends or distributions on their capital stock or redeem, repurchase or retire their
capital stock or indebtedness;
issue stock of subsidiaries;
· make certain investments, loans, advances and acquisitions;
·
·
create liens on our assets to secure debt;
enter into transactions with affiliates;
· merge or consolidate with another company; and
·
sell or otherwise transfer assets.
In addition, under the Restated Term Loan Credit Facility, MSI is required to meet specified
financial ratios in order to undertake certain actions, and under our Restated Revolving Credit Facility, MSI
is required to meet specified financial ratios in order to undertake certain actions, and under certain
circumstances, MSI may be required to maintain a specified fixed charge coverage ratio. Our ability to meet
those tests can be affected by events beyond our control, and we cannot assure you we will meet them. A
breach of any of these covenants could result in a default under our Senior Secured Credit Facilities, which
could also lead to an event of default under our notes if any of the Senior Secured Credit Facilities were
accelerated. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the
lenders could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be
immediately due and payable and terminate all commitments to extend further credit. If we were unable to
repay those amounts, the lenders under our Senior Secured Credit Facilities could proceed against the
collateral granted to them to secure such indebtedness. Holdings, MSI and certain of MSI’s subsidiaries
have pledged substantially all of their assets, including the capital stock of MSI and certain of its
subsidiaries, as collateral under our Senior Secured Credit Facilities. If the indebtedness under our Senior
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Secured Credit Facilities or our notes were to be accelerated, our assets may not be sufficient to repay such
indebtedness in full.
Changes in customer demands could materially adversely affect our sales, results of operations and cash
flow.
Our success depends on our ability to anticipate and respond in a timely manner to changing
customer demands and preferences for products and supplies used in creative activities. If we misjudge the
market, we may significantly overstock unpopular products and be forced to take significant inventory
markdowns, or experience shortages of key items, either of which could have a material adverse impact on
our operating results and cash flow. In addition, adverse weather conditions, economic instability and
consumer confidence volatility could have material adverse impacts on our sales and operating results.
We have recently experienced a data breach and such data breach and any future failure to adequately
maintain security and prevent unauthorized access to electronic and other confidential information could
result in an additional data breach which could materially adversely affect our reputation, financial
condition and operating results.
The protection of our customer, associate and Company data is critically important to us. Our
customers and associates have a high expectation that we will adequately safeguard and protect their
sensitive personal information. We have become increasingly centralized and dependent upon automated
information technology processes. In addition, a portion of our business operations is conducted
electronically, increasing the risk of attack or interception that could cause loss or misuse of data, system
failures or disruption of operations. This risk has increased with the recent launch of our e‑commerce
platform in fiscal 2014. Improper activities by third parties, exploitation of encryption technology, new
data‑hacking tools and discoveries and other events or developments may result in a future compromise or
breach of our networks, payment card terminals or other payment systems. In particular, the techniques used
by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized
until launched against a target; accordingly, we may be unable to anticipate these techniques or implement
adequate preventative measures. Any failure to maintain the security of our customers’ sensitive
information, or data belonging to ourselves or our suppliers, could put us at a competitive disadvantage,
result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines
and penalties, resulting in a possible material adverse impact on our financial condition and results of
operations. While we maintain insurance coverage that may, subject to policy terms and conditions, cover
certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses and would not
remedy damage to our reputation.
In January 2014, we learned of possible fraudulent activity on some U.S. payment cards that had
been used at Michaels, suggesting we may have experienced a data security attack. The Company retained
two independent, expert security firms to conduct an extensive investigation. The Company also worked
closely with law enforcement authorities, banks, credit card issuers and payment processors to determine the
facts.
After extensive analysis, we discovered evidence confirming that systems of Michaels stores in the
United States and its subsidiary, Aaron Brothers, were attacked by criminals using highly sophisticated
malware that had not been encountered previously by either of the security firms (the “Data Breach”).
The Company believes the malware no longer presents a threat while shopping at Michaels or
Aaron Brothers. During the course of the investigation, we determined the following:
·
·
The affected systems contained certain payment card information, such as payment card
number and expiration date, about both Michaels and Aaron Brothers customers. We found
no evidence that other customer personal information, such as name, address or PIN, was at
risk in connection with this issue.
Regarding Michaels stores, the attack potentially targeted a limited portion of the
point‑of‑sale systems at a varying number of stores between May 8, 2013 and January 27,
2014. Only a small percentage of payment cards used in the affected stores during the times of
exposure were impacted by this issue. The analysis conducted by the security firms and the
Company showed that approximately 2.6 million cards may have
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been impacted, which represented about 7% of payment cards used at Michaels stores in the
U.S. during the relevant time period.
·
Regarding Aaron Brothers, we have confirmed that between June 26, 2013 and February 27,
2014, 54 Aaron Brothers stores were affected by this malware. We estimate that
approximately 400,000 cards were potentially impacted during this period.
· We have received a limited number of reports from the payment card brands and banks of
fraudulent use of payment cards potentially connected to Michaels or Aaron Brothers.
In addition, the Data Breach has given rise to putative class action litigation on behalf of customers
and regulatory investigations, as further described in Note 11 to our consolidated financial statements.
There can be no assurance that we will not suffer a similar criminal attack in the future, that
unauthorized parties will not gain access to personal information, or that any such incident will be
discovered in a timely manner.
Competition, including Internet-based competition, could negatively impact our business.
The retail arts and crafts industry, including custom framing, is competitive, which could result in
the pressure to reduce prices and losses in our market share. We must remain competitive in the areas of
quality, price, breadth of selection, customer service, and convenience. We compete with mass merchants
(e.g., Wal‑Mart Stores, Inc. and Target Corporation), which dedicate a portion of their selling space to a
limited selection of craft supplies and seasonal and holiday merchandise, along with national and regional
chains and local merchants. We also compete with specialty retailers, which include Hobby Lobby
Stores, Inc., A.C. Moore Arts & Crafts, Inc. and Jo ‑Ann Stores, Inc. Some of our competitors, particularly
the mass merchants, are larger and have greater financial resources than we do. We also face competition
from Internet‑based retailers, such as Amazon.com, Inc., in addition to traditional store‑based retailers, who
may be larger, more experienced and able to offer products we cannot. This could result in increased price
competition since our customers could more readily search and compare non‑private brand products.
Furthermore, we ultimately compete with alternative sources of entertainment and leisure for our customers.
Our reliance on foreign suppliers increases our risk of obtaining adequate, timely and cost-effective
product supplies.
We rely to a significant extent on foreign manufacturers for our merchandise, particularly
manufacturers located in China. In addition, many of our domestic suppliers purchase a portion of their
products from foreign sources. This reliance increases the risk that we will not have adequate and timely
supplies of various products due to local political, economic, social, or environmental conditions (including
acts of terrorism, the outbreak of war or the occurrence of a natural disaster), transportation delays
(including dock strikes and other work stoppages), restrictive actions by foreign governments, or changes in
U.S. laws and regulations affecting imports or domestic distribution. Reliance on foreign manufacturers also
increases our exposure to trade infringement claims and reduces our ability to return product for various
reasons.
We are at a risk for higher costs associated with goods manufactured in China. Significant
increases in wages or wage taxes paid by contract facilities may increase the cost of goods manufactured,
which could have a material adverse effect on our profit margins and profitability.
All of our products manufactured overseas and imported into the United States are subject to duties
collected by the U.S. Customs Service. We may be subjected to additional duties, significant monetary
penalties, the seizure and forfeiture of the products we are attempting to import, or the loss of import
privileges if we or our suppliers are found to be in violation of U.S. laws and regulations applicable to the
importation of our products.
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Our success will depend on how well we manage our business.
Even if we are able to continue our strategy of expanding our store base, or additionally, to expand
our business through acquisitions or vertical integration opportunities, we may experience problems which
may adversely impact profitability or cash flow. For example:
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the costs of opening and operating new stores may offset the increased sales generated by the
additional stores;
the closure of unsuccessful stores may result in the retention of liability for expensive leases;
a significant portion of our management’s time and energy may be consumed with issues
unrelated to advancing our core business strategies;
our e‑commerce platform may be unprofitable, cannibalize sales from our existing stores, or
be uncompetitive against other internet‑based retailers who sell similar merchandise;
the implementation of future operational efficiency initiatives, which may include the
consolidation of certain operations and/or the possible co‑sourcing of additional selected
functions, may not produce the desired reduction in costs and may result in disruptions arising
from such actions;
failure to maintain stable relations with our labor force may impact our store operations and
sales;
our suppliers may be unable to meet the increased demand of additional stores in a timely
manner; and
we may be unable to expand our existing distribution centers or use third‑party distribution
centers on a cost‑effective basis to provide merchandise to our new stores.
Our growth depends on our ability to open new stores and increase comparable store sales.
One of our key business strategies is to expand our base of retail stores. If we are unable to continue
this strategy, our ability to increase our sales, profitability and cash flow could be impaired. To the extent we
are unable to open new stores as we anticipate, our sales growth would come only from increases in
comparable store sales. Growth in profitability in that case would depend significantly on our ability to
improve gross margin. We may be unable to continue our store growth strategy if we cannot identify suitable
sites for additional stores, negotiate acceptable leases, access sufficient capital to support store growth, or
hire and train a sufficient number of qualified associates.
Damage to the reputation of the Michaels brand or our private and exclusive brands could adversely
affect our sales.
We believe the Michaels brand name and many of our private and exclusive brand names are
powerful sales and marketing tools and we devote significant resources to promoting and protecting them.
To be successful in the future, we must continue to preserve, grow and utilize the value of Michaels’
reputation. Reputational value is based in large part on perceptions of subjective qualities, and even isolated
incidents may erode trust and confidence. In addition, we develop and promote private and exclusive brands,
which we believe have generated national recognition. Our private brands amounted to approximately 48%
of net sales in fiscal 2013 and approximately 51% of net sales in fiscal 2014. Damage to the reputations
(whether or not justified) of our brand names could arise from product failures, data privacy or security
incidents, litigation or various forms of adverse publicity (including adverse publicity generated as a result
of a vendor’s or a supplier’s failure to comply with general social accountability practices), especially in
social media outlets, and may generate negative customer sentiment, potentially resulting in a reduction in
our sales and earnings.
A weak fourth quarter could materially adversely affect our result of operations.
Our business is highly seasonal. Our inventories and short-term borrowings may grow in the third
fiscal quarter as we prepare for our peak selling season in the third and fourth fiscal quarters. Our most
important quarter in terms of
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sales, profitability and cash flow historically has been the fourth fiscal quarter. If for any reason our fourth
fiscal quarter results were substantially below expectations, our operating results for the full year would be
materially adversely affected, and we could have substantial excess inventory, especially in seasonal
merchandise that is difficult to liquidate.
Suppliers from whom our products are sourced may fail us and transitioning to other qualified vendors
could materially adversely affect our revenue and gross profit.
The products we sell are sourced from a wide variety of domestic and international vendors. Global
sourcing has become an increasingly important part of our business, as we have undertaken efforts to
increase the amount of product we source directly from overseas manufacturers. Our ability to find qualified
vendors who meet our standards and supply products in a timely and efficient manner is a significant
challenge, especially with respect to goods sourced from outside the United States. Any issues related to
transitioning vendors could adversely affect our revenue and gross profit.
Many of our suppliers are small firms that produce a limited number of items. Given their limited
resources, these firms are susceptible to cash flow issues, access to capital, production difficulties, quality
control issues and problems in delivering agreed‑upon quantities on schedule. We may not be able, if
necessary, to return products to these suppliers and obtain refunds of our purchase price or obtain
reimbursement or indemnification from them if their products prove defective. These suppliers may also be
unable to withstand a downturn in economic conditions. Significant failures on the part of our key suppliers
could have a material adverse effect on our results of operations.
In addition, many of these suppliers require extensive advance notice of our requirements in order
to supply products in the quantities we desire. This long lead time may limit our ability to respond timely to
shifts in demand.
Unexpected or unfavorable consumer responses to our promotional or merchandising programs could
materially adversely affect our sales, results of operations, cash flow and financial condition.
Brand recognition, quality and price have a significant influence on consumers’ choices among
competing products and brands. Advertising, promotion, merchandising and the cadence of new product
introductions also have a significant impact on consumers’ buying decisions. If we misjudge consumer
responses to our existing or future promotional activities, this could have a material adverse impact on our
sales, results of operations, cash flow and financial condition.
We believe improvements in our merchandise offering help drive sales at our stores. We could be
materially adversely affected by poor execution of changes to our merchandise offering or by unexpected
consumer responses to changes in our merchandise offering.
Our marketing programs, e-commerce initiatives and use of consumer information are governed by an
evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our
failure to comply with existing or future laws, could substantially harm our business and results of
operations.
We collect, maintain and use data provided to us through our online activities and other customer
interactions in our business. Our current and future marketing programs depend on our ability to collect,
maintain and use this information, and our ability to do so is subject to certain contractual restrictions in
third‑party contracts as well as evolving international, federal and state laws and enforcement trends. We
strive to comply with all applicable laws and other legal obligations relating to privacy, data protection and
consumer protection, including those relating to the use of data for marketing purposes. It is possible,
however, that these requirements may be interpreted and applied in a manner that is inconsistent from one
jurisdiction to another, may conflict with other rules or may conflict with our practices. If so, we may suffer
damage to our reputation and be subject to proceedings or actions against us by governmental entities or
others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts to
defend our practices, distract our management, increase our costs of doing business and result in monetary
liability.
In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we
remain in compliance. If applicable data privacy and marketing laws become more restrictive at the federal
or state level, our compliance costs may increase, our ability to effectively engage customers via
personalized marketing may decrease, our
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investment in our e‑commerce platform may not be fully realized, our opportunities for growth may be
curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches
may increase.
Product recalls and/or product liability, as well as changes in product safety and other consumer
protection laws, may adversely impact our operations, merchandise offerings, reputation, results of
operations, cash flow and financial condition.
We are subject to regulations by a variety of federal, state and international regulatory authorities,
including the Consumer Product Safety Commission. In fiscal 2014, we purchased merchandise from
approximately 630 vendors. Since a majority of our merchandise is manufactured in foreign countries, one
or more of our vendors might not adhere to product safety requirements or our quality control standards, and
we might not identify the deficiency before merchandise ships to our stores. Any issues of product safety,
including but not limited to those manufactured in foreign countries, could cause us to recall some of those
products. If our vendors fail to manufacture or import merchandise that adheres to our quality control
standards, our reputation and brands could be damaged, potentially leading to increases in customer litigation
against us. Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce
our merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near or during a
seasonal period. If our vendors are unable or unwilling to recall products failing to meet our quality
standards, we may be required to recall those products at a substantial cost to us. Moreover, changes in
product safety or other consumer protection laws could lead to increased costs to us for certain merchandise,
or additional labor costs associated with readying merchandise for sale. Long lead times on merchandise
ordering cycles increase the difficulty for us to plan and prepare for potential changes to applicable laws.
The Consumer Product Safety Improvement Act of 2008
imposes significant requirements on
manufacturing, importing, testing and labeling requirements for our products. In the event that we are unable
to timely comply with regulatory changes or regulators do not believe we are complying with current
regulations applicable to us, significant fines or penalties could result, and could adversely affect our
reputation, results of operations, cash flow and financial condition.
Changes in regulations or enforcement, or our failure to comply with existing or future regulations, may
adversely impact our business.
We are subject to federal, state and local regulations with respect to our operations in the U.S. We
are further subject to federal, provincial and local regulations in Canada, which are increasingly distinct from
those in the U.S., and may be subject to greater international regulation as our business expands. There are a
number of legislative and regulatory initiatives that could adversely impact our business if they are enacted
or enforced. Those initiatives include wage or workforce issues (such as minimum‑wage requirements,
overtime and other working conditions and citizenship requirements), collective bargaining matters,
environmental regulation, price and promotion regulation, trade regulations and others.
The Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010,
may increase our annual associate health care costs. Proposed changes in tax regulations may also change
our effective tax rate as our business is subject to a combination of applicable tax rates in the various
countries, states and other jurisdictions in which we operate. New accounting pronouncements and
interpretations of existing accounting rules and practices have occurred and may occur in the future. A
change in accounting standards or practices can have a significant effect on our reported results of
operations. Failure to comply with legal requirements could result in, among other things, increased
litigation risk that could affect us adversely by subjecting us to significant monetary damages and other
remedies or by increasing our litigation expenses, administrative enforcement actions, fines and civil and
criminal liability. For example, in fiscal 2012, we settled a pricing and promotion investigation by the New
York State Attorney General’s office through the payment of a fine and other consideration pursuant to an
Assurance of Discontinuance, and could be subject to similar investigations, as well as lawsuits, in the
future. We are currently subject to various class action lawsuits alleging violations of wage and workforce
laws and similar matters (see “Business—Legal Proceedings”). If such issues become more expensive to
address, or if new issues arise, they could increase our expenses, generate negative publicity, or otherwise
adversely affect us.
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Significant increases in inflation or commodity prices such as petroleum, natural gas, electricity, steel,
wood and paper may adversely affect our costs, including cost of merchandise.
Significant future increases in commodity prices or inflation could adversely affect our costs,
including cost of merchandise and distribution costs. Furthermore, the transportation industry may
experience a shortage or reduction of capacity, which could be exacerbated by higher fuel prices. Our results
of operations may be adversely affected if we are unable to secure, or are able to secure only at significantly
higher costs, adequate transportation resources to fulfill our receipt of goods or delivery schedules to the
stores.
We may be subject to information technology system failures or network disruptions, or our information
systems may prove inadequate, resulting in damage to our reputation, business operations and financial
condition.
We depend on our management information systems for many aspects of our business, including
our perpetual inventory, automated replenishment, and weighted-average cost stock ledger systems which
are necessary to properly forecast, manage, analyze and record our inventory. The Company may be subject
to information technology system failures and network disruptions. These may be caused by natural
disasters, accidents, power disruptions,
terrorism or war,
denial‑of‑service attacks, computer viruses, physical or electronic break‑ins, or similar events or disruptions.
System redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may
not be sufficient for all eventualities. Such failures or disruptions could prevent access to the Company’s
online services and preclude store transactions. System failures and disruptions could also impede the
manufacturing and shipping of products, transactions processing and financial reporting. Additionally, we
may be materially adversely affected if we are unable to improve, upgrade, maintain, and expand our
systems.
telecommunications failures, acts of
Improvements to our supply chain may not be fully successful.
An important part of our efforts to achieve efficiencies, cost reductions, and sales and cash flow
growth is the identification and implementation of improvements to our supply chain, including merchandise
ordering, transportation, and receipt processing. We continue to implement enhancements to our distribution
systems and processes, which are designed to improve efficiency throughout the supply chain and at our
stores. Significant changes to our supply chain could have a material adverse impact on our results of
operations.
Changes in newspaper subscription rates may result in reduced exposure to our circular advertisements.
A substantial portion of our promotional activities utilize circular advertisements in local
newspapers. A continued decline in consumer subscriptions of these newspapers could reduce the frequency
with which consumers receive our circular advertisements, thereby negatively affecting sales, results of
operations and cash flow.
Disruptions in the capital markets could increase our costs of doing business.
Any disruption in the capital markets could make it difficult for us to raise additional capital when
needed, or to eventually refinance our existing indebtedness on acceptable terms or at all. Similarly, if our
suppliers face challenges in obtaining credit when needed, or otherwise face difficult business conditions,
they may become unable to offer us the merchandise we use in our business thereby causing reductions in
our revenues, or they may demand more favorable payment terms, all of which could adversely affect our
results of operations, cash flows and financial condition.
Our real estate leases generally obligate us for long periods, which subject us to various financial risks.
We lease virtually all of our store, distribution center, and administrative locations, generally for
long terms. While we have the right to terminate some of our leases under specified conditions by making
specified payments, we may not be able to terminate a particular lease if or when we would like to do so. If
we decide to close stores, we are generally required to continue paying rent and operating expenses for the
balance of the lease term, or paying to exercise rights to terminate, and the performance of any of these
obligations may be expensive. When we assign or sublease vacated locations, we may remain liable on the
lease obligations if the assignee or sublessee does not perform. In addition, when leases for the stores in our
ongoing operations expire, we may be unable to negotiate renewals, either on commercially
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acceptable terms, or at all, which could cause us to close stores. Accordingly, we are subject to the risks
associated with leasing real estate, which can have a material adverse effect on our results.
We have co-sourced certain of our information technology, accounts payable, payroll, accounting and
human resources functions and may co-source other administrative functions, which makes us more
dependent upon third parties.
We place significant reliance on third ‑party providers for the co‑sourcing of certain of our
information technology (“IT”), accounts payable, payroll, accounting and human resources functions. This
co‑sourcing initiative is a component of our ongoing strategy to increase efficiencies, increase our IT
capabilities, monitor our costs and seek additional cost savings. These functions are generally performed in
offshore locations, without Michaels oversight. As a result, we are relying on third parties to ensure that
certain functional needs are sufficiently met. This reliance subjects us to risks arising from the loss of
control over these processes, changes in pricing that may affect our operating results, and potentially,
termination of provision of these services by our suppliers. If our service providers fail to perform, we may
have difficulty arranging for an alternate supplier or rebuilding our own internal resources, and we could
incur significant costs, all of which may have a significant adverse effect on our business. We may
co‑source other administrative functions in the future, which would further increase our reliance on third
parties. Further, the use of offshore service providers may expose us to risks related to local political,
economic, social or environmental conditions (including acts of terrorism, the outbreak of war, or the
occurrence of natural disaster), restrictive actions by foreign governments or changes in U.S. laws and
regulations.
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the
functional currency of our Canadian subsidiary.
Our Canadian operating subsidiary purchases inventory in U.S. dollars, which is sold in Canadian
dollars and exposes us to foreign exchange rate fluctuations. As well, our customers at border locations can
be sensitive to cross‑border price differences. Substantial foreign currency fluctuations could adversely
affect our business. In fiscal 2014, exchange rates had a negative impact on our consolidated operating
results due to a 12% decrease in the Canadian exchange rate.
We are dependent upon the services of our senior management team.
We are dependent on the services, abilities and experience of our executive officers, including Carl
S. Rubin, our Chief Executive Officer, and Charles M. Sonsteby, our Chief Administrative Officer and
Chief Financial Officer. The permanent loss of the services of any of these senior executives and any
change in the composition of our senior management team could have a negative impact on our ability to
execute on our business and operating strategies.
Failure to attract and retain quality sales, distribution center and other associates in appropriate numbers
as well as experienced buying and management personnel could adversely affect our performance.
Our performance depends on recruiting, developing, training and retaining quality sales,
distribution center and other associates in large numbers as well as experienced buying and management
personnel. Many of our store level associates are in entry level or part‑time positions with historically high
rates of turnover. Our ability to meet our labor needs while controlling labor costs is subject to external
factors such as unemployment levels, prevailing wage rates, minimum wage legislation, changing
demographics, health and other insurance costs and governmental labor and employment requirements. In
the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our
workforce could decline, causing our customer service to suffer, while increasing our wages could cause our
earnings to decrease. The market for retail management is highly competitive and, similar to other retailers,
we face challenges in securing sufficient management talent. If we do not continue to attract, train and retain
quality associates and management personnel, our performance could be adversely affected.
Our results may be adversely affected by serious disruptions or catastrophic events, including geo-
political events and weather.
Unforeseen public health issues, such as pandemics and epidemics, and geo‑political events, such as
civil unrest in a country in which our suppliers are located or terrorist or military activities disrupting
transportation, communication
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or utility systems, as well as natural disasters such as hurricanes, tornadoes, floods, earthquakes and other
adverse weather and climate conditions, whether occurring in the United States or abroad, particularly
during peak seasonal periods, could disrupt our operations or the operations of one or more of our vendors
or could severely damage or destroy one or more of our stores or distribution facilities located in the affected
areas. For example, day‑to‑day operations, particularly our ability to receive products from our vendors or
transport products to our stores could be adversely affected, or we could be required to close stores or
distribution centers in the affected areas or in areas served by the affected distribution center. These factors
could also cause consumer confidence and spending to decrease or result in increased volatility in the U.S.
and global financial markets and economy. Such occurrences could significantly impact our operating results
and financial performance. For example, during the fourth quarter of fiscal 2012, our net sales were
adversely affected by Hurricane Sandy.
Our holding company structure makes us, and certain of our direct and indirect subsidiaries, dependent
on the operations of our, and their, subsidiaries to meet our financial obligations.
We, and certain of our direct and indirect subsidiaries, have no significant assets other than our,
and their, interest in our, and their, direct and indirect subsidiaries, including MSI. As a result, we, and
certain of our direct and indirect subsidiaries, rely exclusively upon payments, dividends and distributions
from our, and their, direct and indirect subsidiaries for our, and their, cash flows. Our ability to pay
dividends, if any are declared, to our shareholders is dependent on the ability of our subsidiaries to generate
sufficient net income and cash flows to pay upstream dividends and make loans or loan repayments.
We are controlled by the Sponsors, whose interest may conflict with yours and those of our Company.
We are currently controlled by the Sponsors, who own approximately 70% of our outstanding
common stock. For as long as the Sponsors continue to beneficially own a majority of the outstanding shares
of our common stock, they will be able to direct the election of all of the members of our Board of Directors
(“Board”) and could exercise a controlling influence over our business and affairs, including any
determinations with respect to mergers or other business combinations, the acquisition or disposition of
assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity
securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, the
Sponsors will have the power to determine matters submitted to a vote of our stockholders without the
consent of our other stockholders, will have the power to prevent a change in our control and could take
other actions that might be favorable to them. Even if their ownership falls below a majority, so long as the
Sponsors continue to hold a significant portion of our outstanding common stock, the Sponsors may
continue to be able to strongly influence or effectively control our decisions. Additionally, the Sponsors are
in the business of making investments in companies and may acquire and hold interests in businesses that
compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition
opportunities that may be complementary to our business and, as a result, those acquisition opportunities
may not be available to us.
We are a “controlled company” within the meaning of the rules of The NASDAQ Stock Market and, as a
result, rely on exemptions from certain corporate governance requirements. You will not have the same
protections as those afforded to stockholders of companies that are subject to such governance
requirements.
We are a “controlled company” within the meaning of the corporate governance standards of The
NASDAQ Stock Market. Under The NASDAQ Stock Market rules, a company of which more than 50% of
the voting power is held by an individual, group or another company is a “controlled company” and may
elect not to comply with certain corporate governance requirements, including:
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the requirement that a majority of our Board consist of independent directors;
the requirement that we have a Nominating Committee that is composed entirely of
independent directors with a written charter addressing the Committee’s purpose and
responsibilities; and
the requirement that we have a Compensation Committee that is composed entirely of
independent directors with a written charter addressing the committee’s purpose and
responsibilities.
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We will continue to utilize these exemptions. As a result, we do not have a majority of independent
directors and our Compensation Committee does not consist entirely of independent directors. Accordingly,
you will not have the same protections afforded to stockholders of companies that are subject to all of the
corporate governance requirements of The NASDAQ Stock Market.
The Sponsors are not subject to any contractual obligation to retain their controlling interest. There
can be no assurance as to the period of time during which any of the Sponsors will in fact maintain its
ownership of our common stock.
Our stock price could be extremely volatile and may decline and, as a result, you may not be able to resell
your shares at or above the price you paid for them.
Since listing our common stock on The NASDAQ Global Select Market in June 2014 in connection
with our IPO, the price of our common stock has ranged from a low of $14.51 on August 1, 2014 to a high of
$28.73 on February 25, 2015. In addition, the stock market in general has been highly volatile. As a result,
the market price of our common stock is likely to be similarly volatile, and investors in our common stock
may experience a decrease, which could be substantial, in the value of their stock, including decreases
unrelated to our operating performance or prospects, and could lose part or all of their investment. The price
of our common stock could be subject to wide fluctuations in response to a number of factors, including
those described elsewhere in this filing and others such as:
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variations in our operating performance and the performance of our competitors;
actual or anticipated fluctuations in our quarterly or annual operating results;
publication of research reports by securities analysts about us or our competitors or our
industry;
our failure or the failure of our competitors to meet analysts’ projections or guidance that we
or our competitors may give to the market;
additions and departures of key personnel;
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin ‑offs, joint
ventures, strategic investments or changes in business strategy;
the passage of legislation or other regulatory developments affecting us or our industry;
speculation in the press or investment community;
changes in accounting principles;
terrorist acts, acts of war or periods of widespread civil unrest;
natural disasters and other calamities; and
changes in general market and economic conditions.
In the past, securities class action litigation has often been initiated against companies following
periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our
management’s attention and resources, and could also require us to make substantial payments to satisfy
judgments or to settle litigation.
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Provisions in our charter documents and Delaware law may deter takeover efforts that may be beneficial
to stockholder value.
In addition to the Sponsors’ beneficial ownership of a controlling percentage of our common stock,
Delaware law and provisions in our certificate of incorporation and bylaws could make it harder for a third
party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include
limitations on actions by our stockholders. In addition, our Board has the right to issue preferred stock
without stockholder approval that could be used to dilute a potential hostile acquirer. Our certificate of
incorporation imposes some restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock other than the Sponsors. As a result, you may lose
your ability to sell your stock for a price in excess of the prevailing market price due to these protective
measures and efforts by stockholders to change the direction or management of the Company may be
unsuccessful.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and
exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers or employees.
Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery
of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding
brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director,
officer or other employee to us or our stockholders, (iii) any action asserting a claim against us arising
pursuant to any provision of the DGCL or our certificate of incorporation or the bylaws or (iv) any action
asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or
otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have
consented to the provisions of our certificate of incorporation described above. This choice of forum
provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for
disputes with us or our directors, officers or other employees, which may discourage such lawsuits against
us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our
certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types
of actions or proceedings, we may incur additional costs associated with resolving such matters in other
jurisdictions, which could adversely affect our business and financial condition.
Because our executive officers hold or may hold restricted shares or option awards that will vest upon a
change of control, these officers may have interests in us that conflict with yours.
Our executive officers hold restricted shares and options to purchase shares that would
automatically vest upon a change of control. As a result, these officers may view certain change of control
transactions more favorably than an investor due to the vesting opportunities available to them and, as a
result, may have an economic incentive to support a transaction that you may not believe to be favorable to
stockholders.
Because we have no current plans to pay cash dividends on our common stock for the foreseeable future,
you may not receive any return on investment unless you sell your common stock for a price greater than
you paid.
We may retain future earnings, if any, for future operation, expansion and debt repayment and have
no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay
dividends in the future will be made at the discretion of our Board and will depend on, among other things,
our results of operations, financial condition, cash requirements, contractual restrictions and other factors
that our Board may deem relevant. In addition, our ability to pay dividends may be limited by covenants of
any existing and future outstanding indebtedness we or our subsidiaries incur, including our Senior Secured
Credit Facilities. As a result, you may not receive any return on an investment in our common stock unless
you sell our common stock for a price greater than you paid.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
19
Table of Contents
ITEM 2. PROPERTIES.
We lease substantially all of the sites for our Michaels and Aaron Brothers stores, with the majority
of our stores having initial lease terms of approximately 10 years. The leases are generally renewable, with
increases in lease rental rates. Lessors have made leasehold improvements to prepare our stores for opening
under a majority of our existing leases. As of January 31, 2015, in connection with stores that we plan to
open or relocate in future fiscal years, we had signed approximately 50 leases for Michaels stores.
Management believes our facilities are suitable and adequate for our business as presently conducted.
As of January 31, 2015, we lease the following non-store facilities:
Locations
Distribution centers:
Hazleton, Pennsylvania
Jacksonville, Florida
Lancaster, California
Centralia, Washington
New Lenox, Illinois
Haslet, Texas
City of Commerce, California (Aaron Brothers)
Artistree:
Coppell, Texas (regional processing and fulfillment operations center)
Kernersville, North Carolina (manufacturing plant and regional processing center)
City of Industry, California (regional processing center)
Mississauga, Ontario (regional processing center)
Office space:
Irving, Texas (corporate office support center)
Coppell, Texas (corporate support satellite office)
Mississauga, Ontario (Canadian regional office)
Coppell, Texas (new store staging warehouse)
20
Square
Footage
692,000
506,000
763,000
718,000
693,000
433,000
174,000
3,979,000
230,000
156,000
90,000
62,000
538,000
296,000
67,000
3,000
366,000
82,000
4,965,000
Table of Contents
The following table indicates the number of our retail stores located in each state or province as of
January 31, 2015:
Number of Stores
Aaron
State/Province
Alabama
Alaska
Alberta
Arizona
Arkansas
British Columbia
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Manitoba
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Brunswick
New Hampshire
New Jersey
New Mexico
New York
Newfoundland and Labrador
North Carolina
North Dakota
Nova Scotia
Ohio
Oklahoma
Ontario
Oregon
Pennsylvania
Prince Edward Island
Quebec
Rhode Island
Saskatchewan
South Carolina
South Dakota
5
1
3
1
77
22
17
4
80
34
12
3
18
27
4
17
134
Michaels Brothers Total
12
3
18
32
4
17
211
25
17
4
80
35
8
38
18
8
8
11
13
3
3
24
31
35
23
7
21
5
5
14
3
9
30
3
56
1
36
2
5
31
7
53
17
48
1
14
4
3
7
38
18
8
8
11
13
3
3
24
31
35
23
7
21
5
5
10
3
9
30
3
56
1
36
2
5
31
7
53
15
48
1
14
4
3
2
4
13
2
13
2
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
15
79
13
2
35
23
5
17
1
1,168
15
98
13
2
35
31
5
17
1
1,288
19
8
120
21
Table of Contents
ITEM 3. LEGAL PROCEEDINGS.
Information regarding legal proceedings is incorporated by reference from Note 11 to the
consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock has been listed on The NASDAQ Global Select Market under the symbol
“MIK” since our IPO on June 27, 2014. Prior to that date, there was no public market for our common stock.
As of January 31, 2015, there were 84 holders of record of our common stock. The following table sets forth
the high and low sales price per share for the periods indicated of our common stock on The NASDAQ
Global Select Market:
Second Quarter (1)
Third Quarter
Fourth Quarter
High
$
$
$
17.28
18.50
27.23
Low
$ 14.51
$ 14.64
$ 17.82
(1) Represents the period from June 27, 2014 through August 2, 2014, the end of our second quarter.
Dividends
The Company does not anticipate paying any cash dividends in the near future. Instead, we
anticipate that all of our earnings for the foreseeable future will be used to repay debt, for working capital,
to support our operations and to finance the growth and development of our business. Any future
determination to pay dividends will be at the discretion of our Board, subject to compliance with applicable
law and any contractual provisions, including under agreements for indebtedness, that restrict or limit our
ability to pay dividends, and will depend upon, among other factors, our results of operations, financial
condition, earnings, capital requirements and other factors that our Board may deem relevant. For additional
information concerning restrictions relating to agreements for indebtedness, see Note 5 to the consolidated
financial statements.
In July 2013, FinCo Holdings and FinCo Inc. issued the PIK Notes. FinCo Holdings distributed the
proceeds, net of expenses, to the Company. We used the proceeds to pay a cash dividend, distribution and
other payments to our equity and equity award holders of approximately $781 million (excluding
approximately $2 million currently held in escrow for the benefit of holders of restricted shares of the
Company's common stock) and pay related fees and expenses.
22
Table of Contents
Performance Graph
The following graph shows a comparison of cumulative total return to holders of The Michaels
Companies, Inc.’s common shares against the cumulative total return of S&P 500 Index and S&P 500 Retail
Index for the seven month period ended January 31, 2015. The comparison of the cumulative total returns
for each investment assumes that $100 was invested in The Michaels Companies, Inc. common shares and
the respective indices on June 27, 2014 through January 31, 2015 including reinvestment of any dividends.
Historical share price performance should not be relied upon as an indication of future share price
performance.
The Michaels Companies, Inc.
S&P 500 Index
S&P 500 Retail Index
23
8/2/2014
11/1/2014
6/27/2014
1/31/2015
$100.00 $ 90.24 $107.53 $ 151.76
100.00 98.50 103.77 103.10
100.00 97.24 103.03 108.50
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information for the five most recent fiscal years has been derived from our
consolidated financial statements. This information should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere herein.
Results of Operations Data:
Net sales
Operating income (2)
Interest expense
Losses on early extinguishments of debt and
refinancing costs
Net income
Earnings per share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
Balance Sheet Data:
Cash and equivalents
Merchandise inventories
Total current assets
Total assets
Total current liabilities
Current portion of long-term debt
Long-term debt
Total liabilities
Stockholders’ deficit
Cash Flow Data:
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows used in financing activities
Other Operating Data:
Average net sales per selling square foot (3)
Comparable store sales
Comparable store sales, at constant currency
Total selling square footage (in millions)
Stores Open at End of Year:
Michaels
Aaron Brothers
Total stores open at end of year
Fiscal Year
(1)
2014
2013
2012
2011
2010
(in millions, except earnings per share, other operating
and store count data)
$ 4,738
627
199
$ 4,570
610
215
$ 4,408
592
245
$ 4,210
538
254
$ 4,031
488
276
74
217
14
243
33
200
18
157
53
103
$ 1.07
$ 1.05
$ 1.39
$ 1.36
$ 1.14
$ 1.12
$ 0.90
$ 0.89
$ 0.59
$ 0.58
203
207
175
179
175
178
175
177
175
176
$
378
958
1,462
2,005
890
25
3,124
4,116
(2,111)
$
239
901
1,276
1,811
826
16
3,678
4,593
(2,782)
$
56
862
1,044
1,555
856
150
2,891
3,859
(2,304)
$
371
845
1,339
1,838
861
127
3,363
4,339
(2,501)
$
319
826
1,271
1,780
685
1
3,667
4,434
(2,654)
$
$
441
(138)
(164)
$
449
(112)
(154)
$
299
(124)
(490)
$
409
(109)
(248)
$
438
(83)
(253)
$
220
1.7 %
2.4 %
21.6
$
218
2.9 %
3.4 %
21.1
$
215
1.5 %
1.5 %
20.6
$
212
3.2 %
3.0 %
20.1
205
2.5 %
1.8 %
19.9
1,168
120
1,288
1,136
121
1,257
1,099
125
1,224
1,064
134
1,198
1,045
137
1,182
(1) Fiscal 2012 consisted of 53 weeks while all other periods presented consisted of 52 weeks.
(2) Fiscal 2014 operating income includes a $32 million charge associated with the IPO primarily related
to a $30 million fee paid to certain related parties to terminate our management agreement.
(3) The calculation of average net sales per selling square foot includes only Michaels comparable stores.
Aaron Brothers, which is a smaller store model, is excluded from the calculation.
24
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to
January 31. References to fiscal year mean the year in which that fiscal year began. References herein to
“fiscal 2014” relate to the 52 weeks ended January 31, 2015, references to “fiscal 2013” relate to the 52
weeks ended February 1, 2014, and references to “fiscal 2012” relate to the 53 weeks ended February 2,
2013.
In July 2013, we were incorporated in Delaware in connection with Michaels Stores, Inc.’s (“MSI”)
reorganization into a holding company structure (the “Reorganization”). The Company, Michaels FinCo
Holdings, LLC (“FinCo Holdings”), Michaels FinCo, Inc. (“FinCo Inc.”), Michaels Funding, Inc.
(“Holdings”) and Michaels Stores MergerCo, Inc. (“MergerCo”) were formed in connection with the
Reorganization and MergerCo was merged with and into MSI with MSI being the surviving corporation. As
a result of the Reorganization, FinCo Holdings is wholly owned by the Company, FinCo, Inc. and Holdings
are wholly owned by FinCo Holdings, and MSI is wholly owned by Holdings. MSI was incorporated in
Delaware in 1983 and is headquartered in Irving, Texas.
Fiscal 2014 Overview
With $4.7 billion in net sales in fiscal 2014, we are the largest arts and crafts specialty retailer in
North America (based on store count) providing materials, project ideas and education for creative activities,
under the retail brands of Michaels and Aaron Brothers. We also operate a market-leading vertically-
integrated custom framing business. At January 31, 2015, we operated 1,168 Michaels stores and 120 Aaron
Brothers stores.
Financial highlights for fiscal 2014 include the following:
·
·
·
Net sales increased to $4,738 million, a 3.7% improvement over last year, primarily driven by
comparable store sales growth and the opening of 31 additional stores (net of closures).
Comparable store sales increased 1.7%, or 2.4% at constant exchange rates.
Our Michaels retail stores’ private brand merchandise drove 51% of net sales in fiscal 2014
compared to 48% of net sales in fiscal 2013.
· We reported operating income of $627 million, an increase of 2.8% from the prior year.
Operating income included a $32 million charge primarily associated with the termination of
the management services agreement in connection with the initial public offering (“IPO”).
Excluding the $32 million charge, operating income would have increased $49 million, or
8.0% from prior year.
·
Adjusted EBITDA, a non-GAAP measure that is a required calculation in our debt
agreements, improved by 2.5%, from $792 million in fiscal 2013 to $812 million in fiscal
2014 (see “Management Discussion and Analysis of Financial Condition and Results of
Operations - Non-GAAP Measures”).
· We completed an IPO in which we issued and sold 27.8 million shares of common stock at a
public offering price of $17.00 per share.
· We reduced our outstanding indebtedness by $545 million during fiscal 2014.
In fiscal 2014, we made significant progress implementing our strategic initiatives, including:
·
·
enhancing our in-store shopping experience by adding Wi-Fi technology and price checkers to
all of our Michaels stores;
providing new handheld technology for our associates making it easier to monitor stock levels
and planogram integrity;
25
Table of Contents
·
·
·
·
·
introduction of our exclusive Isaac Mizrahi and Lions Pride yarn products;
creation of our exclusive “Raw Bar” product assortment of unfinished products including
chalk, cork and galvanized metal merchandise that allow our customers to personalize their
creation;
expansion of our direct mail and email marketing efforts to provide customers with more
product and project ideas tailored to their interest;
improved utilization of our event-based marketing with promotional and educational content
to not only excite our customers but also instruct them; and
enhancement of our website, including a new home page and click-to-shop from our online
advertisement.
Fiscal 2015 Outlook
In fiscal 2015, we intend to continue to lead industry growth and innovation through strategic
initiatives such as:
· making our stores more inviting to a broader set of customers, including those new to do-it-
yourself projects and more experienced crafters;
·
·
·
·
enhancing our in-store shopping experience by creating a more visually appealing
environment and making it easier for our customers to shop;
strengthening our connections with customers and reaching new customers through an
expanded marketing program, including print, digital, direct mail, broadcast and community
events;
broadening our merchandising and sourcing capabilities to better identify and source new
trends, merchandise and categories that enhance our portfolio of exclusive brands and
products; and
expanding our omni-channel offering of merchandise, promotional and marketing events.
Comparable Store Sales
Comparable store sales represents the change in net sales for stores open the same number of
months in the indicated and comparable period of the previous year, including stores that were relocated or
expanded during either period, as well as e-commerce sales. A store is deemed to become comparable in its
14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed
more than two weeks is not considered comparable during the month it is closed. If a store is closed longer
than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject
to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of
operation after its reopening.
26
Table of Contents
Results of Operations
The following table sets forth the percentage relationship to net sales of line items of our
consolidated statements of comprehensive income. This table should be read in conjunction with the
following discussion and with our consolidated financial statements, including the related notes.
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general, and administrative
Share-based compensation
Related party expenses
Store pre-opening costs
Impairment of intangible assets
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Other expense and (income), net
Income before income taxes
Provision for income taxes
Net income
Fiscal 2014 Compared to Fiscal 2013
Fiscal Year
2012
2014
2013
100.0 % 100.0 % 100.0 %
60.0
60.1
59.9
40.0
39.9
40.1
25.7
25.6
25.7
0.3
0.5
0.3
0.3
0.3
0.7
0.1
0.1
0.1
0.2
—
—
13.4
13.3
13.2
5.6
4.7
4.2
0.7
0.3
1.6
—
—
0.1
7.1
8.3
7.4
2.6
3.0
2.8
4.5 %
5.3 %
4.6 %
Net Sales. Net sales increased $168 million in fiscal 2014, or 3.7%, compared to fiscal 2013. The
increase in net sales was due to a $90 million increase primarily related to 31 additional stores opened (net
of closures) since February 1, 2014 and a $78 million increase in comparable store sales. Comparable store
sales increased 1.7%, or 2.4% at constant exchange rates, due primarily to an increase in our average ticket.
Gross Profit. Gross profit was 40.1% of net sales in fiscal 2014 compared to 39.9% in fiscal
2013. The 20 basis point improvement is primarily related to a 90 basis point increase due to lower
distribution related costs, favorable shrink experience and leverage associated with occupancy costs as a
result of higher sales. The increase in gross profit was partially offset by a 70 basis point increase in
merchandise costs and costs related to e-commerce initiatives.
Selling, General, and Administrative . Selling, general and administrative (“SG&A”) was 25.7% of
net sales in fiscal 2014 compared to 25.6% in fiscal 2013. SG&A increased $50 million to $1,220 million in
fiscal 2014 due primarily to $12 million of costs associated with operating 31 additional stores (net of
closures), a $24 million increase in performance-based compensation and other payroll-related costs, a $4
million increase in marketing costs and a $4 million increase in credit card fees.
Share-based Compensation. Share-based compensation expenses decreased $9 million to $14
million in fiscal 2014 compared to the prior year. The decrease was due primarily to option awards which
became fully vested during fiscal 2014.
Related Party Expenses. Related party expenses increased $21 million to $35 million in fiscal 2014
compared to the prior year due to a $30 million fee paid to terminate the management services agreement in
connection with our IPO completed in July 2014.
Interest Expense. Interest expense decreased $16 million to $199 million in fiscal 2014 compared
to the prior year. The decrease is primarily attributable to the debt refinancings in the second quarter of
fiscal 2014 and the fourth quarter of fiscal 2013. In addition, in December 2014 we redeemed $180 million
of the PIK Notes. The decrease was partially offset by a full year of interest expense on the PIK Notes that
were issued in July 2013.
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Table of Contents
Losses on Early Extinguishments of Debt and Refinancing Costs. During fiscal 2014, we
recorded a loss on the early extinguishment of debt of $74 million related to the redemption of our 2018
Senior Notes and the partial redemption of our PIK Notes, consisting of $58 million of redemption
premiums and $21 million to write-off related debt issuance costs. The loss was partially offset by a $5
million write-off of the unamortized premium on the 2018 Senior Notes. During fiscal 2013, we recorded a
$7 million loss related to the partial redemption of our then outstanding 2016 Senior Subordinated
Notes. The $7 million loss was comprised of a $5 million redemption premium and $2 million to write-off
related debt issuance costs. In addition, we recorded refinancing costs of $7 million in fiscal 2013 related to
the subsequent refinancing of our remaining outstanding 2016 Senior Subordinated Notes.
Provision for Income Taxes. The effective tax rate for fiscal 2014 was 38.2% compared to 35.9%
in the prior year. The effective tax rate in fiscal 2014 is higher than prior year primarily due to a change in
tax status of our Canadian subsidiary, which resulted in the write-off of certain deferred tax assets. In
addition, the prior year tax rate includes higher state tax credits due to a change in state tax law.
Fiscal 2013 Compared to Fiscal 2012
Net Sales. Net sales increased $162 million in fiscal 2013, or 3.7%, compared to fiscal 2012. The
increase in net sales was due to a $102 million increase primarily related to 33 additional stores opened (net
of closures) since February 1, 2013 and a $126 million increase in comparable store sales, partially offset by
$66 million related to the 53 week of fiscal 2012. Comparable store sales increased 2.9%, or 3.4% at
constant exchange rates, due primarily to an increase in our average ticket partially offset by a decrease in
customer transactions.
rd
Gross Profit. Gross profit was 39.9% of net sales in fiscal 2013 compared to 40.0% in fiscal 2012.
The 10 basis point decrease is due to a 20 basis point increase in occupancy costs due to higher remodel and
maintenance costs, partially offset by a 10 basis point decrease primarily due to improved operational
efficiencies at our vertically integrated framing operations.
Selling, General, and Administrative . SG&A was 25.6% of net sales in fiscal 2013 compared to
25.7% in fiscal 2012. SG&A increased $38 million due primarily to $17 million of costs associated with
operating 33 additional stores (net of closures) in fiscal 2013, $26 million related to higher payroll-related
costs and $8 million due to professional fees associated with strategic initiatives. The increase was partially
offset by approximately $23 million from additional payroll-related costs associated with the 53rd week in
fiscal 2012.
Share-based Compensation. Share-based compensation expenses increased to $23 million in fiscal
2013 from $15 million in fiscal 2012 due to new option grants and changes in estimates for expected
forfeitures.
Related Party Expenses. Related party expenses were $14 million in fiscal 2013 and $13 million in
fiscal 2012, consisting of management fees and associated expenses paid to our Sponsors and Highfields.
Impairment of Intangible Assets. Impairment of intangible assets in fiscal 2012 was related to an
impairment charge of $7 million for long-lived assets and $1 million for goodwill associated with our online
scrapbooking business.
Interest Expense. Interest expense decreased from $245 million in fiscal 2012 to $215 million in
fiscal 2013, due to a reduction in the average interest rate.
Losses on Early Extinguishments of Debt and Refinancing Costs. During fiscal 2013, we
recorded a $7 million loss related to the redemption of $137 million of our then outstanding 2016 Senior
Subordinated Notes. The $7 million loss was comprised of a $5 million redemption premium and $2
million to write-off related debt issuance costs. In addition, we recorded refinancing costs of $7 million
related to the subsequent refinancing of our remaining outstanding 2016 Senior Subordinated Notes. During
fiscal 2012, we recorded refinancing costs of $12 million related to our Restated Term Loan Credit Facility.
We also recorded a loss of $8 million to write-off debt issuance costs related to our Senior Secured Term
Loan Facility and the partial paydown of our Term Loan. In addition, we recorded an $11 million loss
related to the redemption of our remaining outstanding Subordinated Discount Notes. The $11 million loss
was comprised of an $8
28
Table of Contents
million redemption premium and $3 million to write-off related debt issuance costs. Finally, we recorded a
loss of $2 million to write-off debt issuance costs related to our senior secured asset-based Revolving Credit
Facility.
Provision for Income Taxes. The effective tax rate for fiscal 2013 was 35.9% compared to 36.5%
in the prior year. The effective tax rate was lower in fiscal 2013 primarily due to state tax credits.
Liquidity and Capital Resources
We require cash principally for day-to-day operations, to finance capital investments, to purchase
inventory, to service our outstanding debt and for seasonal working capital needs. We expect that our
available cash, cash flow generated from operating activities and funds available under our Restated
Revolving Credit Facility (as defined below) will be sufficient to fund planned capital expenditures, working
capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable
future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely
affected by the occurrence of any of the events described under “Item 1A. Risk Factors” or our failure to
meet our debt covenants as described below. Our Restated Revolving Credit Facility provides senior secured
financing of up to $650 million. As of January 31, 2015, the borrowing base was $650 million, of which we
had no outstanding borrowings, $62 million of outstanding standby letters of credit and $588 million of
unused borrowing capacity. Our cash and cash equivalents increased $139 million from $239 million at
February 1, 2014 to $378 million at January 31, 2015.
We had total outstanding debt of $3,149 million at January 31, 2015, of which $2,453 million was
subject to variable interest rates and $696 million was subject to fixed interest rates.
Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our
ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from
meeting our obligations. Management reacts strategically to changes in economic conditions and monitors
compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition
and flexibility.
We intend to use excess operating cash flows to repay portions of our indebtedness, depending on
market conditions, and to invest in growth opportunities. If we use our excess cash flows to repay our debt, it
will reduce the amount of excess cash available for additional capital expenditures.
We and our subsidiaries, affiliates and significant shareholders may, from time to time, seek to
retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or
exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such
repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements,
contractual restrictions and other factors.
Cash Flow from Operating Activities
Cash flows provided by operating activities was $441 million in fiscal 2014, a decrease of $8
million from fiscal 2013. Cash flows decreased due to an increase in net cash paid for interest totaling $51
million and a $22 million increase in inventory. The decrease was partially offset by an increase in operating
earnings and the timing of vendor payments.
Average inventory per Michaels store (including e-commerce and distribution centers) increased
3.4% to $790,000 at January 31, 2015, from $764,000 at February 1, 2014. The increase is primarily due to
an increase in the amount of in-transit inventory, which is included in our average store calculation, as a
result of the west coast port labor disputes. The slow-down in shipments to our stores had the impact of
decreasing store inventory available for sale to our customers but increasing average store inventory.
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Table of Contents
Cash Flow from Investing Activities
The following table includes capital expenditures paid during the periods presented (in millions):
New and relocated stores and stores not yet opened (1)
Existing stores
Information systems
Corporate and other
Fiscal Year
2013
2014
2012
$
$
$
30
50
40
18
138 $
39 $
26
28
19
112 $
42
30
36
16
124
(1)
In fiscal 2014, we incurred capital expenditures related to the opening of 45 Michaels stores and 5
Aaron Brothers stores, including the relocation of 13 Michaels stores. In fiscal 2013, we incurred
capital expenditures related to the opening of 54 Michaels stores, including the relocation of 14
Michaels stores. In fiscal 2012, we incurred capital expenditures related to the opening of 51 Michaels
stores, including the relocation of 13 Michaels stores.
We currently estimate that our capital expenditures will be $120 million to $130 million in fiscal
2015. We plan to invest in the infrastructure necessary to support the further development of our business
and continued growth. In fiscal 2015, we plan to open 47 new Michaels stores, including 17 relocations. We
expect our capital expenditures will be financed with cash from operating activities.
Restated Term Loan Credit Facility
On October 31, 2006, MSI entered into a $2.4 billion senior secured term loan facility (“Senior
Secured Term Loan Facility”) with Deutsche Bank AG New York Branch (“Deutsche Bank”) and other
lenders. On January 28, 2013, MSI entered into an amended and restated credit agreement maturing on
January 28, 2020 (the “Amended Credit Agreement”) to amend various terms of our Senior Secured Term
Loan Facility, as amended. The Amended Credit Agreement, together with the related security, guarantee
and other agreements, is referred to as the “Restated Term Loan Credit Facility”.
On July 2, 2014, MSI issued an additional $850 million of debt under the Restated Term Loan
Credit Facility maturing in 2020 (“Additional Term Loan”). The Additional Term Loan was issued at 99.5%
of face value, resulting in an effective interest rate of 4.02%. The net proceeds from this borrowing and the
issuance of an additional $250 million of the 5.875% senior subordinated notes were used to fully redeem
the outstanding 7.75% Senior Notes due 2018 (“2018 Senior Notes”) and to pay the applicable make-whole
premium and accrued interest.
As of January 31, 2015, the Restated Term Loan Credit Facility provides for senior secured
financing of $2,490 million. MSI has the right under the Restated Term Loan Credit Facility to request
additional term loans (a) in an aggregate amount of up to $500 million or (b) an amount of term loans
requested by MSI so long as MSI’s consolidated secured debt ratio (as defined in the Restated Term Loan
Credit Facility) is no more than 3.25 to 1.00 on a pro forma basis as of the last day of the most recently
ended four quarter period. The lenders under the Restated Term Loan Credit Facility will not be under any
obligation to provide any such additional term loans and the incurrence of any additional term loans is
subject to customary conditions precedent.
Borrowings under the Restated Term Loan Credit Facility bear interest at a rate per annum equal to,
at MSI’s option, either (a) a base rate determined by reference to the highest of (1) the prime rate of
Deutsche Bank, (2) the federal funds effective rate plus 0.5%, subject to a 2% floor in the case of the
Additional Term Loan, and (3) London Interbank Offered Rate (“LIBOR”), subject to certain adjustments,
plus 1% or (b) LIBOR, subject to certain adjustments and a 1% floor, in each case plus an applicable margin.
The applicable margin is 1.75% (2.00% for the Additional Term Loan) with respect to the base rate
borrowings and 2.75% (3.00% for the Additional Term Loan) with respect to LIBOR borrowings. In
addition, the applicable margin is subject to a 0.25% decrease based on MSI’s consolidated secured debt
ratio. The decrease does not apply to the Additional Term Loan.
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The Restated Term Loan Credit Facility requires MSI to prepay outstanding term loans with
(a) 100% of the net proceeds of any debt issued by MSI or its subsidiaries (with exceptions for certain
permitted debt) and (b) 50% of MSI’s annual excess cash flow, as defined. The 50% threshold will be
reduced to 25% if MSI’s consolidated total leverage ratio, as defined, is less than 6.00:1.00 and will be
reduced to zero if MSI’s consolidated total leverage ratio is less than 5.00:1.00.
MSI must offer to prepay outstanding term loans at 100% of the principal amount, plus any unpaid
interest, with the proceeds of certain asset sales or casualty events under certain circumstances. MSI may
voluntarily prepay outstanding loans under the Restated Term Loan Credit Facility at any time without
premium or penalty other than customary breakage costs with respect to LIBOR loans.
MSI is required to make scheduled quarterly payments equal to 0.25% of the original principal
amount of the term loans, subject to adjustments relating to the incurrence of additional term loans for the
first six years and three quarters of the Restated Term Loan Credit Facility, with the balance paid on
January 28, 2020.
All obligations under the Restated Term Loan Credit Facility are unconditionally guaranteed,
jointly and severally, by Holdings and all of MSI’s existing domestic material subsidiaries and are required
to be guaranteed by certain of MSI’s future domestic wholly-owned material subsidiaries (“the Subsidiary
Guarantors”). All obligations under the Restated Term Loan Credit Facility, and the guarantees of those
obligations, are secured, subject to certain exceptions, by substantially all of the assets of Holdings, MSI and
the Subsidiary Guarantors, including:
·
·
·
a first-priority pledge of MSI’s capital stock and all of the capital stock held directly by MSI
and the Subsidiary Guarantors (which pledge, in the case of any foreign subsidiary, is limited
to 65% of the voting stock of such foreign subsidiary and 100% of the non-voting stock of
such subsidiary);
a first-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor, including substantially all
of MSI’s and its subsidiaries’ owned real property and equipment, but excluding, among other
things, the collateral described below; and
a second-priority security interest in personal property consisting of inventory and related
accounts, cash, deposit accounts, all payments received by Holdings, MSI or the Subsidiary
Guarantors from credit card clearinghouses and processors or otherwise in respect of all credit
card charges and debit card charges for sales of inventory by Holdings, MSI and the
Subsidiary Guarantors, and certain related assets and proceeds of the foregoing.
The Restated Term Loan Credit Facility contains a number of negative covenants that are
substantially similar to, but more restrictive in certain respects than, those governing the 2020 Senior
Subordinated Notes (defined below), as well as certain other customary representations and warranties,
affirmative and negative covenants and events of default. As of January 31, 2015, MSI was in compliance
with all covenants.
Restated Revolving Credit Facility
On February 18, 2010, MSI entered into an agreement to amend and restate various terms of the
then existing asset-based revolving credit facility dated October 31, 2006 (as amended and restated, the
“Senior Secured Asset-Based Revolving Credit Facility”). On September 17, 2012, MSI entered into a
second amended and restated credit agreement (the “Restated Credit Agreement”) with Wells Fargo Bank,
National Association (“Wells Fargo”) and other lenders to amend various terms of our Senior Secured
Asset-Based Revolving Credit Facility. On June 6, 2014, MSI amended its Restated Credit Agreement to,
among other things, permit the incurrence of the Additional Term Loan and refinancing of the 2018 Senior
Notes with the net proceeds of the 2020 Senior Subordinated Notes and the Additional Term Loan. The
Restated Credit Agreement, together with related security, guarantee and other agreements, is referred to as
the “Restated Revolving Credit Facility”.
The Restated Revolving Credit Facility provides for senior secured financing of up to $650 million,
subject to a borrowing base, and matures on September 17, 2017 (“ABL Maturity Date”). The borrowing
base under the Restated Revolving Credit Facility equals the sum of (i) 90% of eligible credit card
receivables and debit card receivables, plus
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(ii) 90% of the appraised net orderly liquidation value of eligible inventory, plus (iii) the lesser of (a) 90% of
the appraised net orderly liquidation value of inventory supported by eligible letters of credit and (b) 90% of
the face amount of eligible letters of credit, minus (iv) certain reserves.
The Restated Revolving Credit Facility provides MSI with the right to request up to $200 million of
additional commitments. The lenders will not be under any obligation to provide any such additional
commitments, and any increase in commitments is subject to customary conditions. If we were to request
additional commitments, and the lenders were to agree to provide such commitments, the facility size could
be increased up to $850 million, however, MSI’s ability to borrow would still be limited by the borrowing
base.
Borrowings under the Restated Revolving Credit Facility bear interest at a rate per annum equal to,
at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Wells
Fargo, (2) the federal funds effective rate plus 0.50% and (3) LIBOR subject to certain adjustments plus
1.00% or (b) LIBOR subject to certain adjustments, in each case plus an applicable margin. The initial
applicable margin is (a) 0.75% for prime rate borrowings and 1.75% for LIBOR borrowings. The applicable
margin is subject to adjustment each fiscal quarter based on the excess availability under the Restated
Revolving Credit Facility. Same-day borrowings bear interest at the base rate plus the applicable margin.
MSI is required to pay a commitment fee on the unutilized commitments under the Restated
Revolving Credit Facility, which initially is 0.375% per annum. The commitment fee is subject to
adjustment each fiscal quarter. If average daily excess availability is less than or equal to 50% of the total
commitments, the commitment fee will be 0.25% per annum. If average daily excess availability is greater
than 50% of the total commitments, the commitment fee will be 0.375%. In addition, MSI must pay
customary letter of credit fees and agency fees.
All obligations under the Restated Revolving Credit Facility are unconditionally guaranteed, jointly
and severally, by Holdings and all of MSI’s existing domestic material subsidiaries and are required to be
guaranteed by the Subsidiary Guarantors. All obligations under the Restated Revolving Credit Facility, and
the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the
assets of Holdings, MSI and the Subsidiary Guarantors, including:
·
·
·
a first-priority security interest in personal property consisting of inventory and related
accounts, cash, deposit accounts, all payments received by Holdings, MSI or the Subsidiary
Guarantors from credit card clearinghouses and processors or otherwise in respect of all credit
card charges and debit card charges for sales of inventory by Holdings, MSI and the
Subsidiary Guarantors, and certain related assets and proceeds of the foregoing;
a second-priority pledge of all of MSI’s capital stock and the capital stock held directly by
MSI and the Subsidiary Guarantors (which pledge, in the case of the capital stock of any
foreign subsidiary, is limited to 65% of the voting stock of such foreign subsidiary and 100%
of the non-voting stock of such subsidiary); and
a second-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor, including substantially all
of MSI’s and its subsidiaries’ owned real property and equipment.
If, at any time, the aggregate amount of outstanding loans, unreimbursed letter of credit drawings
and undrawn letters of credit under the Restated Revolving Credit Facility exceeds the lesser of (i) the
commitment amount and (ii) the borrowing base (the “Loan Cap”), MSI will be required to repay
outstanding loans and cash collateralized letters of credit in an aggregate amount equal to such excess, with
no reduction of the commitment amount. If excess availability under the Restated Revolving Credit Facility
is less than (i) 12.5% of the Loan Cap for five consecutive business days, or (ii) $65 million at any time, or
if certain events of default have occurred, MSI will be required to repay outstanding loans and cash
collateralized letters of credit with the cash MSI is required to deposit daily in a collection account
maintained with the agent under the Restated Revolving Credit Facility. Excess availability under the
Restated Revolving Credit Facility means the lesser of the Loan Cap minus the outstanding credit
extensions. MSI may voluntarily reduce the unutilized portion of
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the commitment amount and repay outstanding loans at any time without premium or penalty, other than
customary breakage costs with respect to LIBOR loans. There is no scheduled amortization under the
Restated Revolving Credit Facility. The principal amount of the loans outstanding is due and payable in full
on the ABL Maturity Date.
The covenants limiting dividends and other restricted payments, investments, loans, advances and
acquisitions, and prepayments or redemptions of indebtedness, each permit the restricted actions in an
unlimited amount, subject to the satisfaction of certain payment conditions, principally that MSI must meet
specified excess availability requirements and minimum consolidated fixed charge coverage ratios, to be
tested on a pro forma and six months projected basis. Adjusted EBITDA, as defined in the Restated
Revolving Credit Facility, is used in the calculation of the consolidated fixed charge coverage ratios.
From the time when MSI has excess availability less than the greater of (a) 10% of the Loan Cap
and (b) $50 million, until the time when MSI has excess availability greater than the greater of (a) 10% of
the Loan Cap and (b) $50 million for 30 consecutive days, the Restated Revolving Credit Facility will
require MSI to maintain a consolidated fixed charge coverage ratio of at least 1.0 to 1.0. The Restated
Revolving Credit Facility also contains certain customary representations and warranties, affirmative
covenants and provisions relating to events of default (including change of control and cross-default to
material indebtedness).
The Restated Revolving Credit Facility contains a number of covenants that, among other things
and subject to certain exceptions, restrict MSI’s ability, and the ability of its restricted subsidiaries, to:
·
·
incur or guarantee additional indebtedness;
pay dividends on MSI’s capital stock or redeem, repurchase or retire MSI’s capital stock;
· make investments, loans, advances and acquisitions;
·
·
·
·
·
·
create restrictions on the payment of dividends or other amounts to MSI from its restricted
subsidiaries;
engage in transactions with MSI’s affiliates;
sell assets, including capital stock of MSI’s subsidiaries;
prepay or redeem indebtedness;
consolidate or merge; and
create liens.
As of January 31, 2015 and February 1, 2014, the borrowing base was $650 million, of which MSI
had availability of $588 million and $589 million, respectively. Borrowing capacity is available for letters of
credit and borrowings on same-day notice. Outstanding standby letters of credit as of January 31, 2015
totaled $62 million.
5.875% Senior Subordinated Notes due 2020
On December 19, 2013, MSI issued $260 million in principal amount of 5.875% senior
subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes”). Interest is payable semi-annually
on June 15 and December 15 of each year, commencing on June 15, 2014. MSI used the net proceeds of
these notes to redeem the outstanding 11.375% senior subordinated notes due November 1, 2016, to pay the
applicable redemption premium and unpaid interest and to pay other related costs.
On June 16, 2014, MSI issued an additional $250 million of the 2020 Senior Subordinated Notes at
102% of face value, resulting in an effective interest rate of 5.76%. The net proceeds from this borrowing,
and the $850 million
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Additional Term Loan, were used to fully redeem the outstanding 2018 Senior Notes and to pay the
applicable make-whole premium and accrued interest.
The 2020 Senior Subordinated Notes are guaranteed,
jointly and severally, fully and
unconditionally, on an unsecured senior subordinated basis, by each of MSI’s subsidiaries that guarantee
indebtedness under the Restated Revolving Credit Facility and the Restated Term Loan Credit Facility
(collectively defined as the “Senior Secured Credit Facilities”).
The 2020 Senior Subordinated Notes and the guarantees are MSI’s and the guarantors’ unsecured
senior subordinated obligations and are (i) subordinated in right of payment to all of MSI’s and the
guarantors’ existing and future senior debt, including the Senior Secured Credit Facilities; (ii) rank equally
in right of payment to all of MSI’s and the guarantors’ future senior subordinated debt; (iii) effectively
subordinated to all of MSI’s and the guarantors’ existing and future secured debt (including the Senior
Secured Credit Facilities) to the extent of the value of the assets securing such debt; (iv) rank senior in right
of payment to all of the MSI’s and the guarantors’ existing and future debt and other obligations that are, by
their terms, expressly subordinated in right of payment to the 2020 Senior Subordinated Notes; and (v) are
structurally subordinated to all obligations of MSI’s subsidiaries that are not guarantors of the 2020 Senior
Subordinated Notes.
At any time prior to December 15, 2016, MSI may redeem all or a part of the 2020 Senior
Subordinated Notes at a redemption price equal to 100% of the principal amount redeemed plus a make-
whole premium, as provided in the indenture governing the 2020 Senior Subordinated Notes (“2020 Senior
Subordinated Notes Indenture”), and any unpaid interest to the date of redemption, subject to the right of
holders of record on the relevant record date to receive interest due on the relevant interest payment date.
On and after December 15, 2016, MSI may redeem all or part of the 2020 Senior Subordinated
Notes, upon notice, at the redemption prices (expressed as percentages of the principal amount of the 2020
Senior Subordinated Notes to be redeemed) set forth below, plus any unpaid interest thereon to the
applicable date of redemption if redeemed during the twelve-month period beginning on December 15 of
each of the years indicated below:
Year
2016
2017
2018 and
thereafter
Percentage
102.938 %
101.469 %
100.000 %
In addition, until December 15, 2016, MSI may, at its option, on one or more occasions redeem up
to 40% of the aggregate principal amount of the 2020 Senior Subordinated Notes with the aggregate
principal amount to be redeemed (“Equity Offering Redemption Amount”) not to exceed an amount equal to
the aggregate gross proceeds from one or more equity offerings (as defined in the 2020 Senior Subordinated
Notes Indenture), at a redemption price equal to 105.875% of the aggregate principal amount, plus any
unpaid interest, provided that (i) each such redemption occurs within 120 days of the date of closing of each
such equity offering; (ii) proceeds in an amount equal to or exceeding the applicable equity offering
redemption amount shall be received by, or contributed to the capital of MSI or any of its restricted
subsidiaries and (iii) at least 50% of the sum of the aggregate principal amount of the 2020 Senior
Subordinated Notes remains outstanding immediately after the occurrence of each such redemption.
Upon a change in control, MSI is required to offer to purchase all of the 2020 Senior Subordinated
Notes at a price in cash equal to 101% of the aggregate principal amount, plus any unpaid interest. The 2020
Senior Subordinated Indenture contains covenants limiting MSI’s ability, and the ability of MSI’s restricted
subsidiaries, to incur or guarantee additional debt, prepay debt that is subordinated to the 2020 Senior
Subordinated Notes, issue stock of subsidiaries, make certain investments, loans, advances and acquisitions,
create liens on MSI’s and such subsidiaries’ assets to secure debt, enter into transactions with affiliates,
merge or consolidate with another company; and sell or otherwise transfer assets. The covenants also limit
MSI’s ability, and the ability of MSI’s restricted subsidiaries, to pay dividends or distributions on MSI’s
capital stock or repurchase MSI’s capital stock, subject to certain exceptions, including dividends,
distributions and repurchases up to an amount in excess of (i) $100 million plus (ii) a basket that builds
based on 50% of MSI’s consolidated net income (as defined in the 2020 Senior Subordinated Indenture) and
certain other amounts, in each case,
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to the extent such payment capacity is not applied as otherwise permitted under the 2020 Senior
Subordinated Indenture and subject to certain conditions. As of January 31, 2015, the permitted restricted
payment amount was approximately $431 million. As of January 31, 2015, MSI was in compliance with all
covenants.
7.50%/8.25% PIK Toggle Notes
On July 29, 2013, FinCo Holdings and FinCo Inc. issued $800 million aggregate principal amount
of 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”) in a private transaction. Interest payments on the
PIK Notes are due February 1 and August 1 of each year until maturity on August 1, 2018. The first two
interest payments and the last interest payment are required to be paid entirely in cash. All other interest
payments must be made in cash, except that all or a portion of the interest on the PIK Notes may be paid by
increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes depending
on the amount of cash dividends that can be paid by MSI under the credit agreements governing our Senior
Secured Credit Facilities, the terms of the indentures governing our outstanding notes and the terms of
MSI’s other indebtedness outstanding at the time. If interest on the PIK Notes is paid in-kind by increasing
the principal amount of the PIK Notes, or by issuing new PIK Notes, the interest rate is 8.25% per annum,
which is the cash interest rate plus 75 basis points. The proceeds from the debt issuance totaled
approximately $783 million, after deducting the debt issuance costs. FinCo Holdings distributed the net
proceeds to the Company which were used to fund a cash dividend, distribution and other payments to the
Company's equity and equity-award holders and to pay related costs.
On July 2, 2014, the Company completed an IPO and received net proceeds totaling $446 million.
The net proceeds were used to redeem $439 million of the outstanding PIK Notes and to pay other expenses
of the offering. The aggregate redemption price (including redemption premium and any unpaid interest)
was $474 million. On December 10, 2014, the Company redeemed $180 million of the PIK Notes for an
aggregate redemption price (including the applicable redemption premium and any unpaid interest) of $188
million.
The PIK Notes are senior unsecured obligations of FinCo Holdings and FinCo Inc. The PIK Notes
are not guaranteed by MSI, Holdings or any of their subsidiaries, however, the indenture governing the PIK
Notes contains restrictive covenants that apply to FinCo Holdings and its restricted subsidiaries, including
MSI, Holdings and their subsidiaries. A breach of such covenants would cause FinCo Holdings and FinCo
Inc. to be in default under the indenture governing the PIK Notes. The indenture also contains restrictive
covenants and events of default substantially similar to, but less restrictive than, those of the 2020 Senior
Subordinated Notes described above. As of January 31, 2015, we were in compliance with all covenants.
The Company may redeem all or part of the PIK Notes, upon notice, at the redemption prices
(expressed as percentages of principal amount of the PIK Toggle Notes to be redeemed) set forth below, plus
any unpaid interest to the applicable date of redemption if redeemed during the twelve-month period
beginning on August 1 of each of the years indicated below:
Year
2014
2015
2016 and thereafter
7.75% Senior Notes due 2018
Percentage
102.00 %
101.00 %
100.00 %
On October 21, 2010, MSI issued $800 million aggregate principal amount of 7.75% senior notes
that matured on November 1, 2018 (“Senior Notes”) at a discounted price of 99.262% of face value,
resulting in an effective interest rate of 7.875%. Interest was payable semi-annually in arrears on May 1 and
November 1 of each year, commencing on May 1, 2011. On September 27, 2012, MSI issued an additional
$200 million aggregate principal amount (the “Additional Senior Notes” and, together with the Senior
Notes, the “2018 Senior Notes”) of Senior Notes under the indenture (the “2018 Senior Indenture”). The
Additional Senior Notes were issued at a premium of 106.25% of face value, resulting in an effective interest
rate of 6.50%. On July 16, 2014 and August 1, 2014, we redeemed the 2018 Senior Notes in the aggregate
principal amounts of $235 million and $765 million, respectively, plus the applicable make-whole premium
and accrued interest, and the 2018 Senior Indenture was discharged.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-
K. We do not typically enter into off-balance sheet arrangements, except for arrangements related to
operating lease commitments, service contract commitments and trade letters of credit, as disclosed in the
contractual obligations table below. Neither we nor our subsidiaries typically guarantee the obligations of
unrelated parties.
Contractual Obligations
As of January 31, 2015, our contractual obligations were as follows (in millions):
Payments Due By Fiscal Year
The Michaels Companies, Inc.:
Operating lease commitments (1)
Other commitments (2)
Total debt (3)
Interest payments (4)
Michaels Stores, Inc.:
Operating lease commitments (1)
Other commitments (2)
Total debt (3)
Interest payments (4)
Total
$ 1,910
89
3,148
704
$ 5,851
$ 1,910
89
2,967
648
$ 5,614
Less Than
1 Year
1-3 Years 3-5 Years
5 Years
More Than
$
$
$
$
391
75
25
141
632
391
75
25
127
618
$
$
$
$
654
10
50
277
991
$
425
3
2,563
256
$ 3,247
654
10
50
250
964
$
425
3
2,382
241
$ 3,051
$
$
$
$
440
1
510
30
981
440
1
510
30
981
(1) Our operating lease commitments generally include non-cancelable leases for property and equipment
used in our operations. Excluded from our operating lease commitments are amounts related to
insurance, taxes, and common area maintenance associated with property and equipment. Such
amounts historically represented approximately 32% of the total lease obligation over the previous
three fiscal years.
(2) Other commitments include trade letters of credit and service contract obligations. Our service contract
obligations were calculated based on the time period remaining in the contract or to the earliest
possible date of termination, if permitted to be terminated by Michaels upon notice, whichever is
shorter.
(3)
Included in total debt is $5 million of unamortized premium and $4 million of unamortized discount
on the Senior Notes, which has not been recognized as of January 31, 2015.
(4) Debt associated with our Restated Term Loan Credit Facility was $2,453 million at January 31, 2015,
and is subject to variable interest rates. The amounts included in interest payments in the table for the
Restated Term Loan Credit Facility were based on the indexed interest rate in effect at January 31,
2015. Approximately $696 million of debt was subject to fixed interest rates. We had no outstanding
borrowings under our Restated Revolving Credit Facility at January 31, 2015. Under our Restated
Revolving Credit Facility, we are required to pay a commitment fee of 0.375% per year on the
unutilized commitments, subject to an adjustment each fiscal quarter. The amounts included in interest
payments for the Restated Revolving Credit Facility were based on these annual commitment fees.
Non-GAAP Measures
The following table sets forth certain non-GAAP measures the Company uses to manage our
performance and measure compliance with certain debt covenants. The Company defines “EBITDA
(excluding losses on early extinguishment of debt and refinancing costs)” as net income before interest,
income taxes, depreciation, amortization and
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losses on early extinguishment of debt and refinancing costs. The Company defines “Adjusted EBITDA” as
EBITDA (excluding losses on early extinguishment of debt and refinancing costs) adjusted for certain
defined amounts in accordance with the Company’s Restated Term Loan Credit Facility and Restated
Revolving Credit Facility (collectively, the “Adjustments”).
The Company has presented EBITDA (excluding losses on early extinguishment of debt and
refinancing costs) and Adjusted EBITDA to provide investors with additional information to evaluate our
operating performance and our ability to service our debt. Adjusted EBITDA is a required calculation under
the Company’s Senior Secured Credit Facilities. As it relates to the Senior Secured Credit Facilities.
Adjusted EBITDA is used in the calculations of fixed charge coverage and leverage ratios, which, under
certain circumstances determine mandatory repayments or maintenance covenants and may restrict the
Company’s ability to make certain payments (characterized as restricted payments), investments (including
acquisitions) and debt repayments.
As EBITDA (excluding losses on early extinguishment of debt and refinancing costs) and Adjusted
EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S.
generally accepted accounting principles (“GAAP”), these measures should not be considered in isolation of,
or as a substitute for, net income, as an indicator of operating performance, or net cash provided by
operating activities as an indicator of liquidity. Our computation of EBITDA (excluding losses on early
extinguishment of debt and refinancing costs) and Adjusted EBITDA may differ from similarly titled
measures used by other companies.
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The following table shows a reconciliation of EBITDA (excluding losses on early extinguishments
of debt and refinancing costs) and Adjusted EBITDA to net income and net cash provided by operating
activities (in millions):
Net cash provided by operating activities
Depreciation and amortization
Share-based compensation
Debt issuance costs amortization
Accretion of long-term debt
Losses on early extinguishments of debt and refinancing costs
Impairment of intangible assets
Changes in assets and liabilities
Net income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Provision for income taxes
Depreciation and amortization
EBITDA (excluding losses on early extinguishment of debt and
refinancing costs)
Adjustments:
Share-based compensation
Management fees to Sponsors and others
Impairment of intangible assets
Severance costs
Store pre-opening costs
Store remodel costs
Foreign currency transaction losses (gains)
Store closing costs
Offering costs
Other (1)
Adjusted EBITDA
$
Fiscal Year
2013
2014
2012
441 $
(111)
(19)
(10)
1
(74)
—
(11)
217
199
74
134
111
449 $
(106)
(34)
(10)
1
(14)
—
(43)
243
215
14
136
106
299
(97)
(21)
(14)
—
(33)
(8)
74
200
245
33
115
97
735
714
690
19
35
—
4
5
4
3
2
3
2
812 $
34
14
—
5
5
7
2
5
—
6
792 $
21
13
8
1
5
2
(1)
4
—
4
747
$
(1) Other adjustments relate to items such as moving and relocation expenses, franchise taxes, sign on
bonuses and certain legal expenses.
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in conformity with U.S. GAAP. These
consolidated financial statements include some amounts that are based on our informed judgments and
estimates. Our significant accounting policies are discussed in Note 1 to the consolidated financial
statements. Our critical accounting policies represent those policies that are subject to judgments and
uncertainties. The following discussion addresses our most critical accounting policies, which are those that
are both important to the portrayal of our financial condition/results of operations and that require significant
judgment or use of complex estimates.
Merchandise Inventories. Merchandise inventories are valued at the lower of cost or market, with
cost determined using a weighted-average method. Cost is calculated based upon the purchase price of an
item at the time it is received by us, and also includes the cost of warehousing, handling, purchasing, and
importing, as well as inbound and outbound transportation, partially offset by vendor allowances. This net
inventory cost is recognized through cost of sales when the inventory is sold. It is impractical for us to
assign specific allocated overhead costs and vendor allowances to individual units of inventory. As such, to
match net inventory costs against the related revenues, we estimate the net inventory costs to be deferred
and recognized each period as the inventory is sold.
We utilize perpetual inventory records to value inventory in our stores. Physical inventory counts
are performed in a significant number of stores during each fiscal quarter by a third-party inventory counting
service, with substantially
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all stores open longer than one year subject to at least one count each fiscal year. We adjust our perpetual
records based on the results of the physical counts. We maintain a provision for estimated shrinkage based
on the actual historical results of our physical inventories. We compare our estimates to the actual results of
the physical inventory counts as they are taken and adjust the shrink estimates accordingly. A 10% change
in our estimated shrinkage reserve would have affected net income by approximately $1 million for fiscal
2014. We also evaluate our merchandise to ensure that the expected net realizable value of the merchandise
held at the end of a fiscal period exceeds cost. In the event that the expected net realizable value is less than
cost, we reduce the value of that inventory accordingly. A 10% change in our inventory valuation reserve
would have affected net income by approximately $1 million in fiscal 2014.
Vendor allowances, which primarily represent volume rebates and cooperative advertising funds,
are recorded as a reduction of the cost of the merchandise inventories and a subsequent reduction in cost of
sales when the inventory is sold. We generally earn vendor allowances as a percentage of certain
merchandise purchases with no minimum purchase requirements. During the three fiscal years ended
January 31, 2015, the number of vendors from which vendor allowances were received ranged from
approximately 560 to 660. As a result of our increased direct import volume, vendor allowances, as a
percentage of net sales, have been declining and we expect this trend to continue in future years.
Goodwill. We review goodwill for impairment each year in the fourth quarter, or more frequently if
events occur which indicate a potential reduction in the fair value of our reporting unit’s net assets below its
carrying value. We have elected to first perform a qualitative assessment to determine whether it is more
likely than not (that is, a likelihood of more than 50 percent) that the fair value of our reporting unit is less
than its carrying value. Factors used in our qualitative assessment include, but are not limited to,
macroeconomic conditions, industry and market conditions, cost factors, overall financial performance,
Company and reporting unit specific events, and the difference between the fair value and carrying value in
recent valuations.
If, after assessing the totality of events or circumstances such as those described above, we
determine that it is more likely than not that the fair value of our reporting unit is greater than its carrying
amount, no further action is required. If we determine that it is more likely than not that the fair value of our
reporting unit is less than its carrying amount, we will compare the reporting unit’s carrying value to its
estimated fair value, determined through estimated discounted future cash flows and market-based
methodologies. If the carrying value exceeds the estimated fair value, we determine the fair value of all
assets and liabilities of the reporting unit, including the implied fair value of goodwill. If the carrying value
of goodwill exceeds the implied fair value, we recognize an impairment charge equal to the difference.
Factors used in the valuation of goodwill include, but are not limited to, management’s plans for
future operations, recent operating results and discounted projected future cash flows. Material assumptions
used in our impairment analysis include the weighted-average cost of capital percentage, terminal growth
rate and forecasted long-term sales growth. During fiscal 2014 and fiscal 2013, there was no impairment
charge taken on our goodwill.
Impairment of Long-Lived Assets. We evaluate long-lived assets, other than goodwill and assets
with indefinite lives, for indicators of impairment whenever events or changes in circumstances indicate
their carrying amounts may not be recoverable. Additionally, for store assets, we evaluate the performance
of individual stores for indicators of impairment and underperforming stores are selected for further
evaluation of the recoverability of the carrying amounts. The evaluation of long-lived assets is performed at
the lowest level of identifiable cash flows, which is at the individual store level.
Our evaluation requires consideration of a number of factors including changes in consumer
demographics and uncertain future events. Accordingly, our accounting estimates may change from period
to period. These factors could cause management to conclude impairment indicators exist and require that
tests be performed, which could result in a determination that the value of long-lived assets is impaired,
resulting in a write down to fair value.
Our initial indicator that store assets are considered to be recoverable is that the estimated
undiscounted cash flows for the remaining lease term, assuming zero growth over current year store
performance, exceed the carrying value of the assets. This evaluation is performed on stores open longer
than 36 months (unless significant impairment indicators exist), as we consider a store to become mature
after that time period. Any stores that do not meet the initial criteria are further evaluated taking into
consideration the estimated undiscounted store-specific cash flows for the remaining lease term compared to
the carrying value of the assets. To estimate store-specific future cash flows, management must make
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assumptions about key store variables, including sales, growth rate, gross margin, payroll and other
controllable expenses. Furthermore, management considers other factors when evaluating stores for
impairment, including the individual store’s execution of its operating plan and other local market
conditions. If actual results differ from these estimates, we may be exposed to additional impairment losses
that may be material.
An impairment is recognized once all the factors noted above are taken into consideration and it is
determined the carrying amount of the store’s assets are not recoverable. The impairment is based on the
estimated fair value of the assets, excluding assets that can be redeployed. In addition to recording
impairment charges based on the previously discussed criteria, we maintain a list of stores we consider at
risk and monitor those stores closely.
Reserve for Closed Facilities. We maintain a reserve for future rental obligations, carrying costs,
and other closing costs related to closed facilities, primarily closed and relocated stores. In accordance with
ASC 420, Exit or Disposal Cost Obligations, we recognize exit costs for any store closures at the time the
store is closed. Such costs are recorded within the cost of sales and occupancy expense line item on our
consolidated statements of comprehensive income.
The cost of closing a store or facility is recorded at the estimated fair value of expected cash flows
which we calculate as the lesser of the present value of future rental obligations remaining under the lease
(less estimated sublease rental income) or the lease termination fee (if an executed termination agreement
exists). The determination of the reserves is dependent on our ability to make reasonable estimates of costs
to be incurred post-closure and of rental income to be received from subleases. If our estimates only included
rental income under actual subleases and not potential future subleases, the reserves would increase by
approximately $4 million.
Self-Insurance. We have insurance coverage for losses in excess of self-insurance limits for
medical claims, general liability and workers’ compensation claims. Reserves for healthcare, general liability
and workers’ compensation are determined through the use of actuarial studies. Due to the significant
judgments and estimates utilized in determining these reserves, they are subject to a high degree of
variability. A 10% change in our self-insurance reserves would have affected net income by approximately
$4 million in fiscal 2014.
Share-Based Compensation. ASC 718, Stock Compensation (“ASC 718”) requires all share-based
payments to employees, including grants of employee stock options and restricted shares, to be recognized
using the fair value method of accounting. During fiscal 2014 and the last quarter of fiscal 2013, the
Company measured share-based compensation using the grant date fair value accounting guidance of ASC
718. During fiscal 2012 and the first three quarters of fiscal 2013, the Company determined its employee
stock options should be recorded under the liability accounting guidance of ASC 718. As such, we measured
share-based compensation based on either the grant date fair value of the equity awards or the fair value of
our option awards at the end of the period. Share-based awards are recognized ratably over the requisite
service period.
All grants of our stock options have an exercise price equal to or greater than the fair market value
of our common stock on the date of grant. Because we were privately held prior to June 27, 2014 and there
was no public market for the common stock, the fair value of our equity was estimated by our management,
relying in part on an independent appraisal of the fair market value by a third-party valuation firm, and
approved by our Board at the time option grants were awarded. For fiscal 2012 through the second quarter
of fiscal 2014, valuations completed relied on projections of our future performance, estimates of our
weighted-average cost of capital, and metrics based on the performance of a peer group of similar
companies, including valuation multiples and stock price volatility. Following our IPO, the exercise price of
stock options are based on the closing market price of our common stock on the grant date. From
February 1, 2014 to January 31, 2015, the estimated fair value of common stock increased from $16.03 to
$25.80 per share.
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The following table details information on stock options granted by quarter for fiscal year 2014:
Fair value of Average fair value
Quarter end date
May 3, 2014
August 2, 2014
November 1, 2014
January 31, 2015
# of options Exercise common stock
price
at grant
granted
21,918 $ 16.03 $
393,200 $ 16.03 $
1,113,365 $ 15.16 $
108,430 $ 22.75 $
of option at
January 31, 2015
5.79
3.81
3.61
5.41
16.03 $
16.03 $
15.16 $
22.75 $
Other assumptions used in the option value models for estimating the fair value of stock option
awards include expected volatility of our common stock share price, expected terms of the options, expected
dividends, and historical risk-free rates. The expected volatility rate is based on both historical volatility as
well as implied volatilities from the exchange-traded options on the common stock of a peer group of
companies. We utilize historical exercise and post-vesting employment behavior to estimate the expected
terms of the options and assume a zero dividend rate. The risk-free interest rate is based on the yields of U.S.
Treasury instruments with approximately the same term as the expected life of the stock option award. Our
forfeiture assumptions are estimated based on historical experience and anticipated events. We update our
assumptions quarterly based on historical trends and current market observations.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This
involves assessing current tax exposure together with temporary differences resulting from differing
treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are
evaluated for recoverability based on estimated future taxable income. To the extent recovery is deemed not
likely, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is
required or should be adjusted also considers, among other things, the nature, frequency, and severity of
recent losses, forecasts of future profitability and the duration of statutory carryforward periods.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09
supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605) ”, and requires
entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those
goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period and is to be applied retrospectively, with early
application not permitted. We are evaluating the new standard, but do not anticipate a material impact to the
consolidated financial statements once implemented.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Risk
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is
the functional currency of our Canadian subsidiary. Our sales, costs and expenses of our Canadian
subsidiary, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of January
31, 2015, a 10% increase or decrease in the exchange rate of the Canadian dollar would increase or decrease
net income by approximately $5 million.
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our Restated Term Loan
Credit Facility and our Restated Revolving Credit Facility. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt” for
further detail. The interest rates on our Restated Term Loan Credit Facility and our Restated Revolving
Credit Facility will reprice periodically, which will impact our earnings and cash flow. The interest rates on
our 2020 Senior Subordinated Notes and PIK Notes are fixed. Based on our overall interest rate exposure to
variable rate debt outstanding as of January 31, 2015, a 1% increase or decrease in interest
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rates would increase or decrease income before income taxes by approximately $25 million. A 1% increase
or decrease in interest rates would impact the fair value of our long-term fixed rate debt by approximately
$15 million. A change in interest rates would not materially affect the fair value of our variable rate debt as
the debt reprices periodically.
Inflation Risk
We do not believe inflation and changing commodity prices have had a material impact on our net
sales, income from continuing operations, plans for expansion or other capital expenditures for any year
during the three-year period ended January 31, 2015. However, we cannot be sure inflation and changing
commodity prices will not have an adverse impact on our operating results, financial condition, plans for
expansion or other capital expenditures in future periods.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Consolidated Financial Statements and Supplementary Data on page F-1. The
Consolidated Financial Statements and Supplementary Data are included on pages F-2 through F-35 and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Included in this Annual Report on Form 10-K are certifications by our Chief Executive Officer and
our Chief Financial Officer, which are required in accordance with Rule 15d-14 of the Securities Exchange
Act of 1934, as amended. This section includes information concerning the controls and controls evaluation
referred to in the certifications. Page F-2 of this Report includes the attestation report of Ernst & Young
LLP, our independent registered public accounting firm, regarding its audit of the effectiveness of our
internal control over financial reporting. This section should be read in conjunction with the Ernst & Young
attestation for a complete understanding of this section.
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) promulgated by the SEC under the Securities Exchange Act of 1934) designed to provide reasonable
assurance information, which is required to be timely disclosed, is accumulated and communicated to
management in a timely fashion. We note the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
An evaluation was carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls are effective
to provide reasonable assurance that information required to be disclosed in the reports that we file or submit
under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to
management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely
decisions regarding required disclosure and are effective to provide reasonable assurance that such
information is recorded, processed, summarized, and reported within the time periods specified by the
SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter
ended January 31, 2015 that materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as amended. Internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with
authorizations of management and directors of the company, and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements and, even when determined to be effective, can only provide reasonable, not absolute,
assurance with respect to financial statement preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes
in conditions or deterioration in the degree of compliance.
Management assessed the effectiveness of our internal control over financial reporting as of
January 31, 2015. Management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in its Internal Control—Integrated Framework (2013). Management’s
assessment included the evaluation of such elements as the design and operating effectiveness of financial
reporting controls, process documentation, accounting policies, and the overall control environment. This
assessment is supported by testing and monitoring performed or supervised by our Internal Audit
organization.
Based on management’s assessment, management has concluded that the Company’s internal
control over financial reporting was effective as of January 31, 2015. The independent registered public
accounting firm, Ernst & Young LLP, issued an attestation report on the effectiveness of our internal control
over financial reporting. The Ernst & Young LLP report is included on Page F-2 of this Annual Report on
Form 10-K.
ITEM 9B. OTHER INFORMATION.
Iran Threat Reduction and Syria Human Rights Act of 2012
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which
added Section 13(r) of the Exchange Act, the Company hereby incorporates by reference herein Exhibit 99.1
of this Annual Report on Form 10-K, which includes disclosures publicly filed and/or provided to The
Blackstone Group L.P., one of our Sponsors, by Travelport Worldwide Limited which may be considered its
affiliate.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
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ITEM 12.
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item will be contained in our Definitive Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements and Supplementary Data on page F-1.
(2) Financial Statement Schedules:
All financial statement schedules are omitted because they are not required or are not applicable, or
the required information is provided in the consolidated financial statements or notes described in 15(1)
above.
(3)
Exhibits:
The exhibits listed in the accompanying Index to Exhibits attached hereto are filed or incorporated
by reference into this Annual Report on Form 10-K.
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THE MICHAELS COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income for the fiscal years ended January 31, 2015,
February 1, 2014 and February 2, 2013
Consolidated Balance Sheets at January 31, 2015 and February 1, 2014
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2015, February 1,
2014 and February 2, 2013
Consolidated Statements of Stockholders’ Deficit for the fiscal years ended January 31, 2015,
February 1, 2014 and February 2, 2013
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-4
F-5
F-6
F-7
F-8
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
The Michaels Companies, Inc.
We have audited The Michaels Companies, Inc.’s (the Company) internal control over
financial reporting as of January 31, 2015, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). The Michaels Companies, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management
Report on Internal Control over Financial Reporting (see Item 9A). Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, The Michaels Companies, Inc. maintained, in all material respects, effective
internal control over financial reporting as of January 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of January 31, 2015 and February 1,
2014 and the related consolidated statements of comprehensive income, stockholders’ deficit and cash
flows for the three years in the period ended January 31, 2015 and our report dated March 19, 2015
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, TX
March 19, 2015
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
The Michaels Companies, Inc.
We have audited
the accompanying consolidated balance sheets of The Michaels
Companies, Inc. (the Company) as of January 31, 2015 and February 1, 2014 and the related
consolidated statements of comprehensive income, stockholders’ deficit and cash flows for each of the
three years in the period ended January 31, 2015. 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 the standards of the Public Company Accounting
Oversight Board (United States). 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 financial statements referred to above present fairly, in all material respects,
the consolidated financial position of The Michaels Companies, Inc. at January 31, 2015 and February
1, 2014, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended January 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), The Michaels Companies, Inc.’s internal control over financial
reporting as of January 31, 2015, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated March 19, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, TX
March 19, 2015
F-3
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, except per share data)
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general, and administrative
Share-based compensation
Related party expenses
Store pre-opening costs
Impairment of intangible assets
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Other expense and (income), net
Income before income taxes
Provision for income taxes
Net income
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other
Comprehensive income
Earnings per share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
Fiscal Year
2014 2013 2012
$4,738 $ 4,570 $ 4,408
2,643
2,748
1,765
1,822
1,132
1,170
15
23
13
14
5
5
8
—
592
610
245
215
33
14
(1)
2
315
379
115
136
200
2,837
1,901
1,220
14
35
5
—
627
199
74
3
351
134
$ 217 $
243 $
(12)
$ 205 $
(6)
237 $
—
200
$ 1.07 $ 1.39 $ 1.14
$ 1.05 $ 1.36 $ 1.12
203
207
175
179
175
178
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
Current Assets:
Cash and equivalents
Merchandise inventories
Prepaid expenses and other
Deferred income taxes
Income tax receivables
Total current assets
Property and equipment, net
Goodwill
Debt issuance costs, net
Deferred income taxes
Other assets
Total assets
THE MICHAELS COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
ASSETS
January 31,
2015
February 1,
2014
$
$
$
378 $
958
86
38
2
1,462
386
94
41
20
2
2,005 $
447 $
392
25
—
26
890
3,124
9
93
4,116
239
901
95
39
2
1,276
358
94
52
28
3
1,811
368
411
16
1
30
826
3,678
2
87
4,593
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable
Accrued liabilities and other
Current portion of long-term debt
Deferred income taxes
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ Deficit:
Common stock, $0.06775 par value, 350 million shares authorized;
206 million shares issued and outstanding at January 31, 2015 and
175 million shares issued and outstanding at February 1, 2014
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
14
558
(2,671)
(12)
(2,111)
2,005 $
12
94
(2,888)
—
(2,782)
1,811
$
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Share-based compensation
Debt issuance costs amortization
Accretion of long-term debt
Losses on early extinguishments of debt and refinancing costs
Impairment of intangible assets
Loss on disposition of property and equipment
Excess tax benefits from share-based compensation
Changes in assets and liabilities:
Merchandise inventories
Prepaid expenses and other
Deferred income taxes
Accounts payable
Accrued interest
Accrued liabilities and other
Income taxes
Other liabilities
Net cash provided by operating activities
2014
Fiscal Year
2013
2012
$
217 $
243 $
200
111
19
10
(1)
74
—
4
(5)
(60)
11
15
77
(46)
14
1
—
441
106
34
10
(1)
14
—
—
—
(38)
(8)
(4)
102
23
(28)
(7)
3
449
97
21
14
—
33
8
—
—
(21)
(7)
(2)
(35)
(10)
(16)
18
(1)
299
Cash flows used in investing activities:
Additions to property and equipment
(138)
(112)
(124)
Cash flows from financing activities:
Issuance of PIK Notes
Payment of PIK Notes
Borrowings on Restated Term Loan Credit Facility
Repayments on Restated Term Loan Credit Facility
Borrowings on Restated Revolving Credit Facility
Payments on Restated Revolving Credit Facility
Issuance of 2018 Senior Notes
Payment of 2018 Senior Notes
Payment of Subordinated Discount Notes
Payment of 2016 Senior Subordinated Notes
Issuance of 2020 Senior Subordinated Notes
Issuance of common stock
Payment of debt issuance costs
Payment of dividends
Change in cash overdraft
Proceeds from stock options exercised
Common stock repurchased
Excess tax benefits from share-based compensation
Other financing activities
Net cash used in financing activities
—
(627)
846
(21)
23
(23)
—
(1,057)
—
—
255
446
(12)
(1)
(2)
27
(21)
5
(2)
(164)
800
—
—
(12)
389
(390)
—
—
—
(403)
260
—
(21)
(766)
(5)
5
(8)
—
(3)
(154)
—
—
1,640
(1,996)
322
(321)
213
—
(315)
—
—
—
(25)
—
(5)
—
—
—
(3)
(490)
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
139
239
378 $
183
56
239 $
(315)
371
56
$
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Three Years Ended January 31, 2015
(in millions)
Additional
Accumulated
Other
Number of Common Paid-in Accumulated Comprehensive
Shares
Stock
Capital
Deficit
Income (Loss) Total
Balance at January 28, 2012
Net income
Exercise of stock options
Share-based compensation
Repurchase of stock
Balance at February 2, 2013
Net income
Dividend declared
Foreign currency translation
and other
Reclass from share-based
compensation liability
Exercise of stock options
Share-based compensation
Repurchase of stock
Balance at February 1, 2014
Net income
Foreign currency translation
and other
Share-based compensation
Exercise of stock options
Repurchase of stock
Issuance of common stock
Issuance of restricted shares
Balance at January 31, 2015
175 $
—
1
—
(1)
175
—
—
—
—
4
—
(4)
175
—
—
—
3
(1)
28
1
206 $
12 $
—
—
—
—
12
—
—
40 $ (2,559) $
—
—
(3)
—
37
—
—
200
—
—
—
(2,359)
243
(769)
—
—
—
—
—
12
—
—
—
—
—
2
—
14 $
(5)
49
5
13
(5)
94
—
—
16
27
(21)
442
—
558 $
—
—
—
—
(3)
(2,888)
217
—
—
—
—
—
—
(2,671) $
6 $(2,501)
200
—
(3)
—
(2,304)
243
(769)
—
—
—
—
6
—
—
(6)
—
—
—
—
—
—
(11)
49
5
13
(8)
(2,782)
217
(12)
(12)
16
—
27
—
(21)
—
444
—
—
—
(12) $ (2,111)
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
THE MICHAELS COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Michaels Companies, Inc. owns and operates a chain of specialty retail stores in 49 states
and Canada featuring arts, crafts, framing, floral, home décor and seasonal merchandise for the hobbyist
and do-it-yourself home decorator. Our wholly-owned subsidiary, Aaron Brothers, Inc., operates a chain
of framing and art supply stores located in nine states. All expressions of the “Company”, “us”, “we”,
“our”, and all similar expressions are references to The Michaels Companies, Inc. and our consolidated,
wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires. Our
consolidated financial statements include the accounts of The Michaels Companies, Inc. and our
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Disclosures for Michaels Stores, Inc. (“MSI”) have been included to meet the disclosure requirements
of Rule 12-04 of Regulation S-X as further discussed in Note 14.
In July 2013, we were incorporated in Delaware in connection with MSI’s reorganization into a
holding company structure (the “Reorganization”). The Company, Michaels FinCo Holdings, LLC
(“FinCo Holdings”), Michaels FinCo, Inc. (“FinCo Inc.”), Michaels Funding, Inc. (“Holdings”) and
Michaels Stores MergerCo, Inc. (“MergerCo”) were formed in connection with the Reorganization and
MergerCo was merged with and into MSI with MSI being the surviving corporation. As a result of the
Reorganization, FinCo Holdings is wholly owned by the Company, FinCo, Inc. and Holdings are
wholly owned by FinCo Holdings, and MSI is wholly owned by Holdings. MSI was incorporated in
Delaware in 1983 and is headquartered in Irving, Texas.
Fiscal Year
We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday
closest to January 31. All references to fiscal year mean the year in which that fiscal year began.
References to “fiscal 2014” relate to the 52 weeks ended on January 31, 2015, references to “fiscal
2013” relate to the 52 weeks ended on February 1, 2014, and references to “fiscal 2012” relate to the 53
weeks ended on February 2, 2013.
Stock Split
On June 6, 2014, our stockholders approved a common stock split in the ratio of 1.476 to 1.00.
All share and related option information presented in these consolidated financial statements and
accompanying footnotes has been retroactively adjusted to reflect the increased number of shares
resulting from this action.
Initial Public Offering
On July 2, 2014, the Company completed an initial public offering (“IPO”) in which we issued
and sold 27.8 million shares of common stock at a public offering price of $17.00 per share. After
deducting for underwriting fees, the net proceeds of $446 million were used to redeem $439 million of
our then outstanding PIK Notes (as defined in Note 5) and to pay other expenses of the offering.
Preferred Shares
During the second quarter of fiscal 2014, the Board of Directors authorized 50 million shares
of preferred stock. No preferred shares have been issued as of January 31, 2015.
F-8
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Foreign Currency
The functional currency of our Canadian operations is the Canadian dollar. Translation
adjustments result from translating our Canadian subsidiary’s financial statements into U.S. dollars.
Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income
statement accounts are translated at average exchange rates during the year. Translation adjustments are
recorded as a component of accumulated other comprehensive income in our consolidated statements of
stockholders’ deficit. The translation adjustments recorded in accumulated other comprehensive loss,
net of taxes, was a loss of $12 million, $6 million and less than $1 million in fiscal 2014, fiscal 2013
and fiscal 2012, respectively. Transaction gains and losses are recorded as a part of other expense and
(income), net in our consolidated statements of comprehensive income.
Cash and Equivalents
Cash and equivalents are comprised of cash, money market mutual funds, and short-term
interest bearing securities with original maturities of three months or less. Cash and equivalents also
include proceeds due from credit card transactions with settlement terms of less than five days. Cash
equivalents are carried at cost, which approximates fair value. The carrying amount approximates fair
value due to the short-term maturity of those instruments.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, with cost determined using a
weighted-average method. Cost is calculated based upon the purchase price of an item at the time it is
received by us, and also includes the cost of warehousing, handling, purchasing, and importing, as well
as inbound and outbound transportation, partially offset by vendor allowances. This net inventory cost is
recognized through cost of sales when the inventory is sold. It is impractical for us to assign specific
allocated overhead costs and vendor allowances to individual units of inventory. As such, to match net
inventory costs against the related revenues, we estimate the net inventory costs to be deferred and
recognized each period as the inventory is sold.
We utilize perpetual inventory records to value inventory in our stores. Physical inventory
counts are performed in a significant number of stores during each fiscal quarter by a third-party
inventory counting service, with substantially all stores open longer than one year subject to at least one
count each fiscal year. We adjust our perpetual records based on the results of the physical counts. We
maintain a provision for estimated shrinkage based on the actual historical results of our physical
inventories. We compare our estimates to the actual results of the physical inventory counts as they are
taken and adjust the shrink estimates accordingly.
Vendor allowances, which primarily represent volume rebates and cooperative advertising
funds, are recorded as a reduction to the cost of the merchandise inventories and a subsequent reduction
in cost of sales when the inventory is sold. We generally earn vendor allowances as a percentage of
certain merchandise purchases with no minimum purchase requirements. We recognized vendor
allowances of $92 million, or 1.9% of net sales, in fiscal 2014, $102 million, or 2.2% of net sales, in
fiscal 2013, and $110 million, or 2.5% of net sales, in fiscal 2012.
We routinely identify merchandise that requires some price reduction to accelerate sales of the
product. The need for this reduction is generally attributable to clearance of seasonal merchandise or
product that is being displaced from its assigned location in the store to make room for new
merchandise. Additional stock keeping units (“SKUs”) that are candidates for repricing are identified
using our perpetual inventory data. In each case, the appropriate repricing is determined at our
corporate office support center. Price changes are transmitted electronically to the store and instructions
are provided to our stores regarding product placement, signage and display to ensure the product is
effectively cleared.
We also evaluate our merchandise to ensure that the expected net realizable value of the
merchandise held at the end of a fiscal period exceeds cost. In the event that the expected net realizable
value is less than cost, we reduce the value of that inventory accordingly.
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Property and Equipment
Property and equipment is recorded at cost. Depreciation is recorded on a straight-line basis
over the estimated useful lives of the assets. Amortization of property under capital leases is on a
straight-line basis over the lease term and is included in depreciation expense. We expense repairs and
maintenance costs as incurred. We capitalize and depreciate significant renewals or betterments that
substantially extend the life of the asset. Useful lives are generally estimated as follows:
Buildings
Leasehold improvements
Fixtures and equipment
Computer equipment
Capitalized software
Years
30
10 *
8
5
1 - 5
* We amortize leasehold improvements over the lesser of the useful life of the asset or the remaining
lease term of the underlying facility.
Capitalized Software Costs
We capitalize certain costs related to the acquisition and development of internal use software
that is expected to benefit future periods. These costs are being amortized on a straight-line basis over
the estimated useful life, which is generally five years. As of January 31, 2015 and February 1, 2014, we
had unamortized capitalized software costs of approximately $87 million and $91 million, respectively.
These amounts are included in property and equipment, net in the consolidated balance sheets.
Amortization expense related to capitalized software costs totaled approximately $40 million,
$46 million and $36 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Goodwill
Under the provisions of Accounting Standards Codification (“ASC”) 350, Intangibles—
Goodwill and Other, we review goodwill for impairment each year in the fourth quarter, or more
frequently if events occur which indicate a potential reduction in the fair value of our reporting unit’s
net assets below its carrying value. We have elected to first perform a qualitative assessment to
determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair
value of our reporting unit is less than its carrying value. Factors used in our qualitative assessment
include, but are not limited to, macroeconomic conditions, industry and market conditions, cost factors,
overall financial performance, Company and reporting unit specific events, and the difference between
the fair value and carrying value in recent valuations.
If, after assessing the totality of events or circumstances such as those described above, we
determine that it is more likely than not that the fair value of our reporting unit is greater than its
carrying amount, no further action is required. If we determine that it is more likely than not that the
fair value of our reporting unit is less than its carrying amount, we will compare the reporting unit’s
carrying value to its estimated fair value, determined through estimated discounted future cash flows
and market-based methodologies. If the carrying value exceeds the estimated fair value, we determine
the fair value of all assets and liabilities of the reporting unit, including the implied fair value of
goodwill. If the carrying value of goodwill exceeds the implied fair value, we recognize an impairment
charge equal to the difference. There are assumptions and estimates underlying the determination of fair
value and any resulting impairment loss. Significant changes in these assumptions, or another estimate
using different, but still reasonable, assumptions could produce different results. During fiscal 2012, we
recognized an impairment charge of $1 million related to our online scrapbooking business
(“ScrapHD”) goodwill. See Note 2 for further information. During fiscal 2014 and fiscal 2013, there
was no impairment charge required related to our goodwill.
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Impairment of Long-Lived Assets
We evaluate long-lived assets, other than goodwill and assets with indefinite lives, for
indicators of impairment whenever events or changes in circumstances indicate their carrying amounts
may not be recoverable. Our evaluation compares the carrying value of the assets with their estimated
future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would
be recognized during that period based on the estimated fair value of the assets. Our impairment
analysis contains management assumptions about key variables including sales, growth rate, gross
margin, payroll and other controllable expenses. If actual results differ from these estimates, we may be
exposed to additional impairment losses that may be material. As a result of our impairment review, we
recognized an impairment charge of less than $1 million in fiscal 2014, $2 million in fiscal 2013, and $7
million in fiscal 2012.
Reserve for Closed Facilities
We maintain a reserve for future rental obligations, carrying costs and other closing costs
related to closed facilities, primarily closed and relocated stores. In accordance with ASC 420, Exit or
Disposal Cost Obligations, we recognize exit costs for any store closures at the time the store is closed.
Such costs are recorded within the cost of sales and occupancy expense line item in our consolidated
statements of comprehensive income.
The cost of closing a store or facility is recorded at the estimated fair value of expected cash
flows which we calculate as the lesser of the present value of future rental obligations remaining under
the lease (less estimated sublease rental income) or the lease termination fee (if an executed termination
agreement exists). The determination of the reserves is dependent on our ability to make reasonable
estimates of costs to be incurred post-closure and of rental income to be received from subleases.
The following is a detail of account activity related to closed facilities (in millions):
Balance at beginning of fiscal year
Additions charged to costs and expenses
Payment of rental obligations and other
Balance at end of fiscal year
Self-Insurance
Fiscal Year
2013
2012
5 $
2
(3)
4 $
8 $
5
(8)
5 $
9
5
(6)
8
2014
$
$
We have insurance coverage for losses in excess of self-insurance limits for medical claims,
general liability and workers’ compensation claims. Reserves for healthcare, general liability and
workers’ compensation are determined through the use of actuarial studies. Due to the significant
judgments and estimates utilized for determining these reserves, they are subject to a high degree of
variability. In the event our insurance carriers are unable to pay claims submitted to them, we would
record a liability for such estimated payments we expect to incur.
Revenue Recognition
Revenue from sales of our merchandise is recognized when the customer takes possession of
the merchandise. Revenue is presented net of point-of-sale coupons, discounts and sales taxes collected.
Sales related to custom framing are recognized when the order is picked up by the customer. We allow
for merchandise to be returned under most circumstances up to 120 days after purchase and provide a
reserve for estimated returns. We use historical customer return behavior to estimate our reserve
requirements.
We record a gift card liability on the date we issue the gift card to the customer. We record
revenue and reduce the gift card liability as the customer redeems the gift card. Any remaining
liabilities are evaluated to determine whether the likelihood of the gift card being redeemed is remote
(gift card breakage). Our estimates of gift card
F-11
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breakage are based on customers’ historical redemption rates and patterns, which may not be indicative
of future redemption rates and patterns. Our estimates of the gift card breakage rate are applied to the
estimated amount of gift cards that are expected to go unused.
Costs of Sales and Occupancy Expense
Costs of sales are included in merchandise inventories and expensed as the merchandise is
sold. Included in our costs of sales are the following:
·
·
·
·
purchase price of merchandise, net of vendor allowances and rebates;
inbound freight, inspection costs, duties and import agent commissions;
warehousing, handling,
distribution center-to-store freight costs), purchasing and receiving costs; and
transportation (including
internal
transfer costs such as
share-based compensation costs for those employees involved in preparing inventory for
sale.
Included in our occupancy expenses are the following costs which are recognized as period
costs as described below:
·
·
·
·
store expenses such as rent, insurance, taxes, common area maintenance, utilities, repairs
and maintenance;
amortization of store buildings and leasehold improvements;
store closure costs; and
store remodel costs.
Rent is recognized on a straight-line basis, including consideration of rent holiday, tenant
improvement allowances received from the landlords and applicable rent escalations over the term of
the lease. The commencement date of the rent expense is the earlier of the date when we become
legally obligated for the rent payments or the date when we take possession of the building for
construction purposes.
Selling, General and Administrative
Included in selling, general and administrative are store personnel costs, store operating
expenses, advertising, store depreciation and corporate overhead costs. Advertising costs are expensed
in the period in which the advertising first occurs. Advertising costs totaled $185 million, $181 million
and $179 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Store Pre-Opening Costs
We expense all start-up activity costs as incurred. Store pre-opening costs consist primarily of
payroll-related costs incurred prior to the store opening.
Income Taxes
We record income tax expense using the liability method for taxes and are subject to income
tax in many jurisdictions, including the U.S., various states and localities, and Canada. A current tax
liability or asset is recognized for the estimated taxes payable or refundable on the tax returns for the
current year and a deferred tax liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards. Deferred tax
F-12
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assets and liabilities are measured using enacted income tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect of a
change in tax rates is recognized as income or expense in the period that includes the enactment date. A
valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized.
Share-Based Compensation
ASC 718, Stock Compensation (“ASC 718”), requires all share-based compensation to
employees, including grants of employee stock options and restricted shares, to be recognized using the
fair value method of accounting. During fiscal 2014 and the last quarter of fiscal 2013, the Company
measured share-based compensation using the grant date fair value accounting guidance of ASC
718. During fiscal 2012 and the first three quarters of fiscal 2013, the Company determined its
employee stock options should be recorded under the liability accounting guidance of ASC 718. As
such, we measured share-based compensation based on either the grant date fair value of the equity
awards or the fair value of our option awards at the end of the period. Share-based awards are
recognized ratably over the requisite service period.
Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires us 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.
Reclassification
Certain prior year amounts have been reclassified in the accompanying consolidated financial
statements to conform to our fiscal 2014 presentation.
2. FAIR VALUE MEASUREMENTS
As defined in ASC 820, Fair Value Measurements (“ASC 820”), fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 establishes a three-level valuation hierarchy for fair
value measurements. These valuation techniques are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect less transparent active market data, as well as internal assumptions. These two types of inputs
create the following fair value hierarchy:
·
·
·
Level 1—Quoted prices for identical instruments in active markets;
Level 2—Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose significant inputs are observable; and
Level 3—Instruments with significant unobservable inputs.
Impairment losses related to store-level property and equipment are calculated using
significant unobservable inputs including the present value of future cash flows expected to be
generated using a risk-adjusted weighted-average cost of capital and comparable store sales growth
assumptions, and therefore are classified as a Level 3 measurement in the fair value hierarchy. As a
result of our impairment review, we recorded a store level property and equipment impairment charge
of less than $1 million and $2 million in fiscal 2014 and fiscal 2013, respectively. We did not have an
impairment charge in fiscal 2012.
In fiscal 2010, the Company acquired Scrap HD, an online scrapbooking business. As a result
of negative operating results, we estimated the fair value of ScrapHD to be zero as of February 2, 2013.
We recorded an
F-13
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impairment charge in fiscal 2012 of $7 million for long-lived assets associated with our online
scrapbooking business and a goodwill impairment charge of $1 million, which represents the total
carrying amount of ScrapHD’s goodwill.
The table below provides the carrying and fair values of our Restated Term Loan Credit
Facility, our 2020 Senior Subordinated Notes and our PIK Notes (all as defined in Note 5) as of January
31, 2015. The fair value of our Restated Term Loan Credit Facility, our 2020 Senior Subordinated
Notes and our PIK Notes were determined based on quoted market prices which are considered Level 2
inputs within the fair value hierarchy.
Carrying
Fair
Value
Value
Restated term loan credit facility
Senior subordinated notes
PIK notes
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in millions):
(In millions)
$ 2,453 $ 2,413
516
184
515
181
Buildings and leasehold improvements
Fixtures and equipment
Capitalized software
Construction in progress
Less accumulated depreciation and amortization
January 31,
February 1,
2015
2014
$
$
451
879
221
28
1,579
(1,193)
386
$
$
403
884
277
36
1,600
(1,242)
358
4. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following (in millions):
Accrued payroll
Self-insurance
Accrued interest
Property, sales and use taxes
Gift card liability
Accrued and straight-line rent
Other
F-14
January 31,
February 1,
2015
2014
$
$
128
71
10
60
38
18
67
392
$
$
103
71
56
53
36
17
75
411
Table of Contents
5. DEBT
Debt for The Michaels Companies, Inc. and MSI consisted of the following at the end of fiscal
2014 and fiscal 2013 (in millions):
The
Michaels Companies, Inc. Michaels Stores, Inc.
February
1,
January 31, February 1,
January
31,
Interest Rate
2015
2014
2015
2014
Restated term loan credit facility
Senior notes
Senior subordinated notes
PIK notes
Total debt
Less current portion
Long-term debt
Variable $
7.75 %
5.875 %
7.50 % /
8.25%
$
2,453 $
—
515
181
3,149
(25)
3,124 $
1,628 $ 2,453 $ 1,628
1,006
—
1,006
260
515
260
800
—
—
2,894
3,694 2,968
(16)
(25)
3,678 $ 2,943 $ 2,878
(16)
The aggregate amount of scheduled maturities of The Michaels Companies, Inc. and MSI debt
for the next five years and thereafter is as follows (in millions):
Fiscal Year
2015
2016
2017
2018
2019
Thereafter
Total debt payments
Plus unrealized premium amortization
Less unrealized discount accretion
Total debt balance as of January 31, 2015
The Michaels
Companies, Inc.
$
25 $
25
25
206
Michaels
Stores, Inc.
25
25
25
25
2,357 2,357
510
3,148 2,967
5
(4)
2,968
5
(4)
3,149 $
510
$
As of January 31, 2015 and February 1, 2014, the weighted-average interest rate of the variable
debt was 3.84% and 3.75%, respectively. Cash paid for interest totaled $234 million, $183 million and
$239 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
As of January 31, 2015, debt costs for The Michaels Companies, Inc. and MSI totaled
$95 million and $91 million, respectively. We amortize deferred financing costs using the straight-line
method over the terms of the respective debt agreements (which range from five to ten years).
Amortization expense related to deferred financing costs is recorded in interest expense in the
accompanying consolidated statements of comprehensive income. The straight-line method produces
results materially consistent with the effective interest method. Our expected
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amortization expense for The Michaels Companies, Inc. and MSI related to the deferred financing costs
for each of the next five fiscal years and thereafter is as follows (in millions):
Fiscal Year
2015
2016
2017
2018
2019
Thereafter
Total amortization expense
Restated Term Loan Credit Facility
$
The Michaels
Companies, Inc.
9 $
9
8
7
6
2
41 $
Michaels
Stores, Inc.
8
8
8
6
6
2
38
$
On October 31, 2006, MSI entered into a $2.4 billion senior secured term loan facility (“Senior
Secured Term Loan Facility”) with Deutsche Bank AG New York Branch (“Deutsche Bank”) and other
lenders. On January 28, 2013, MSI entered into an amended and restated credit agreement maturing on
January 28, 2020 (the “Amended Credit Agreement”) to amend various terms of our Senior Secured
Term Loan Facility, as amended. The Amended Credit Agreement, together with the related security,
guarantee and other agreements, is referred to as the “Restated Term Loan Credit Facility”.
On July 2, 2014, MSI issued an additional $850 million of debt under the Restated Term Loan
Credit Facility maturing in 2020 (“Additional Term Loan”). The Additional Term Loan was issued at
99.5% of face value, resulting in an effective interest rate of 4.02%. The net proceeds from this
borrowing and the issuance of an additional $250 million of the 5.875% senior subordinated notes were
used to fully redeem the outstanding 7.75% Senior Notes due 2018 (“2018 Senior Notes”) and to pay the
applicable make-whole premium and accrued interest.
As of January 31, 2015, the Restated Term Loan Credit Facility provides for senior secured
financing of $2,490 million. MSI has the right under the Restated Term Loan Credit Facility to request
additional term loans (a) in an aggregate amount of up to $500 million or (b) an amount of term loans
requested by MSI so long as MSI’s consolidated secured debt ratio (as defined in the Restated Term
Loan Credit Facility) is no more than 3.25 to 1.00 on a pro forma basis as of the last day of the most
recently ended four quarter period. The lenders under the Restated Term Loan Credit Facility will not
be under any obligation to provide any such additional term loans and the incurrence of any additional
term loans is subject to customary conditions precedent.
Borrowings under the Restated Term Loan Credit Facility bear interest at a rate per annum
equal to, at MSI’s option, either (a) a base rate determined by reference to the highest of (1) the prime
rate of Deutsche Bank, (2) the federal funds effective rate plus 0.5%, subject to a 2% floor in the case of
the Additional Term Loan, and (3) London Interbank Offered Rate (“LIBOR”), subject to certain
adjustments, plus 1% or (b) LIBOR, subject to certain adjustments and a 1% floor, in each case plus an
applicable margin. The applicable margin is 1.75% (2.00% for the Additional Term Loan) with respect
to the base rate borrowings and 2.75% (3.00% for the Additional Term Loan) with respect to LIBOR
borrowings. In addition, the applicable margin is subject to a 0.25% decrease based on MSI’s
consolidated secured debt ratio. The decrease does not apply to the Additional Term Loan.
The Restated Term Loan Credit Facility requires MSI to prepay outstanding term loans with
(a) 100% of the net proceeds of any debt issued by MSI or its subsidiaries (with exceptions for certain
permitted debt) and (b) 50% of MSI’s annual excess cash flow, as defined. The 50% threshold will be
reduced to 25% if MSI’s consolidated total leverage ratio, as defined, is less than 6.00:1.00 and will be
reduced to zero if MSI’s consolidated total leverage ratio is less than 5.00:1.00.
MSI must offer to prepay outstanding term loans at 100% of the principal amount, plus any
unpaid interest, with the proceeds of certain asset sales or casualty events under certain
circumstances. MSI may voluntarily prepay
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outstanding loans under the Restated Term Loan Credit Facility at any time without premium or penalty
other than customary breakage costs with respect to LIBOR loans.
MSI is required to make scheduled quarterly payments equal to 0.25% of the original principal
amount of the term loans, subject to adjustments relating to the incurrence of additional term loans for
the first six years and three quarters of the Restated Term Loan Credit Facility, with the balance paid on
January 28, 2020.
All obligations under the Restated Term Loan Credit Facility are unconditionally guaranteed,
jointly and severally, by Holdings, and all of MSI’s existing domestic material subsidiaries and are
required to be guaranteed by certain of MSI’s future domestic wholly-owned material subsidiaries (“the
Subsidiary Guarantors”). All obligations under the Restated Term Loan Credit Facility, and the
guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the
assets of Holdings, MSI and the Subsidiary Guarantors, including:
·
·
·
a first-priority pledge of MSI’s capital stock and all of the capital stock held directly by
MSI and the Subsidiary Guarantors (which pledge, in the case of any foreign subsidiary,
is limited to 65% of the voting stock of such foreign subsidiary and 100% of the non-
voting stock of such subsidiary);
a first-priority security interest in, and mortgages on, substantially all other tangible and
intangible assets of Holdings, MSI and each Subsidiary Guarantor,
including
substantially all of MSI’s and its subsidiaries’ owned real property and equipment, but
excluding, among other things, the collateral described below; and
a second-priority security interest in personal property consisting of inventory and related
accounts, cash, deposit accounts, all payments received by Holdings, MSI or the
Subsidiary Guarantors from credit card clearinghouses and processors or otherwise in
respect of all credit card charges and debit card charges for sales of inventory by
Holdings, MSI and the Subsidiary Guarantors, and certain related assets and proceeds of
the foregoing.
The Restated Term Loan Credit Facility contains a number of negative covenants that are
substantially similar to, but more restrictive in certain respects than, those governing the 2020 Senior
Subordinated Notes (defined below), as well as certain other customary representations and warranties,
affirmative and negative covenants and events of default. As of January 31, 2015, MSI was in
compliance with all covenants.
In accordance with ASC 470, Debt (“ASC 470”), MSI recorded a $12 million charge related to
refinancing costs and capitalized $5 million in debt issuance costs in fiscal 2012 associated with the
Restated Term Loan Credit Facility. MSI also recorded a loss on the early extinguishment of debt in
fiscal 2012 of approximately $8 million to write-off debt issuance costs associated with the Senior
Secured Term Loan Facility, with the remaining $9 million of unamortized debt issuance costs being
amortized over the revised life of the Restated Term Loan Credit Facility. In fiscal 2014, MSI
capitalized an additional $14 million of debt issuance costs related to the Additional Term Loan. The
debt issuance costs are being amortized as interest expense over the life of the Restated Term Loan
Credit Facility.
As of January 31, 2015, MSI is amortizing $47 million in debt issuance costs as interest
expense over the life of the term loan.
Restated Revolving Credit Facility
On February 18, 2010, MSI entered into an agreement to amend and restate various terms of
the then existing asset-based revolving credit facility dated October 31, 2006 (as amended and restated,
the “Senior Secured Asset-Based Revolving Credit Facility”). On September 17, 2012, MSI entered
into a second amended and restated credit agreement (the “Restated Credit Agreement”) with Wells
Fargo Bank, National Association (“Wells Fargo”) and other lenders to amend various terms of our
Senior Secured Asset-Based Revolving Credit Facility. On June 6, 2014, MSI amended its Restated
Credit Agreement to, among other things, permit the incurrence of the Additional Term Loan and
refinancing of the 2018 Senior Notes with the net proceeds of the 2020 Senior Subordinated Notes and
the
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Additional Term Loan. The Restated Credit Agreement, together with related security, guarantee and
other agreements, is referred to as the “Restated Revolving Credit Facility”.
The Restated Revolving Credit Facility provides for senior secured financing of up to $650
million, subject to a borrowing base, and matures on September 17, 2017 (“ABL Maturity Date”). The
borrowing base under the Restated Revolving Credit Facility equals the sum of (i) 90% of eligible credit
card receivables and debit card receivables, plus (ii) 90% of the appraised net orderly liquidation value
of eligible inventory, plus (iii) the lesser of (a) 90% of the appraised net orderly liquidation value of
inventory supported by eligible letters of credit and (b) 90% of the face amount of eligible letters of
credit, minus (iv) certain reserves.
The Restated Revolving Credit Facility provides MSI with the right to request up to $200
million of additional commitments. The lenders will not be under any obligation to provide any such
additional commitments, and any increase in commitments is subject to customary conditions. If we
were to request additional commitments, and the lenders were to agree to provide such commitments,
the facility size could be increased up to $850 million, however, MSI’s ability to borrow would still be
limited by the borrowing base.
Borrowings under the Restated Revolving Credit Facility bear interest at a rate per annum
equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate
of Wells Fargo, (2) the federal funds effective rate plus 0.50% and (3) LIBOR subject to certain
adjustments plus 1.00% or (b) LIBOR subject to certain adjustments, in each case plus an applicable
margin. The initial applicable margin is (a) 0.75% for prime rate borrowings and 1.75% for LIBOR
borrowings. The applicable margin is subject to adjustment each fiscal quarter based on the excess
availability under the Restated Revolving Credit Facility. Same-day borrowings bear interest at the base
rate plus the applicable margin.
MSI is required to pay a commitment fee on the unutilized commitments under the Restated
Revolving Credit Facility, which initially is 0.375% per annum. The commitment fee is subject to
adjustment each fiscal quarter. If average daily excess availability is less than or equal to 50% of the
total commitments, the commitment fee will be 0.25% per annum. If average daily excess availability is
greater than 50% of the total commitments, the commitment fee will be 0.375%. In addition, MSI must
pay customary letter of credit fees and agency fees.
All obligations under the Restated Revolving Credit Facility are unconditionally guaranteed,
jointly and severally, by Holdings and all of MSI’s existing domestic material subsidiaries and are
required to be guaranteed by the Subsidiary Guarantors. All obligations under the Restated Revolving
Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by
substantially all of the assets of Holdings, MSI and the Subsidiary Guarantors, including:
·
·
·
a first-priority security interest in personal property consisting of inventory and related
accounts, cash, deposit accounts, all payments received by Holdings, MSI or the
Subsidiary Guarantors from credit card clearinghouses and processors or otherwise in
respect of all credit card charges and debit card charges for sales of inventory by
Holdings, MSI and the Subsidiary Guarantors, and certain related assets and proceeds of
the foregoing;
a second-priority pledge of all of MSI’s capital stock and the capital stock held directly
by MSI and the Subsidiary Guarantors (which pledge, in the case of the capital stock of
any foreign subsidiary, is limited to 65% of the voting stock of such foreign subsidiary
and 100% of the non-voting stock of such subsidiary); and
a second-priority security interest in, and mortgages on, substantially all other tangible
and intangible assets of Holdings, MSI and each Subsidiary Guarantor, including
substantially all of MSI’s and its subsidiaries’ owned real property and equipment.
If, at any time, the aggregate amount of outstanding loans, unreimbursed letter of credit
drawings and undrawn letters of credit under the Restated Revolving Credit Facility exceeds the lesser
of (i) the commitment amount
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and (ii) the borrowing base (the “Loan Cap”), MSI will be required to repay outstanding loans and cash
collateralized letters of credit in an aggregate amount equal to such excess, with no reduction of the
commitment amount. If excess availability under the Restated Revolving Credit Facility is less than
(i) 12.5% of the Loan Cap for five consecutive business days, or (ii) $65 million at any time, or if
certain events of default have occurred, MSI will be required to repay outstanding loans and cash
collateralized letters of credit with the cash MSI is required to deposit daily in a collection account
maintained with the agent under the Restated Revolving Credit Facility. Excess availability under the
Restated Revolving Credit Facility means the lesser of the Loan Cap minus the outstanding credit
extensions. MSI may voluntarily reduce the unutilized portion of the commitment amount and repay
outstanding loans at any time without premium or penalty, other than customary breakage costs with
respect to LIBOR loans. There is no scheduled amortization under the Restated Revolving Credit
Facility. The principal amount of the loans outstanding is due and payable in full on the ABL Maturity
Date.
The covenants limiting dividends and other restricted payments, investments, loans, advances
and acquisitions, and prepayments or redemptions of indebtedness, each permit the restricted actions in
an unlimited amount, subject to the satisfaction of certain payment conditions, principally that MSI
must meet specified excess availability requirements and minimum consolidated fixed charge coverage
ratios, to be tested on a pro forma and six months projected basis. Adjusted EBITDA, as defined in the
Restated Revolving Credit Facility, is used in the calculation of the consolidated fixed charge coverage
ratios.
From the time when MSI has excess availability less than the greater of (a) 10% of the Loan
Cap and (b) $50 million, until the time when MSI has excess availability greater than the greater of
(a) 10% of the Loan Cap and (b) $50 million for 30 consecutive days, the Restated Revolving Credit
Facility will require MSI to maintain a consolidated fixed charge coverage ratio of at least 1.0 to 1.0.
The Restated Revolving Credit Facility also contains certain customary representations and warranties,
affirmative covenants and provisions relating to events of default (including change of control and
cross-default to material indebtedness).
The Restated Revolving Credit Facility contains a number of covenants that, among other
things and subject to certain exceptions, restrict MSI’s ability, and the ability of its restricted
subsidiaries, to:
·
·
incur or guarantee additional indebtedness;
pay dividends on MSI’s capital stock or redeem, repurchase or retire MSI’s capital stock;
· make investments, loans, advances and acquisitions;
·
·
·
·
·
·
create restrictions on the payment of dividends or other amounts to MSI from its
restricted subsidiaries;
engage in transactions with MSI’s affiliates;
sell assets, including capital stock of MSI’s subsidiaries;
prepay or redeem indebtedness;
consolidate or merge; and
create liens.
In accordance with ASC 470, MSI recorded a loss on the early extinguishment of debt in fiscal
2012 of approximately $2 million to write-off debt issuance costs related to the execution of the
Restated Revolving Credit Facility, with the remaining $7 million of unamortized debt issuance costs
being amortized over the life of the Restated Revolving Credit Facility. In addition, MSI capitalized $4
million of debt issuance costs in fiscal 2012 associated with
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the Restated Revolving Credit Facility. These debt issuance costs are being amortized as interest
expense over the life of the Restated Revolving Credit Facility.
As of January 31, 2015 and February 1, 2014, the borrowing base was $650 million, of which
MSI had availability of $588 million and $589 million, respectively. Borrowing capacity is available for
letters of credit and borrowings on same-day notice. Outstanding standby letters of credit as of January
31, 2015 totaled $62 million.
5.875% Senior Subordinated Notes due 2020
On December 19, 2013, MSI issued $260 million in principal amount of 5.875% senior
subordinated notes maturing in 2020 (“2020 Senior Subordinated Notes”). Interest is payable semi-
annually on June 15 and December 15 of each year, commencing on June 15, 2014. MSI used the net
proceeds of these notes to redeem the outstanding 11.375% senior subordinated notes due November 1,
2016, to pay the applicable redemption premium and unpaid interest and to pay other related costs.
On June 16, 2014, MSI issued an additional $250 million of the 2020 Senior Subordinated
Notes at 102% of face value, resulting in an effective interest rate of 5.76%. The net proceeds from this
borrowing, and the $850 million Additional Term Loan, were used to fully redeem the outstanding 2018
Senior Notes and to pay the applicable make-whole premium and accrued interest.
The 2020 Senior Subordinated Notes are guaranteed, jointly and severally, fully and
unconditionally, on an unsecured senior subordinated basis, by each of MSI’s subsidiaries that
guarantee indebtedness under the Restated Revolving Credit Facility and the Restated Term Loan
Credit Facility (collectively defined as the “Senior Secured Credit Facilities”).
The 2020 Senior Subordinated Notes and the guarantees are MSI’s and the guarantors’
unsecured senior subordinated obligations and are (i) subordinated in right of payment to all of MSI’s
and the guarantors’ existing and future senior debt, including the Senior Secured Credit Facilities;
(ii) rank equally in right of payment to all of MSI’s and the guarantors’ future senior subordinated debt;
(iii) effectively subordinated to all of MSI’s and the guarantors’ existing and future secured debt
(including the Senior Secured Credit Facilities) to the extent of the value of the assets securing such
debt; (iv) rank senior in right of payment to all of the MSI’s and the guarantors’ existing and future debt
and other obligations that are, by their terms, expressly subordinated in right of payment to the 2020
Senior Subordinated Notes; and (v) are structurally subordinated to all obligations of MSI’s subsidiaries
that are not guarantors of the 2020 Senior Subordinated Notes.
At any time prior to December 15, 2016, MSI may redeem all or a part of the 2020 Senior
Subordinated Notes at a redemption price equal to 100% of the principal amount redeemed plus a
make-whole premium, as provided in the indenture governing the 2020 Senior Subordinated Notes
(“2020 Senior Subordinated Notes Indenture”), and any unpaid interest to the date of redemption,
subject to the right of holders of record on the relevant record date to receive interest due on the
relevant interest payment date.
On and after December 15, 2016, MSI may redeem all or part of the 2020 Senior Subordinated
Notes, upon notice, at the redemption prices (expressed as percentages of the principal amount of the
2020 Senior Subordinated Notes to be redeemed) set forth below, plus any unpaid interest thereon to the
applicable date of redemption if redeemed during the twelve-month period beginning on December 15
of each of the years indicated below:
Year
2016
2017
2018 and thereafter
Percentage
102.938 %
101.469 %
100.000 %
In addition, until December 15, 2016, MSI may, at its option, on one or more occasions redeem
up to 40% of the aggregate principal amount of the 2020 Senior Subordinated Notes with the aggregate
principal amount to be
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redeemed (“Equity Offering Redemption Amount”) not to exceed an amount equal to the aggregate
gross proceeds from one or more equity offerings (as defined in the 2020 Senior Subordinated Notes
Indenture), at a redemption price equal to 105.875% of the aggregate principal amount, plus any unpaid
interest, provided that (i) each such redemption occurs within 120 days of the date of closing of each
such equity offering; (ii) proceeds in an amount equal to or exceeding the applicable equity offering
redemption amount shall be received by, or contributed to the capital of MSI or any of its restricted
subsidiaries and (iii) at least 50% of the sum of the aggregate principal amount of the 2020 Senior
Subordinated Notes remains outstanding immediately after the occurrence of each such redemption.
Upon a change in control, MSI is required to offer to purchase all of the 2020 Senior
Subordinated Notes at a price in cash equal to 101% of the aggregate principal amount, plus any unpaid
interest. The 2020 Senior Subordinated Indenture contains covenants limiting MSI’s ability, and the
ability of MSI’s restricted subsidiaries, to incur or guarantee additional debt, prepay debt that is
subordinated to the 2020 Senior Subordinated Notes, issue stock of subsidiaries, make certain
investments, loans, advances and acquisitions, create liens on MSI’s and such subsidiaries’ assets to
secure debt, enter into transactions with affiliates, merge or consolidate with another company; and sell
or otherwise transfer assets. The covenants also limit MSI’s ability, and the ability of MSI’s restricted
subsidiaries, to pay dividends or distributions on MSI’s capital stock or repurchase MSI’s capital stock,
subject to certain exceptions, including dividends, distributions and repurchases up to an amount in
excess of (i) $100 million plus (ii) a basket that builds based on 50% of MSI’s consolidated net income
(as defined in the 2020 Senior Subordinated Indenture) and certain other amounts, in each case, to the
extent such payment capacity is not applied as otherwise permitted under the 2020 Senior Subordinated
Indenture and subject to certain conditions. As of January 31, 2015, the permitted restricted payment
amount was approximately $431 million. As of January 31, 2015, MSI was in compliance with all
covenants.
In accordance with ASC 470, MSI is amortizing $14 million in debt issuance costs, including
$5 million of costs capitalized in fiscal 2014 and $4 million capitalized in fiscal 2013, as interest
expense over the life of the 2020 Senior Subordinated Notes.
7.50%/8.25% PIK Toggle Notes
On July 29, 2013, FinCo Holdings and FinCo Inc. issued $800 million aggregate principal
amount of 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”) in a private transaction. Interest
payments on the PIK Notes are due February 1 and August 1 of each year until maturity on August 1,
2018. The first two interest payments and the last interest payment are required to be paid entirely in
cash. All other interest payments must be made in cash, except that all or a portion of the interest on the
PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing
additional PIK Notes depending on the amount of cash dividends that can be paid by MSI under the
credit agreements governing our Senior Secured Credit Facilities, the terms of the indentures governing
our outstanding notes and the terms of MSI’s other indebtedness outstanding at the time. If interest on
the PIK Notes is paid in-kind by increasing the principal amount of the PIK Notes, or by issuing new
PIK Notes, the interest rate is 8.25% per annum, which is the cash interest rate plus 75 basis points. The
proceeds from the debt issuance totaled approximately $783 million, after deducting the debt issuance
costs. FinCo Holdings distributed the net proceeds to the Company which were used to fund a cash
dividend, distribution and other payments to the Company's equity and equity-award holders and to pay
related costs.
On July 2, 2014, the Company completed an IPO and received net proceeds totaling $446
million. The net proceeds were used to redeem $439 million of the outstanding PIK Notes and to pay
other expenses of the offering. The aggregate redemption price (including redemption premium and any
unpaid interest) was $474 million. On December 10, 2014, the Company redeemed $180 million of the
PIK Notes for an aggregate redemption price (including the applicable redemption premium and any
unpaid interest) of $188 million.
In accordance with ASC 470, we recorded a loss on the early extinguishment of debt of $18
million related to the redemption of the PIK Notes in fiscal 2014. The $18 million loss consisted of a
$7 million redemption premium and an $11 million charge to write-off debt issuance costs.
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The PIK Notes are senior unsecured obligations of FinCo Holdings and FinCo Inc. The PIK
Notes are not guaranteed by MSI, Holdings or any of their subsidiaries, however, the indenture
governing the PIK Notes contains restrictive covenants that apply to FinCo Holdings and its restricted
subsidiaries, including MSI, Holdings and their subsidiaries. A breach of such covenants would cause
FinCo Holdings and FinCo Inc. to be in default under the indenture governing the PIK Notes. The
indenture also contains restrictive covenants and events of default substantially similar to, but less
restrictive than, those of the 2020 Senior Subordinated Notes described above. As of January 31, 2015,
we were in compliance with all covenants.
The Company may redeem all or part of the PIK Notes, upon notice, at the redemption prices
(expressed as percentages of principal amount of the PIK Toggle Notes to be redeemed) set forth below,
plus any unpaid interest to the applicable date of redemption if redeemed during the twelve-month
period beginning on August 1 of each of the years indicated below:
Year
2014
2015
2016 and thereafter
7.75% Senior Notes due 2018
Percentage
102.00 %
101.00 %
100.00 %
On October 21, 2010, MSI issued $800 million aggregate principal amount of 7.75% senior
notes that matured on November 1, 2018 (“Senior Notes”) at a discounted price of 99.262% of face
value, resulting in an effective interest rate of 7.875%. Interest was payable semi-annually in arrears on
May 1 and November 1 of each year, commencing on May 1, 2011. On September 27, 2012, MSI
issued an additional $200 million aggregate principal amount (the “Additional Senior Notes” and,
together with the Senior Notes, the “2018 Senior Notes”) of Senior Notes under the indenture (the “2018
Senior Indenture”). The Additional Senior Notes were issued at a premium of 106.25% of face value,
resulting in an effective interest rate of 6.50%. On July 16, 2014 and August 1, 2014, we redeemed the
2018 Senior Notes in the aggregate principal amounts of $235 million and $765 million, respectively,
plus the applicable make-whole premium and accrued interest, and the 2018 Senior Indenture was
discharged.
In accordance with ASC 470, we recorded a loss on the early extinguishment of debt of $56
million related to the redemption of the 2018 Senior Notes. The $56 million loss consisted of $51
million of redemption premiums and $10 million to write-off related debt issuance costs. This loss was
partially offset by a $5 million write-off of unamortized net premiums.
11.375% Senior Subordinated Notes due 2016
On October 31, 2006, MSI issued $400 million in principal amount of 11.375% senior
subordinated notes due November 1, 2016 (the “2016 Senior Subordinated Notes”). Interest was
payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2007.
On February 27, 2013, MSI redeemed $137 million of the 2016 Senior Subordinated Notes at a
redemption price equal to 103.792% for an aggregate redemption price (including the applicable
redemption premium and any unpaid interest) of $147 million. On January 21, 2014, MSI redeemed the
remaining $256 million of 2016 Senior Subordinated Notes at a redemption price equal to 101.896%, or
a total of $261 million. Accordingly, MSI’s obligations under the 2016 Senior Subordinated Notes
Indenture were discharged. In accordance with ASC 470, MSI recorded a loss on the early
extinguishment of debt in fiscal 2013 of approximately $14 million related to the redemption of our
2016 Senior Subordinated Notes. The $14 million loss was comprised of an $8 million redemption
premium and $6 million to write-off related debt issuance and other costs.
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13% Subordinated Discount Notes due 2016
On October 31, 2006, we issued $469 million in principal amount of 13% subordinated
discount notes due on November 1, 2016, ("Subordinated Discount Notes"). Interest was payable semi-
annually on May 1 and November 1 of each year, commencing on May 1, 2012.
On November 1, 2012, we redeemed a portion of each Subordinated Discount Note equal to
the applicable high yield discount obligation (“AHYDO Amount”), as defined in the subordinated
discount notes indenture, at a redemption price equal to 100% and the remaining outstanding
Subordinated Discount Notes at a redemption price equal to 104.333%. In accordance with ASC 470,
we recorded a loss on the early extinguishment of debt of approximately $11 million related to the
redemption of our Subordinated Discount Notes. The $11 million loss is comprised of an $8 million
redemption premium and $3 million to write-off related debt issuance costs.
6. LEASES
We operate stores and use distribution centers, office facilities and equipment that are
generally leased under non-cancelable operating leases, the majority of which provide for renewal
options. Future minimum annual rental commitments for all non-cancelable operating leases as of
January 31, 2015 are as follows (in millions):
For the fiscal year:
2015
2016
2017
2018
2019
Thereafter
Total minimum rental commitments
$
$
391
356
298
242
183
440
1,910
Rent expense applicable to non-cancelable operating leases was $377 million, $370 million
and $355 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
7. 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
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components of deferred tax assets and liabilities as of the respective year-end balance sheets for The
Michaels Companies, Inc. and MSI are as follows (in millions):
The
Michaels Companies, Inc.
Michaels Stores, Inc.
Fiscal Year
Fiscal Year
2014
2013
2014
2013
Gross deferred tax assets:
$
Accrued liabilities
State income taxes
Vacation accrual
Share-based compensation
Deferred rent
Gift cards
Self-insurance
Original issue discount write-off
Federal, State and foreign net operating losses
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation
allowance
Deferred tax liabilities:
Merchandise inventories
Property and equipment
Unremitted earnings
Cancellation of debt income
Total deferred tax liabilities
13 $
4
8
16
15
5
19
33
8
9
130
(5)
14 $
3
8
22
17
5
19
41
9
10
148
(9)
13 $
4
8
16
15
5
19
33
8
9
130
(5)
125
139
125
(8)
(34)
(2)
(32)
(76)
(10)
(25)
—
(40)
(75)
(8)
(34)
(2)
(32)
(76)
Net deferred tax assets
$
49 $
64 $
49 $
Current portion
Non-current portion
Total
38
11
49 $
38
26
64 $
38
11
49 $
$
F-24
14
3
8
22
17
5
19
41
9
10
148
(9)
139
(10)
(25)
—
(40)
(75)
64
38
26
64
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The reconciliation between the actual provision for income tax and the provision for income
tax calculated by applying the federal statutory tax rate of 35% is as follows (in millions):
Income tax provision at statutory
rate
State income taxes, net of federal
income tax effect
Federal tax credits
Unrecognized tax benefits
State valuation allowance
Other
Total provision for income tax
The Michaels Companies, Inc.
Michaels Stores, Inc.
Fiscal Year
2013
2014
2012
2014
Fiscal Year
2013
2012
$
123 $
133 $
111 $
146 $
144 $
11
(2)
4
(4)
2
134 $
8
(1)
—
(1)
(3)
136 $
6
—
(1)
—
(1)
115 $
13
(2)
4
(4)
—
157 $
9
(1)
—
(1)
(3)
148 $
$
111
6
—
(1)
—
(1)
115
The federal, state and international provision for income tax for The Michaels Companies, Inc.
and MSI are as follows (in millions):
Current:
Federal
State
International
Total current
Deferred:
Federal
State
International
Total deferred
The Michaels Companies, Inc.
Michaels Stores, Inc.
2014
Fiscal Year
2013
2012
Fiscal Year
2013
2014
2012
$
90
19
10
119
20
(2)
(3)
15
$
114
15
11
140
(1)
(4)
1
(4)
$
92
10
20
122
$111
21
10
142
$125
15
11
151
$ 92
10
20
122
(7)
1
(1)
(7)
20
(2)
(3)
15
—
(4)
1
(3)
(7)
1
(1)
(7)
Provision for income taxes
$
134
$
136
$
115
$157
$148
$115
A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless
it is more likely than not that such assets will be realized. In evaluating our ability to realize our
deferred tax assets we considered sources of future taxable income, including future reversals of
existing taxable temporary differences, forecast of future profitability, taxable income in prior carryback
years and tax-planning strategies. The valuation allowance recorded, net of the federal benefit, against
our deferred tax assets totaled $5 million and $9 million as of January 31, 2015 and February 1, 2014,
respectively.
At January 31, 2015, we had state net operating loss carryforwards to reduce future taxable
income of approximately $8 million, net of federal tax benefits, expiring at various dates between fiscal
2015 and fiscal 2032. Cash paid for income taxes totaled $112 million, $145 million and $108 million
in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Uncertain Tax Positions
We operate in a number of tax jurisdictions and are subject to examination of our income tax
returns by tax authorities in those jurisdictions who may challenge any item on these tax returns.
Because the tax matters challenged by tax authorities are typically complex, the ultimate outcome of
these challenges is uncertain. In accordance with
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ASC 740, Income Taxes, we recognize the benefits of uncertain tax positions in our consolidated
financial statements only after determining that it is more likely than not that the uncertain tax positions
will be sustained.
A reconciliation of gross unrecognized tax benefits, including reduction of deferred tax assets
for state operating losses, from the end of fiscal year 2013 through the end of fiscal 2014 is as
follows (in millions):
Balance at beginning of year
Additions based on tax positions related to the current year
Additions for tax positions related to prior years
Reductions for expiration of statute of limitations
Balance at end of year
$
$
12
3
4
(2)
17
Included in the balance of unrecognized tax benefits at January 31, 2015 is $5 million which, if
recognized, would affect tax expense. Our policy is to classify all income-tax related interest and
penalties as income tax expense. At January 31, 2015 and February 1, 2014, the total amount of interest
and penalties accrued within the tax liability was $3 million and $2 million, respectively. There w as no
material interest and penalties recognized in the consolidated statements of comprehensive income in
fiscal years 2014, 2013 and 2012.
In the normal course of business, we are subject to examination by taxing authorities in major
Canadian, U.S. Federal and U.S. State jurisdictions. The periods subject to examination for our federal
return are fiscal 2010 to fiscal 2014, fiscal 2007 to fiscal 2014 for our Canadian returns and fiscal 2009
to fiscal 2014 for all major state tax returns. The pretax income from foreign operations for fiscal 2014,
fiscal 2013 and fiscal 2012 totaled $38 million, $39 million and $52 million, respectively.
8. SHARE-BASED COMPENSATION
The Michaels Companies, Inc. Amended and Restated 2014 Omnibus Long-Term Incentive
Plan (“2014 Omnibus Plan”) provides for the grant of share-based awards for up to 21 million shares of
common stock. As of January 31, 2015, there were 8.8 million shares of common stock remaining
available for grant. Generally, awards vest ratably over four or five years and expire eight to ten years
from the grant date. During fiscal 2014 and the last quarter of fiscal 2013, the Company measured
share-based compensation for new awards using the grant date fair value accounting guidance of ASC
718. During fiscal 2012 and the first three quarters of fiscal 2013, the Company determined its
employee stock options should be recorded under the liability accounting guidance of ASC 718. As such
we measured share-based compensation based on either the grant date fair value of the equity awards or
the fair value of our option awards at the end of the period. As of January 31, 2015, compensation cost
for all share-based awards not yet recognized related to nonvested awards totaled $14 million and is
expected to be recognized over a weighted-average period of 2.8 years. Share-based liabilities paid in
fiscal 2013 totaled $19 million. Share-based compensation totaled $19 million in fiscal 2014,
$34 million in fiscal 2013 and $21 million in fiscal 2012 and is recorded in cost of sales and occupancy
expense and share-based compensation in the consolidated statements of comprehensive income.
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Stock Options
The fair value of each stock option is estimated using the Black-Scholes option pricing model.
The following table presents the weighted-average assumptions used during fiscal years 2014, 2013 and
2012:
Risk-free interest rates (1)
Expected dividend yield
Expected volatility (2)
Expected life of options in
years (3)
Fair value of equity per share
(4)
2014
Fiscal Year
2013
1.3 %
0.0 %
27.5 - 28.4 %
0.1 -
1.4 %
0.0 %
25.5 - 32.5 %
2012
0.1 -
1.1 %
0.0 %
29 - 35.2 %
4.0
4.0 -
5.0
1.0 -
5.0
$15.16 -22.75
$14.76 -18.28
$16.32 -16.99
(1) Based on interest rates for U.S. Treasury instruments with terms consistent with the expected
lives of the awards.
(2) We considered both the historical volatility as well as implied volatilities for exchange-traded
options of a peer group of companies.
(3) Expected lives were based on an analysis of historical exercise and post-vesting employment
termination behavior. Since fair value was remeasured at the end of the year in fiscal 2012, and
at the end of the third quarter in fiscal 2013, the expected life was adjusted based on the
remaining life of the options.
(4) The Company’s common stock valuations for periods prior to our IPO on June 27, 2014, fiscal
2013 and fiscal 2012 relied on projections of our future performance, estimates of our weighted-
average cost of capital, and metrics based on the performance of a peer group of similar
companies, including valuation multiples and stock price volatility. Subsequent to June 27, 2014,
the Company used the closing market price of our common stock on the grant date.
The stock option activity during the fiscal year ended January 31, 2015 was as follows:
Weighted-
Average
Remaining Aggregate
Contractual
Average Exercise Term (In
Weighted-
Intrinsic
Value
(In millions)
Price
years)
Number of
Shares
(In millions)
Outstanding at beginning of year
Granted
Exercised
Expired/Forfeited
Outstanding at end of year
11.8 $
1.6
(3.0)
(0.6)
9.8
9.37
15.88
7.67
11.82
10.86
4.9 $
146
Shares exercisable at end of year
5.5 $
8.35
3.2 $
96
The total fair value of options that vested during fiscal 2014, fiscal 2013 and fiscal 2012 was
$15 million, $17 million and $30 million, respectively. The intrinsic value for options that vested during
fiscal 2014, fiscal 2013 and fiscal 2012 was $33 million, $25 million and $22 million, respectively. The
intrinsic value for options exercised was $42 million in fiscal 2014, $27 million in fiscal 2013 and $5
million in fiscal 2012. As of the beginning of fiscal 2014, there were 5.2 million nonvested options with
a weighted-average fair value of $6.04 per share. As of the end of fiscal 2014, there were 4.3 million
nonvested options with a weighted-average fair value of $4.66 per share. The weighted-average fair
value of options granted during fiscal 2014 and fiscal 2013 was $3.77 and $4.68, respectively. During
fiscal 2014, there were 2.0 million options that vested and 0.6 million options that were cancelled with a
weighted-average fair value of $7.16 and $5.77 per share, respectively.
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Restricted Shares
The Company issues restricted shares to certain key employees and its Board of Directors.
Generally, restricted shares awarded to employees vest ratably over four or five years. Restricted shares
awarded to Board of Director members vest ratably over one year.
Restricted share activity during the fiscal year ended January 31, 2015 was as follows:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
9. EARNINGS PER SHARE
Number of Weighted-
Average Fair
Value
Shares
(in millions)
0.80 $
0.30
(0.20)
—
0.90 $
17.07
16.04
16.64
16.49
16.79
Basic earnings per share is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding. Diluted earnings per share is computed by
dividing income available to common stockholders by the weighted-average shares outstanding plus the
potential dilutive impact from the exercise of stock options and restricted shares. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive. There were no material anti-
dilutive shares during the periods presented.
The following table presents a reconciliation of the diluted weighted-average shares (in
millions, except per share data):
Numerator:
Net income
Income related to vested restricted shares
Income available to common stockholders
Denominator:
Basic weighted-average shares
Effect of dilutive securities:
Stock options
Restricted shares
Dilutive weighted-average shares
Basic earnings per common share
Diluted earnings per common share
Fiscal Year
2014
2013
2012
$
$
217 $
1
216 $
243 $
1
242 $
200
—
200
203.2
174.8
174.7
3.9
0.2
207.3
3.9
—
178.7
3.3
0.2
178.2
$
$
1.07 $
1.05 $
1.39 $
1.36 $
1.14
1.12
10. SEGMENTS AND GEOGRAPHIC INFORMATION
We consider our Michaels-U.S., Michaels-Canada and Aaron Brothers to be our operating
segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment
Reporting (“ASC 280”). We determined that each of our operating segments have similar economic
characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine our
operating segments into one reporting segment.
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Our net sales and total assets by country are as follows (in millions):
Net Sales:
United States
Canada
Consolidated Total
Total Assets:
United States
Canada
Consolidated Total
Fiscal Year
2014 2013 2012
$ 4,277 $ 4,132 $ 3,989
419
438
$ 4,738 $ 4,570 $ 4,408
461
$ 1,870 $ 1,688 $ 1,446
109
123
$ 2,005 $ 1,811 $ 1,555
135
We present assets based on their physical, geographic location. Certain assets located in the
U.S. are also used to support our Canadian operations, but we do not allocate these assets to Canada.
Our net sales by major product categories are as follows (in millions):
General crafts
Home décor and seasonal
Framing
Scrapbooking
Fiscal Year
2014 2013 2012
$ 2,409 $ 2,371 $ 2,220
890
898
836
862
462
439
$ 4,738 $ 4,570 $ 4,408
971
903
455
Our chief operating decision makers evaluate historical operating performance and plan and
forecast future periods’ operating performance based on operating income and earnings before interest,
income taxes, depreciation, amortization and losses on early extinguishments of debt and refinancing
costs (“EBITDA (excluding losses on early extinguishments of debt and refinancing costs)”). We
believe these metrics more closely reflect the operating effectiveness of factors over which management
has control. A reconciliation of EBITDA (excluding losses on early extinguishments of debt and
refinancing costs) to net income is presented below (in millions):
Fiscal Year
Net income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Provision for income taxes
Depreciation and amortization
EBITDA (excluding losses on early extinguishments of debt and
refinancing costs)
11. CONTINGENCIES
Rea Claim
2014 2013 2012
$ 217 $ 243 $ 200
245
33
115
97
215
14
136
106
199
74
134
111
$ 735 $ 714 $ 690
On September 15, 2011, MSI was served with a lawsuit filed in the California Superior Court
in and for the County of Orange (“Superior Court”) by four former store managers as a class action
proceeding on behalf of themselves and certain former and current store managers employed by MSI in
California. The lawsuit alleges that MSI improperly classified its store managers as exempt employees
and as such failed to pay all wages, overtime, waiting time penalties and failed to provide accurate wage
statements. The lawsuit also alleges that the foregoing conduct was in breach of various laws, including
California’s unfair competition law. On December 3, 2013, the
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Superior Court entered an order certifying a class of approximately 200 members. MSI successfully
removed the case to the United States District Court for the Central District of California and on May 8,
2014, the class was de‑certified. As a result of the decertification, we have approximately 50 individual
claims pending. We believe we have meritorious defenses and intend to defend the lawsuits vigorously.
We do not believe the resolution of the lawsuits will have a material effect on our consolidated financial
statements.
Fair Credit Reporting Claim
On December 11, 2014, MSI was served with a lawsuit, Christina Graham v. Michaels Stores,
Inc., filed in the U.S. District Court for the District of New Jersey by a former associate. The lawsuit is
a purported class action, bringing plaintiff’s individual claims, as well as claims on behalf of a putative
class of applicants who applied for employment with Michaels through an online application, and on
whom a background check for employment was procured. The lawsuit alleges that MSI violated the
Fair Credit Reporting Act (“FCRA”) and the New Jersey Fair Credit Reporting Act by failing to provide
the proper disclosure and obtain the proper authorization to conduct background checks. Since the
initial filing, another named plaintiff joined the lawsuit, which was amended in February 2015,
Christina Graham and Gary Anderson v. Michaels Stores, Inc., with substantially similar allegations.
The plaintiffs seek statutory and punitive damages as well as attorneys’ fees and costs.
Following the filing of the Graham case in New Jersey, four additional purported class action
lawsuits with five plaintiffs were filed, Raini Burnside v. Michaels Stores, Inc., pending in the U.S.
District Court in the Western District of Missouri, Michele Castro and Janice Bercut v. Michaels
Stores, Inc., in the U.S. District Court in the Northern District of Texas, Sue Gettings v. Michaels Stores,
Inc., in the U.S. District Court in the Southern District of New York, and Barbara Horton v. Michaels
Stores, Inc., in the U.S. District Court in the Central District of California. All five plaintiffs allege
violations of the FCRA. In addition, Castro, Horton and Bercut also allege violations of California’s
unfair competition law.
Since the filing of these lawsuits, an application has been made to the U.S. Judicial Panel on
Multidistrict Litigation to consolidate and transfer the pending cases to the Northern District of Texas.
The Company intends to defend the lawsuits vigorously. We cannot reasonably estimate the potential
loss, or range of loss, related to the lawsuits, if any.
Data Security Incident
Five putative class actions were filed against MSI relating to the January 2014 data
breach. The plaintiffs generally allege that MSI failed to secure and safeguard customers’ private
information including credit and debit card information, and as such, breached an implied contract, and
violated the Illinois Consumer Fraud Act (and other states’ similar laws) and are seeking damages
including declaratory relief, actual damages, punitive damages, statutory damages, attorneys’ fees,
litigation costs, remedial action, pre and post judgment interest, and other relief as available. The cases,
are as follows: Christina Moyer v. Michaels Stores, Inc., was filed on January 27, 2014; Michael and
Jessica Gouwens v. Michaels Stores, Inc., was filed on January 29, 2014; Nancy Maize and Jessica
Gordon v. Michaels Stores, Inc., was filed on February 21, 2014; and Daniel Ripes v. Michaels
Stores, Inc., was filed on March 14, 2014. These four cases were filed in the United States District
Court-Northern District of Illinois, Eastern Division. On March 18, 2014, an additional putative class
action was filed in the United States District Court for the Eastern District of New York, Mary Jane
Whalen v. Michaels Stores, Inc., but was voluntarily dismissed by the plaintiff on April 11, 2014
without prejudice to her right to re‑file a complaint. On April 16, 2014, an order was entered
consolidating the remaining actions. On July 14, 2014, the Company’s motion to dismiss the
consolidated complaint was granted. On August 11, 2014, plaintiffs filed a motion to alter or amend the
judgment, which was denied on October 14, 2014. The deadline to file a notice of appeal expired on
November 13, 2014.
On December 2, 2014, Whalen filed a new lawsuit against MSI related to the data breach in the
United States District Court for the Eastern District of New York, Mary Jane Whalen v. Michaels
Stores, Inc., seeking damages including declaratory relief, monetary damages, statutory damages,
punitive damages, attorneys’ fees and costs,
F-30
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injunctive relief, pre and post judgment interest, and other relief as available. The Company intends to
defend the lawsuit vigorously. We cannot reasonably estimate the potential loss, or range of loss,
related to the lawsuit, if any.
In connection with the breach, payment card companies and associations may seek to require
us to reimburse them for unauthorized card charges and costs to replace cards and may also impose
fines or penalties in connection with the data breach, and enforcement authorities may also impose fines
or other remedies against us. We have also incurred other costs associated with the data breach,
including legal fees, investigative fees, costs of communications with customers and credit monitoring
services provided to our customers. In addition, state and federal agencies, including states’ attorneys
general and the Federal Trade Commission may investigate events related to the data breach, including
how it occurred, its consequences and our responses. Although we intend to cooperate in these
investigations, we may be subject to fines or other obligations, which may have an adverse effect on
how we operate our business and our results of operations. We cannot reasonably estimate the potential
loss or range of loss related to any reimbursement costs, fines or penalties that may be assessed, if any.
California Zip Code Claims
On August 15, 2008, Linda Carson, a consumer, filed a purported class action proceeding
against MSI in the Superior Court of California, County of San Diego (“San Diego Superior Court”), on
behalf of herself and all similarly-situated California consumers. The Carson lawsuit alleges that MSI
unlawfully requested and recorded personally identifiable information (i.e., her zip code) as part of a
credit card transaction. The plaintiff seeks statutory penalties, costs, interest, and attorneys’ fees. On
February 10, 2011, the California Supreme Court ruled, in a similar matter, Williams-Sonoma v. Pineda,
that zip codes are personally identifiable information and, therefore, the Song-Beverly Credit Card Act
of 1971, as amended, prohibits businesses from requesting or requiring zip codes in connection with a
credit card transaction.
Subsequent to the California Supreme Court decision, three additional purported class action
lawsuits seeking similar relief have been filed against MSI: Carolyn Austin v. Michaels Stores, Inc. and
Tiffany Heon v. Michaels Stores, Inc., both in the San Diego Superior Court, and Sandra A. Rubinstein v.
Michaels Stores, Inc. in the Superior Court of California, County of Los Angeles, Central Division. An
order coordinating the cases has been entered and plaintiffs filed a consolidated complaint on April 24,
2012. The parties settled the lawsuit for an amount that will not have a material effect on our
consolidated financial statements. On August 6, 2014, the court granted final approval of the
settlement.
General
In addition to the litigation discussed above, we are now, and may be in the future, involved in
various other lawsuits, claims and proceedings incident to the ordinary course of business. The results
of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be
time consuming, result in costly litigation, require significant amounts of management time and result in
diversion of significant resources.
For some of the matters disclosed above, as well as other matters previously disclosed in the
Company’s filings with the SEC, the Company is able to estimate a range of losses in excess of the
amounts recorded, if any, in the accompanying consolidated financial statements. As of January 31,
2015, the aggregate estimated loss is approximately $17 million, which includes amounts recorded by
the Company.
12. RETIREMENT PLANS
We sponsor a 401(k) Savings Plan for our eligible employees and certain of our subsidiaries.
Participation in the 401(k) Savings Plan is voluntary and available to any employee who is at least
21 years of age and has completed 500 hours of service in a six-month eligibility period. Participants
may elect to contribute up to 80% of their compensation on a pre-tax basis and up to 10% on an after-
tax basis. In accordance with the provisions of the 401(k) Savings Plan, we make a matching cash
contribution to the account of each participant in an amount equal to 50% of the participant’s pre-tax
contributions that do not exceed 6% of the participant’s compensation for the year.
F-31
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Matching contributions vest to the participants based on years of service, with 100% vesting after three
years. Our matching contribution expense was $4 million in each of fiscal 2014, fiscal 2013 and fiscal
2012.
13. RELATED PARTY TRANSACTIONS
Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone
Group”, together with Bain Capital, the “Sponsors”) own approximately 70% of our outstanding
common stock as of January 31, 2015. Prior to our IPO on July 2, 2014, the Sponsors and another
common stockholder, Highfields Capital Management LP (“Highfields”), received annual management
fees of $12 million and $1 million, respectively. In connection with the IPO, the management
agreement was terminated and the Company paid the Sponsors and Highfields an aggregate $30 million
termination fee. During fiscal 2014, fiscal 2013 and fiscal 2012, we recognized expense of $35 million,
$14 million and $13 million, respectively, related to management fees and reimbursement of out-of-
pocket expenses. These expenses are included in related party expenses in the consolidated statements
of comprehensive income.
The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize
to count our store inventory. Payments associated with this vendor during each of fiscal 2014, fiscal
2013 and fiscal 2012 were $6 million, and are included in SG&A in the consolidated statements of
comprehensive income.
The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize
for all of the candy-type items in our stores. Payments associated with this vendor during fiscal 2014,
fiscal 2013 and fiscal 2012 were $26 million, $24 million and $24 million, respectively, and are
recognized in cost of sales as the sales are incurred.
The Blackstone Group owns a majority equity position in Hilton Hotels, an external vendor we
utilize for hospitality services. Payments associated with this vendor were $1 million during fiscal 2014,
minimal during fiscal 2013, and $1 million during fiscal 2012, and are included in SG&A in the
consolidated statements of comprehensive income.
The Blackstone Group owns a majority equity position in Brixmor Properties Group, a vendor
we utilize to lease certain properties. Payments associated with this vendor during fiscal 2014, fiscal
2013 and fiscal 2012 were $3 million, $4 million and $5 million, respectively. These expenses are
included in cost of sales and occupancy expense in the consolidated statements of comprehensive
income.
Our current directors (other than Jill A. Greenthal, John J. Mahoney, James A. Quella, Beryl
B. Raff and Carl S. Rubin ) are affiliates of Bain Capital or The Blackstone Group. As such, some or all
of such directors may have an indirect material interest in payments with respect to debt securities of the
Company that have been purchased by affiliates of Bain Capital and The Blackstone Group. As of
January 31, 2015, affiliates of The Blackstone Group held $50 million of our Restated Term Loan
Credit Facility.
14. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Our debt covenants restrict MSI, and certain subsidiaries of MSI, from various activities
including the incurrence of additional debt, payment of dividends and the repurchase of MSI’s capital
stock (subject to certain exceptions), among other things. The following condensed consolidated
financial
its wholly-owned
subsidiaries. The information is presented in accordance with the requirements of Rule 12-04 under the
SEC’s Regulation S-X. In addition, disclosure requirements of Rule 12-04 of Regulation S-X regarding
material contingencies and long-term obligations are included in Note 5. Debt, Note 6. Leases, Note 7.
Income Taxes and Note 11. Contingencies, where applicable.
information of MSI and
information
represents
financial
the
F-32
Table of Contents
Current assets:
Cash and equivalents
Merchandise inventories
Prepaid expense and other
Receivable from parent
Deferred income taxes
Income tax receivables
Total current assets
Property and equipment, net
Goodwill
Debt issuance costs, net
Deferred income taxes
Long-term receivable from Parent
Other assets
Total assets
Michaels Stores, Inc.
Condensed Consolidated Balance Sheets
(in millions)
ASSETS
Fiscal Year
2014
2013
$
234
374 $
901
958
95
85
2
—
39
38
2
2
1,273
1,457
358
386
94
94
37
38
28
20
8
5
3
2
$ 2,002 $ 1,801
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
Accrued liabilities and other
Current portion of long-term debt
Dividend payable to Holdings
Deferred income taxes
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
F-33
$
447 $
389
25
—
—
60
921
2,943
9
93
(1,964)
368
377
16
30
1
42
834
2,878
2
88
(2,001)
$ 2,002 $ 1,801
Table of Contents
Michaels Stores, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in millions)
Fiscal Year
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Share-based compensation
Related party expenses
Store pre-opening costs
Impairment of intangible assets
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Other expense and (income), net
Income before income taxes
Provision for income taxes
Net income
2012
2014
2013
$ 4,738 $ 4,570 $ 4,408
2,643
1,765
1,132
15
13
5
8
592
245
33
(1)
315
115
200
2,837
1,901
1,217
14
35
5
—
630
155
56
3
416
157
259 $
2,748
1,822
1,169
23
14
5
—
611
183
14
2
412
148
264 $
$
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other
Comprehensive income
(12)
247 $
(6)
258 $
—
200
$
Michaels Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in millions)
Cash flows provided by operating activities:
Net cash provided by operating activities
Cash flows used in investing activities:
Additions to property and equipment
Cash flows from financing activities:
Net repayments of debt
Net borrowings of debt
Payment of dividend to Holdings
Other financing activities
Net cash used in financing activities
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
F-34
Fiscal Year
2014
2013
2012
$
521 $
468 $
299
(138)
(112)
(124)
(1,101)
1,124
(805)
649
(2,632)
2,175
(256)
(10)
(243)
—
(22)
(178)
—
(33)
(490)
140
234
374 $
178
56
234 $
(315)
371
56
$
Table of Contents
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for fiscal 2014 and fiscal 2013 were as follows (in
millions, except per share data):
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Share-based compensation
Operating income
Losses on early extinguishments of debt and
refinancing costs
Net income (loss)
Diluted earnings (loss) per share
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Share-based compensation
Operating income
Losses on early extinguishments of debt and
refinancing costs
Net income
Diluted earnings per share
Fiscal Year 2014
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
$
1,052 $
623
429
282
4
139
948 $
591
357
270
2
52
—
45
0.25 $
68
(48)
(0.26) $
$
1,130 $
678
452
304
4
142
—
64
0.31 $
1,608
945
663
364
4
294
6
157
0.75
First
Quarter
$
993 $
584
409
272
3
128
7
46
0.26 $
$
Fiscal Year 2013
Second
Quarter
Third
Quarter
Fourth
Quarter
904 $
567
337
254
8
71
—
17
0.09 $
1,118 $
665
453
309
4
135
—
47
0.26 $
1,555
932
623
335
8
276
7
133
0.74
We report on the basis of a 52-week or 53-week fiscal year, which ends on the Saturday
closest to January 31. Our interim periods each contain 13 weeks, with the first quarter ending on a
Saturday 13 weeks after the end of our previous fiscal year.
F-35
Table of Contents
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.
Date: March 19, 2015
THE MICHAELS COMPANIES, INC.
By: /s/ Charles M. Sonsteby
Charles M. Sonsteby
Chief Administrative Officer & Chief Financial
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.
/s/ Carl S. Rubin
Carl S. Rubin
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Charles M. Sonsteby
Charles M. Sonsteby
Chief Administrative Officer & Chief Financial
Officer
(Principal Financial Officer)
March 19, 2015
March 19, 2015
Chief Accounting Officer and Controller
March 19, 2015
(Principal Accounting Officer)
/s/ James E. Sullivan
James E. Sullivan
/s/ Josh Bekenstein
Josh Bekenstein
/s/ Todd M. Cook
Todd M. Cook
Director
Director
/s/ Nadim El Gabbani
Nadim El Gabbani
Director
/s/ Jill A. Greenthal
Jill A. Greenthal
/s/ Lewis S. Klessel
Lewis S. Klessel
/s/ Matthew S. Levin
Matthew S. Levin
/s/ John J. Mahoney
John J. Mahoney
/s/ James A. Quella
James A. Quella
/s/ Beryl B. Raff
Beryl B. Raff
/s/ Peter F. Wallace
Peter F. Wallace
Director
Director
Director
Director
Director
Director
Director
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
March 19, 2015
Table of Contents
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
EXHIBIT INDEX
Description of Exhibit
Agreement and Plan of Merger, dated as of July 22, 2013, by and among Michaels
Stores, Inc., The Michaels Companies, Inc., Michaels FinCo Holdings, LLC, Michaels
Funding, Inc., and Michaels Stores MergerCo. Inc. (previously filed as Exhibit 2.1 to
Form 10-Q filed by Michaels Stores, Inc. on August 30, 2013, SEC File No. 001-09338).
Second Amended and Restated Certificate of Incorporation of The Michaels Companies, Inc.
(previously filed as Exhibit 3.2 to Form S-1 filed by the Company on June 9, 2014, SEC File
No. 333-193000).
Form of Amended and Restated Bylaws of The Michaels Companies, Inc. (previously filed
as Exhibit 3.4 to Form S-1 filed by the Company on June 2, 2014, SEC File No. 333-
193000).
Form of Specimen Common Stock Certificate of The Michaels Companies, Inc. (previously
filed as Exhibit 4.1 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-
193000)
Form of Amended and Restated Registration Rights Agreement (previously filed as
Exhibit 4.2 to Form S-1 filed by the Company on June 2, 2014, SEC File No. 333-193000).
Form of Investor Agreement (previously filed as Exhibit 4.3 to Form S-1 filed by the
Company on June 2, 2014, SEC File No. 333-193000).
Senior Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors
named therein and Wells Fargo Bank, National Association, as trustee (previously filed as
Exhibit 4.1 to Form 10-Q filed by Michaels Stores, Inc. on December 7, 2006, SEC File
No. 001-09338).
Supplemental Indenture, dated as of October 20, 2010, by and among Michaels Stores, Inc.
and Law Debenture Trust Company of New York, as trustee (previously filed as Exhibit 4.1
to Form 8-K filed by Michaels Stores, Inc. on October 26, 2010, SEC File No. 001-09338).
Indenture, dated as of October 21, 2010, by and among Michaels Stores, Inc., the guarantors
named therein and Law Debenture Trust Company of New York, as trustee (previously filed
as Exhibit 4.2 to Form 8-K filed by Michaels Stores, Inc. on October 26, 2010, SEC File
No. 001-09338).
Supplemental Indenture, dated as of September 27, 2012, by and among Michaels
Stores, Inc., the guarantors named therein and Law Debenture Trust Company of New York,
as trustee (previously filed as Exhibit 4.1 to Form 8-K filed by Michaels Stores, Inc. on
October 2, 2012, SEC File No. 001-09338).
Indenture, dated as of December 19, 2013, by and among Michaels Stores, Inc., the
guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously
filed as Exhibit 4.1 to Form 8-K filed by Michaels Stores, Inc. on December 19, 2013, SEC
File No. 001-09338).
Supplemental Indenture, dated as of June 16, 2014, by and among Michaels Stores, Inc., the
guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously
filed as Exhibit 4.11 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-
193000)
4.10
Indenture, dated as of July 29, 2013, among Michaels FinCo Holdings, LLC, Michaels
FinCo, Inc. and Law Debenture Trust Company of New York, as trustee (previously filed as
Exhibit 4.12 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-193000)
Table of Contents
4.11
4.12
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
Registration Rights Agreement, dated as of October 31, 2006, among Michaels Stores, Inc.
and certain stockholders thereof (previously filed as Exhibit 4.7 to Form 10-Q filed by
Michaels Stores, Inc. on December 7, 2006, SEC File No. 001-09338).
Registration Rights Agreement, dated as of September 27, 2012, by and among Michaels
Stores, Inc., the guarantors named therein and the Initial Purchasers named therein
(previously filed as Exhibit 4.2 to Form 8-K filed by Michaels Stores, Inc. on October 2,
2012, SEC File No. 001-09338).
Michaels Stores, Inc. 2006 Equity Incentive Plan (previously filed as Exhibit 10.1 to Form 8-
K filed by Michaels Stores, Inc. on February 21, 2007, SEC File No. 001-09338).
Form of Stock Option Agreement under the Michaels Stores, Inc. 2006 Equity Incentive Plan
(previously filed as Exhibit 10.2 to Form 8-K filed by Michaels Stores, Inc. on February 21,
2007, SEC File No. 001-09338).
Amended Form of Stock Option Agreement under Michaels Stores, Inc. 2006 Equity
Incentive Plan (previously filed as Exhibit 10.1 to Form 10-Q filed by Michaels Stores, Inc.
on September 4, 2009, SEC File No. 001-09338).
Form of Restricted Stock Award Agreement under the Michaels Stores, Inc. 2006 Equity
Incentive Plan (previously filed as Exhibit 10.3 to Form 10-Q filed by Michaels Stores, Inc.
on June 6, 2008, SEC File No. 001-09338).
The Michaels Companies, Inc. Equity Incentive Plan (previously filed as Exhibit 10.1 to
Form 10-Q filed by Michaels Stores, Inc. on August 30, 2013, SEC File No. 001-09338).
Form of Stock Option Agreement under the Michaels Companies, Inc. Equity Incentive Plan
(previously filed as Exhibit 10.2 to Form 10-Q filed by Michaels Stores, Inc. on August 30,
2013, SEC File No. 001-09338).
Form of Restricted Stock Award Agreement under the Michaels Companies, Inc. Equity
Incentive Plan (previously filed as Exhibit 10.3 to Form 10-Q filed by Michaels Stores, Inc.
on August 30, 2013, SEC File No. 001-09338).
Form of Restricted Stock Award Agreement for Independent Directors under the Michaels
Companies, Inc. Equity Incentive Plan (previously filed as Exhibit 10.1 to Form 10-Q filed
by Michaels Stores, Inc. on December 10, 2013, SEC File No. 001-09338).
Amended and Restated 2014 Omnibus Long-Term Incentive Plan (previously filed as
Exhibit 10.1 to Form S-1 filed by the Company on June 16, 2014, SEC File No. 333-
193000).
Form of Stock Option Agreement under the 2014 Omnibus Long-Term Incentive Plan
(previously filed as Exhibit 10.2 to Form S-1 filed by the Company on June 2, 2014, SEC
File No. 333-193000).
Form of Restricted Stock Award Agreement under the 2014 Omnibus Long-Term Incentive
Plan (previously filed as Exhibit 10.3 to Form S-1 filed by the Company on June 2, 2014,
SEC File No. 333-193000).
Form of Restricted Stock Award Agreement for Independent Directors under the 2014
Omnibus Long-Term Incentive Plan (previously filed as Exhibit 10.4 to Form S-1 filed by
the Company on June 2, 2014, SEC File No. 333-193000).
Table of Contents
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20
10.21
10.22
10.23*
10.24
Form of Restricted Stock Unit Agreement under the 2014 Omnibus Long-Term Incentive
Plan (previously filed as Exhibit 10.1 to Form 10-Q filed by the Company on August 29,
2014, SEC File No. 001-36501).
Form of Fiscal Year 2014 Bonus Plan for Executive Officers (previously filed as exhibit 10.1
to form 8-K filed by Michaels Stores, Inc. on March 31, 2014, SEC File No. 001-09338).
The Michaels Companies, Inc. Annual Incentive Plan (previously filed as Exhibit 10.14 to
Form S-1 filed by the Company on June 2, 2014, SEC File No. 333-193000).
Employment Agreement, dated February 13, 2013, between Michaels Stores, Inc. and Carl S.
Rubin (previously filed as Exhibit 10.1 to Form 10-Q filed by Michaels Stores, Inc. on
May 24, 2013, SEC File No. 001-09338).
Restricted Stock Award Agreements, dated March 18, 2013, between Michaels Stores, Inc.
and Carl S. Rubin (previously filed as Exhibit 10.2 to Form 10-Q filed by Michaels Stores,
Inc. on May 24, 2013, SEC File No. 001-09338).
Stock Option Agreement, dated March 18, 2013, between Michaels Stores, Inc. and Carl S.
Rubin (previously filed as Exhibit 10.1 to Form 10-Q filed by Michaels Stores, Inc. on
May 24, 2013, SEC File No. 001-09338).
Letter Agreement, dated September 15, 2010, between Michaels Stores, Inc. and Charles M.
Sonsteby (previously filed as Exhibit 99.2 to Form 8-K filed by Michaels Stores, Inc. on
September 17, 2010, SEC File No. 001-09338).
Amended and Restated Stockholders Agreement, dated as of February 16, 2007, among
Michaels Stores, Inc. and certain stockholders thereof (previously filed as Exhibit 10.23 to
Form 10-K filed by Michaels Stores, Inc. on May 3, 2007, SEC File No. 001-09338).
Management Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Bain
Capital Partners, LLC and Blackstone Management Partners V, LLC (previously filed as
Exhibit 10.2 to Form 10-Q filed by Michaels Stores, Inc. on December 7, 2006, SEC File
No. 001-09338).
Management Agreement, dated as of October 31, 2006, between Michaels Stores, Inc. and
Highfields Capital Management, LP (previously filed as Exhibit 10.3 to Form 10-Q filed by
Michaels Stores, Inc. on December 7, 2006, SEC File No. 001-09338).
Michaels Stores, Inc. Amended and Restated Officer Severance Pay Plan (previously filed as
Exhibit 10.26 to Form S-1 filed by the Company on January 12, 2015, SEC File No. 333-
201444).
Form of Director and Officer Indemnification Agreement (previously filed as Exhibit 10.29
to Form S-1 filed by the Company on June 9, 2014 SEC File No. 333-193000).
Table of Contents
10.25
10.26
10.27
10.28
10.29
10.30
Amended and Restated Credit Agreement, dated as of February 18, 2010, among Michaels
Stores, Inc., as lead borrower, the borrowers named therein, the facility guarantors named
therein, Bank of America, N.A., as administrative agent and collateral agent, the lenders
party thereto (collectively, the “Lenders”), Wells Fargo Retail Finance, LLC, as syndication
agent, Deutsche Bank Securities Inc., JPMorgan Chase Bank, N.A. and Credit Suisse, as co-
documentation agents, General Electric Capital Corporation, UBS Securities LLC and RBS
Business Capital, as senior managing agents, Banc of America Securities, LLC, Wells Fargo
Retail Finance, LLC and Deutsche Bank Securities Inc., as joint lead arrangers, and Banc of
America Securities LLC, Wells Fargo Retail Finance, LLC, Deutsche Bank Securities Inc.,
J.P. Morgan Securities Inc. and Credit Suisse, as joint book runners (previously filed as
Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc., on February 19, 2010, SEC File
No. 001-09338).
Exhibits and Schedules to Amended and Restated Credit Agreement, dated as of February 18,
2010, among Michaels Stores, Inc., as lead borrower, the borrowers named therein, the
facility guarantors named therein, Bank of America, N.A., as administrative agent and
collateral agent, the lenders party thereto (collectively, the “Lenders”), Wells Fargo Retail
Finance, LLC, as syndication agent, Deutsche Bank Securities Inc., JPMorgan Chase Bank,
N.A. and Credit Suisse, as co-documentation agents, General Electric Capital Corporation,
UBS Securities, LLC and RBS Business Capital, as senior managing agents, Banc of
America Securities, LLC, Wells Fargo Retail Finance, LLC and Deutsche Bank Securities
Inc., as joint lead arrangers, and Banc of America Securities, LLC, Wells Fargo Retail
Finance, LLC, Deutsche Bank Securities, Inc., J.P. Morgan Securities, Inc. and Credit Suisse,
as joint book runners (previously filed as Exhibit 10.2 to Form 8-K filed by Michaels
Stores, Inc. on May 28, 2010, SEC File No. 001-09338).
Second Amended and Restated Credit Agreement, dated as of September 17, 2012, among
Michaels Stores, Inc., the other borrowers from time to time party thereto, the facility
guarantors from time to time party thereto, the lenders from time to time party thereto, Wells
Fargo Bank, National Association, as administrative agent and collateral agent, and the other
agents named therein (previously filed as Exhibit 10.1 to Form 8-K filed by Michaels
Stores, Inc. on September 18, 2012, SEC File No. 001-09338).
Exhibits and Schedules to Second Amended and Restated Credit Agreement, dated as of
September 17, 2012, among Michaels Stores, Inc., the other borrowers from time to time
party thereto, the facility guarantors from time to time party thereto, the lenders from time to
time party thereto, Wells Fargo Bank, National Association, as administrative agent and
collateral agent, and the other agents named therein (previously filed as Exhibit 10.21 to
Form 10-K filed by Michaels Stores, Inc. on March 15, 2013, SEC File No. 001-09338).
First Amendment to Second Amended and Restated Credit Agreement, dated June 6, 2014, to
the Second Amended and Restated Credit Agreement, dated September 17, 2012, among
Michaels Stores, Inc., the other borrowers named therein, the facility guarantors named
therein,
therein, Wells Fargo Bank, National Association, as
administrative agent, collateral agent, lender, swingline lender and issuing bank (previously
filed as Exhibit 10.2 to Form 8-K filed by Michaels Stores, Inc. on June 11, 2014, SEC File
No. 001-09338).
lenders named
the
Credit Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche
Bank AG New York Branch, as administrative agent, the other lenders named therein,
JPMorgan Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit
Suisse, as co-documentation agents, and Deutsche Bank Securities Inc., J.P. Morgan
Securities, Inc. and Banc of America Securities, LLC as co-lead arrangers and joint
bookrunners (previously filed as Exhibit 10.5 to Form 10-Q filed by Michaels Stores, Inc. on
December 7, 2006, SEC File No. 001-09338).
Table of Contents
10.31
10.32
10.33
10.34
10.35
10.36
First Amendment to Credit Agreement, dated as of January 19, 2007, to the Credit
Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG
New York Branch, as administrative agent, the other lenders named therein, JPMorgan
Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-
documentation agents, and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and
Banc of America Securities, LLC as co-lead arrangers and joint bookrunners (previously
filed as Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on January 25, 2007, SEC
File No. 001-09338).
Second Amendment to Credit Agreement, dated as of May 10, 2007, to the Credit
Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG
New York Branch, as administrative agent, the other lenders named therein, JPMorgan
Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-
documentation agents, and Deutsche Bank Securities, Inc., J.P. Morgan Securities, Inc. and
Banc of America Securities, LLC as co-lead arrangers and joint bookrunners (previously
filed as Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on May 11, 2007, SEC File
No. 001-09338).
Third Amendment to Credit Agreement, dated as of August 20, 2009, to the Credit
Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG
New York Branch, as administrative agent, the other lenders named therein, JPMorgan
Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-
documentation agents, and Deutsche Bank Securities, Inc., J.P. Morgan Securities, Inc. and
Banc of America Securities, LLC as co-lead arrangers and joint bookrunners (previously
filed as Exhibit 10.3 to Form 10-Q filed by Michaels Stores, Inc. on September 4, 2009, SEC
File No. 001-09338).
Fourth Amendment to Credit Agreement, dated as of November 5, 2009, to the Credit
Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG
New York Branch, as administrative agent, the other lenders named therein, JPMorgan
Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-
documentation agents, and Deutsche Bank Securities, Inc., J.P. Morgan Securities, Inc. and
Banc of America Securities, LLC as co-lead arrangers and joint bookrunners (previously
filed as Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on November 5, 2009 SEC
File No. 001-09338).
Fifth Amendment to Credit Agreement, dated as of December 15, 2011, to the Credit
Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG
New York Branch, as administrative agent, the other lenders named therein, JPMorgan
Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-
documentation agents, and Deutsche Bank Securities, Inc., J.P. Morgan Securities Inc. and
Banc of America Securities, LLC as co-lead arrangers and joint bookrunners (previously
filed as Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on December 16, 2011 SEC
File No. 001-09338).
Amended and Restated Credit Agreement, dated as of January 28, 2013, among Michaels
Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent, and Barclays
Bank, PLC, Credit Suisse Securities (USA), LLC, Goldman Sachs Bank USA, J.P. Morgan
Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley
Senior Funding, Inc. and Wells Fargo Securities, LLC, as co-documentation agents, and
Deutsche Bank Securities Inc., Barclays Bank PLC, Credit Suisse Securities (USA), LLC,
Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley Senior Funding, Inc. and Wells Fargo Securities, LLC,
as co-lead arrangers and joint bookrunners (previously filed as Exhibit 10.1 to Form 8-K filed
by Michaels Stores, Inc. on February 1, 2013, SEC File No. 001-09338).
Table of Contents
10.37
10.38
10.39
10.40
10.41
10.42
10.43*
21.1
31.1
31.2
32.1
99.1
Exhibits and Schedules to Amended and Restated Credit Agreement, dated as of January 28,
2013, among Michaels Stores, Inc., Deutsche Bank AG New York Branch, as administrative
agent, and Barclays Bank PLC, Credit Suisse Securities (USA), LLC, Goldman Sachs Bank
USA, J.P. Morgan Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley Senior Funding, Inc. and Wells Fargo Securities, LLC, as co-documentation
agents, and Deutsche Bank Securities Inc., Barclays Bank PLC, Credit Suisse Securities
(USA), LLC, Goldman Sachs Bank USA, J.P. Morgan Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley Senior Funding, Inc. and Wells Fargo
Securities, LLC, as co-lead arrangers and joint bookrunners (previously filed as Exhibit 10.29
to Form 10-K filed by Michaels Stores, Inc. on March 15, 2013, SEC File No. 001-09338).
First Amendment to Amended and Restated Credit Agreement, dated June 10, 2014, to the
Amended and Restated Credit Agreement, dated January 28, 2013, among Michaels
Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent, and the
guarantors named therein (previously filed as Exhibit 10.3 to Form 8-K filed by Michaels
Stores, Inc. on June 11, 2014, SEC File No. 001-09338).
Purchase Agreement, dated October 7, 2010, by and among the Michaels Stores, Inc., the
Guarantors named therein and the Initial Purchasers named therein (previously filed as
Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on October 14, 2010, SEC File
No. 001-09338).
Purchase Agreement, dated September 20, 2012, by and among the Michaels Stores, Inc., the
Guarantors named therein and the Initial Purchasers named therein (previously filed as
Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on September 25, 2012, SEC File
No. 001-09338).
Purchase Agreement, dated December 16, 2013, by and among Michaels Stores, Inc., the
guarantors named therein and the Initial Purchasers named therein (previously filed as
Exhibit 10.1 to Form 8-K filed by Michaels Stores, Inc. on December 19, 2013, SEC File
No. 001-09338).
Purchase Agreement, dated June 5, 2014, by and among Michaels Stores, Inc., the Guarantors
named therein and the Initial Purchasers named therein (previously filed as Exhibit 10.1 to
Form 8-K filed by Michaels Stores, Inc. on June 11, 2014, SEC File No. 001-09338)
Michaels Stores, Inc. Employees 401(k) Plan, effective March 1, 2009 (previously filed as
Exhibit 10.30 to Form 10-K filed by Michaels Stores, Inc., on April 2, 2009, SEC File
No. 001-09338).*
Subsidiaries of Michaels Stores, Inc. (previously filed as Exhibit 21.1 to Form S-1 filed by
the Company on June 2, 2014, SEC File No. 333-193000).
Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
Section 13(r) Disclosure (filed herewith).
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Table of Contents
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Management contract or compensatory plan or arrangement.
Exhibit 31.1
I, Carl S. Rubin, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of The Michaels Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 19, 2015
/s/ Carl S. Rubin
Carl S. Rubin
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Charles M. Sonsteby, certify that
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of The Michaels Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 19, 2015
/s/ Charles M. Sonsteby
Charles M. Sonsteby
Chief Administrative Officer & Chief Financial
Officer
( Principal Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO § 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the filing of the Annual Report on Form 10-K of The Michaels Companies, Inc.,
a Delaware corporation (the “Company”), for the year ended January 31, 2015, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the
Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that, to such officer’s knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 19, 2015
/s/ Carl S. Rubin
Carl S. Rubin
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles M. Sonsteby
Charles M. Sonsteby
Chief Administrative Officer & Chief Financial
Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being
filed as part of the Report or as a separate disclosure document.
Section 13(r) Disclosure
Exhibit 99.1
Travelport Worldwide Limited, which may be considered an affiliate of The Blackstone Group, L.P.,
provided the disclosure reproduced below in its Form 10-K for the fiscal year ended December 31, 2014.
We have no involvement in or control over the activities of Travelport Worldwide Limited, any of its
predecessor companies or any of its subsidiaries, and we have not independently verified or participated in
the preparation of this disclosure.
“As part of our global business in the travel industry, we provide certain passenger travel related
Travel Commerce Platform and Technology Services to Iran Air. We also provide certain Technology
Services to Iran Air Tours. All of these services are either exempt from applicable sanctions
prohibitions pursuant to a statutory exemption permitting transactions ordinarily incident to travel or, to
the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign Assets Control.
Subject to any changes in the exempt/licensed status of such activities, we intend to continue these
business activities, which are directly related to and promote the arrangement of travel for individuals.
The gross revenue and net profit attributable to these activities for the year ended December 31,
2014 were approximately $660,000 and $470,000, respectively.”