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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 30, 2016
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 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 (§232.405 of this chapter) 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 large 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 1, 2015 was
approximately $1,713,190,000 based upon the closing sales price of $25.34 quoted on The NASDAQ Global Select Market as of
July 31, 2015. For this purpose, directors and officers have been assumed to be affiliates.
As of March 9, 20 16, 208,977,716 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 1, 201 6.
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, share repurchases, 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 $4,912.8 million in sales in fiscal 2015, 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 30, 2016, we operate 1,196 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 117 Aaron Brothers
stores in nine states, with approximately 5,500 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.
Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of
Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels
Companies, Inc. (the “Company”) was incorporated in Delaware in connection with the reorganization. In July
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, resulting in net proceeds of $445.7 million.
On February 2, 2016, we acquired Lamrite West, Inc. and certain of its affiliates and subsidiaries
(“Lamrite”) for $150.0 million, subject to certain purchase price adjustments, utilizing our existing cash on
hand. Lamrite operates an international wholesale business under the Darice brand name and 32 arts and crafts
retail stores, located primarily in Ohio and the surrounding states, under the Pat Catan’s brand name. Lamrite
is expected to generate revenues of over $200 million in fiscal 2016 and the retail stores have approximately
32,000 average square feet of selling space per store. The acquisition is expected to enhance our private brand
development capabilities, accelerate our direct sourcing initiatives and strengthen our business-to-business
capabilities.
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Merchandising
Michaels. Each Michaels store offers approximately 33,000 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
Papercrafting
2015
Fiscal Year
2014
2013
52 %
21
17
10
100 %
52 %
21
17
10
100 %
53 %
20
17
10
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 brands such as Wilton, Crayola and Isaac Mizrahi. 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 6,000 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 Holiday 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 650 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 2015, one sourcing agent supplied approximately 16% 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 labor. These systems also allow us to react more quickly to selling
trends and allow our store team members 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 moulding to our regional processing centers for custom framing
orders for our stores. We manufacture approximately 35 % of the moulding we process, import approximately
45% 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 2015, 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 2015, processed 31.0 million linear feet of frame
moulding and 4.6 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 88% of Michaels stores’
merchandise receipts are shipped through the distribution network with the remainder shipped directly from
vendors to stores. Approximately 68% 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 reported 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
2015
2014
Fiscal Year
2013
2012
2011
1,168
30
17
(2)
(17)
1,196
1,136
32
13
—
(13)
1,168
1,099
40
14
(3)
(14)
1,136
1,064
38
13
(3)
(13)
1,099
1,045
25
15
(6)
(15)
1,064
120
—
—
(3)
—
117
1,313
121
5
—
(6)
—
120
1,288
125
—
2
(5)
(1)
121
1,257
134
—
—
(8)
(1)
125
1,224
137
—
—
(3)
—
134
1,198
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 43 Michaels stores in fiscal 2016, including approximately 13 relocations. We continue to
pursue a store relocation program to improve the real estate location quality and performance of our store base.
During fiscal 2016, we plan to close up to 10 Michaels stores and up to 10 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 team members with store training.
Our Michaels store operating model, which is based on historical store performance, assumes an
average store size of approximately 18,000 selling square feet. Our fiscal 2015 average initial net investment,
which varies by site and specific store characteristics, is $1.1 million per Michaels store and consists of store
build-out costs, pre-opening expenses and average first year inventory.
Employees
As of January 30, 2016, we employed approximately 50,000 team members, approximately 37,000 of
whom were employed on a part-time basis. The number of part-time team members substantially increases
during the Holiday selling season. Of our full-ti me team members, approximately 3,500 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 team members 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
in which we compete in is highly fragmented and includes stores across the United States and Canada operated
primarily by small, independent retailers along with a few regional and national chains. We believe customers
choose where to shop based
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upon store location, breadth of 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:
· 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 700 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.
· Mass merchandisers. This category of 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 to those
trends and their current merchandise offerings. These mass merchandisers generally have limited
customer service staffs with minimal experience in crafting projects.
·
·
Small, local specialty retailers. This category includes local independent arts and crafts retailers and
custom framing shops. Typically, these stores 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
Substantially all of our international business is in Canada, which accounted for approximately 9% of
total sales in fiscal 2015, and 10% of total sales in fiscal 2014 and fiscal 2013. During the last three years,
approximately 7% 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
As of January 30, 2016, 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 in the “Investor Relations” section. Accordingly, investors
should monitor this portion of our website, 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, as well as risks not
currently known to us, 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 an 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. 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 30, 2016, we had total outstanding debt of $2,792.2 million, of which $2,282.2 million
was subject to variable interest rates and $510.0 million was subject to fixed interest rates. As of January 30,
2016, we had $586.8 million of additional borrowing capacity (after giving effect to $63.2 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;
restricting us from making strategic acquisitions or causing us to make non ‑strategic
divestitures;
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·
·
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, Michaels Funding, Inc. (“Holdings”), and Michaels FinCo Holdings, LLC (“FinCo
Holdings”) and their subsidiaries, to the restrictions contained in our Senior Secured Credit Facilities and the
indenture governing our notes. In addition, our Senior Secured Credit Facilities and indenture 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 indenture 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 indenture 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; or
·
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 experienced a data breach in the past 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, team members and Company data is critically important to us. Our
customers and team members 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 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. There can be
no assurance that we will not suffer a 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
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 to retain and grow our market share. We compete
with mass merchants, 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
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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.
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:
·
·
·
·
·
·
·
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 the liability for the
corresponding 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 team members.
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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 5 2.9% of net sales in fiscal 2015
and 50.8% 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 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.
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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 with such laws. 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 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 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 2015, we purchased merchandise from
approximately 650 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.
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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. 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.
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, telecommunications failures, acts of 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.
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.
If we are unable to successfully implement significant changes, this could disrupt our supply chain, which
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
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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 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. 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. In addition, our customers at border locations can
be sensitive to cross‑border price differences. Substantial foreign currency fluctuations could adversely affect
our business. In fiscal 2015, exchange rates had a negative impact on our consolidated operating results due to
a 10% 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 either 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 team members 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 team members in large numbers as well as experienced buying and management personnel.
Many of our store level team members are in entry level or part‑time positions with historically high rates of
turnover. Our ability to meet our labor
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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 team members, 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 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 third quarter of fiscal 2015, one of our
stores was damaged by weather related to Hurricane Joaquin, resulting in closure and lost sales. Had the
hurricane impacted a larger geographic area, it is possible that we would have suffered a substantial negative
impact to our sales for a prolonged period.
Any difficulty executing or integrating an acquisition, a business combination or a major business initiative
could adversely affect our business or results of operations.
Any difficulty in executing or integrating an acquisition, a business combination or a major business
initiative, including the recent acquisition of Lamrite West, Inc. and certain of its affiliates and subsidiaries,
may result in our inability to achieve anticipated benefits from these transactions in the time frame that we
anticipate, or at all, which could adversely affect our business or results of operations. Such transactions may
also disrupt the operation of our current activities and divert management's attention from other business
matters. In addition, the Company’s current credit agreements place certain limited constraints on our ability to
make an acquisition or enter into a business combination, and future borrowing agreements could place tighter
constraints on such actions.
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 the
interest in 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 direct and indirect subsidiaries’
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 affiliates of or funds advised by Bain Capital Partners, LLC and The
Blackstone Group L.P. (the “Sponsors”), who own approximately 63% 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
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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:
·
·
·
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.
We currently 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 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
$30.00 on March 20, 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:
·
·
·
·
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;
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·
·
·
·
·
·
·
·
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.
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.
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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 plan to 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.
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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 30, 2016, in connection with stores that we plan to open
or relocate in future fiscal years, we had signed approximately 35 leases for Michaels stores. Management
believes our facilities are suitable and adequate for our business as presently conducted.
As of January 30, 2016, 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)
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
3,000
299,000
82,000
4,898,000
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The following table indicates the number of our retail stores located in each state or province as of
January 30, 2016:
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
Tennessee
Texas
5
1
1
76
3
Michaels Brothers Total
12
3
20
32
4
17
210
25
18
4
80
35
8
39
18
8
8
12
15
3
4
24
32
34
23
7
21
5
6
13
3
9
31
4
60
1
37
3
6
31
7
56
17
48
1
16
4
3
14
2
16
99
12
3
20
27
4
17
134
22
18
4
80
34
7
39
18
8
8
12
15
3
4
24
32
34
23
7
21
5
6
10
3
9
31
4
60
1
37
3
6
31
7
56
15
48
1
16
4
3
14
2
16
81
18
3
2
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
13
2
36
23
5
17
1
1,196
13
2
36
31
5
17
1
1,313
8
117
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 30, 2016, there were approximately 360 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:
First Quarter
Second Quarter (1)
Third Quarter
Fourth Quarter
Fiscal Year
2015
2014
High Low High Low
$ 30.00 $ 25.77 $
—
$ 28.49 $ 24.60 $ 17.28 $ 14.51
$ 26.84 $ 21.78 $ 18.50 $ 14.64
$ 24.05 $ 19.46 $ 27.23 $ 17.82
— $
(1) For fiscal 2014, the indicated stock prices represent 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, repurchase outstanding shares, 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 Michaels FinCo, Inc. (“FinCo Inc.”) issued the 7.50%/8.25% PIK
Toggle Notes which were due in 2018 (“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 $780.1 million (excluding $1.5 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 from June 27, 2014 (the date the Company’s stock commenced trading on the NASDAQ Global Select
Market) through January 30, 2016. 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 30, 2016 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
6/27/2014 8/2/2014 11/1/2014 1/31/2015 5/2/2015 8/1/2015 10/31/2015 1/30/2016
$100.00 $90.24 $107.53 $151.76 $154.41 $149.06 $137.53 $128.24
100.00 98.50 103.77 103.10 109.51 109.85 109.16 102.41
100.00 97.24 103.03 108.50 115.51 115.68 108.22 97.18
23
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.
Fiscal Year
(1)
2015
2013
(in thousands, except earnings per share, other operating and store count data)
2012
2014
2011
Results of Operations
Data:
Net sales
Operating income (2)
Interest expense
Losses on early
extinguishments of debt
and refinancing costs
Net income
Earnings per common
share:
Basic
Diluted
Weighted-average
common 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
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 thousands)
Stores Open at End of
Year:
Michaels
Aaron Brothers
Total stores open at end
of year
$ 4,912,782
720,604
139,405
$ 4,738,144
626,529
198,409
$ 4,569,792
610,402
214,497
$ 4,407,545
592,050
245,466
$ 4,209,586
537,964
253,678
8,485
362,912
74,312
217,395
14,420
243,430
32,551
199,734
17,714
157,713
$
$
1.75
1.72
$
$
1.07
1.05
$
$
1.39
1.36
$
$
1.14
1.12
$
$
0.90
0.89
206,845
209,346
203,229
207,101
174,797
178,628
174,715
178,068
174,646
176,352
$
409,391
1,002,607
1,499,713
2,023,277
904,850
$
378,295
958,171
1,423,778
1,961,108
889,632
$
238,864
901,308
1,237,336
1,767,132
825,556
$
55,961
862,478
1,007,479
1,519,510
851,618
24,900
2,744,942
3,747,372
(1,724,095)
24,900
3,089,781
4,072,633
(2,111,525)
16,400
3,633,279
4,549,414
(2,782,282)
150,514
2,855,834
3,823,471
(2,303,961)
$
371,030
844,842
1,297,062
1,791,289
860,945
126,540
3,316,358
4,292,433
(2,501,144)
$
$
223
1.8 %
$
220
1.7 %
$
218
2.9 %
$
215
1.5 %
3.2 %
2.4 %
3.4 %
1.5 %
212
3.2 %
3.0 %
22,068
21,605
21,108
20,588
20,096
1,196
117
1,313
1,168
120
1,288
1,136
121
1,257
1,099
125
1,224
1,064
134
1,198
(1) Fiscal 2012 consisted of 53 weeks while all other periods presented consisted of 52 weeks.
(2) Fiscal 2014 operating income includes a $32.3 million charge associated with the IPO primarily related
to a $30.2 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. All references to fiscal year mean the year in which that fiscal year began. References to “fiscal
2015” relate to the 52 weeks ended January 30, 2016, references to “fiscal 2014” relate to the 52 weeks ended
January 31, 2015 and references to “fiscal 2013” relate to the 52 weeks ended February 1, 2014.
Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state of
Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The Michaels
Companies, Inc. (the “Company”) was incorporated in Delaware in connection with the reorganization. In July
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, resulting in net proceeds of $445.7 million.
Fiscal 2015 Overview
With $4,912.8 million in net sales in fiscal 2015, 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 30, 2016, we operated 1,196 Michaels stores and 117 Aaron Brothers
stores.
Financial highlights for fiscal 2015 include the following:
·
·
·
Net sales increased to $4,912.8 million, a 3.7% improvement over last year, primarily driven by
comparable store sales growth and the opening of 25 additional stores (net of closures).
Comparable store sales increased 1.8%, or 3.2% at constant exchange rates.
Our Michaels retail stores’ private brand merchandise drove 52.9% of net sales in fiscal 2015
compared to 50.8% of net sales in fiscal 2014.
· We reported operating income of $720.6 million, an increase of 15.0% from the prior year.
·
Adjusted EBITDA, a non-GAAP measure that is a required calculation in our debt agreements,
improved by 6.6%, from $812.8 million in fiscal 2014 to $866.2 million in fiscal 2015 (see
“Management Discussion and Analysis of Financial Condition and Results of Operations - Non-
GAAP Measures”).
· We repaid $355.8 million of our outstanding 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK
Notes”) and the Restated Term Loan Credit Facility (as defined below) during fiscal 2015.
In fiscal 2015, we made significant progress implementing our strategic initiatives, including:
·
·
·
·
enhanced the in-store shopping experience by improving our store signage and graphics
packages and lowering drive aisle fixtures;
expansion of our marketing efforts to include occasional store-wide marketing events and new
television campaigns;
partnering with Pinterest to gain unique marketing opportunities and insight into crafters’
behavior;
introduction of new private brand products such as new markers and craft paint, a new line of
“Paper Craft It” products and new lifestyle frame and home décor;
25
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·
·
·
·
performing store resets to provide the flexibility to cost effectively expand and contract the
various product categories in our broad portfolio offering based on customer demand and the
selling season;
improved our website by adding new products and online video classes to better tailor classes to
the schedule of our customers;
leveraging our industry leading database to personalize both direct mail and email marketing
based on customer’s shopping history and preference; and
delivered trend-right merchandise to our customers.
Fiscal 2016 Outlook
In fiscal 2016, 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;
expanding our omni-channel offering of merchandise, promotional and marketing 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
strengthening our business-to-business operations.
On February 2, 2016, we acquired Lamrite West, Inc. and certain of its affiliates and subsidiaries
(“Lamrite”) for $150.0 million, subject to certain purchase price adjustments, utilizing our existing cash on
hand. Lamrite operates an international wholesale business under the Darice brand name and 32 arts and crafts
retail stores, located primarily in Ohio and the surrounding states, under the Pat Catan’s brand name. Lamrite
is expected to generate revenues of over $200 million in fiscal 2016 and the retail stores have approximately
32,000 average square feet of selling space per store. The acquisition is expected to enhance our private brand
development capabilities, accelerate our direct sourcing initiatives and strengthen our business-to-business
capabilities.
In March 2016, the Board of Directors authorized the Company to purchase $200.0 million of the
Company’s common stock on the open market. The share repurchase program does not have an expiration
date, and the timing and number of repurchase transactions under the program will depend on market
conditions, corporate considerations, debt agreements and regulatory requirements.
Comparable Store Sales
Comparable store sales represents the change in net sales for stores open the same number of months
in the 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.
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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.
Fiscal Year
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Related party expenses
Store pre-opening costs
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Other expense, net
Income before income taxes
Provision for income taxes
Net income
Fiscal 2015 Compared to Fiscal 2014
2013
2014
2015
100.0 % 100.0 % 100.0 %
60.1
59.9
39.9
40.1
26.1
26.0
0.3
0.8
0.1
0.1
13.4
13.2
4.7
4.2
0.3
1.6
—
0.1
8.3
7.4
3.0
2.8
4.6 % 5.3 %
59.9
40.1
25.3
—
0.1
14.7
2.8
0.2
—
11.6
4.3
7.4 %
Net Sales. Net sales increased $174.6 million in fiscal 2015, or 3.7%, compared to fiscal 2014. The
increase in net sales was due to a $91.5 million increase primarily related to 25 additional stores opened (net of
closures) since January 31, 2015 and an $83.1 million increase in comparable store sales. Comparable store
sales increased 1.8%, or 3.2% at constant exchange rates, due primarily to an increase in our average ticket.
Gross Profit. Gross profit was 40.1% as a percent of net sales for both fiscal 2015 and fiscal 2014.
An improvement related to an increase in retail prices and sourcing efficiencies was offset by an increase in
promotional activity as a result of the continued competitive retail environment and the negative impact of
foreign exchange rates.
Selling, General and Administrative . Selling, general and administrative (“SG&A”) was 25.3% of
net sales in fiscal 2015 compared to 26.0% in fiscal 2014. SG&A increased $9.1 million to $1,243.0 million in
fiscal 2015 due primarily to $10.9 million of costs associated with operating 25 additional stores (net of
closures) and an increase in marketing costs of $4.0 million, partially offset by a decrease in Canadian
operating costs due primarily to the impact of foreign exchange.
Related Party Expenses. Related party expenses decreased $35.7 million in fiscal 2015 compared to
the prior year due to the termination of the management services agreement in connection with our IPO
completed in July 2014.
Interest Expense. Interest expense decreased $59.0 million to $139.4 million in fiscal 2015. The
decrease is primarily attributable to $39.7 million of interest savings from the redemption of the remaining
outstanding PIK Notes in fiscal 2014 and fiscal 2015 and $19.5 million of interest savings from the refinancing
of the 7.75% Senior Notes due 2018 (“2018 Senior Notes”) during fiscal 2014.
Losses on Early Extinguishments of Debt and Refinancing Costs. We recorded a loss on the early
extinguishment of debt of $8.5 million during fiscal 2015 related to the redemption of our remaining
outstanding PIK Notes and the partial prepayment of our Restated Term Loan Credit Facility maturing in 2020
(“Additional Term Loan”), consisting of $4.4 million to write off related debt issuance costs, $3.6 million of
redemption premiums and a $0.5 million write-off of the unamortized net discount of the Additional Term
Loan. During fiscal 2014, we recorded a loss on the early extinguishment of debt of $74.3 million related to
the redemption of our 2018 Senior Notes and the partial redemption of our PIK Notes, consisting of $58.8
million of redemption premiums and $20.6 million to write off related debt issuance
27
Table of Contents
costs. The loss in fiscal 2014 was partially offset by a $5.1 million write-off of the unamortized premium on
the 2018 Senior Notes.
Provision for Income Taxes. The effective tax rate for fiscal 2015 was 36.6% compared to 38.1% in
the prior year. The effective tax rate for fiscal 2015 was lower than the prior year primarily due to our
assertion in fiscal 2015 to indefinitely reinvest the fiscal 2014 and fiscal 2015 earnings of our Canadian
subsidiary into our operations outside of the U.S., which is taxed at a lower rate than the U.S.
Fiscal 2014 Compared to Fiscal 2013
Net Sales. Net sales increased $168.4 million in fiscal 2014, or 3.7%, compared to fiscal 2013. The
increase in net sales was due to a $90.0 million increase primarily related to 31 additional stores opened (net of
closures) since February 1, 2014 and a $78.4 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 . SG&A was 26.0% of net sales in fiscal 2014 compared to
26.1% in fiscal 2013. SG&A increased $40.6 million to $1,233.9 million in fiscal 2014 due primarily to $12.4
million of costs associated with operating 31 additional stores (net of closures), a $23.9 million increase in
performance-based compensation and other payroll-related costs, a $4.3 million increase in marketing costs
and a $3.7 million increase in credit card fees.
Related Party Expenses. Related party expenses increased $22.0 million to $35.7 million in fiscal
2014 compared to the prior year due to a $30.2 million fee paid to terminate the management services
agreement in connection with our IPO completed in July 2014.
Interest Expense. Interest expense decreased $16.1 million to $198.4 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 $180.0 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.
Losses on Early Extinguishments of Debt and Refinancing Costs. During fiscal 2014, we recorded a
loss on the early extinguishment of debt of $74.3 million related to the redemption of our 2018 Senior Notes
and the partial redemption of our PIK Notes, consisting of $58.8 million of redemption premiums and $20.6
million to write off related debt issuance costs. The loss was partially offset by a $5.1 million write-off of the
unamortized premium on the 2018 Senior Notes. During fiscal 2013, we recorded a $7.3 million loss related to
the partial redemption of our then outstanding 11.375% senior subordinated notes due November 1, 2016 (the
“2016 Senior Subordinated Notes”). The $7.3 million loss was comprised of a $5.2 million redemption
premium and $2.1 million to write off related debt issuance costs. In addition, we recorded refinancing costs of
$7.1 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 38.1% compared to 35.8% in
the prior year. The effective tax rate in fiscal 2014 was 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.
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
28
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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 $650.0 million, subject to a
borrowing base. As of January 30, 2016, the borrowing base was $650.0 million, of which we had no
outstanding borrowings, $63.2 million of outstanding standby letters of credit and $586.8 million of unused
borrowing capacity. Our cash and cash equivalents totaled $409.4 million at January 30, 2016, of which $33.9
million was held by our Canadian subsidiaries. If it were necessary to repatriate these funds for use in the U.S.,
we would be required to pay U.S. taxes on the amount of undistributed earnings in our Canadian subsidiaries.
However, it is our intent to indefinitely reinvest these funds outside the U.S.
On May 6, 2015, the Company redeemed the remaining $180.9 million of the PIK Notes for an
aggregate redemption price of $188.0 million (including redemption premium and any unpaid interest). This
final payment retired the PIK Notes and discharged the obligations under the indenture governing the PIK
Notes.
On December 28, 2015, MSI voluntarily prepaid $150.0 million in principal of the Additional Term
Loan for an aggregate redemption price (including any unpaid interest) of $151.0 million.
On February 2, 2016, we acquired Lamrite for $150.0 million, subject to certain purchase price
adjustments, utilizing our existing cash on hand. Lamrite operates an international wholesale business under
the Darice brand name and 32 arts and crafts retail stores, located primarily in Ohio and the surrounding states,
under the Pat Catan’s brand name. Lamrite is expected to generate revenues of over $200 million in fiscal 2016
and the retail stores have approximately 32,000 average square feet of selling space per store. The acquisition
is expected to enhance our private brand development capabilities, accelerate our direct sourcing initiatives and
strengthen our business-to-business capabilities.
In March 2016, the Board of Directors authorized the Company to purchase $200.0 million of the
Company’s common stock on the open market. The share repurchase program does not have an expiration
date, and the timing and number of repurchase transactions under the program will depend on market
conditions, corporate considerations, debt agreements and regulatory requirements.
We had total outstanding debt of $2,792.2 million at January 30, 2016, of which $2,282.2 million was
subject to variable interest rates and $510.0 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 invest in growth opportunities, repurchase
outstanding shares, and to repay portions of our indebtedness, depending on prevailing market conditions,
liquidity requirements, contractual restrictions and other factors. As such, 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. If we use our excess cash flows to repay our debt, it will reduce the
amount of excess cash available for additional capital expenditures.
Cash Flow from Operating Activities
Cash flows provided by operating activities was $504.0 million in fiscal 2015, an increase of $62.1
million from fiscal 2014. The increase in cash provided by operating activities was primarily due to a $94.1
million increase in operating income in fiscal 2015 and interest savings from the redemptions of our PIK Notes
in fiscal 2015 and fiscal 2014 and the refinancing of our 2018 Senior Notes in fiscal 2014. The increase in
operating income was partially due to a $35.7 million decrease in related party expenses as a result of the
termination of the management services agreement in fiscal 2014. The increase in cash provided by operating
activities was partially offset by the timing of vendor payments and an increase in income taxes due to the
increase in operating income in fiscal 2015.
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Table of Contents
Average inventory per Michaels store (including e-commerce and distribution centers) increased 2.9%
to $813,000 at January 30, 2016, from $790,000 at January 31, 2015. The increase is due to a strategic decision
to increase inventory levels of core products in fiscal 2015.
Cash Flow from Investing Activities
The following table includes capital expenditures paid during the periods presented (in thousands):
New and relocated stores and stores not yet opened (1)
Existing stores
Information systems
Corporate and other
2015
2013
Fiscal Year
2014
$ 30,315 $ 29,846 $ 38,707
48,289 49,898 26,505
32,228 40,191 28,032
13,088 17,845 18,912
$123,920 $137,780 $112,156
(1)
In fiscal 2015, we incurred capital expenditures related to the opening of 47 Michaels stores, including
the relocation of 17 Michaels stores. 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.
We currently estimate that our capital expenditures will be $125.0 million to $135.0 million in fiscal
2016. We plan to invest in the infrastructure necessary to support the further development of our business. In
fiscal 2016, we plan to open approximately 43 new Michaels stores, including approximately 13 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 $2,400.0 million 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. 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 $850.0 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 $250.0 million of the 5.875% senior subordinated notes were used to fully redeem the
then outstanding 2018 Senior Notes and to pay the applicable make-whole premium and accrued interest.
As of January 30, 2016, the Restated Term Loan Credit Facility provides for senior secured financing
of $2,282.2 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 $500.0 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.
On December 28, 2015, MSI voluntarily prepaid $150.0 million in principal of the Additional Term
Loan for an aggregate redemption price (including any unpaid interest) of $151.0 million.
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
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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 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 Michaels Funding, Inc. (“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”). We are in the process of joining certain of our subsidiaries acquired in the
Lamrite transaction as Subsidiary Guarantors under the Restated Term Loan Credit Facility. 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 (as defined below), as well as certain other customary representations and warranties,
affirmative and negative covenants and events of default. As of January 30, 2016, MSI was in compliance with
all covenants.
5.875% Senior Subordinated Notes due 2020
On December 19, 2013, MSI issued $260.0 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%
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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 $250.0 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 $850.0 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”). We are in the process of joining certain of our subsidiaries acquired in the
Lamrite transaction as Subsidiary Guarantors under the 2020 Senior Subordinated Notes Indenture (as defined
below).
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
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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) $100.0 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 30, 2016, the permitted restricted payment amount was
$268.6 million. As of January 30, 2016, 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 $650.0 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.
As of January 30, 2016 and January 31, 2015, the borrowing base was $650.0 million, of which MSI
had availability of $586.8 million and $587.6 million, respectively. Borrowing capacity is available for letters
of credit and borrowings on same-day notice. Outstanding standby letters of credit as of January 30, 2016
totaled $63.2 million.
The Restated Revolving Credit Facility also provides MSI with the right to request up to $200.0
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 $850.0 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.
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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. We are in the process of joining certain of our subsidiaries acquired
in the Lamrite transaction as Subsidiary Gurantors under the Restated Revolving Credit Facility. 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) $65.0 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) $50.0 million, until the time when MSI has excess availability greater than the greater of (a) 10% of the
Loan Cap and (b) $50.0 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;
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·
·
·
·
·
·
·
·
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.
PIK Toggle Notes
On July 29, 2013, Michaels FinCo Holdings, LLC (“FinCo Holdings”) and Michaels FinCo, Inc.
(“FinCo Inc.”) issued $800.0 million aggregate principal amount of PIK Notes in a private transaction. Interest
was payable semi-annually on February 1 and August 1 of each year until maturity on August 1, 2018. The
proceeds from the debt issuance totaled $782.4 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 $445.7 million.
The net proceeds were used to redeem $439.1 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
$473.5 million. On December 10, 2014, the Company redeemed $180.0 million of the PIK Notes for an
aggregate redemption price (including redemption premium and any unpaid interest) of $188.4 million.
On May 6, 2015, the Company redeemed the remaining $180.9 million of the PIK Notes for an
aggregate redemption price (including redemption premium and any unpaid interest) of $188.0 million. This
final payment retired the PIK Notes and discharged the obligations under the indenture governing the PIK
Notes.
7.75% Senior Notes due 2018
On October 21, 2010, MSI issued $800.0 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 $200.0 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
$235.0 million and $765.0 million, respectively, plus the applicable make-whole premium and accrued interest,
and the 2018 Senior Indenture was discharged.
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.
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Contractual Obligations
As of January 30, 2016, our contractual obligations were as follows (in thousands):
Payments Due By Fiscal Year
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Total debt (1)
Operating lease commitments (2)
Interest payments (3)
Other commitments (4)
$ 2,792,150 $ 24,900 $ 49,800 $ 2,717,450 $
—
1,958,997 400,096 663,331 437,466 458,104
—
496,288 120,051 232,934
—
101,683 87,118 14,037
$ 5,349,118 $ 632,165 $ 960,102 $ 3,298,747 $ 458,104
143,303
528
(1) Total debt includes only principal payments owed on 2020 Senior Subordinated Notes and Restated
Term Loan Credit Facility. The amounts shown above do not include unamortized premium/discount
and deferred debt issuance costs reflected in the Company’s consolidated balance sheets since those
excluded amounts do not represent contractual obligations.
(2) 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.
(3) Debt associated with our Restated Term Loan Credit Facility was $2,282.2 million at January 30, 2016,
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 30, 2016.
Debt associated with the 2020 Senior Subordinated Notes was $510.0 million at January 30, 2016, and
was subject to fixed interest rates. We had no outstanding borrowings under our Restated Revolving
Credit Facility at January 30, 2016. 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.
(4) 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.
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 extinguishments of debt and refinancing costs)” as net income before interest,
income taxes, depreciation, amortization and losses on early extinguishments of debt and refinancing costs.
The Company defines “Adjusted EBITDA” as EBITDA (excluding losses on early extinguishments 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 extinguishments 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.
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As EBITDA (excluding losses on early extinguishments 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 extinguishments
of debt and refinancing costs) and Adjusted EBITDA may differ from similarly titled measures used by other
companies.
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 thousands):
Net cash provided by operating activities
Depreciation and amortization
Share-based compensation
Debt issuance costs amortization
Accretion of long-term debt, net
Deferred income taxes
Losses on early extinguishments of debt and refinancing costs
Gains (losses) on disposition of property and equipment
Excess tax benefits from share-based compensation
Other
Changes in assets and liabilities
Net income
Interest expense
Provision for income taxes
Depreciation and amortization
Losses on early extinguishments of debt and refinancing costs
Interest income
EBITDA (excluding losses on early extinguishments of debt and
refinancing costs)
Adjustments:
Share-based compensation
Management fees to Sponsors and others
Transition costs
Severance costs
Store pre-opening costs
Store remodel costs
Foreign currency transaction losses
Store closing costs
IPO costs
Other (1)
Adjusted EBITDA
2015
2013
(19,387)
(10,333)
516
(15,282)
Fiscal Year
2014
$ 504,047 $ 441,997 $ 448,989
(110,858) (105,939)
(34,262)
(10,195)
1,310
4,030
(74,312) (14,420)
156
13
(545)
(45,707)
217,395 243,430
198,409 214,497
133,639 135,905
110,858 105,939
14,420
(278)
(114,756)
(15,064)
(8,467)
150
(8,611)
(8,485)
25
14,507
—
(434)
362,912
139,405
209,208
114,756
8,485
(615)
(3,995)
5,081
—
3,968
74,312
(363)
834,151 734,250 713,913
15,064
—
—
2,733
4,858
4,554
579
(104)
—
4,336
34,262
13,695
1,510
5,345
4,798
7,100
1,777
5,050
—
4,886
$ 866,171 $ 812,819 $ 792,336
19,387
35,682
230
4,123
5,172
3,886
2,757
1,931
2,134
3,267
(1) Other adjustments primarily relate to items such as moving and relocation expenses, the Lamrite
acquisition, 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
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critical accounting policies, which are those that are both important to the portrayal of our financial condition
and 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 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 $0.9
million for fiscal 2015. 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 $0.7 million in fiscal 2015.
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. 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, terminal growth rate and
forecasted long-term sales growth. During fiscal 2015 and fiscal 2014, 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.
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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
12 months (unless significant impairment indicators exist). 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 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.
Self-Insurance. We have insurance coverage for losses in excess of self-insurance limits for medical
claims, general liability and workers’ compensation claims. Our liability represents an estimate of the ultimate
cost of claims incurred as of the balance sheet dates. The estimated liability is not discounted and is established
based upon analysis of historical data and actuarial estimates. While we believe these estimates are reasonable
based on the information currently available, if actual trends, including the severity or frequency of claims,
medical cost inflation, or fluctuations in premiums differ from our estimates, our results of operations could be
impacted. A 10% change in our self-insurance reserves would have affected net income by $4.0 million in
fiscal 2015.
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 2015, 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 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 2013 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.
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The following table details information on stock options granted by quarter for fiscal 2015:
Number
Quarter end date
May 2, 2015
August 1, 2015
October 31, 2015
January 30, 2016
of options
Fair value of
granted Exercise common stock
Fair value
of
option
(in
thousands)
price
188 $ 28.61 $
28.25
77
23.10
1,330
22.30
80
at grant
at grant
28.61 $
28.25
23.10
22.30
6.80
6.72
5.86
5.96
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 our historical volatility as well
as historical and 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.
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 subsidiaries. Our sales, costs and expenses of our Canadian subsidiaries,
when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of January 30, 2016, a 10%
increase or decrease in the exchange rate of the Canadian dollar would increase or decrease net income by
approximately $4 million for fiscal 2015.
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 rate on our 2020
Senior Subordinated Notes is fixed. Based on our overall interest rate exposure to variable rate debt
outstanding as of January 30, 2016, a 1% change in interest rates would increase or decrease income before
income taxes by $22.8 million. A 1% change in interest rates would impact the fair value of our long-term
fixed rate debt by $13.0 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 30, 2016. 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.
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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 LLP
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 controls over financial reporting during the quarter ended
January 30, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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
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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
30, 2016. 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 30, 2016. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
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.
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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 30, 2016,
January 31, 2015 and February 1, 2014
Consolidated Balance Sheets at January 30, 2016 and January 31, 2015
Consolidated Statements of Cash Flows for the fiscal years ended January 30, 2016, January 31,
2015 and February 1, 2014
Consolidated Statements of Stockholders’ Deficit for the fiscal years ended January 30, 2016,
January 31, 2015 and February 1, 2014
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 30, 2016, 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 30, 2016, 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 30, 2016 and January 31,
2015 and the related consolidated statements of comprehensive income, stockholders’ deficit and cash
flows for the three years in the period ended January 30, 2016 and our report dated March 17, 2016
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, TX
March 17, 2016
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 30, 2016 and January 31, 2015 and the related consolidated statements of
comprehensive income, stockholders’ deficit and cash flows for each of the three years in the period ended
January 30, 2016. 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 30, 2016 and January
31,2015 and the consolidated results of its operations and its cash flows for each of the three years in the
period ended January 30, 2016, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted ASU 2015-
1 7 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” and ASU 2015-03
“Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs”.
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 30, 2016, 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 17, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, TX
March 17, 2016
F-3
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
Fiscal Year
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Related party expenses
Store pre-opening costs
Operating income
Interest expense
Losses on early extinguishments of debt and refinancing costs
Other expense, net
Income before income taxes
Provision for income taxes
Net income
2013
2015
2014
$4,912,782 $4,738,144 $4,569,792
2,747,630
2,836,965
1,822,162
1,901,179
1,193,282
1,233,901
13,695
35,682
4,783
5,067
610,402
626,529
214,497
198,409
14,420
74,312
2,150
2,774
379,335
351,034
135,905
133,639
$ 362,912 $ 217,395 $ 243,430
2,944,431
1,968,351
1,242,961
—
4,786
720,604
139,405
8,485
594
572,120
209,208
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other
Comprehensive income
Earnings per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
(10,251)
(6,239)
$ 352,661 $ 205,392 $ 237,191
(12,003)
$
$
1.75 $
1.72 $
1.07 $
1.05 $
1.39
1.36
206,845
209,346
203,229 174,797
207,101 178,628
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
Current Assets:
Cash and equivalents
Merchandise inventories
Prepaid expenses and other
Income tax receivables
Total current assets
Property and equipment, net
Goodwill
Deferred income taxes
Other assets
Total assets
THE MICHAELS COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS
January 30,
2016
January 31,
2015
$
409,391 $
378,295
958,171
84,894
2,418
1,423,778
386,372
94,290
49,010
7,658
$ 2,023,277 $ 1,961,108
1,002,607
86,484
1,231
1,499,713
378,507
94,290
40,399
10,368
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable
Accrued liabilities and other
Current portion of long-term debt
Income taxes payable
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ Deficit:
$
457,704 $
377,606
24,900
44,640
904,850
2,744,942
97,580
3,747,372
447,165
391,997
24,900
25,570
889,632
3,089,781
93,220
4,072,633
Common stock, $0.06775 par value, 350,000 shares authorized;
208,996 shares issued and outstanding at January 30, 2016 and 205,803
shares issued and outstanding at January 31, 2015
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
13,979
592,420
(2,308,438)
(22,056)
(1,724,095)
13,799
557,831
(2,671,350)
(11,805)
(2,111,525)
$ 2,023,277 $ 1,961,108
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
2015
Fiscal Year
2014
2013
$ 362,912 $
217,395 $
243,430
Depreciation and amortization
Share-based compensation
Debt issuance costs amortization
Accretion of long-term debt, net
Deferred income taxes
Losses on early extinguishments of debt and refinancing costs
(Gains) losses on disposition of property and equipment
Excess tax benefits from share-based compensation
Other
Changes in assets and liabilities:
Merchandise inventories
Prepaid expenses and other
Other assets
Accounts payable
Accrued interest
Accrued liabilities and other
Income taxes
Other liabilities
Net cash provided by operating activities
114,756
15,064
8,467
(150)
8,611
8,485
(25)
(14,507)
—
(44,213)
(1,150)
(34)
24,217
1,852
(23,530)
44,941
(1,649)
504,047
110,858
19,387
10,333
(516)
15,282
74,312
3,995
(5,081)
—
(60,343)
10,613
(324)
76,710
(45,647)
14,294
1,006
(277)
441,997
105,939
34,262
10,195
(1,310)
(4,030)
14,420
(156)
(13)
545
(37,799)
(9,051)
1,016
101,829
22,703
(29,543)
(6,900)
3,452
448,989
Cash flows from investing activities:
Additions to property and equipment
Purchase of long-term investment
Net cash used in investing activities
Cash flows from financing activities:
Issuance of PIK Notes
Payment of PIK Notes
Borrowings on restated revolving credit facility
Payments on restated revolving credit facility
Borrowings on restated term loan credit facility
Payments on restated term loan credit facility
Payment of 2018 senior notes
Issuance of 2020 senior subordinated notes
Payment of 2016 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
(123,920)
(5,000)
(128,920)
(137,780)
—
(137,780)
(112,156)
—
(112,156)
— —
(184,467)
45,047
(45,047)
—
(174,900)
—
—
255,000
— —
—
—
(492)
643
22,655
(21,977)
14,507
—
(344,031)
800,000
(627,142) —
388,902
23,000
(23,000)
(390,116)
845,750 —
(12,300)
(20,650)
(1,057,239) —
260,000
(402,908)
445,660 —
(21,270)
(12,363)
(766,198)
(530)
(4,655)
(2,075)
5,668
27,211
(8,054)
(21,557)
13
5,081
(3,012)
(1,932)
(153,930)
(164,786)
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
31,096
378,295
$ 409,391 $
139,431
238,864
378,295 $
182,903
55,961
238,864
See accompanying notes to consolidated financial statements.
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THE MICHAELS COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Three Years Ended January 30, 2016
(in thousands)
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
Issuance of stock
Balance at February
1, 2014
Net income
Foreign currency
translation and other
Share-based
compensation
Exercise of stock
options and other
awards
Repurchase of stock
Issuance of common
stock in IPO
Issuance of restricted
shares, net
Balance at January
31, 2015
Net income
Foreign currency
translation and other
Share-based
compensation
Exercise of stock
options and other
awards
Repurchase of stock
Issuance of restricted
shares, net
Balance at January
30, 2016
Number of Common
Shares
Stock
Additional
Paid-in
Capital
Accumulated Comprehensive
Deficit
Income (Loss)
Total
Accumulated
Other
174,780 $ 11,841 $ 36,772 $ (2,359,011) $
243,430
(768,928)
— —
— —
—
—
6,437 $ (2,303,961)
243,430
(768,928)
—
—
— —
(5,533)
(819)
(6,239)
(12,591)
— —
49,066
4,006
266
5,402
—
—
—
(3,777)
15
— 13,088
(4,419)
(218)
— —
—
(3,417)
—
175,024 11,889 94,376 (2,888,745)
217,395
—
—
—
—
—
—
—
—
15,983
3,221
(1,278)
218 26,993
(190) (21,367)
27,778 1,882 441,846
1,058 —
—
—
—
—
—
—
—
205,803 13,799 557,831 (2,671,350)
362,912
—
—
—
—
49,066
—
5,668
—
—
13,088
(8,054)
—
198 (2,782,282)
217,395
—
(12,003)
(12,003)
—
15,983
—
—
27,211
(21,557)
—
443,728
—
—
(11,805) (2,111,525)
362,912
—
—
—
—
—
(10,251)
(10,251)
—
— 15,502
—
—
15,502
3,447
(1,055)
233 41,011
(53) (21,924)
—
—
—
—
41,244
(21,977)
801
—
—
—
—
—
208,996 $ 13,979 $ 592,420 $ (2,308,438) $
(22,056) $ (1,724,095)
See accompanying notes to consolidated financial statements.
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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.
Michaels Stores, Inc. (“MSI”) is headquartered in Irving, Texas and was incorporated in the state
of Delaware in 1983. In July 2013, MSI was reorganized into a holding company structure and The
Michaels Companies, Inc. (the “Company”) was incorporated in Delaware in connection with the
reorganization. In July 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, resulting in net
proceeds of $445.7 million.
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 2015” relate to the 52 weeks ended January 30, 2016, references to “fiscal 2014” relate to the 52
weeks ended January 31, 2015 and references to “fiscal 2013” relate to the 52 weeks ended February 1,
2014.
Preferred Shares
The Company’s Board of Directors has authorized the issuance of 50.0 million shares of
preferred stock under The Michaels Companies, Inc. Certificate of Incorporation. No preferred shares have
been issued as of January 30, 2016.
Share Repurchase Program
In March 2016, the Board of Directors authorized the Company to purchase $200.0 million of the
Company’s common stock on the open market. The share repurchase program does not have an expiration
date, and the timing and number of repurchase transactions under the program will depend on market
conditions, corporate considerations, debt agreements and regulatory requirements.
Foreign Currency
The functional currency of our Canadian operations is the Canadian dollar. Translation
adjustments result from translating our Canadian subsidiaries’ 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 $10.3 million, $12.0 million and $6.2 million in fiscal 2015, fiscal 2014 and fiscal
2013, respectively. Transaction gains and losses are recorded as a part of other expense, net in our
consolidated statements of comprehensive income and were immaterial in fiscal 2015, fiscal 2014 and
fiscal 2013.
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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. The carrying
amount of cash equivalents 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
$82.3 million, or 1.7% of net sales, in fiscal 2015, $91.8 million, or 1.9% of net sales, in fiscal 2014, and
$102.4 million, or 2.2% of net sales, in fiscal 2013.
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.
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
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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 (a)
Fixtures and equipment
Computer equipment
Capitalized software
Years
30
10
8
5
1 - 5
(a) 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 30, 2016 and January 31, 2015, we had
unamortized capitalized software costs of $83.2 million and $87.1 million, respectively. These amounts
are included in property and equipment, net in the consolidated balance sheets. Amortization expense
related to capitalized software costs totaled $31.2 million, $40.5 million and $45.8 million in fiscal 2015,
fiscal 2014 and fiscal 2013, 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 2015 and fiscal 2014, there
was no impairment charge required related to 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. 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 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
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exposed to additional impairment losses that may be material. As a result of our impairment review, there
were no material impairment charges recorded in fiscal 2015, fiscal 2014 and fiscal 2013.
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 activity related to closed facilities (in thousands):
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
2015
2013
Fiscal Year
2014
$ 3,386 $ 4,598 $ 7,684
5,050
1,931
(8,136)
(3,143)
915 $ 3,386 $ 4,598
1,946
(4,417)
$
We have insurance coverage for losses in excess of self-insurance limits for medical claims,
general liability and workers’ compensation claims. Our liability represents an estimate of the ultimate cost
of claims incurred as of the balance sheet dates. The estimated liability is not discounted and is established
based upon analysis of historical data and actuarial estimates. While we believe these estimates are
reasonable based on the information currently available, if actual trends, including the severity or
frequency of claims, medical cost inflation, or fluctuations in premiums differ from our estimates, our
results of operations could be impacted. 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 180 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 or when the likelihood of
redemption by the customer is remote (“gift card breakage”). We estimate gift card breakage based on
customers’ historical redemption rates and patterns. If actual redemption patterns vary from the
Company’s estimates or if regulations change, actual gift card breakage may differ from the amounts
recorded. Gift card breakage income is recorded in net sales in the consolidated statements of
comprehensive income over the period of estimated performance.
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Costs of Sales and Occupancy Expense
The costs of merchandise sales are 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, transportation (including internal transfer costs such as distribution
center-to-store freight costs), purchasing and receiving costs; and
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 lease term 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 (“SG&A”) 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 $188.9 million,
$185.0 million and $180.7 million in fiscal 2015, fiscal 2014 and fiscal 2013, 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 tax liability or
receivable 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 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.
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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 2015, 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 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 2015 presentation, including the reclassification of current deferred
income taxes to non-current deferred income taxes and the reclassification of certain unamortized debt
issuance costs from non-current assets to a direct reduction of the related long-term debt obligation.
Accounting Pronouncements Recently Adopted
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts. Amortization of the costs will
continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15 “Interest –
Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance
Costs Associated with Line-of Credit Arrangements”, which clarifies that the guidance in ASU 2015-03
does not apply to line-of-credit arrangements. Given the absence of the authoritative guidance in ASU
2015-03, the SEC will not object to an entity deferring and presenting debt issuance costs related to line-
of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably
over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. The Company adopted this guidance in the fourth quarter of
fiscal 2015, which has been applied retrospectively. As a result of the adoption of this standard, at January
30, 2016 and January 31, 2015, unamortized debt issuance costs of $24.0 million and $34.6 million,
respectively, are reported as a deduction from the related long-term debt obligations on the Company's
consolidated balance sheets. Debt issuance costs associated with the Restated Revolving Credit Facility
remain classified as an asset for all periods presented. The adoption of this standard did not have any other
impact on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11 , “Inventory (Topic 330): Simplifying the
Measurement of Inventory” ("ASU 2015-11"), which requires that inventory that is measured using
average cost be measured at the lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal
and transportation. When evidence exists that the net realizable value of inventory is lower than its cost,
the difference will be recognized as a loss in earnings in the period in which it occurs. This new guidance
must be applied on a prospective basis. The Company adopted the provisions of ASU 2015-11 in the fourth
quarter of fiscal 2015 and its adoption did not have a material impact on the Company's consolidated
financial statements.
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Table of Contents
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 requires that deferred tax
liabilities and assets within each tax jurisdiction, including any related valuation allowance, be classified
as noncurrent in the consolidated balance sheet. The Company early adopted ASU 2015-17 in the fourth
quarter of fiscal 2015 on a retrospective basis, resulting in the reclassification of $38.3 million from current
deferred tax assets to noncurrent deferred tax assets as of January 31, 2015.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02").
Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its
balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are
required to disclose qualitative and quantitative information about leasing arrangements to enable a user of
the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including
interim periods within that reporting period, with early adoption permitted. At adoption, this update will be
applied using a modified retrospective approach. We are currently evaluating the impact that ASU 2016-02
will have on the consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “ Intangibles — Goodwill and Other - Internal-
Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement” (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud computing arrangement includes a software
license, the customer should account for the software license element of the arrangement consistent with
the acquisition of other software licenses. If a cloud computing arrangement does not include a software
license, the customer should account for the arrangement as a service contract. The new guidance does not
change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for
annual reporting periods beginning after December 15, 2015, including interim periods within that
reporting period. We have evaluated the new standard and it will not have a material impact to the
consolidated financial statements once implemented.
In May 2014, the FASB issued 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. In July 2015, the FASB decided to delay
the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting period. The standard is
to be applied retrospectively, with early application permitted for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. We are evaluating the new
standard, but do not anticipate a material impact to the consolidated financial statements once
implemented.
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;
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·
·
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, there
were no material impairment charges recorded in fiscal 2015, fiscal 2014 and fiscal 2013.
The carrying value of cash and cash equivalents, accounts receivable and accounts payable
approximates their estimated fair values due to the short maturities of these instruments.
The table below provides the carrying and fair values of our Restated Term Loan Credit Facility
and our 2020 Senior Subordinated Notes (as defined in Note 5) as of January 30, 2016. The fair value of
our Restated Term Loan Credit Facility and our 2020 Senior Subordinated Notes were determined based
on quoted market prices which are considered Level 2 inputs within the fair value hierarchy.
Restated term loan credit facility
Senior subordinated notes
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
Notional
Value
Fair
Value
(in thousands)
$ 2,282,150
510,000
$ 2,251,354
525,300
Buildings and leasehold improvements
Fixtures and equipment
Capitalized software
Construction in progress
Less accumulated depreciation and amortization
F-15
January 30,
2016
480,468
907,457
241,915
31,394
1,661,234
(1,282,727)
378,507
$
$
January 31,
2015
450,982
879,033
221,005
28,426
1,579,446
(1,193,074)
386,372
$
$
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4. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following (in thousands):
Accrued payroll
Self-insurance
Accrued interest
Property, sales and use taxes
Gift card liability
Accrued and straight-line rent
Other
5. DEBT
Long-term debt consists of the following (in thousands):
January 30,
2016
119,124
65,716
11,778
56,594
42,577
19,694
62,123
377,606
$
$
January 31,
2015
127,741
70,793
9,926
60,076
37,515
17,785
68,161
391,997
$
$
Restated term loan credit facility
Senior subordinated notes
PIK notes
Total debt
Less unamortized discount/premium and debt costs
Total debt, net
Less current portion
Long-term debt
Interest Rate
January 30,
2016
January 31,
2015
Variable $ 2,282,150 $ 2,457,050
510,000
510,000
5.875 %
7.50 % /
8.25 %
—
2,792,150
(22,308)
180,850
3,147,900
(33,219)
2,769,842 3,114,681
(24,900)
$ 2,744,942 $ 3,089,781
(24,900)
The aggregate amount of scheduled maturities of debt for the next five years and thereafter is as
follows (in thousands):
Fiscal Year
2016
2017
2018
2019
2020
Total debt payments
Less unamortized discount/premium and debt costs
Total debt balance as of January 30, 2016
Amount
$
24,900
24,900
24,900
2,207,450
510,000
2,792,150
(22,308)
$ 2,769,842
As of January 30, 2016 and January 31, 2015, the weighted-average interest rate of the variable
debt was 3.83%. Cash paid for interest totaled $129.3 million, $234.3 million and $182.8 million in fiscal
2015, fiscal 2014 and fiscal 2013, respectively.
As of January 30, 2016, gross debt issuance costs totaled $88.8 million. We amortize debt
issuance costs using the straight-line method over the terms of the respective debt agreements (which
range from five to seven years). Amortization expense related to debt issuance costs is recorded in interest
expense in the accompanying consolidated statements of comprehensive income. The straight-line method
produces results materially consistent with the
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effective interest method. Our expected amortization expense related to the debt issuance costs for each of
the next five years and thereafter is as follows (in thousands):
Fiscal Year
2016
2017
2018
2019
2020
Total amortization expense
Restated Term Loan Credit Facility
Amount
$
7,896
7,143
5,638
5,638
1,468
27,783
$
On October 31, 2006, MSI entered into a $2,400.0 million 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. 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 $850.0 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 $250.0 million of the 5.875% senior subordinated notes were used to
fully redeem the then outstanding 7.75% Senior Notes due 2018 (“2018 Senior Notes”) and to pay the
applicable make-whole premium and accrued interest.
As of January 30, 2016, the Restated Term Loan Credit Facility provides for senior secured
financing of $2,282.2 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 $500.0 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.
On December 28, 2015, MSI voluntarily prepaid $150.0 million in principal of the Additional
Term Loan for an aggregate redemption price (including any unpaid interest) of $151.0 million.
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.
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MSI must offer to prepay outstanding term loans at 100% of the principal amount, plus any
the proceeds of certain asset sales or casualty events under certain
unpaid
interest, with
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 Michaels Funding, Inc. (“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”). We are in the process of joining certain of our subsidiaries
acquired in the Lamrite West, Inc. transaction as Subsidiary Guarantors under the Restated Term Loan
Credit Facility. 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 (as defined below), as well as certain other customary representations and warranties,
affirmative and negative covenants and events of default. As of January 30, 2016, MSI was in compliance
with all covenants.
In accordance with ASC 470, Debt (“ASC 470”), MSI capitalized $14.5 million of debt issuance
costs in fiscal 2014 related to the Additional Term Loan. The debt issuance costs are reflected as a
deduction from the carrying value of debt in the consolidated balance sheets and are being amortized as
interest expense over the life of the Restated Term Loan Credit Facility. As a result of the $150.0 million
Additional Term Loan prepayment on December 28, 2015, MSI recorded a loss on early extinguishment of
debt of $2.4 million, consisting of $1.9 million of unamortized debt issuance costs and $0.5 million of
unamortized net discount. As of January 30, 2016, MSI is amortizing $44.3 million in debt issuance
costs as interest expense over the life of the term loan. Debt issuance costs related to this facility are
reflected as a deduction from the carrying value of debt in the consolidated balance sheets.
5.875% Senior Subordinated Notes due 2020
On December 19, 2013, MSI issued $260.0 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.
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On June 16, 2014, MSI issued an additional $250.0 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 $850.0 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”). We are in the process of joining certain of
our subsidiaries acquired in the Lamrite West, Inc. transaction as Subsidiary Guarantors under the 2020
Senior Subordinated Notes Indenture (as defined below).
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
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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) $100.0 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 30, 2016, the permitted restricted
payment amount was $268.6 million. As of January 30, 2016, MSI was in compliance with all covenants.
In accordance with ASC 470, MSI
is amortizing $13.6 million in debt issuance costs,
including $5.9 million capitalized in fiscal 2014, as interest expense over the life of the 2020 Senior
Subordinated Notes. Debt issuance costs related to these notes are reflected as a deduction from the
carrying value of debt in the consolidated balance sheets.
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 $650.0
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.
As of January 30, 2016 and January 31, 2015, the borrowing base was $650.0 million, of which
MSI had availability of $586.8 million and $587.6 million, respectively. Borrowing capacity is available
for letters of credit and borrowings on same-day notice. Outstanding standby letters of credit as of January
30, 2016 totaled $63.2 million.
The Restated Revolving Credit Facility also provides MSI with the right to request up to $200.0
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 $850.0 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
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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. We are in the process of joining certain of our subsidiaries
acquired in the Lamrite West, Inc. transaction as Subsidiary Gurantors under the Restated Revolving
Credit Facility. 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) $65.0 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) $50.0 million, until the time when MSI has excess availability greater than the greater of (a) 10%
of the Loan Cap and (b) $50.0 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).
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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 is amortizing $30.9 million in debt issuance costs as interest
expense over the life of the Restated Revolving Credit Facility. Debt issuance costs related to this facility
are reflected as an asset within the consolidated balance sheets.
PIK Toggle Notes
On July 29, 2013, Michaels FinCo Holdings, LLC (“FinCo Holdings”) and Michaels FinCo, Inc.
(“FinCo Inc.”) issued $800.0 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due
2018 (“PIK Notes”) in a private transaction. Interest was payable semi-annually on February 1 and August
1 of each year until maturity on August 1, 2018. The proceeds from the debt issuance totaled $782.4
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 $445.7
million. The net proceeds were used to redeem $439.1 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 $473.5 million. On December 10, 2014, the Company redeemed $180.0 million of the
PIK Notes for an aggregate redemption price (including redemption premium and any unpaid interest) of
$188.4 million.
On May 6, 2015, the Company redeemed the remaining $180.9 million of the PIK Notes for an
aggregate redemption price (including redemption premium and any unpaid interest) of $188.0 million.
This final payment retired the PIK Notes and discharged the obligations under the indenture governing the
PIK Notes.
In accordance with ASC 470, we recorded a loss on the early extinguishment of debt of $18.4
million related to the redemption of the PIK Notes in fiscal 2014. The $18.4 million loss consisted of
an $8.0 million redemption premium and a $10.4 million charge to write off debt issuance costs. In
addition, in fiscal 2015, the Company recorded $6.1 million of debt extinguishment costs, which consists
of a $3.6 million redemption premium and $2.5 million of unamortized debt issuance costs.
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7.75% Senior Notes due 2018
On October 21, 2010, MSI issued $800.0 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 $200.0 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 $235.0 million and $765.0 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 $55.9
million related to the redemption of the 2018 Senior Notes in fiscal 2014. The $55.9 million loss
consisted of $50.8 million of redemption premiums and $10.2 million to write off related debt issuance
costs. This loss was partially offset by a $5.1 million write-off of unamortized net premiums.
11.375% Senior Subordinated Notes due 2016
On October 31, 2006, MSI issued $400.0 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 $137.0 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 $147.2 million. On January 21, 2014, MSI redeemed the
remaining $255.9 million of 2016 Senior Subordinated Notes at a redemption price equal to 101.896%, or
a total of $260.7 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 $14.4 million related to the redemption of our 2016 Senior Subordinated Notes.
The $14.4 million loss was comprised of an $8.5 million redemption premium and $5.9 million to write
off related debt issuance and other 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 30, 2016 are as
follows (in thousands):
Fiscal Year
2016
2017
2018
2019
2020
Thereafter
Total minimum rental commitments
$
400,096
358,304
305,027
247,216
190,250
458,104
$ 1,958,997
Rent expense applicable to non-cancelable operating leases was $388.1 million, $376.8 million
and $370.0 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
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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 components of deferred tax assets and liabilities as of the respective year-end
balance sheets are as follows (in thousands):
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
$
Fiscal Year
2015
2014
13,748 $
8,156
6,360
9,387
17,880
7,093
17,992
24,672
5,463
8,731
119,482
(3,050)
116,432
(9,350)
(42,495)
—
(24,188)
(76,033)
13,135
4,160
7,664
15,828
15,373
4,534
18,985
32,750
8,061
9,523
130,013
(5,317)
124,696
(7,959)
(33,649)
(2,369)
(31,709)
(75,686)
Net deferred tax assets
$
40,399 $
49,010
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.
At January 30, 2016, we had state net operating loss carryforwards to reduce future taxable
income of $5.5 million, net of federal tax benefits, expiring at various dates between fiscal 2015 and fiscal
2032. Cash paid for income taxes totaled $154.9 million, $112.4 million and $144.7 million in fiscal 2015,
fiscal 2014 and fiscal 2013, respectively.
A provision for income taxes has not been recognized for U.S. taxes on undistributed earnings of
our Canadian subsidiaries for fiscal 2014 and fiscal 2015 as these earnings were, and are expected to
continue to be, permanently reinvested. The aggregate undistributed earnings of our Canadian subsidiaries
for which no deferred tax liability has been recognized is $48.5 million as of the end of fiscal 2015. If
these earnings are remitted to the U.S. at a future date, additional tax liabilities will be incurred thereon.
The unrecognized deferred tax liabilities on the unremitted earnings is approximately $8.8 million at
January 30, 2016.
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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 thousands):
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
2015
200,242
19,131
(1,696)
2,268
(2,268)
(8,469)
209,208
$
$
Fiscal Year
2014
122,862
11,364
(2,494)
3,571
(3,571)
1,907
133,639
$
$
2013
132,768
8,221
(1,095)
—
(1,475)
(2,514)
135,905
$
$
The federal, state and international provision for income taxes are as follows (in thousands):
Current:
Federal
State
International
Total current
Deferred:
Federal
State
International
Total deferred
Provision for income taxes
Uncertain Tax Positions
2015
Fiscal Year
2014
$
$
164,384
27,167
9,746
201,297
$
90,025
19,147
10,418
119,590
6,300
2,762
(1,151)
7,911
18,665
(1,786)
(2,830)
14,049
2013
113,922
14,852
11,488
140,262
(1,020)
(4,480)
1,143
(4,357)
$
209,208
$
133,639
$
135,905
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 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 from the end of fiscal 2014 through the end of
fiscal 2015 is as follows (in thousands):
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 tax positions related to prior years
Reductions for expiration of statute of limitations
Balance at end of year
$ 16,715
3,928
2,422
(731)
(3,198)
$ 19,136
Included in the balance of unrecognized tax benefits at January 30, 2016 is $11.2 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 30, 2016 and January 31, 2015, the total amount of interest
and penalties accrued within the
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tax liability was $4.6 million and $3.5 million, respectively. There was no material interest and penalties
recognized in the consolidated statements of comprehensive income in fiscal years 2015, 2014 and 2013.
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 2011 to fiscal 2014, fiscal 2008 to fiscal 2014 for our Canadian returns and fiscal 2009 to
fiscal 2014 for all major state tax returns. Our income tax returns for fiscal 2011 and fiscal 2012 are
currently under examination by the Canadian tax authorities. We are not aware of any issues which would
result in a material assessment of tax obligations. The pretax income from foreign operations for fiscal
2015, fiscal 2014 and fiscal 2013 totaled $33.2 million, $38.0 million and $38.8 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 21.3 million shares of
common stock. As of January 30, 2016, there were 7.4 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 2015, 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 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 30, 2016, unrecognized compensation cost for all unvested
share-based awards totaled $45.3 million and is expected to be recognized over a weighted-average period
o f 3.0 years. Share-based compensation expense totaled $15.1 million in fiscal 2015, $19.4 million in
fiscal 2014 and $34.3 million in fiscal 2013 and is recorded in cost of sales and occupancy expense and
SG&A expense 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 assumptions used during fiscal years 2015, 2014 and 2013:
2015
2013
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)
1.1 - 1.5 %
0.0 %
0.1 - 1.4 %
0.0 %
27.4 - 31.2 % 27.5 - 28.4 % 25.5 - 32.5 %
4.0
4.0
$ 22.30 - $ 28.82 $ 15.16 - $ 22.75
4.0 - 5.0
$ 14.76 - $ 18.28
Fiscal Year
2014
1.3 %
0.0 %
(1) Based on interest rates for U.S. Treasury instruments with terms consistent with the expected lives
of the awards.
(2) We considered o u r historical volatility as well as the historical and 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.
(4) The Company’s common stock valuations for periods prior to our IPO on June 27, 2014 and fiscal
2013 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 30, 2016 was as follows:
Number of
Weighted-
Weighted-
Average
Remaining
Contractual
Aggregate
Intrinsic
Shares
(in thousands)
Average Exercise Term (in
years)
Price
Value
(in thousands)
Outstanding at beginning of year
Granted
Exercised
Expired/Forfeited
Outstanding at end of year
9,838 $
1,675
(3,169)
(372)
7,972
10.86
23.92
7.14
16.61
14.84
5.9 $
58,835
Shares exercisable at end of year
3,705 $
11.08
3.8 $
58,667
The total grant date fair value of options that vested during fiscal 2015, fiscal 2014 and fiscal
2013 was $7.3 million, $14.5 million and $17.1 million, respectively. The intrinsic value for options that
vested during fiscal 2015, fiscal 2014 and fiscal 2013 was $18.1 million, $33.0 million and $25.3 million,
respectively. The intrinsic value for options exercised was $65.6 million in fiscal 2015, $42.1 million in
fiscal 2014 and $27.4 million in fiscal 2013. As of the beginning of fiscal 2015, there were 4.3 million
nonvested options with a weighted-average fair value of $4.66 per share. As of the end of fiscal 2015, there
were 4.3 million nonvested options with a weighted-average fair value of $4.97 per share. The weighted-
average fair value of options granted during fiscal 2015 and fiscal 2014 was $6.01 and $3.77, respectively.
During fiscal 2015, there were 1.4 million options that vested and 0.4 million options that were cancelled
with a weighted-average fair value of $5.30 and $4.76 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 30, 2016 was as follows:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
9. EARNINGS PER SHARE
Number of
Shares
(in thousands)
904 $
883
(276)
(82)
1,429 $
Weighted-
Average Fair
Value
16.79
23.69
16.59
20.29
20.88
The Company’s unvested restricted stock awards contain non-forfeitable rights to dividends and
meet the criteria of a participating security as defined by ASC 260, “Earnings Per Share.” Under the two-
class method, net income per share is computed by dividing net income allocated to common shareholders
by the weighted average number of common shares outstanding for the period. In applying the two-class
method, net income is allocated to both common and participating securities based on their respective
weighted-average shares outstanding for the period. Diluted earnings per share is computed by dividing
income available to common stockholders by the weighted-average common shares outstanding plus the
potential dilutive impact from the exercise of stock options. Common equivalent shares are excluded from
the computation if their effect is anti-dilutive. There were 0.8 million, 0.3 million and 2.4 million anti-
dilutive shares in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data):
2015
Fiscal Year
2014
2013
Basic earnings per common share:
Net income
Less income related to unvested restricted shares
Income available to common shareholders - Basic
Weighted-average common shares outstanding - Basic
Basic earnings per common share
$ 362,912 $ 217,395 $ 243,430
(660)
$ 361,012 $ 216,560 $ 242,770
(1,900)
(835)
206,845
203,229
$
1.75 $
1.07 $
174,797
1.39
Diluted earnings per common share:
Net income
$ 362,912 $ 217,395 $ 243,430
Less income related to unvested restricted shares
Income available to common shareholders - Diluted
Weighted-average common shares outstanding - Basic
Effect of dilutive stock options
Weighted-average common shares outstanding - Diluted
Diluted earnings per common share
F-28
(1,877)
(646)
$ 361,035 $ 216,576 $ 242,784
(819)
206,845
2,501
209,346
203,229
3,872
207,101
$
1.72 $
1.05 $
174,797
3,831
178,628
1.36
Table of Contents
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.
Our net sales and total assets by country are as follows (in thousands):
2015
Fiscal Year
2014
2013
Net Sales:
United States
Canada
Total
Total Assets:
United States
Canada
Total
$ 4,473,454 $ 4,276,794 $ 4,132,037
437,755
$ 4,912,782 $ 4,738,144 $ 4,569,792
439,328
461,350
$ 1,887,570 $ 1,825,562 $ 1,644,548
122,584
$ 2,023,277 $ 1,961,108 $ 1,767,132
135,707
135,546
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 are not allocated to Canada.
Our net sales by major product categories are as follows (in thousands):
General crafts
Home décor and seasonal
Framing
Papercrafting
2013
2015
Fiscal Year
2014
$ 2,487,288 $ 2,409,136 $ 2,370,843
898,170
862,020
438,759
$ 4,912,782 $ 4,738,144 $ 4,569,792
1,003,436
927,588
494,470
971,176
902,934
454,898
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 thousands):
Net income
Interest expense
Provision for income taxes
Depreciation and amortization
Losses on early extinguishments of debt and refinancing costs
Interest income
EBITDA (excluding losses on early extinguishments of debt and
refinancing costs)
F-29
2015
2013
Fiscal Year
2014
$ 362,912 $ 217,395 $ 243,430
214,497
198,409
135,905
133,639
105,939
110,858
14,420
74,312
(278)
(363)
139,405
209,208
114,756
8,485
(615)
$ 834,151 $ 734,250 $ 713,913
Table of Contents
11. CONTINGENCIES
Rea Claim
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 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 decertified. As a result of
the decertification, we have 30 individual claims pending as well as a separate representative action
pending in the California Superior Court in and for the County of San Diego brought on behalf of store
managers throughout the state. 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, five additional purported class action
lawsuits with six plaintiffs were filed, Michele Castro and Janice Bercut v. Michaels Stores, Inc., in the
U.S. District Court for the Northern District of Texas, Michelle Bercut v. Michaels Stores, Inc., in the
Superior Court of California for Sonoma County, Raini Burnside v. Michaels Stores, Inc., pending in the
U.S. District Court for the Western District of Missouri, Sue Gettings v. Michaels Stores, Inc., in the U.S.
District Court for the Southern District of New York, and Barbara Horton v. Michaels Stores, Inc., in the
U.S. District Court for the Central District of California. All of the plaintiffs alleged violations of the
FCRA. In addition, the Castro, Horton and Janice Bercut lawsuits also alleged violations of California’s
unfair competition law. The Burnside, Horton and Gettings lawsuits have been dismissed and an offer of
judgment has been accepted in the Castro lawsuit and will be dismissed. The Graham, Janice Bercut and
Michelle Bercut lawsuits were transferred for centralized pretrial proceedings to the District of New
Jersey.
The Company intends to defend the remaining 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 alleged 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
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Table of Contents
March 14, 2014. These four cases were filed in the United States District Court for the 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 Illinois actions. On July 14, 2014,
the Company’s motion to dismiss the consolidated complaint was granted.
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, injunctive relief, pre and post judgment interest, and other relief as
available. The Company filed a motion to dismiss which was granted on December 28, 2015, and judgment
was entered in favor of the Company on January 8, 2016. Plaintiff filed a notice of appeal on January 27,
2016, appealing that judgment to the United States Court of Appeals for the Second Circuit.
The Company intends to defend this 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 have sought to require
us to reimburse them for unauthorized card charges and costs to replace cards and may also seek 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, various states’ attorneys general investigated events related to the data breach,
including how it occurred, its consequences and our responses. We fully cooperated in these investigations
and we do not expect any further action. We cannot reasonably estimate the potential loss or range of loss
related to any reimbursement costs, fines or penalties that may be assessed. Such amounts incurred to date
are immaterial to the consolidated financial statements.
Consumer Product Safety Commission Claim
On April 21, 2015, the United States Department of Justice, on behalf of the Consumer Product
Safety Commission (the “CPSC”), filed a complaint against MSI and Michaels Stores Procurement
Company, Inc. (“MSPC”) in the U.S. District Court for the Northern District of Texas. The complaint
seeks civil penalties for an alleged failure to timely report a potential product safety hazard to the CPSC
related to the breakage of certain glass vases. The complaint also alleges the report contained a material
misrepresentation and seeks injunctive relief requiring MSI and MSPC to, among other things, establish
internal recordkeeping and compliance monitoring systems. The Company filed a partial motion to dismiss
on June 18, 2015 seeking dismissal of the CPSC’s claims for civil penalties, and is awaiting a decision
from the Court. We believe we have meritorious defenses and intend to defend the lawsuit vigorously. We
do not believe the resolution of the lawsuit will have a material effect on our consolidated financial
statements.
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 lawsuits involving the Company, we are
able to estimate a range of losses in excess of the amounts recorded, if any, in the accompanying
consolidated financial statements. As of January 30, 2016, the aggregate estimated loss is approximately
$15 million, which includes amounts recorded by the Company.
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Table of Contents
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 three months of full-time service or one year of part-time service. 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. Matching contributions vest to the
participants based on years of service, with 100% vesting after three years. Our matching contribution
expense was $4.8 million, $4.1 million, and $4.2 million in fiscal 2015, fiscal 2014 and fiscal 2013,
respectively.
13. RELATED PARTY TRANSACTIONS
Affiliates of, or funds advised by, Bain Capital Partners, LLC (“Bain Capital”) and The
Blackstone Group L.P. (“The Blackstone Group”, together with Bain Capital and their applicable affiliates,
the “Sponsors”) own approximately 63% of our outstanding common stock as of January 30, 2016. Prior
to our IPO on July 2, 2014, the Sponsors and another common stockholder, Highfields Capital
fees of $12.0 million and
Management LP
$1.0 million, respectively. In connection with the IPO, the management agreement was terminated and the
Company paid the Sponsors and Highfields an aggregate $30.2 million termination fee. During fiscal 2014
and fiscal 2013, we recognized expense of $35.7 million and $13.7 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. No related party expenses were
incurred in fiscal 2015.
annual management
(“Highfields”),
received
The Blackstone Group owns a majority equity position in RGIS, a vendor we utilize to count our
store inventory. Payments associated with this vendor totaled $5.9 million, $5.8 million and $5.6 million
during fiscal 2015, fiscal 2014 and fiscal 2013, respectively, and are included in SG&A in the consolidated
statements of comprehensive income.
The Blackstone Group owns a majority equity position in Vistar, a vendor we utilize for all of the
candy-type items in our stores. Payments associated with this vendor during fiscal 2015, fiscal 2014 and
fiscal 2013 were $28.6 million, $25.6 million and $24.0 million, respectively, and are recognized in cost of
sales and occupancy expense in the consolidated statements of comprehensive income as the sales are
incurred.
The Blackstone Group owns an equity position in Brixmor Properties Group, a vendor we utilize
to lease certain properties. Payments associated with this vendor during fiscal 2015, fiscal 2014 and fiscal
2013 were $2.1 million, $3.0 million and $3.8 million, respectively. These expenses are included in cost of
sales and occupancy expense in the consolidated statements of comprehensive income.
The Blackstone Group owns an equity position in Hilton Hotels, a vendor we utilize for
hospitality services. Payments associated with this vendor were $0.4 million during fiscal 2015, $1.4
million during fiscal 2014 and $0.1 million during fiscal 2013, and are included in SG&A in the
consolidated statements of comprehensive income.
The Blackstone Group owns a majority equity position in Excel Trust, Inc., a vendor we utilize to
lease certain properties. Payments associated with this vendor during fiscal 2015, fiscal 2014 and fiscal
2013 were $2.1 million, $1.8 million and $1.3 million, respectively. These expenses are included in cost
of sales and occupancy expense in the consolidated statements of comprehensive income.
Five of our current directors, Joshua Bekenstein, Nadim El Gabbani, Lewis S. Klessel, Matthew
S. Levin and Peter F. Wallace, 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
30, 2016, affiliates of The Blackstone Group held $57.9 million of our Restated Term Loan Credit
Facility.
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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 information
represents the financial information of MSI and its wholly-owned subsidiaries subject to these restrictions.
The information is presented in accordance with the requirements of Rule 12-04 under the SEC’s
Regulation S-X.
Michaels Stores, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
ASSETS
Fiscal Year
2015
2014
Current assets:
Cash and equivalents
Merchandise inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
Accrued liabilities and other
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other liabilities
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
F-33
$
404,650 $
373,559
958,171
87,093
1,418,823
386,372
94,290
60,935
$ 2,023,631 $ 1,960,420
1,002,607
87,573
1,494,830
378,507
94,290
56,004
$
457,704 $
375,992
24,900
89,996
948,592
2,744,942
95,400
(1,765,303)
447,016
388,785
24,900
59,885
920,586
2,911,566
93,221
(1,964,953)
$ 2,023,631 $ 1,960,420
Table of Contents
Michaels Stores, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Other operating expense
Operating income
Interest and other expense
Income before income taxes
Provision for income taxes
Net income
Other comprehensive income, net of tax:
Foreign currency translation adjustment and other
Comprehensive income
2015
2013
Fiscal Year
2014
$4,912,782 $4,738,144 $4,569,792
2,747,630
2,836,965
1,822,162
1,901,179
1,192,520
1,230,639
18,478
40,749
611,164
629,791
198,898
213,697
412,266
416,094
147,839
156,976
$ 365,599 $ 259,118 $ 264,427
2,944,431
1,968,351
1,241,876
4,786
721,689
138,662
583,027
217,428
(10,251)
(6,239)
$ 355,348 $ 247,115 $ 258,188
(12,003)
Michaels Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Purchase of long-term investment
Net cash used in investing activities
Cash flows from financing activities:
Net repayments of debt
Net borrowings of debt
Payment of dividend to Michaels Funding, Inc.
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
15. SUBSEQUENT EVENT
2015
Fiscal Year
2014
2013
$ 507,806 $
521,109 $ 468,780
(123,920)
(5,000)
(128,920)
(137,780)
—
(137,780)
(112,156)
—
(112,156)
(219,947)
45,047
(188,046)
15,151
(347,795)
(1,100,889)
1,123,750
(255,552)
(11,239)
(243,930)
(805,324)
648,902
—
(22,003)
(178,425)
31,091
373,559
$ 404,650 $
178,199
139,399
55,961
234,160
373,559 $ 234,160
On February 2, 2016, we acquired t h e Lamrite West, Inc. and certain of its affiliates and
subsidiaries (“Lamrite”) for $150.0 million, subject to certain purchase price adjustments, utilizing our
existing cash on hand. Lamrite operates an international wholesale business under the Darice brand name
and 32 arts and crafts retail stores,
F-34
Table of Contents
located primarily in Ohio and the surrounding states, under the Pat Catan’s brand name. The acquisition is
expected to enhance our private brand development capabilities, accelerate our direct sourcing initiatives
and strengthen our business-to-business capabilities. Since the closing of this acquisition occurred
subsequent to our fiscal year-end, the allocation of the purchase price to the underlying assets acquired and
liabilities assumed is subject to a formal valuation process, which has not yet been completed. We will
reflect the preliminary valuation of the net assets acquired and the operational results of Lamrite in our
first quarter of fiscal 2016. The purchase price allocation will be finalized as soon as practicable within the
measurement period, but not later than one year following the acquisition close date.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for fiscal 2015 and fiscal 2014 were as follows (in
thousands, except per share data):
Fiscal 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Operating income
Losses on early extinguishments of debt and
refinancing costs
Net income
Diluted earnings per common share
Net sales
Cost of sales and occupancy expense
Gross profit
Selling, general and administrative
Operating income (1)
Losses on early extinguishments of debt and
refinancing costs
Net income (loss)
Diluted earnings (loss) per common share
$ 1,077,600 $ 984,270 $ 1,168,423 $ 1,682,489
994,854
687,635
362,987
324,188
610,949
373,321
275,699
96,582
702,825
465,598
308,704
155,852
635,803
441,797
295,571
143,982
—
66,738
6,072
35,711
—
76,797
$
0.32 $
0.17 $
0.37 $
2,413
183,666
0.87
Fiscal 2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 1,052,048 $ 948,150 $ 1,130,195 $ 1,607,751
944,695
663,056
368,493
293,958
590,953
357,197
272,888
50,892
678,012
452,183
307,537
142,479
623,305
428,743
284,983
139,200
—
45,414
67,980
(48,643)
—
64,064
$
0.25 $
(0.26) $
0.31 $
6,332
156,560
0.75
(1) Operating income for the second quarter of fiscal 2014 includes a $32.3 million charge associated
with the IPO primarily related to a $30.2 million fee paid to related parties to terminate our
management agreement.
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 17, 2016
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)
March 17, 2016
/s/ Charles M. Sonsteby
Charles M. Sonsteby
Chief Administrative Officer & Chief Financial Officer March 17, 2016
(Principal Financial Officer)
/s/ James E. Sullivan
James E. Sullivan
/s/ Joshua Bekenstein
Joshua Bekenstein
/s/ Monte E. Ford
Monte E. Ford
/s/ Nadim El Gabbani
Nadim El Gabbani
/s/ Karen Kaplan
Karen Kaplan
/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
Chief Accounting Officer and Controller
March 17, 2016
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
March 17, 2016
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).
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)
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)
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).
4.10
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).
Table of Contents
Exhibit
Number
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
Description of Exhibit
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 Stock Option Agreement under the 2014 Omnibus Long-Term Incentive Plan (filed
herewith).
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).
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).
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).
Table of Contents
Exhibit
Number
10.16*
10.17*
10.18*
10.19*
10.20
10.21
10.22
10.23*
10.24
10.25
Description of Exhibit
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).
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).
Table of Contents
Exhibit
Number
10.26
10.27
10.28
10.29
10.30
10.31
Description of Exhibit
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,
the lenders named 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).
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).
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).
Table of Contents
Exhibit
Number
10.32
10.33
10.34
10.35
10.36
10.37
Description of Exhibit
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).
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).
Table of Contents
Exhibit
Number
10.38
10.39
10.40
10.41
10.42
10.43*
21.1
23.1
31.1
31.2
32.1
99.1
Description of Exhibit
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. (filed herewith).
Consent of Ernst & Young LLP (filed herewith)
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
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.
Name:
Number of Shares of Stock Subject to Option:
Price Per Share:
Date of Grant:
Exhibit 10.11
[●]
[●]
$[●]
[●]
The Michaels Companies, Inc.
2014 Omnibus Long-Term Incentive Plan
Non-statutory Stock Option Agreement
This agreement (this “ Agreement”) evidences a stock option granted by The
Michaels Companies, Inc. (the “Company”) to the individual named above (the
“Optionee”) pursuant to and subject to the terms of The Michaels Companies, Inc.
2014 Omnibus Long-Term Incentive Plan (as amended from time to time, the
“Plan”), which is incorporated herein by reference.
1. Grant of Stock Option . On the date of grant set forth above (the “ Date of
Grant”) the Company granted to the Optionee an option (the “ Stock Option”) to
purchase, on the terms provided herein and in the Plan, up to the number of shares
of Stock set forth above (each, a “Share,” and collectively, the “ Shares”) at the
exercise price per Share set forth above, in each case subject to adjustment pursuant
to Section 7 of the Plan in respect of transactions occurring after the date hereof.
The Stock Option evidenced by this Agreement is a non-statutory option
(that is, an option that is not to be treated as a stock option described in subsection
(b) of Section 422 of the Code). The Optionee is an employee of the Company
and/or of one or more subsidiaries of the Company with respect to which the
Company has a “controlling interest” as described in Treas. Regs. §1.409A-1(b)(5)
(iii)(E)(1).
2. Meaning of Certain Terms . Each initially capitalized term used but not
separately defined herein has the meaning assigned to such term in the Plan. The
following terms have the following meanings:
(a)
“Change of Control ” means the occurrence of any of the following:
(i) any consolidation or merger of the Company with or into any
other corporation or other Person, or any other corporate
reorganization or transaction (including the acquisition of capital
stock of the Company), whether or not the Company is a party
thereto, in which the stockholders of the Company immediately
prior to such consolidation, merger, reorganization or transaction,
own capital stock either (A) representing directly, or indirectly
through one or more entities, less than fifty percent (50%) of the
economic interests in or voting power of the Company or other
surviving entity immediately after such consolidation, merger,
reorganization or transaction or (B) that does not directly, or
indirectly through one or more entities, have the power to elect a
majority of the entire board of directors of the Company or other
surviving entity
immediately after such consolidation, merger, reorganization or
transaction; (ii) any stock sale or other transaction or series of related
transactions, whether or not the Company is a party thereto, after
giving effect to which in excess of fifty percent (50%) of the
Company’s voting power is owned directly, or indirectly through one
or more entities, by any Person and its “affiliates” or “associates” (as
such terms are defined in the rules adopted by the Securities and
Exchange Commission under the Securities Exchange Act of 1934,
as in effect from time to time), other than the Investors and their
respective affiliated funds, excluding, in any case referred to in
clause (i) or (ii) an initial public offering or any bona fide primary or
secondary public offering following the occurrence of an initial
public offering; or (iii) a sale, lease or other disposition of all or
substantially all of the assets of the Company.
(b)
(c)
(d)
“Investors” means Bain Capital Partners, LLC and The Blackstone
Group L.P.
“Person” means any individual, partnership, corporation, company,
association, trust, joint venture, limited liability company,
unincorporated organization, entity or division, or any government,
governmental department or agency or political subdivision thereof.
“Qualifying Retirement” means the Optionee’s voluntary
termination of Employment by reason of his or her retirement (i) at
or above age 65 or (b) at or above age 55 with five (5) years of
service to the Company.
3. Vesting; Method of Exercise . Unless earlier terminated, forfeited,
relinquished or expired, the Stock Option shall vest as follows, provided in each
case that the Optionee has remained in continuous Employment from the Date of
Grant through the applicable vesting date:
(a)
(b)
Twenty-five percent (25%) of the Stock Option shall vest on each
anniversary of the Date of Grant.
In the event (i) the Stock Option (or any portion thereof) is
outstanding as of immediately prior to a Change of Control and the
Administrator provides for the assumption or continuation of, or the
substitution of a substantially equivalent award for, the Stock Option
(or any portion thereof) in accordance with Section 7(a)(i) of the
Plan (the “Rollover Award”) and (ii) the Optionee’s Employment is
terminated by the Company (or its successor) without Cause within
the twelve (12) months following the Change of Control, the
Rollover Award to the extent still outstanding will vest in full on the
date of the Optionee’s termination of Employment.
(c)
Notwithstanding Sections 6(a)(4)(A), (B) or (C) of the Plan, but
subject to Section 6(a)(4)(D) of the Plan, in the event the Optionee’s
Employment
-2-
ceases by reason of a Qualifying Retirement, the portion of the Stock
Option that is then exercisable will remain exercisable until the
earlier of the second anniversary of such Qualifying Retirement and
the Final Exercise Date (as defined below).
No portion of the Stock Option may be exercised until it vests. Each election to
exercise must comply with such rules as the Administrator prescribes from time to
time and must be accompanied by payment in full of the exercise price in the form
of (i) cash or a check acceptable to the Administrator, (ii) to the extent permitted by
the Administrator, payment by means of a broker-assisted cashless exercise program,
(iii) such other form of payment, if any, as may be acceptable to the Administrator,
or (iv) any combination of the foregoing. The latest date on which the Stock Option
or any portion thereof may be exercised will be the 10th anniversary of the Date of
Grant (the “Final Exercise Date”); provided, however, if at such time the Optionee
or other person (if any) authorized to exercise the Stock Option is prohibited by
applicable law or written Company policy applicable to the Optionee (or such other
person, as applicable) and similarly situated persons from engaging in any open-
market sales of Stock, the Final Exercise Date will be automatically extended to
thirty (30) days following the date the Optionee or such other person, as the case
may be, is no longer prohibited from engaging in such open-market sales. Any
portion of the Stock Option that remains outstanding and has not been exercised by
the Final Exercise Date will thereupon immediately terminate. Upon any earlier
termination of Employment, subject to Sections 3(b) and (c) above, the provisions of
Section 6(a)(4)(A)-(D) of the Plan shall apply.
4. Forfeiture; Recovery of Compensation . By accepting the Stock Option
the Optionee expressly acknowledges and agrees that his or her rights, and those of
any permitted transferee, under the Stock Option or to any Stock acquired under the
Stock Option or proceeds from the disposition thereof, are subject to Section 6(a)
(5) of the Plan (including any successor provision) and Section 5 of this
Agreement. Nothing in the preceding sentence shall be construed as limiting the
general application of Section 9 of this Agreement.
5. Non-Competition/Non-Solicitation. The Optionee hereby acknowledges
that the Company and its Affiliates have invested and continue to invest
considerable resources in developing Company Information (as defined below) and
trade secrets, and in establishing and maintaining relationships with customers,
employees, and vendors. The Optionee hereby further acknowledges that the
Award is being furnished to the Optionee as good and valuable consideration,
among other consideration, in exchange for the below covenants, which are
necessary to protect the Company Information, trade secrets, and goodwill of the
Company and its Affiliates:
(a)
Non-Competition. The Optionee covenants and agrees that during
the Optionee’s Employment and for a period of twelve (12) months
(and such period shall be tolled on a day-to-day basis for each day
during which the Optionee participates in any activity in violation of
the restrictions set forth in this Section 5(a)) following the
Optionee’s termination of Employment, whether such termination
occurs at the insistence of the
-3-
Company or its Affiliates or the Optionee (for whatever reason), the
Optionee will not, directly or indirectly, alone or in association with
others, anywhere in the Territory (as defined below), own, manage,
operate, control or participate in the ownership, management,
operation or control of, or be connected as an officer, employee,
investor, principal, joint venturer, shareholder, partner, director,
consultant, agent or otherwise with, or have any financial interest
(through stock or other equity ownership, investment of capital, the
lending of money or otherwise) in, any business, venture or activity
that directly or indirectly competes, or is in planning, or has
undertaken any preparation, to compete, with the Business of the
Company or any of its Immediate Affiliates (any Person who
engages in any such business venture or activity, a “Competitor”),
except that nothing contained in this Section 5(a) shall prevent the
Optionee’s wholly passive ownership of two percent (2%) or less of
the equity securities of any Competitor that is a publicly-traded
company. For purposes of this Section 5(a), the “Business of the
Company or any of its Immediate Affiliates” is that of arts and crafts
specialty retailer providing materials, ideas and education for
creative activities, as well as any other business that the Company or
any of its Immediate Affiliates conducts or is actively planning to
conduct at any time during the Optionee’s Employment, or with
respect to the Optionee’s obligations following his or her termination
of Employment the twelve (12) months immediately preceding the
Optionee’s termination of Employment; provided, that the term
“Competitor” shall not include any business, venture or activity
whose gross receipts derived from the retail sale of arts and crafts
products (aggregated with the gross receipts derived from the retail
sale of arts and crafts projects of any related business, venture or
activity) are less than ten percent (10%) of the aggregate gross
receipts of such businesses, ventures or activities. For purposes of
this Section 5(a), the “Territory” is comprised of those states within
the United States, those provinces of Canada, and any other
geographic area in which the Company or any of its Immediate
Affiliates was doing business or actively planning to do business at
any time during the Optionee’s Employment, or with respect to the
Optionee’s obligations following his or her termination of
Employment the twelve (12) months immediately preceding the
Optionee’s termination of Employment. For purposes of this
Section, “Immediate Affiliates” means those Affiliates which are one
of the following: (i) a direct or indirect subsidiary of the Company,
(ii) a parent to the Company or (iii) a direct or indirect subsidiary of
such a parent.
(b)
Non-Solicitation. The Optionee covenants and agrees that during the
Optionee’s Employment and for a period of twelve (12) months (and
such period shall be tolled on a day-to-day basis for each day during
which the Optionee participates in any activity in violation of the
restrictions set forth in this Section 5(b)) after the termination of the
Optionee’s Employment, whether such termination occurs at the
insistence of the
-4-
(c)
Company or the Optionee (for whatever reason), the Optionee shall
not, and shall not assist any other Person to, (i) hire or solicit for hire
any employee of the Company or any of its Immediate Affiliates or
seek to persuade any employee of the Company or any of its
Immediate Affiliates to discontinue employment or (ii) solicit or
encourage any independent contractor providing services to the
Company or any of its Immediate Affiliates to terminate or diminish
its relationship with them; provided, however, that after termination
of the Optionee’s Employment, these restrictions shall apply only
with respect to employees of, and independent contractors providing
services to, the Company or one of its Immediate Affiliates who
were such on the date that the Optionee’s Employment terminated or
at any time during the nine (9) months immediately preceding such
termination date.
Goodwill and Company Information . The Optionee acknowledges
the importance to the Company and its Affiliates of protecting their
legitimate business interests, including without limitation the
valuable Company Information and goodwill that they have
developed or acquired at considerable expense. The Optionee
acknowledges and agrees that in the course of the Optionee’s
Employment, the Optionee has acquired: (i) confidential
information including without limitation information received by the
Company (or any of its Affiliates) from third parties, under
confidential conditions, (ii) other technical, product, business,
financial or development information from the Company (or any of
its Affiliates), the use or disclosure of which reasonably might be
construed to be contrary to the interest of the Company (or any of its
Affiliates), or (iii) any other proprietary information or data,
including but not limited to identities, responsibilities, contact
information, performance and/or compensation levels of employees,
costs and methods of doing business, systems, processes, computer
hardware and software, compilations of information, third-party IT
service providers and other Company or its Affiliates’ vendors,
records, sales reports, sales procedures, financial information,
customer requirements and confidential negotiated terms, pricing
techniques, customer lists, price lists, information about past,
present, pending and/or planned Company or its Affiliates’
transactions not publically disclosed and other confidential
information which the Optionee may have acquired during the
Optionee’s Employment (hereafter collectively referred to as
“Company Information”) which are owned by the Company or its
Affiliates and regularly used in the operation of its business, and as
to which precautions are taken to prevent dissemination to persons
other than certain directors, officers and employees and if disclosed,
would assist in competition against the Company or any of its
Affiliates. The Optionee understands and agrees that such Company
Information was and will be disclosed to the Optionee in confidence
and for use only in performing work for the Company or its
Affiliates. The Optionee understands and agrees that the Optionee:
(x) will keep such Company Information confidential at all times, (y)
will not disclose or
-5-
communicate Company Information to any third party, and (z) will
not make use of Company Information on the Optionee’s own
behalf, or on behalf of any third party. In view of the nature of the
Optionee’s Employment and the nature of Company Information the
Optionee receives during the course of the Optionee’s Employment,
the Optionee agrees that any unauthorized disclosure to third parties
of Company Information would cause irreparable damage to the
confidential or trade secret status of Company Information. The
Optionee further acknowledges and agrees that the restrictions on the
Optionee’s activities set forth above are necessary to protect the
goodwill, Company Information and other legitimate interests of the
Company and its Affiliates and that the Optionee’s acceptance of
these restrictions is a condition of receipt of the Award, to which the
Optionee would not otherwise be entitled, and the Award is good and
sufficient consideration to support the Optionee’s agreement to and
compliance with these covenants.
(d)
Remedies. In the event of a breach or threatened breach by the
Optionee of any of the covenants contained in Section 5(a), 5(b) or
5(c):
(i) the Optionee hereby consents and agrees that (x) any
vested portion of the Stock Option that is unexercised and
(y) all shares of Stock issued upon exercise of the Stock
Option shall be forfeited effective as of the date of such
breach or threatened breach, unless sooner terminated by
operation of another term or condition of this Agreement or
the Plan;
(ii) the Optionee hereby consents and agrees that if the
Optionee has sold any shares of Stock upon or following the
exercise of the Stock Option within twelve (12) months prior
to the date of such breach or threatened breach, the Optionee
shall pay to the Company the gross proceeds realized by the
Optionee in connection with such sale; and
(iii) the Optionee hereby consents and agrees that the
Company shall be entitled to seek, in addition to other
available remedies, a temporary or permanent injunction or
other equitable relief against such breach or threatened
breach from any court of competent jurisdiction, without the
necessity of showing any actual damages or that money
damages would not afford an adequate remedy, and without
the necessity of posting any bond or other security. The
aforementioned equitable relief shall be in addition to, not in
lieu of, legal remedies, monetary damages or other available
forms of relief.
(e)
General. The Optionee agrees that the above restrictive covenants
are completely severable and independent agreements supported by
good and
-6-
valuable consideration and, as such, shall survive the termination of
this Agreement for whatever reason. The Company and the
Optionee agree that any invalidity or unenforceability of any one or
more of such restrictions on competition shall not render invalid or
unenforceable any remaining restrictive covenants. Should a court of
competent jurisdiction determine that the scope of any provision of
this Section 5 is too broad to be enforced as written, the Company
and the Optionee intend that the court reform the provision to such
narrower scope as it determines to be reasonable and enforceable.
6. Transfer of Stock Option . The Stock Option may not be transferred
except at death in accordance with Section 6(a)(3) of the Plan.
7. Form S-8 Prospectus. The Optionee acknowledges that he or she has
received and reviewed a copy of the prospectus required by Part I of Form S-8
relating to shares of Stock that may be issued pursuant to the exercise of the Stock
Option under the Plan.
8. Governing Law. Notwithstanding anything to the contrary in the Plan,
Section 5 of this Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, without giving effect to any choice or conflict of law
provision or rule that would cause the application of the laws of any other
jurisdiction, except where preempted by federal law. Both parties hereby consent
and submit to the jurisdiction of the state and federal courts in Dallas County,
Texas in all questions and controversies arising out of this Agreement.
9. Acknowledgments. By accepting the Stock Option, the Optionee agrees
to be bound by, and agrees that the Stock Option is subject in all respects to, the
terms of the Plan. The Optionee further acknowledges and agrees that (i) the
signature to this Agreement on behalf of the Company is an electronic signature
that will be treated as an original signature for all purposes hereunder and (ii) such
electronic signature will be binding against the Company and will create a legally
binding agreement when this Agreement is countersigned by the Optionee.
[The remainder of this page is intentionally left blank]
-7-
Executed as of the ___ day of [●], [●].
Company:
THE MICHAELS COMPANIES,
INC.
By:
______________________________
Name:
Title:
Optionee:
__________________________________
Name:
Address:
[Signature Page to Non-Statutory Option Agreement]
Exhibit 21.1
Subsidiaries of The Michaels Companies, Inc.
Aaron Brothers, Inc., a Delaware corporation
Aaron Brothers Card Services, LLC, a Virginia limited liability company
Artistree, Inc., a Delaware corporation
Artistree of Canada, ULC, a Nova Scotia unlimited liability company
ConsumerCrafts, LLC, a Delaware limited liability company
Darice, Inc., a Ohio corporation
Darice Imports, Inc., a Ohio corporation
Lamrite West, Inc., a Ohio corporation
Michaels Finance Company, Inc., a Delaware corporation
Michaels FinCo Holdings, LLC, a Delaware limited liability company
Michaels FinCo, Inc., a Delaware corporation
Michaels Funding, Inc., a Delaware corporation
Michaels of Canada Holdings LP No. 1, an Alberta limited partnership
Michaels of Canada Holdings LP No. 2, an Alberta limited partnership
Michaels of Canada, ULC, a Nova Scotia unlimited liability company
Michaels of Luxembourg S.a.r.l., a "société à responsabilité limitée" organised under the laws of the
Grand-Duchy of Luxembourg
Michaels Stores, Inc., a Delaware corporation
Michaels Stores Card Services, LLC, a Virginia limited liability company
Michaels Stores of Puerto Rico, LLC, a Puerto Rico limited liability company
Michaels Stores Procurement Company, Inc., a Delaware corporation
Michaels U.S. Holdings 1, LLC, a Delaware limited liability company
Michaels U.S. Holdings 2, LLC, a Delaware limited liability company
Tiny Crafts, LLC, an Ohio limited liability company
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-
205583) and the related Prospectus and in the Registration Statement (Form S-8 No. 333-
197218) pertaining to the Amended and Restated 2014 Omnibus Long-Term Incentive Plan of
The Michaels Companies, Inc., of our reports dated March 17, 2016, with respect to the
consolidated financial statements of The Michaels Companies, Inc., and the effectiveness of
internal control over financial reporting of The Michaels Companies, Inc. included in this Annual
Report (Form 10-K) for the year ended January 30, 2016.
/s/ Ernst & Young LLP
Dallas, TX
March 17, 2016
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 17, 2016
/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 17, 2016
/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 30, 2016, 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.
6
Date: March 17, 2016
/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, 2015. 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, 2015
were approximately $551,000 and $389,000, respectively, and $660,000 and $470,000 for the year ended
December 31, 2014, respectively.”