-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IB1SQLavat9KtRKT58NJsuHC1zNmC+BQik3uogJAQprrTVYwB1nyd6dk528icqqF LA34xqoEsHn2IoGWSv3mPQ== 0000740670-97-000006.txt : 19970918 0000740670-97-000006.hdr.sgml : 19970918 ACCESSION NUMBER: 0000740670-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970802 FILED AS OF DATE: 19970916 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAELS STORES INC CENTRAL INDEX KEY: 0000740670 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 751943604 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11822 FILM NUMBER: 97681204 BUSINESS ADDRESS: STREET 1: 8000 BENT BRANCH DR STREET 2: PO BOX 619566 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2147147000 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 2, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ________ _________ Commission File Number 0-11822 ______________________________ MICHAELS STORES, INC. (Exact name of registrant as specified in its charter) Delaware 75-1943604 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8000 Bent Branch Drive, Irving, Texas 75063 P.O. Box 619566, DFW, Texas 75261-9566 (Address of principal executive offices, including zip code) (972) 409-1300 (Registrant's telephone number, including area code) _____________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding as of Title September 10, 1997 _____ ________________________ Common stock, par value $.10 per share 28,467,802 MICHAELS STORES, INC. FORM 10-Q Part I - FINANCIAL INFORMATION Item 1. Financial Statements MICHAELS STORES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share data) (Unaudited)
ASSETS August 2, February 1, 1997 1997 _________ ___________ Current assets: Cash and equivalents $ 35,507 $ 59,069 Merchandise inventories 420,822 351,208 Income taxes receivable and deferred income taxes 5,881 15,207 Prepaid expenses and other 14,716 12,059 ________ ________ Total current assets 476,926 437,543 ________ ________ Property and equipment, at cost 308,349 294,022 Less accumulated depreciation (122,664) (104,943) ________ ________ 185,685 189,079 ________ ________ Costs in excess of net assets of acquired operations, net 138,762 140,697 Deferred income taxes 19,247 10,550 Other assets 3,272 6,566 ________ ________ 161,281 157,813 ________ ________ $823,892 $784,435 ________ ________ ________ ________ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 97,731 $104,966 Accrued liabilities and other 83,533 92,765 ________ ________ Total current liabilities 181,264 197,731 ________ ________ Senior notes 125,000 125,000 Convertible subordinated notes 96,940 96,940 Other long-term liabilities 31,276 31,962 ________ ________ Total long-term liabilities 253,216 253,902 ________ ________ 434,480 451,633 ________ ________ Commitments and contingencies Shareholders' equity: Common stock, 27,954,811 shares outstanding 2,795 2,369 Additional paid-in capital 327,603 271,405 Retained earnings 59,014 59,028 ________ ________ Total shareholders' equity 389,412 332,802 ________ ________ $823,892 $784,435 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Quarter Ended _________________________ August 2, July 28, 1997 1996 _________ ________ Net sales $278,038 $260,476 Cost of sales and occupancy expense 190,998 184,574 Selling, general and administrative expense 85,547 83,981 ________ ________ Operating income (loss) 1,493 (8,079) Interest expense 5,702 4,824 Other expense and (income), net 461 (106) ________ ________ Loss before income taxes (4,670) (12,797) Income tax benefit (1,775) (4,864) ________ ________ Net loss $ (2,895) $ (7,933) ________ ________ ________ ________ Loss per common share $(.11) $(.34) _____ _____ _____ _____ Weighted average common shares outstanding 26,299 23,532 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited)
Six Months Ended ______________________ August 2, July 28, 1997 1996 _________ ________ Net sales $599,356 $562,351 Cost of sales and occupancy expense 411,126 389,641 Selling, general and administrative expense 177,431 172,951 ________ ________ Operating income (loss) 10,799 (241) Interest expense 11,444 8,534 Other income, net (1,088) (373) ________ ________ Income (loss) before income taxes 443 (8,402) Provision (benefit) for income taxes 168 (3,194) ________ ________ Net income (loss) $ 275 $ (5,208) ________ ________ ________ ________ Earnings (loss) per common and common equivalent share $ .01 $(.23) _____ _____ _____ _____ Weighted average common and common equivalent shares outstanding 26,301 22,782 ______ ______ ______ ______
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended _______________________ August 2, July 28, 1997 1996 _________ ________ Operating activities: Net income $ 275 $ (5,208) Adjustments: Depreciation 20,178 15,881 Amortization 2,114 2,087 Other 802 362 Change in assets and liabilities: Merchandise inventories (69,614) (52,689) Prepaid expenses and other (2,657) (3,247) Deferred income taxes and other 4,897 (3,175) Accounts payable (7,235) 1,002 Accrued liabilities and other (9,573) (9,637) ________ ________ Net change in assets and liabilities (84,182) (67,746) ________ ________ Net cash used in operating activities (60,813) (54,624) ________ ________ Investing activities: Additions to property and equipment (15,836) (16,817) Net proceeds from sales of property and equipment 1,594 - Net proceeds from sales of investments 3,386 - ________ ________ Net cash used in investing activities (10,856) (16,817) ________ ________ Financing activities: Net borrowings under bank credit facilities - (68,200) Payment of other long-term liabilities (2,065) (551) Proceeds from issuance of senior notes - 120,542 Proceeds from issuance of common stock and other 50,172 25,345 ________ ________ Net cash provided by financing activities 48,107 77,136 ________ ________ Net (decrease) increase in cash and equivalents (23,562) 5,695 Cash and equivalents at beginning of year 59,069 2,870 ________ ________ Cash and equivalents at end of period $ 35,507 $ 8,565 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. MICHAELS STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Six Months Ended August 2, 1997 (Unaudited) Note A ______ The accompanying consolidated financial statements are unaudited (except for the Consolidated Balance Sheet as of February 1, 1997) and, in the opinion of management, reflect all adjustments that are necessary for a fair presentation of financial position and results of operations for the three and six months ended August 2, 1997. All of such adjustments are of a normal and recurring nature. Because of the seasonal nature of the Company's business, the results of operations for the three and six months ended August 2, 1997 are not indicative of the results to be expected for the entire year. Certain fiscal 1996 amounts have been reclassified to conform to the fiscal 1997 presentation. Note B ______ Earnings per share data are based on the weighted average number of shares outstanding, including common stock equivalents and other dilutive securities when applicable. The assumed conversion of the convertible subordinated notes was anti-dilutive for each period presented and was therefore not included in the calculation of fully diluted earnings per share data. Note C ______ Investing and financing activities not affecting cash during the six months ended August 2, 1997 included additions to property and equipment through capital lease obligations of $3,230,000 related to the acquisition of new computer equipment. Note D ______ In August 1995, two lawsuits were filed by certain security holders against the Company and certain present and former officers and directors seeking class action status on behalf of purchasers of the Company's Common Stock between February 1, 1995 and August 23, 1995. Among other things, the plaintiffs alleged that misstatements and omissions by defendants relating to projected and historical operating results, inventory and other matters involving future plans resulted in an inflation of the price of the Company's Common Stock during the period between February 1, 1995 and August 23, 1995. The United States District Court for the Northern District of Texas subsequently consolidated those two lawsuits and certified the class. The Company and the other defendants denied any liability and believed they had meritorious defenses to the lawsuit. On September 9, 1997, the Company, together with the other defendants, and the plaintiffs agreed in principal to a settlement with a cash payment of $6.25 million. After giving effect to prior expenditures for costs incurred in defending the lawsuit, substantially all of the settlement amount is expected to be covered by insurance. The settlement is subject to the parties' negotiation of definitive documentation evidencing the settlement and the Court's approval of the fairness of the settlement terms. If the settlement is not documented and approved, the lawsuit will proceed. A lawsuit was commenced against the Company and several other parties on September 19, 1994 in the Superior Court of Stanislaus County, California, on behalf of a former employee, Naomi Snyder, her child, and her husband. The complaint alleges that the former employee and her then-unborn child were exposed to excessive levels of carbon monoxide in one of the Company's stores caused by a propane gas powered floor buffer which was operated by an outside cleaning service, resulting, among other things, in severe and permanent injuries to the child. Plaintiffs' Statement of Damages, filed on or about January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled the plaintiff's pleadings did not state a cause of action against the Company upon which relief could be granted. However, the ruling by the trial court was overturned by the Court of Appeals of the State of California, Fifth Appellate District, on September 23, 1996. The California Supreme Court granted review on December 23, 1996. Oral arguments were held before the Court on September 9, 1997, but a ruling has not yet been issued. Should the California Supreme Court sustain the appellate court ruling and remand the case to the trial court, the Company believes it has meritorious defenses to this action and will defend itself vigorously. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the litigation described above, is uncertain, and there can be no assurance that future costs related to such litigation would not be material to the Company's financial position or results of operations. Note E ______ The FASB has issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, which is effective for financial statements issued after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this new standard is not expected to have a material impact on the disclosure of earnings per share in the financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General _______ Certain statements contained in this section which are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, customer demand and trends in the arts and crafts industry, related inventory risks due to shifts in customer demand, the effect of economic conditions, the impact of competitors' locations or pricing, the availability of acceptable real estate locations for new stores, difficulties with respect to new information system technologies, supply constraints or difficulties, the results of financing efforts, the effect of the Company's accounting policies, and other risks detailed in the Company's Securities and Exchange Commission filings. Results of Operations _____________________ The following table shows the percentage of net sales that each item in the Consolidated Statements of Operations represents. This table should be read in conjunction with the following discussion and with the Company's financial statements, including the notes:
For the For the Quarter Ended Six Months Ended ___________________ __________________ August 2, July 28, August 2, July 28, 1997 1996 1997 1996 _________ ________ _________ ________ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales and occupancy expense 68.7 70.9 68.6 69.3 Selling, general and administrative expense 30.8 32.2 29.6 30.7 _____ _____ _____ _____ Operating income (loss) 0.5 (3.1) 1.8 (0.0) Interest expense 2.0 1.9 1.9 1.5 Other expense and (income), net 0.2 (0.1) (0.2) (0.0) _____ _____ _____ _____ (Loss) income before income taxes (1.7) (4.9) 0.1 (1.5) (Benefit) provision for income taxes (0.7) (1.9) 0.0 (0.6) _____ _____ _____ _____ Net (loss) income (1.0)% (3.0)% 0.1% (0.9)% _____ _____ _____ _____ _____ _____ _____ _____
Three months ended August 2, 1997 compared to the _________________________________________________ three months ended July 28, 1996 ________________________________ Net sales in the second quarter of fiscal 1997 increased $17.6 million, or 7%, over the second quarter of fiscal 1996. The results for the second quarter of fiscal 1997 included sales from 9 new Michaels stores that were opened during the twelve month period ended August 2, 1997. During the second quarter, sales of the new stores (net of 9 closures) accounted for an increase of $3.1 million. Same-store sales increased 6% in the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996, which contributed $14.5 million to the net sales increase. The improvement in same-store sales performance is due to strong performance in the Company's core categories of general crafts, framing, art and floral, which management believes is the result of updated planograms put into place during the summer in 1996 and improved in-stock positions in top selling and hot items. Cost of sales and occupancy expense, as a percentage of net sales, for the second quarter of fiscal 1997 decreased by 2.2% compared to the second quarter of fiscal 1996. This decrease was principally due to improved gross margins which management attributes to decreasing the dependency on advertising to fuel sales growth. The decrease was partially offset by higher distribution costs, which increased due to the Company's investment last year in an upgraded warehouse network and related systems. As the Company improves its utilization of the upgraded warehouse network, the return on this investment should yield improved gross margins. Selling, general and administrative expense, as a percentage of net sales, decreased by 1.4% in the second quarter of fiscal 1997 compared to the second quarter of 1996. The Company saved $2.9 million in advertising costs versus last year, and showed improved expense leverage in store labor and nearly all other categories of store operating expenses with the exception of depreciation, which reflects the impact of its increased investment in the POS system. Six months ended August 2, 1997 compared to the _______________________________________________ six months ended July 28, 1996 ______________________________ Net sales in the first six months of fiscal 1997 increased $37.0 million, or 7%, over the first six months of fiscal 1996. The results for the first six months of fiscal 1997 included sales from 9 new Michaels stores that were opened during the twelve month period ended August 2, 1997. During the first six months, sales of the new stores (net of 9 closures) accounted for an increase of $7.8 million. Same-store sales increased 5% in the first six months of fiscal 1997 compared to the first six months of fiscal 1996, which contributed $29.2 million to the net sales increase. The improvement in same-store sales performance is due to strong performance in the Company's core categories of general crafts, framing, art and floral, which management believes is the result of updated planograms put into place during the summer in 1996 and improved in-stock positions in top selling and hot items. Cost of sales and occupancy expense, as a percentage of net sales, for the first six months of fiscal 1997 decreased by 0.7% compared to the first six months of fiscal 1996. This decrease was principally due to improved gross margins which management attributes to decreasing the dependency on advertising to fuel sales growth. The decrease was partially offset by higher occupancy costs and higher distribution costs. The increase in occupancy costs is primarily attributable to rent reserves established for the Company's 1997 store relocation program and rent increases incurred in connection with the 1996 relocation and expansion program. Distribution costs increased due to the Company's investment last year in an upgraded warehouse network and related systems. Selling, general and administrative expense, as a percentage of net sales, decreased by 1.1% in the first six months of fiscal 1997 compared to the first six months of fiscal 1996. The Company saved $6.9 million in advertising costs versus last year, and showed improved expense leverage in store labor and nearly all other categories of store operating expenses with the exception of depreciation, which reflects the impact of its increased investment in the POS system. Liquidity and Capital Resources _______________________________ Cash flow from operations of negative $60.8 million was generated during the first six months of fiscal 1997 compared to negative $54.6 million of cash flow from operations generated during the first six months of fiscal 1996. These results are consistent with the Company's pattern of building inventory and opening and relocating stores early in the fiscal year. Inventories per Michaels store remained basically constant at $904,000 at August 2, 1997 compared to $902,000 last year. Borrowings outstanding under the Company's bank credit agreement ("Credit Agreement"), which expires in June 1999, were $19.0 million at the end of the second quarter of fiscal 1996 and there were no borrowings outstanding at August 2, 1997. The Company opened four Michaels stores and closed eight during the first six months of fiscal 1997. Capital expenditures for the newly opened stores amounted to approximately $1.5 million. Additional capital expenditures of approximately $14.3 million during the first six months related primarily to the relocation or remodeling of approximately 30 existing stores, and for various systems enhancements. The Company expects capital expenditures during the remainder of fiscal 1997 to total approximately $18 to $20 million, relating primarily to costs for new stores, store relocations and remodeling, merchandising and other information systems and various other projects. In addition, the Company may incur interim construction costs during the remainder of fiscal 1997 of up to $12 million for the relocation in 1998 of one of its distribution centers. At August 2, 1997, the Company had working capital of $295.7 million compared to $239.8 million at February 1, 1997. The Credit Agreement provides for an unsecured line of credit of up to $100 million. Management believes that the Company's available cash, funds generated by operations and funds available under the Credit Agreement should be sufficient to finance continuing operations and sustain current growth plans. Management believes that the Company can finance an annual store expansion of 12% to 15% (on a square footage basis) from internally generated cash flow. MICHAELS STORES, INC. FORM 10-Q Part II - OTHER INFORMATION Item 1. Legal Proceedings For a description of legal proceedings, see Note D to "Notes to Consolidated Financial Statements," which description is incorporated herein by this reference. Item 4. Submission of matters to a vote of Security Holders. The 1997 annual meeting of shareholders of the Company was held on June 6, 1997. The following items of business were presented to the shareholders: Election of Directors _____________________ The three directors were elected as proposed in the Proxy Statement dated April 30, 1997 under the caption titled "Election of Directors" as follows:
Total Vote Total Vote for Withheld From Name Each Director Each Director ____ ______________ _____________ Sam Wyly 22,220,485 1,385,265 Michael C. French 22,218,925 1,386,825 Donald R. Miller, Jr. 22,218,725 1,387,025
Approval of the 1997 Employees Stock Purchase Plan __________________________________________________ The 1997 Employees Stock Purchase Plan as proposed in the Proxy Statement dated April 30, 1997 under the caption titled "Approval of the 1997 Employees Stock Purchase Plan" was approved (For-17,910,992; Against-1,301,374; Abstain-471,046; Broker Non-Vote 3,922,338). Approval of the 1997 Stock Option Plan ______________________________________ The 1997 Stock Option Plan as proposed in the Proxy Statement dated April 30, 1997 under the caption titled "Approval of the 1997 Stock Option Plan" was approved (For-10,374,842; Against-7,243,530; Abstain-2,313,865; Broker Non-Vote 3,673,513). Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11 - Computation of Earnings Per Common Share for the Six Months Ended August 2, 1997. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the period covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICHAELS STORES, INC. By: /s/ Bryan M. DeCordova _______________________ Bryan M. DeCordova Executive Vice President - Chief Financial Officer (Principal Financial Officer) Dated: September 16, 1997 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE 11 Computation of Earnings Per Common Share for the Six Months Ended August 2, 1997. 27 Financial Data Schedule EXHIBIT 11 MICHAELS STORES, INC. Computation of Earnings Per Common Share Six Months Ended August 2, 1997 (Unaudited)
Weighted Average Outstanding Equivalent Shares _____________________ Total Fully Outstanding Primary Diluted ___________ __________ __________ Outstanding at beginning of year 23,690,926 23,690,926 23,690,926 Shares issued during period 4,263,885 2,073,080 2,073,080 __________ __________ Weighted average common shares outstanding 25,764,006 25,764,006 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 421,135 537,174 __________ __________ __________ Total outstanding common shares 27,954,811 26,185,141 26,301,180 __________ __________ __________ __________ __________ __________ Earnings per common and common equivalent share $.01 $.01 ____ ____ ____ ____
EX-27 2
5 6-MOS JAN-31-1998 AUG-02-1997 35,507 0 0 0 420,822 476,926 308,349 122,664 823,892 181,264 221,940 0 0 2,795 386,617 823,892 599,356 599,356 411,126 588,557 (1,088) 0 11,444 443 168 275 0 0 0 275 .01 .01
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