-----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, QChZS9vp8dGn6jIySMDwkHCm1HCKLLMPAivFvWWz5mLNnDGPC8e7NO5dyise++fG 1c6Sj/LLUFdjVzCOsViJAw== 0000740670-98-000012.txt : 19981216 0000740670-98-000012.hdr.sgml : 19981216 ACCESSION NUMBER: 0000740670-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 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: 98769875 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 October 31, 1998 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 of incorporation) (I.R.S. employer 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 REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
SHARES OUTSTANDING AS OF TITLE DECEMBER 9, 1998 _____ ________________ Common stock, par value $.10 per share 28,548,550
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)
October 31, 1998 January 31, 1998 ________________ ________________ (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $ 38,133 $ 162,283 Merchandise inventories 602,881 385,580 Income taxes receivable and deferred income taxes 11,624 11,291 Prepaid expenses and other 16,212 14,029 __________ _________ Total current assets 668,850 573,183 __________ _________ PROPERTY AND EQUIPMENT, AT COST 372,841 331,755 Less accumulated depreciation (167,144) (138,719) __________ _________ 205,697 193,036 __________ _________ COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET 133,925 136,827 DEFERRED INCOME TAXES 2,695 2,695 OTHER ASSETS 2,983 2,753 __________ _________ 139,603 142,275 __________ _________ $1,014,150 $ 908,494 __________ _________ __________ _________ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 157,210 $ 109,456 Accrued liabilities and other 126,685 105,036 __________ _________ Total current liabilities 283,895 214,492 __________ _________ BANK DEBT 30,100 - SENIOR NOTES 125,000 125,000 CONVERTIBLE SUBORDINATED NOTES 96,940 96,940 OTHER LONG-TERM LIABILITIES 27,886 30,151 __________ _________ Total long-term liabilities 279,926 252,091 __________ _________ 563,821 466,583 __________ _________ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, 28,536,591 shares outstanding 2,968 2,903 Additional paid-in capital 367,144 350,977 Retained earnings 100,589 88,031 Treasury stock, at cost (20,372) - __________ _________ Total stockholders' equity 450,329 441,911 __________ _________ $1,014,150 $ 908,494 __________ _________ __________ _________
See accompanying notes to consolidated financial statements. 2 MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited)
Quarter Ended ____________________________ October 31, November 1, 1998 1997 ___________ ___________ NET SALES $382,841 $350,070 Cost of sales and occupancy expense 254,080 237,528 ________ ________ GROSS PROFIT 128,761 112,542 Selling, general and administrative expense 108,928 98,956 Store pre-opening costs 2,688 643 ________ ________ OPERATING INCOME 17,145 12,943 Interest expense 5,601 5,936 Other income, net (160) (126) ________ ________ INCOME BEFORE INCOME TAXES 11,704 7,133 Provision for income taxes 4,448 2,711 ________ ________ NET INCOME $ 7,256 $ 4,422 ________ ________ ________ ________ EARNINGS PER COMMON SHARE: Basic $0.25 $0.16 Diluted $0.24 $0.15
See accompanying notes to consolidated financial statements. 3 MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited)
Nine Months Ended ____________________________ October 31, November 1, 1998 1997 ___________ ___________ NET SALES $1,032,782 $949,426 Cost of sales and occupancy expense 694,279 648,654 __________ ________ GROSS PROFIT 338,503 300,772 Selling, general and administrative expense 296,431 276,233 Store pre-opening costs 6,759 797 __________ ________ OPERATING INCOME 35,313 23,742 Interest expense 16,884 17,380 Other income, net (3,170) (1,214) __________ ________ INCOME BEFORE INCOME TAXES 21,599 7,576 Provision for income taxes 8,208 2,879 __________ ________ NET INCOME $ 13,391 $ 4,697 __________ ________ __________ ________ EARNINGS PER COMMON SHARE: Basic $0.45 $0.18 Diluted $0.43 $0.17
See accompanying notes to consolidated financial statements. 4 MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended _________________________ October 31, November 1, 1998 1997 ___________ ___________ OPERATING ACTIVITIES: Net income $ 13,391 $ 4,697 Adjustments: Depreciation 32,231 30,663 Amortization 3,211 3,173 Other 799 1,402 Change in assets and liabilities: Merchandise inventories (217,301) (138,547) Prepaid expenses and other (2,183) (5,469) Deferred income taxes and other (1,298) 6,327 Accounts payable 47,754 49,322 Accrued liabilities and other 23,020 1,120 ________ ________ Net change in assets and liabilities (150,008) (87,247) ________ ________ Net cash used in operating activities (100,376) (47,312) ________ ________ INVESTING ACTIVITIES: Additions to property and equipment (61,628) (27,380) Net proceeds from sales of property and equipment 19,228 1,623 Net proceeds from sales of investments - 3,386 ________ ________ Net cash used in investing activities (42,400) (22,371) ________ ________ FINANCING ACTIVITIES: Net borrowings under bank credit facilities 30,100 - Payment of other long-term liabilities (3,953) (3,331) Acquisition of treasury stock (20,372) - Proceeds from stock options exercised 6,763 59,484 Proceeds from issuance of common stock and other 6,088 2,550 ________ ________ Net cash provided by financing activities 18,626 58,703 ________ ________ NET DECREASE IN CASH AND EQUIVALENTS (124,150) (10,980) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 162,283 59,069 ________ ________ CASH AND EQUIVALENTS AT END OF PERIOD $ 38,133 $ 48,089 ________ ________ ________ ________
See accompanying notes to consolidated financial statements. 5 MICHAELS STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended October 31, 1998 (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements are unaudited (except for the Consolidated Balance Sheet as of January 31, 1998) and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Because of the seasonal nature of the Company's business, the results of operations for the three and nine months ended October 31, 1998 are not indicative of the results to be expected for the entire year. Certain fiscal 1997 amounts have been reclassified to conform to the fiscal 1998 presentation. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended January 31, 1998. NOTE B - SUPPLEMENTAL CASH FLOW INFORMATION Investing and financing activities not affecting cash during the nine months ended October 31, 1998 included additions to property and equipment through capital lease obligations of $2,721,000 related to the acquisition of new computer equipment. NOTE C - DEBT In August 1998, the Company entered into a new unsecured revolving credit agreement with BankBoston, N.A. and other lending institutions (the "Credit Agreement") providing for a revolving loan of $100 million which may be increased to $125 million pursuant to certain terms and conditions as set forth in the Credit Agreement. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding. The interest rate on the Credit Agreement is generally (a) the higher of (i) an annual rate of interest announced from time to time by BankBoston, N.A. or (ii) one-half of one percent (1/2%) above the Federal Funds Effective Rate or (b) the Eurodollar Rate as defined by the Credit Agreement. The Company is required to pay a commitment fee of up to .3% per annum on the unused portion of the revolving line of credit. The Credit Agreement provides certain annual restrictions on the aggregate amount of capital expenditures, restricts the payment of dividends and requires the Company to maintain compliance with various financial ratios. The Credit Agreement expires in August 2001. NOTE D - CONTINGENCIES 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 6 January 26, 1995, seeks $11 million. On April 10, 1995 the trial court ruled the plaintiff's pleadings did not state a cause of action against the Company upon which relief could be granted. However, the ruling by the trial court was overturned by the Court of Appeals of the State of California, Fifth Appellate District, on September 23, 1996. On October 30, 1997, the California Supreme Court sustained the appellate court ruling and remanded the case to the trial court. A settlement agreement has been reached by the parties and the Company's portion of the settlement amount was fully covered by insurance. 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 is not expected to have a material adverse effect on the Company's financial position or results of operations. NOTE E - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per common share:
Quarter Ended Nine Months Ended _______________________ _______________________ October 31, November 1, October 31, November 1, 1998 1997 1998 1997 ___________ ___________ ___________ ___________ (In thousands except per share amounts) Numerator: Net income $ 7,256 $ 4,422 $13,391 $ 4,697 _______ _______ _______ _______ _______ _______ _______ _______ Denominator: Denominator for basic earnings per share-weighted average shares 29,402 28,423 29,442 26,651 Effect of dilutive securities: Employee stock options 1,202 1,726 1,654 1,320 _______ _______ _______ _______ Denominator for diluted earnings per share-adjusted weighted average shares 30,604 30,149 31,096 27,971 _______ _______ _______ _______ _______ _______ _______ _______ Basic earnings per common share $0.25 $0.16 $0.45 $0.18 _____ _____ _____ _____ _____ _____ _____ _____ Diluted earnings per common share $0.24 $0.15 $0.43 $0.17 _____ _____ _____ _____ _____ _____ _____ _____
The convertible subordinated notes were not included in the diluted earnings per common share calculations because they were antidilutive for the periods presented. The convertible subordinated notes could potentially affect diluted earnings per common share in the future. 7 NOTE F - STORE PRE-OPENING COSTS In April 1998, the AICPA issued Statement of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"), which requires that costs related to start-up activities be expensed as incurred. Prior to fiscal 1998, the Company deferred store pre-opening costs until the fiscal year in which the store opened. The Company adopted the provisions of SOP 98-5 in its financial statements for the first quarter of fiscal 1998 and, as a result, began expensing pre-opening costs as incurred. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Certain statements contained in this discussion and analysis which are not historical facts are forward looking statements that involve risks and uncertainties, including, but not limited to, customer demand and trends in the arts and crafts industry, related inventory risks due to shifts in customer demand, the effect of economic conditions, the impact of competitors' locations or pricing, the effectiveness of advertising strategies, the availability of acceptable real estate locations for new stores, difficulties with respect to new information system technologies and the Company's ability to address the Year 2000 Issue, supply constraints or difficulties, the results of financing efforts, and other risks detailed in the Company's Securities and Exchange Commission filings. RESULTS OF OPERATIONS The following table sets forth the percentage relationship to net sales of each line item of the Company's Consolidated Statements of Income. This table should be read in conjunction with the following discussion and with the Company's Consolidated Financial Statements, including the related notes.
Quarter Ended Nine Months Ended _______________________ _______________________ October 31, November 1, October 31, November 1, 1998 1997 1998 1997 ___________ ___________ ___________ ___________ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales and occupancy expense 66.4 67.9 67.2 68.3 _____ _____ _____ _____ Gross margin 33.6 32.1 32.8 31.7 Selling, general and administrative expense 28.4 28.2 28.7 29.1 Store pre-opening costs 0.7 0.2 0.7 0.1 _____ _____ _____ _____ Operating income 4.5 3.7 3.4 2.5 Interest expense 1.5 1.7 1.6 1.8 Other income, net (0.1) (0.0) (0.3) (0.1) _____ _____ _____ _____ Income before income taxes 3.1 2.0 2.1 0.8 Provision for income taxes 1.2 0.7 0.8 0.3 _____ _____ _____ _____ Net income 1.9% 1.3% 1.3% 0.5% _____ _____ _____ _____ _____ _____ _____ _____
In the discussion below, all percentages provided for certain items are calculated as a percentage of net sales. 9 QUARTER ENDED OCTOBER 31, 1998 COMPARED TO THE QUARTER ENDED NOVEMBER 1, 1997 Net sales in the third quarter of fiscal 1998 increased $32.8 million, or 9%, over the third quarter of fiscal 1997. The results for the third quarter of fiscal 1998 included sales from 48 Michaels and 6 Aaron Brothers stores that were opened during the 12-month period ended October 31, 1998. During the third quarter, sales at the new stores (net of 2 closures) accounted for an increase of $28.6 million. Same-store sales increased 1% in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997, which contributed $4.2 million to the net sales increase. The sales increases were driven by increases in the Company's core categories of art supplies, general crafts, and Fall and Halloween seasonal merchandise. The rate of same-store sales increases has declined from prior quarters and is attributed to a softening in consumer demand. Management believes that this softening in consumer demand will continue and will result in a slight decrease in same-store sales in the fourth quarter of fiscal 1998. Cost of sales and occupancy expense, as a percentage of net sales, decreased by 1.5% in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. This decrease was primarily attributable to improved gross margins from reduced promotional markdowns, partially offset by higher occupancy expense, as a percentage of net sales, including additional reserves for store closures established in the third quarter of fiscal 1998. As a result of these factors, gross margin increased to 33.6% compared to 32.1% in the prior year. Selling, general and administrative expense, as a percentage of net sales, increased by 0.2% in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. This increase was due to increased store labor expense and costs relating to a corporate-wide store manager's meeting, partially offset by reduced advertising expense, as a percentage of net sales. Store pre-opening costs, as a percentage of net sales, increased by 0.5% in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 as the Company adopted a change in accounting rules requiring that store pre-opening costs be expensed as incurred. For the full year, store pre-opening costs are expected to increase by 0.3% in fiscal 1998 compared to the prior year, as the Company will have opened or relocated 64 Michaels and 12 Aaron Brothers stores in the current year compared to 23 Michaels and 4 Aaron Brothers stores in the prior year. See Note F in the Notes to Consolidated Financial Statements. 10 NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED NOVEMBER 1, 1997 Net sales in the first nine months of fiscal 1998 increased $83.4 million, or 9%, over the first nine months of fiscal 1997. The results for the first nine months of fiscal 1998 included sales from 48 Michaels and 6 Aaron Brothers stores that were opened during the 12-month period ended October 31, 1998. During the first nine months, sales of the new stores (net of 11 closures) accounted for an increase of $54.4 million. Same-store sales increased 3% in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997, which contributed $29.0 million to the net sales increase. The improvement in same-store sales performance was due to a strong performance in the Company's core categories of art supplies, general crafts, ribbon, needlecrafts and hobbies. The rate of same-store sales increases has declined from prior quarters and is attributed to a softening in consumer demand. Management believes that this softening in consumer demand will continue and will result in a slight decrease in same-store sales in the fourth quarter of fiscal 1998, but will remain up for the full year. Cost of sales and occupancy expense, as a percentage of net sales, decreased by 1.1% in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. This decrease was principally due to improved gross margins, reduced remodel expenses, and an improved leveraging of fixed occupancy costs. As a result of these factors, gross margin increased to 32.8% compared to 31.7% in the prior year. Selling, general and administrative expense, as a percentage of net sales, decreased by 0.4% in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. This decrease was due to reduced legal and professional fees, and to improved expense leverage in store labor and all other categories of store operating expenses. Store pre-opening costs, as a percentage of net sales, increased by 0.6% in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997 as the Company adopted a change in accounting rules requiring that store pre-opening costs be expensed as incurred. For the full year, store pre-opening costs are expected to increase by 0.3% in fiscal 1998 compared to the prior year, as the Company will have opened or relocated 64 Michaels and 12 Aaron Brothers stores in the current year compared to 23 Michaels and 4 Aaron Brothers stores in the prior year. See Note F in the Notes to Consolidated Financial Statements. 11 LIQUIDITY AND CAPITAL RESOURCES Cash flow used in operating activities during the first nine months of fiscal 1998 was $100.4 million compared to $47.3 million of cash flow used in operating activities during the first nine months of fiscal 1997. These results are consistent with the Company's plan to build inventory and open and relocate stores early in the fiscal year. Inventories per Michaels store increased 12% to $1,172,000 at October 31, 1998 compared to $1,047,000 at November 1, 1997 as a result of increasing the number of items replenished by the Company's distribution centers from approximately 6,200 in the prior year to approximately 11,000 in fiscal 1998, and as the store in-stock position of best selling merchandise has been improved. The Company opened 48 Michaels and 3 Aaron Brothers stores and relocated 14 Michaels and 5 Aaron Brothers stores during the first nine months of fiscal 1998. Capital expenditures for the newly opened stores amounted to approximately $30.8 million. Additional capital expenditures of approximately $30.8 million during the first nine months of fiscal 1998 related primarily to existing stores, to interim construction costs for the relocation of the Company's California distribution center, and for various systems enhancements. The Company completed two sale/leaseback transactions for the California distribution facility and a portion of its equipment during the second quarter of fiscal 1998 with gross proceeds amounting to $19.0 million. The Company expects additional capital expenditures during the remainder of fiscal 1998 to total approximately $18 to $23 million, relating primarily to costs for new stores, store relocations and remodeling, merchandising and other information systems and various other projects. In October 1998, the Company repurchased 1,145,000 shares of its Common Stock for an aggregate purchase price of $20.4 million and placed the shares in treasury. At October 31, 1998, the Company had working capital of $385.0 million compared to $358.7 million at January 31, 1998. In August 1998, the Company entered into a new unsecured revolving credit agreement with BankBoston, N.A. and other lending institutions (the "Credit Agreement") providing for a revolving loan of $100 million which may be increased to $125 million pursuant to certain terms and conditions as set forth in the Credit Agreement. Borrowings under the Credit Agreement were $30.1 million at October 31, 1998, and there were no borrowings outstanding under the Company's prior credit agreement at any time during fiscal 1997 or fiscal 1998. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding. The interest rate on the Credit Agreement is generally (a) the higher of (i) an annual rate of interest announced from time to time by BankBoston, N.A. or (ii) one-half of one percent (1/2%) above the Federal Funds Effective Rate or (b) the Eurodollar Rate as defined by the Credit Agreement. The Company is required to pay a commitment fee of up to .3% per annum on the unused portion of the revolving line of credit. The Credit Agreement provides certain annual restrictions on the aggregate amount of capital expenditures, restricts the payment of dividends and requires the Company to maintain compliance with various financial ratios. The Credit Agreement expires in August 2001. Management believes that the Company's available cash, funds generated by operating activities, funds available under the Credit Agreement and lease financing, should be sufficient to finance continuing operations and sustain current growth plans. Management believes that the Company can finance an annual store expansion at a rate of 12% to 15% (on a square footage basis) from internally generated cash flow. 12 IMPACT OF THE YEAR 2000 The Company is highly dependent on proper functioning of its internal information systems for purposes of tracking inventory and sales information and on its vendors' systems for purposes of assuring accurate and timely deliveries of goods to the Company's distribution centers and stores. Because the Company has invested substantial amounts of money and effort in updating its internal systems in recent years, it believes such systems are already substantially advanced in Year 2000 compliance. The Company has implemented a comprehensive plan designed to make its operations more fully Year 2000 compliant. The Company is utilizing both internal and external resources to complete its Year 2000 initiatives. The Company has established a corporate project office, which reports to an executive management team, to oversee, monitor and coordinate the Company-wide Year 2000 efforts. An experienced, nationally-known consulting firm has been engaged to provide objective project management and technical expertise to assist internal resources in the completion of the Year 2000 project. The Company's plan focuses on three areas-information systems, business management and vendor relations-and generally covers four stages, including (i) inventory, (ii) assessment, (iii) remediation and (iv) testing and certification. The remediation and testing and certification stages do not apply to the vendor relations area, with respect to which the Company will rely on assurances from vendors and contingency plans. The information systems area includes the Company's proprietary and third party application systems and related hardware, software and data and telephone networks. The Company's computer, data and voice infrastructure, which supports merchandise procurement and distribution, inventory control and point-of-sale information systems, is primarily serviced by a third party. The inventory and assessment phases of the Year 2000 compliance plan are completed in the information systems area. Approximately 52% of the Company's application systems are presently believed to be Year 2000 compliant. Remediation or replacement of the majority of the Company's remaining systems is in process, with substantial completion anticipated by mid-1999. The testing and certification stage for these areas is targeted to be largely completed by the end of third quarter 1999. Management believes that the Company is on schedule to complete year 2000 compliance plans with respect to its information systems. The business management area includes equipment and systems, such as elevators and security systems, that contain embedded computer technology. The Company's assessment of these systems has begun and is scheduled to be completed by January 31, 1999. Based on such assessment and assurances from third parties, the Company believes these systems present little Year 2000 exposure or risk. The Company has surveyed its "mission critical" merchandise and service vendors to determine their Year 2000 status and has either obtained or is negotiating to obtain appropriate assurances from these vendors. In addition, the Company is conducting more detailed assessments of the progress of its electronic data interchange trading partners. In fiscal year 1997, the Company's top ten vendors accounted for approximately 17% of total purchases, with no single merchandise vendor accounting for more than 4% of total purchases. The Company expects to complete its assessment phase with respect to vendors' systems by January 31, 1999. 13 The Company is developing contingency plans, such as alternative sourcing, and identifying what actions would need to be taken if a critical system or service provider were not Year 2000 compliant. The Company expects these plans to be finalized by mid-1999. Currently, the Company does not expect substantial increases in inventory will be required as a contingency measure. The Company has begun, but not yet completed, a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by the Company and certain third parties to complete efforts to achieve Year 2000 compliance on a timely basis. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, and such scenario has not yet been clearly identified. The Company currently plans to complete such analysis and contingency planning by mid-1999. Despite the Company's significant efforts to make its systems and facilities Year 2000 compliant, the ability of third party service providers, vendors and certain other third parties, including governmental entities and utility companies, to be Year 2000 compliant is beyond the Company's control. Accordingly, the Company can give no assurances that the systems of other parties on which the Company's systems or operations rely will be timely converted or compatible with the Company's systems. The failure of these entities to comply on a timely basis could have a material adverse effect on the Company. At the present time, however, the Company does not expect Year 2000 issues to materially affect its products, services, competitive position, or financial performance or condition. Total external costs related to the Year 2000 effort (exclusive of the costs of planned development of new systems) are estimated to be approximately $2 million, of which approximately $700,000 has been incurred by the Company through November 1998. In addition, the Company has accelerated the planned development of new information systems with improved business functionality to replace systems that were not Year 2000 compliant. The cost of these new information systems will approximate $4.7 million, of which approximately $300,000 has been incurred by the Company prior to the date of this report. The Company's Year 2000 costs, including the acceleration of development of new systems already planned, have been, and are expected to be, funded with cash flow from operations. The Company does not separately track internal direct costs associated with the utilization of its officers and employees in its Year 2000 compliance efforts. The foregoing statements as to cost and timetables relating to the Year 2000 effort are forward looking and are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They are based on the Company's best estimates, which may be updated as additional information becomes available. The Company's forward looking statements are also based on assumptions about many important factors, including the technical skills of employees and independent contractors, the representations and preparedness of third parties, the ability of vendors to deliver merchandise or perform services required by the Company and the collateral effects of the Year 2000 issues on the Company's business partners and customers. While the Company believes its assumptions are reasonable, it cautions that it is impossible to predict the impact of certain factors that could cause actual costs or timetables to differ materially from those expected. 14 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 1998 annual meeting of shareholders of the Company was held on September 22, 1998. 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 August 12, 1998 under the caption titled "Election of Directors" as follows:
Total Vote Total Vote for Withheld From Name Each Director Each Director ____ ______________ _____________ Charles J. Wyly, Jr. 24,859,861 1,115,720 Richard E. Hanlon 24,860,351 1,115,230 Kelly Elliott 24,855,045 1,120,536
Approval of the Amendment to the Company's Restated ___________________________________________________ Certificate of Incorporation ____________________________ The Amendment to the Company's Restated Certificate of Incorporation as proposed in the Proxy Statement dated August 12, 1998 under the caption titled "Certificate Amendment" was approved (For-17,111,340; Against- 8,812,305; Abstain-51,936; Broker Non-Vote-0-). ITEM 5. OTHER INFORMATION The 1999 Annual Meeting of Stockholders (the "1999 Annual Meeting") is scheduled to be held on Thursday, June 17, 1999. In order to be considered for inclusion in the proxy statement for the 1999 Annual Meeting, stockholder proposals must be in writing and received by February 28, 1999. For a stockholder proposal which is not submitted for inclusion in such proxy statement to be considered at the 1999 Annual Meeting, notice of such stockholder proposal must be submitted by March 15, 1999. The stockholder proposals should be submitted to Michaels Stores, Inc., P.O. Box 619566, DFW, Texas 75261-9566, Attention: Secretary. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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. 15 MICHAELS STORES, INC. 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 and Chief Financial Officer (Principal Financial Officer) Dated: December 15, 1998 16 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE 27 Financial Data Schedule
17 EX-27 2
5 1000 3-MOS 9-MOS JAN-30-1999 JAN-30-1999 AUG-02-1998 FEB-01-1998 OCT-31-1998 OCT-31-1998 38,133 0 0 0 0 0 0 0 602,881 0 668,850 0 372,841 0 167,144 0 1,014,150 0 283,895 0 221,940 0 0 0 0 0 2,968 0 447,361 0 1,014,150 0 382,841 1,032,782 382,841 1,032,782 254,080 694,279 365,696 997,469 (160) (3,170) 0 0 5,601 16,884 11,704 21,599 4,448 8,208 7,256 13,391 0 0 0 0 0 0 7,256 13,391 .25 .45 .24 .43
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